SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A - NO. 3
(Mark One)
/x/ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 [Fee Required]
For the fiscal year ended JUNE 30, 1996 or
/ / Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required]
For the transition period from _______ to _______
Commission File Number 0-11274
PHARMACEUTICAL FORMULATIONS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 22-2367644
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
460 PLAINFIELD AVENUE, EDISON, NJ 08818
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (908) 985-7100
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.08 PAR VALUE, AND COMMON STOCK PURCHASE WARRANTS
(TITLE OF CLASS)
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 if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K ('229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. / /
The aggregate market value of the voting stock held by non-affiliates
(based upon the average of the high and low bid prices) on August 20, 1996 was
approximately $6,690,000.
As of August 20, 1996, there were 29,508,814 shares of Common Stock,
par value $.08 per share, outstanding.
Portions of the definitive Information or Proxy Statement to be filed
with the Securities and Exchange Commission (the "Commission") not later than
120 days after the end of the fiscal year covered by this Form 10-K with respect
to the registrant's Annual Meeting of Shareholders to be held in 1996 are
incorporated by reference into Part III of this Form 10-K.
Certain exhibits listed in Item 14 of Part IV have been incorporated
by reference.
<PAGE>
Items 1, 3, 7, 8, 11 and 12 of Part I are amended to read as follows:
ITEM 1. BUSINESS
INTRODUCTION
Pharmaceutical Formulations, Inc. (the "Company" or "PFI"), a Delaware
corporation, is primarily engaged in the manufacture and distribution of over
100 nonprescription ("over-the-counter" or "OTC") solid dosage pharmaceutical
products in tablet, caplet and capsule form (collectively, "Generic OTC
Products"), which are sold under its customers' store brands or other private
labels. These private-label products account for a large portion of the
Company's revenues. The Company also manufactures products for national brand
pharmaceutical companies, although sales of such products represent less than
10% of the Company's sales. To a limited extent, the Company also sells Generic
OTC Products under its own trade name, Health+Cross(tm), which sales account for
less than 1% of the Company's total revenues. The Company believes that the
therapeutic benefits of its Generic OTC Products are comparable to those of
equivalent national brand name products because the chemical compositions of the
active ingredients of the brand name products on which the Company's products
are patterned are identical to those of the Company's products. The Company is
subject to regulation by the US Food and Drug Administration ("FDA"). The
Company also engages in a research and development program which seeks to
develop and gain regulatory approval of products which are comparable to
national brand products which have switched from prescription to OTC drug
status. The Company's largest customers include Revco D.S. Inc. ("Revco"),
Walgreen Company ("Walgreen") and Price-Costco, Inc. ("Price-Costco"). Prior to
June 30, 1995, the Company operated through its then-wholly- owned subsidiary,
Private Formulations, Inc., an Ohio corporation. Such subsidiary was merged into
PFI on June 30, 1995.
CERTAIN RELATIONSHIPS WITH ICC
In September 1991, the Company entered into an agreement with ICC
Industries Inc. ("ICC") pursuant to which ICC was granted a series of options
and related preemptive rights to acquire a total of approximately 66% of the
shares of the Company's Common Stock outstanding (as subsequently amended, the
"ICC Option Agreement"). ICC is a major international manufacturer and marketer
of chemical, plastic and pharmaceutical products which had 1995 sales in excess
of $1 billion. ICC and its subsidiaries have offices in key business centers
around the world and own numerous manufacturing plants. ICC has exercised all of
its options and certain of the related preemptive rights and currently owns an
aggregate of 19,635,894 shares of Common Stock, representing 66.5% of the
Company's outstanding Common Stock. In fiscal 1996, the Company sold 2,500,000
shares of Series A Cumulative Redeemable Convertible Preferred Stock to ICC.
Such shares of preferred stock are convertible into common stock at the election
of the holder after 36 months from issuance. In addition, the Company purchases
certain raw materials from ICC and leases equipment from ICC, or its affiliates.
See "Certain Relationships and Related Transactions."
PRODUCTS
GENERIC OTC PRODUCTS
Currently, the Company markets more than 100 different types of
Generic OTC Products (including different dosage strengths of the same chemical
composition). These include analgesics (such as ibuprofen and acetaminophen),
antacids, cough-cold preparations, sinus/allergy and laxatives. In each of the
fiscal years ended June 30, 1996, 1995 and 1994, sales of ibuprofen accounted
for 41%, 41%, and 46% respectively, of the Company's total revenues, and sales
of acetaminophen products accounted for 11%, 11% and 12% respectively, of the
Company's total revenues. "Generic" pharmaceutical products are drugs which are
sold under chemical names rather than brand names and possess chemical
compositions (and the Company believes, therapeutic benefits), equivalent to the
brand name drugs on which they are patterned. OTC drugs are drugs which can be
obtained without a physician's prescription. Generic drug products are subject
to the same governmental standards for safety and efficacy (effectiveness) as
their brand name equivalents and are typically sold at prices substantially
below the brand name drug. The Company manufactures Generic OTC Products which
it believes are chemically and therapeutically equivalent to such brand name
products as Anacin(R), Tylenol(R), Bufferin(R), Ecotrin(R), Motrin(R), Advil(R),
Excedrin(R), Sominex(R), Maalox(R), Sudafed(R), Comtrex(R), Sinutab(R),
Dristan(R), Dimetapp(R), Dexatrim(R), Dramamine(R), Actifed(R), Benadryl(R),
Allerest(R), and Metamucil(R), among others.
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FN
1 Such brand names are registered marks of companies unrelated to PFI.
SOLUBLE ASPIRIN
In 1983, the Company acquired the exclusive manufacturing and
marketing rights in the United States and Canada to an oral stabilized soluble
sodium aspirin ("Soluble Aspirin") patent in powder form and in 1985, acquired
the worldwide rights thereto (with the exception of South America). In 1987, the
Company obtained a patent for the Soluble Aspirin in tablet form. In addition,
the Company owns certain foreign Soluble Aspirin patents. The Company is not
currently engaged in development or marketing activities with respect to this
product.
PRODUCTS IN DEVELOPMENT
In October 1993, the Company entered into an agreement with Farmacon,
Inc. ("Farmacon"), the owner of certain proprietary information and technology
relating to Sucralfate tablets used for the treatment of ulcers, pursuant to
which Farmacon and the Company agreed to develop sucralfate tablets. The
contract grants the Company certain exclusive manufacturing, marketing and
distribution rights with respect to such product in both the ethical and OTC
markets. The agreement (which expires ten years after approval by the FDA of
distribution of the product subject to certain rights to extend the agreement)
provides that the cost of all clinical studies and the cost of obtaining
regulatory approval will be borne by Farmacon, while the costs of raw materials
and components used to produce clinical batches and to produce the product after
regulatory approval will be borne by the Company. The Company has agreed,
however, to contribute up to $600,000 (of which $400,000 was contributed through
the fiscal year 1996) to the development and approval process based on certain
benchmarks as defined in the agreement. The parties further agreed that any
"product profit" (as defined in the agreement) will be distributed 75% to
Farmacon and 25% to the Company. Currently, the parties anticipate the receipt
of regulatory approval with respect to the sale of such product in calendar
1997, but there is no assurance that governmental approval of such product will
be granted at such time or at all.
The Company, in connection with ICC, is developing the OTC version of
Cimetidine, an anti-ulcer drug. The Company expects to file an ANDA with the FDA
by December 1996. If an ANDA is approved, sales could not be made before July 1,
1998, when the marketing exclusivity on the brand name equivalent expires.
The Company has filed an ANDA with the FDA for Naproxen Sodium, an
analgesic. The Company is awaiting approval for the product from the FDA. If an
ANDA is approved, sales could not be made before January 11, 1997, when the
marketing exclusivity on the brand name drug expires.
There are no other products in development at this time for which the
Company has expended material amounts. Whether or not material amounts will be
spent in the future with respect to these or other products depends upon many
factors, including market conditions.
MANUFACTURING
In order to manufacture Generic OTC Products, the Company acquires raw
materials from suppliers located in the United States and abroad, including ICC,
an affiliate of the Company. During the fiscal year ended June 30, 1996, the
Company purchased from ICC $795,000 of raw materials.
To date, the Company has obtained the raw materials it needs and
expects that such raw materials will continue to be readily available in the
future. Raw materials delivered to the Company are first placed in quarantine so
that samples of each lot can be assayed for purity and potency by a team of
trained chemists and technicians employed by the Company. Incoming materials are
tested to assure that they are free of objectionable microorganisms and that
they meet chemical and physical testing requirements. Throughout the
manufacturing process, samples are taken by quality assurance inspectors for
quality control testing. The raw materials must meet standards established by
the United States Pharmacopoeia, the National Formulary and the FDA, as well as
by the Company and its customers.
To produce capsules and tablets, the Company utilizes specialized
equipment which compresses tablets and fills powder and granules into hard
gelatin capsules. At this stage, certain tablets are film or sugar coated to
achieve an aesthetically appealing tablet. The customer chooses whether its
order of Generic OTC Products will be delivered in bulk containers or in
packages. Typically, the Company assists its customers in developing the size,
design and graphics of the folding carton, label and container for the products.
The package can be automatically placed into shipping containers of the
customer's selection.
Since January 1992, the Company has entered into various subleases of
equipment and leasehold improvements from companies affiliated with ICC, for
which the Company pays such affiliates fixed monthly fees. Such leases have
various terms, expiring at different times between 1997 and 2001. Upon
expiration of the term of each lease, the Company is entitled to purchase the
equipment for a price of $1.00.
In response to drug tampering problems affecting the industry
generally, the Company has instituted certain tamper-evident features in its
packaging operation. A tamper-evident package is one which readily reveals any
violation of the packaging or possible contamination of the product. These
include a foil inner-seal which is electronically sealed after the capping
operation and, for some customers, a neck band or outer safety seal applied to
the bottle and cap as an additional tamper-evident feature. In addition, the
Company manufactures a banded capsule which contains a heat-sealed band in the
center to deter ease of opening and/or closing the capsule product. Although the
Company takes steps to make its products tamper-resistant, it believes that no
product is "tamper-proof." There can be no assurance that the Company's products
will not be tampered with. Any such tampering, even if it occurs in the retail
outlets, may have a material adverse effect on the Company. See AInsurance.@
CUSTOMERS
The Company's customers consist of retailers, wholesalers,
distributors, and brand-name pharmaceutical companies. Sales to retail drug and
supermarket chains and mass merchandisers accounted for approximately 85%, 80%
and 66%, of the Company's sales for fiscal 1996, 1995 and 1994, respectively.
Bulk sales to wholesalers and distributors accounted for approximately 13%, 14%
and 25%, of the Company's sales during fiscal years 1996, 1995 and 1994. Sales
to brand-name pharmaceutical companies accounted for approximately 2%, 6%, and
9% in fiscal 1996, 1995 and 1994 respectively. All of these sales consisted of
products which the Company's customers sell under their own store brand or other
labels.
Sales to Revco, one of the Company's largest customers, accounted for
$11,078,000 (20%), $14,536,000 (25%) and $8,756,000 (16%) of the Company's net
sales for fiscal 1996, 1995 and 1994, respectively. Sales to Walgreen were
$7,609,000 (14%), $8,373,000 (14%) and $8,684,000 (16%) for fiscal 1996, 1995
and 1994, respectively. Sales to ICC were $9,267,000 (17%) for 1994. Sales to
Price-Costco were $6,508,000 (12%), $6,892,000 (12%) and $4,488,000 (8%) in
fiscal 1996, 1995 and 1994, respectively.
The amounts of backlog orders at the end of fiscal 1996 and 1995 were
not significant.
MARKETING AND PROMOTION
The Company has 11 employees in sales and customer service. This staff
and 25 independent brokers sell the OTC pharmaceutical products and the
marketing services of the Company to current and potential customers.
The Company has 8 employees in marketing and graphic design who work
with customers to develop and execute customized marketing programs directed at
selling consumers on the therapeutic benefits of the OTC pharmaceutical store
brands products.
RESEARCH AND DEVELOPMENT
The Company maintains a staff of five employees in its product
development department, as well as other support staff to assist its customers.
The Company's research and development activities are primarily related to the
determination of the formula and specifications of the product desired by a
customer, as well as the potency, dosage, flavor, quality, efficacy, color,
hardness, form (i.e. tablet, caplet or capsule) and its packaging, as well as
costs related to new products in development including costs associated with
regulatory approvals. The Company's research and development expenditures in
fiscal 1996, 1995 and 1994 were $790,000, $1,488,000 and $574,000, respectively.
The rate of R&D expenditures fluctuates significantly from year to year
depending primarily on what generic products are coming off patent in the near
future and whether or not such products are appropriate for development by the
Company. The increase of $914,000 in R&D expenditures between 1994 and 1995 was
due to the development of new products to fund future sales growth, including
significant expenditures on Sulcralfate. The decrease of $698,000 between 1995
and 1996 was due to the fact that research projects were not being performed at
the same rate as in the prior fiscal year. Expenditures in one year are not
necessarily indicative of expenditures in future years.
See "Products - Products in Development" above for a discussion of
research and products-development activities related to new products.
NEW JERSEY INDUSTRIAL SITE RECOVERY ACT
In 1986, Revco commenced a soil and groundwater cleanup of the
Company's facility, under the New Jersey Industrial Site Recovery Act ("ISRA")
in connection with Revco's sale of all of its shares of stock in Private
Formulations, Inc. to the Company. Prior to completing the sale, Revco entered
into an Administrative Consent Order ("ACO") with the New Jersey Department of
Environmental Protection ("NJDEP"). The ACO named Revco as the primary party to
evaluate and remediate environmental contamination at the facility.
Environmental testing by Revco revealed soil and groundwater contamination,
primarily by methylene chloride. Revco posted a financial assurance bond in the
amount of $1,000,000 to secure its cleanup obligations under ISRA and the ACO.
The terms of the Revco sale to the Company in 1987 included an agreement in
which Revco agreed to assume all costs which were attributable to environmental
cleanups relating to conditions at the facility existing as of the closing of
the sale, necessary to comply with ISRA and the ACO. In August 1989, the Company
entered into an ACO with the NJDEP in connection with the Company's sale and
lease-back of the facility. In 1990, NJDEP determined that the soil remediation
was complete. In September 1992, the 1989 ACO was amended to include the
exercise by ICC of options to purchase a majority of the outstanding shares of
the Company's Common Stock. The Company was not required to post a financial
assurance bond under the 1989 ACO or the 1992 ACO amendment. In May 1993, NJDEP
approved the Revco groundwater remediation plan, subject to certain conditions,
and the financial assurance bond has been reduced from $1,000,000 to $306,000 as
specified in the cleanup plan. Revco began operating a groundwater remediation
treatment system in 1995.
In July 1993, the Company received notification that the NJDEP has
determined that all areas of environmental concern arising from and after
September 1991 have been satisfactorily addressed and require no further action
on behalf of the Company. NJDEP issued a "No Further Action" letter in September
1993. This letter, however, related only to the period since September 1991 and
specifically does not apply to the matters being addressed by the ACOs with
Revco and the Company for periods prior to September 1991.
Although Revco is primarily responsible for the entire cost of the
cleanup, the Company guaranteed the cleanup under the terms of the 1989 ACO and
the 1992 ACO amendment. In addition, the Company agreed to indemnify the owner
of the facility under the terms of the 1989 sale lease-back. If Revco 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
therefor. The likelihood of Revco being unable to satisfy any claims which may
be made against it in connection with the facility, however, are remote.
Accordingly, the Company believes that it will not have to bear any costs
associated with remediation of the facility and it will not need to make any
material capital expenditures for environmental control facilities.
GOVERNMENTAL REGULATION
Pharmaceutical companies are subject to extensive regulation by the
Federal government, primarily by the Food and Drug Administration ("FDA"), under
the Federal Food, Drug and Cosmetic Act, the Controlled Substance Act and other
federal statutes and regulations. These regulations govern or influence the
testing, manufacture, safety, labeling, storage, recordkeeping, approval,
pricing, advertising and promotion of the Company's drug products. Failure to
comply with FDA and other governmental requirements can result in a variety of
adverse regulatory actions, including but not limited to the seizure of company
products, demand for a product recall, total or partial suspension of
manufacturing/production, refusal by FDA to approve new products, and withdrawal
of existing product approvals.
The FDA requires all pharmaceutical products to be proven safe and
effective before they may be commercially distributed in the United States. In
order to prove the safety and efficiency of most pharmaceutical products,
pharmaceutical companies are often required to conduct extensive preclinical
(animal) and clinical (human) testing. Such testing is extensively regulated by
the FDA.
Most prescription drug products obtain FDA marketing approval via
either the "new drug application" ("NDA") process or the "abbreviated new drug
application" ("ANDA") process. An NDA is submitted to FDA in order to prove that
a drug product is safe and effective. NDAs typically contain data developed from
extensive clinical studies. The filing of an NDA with the FDA provides no
assurance that the FDA will approve the applicable drug product for marketing.
Some drug products (generic drug products) are capable of being
approved for marketing by FDA via the ANDA process. An ANDA is submitted to FDA
in order to demonstrate that a drug product is "bioequivalent" to a drug product
that has already been approved by FDA for safety and effectiveness (i.e. an
"innovator" drug product). Unlike an NDA, an ANDA is not required to contain
evidence of safety and effectiveness. Rather, ANDAs for orally administered
dosage forms typically contain "bioavailability" studies to demonstrate
"bio-equivalence." Other dosage forms such as parenterals and topicals may have
difference requirements. As with NDAs, the filing of an ANDA with the FDA
provides no assurance that the FDA will approve the applicable drug product for
marketing.
The current regulatory framework that governs generic drug approvals
via the ANDA process was enacted in 1984 and is commonly known as the
"Waxman-Hatch Act." Under the Waxman-Hatch Act, companies are permitted to
conduct studies required for regulatory approval notwithstanding the existence
of patent protection relevant to the substance or product under investigation.
Thus, "bioavailability" studies for a generic drug product may be conducted
regardless of whether the related "innovator" product has patent protection.
A company generally may file an ANDA application with the FDA at any
point in time - with certain exceptions, however, such as when an "innovator"
drug product was granted five years of "marketing exclusivity" under the
Waxman-Hatch Act. In this case, the ANDA application may not be filed with FDA
until the five years of "marketing exclusivity" have expired. Such prohibition
on filing does not apply, however, if the period of marketing exclusivity is
three years.
When an ANDA application is filed, the FDA may immediately review the
application regardless of whether the "innovator" product has patent protection
or is subject to "marketing exclusivity." The FDA's ANDA approval, however, is
conditional and does not become effective until the expiration of any applicable
patent or "marketing exclusivity" periods. After the expiration of these
periods, a generic product that has received conditional ANDA approval may be
marketed immediately.
Some drug products that are intended for over-the-counter ("OTC")
marketing require NDA or ANDA approval. Most OTC drug products, however, may be
commercially distributed without obtaining FDA approval of an NDA or ANDA
application. The FDA established the OTC Drug Review in the early 1970's, which
led to the creation of OTC drug monographs that indicate whether certain drug
ingredients are safe and effective for specific intended uses. Final OTC drug
monographs have the force of law. Products that conform with the requirements of
a final OTC drug monograph do not require NDA or ANDA approval, whereas
nonconforming OTC products covered by a monograph must by approved via an NDA or
ANDA.
Many OTC drug monographs have not yet been finalized. The FDA
generally permits the marketing of OTC drug products that conform to the
proposed requirements of a non- final monograph. The FDA also permits the
marketing of OTC products that do not conform to a non-final monograph subject
to certain limitations. Normally, such products may be marketed, pending the
effective date of the applicable final OTC drug monograph, if they are
substantially similar to OTC drug products that were marketed OTC in the United
States prior to December 4, 1975.
If the final drug monographs require the Company to expend substantial
sums to maintain FDA compliance, the Company could be materially, adversely
affected. In the past, the Company's Generic OTC Products (with the exception of
ibuprofen) have not required approval of NDAs or ANDAs. Certain products under
development, however, require such approvals (see "Products - Products in
Development"). The FDA has approved ANDA's in 200 mg., 300 mg., 400 mg., 600 mg.
and 800 mg. dosage strengths for the Company's ibuprofen product (although, at
present, the Company sells its ibuprofen products in the 200 mg. strength only).
The Company has also obtained FDA approval of certain different colors and
shapes for its 200 mg. ibuprofen product.
All drug products, whether prescription or OTC, are required to be
manufactured and processed in compliance with the FDA's "good manufacturing
practices" ("GMPs"). GMPs are "umbrella" regulations that prescribe, in general
terms, the methods to be used for the manufacture, packing, processing, and
storage of drug products to ensure that such products are safe and effective.
Examples of GMP regulatory requirements include record-keeping requirements and
mandatory testing of in-process materials and components. FDA inspectors
determine whether a company is in compliance with GMPs. Failure to comply with
GMPs may render a drug "adulterated" and could subject the company to adverse
regulatory actions.
FDA regulates many other aspects of pharmaceutical product development
and marketing, including but not limited to product labeling and, for
prescription drug products, product advertising. The Federal Trade Commission is
the primary Federal agency responsible for regulating OTC drug product
advertising.
In addition to Federal regulation, pharmaceutical companies are also
subject to state regulatory requirements - which may differ from one state to
another.
The Company believes that it is currently in compliance with FDA
regulations. However, in anticipation of more stringent and extensive
requirements by FDA, the Company has undertaken a major renovation and upgrade
of its manufacturing plant. The Company believes that these improvements, which
were substantially completed in June 1996 at a cost of approximately $3,000,000,
will assure the Company's satisfaction of both present and future FDA
regulations and guidelines as well as facilitate the Company's ability to
produce state-of-the-art products for its customers.
Federal and/or state legislation and regulations concerning various
aspects of the health care industry are under almost constant review and the
Company is unable to predict, at this time, the likelihood of passage of
additional legislation, nor can it predict the extent to which it may be
affected by legislative and regulatory developments concerning its products and
the health care field generally.
PATENTS AND TRADEMARKS
In 1987, the United States Patent Office granted Letters Patent to the
Company for Soluble Aspirin in tablet form. The United States patent for Soluble
Aspirin in tablet form expires in the year 2002. In addition, the Company owns
several Soluble Aspirin patents in Canada and certain other foreign countries.
Allerfed(R), Leg Ease(R) and Health+Cross(R) are federally registered
trademarks owned by the Company. To the extent that the Company's packaging and
labeling of its Generic OTC Products may be considered similar to the brand name
products to which they are comparable, and to the extent that a court may
determine that such similarity may constitute confusion over the source of the
product, the Company may be subject to legal actions under state and Federal
statutes and case law to enjoin the use of the packaging and for damages.
INSURANCE
The Company may be subject to product liability claims by persons
damaged by the use of its products. The Company maintains product liability
insurance for its Generic OTC Products covering up to $10,000,000 in liability.
Although there have been no material product liability claims made against the
Company to date, there can be no assurance that such coverage will adequately
cover any claims which may be made or that such insurance will not significantly
increase in cost or become unavailable in the future. The inability of the
Company to maintain necessary product liability insurance would significantly
restrict its ability to sell any products and could result in a cessation of its
business.
COMPETITION
Competition in the pharmaceutical industry is intense. The Company
competes not only with numerous manufacturers of generic OTC products, but also
with brand name drug manufacturers, most of which are well known to the public.
In addition, the Company's products compete with a wide range of products,
including well-known name brand products, almost all of which are manufactured
or distributed by major pharmaceutical companies. Many of the Company's
competitors, including all of the manufacturers and distributors of brand name
drugs, have greater financial and other resources than the Company, and are
therefore able to expend more effort than the Company in areas such as product
development and marketing. The crucial competitive factors are product quality,
reliable delivery, customer service, merchandising support and price. Although
the Company believes that its present equipment and facilities render its
operations competitive as to price and quality, many competitors may have far
greater management expertise and physical operations (in addition to financial
resources) than those of the Company, which may enable them to perform high
quality services at lower prices than the services performed by the Company.
Additionally, some of the Company's customers may acquire the same equipment and
technology used by the Company and perform for themselves the services which the
Company now performs for them.
EMPLOYEES
As of August 1, 1996, the Company employed approximately 302 full-time
employees. Of such employees, 188 are engaged in manufacturing activities and
are covered by a collective bargaining agreement between the Company and Local
522 affiliated with the International Brotherhood of Teamsters of New Jersey
("Local 522"), which expires on October 24, 1998. Additionally, five of the
Company's employees are represented by Local 68 of the International Union of
Operating Engineers, affiliated with the AFL-CIO. As of August 1, 1996, the
Company had 19 persons employed in sales and marketing, 48 administrative and
operational employees and 42 laboratory technicians and scientists. The Company
believes that its relations with its employees are satisfactory.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers and directors of the Company as of June 30,
1996 are set forth below:
Name Position
Charles E. LaRosa President; Chief Executive Officer; Director
Brian W. Barbee Vice President, Scientific Affairs
David Belaga Vice President, Marketing
Anthony Cantaffa Vice President, Mergers & Acquisitions
George Chin Vice President, Sales
Frank Marchese Vice President, Finance; Chief Financial Officer;
Treasurer; Secretary
Allessandro R. Pierpaoli Vice President, R&D Technical Affairs
John L. Oram Chairman of the Board; Director
Ben A. Blackshire Director
Michael P. Callahan Director
Ray W. Cheesman Director
Dr. Max A. Tesler Director
Directors serve from when elected to the next annual meeting of
stockholders. All directors will serve until the 1996 annual meeting of
stockholders.
ICC has advised the Company that it plans to nominate members to the
Company's Board of Directors from time to time, in accordance with the laws of
the State of Delaware and the by-laws of the Company.
In August 1993, the Company formed Audit, Compensation and Stock
Option Committees of the Board of Directors. The members of the Audit Committee
and the Stock Option Committee are Messrs. Cheesman, Blackshire and Callahan.
The members of the Compensation Committee are Messrs. Oram, Cheesman,
Blackshire, and Callahan.
BUSINESS EXPERIENCE OF THE COMPANY'S DIRECTORS
BEN A. BLACKSHIRE, age 59, has been a director of the Company since
December 1989. Since 1987, Mr. Blackshire has been President and Chief Executive
Officer of Strategem, Inc., a company which licenses pharmaceutical products to
United States companies from international pharmaceutical companies. From 1983
to 1987, Mr. Blackshire was Chairman and Chief Executive Officer of B.C.
Christopher & Co., of Kansas City, Missouri, a securities and commodities
broker-dealer.
MICHAEL P. CALLAHAN, age 48, has been a director of the Company since
July 1993. Since January 1996, Mr. Callahan has been President and Chief
Executive Officer of Intersport Limited, a company engaged in the design,
marketing and distribution of athletic equipment. From December 1994 until
January 1996, Mr. Callahan was Chief Financial and Operating Officer of
Intersport. From March 1989 until January 1994, Mr. Callahan was employed as
Chief Financial Officer and a director of Candie's, Inc. ("Candie's"), a
publicly traded company engaged in the design, marketing and distribution of
footwear. From February 1992 through February 1993, Mr. Callahan was also
President of Candie's. From February 1987 through March 1989, Mr. Callahan was
Vice President - Finance of Coherent Communications, a company engaged in the
manufacture of telecommunications equipment. Mr. Callahan is a licensed
Certified Public Accountant.
RAY W. CHEESMAN, age 65, has been a director of the Company since July
1993, and has been a consultant to KPMG Peat Marwick an international accounting
firm from 1987 through June 1996. Prior thereto, Mr. Cheesman was a partner in
such firm. Mr. Cheesman is a licensed Certified Public Accountant.
CHARLES E. LAROSA, age 54, has been a director of the Company and
President and Chief Executive Office since December 1995. For the five years
prior thereto he was President of American Home Food Products, subsidiary of
American Home Products Corporation.
JOHN L. ORAM, age 52, has been a director of the Company since July
1993. Mr. Oram was appointed Chairman of the Board in December 1995. Mr. Oram
has been President and Chief Operating Officer of ICC since 1987. ICC, an
affiliate of the Company, is a major international manufacturer and marketer of
chemical, plastic and pharmaceutical products. Since 1980, Mr. Oram has been a
director of Electrochemical Industries (Frutarom) Ltd. ("EIF"), an Israeli
subsidiary of ICC listed on the Tel-Aviv and American Stock Exchanges, engaged
in the manufacture and distribution of chemical products. From May 1996, Mr.
Oram has been a director of Frutarom Industries (1995) Limited, a company
spun-off from EIF and listed on the Tel-Aviv Stock Exchange engaged in the
flavor and fragrance industry.
DR. MAX A. TESLER, age 65, was Chairman of the Company's Board of
Directors from the Company's formation in June 1981 until December 1995 and
Chief Executive Officer from July 1983 until December 1995. Dr. Tesler has been
President of the Company from 1983 until August 1990, and from April 1991 until
December 1995. He is currently a director. From 1962 to 1982, and from 1991 to
the present, Dr. Tesler has been an attending physician in charge of
gastroenterology at St. Clare's Hospital in New York City and an Assistant in
Medicine at New York University Hospital. Dr. Tesler was a director of MTG
Capital Corp., a publicly-held company, from November 1988 until or about
December 1991. Dr. Tesler received a degree from New York University in 1951,
and his Doctor of Medicine degree from New York University- Bellevue Medical
School in 1955. Dr. Tesler maintains a very limited private practice of
medicine.
BUSINESS EXPERIENCES OF THE COMPANY'S EXECUTIVE OFFICERS NOT ACTING AS
DIRECTORS
BRIAN W. BARBEE, age 46, has been Vice President of Scientific Affairs
since December 1995. He was Vice President, Quality Assurance/Quality Control
and Regulatory, between January 1993 and December 1995; such position was made
an executive office of the Company in September 1995. He joined the Company in
1978 and became Director of Quality Assurance in December 1982 and Director of
Regulatory Affairs in May 1988.
DAVID BELAGA, age 40, has been Vice President, Marketing since May
1996. Prior thereto he was a Senior Product Manager at American Home Products
(1994-1996) and Block Drug (1986-1994) and an Assistant Brand Manager at
Pepsi-Cola Co. (1985-86).
ANTHONY CANTAFFA, age 53, has been the Company's Vice President,
Mergers & Acquisitions since August 1995. He was also Chief Financial Officer
and Treasurer from 1988 until August 1990 and from April 1991 to August 1995.
Mr. Cantaffa was also the Company's Chief Operating Officer from 1988 until May
1995. Mr. Cantaffa has also been employed as the Company's Vice
President-Finance since 1987 and Corporate Controller since 1983.
GEORGE CHIN, age 43, has been Vice President, Sales since 1991; such
position was made an executive office of the Company in September 1995. Mr. Chin
was Field Sales Manager from 1989 until 1991. Prior to joining the Company, he
was National Account Manager of Perrigo Company, a store brand health and beauty
aids manufacturer, from 1986 to 1989 and District Supervisor of Beecham
Products.
FRANK MARCHESE, age 41, has been Vice President, Finance, Chief
Financial Officer and Treasurer since September 1995 and Secretary since April
1996. He was Vice President, Finance and Administration of the Company's
subsidiary Private Formulations, Inc. from October 1992 until June 1995 when it
was merged into the Company. Mr. Marchese was formerly Vice President, Finance
of Primex Plastics, Inc., a subsidiary of ICC Industries Inc, from August 1989
to September 1992. Mr. Marchese is a licensed Certified Public Accountant.
A. RANDALL PIERPAOLI, age 52, Ph.D., was Vice President, R&D Technical
Affairs from December 1995 until September 1996. He was Vice President,
Technical Affairs from September 1995 until December 1995. From December 1991 to
February 1994, he held directorships for Quality Control and Analytical R&D and
was senior GMP compliance officer at Barr Laboratories, Inc., producer of
generic ethical drugs; he was Executive Director R&D Technical Affairs, from
February 1994 until his departure in 1995. From July 1984 to December 1991, Dr.
Pierpaoli was divisional Quality Control Manager and Corporate QA Liaison for
the Consumer Healthcare Division of Pfizer, Inc. Dr. Pierpaoli holds a Ph.D. in
Physical Chemistry and is an acknowledged expert in regulatory, statistical, and
analytical protocols appropriate to drug manufacture and testing.
FORWARD LOOKING STATEMENTS
When used in this Form 10-K 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 historically 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 3. LEGAL PROCEEDINGS
Rosenblum v. PFI. In or about October 1991, an action was instituted
in the Superior Court of New Jersey, County of Middlesex, against the Company by
an individual, Marvin Rosenblum, seeking $3,500,000 in damages and other relief
for claimed breach of 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. As a result of plaintiff's poor
physical condition, in April 1994 he moved to transfer the matter to the
"inactive" trial list which motion has been granted. Accordingly, no further
action will be taken by either party with respect to the matter unless and until
plaintiff seeks to restore the matter to the active trial calendar.
Univest v. PFI. In or about November 1992, an action was instituted
against the Company in the Supreme Court of New York, County of New York, by
Univest Technologies, alleging breach by the Company of an agreement to furnish
soluble aspirin. Plaintiff seeks consequential damages of $1,500,000 and other
relief. The Company has denies that any such agreement existed and that any
moneys are owed to plaintiff and moved to dismiss the complaint, which motion
was granted with leave to replead. Plaintiff served an amended complaint
thereafter and the Company again moved to dismiss the complaint. The court has
not yet ruled on the Company's second motion. If the complaint is not dismissed,
the Company intends to assert counterclaims against plaintiff for amounts in
excess of the amount sought, on the basis of, among other things, plaintiff's
fraud and misrepresentation.
Puritan Quartz v. PFI. In or about July 1994, Puritan Quartz, Inc.
("Puritan") brought suit against the Company in the U.S. District Court for the
Southern District of New York, alleging breach of (i) a purported contractual
obligation to supply Puritan with acetaminophen and ibuprofen for resale to an
unrelated party and (ii) related confidentiality obligations. The complaint
seeks damages in the aggregate amount of $3,600,000 plus $300,000 for each
additional month of continuing breach. The Company's answer denies any liability
to Puritan noting that the agreement had a one-year term ending on October 16,
1993, prior to the events giving rise to the alleged breach, and that such
agreement was never extended. The Company's answer also disputes the aggregate
amount of Puritan's alleged lost profits. The case is currently in discovery and
the Company intends to move for summary judgment at the close of discovery.
Gary Sherman Investments v. PFI. In March 1996, the Company was named
as a defendant in a lawsuit filed in the United States District Court for the
District of New Jersey by Gary Sherman Investments, Inc., formerly known as
Polystar Corporation ("GSI"). GSI alleged that it was owed $400,000 pursuant to
a promissory note allegedly executed in GSI's favor in or about March 1991, and
sought to recover the full face amount of the note plus accrued interest. The
Company's answer denied that such money was owed and the Company filed a
counterclaim alleging, inter alia, breaches of fiduciary duty and fraud by GSI.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FINANCIAL CONDITION AT JUNE 30, 1996
At June 30, 1996, the Company had working capital of $7,928,000
compared to $12,172,000 at June 30, 1995. The decrease of $4,244,000 is
primarily due to the net loss of $3,465,000 for the fiscal year ended June 30,
1996. The decrease includes a reduction in inventory of $5,195,000 offset by an
increase in accounts receivable of $418,000 and an increase in cash of $629,000.
The decrease is a result of the lower sales as the Company reduced its inventory
levels to conserve cash to fund operations and reduce long-term debt. Accrued
expenses have increased due to the special compensation expense and other costs.
The Company received $3,163,000 cash from operations in fiscal 1996.
Decreases in inventory of $5,195,000 and non-cash charges more than offset the
net loss incurred in 1996. These funds, along with proceeds from the issuance of
preferred stock of $2,500,000 and debt of $968,000 were used to purchase
property plant and equipment of $2,317,000 and pay debt of $3,783,000.
Capital expenditures were $4,118,000 for the fiscal year ended June
30, 1996. The majority of this amount related to a major plant renovation which
improved efficiencies and increased laboratory capacity. The balance of the
capital expenditures were to improve manufacturing capacity and reduce costs.
The cost of the plant upgrade as well as other capital acquisitions was
partially financed through capital leases entered-into with ICC. The amount due
to ICC under capital lease obligations was $4,635,000 as of June 30, 1996. The
terms of these leases vary from three to five years at rates commensurate with
current market conditions. While in past periods the Company was dependent upon
ICC for lease financing and other financing assistance, the Company's dependence
on ICC has been lessening in recent years as additional financing sources have
become available to the Company. ICC nevertheless is still a significant source
of lease financing.
The Company has a $15,000,000 asset-based line of credit with an
institutional lender. At June 30, 1996, the Company had $3,455,000 of unused
availability under this agreement. The line of credit expires February 4, 1999
and bears interest at 1-3/4% above the prime lending rate (currently 8 1/4%).
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. See Note 5 to the Financial Statements
for the material terms of the Company's debt agreements. Principal repayments of
long term debt and capital lease obligations were $707,000 and $1,684,000
respectively.
In the fiscal year ended June 30, 1996, certain of the 8.25%
Debentures were converted into common stock of the Company. The conversion
reduced debt and increased stockholders' equity by $28,000. In addition, ICC
exercised its' preemptive rights with respect to such conversions and purchased
shares of common stock, which increased stockholders' equity by $19,000.
In April 1996 the Company sold 2,500,000 shares of Series A Preferred
Stock to ICC for an aggregate of $2,500,000. The Preferred Stock increased
working capital and stockholder equity.
The Company has a net deferred tax asset of $2,474,000, before the
valuation allowance, at June 30, 1996, which consists of future tax benefits of
net operating loss carryforwards and various other temporary differences. The
Company has forecasted profitable operations for at least the next few years
and, therefore, has recorded a net deferred tax asset of $1,150,000 at June 30,
1996. The benefits of net operating loss carryforwards and other temporary
differences that will take more than a few years to realize can not be
reasonably determined at this time due to the dynamics in the industry and the
Company's inconsistent operating results in the past. Accordingly, a valuation
allowance of $1,324,000 was recorded at June 30, 1996, to provide for this
uncertainty. The realization of this asset in future periods will improve the
liquidity of the Company.
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 $2,500,000 of capital equipment in the fiscal year ending June
30, 1997 to increase capacity and reduce costs. The Company intends for these
capital expenditures to be financed through capital leases with either ICC or
other parties. While the Company has in the past had no difficulty in obtaining
capital 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.
RESULTS OF OPERATIONS FOR FISCAL 1996 COMPARED TO FISCAL 1995
Revenues for the fiscal year ended June 30, 1996 were $57,572,000
compared to $62,427,000 in the prior fiscal year. This decrease of $4,855,000 or
8% is the result of reductions in the private label (store brand), bulk and
contract manufacturing sectors of the business. The majority of the reduction in
private label (store brand) is the result of a reduction in purchases by Revco
D.S., Inc. ("Revco") for which the prior year period included increased sales to
fill start-up requirements for a new acquisition by Revco. In addition, a major
contract manufacturing project from the prior fiscal year did not continue at
the same rate in the current year.
Sales discounts and allowances were $3,245,000 in the fiscal year
ended June 30, 1996 as compared to $3,320,000 in the prior fiscal year.
Three customers each represent over 10% of the Company's sales for the
fiscal year ended June 30, 1996. These three customers are Revco, Walgreen
Company ("Walgreen") and Price-Costco, Inc. ("Price-Costco"). Net sales to these
three customers were $25,195,000 (46%) as compared to $29,801,000 (50%) in the
prior year.
Cost of sales was 82% for the fiscal year ended June 30, 1996 as
compared to 76% in the prior fiscal year. The increase in cost of sales as a
percentage of sales is due to the lower sales volume, especially in the bulk and
contract manufacturing sectors which traditionally have lower cost of sales
percentages than the private label (store brand) sectors. In addition, there
were increases in certain operating costs such as raw materials and labor rates.
Selling, general and administration expenses were $9,143,000 as
compared to $7,719,000 in the prior year. The increase of $1,424,000 is a result
of increased selling and distribution costs to continually expand the customer
and product base. The Company has a new warehouse and distribution center to
facilitate the movement of inventory.
The Company incurred $678,000 of special compensation of which the
majority was for estimated costs of special compensation expense for a former
president and chief executive officer.
Research and development costs were $790,000 in the fiscal year ended
June 30, 1996 as compared to $1,488,000 in the prior fiscal year. The decrease
of $698,000 is due to research projects which are not being performed at the
same rate as the prior fiscal year.
Interest and other expenses were $3,511,000 in the fiscal year ended
June 30, 1996 as compared to $3,447,000 in the prior fiscal year.
The Company recorded an income tax benefit of $911,000, the majority
of which relates to the carryback of the current year net operating losses to
the prior three years to recover federal income taxes paid in prior years,
offset by an increase in the valuation allowance for deferred income taxes due
to management's assessment of the realizability of the deferred tax as measured
by the valuation allowance.
Net loss for the fiscal year ended June 30, 1996 was $3,465,000 or
$.12 per share compared to net income of $2,046,000 or $.07 per share in the
prior fiscal year.
The Company continues to take steps to increase revenues and reduce
costs to reverse the losses incurred in fiscal year ended June 30, 1996. These
steps include: (a) adding customers and products to the current business to
increase sales volume, (b) continual reductions in material costs and (c) other
cost-saving measures as well as other actions to improve profitability. There
can be no assurance that such actions will reverse the current loss and return
the Company to profitability.
RESULTS OF OPERATIONS FOR FISCAL 1995 COMPARED WITH FISCAL 1994
Revenues for the fiscal year ended June 30, 1995 were $62,427,000
compared to $56,256,000 in the prior year. The increase of $6,171,000 or 11%
resulted mainly from increased sales of existing products to current customers
and new customers and, to a lesser degree, to sales of new products (including
cough and cold medications and allergy products). Three customers, Revco,
Price-Costco and Walgreen, accounted for approximately $29,801,000 (50%) of net
sales in the fiscal year ended June 30, 1995 as compared to $21,928,000 (40%) in
the prior fiscal year. The increase in sales for these customers as well as
increases to other private label (store brand) customers was offset somewhat by
a decrease in sales in the Company's bulk manufacturing and contract
manufacturing sectors.
Sales discounts and allowances were $3,320,000 in the fiscal year
ended June 30, 1995 as compared to $2,056,000 in the prior fiscal year. The
increase is the result of increased sales, especially in the private label
section of the business where discounts and allowances are more prevalent. In
addition, the Company has increased the allowances to certain private label
customers to respond to competitive pressures in the market place.
Cost of goods sold was 76% of sales for the fiscal year ended June 30,
1995 as compared to 75% in the prior fiscal year. The Company achieved
manufacturing cost efficiencies through increased sales volume and cost
containment. The decreases in the bulk and contract manufacturing sector of the
business, which traditionally has higher gross profit margins was offset by cost
efficiencies resulting primarily from higher sales in the private label (store
brand) business, which traditionally has lower gross profit margins.
Selling, general and administrative costs were $7,719,000 as compared
to $6,691,000 in the prior year. The increase of $1,028,000 is a result of
increased marketing and promotion costs to increase sales in the private label
sector of the business. These costs are incurred to expand the customer and
product base. In addition, administrative costs have increased (salaries, legal,
etc.) to support the increased sales volume.
Research and development costs were $1,488,000 in the fiscal year
ended June 30, 1995, compared to $574,000 in the prior fiscal year. The increase
of $914,000 is due to the development of new products to fund future sales
growth.
Interest expense was $3,512,000 in the fiscal year ended June 30, 1995
compared to $3,298,000 in the prior fiscal year. The increase of $214,000
results from increased borrowing on the Company's revolving line of credit to
finance growth in accounts receivable and inventory.
The Company recorded a reduction in the deferred tax valuation
allowance of $1,000,000 in fiscal year ended 1995 as compared to $197,000 in the
prior fiscal year. This is a result of a change in estimate for deferred income
taxes, which increased net income by $1,000,000 in fiscal year ended June 30,
1995.
Net income was $2,046,000 or $.07 per share as compared to $2,211,000
or $.08 per share in the prior year.
EFFECTS OF INFLATION
The Company does not believe that inflation had a material effect on
its operations for the fiscal years ended June 30, 1996, 1995 or 1994,
respectively.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED JUNE 30, 1996 FOR PHARMACEUTICAL
FORMULATIONS, INC. AND SUBSIDIARIES
Report of Independent Certified Public Accountants F-1
Consolidated Financial Statements
Balance Sheets at June 30, 1996 and 1995 F-2
Statements of Operations for the Years
Ended June 30, 1996, 1995 and 1994 F-3
Statements of Changes in Stockholders'
Equity (Deficiency) for the Years Ended
June 30, 1996, 1995 and 1994 F-4
Statements of Cash Flows for the
Years Ended June 30, 1996, 1995 and 1994 F-5
Notes to Consolidated Financial Statements F-6
<PAGE>
FINANCIAL STATEMENT SCHEDULE
Report of Independent Certified Public Accountants
on Financial Statement Schedule F-22
Schedule II - Valuation and Qualifying Accounts F-23
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors
Pharmaceutical Formulations, Inc.
We have audited the accompanying consolidated balance sheets of
Pharmaceutical Formulations, Inc. and subsidiaries as of June 30, 1996 and 1995,
and the related consolidated statements of operations, changes in stockholders'
equity (deficiency) and cash flows for each of the three years in the period
ended June 30, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly in all material respects, the consolidated financial position of
Pharmaceutical Formulations, Inc. and subsidiaries as of June 30, 1996 and 1995
and the results of their operations and their cash flows for each of the three
years in the period ended June 30, 1996 in conformity with generally accepted
accounting principles.
/s/ BDO Seidman, LLP
Woodbridge, New Jersey
August 26, 1996
<PAGE>
<TABLE>
<CAPTION>
PHARMACEUTICAL FORMULATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,284,000 $ 655,000
Accounts receivable, net of allowance for doubtful accounts of $300,000 and $333,000 8,511,000 8,093,000
Inventories 9,720,000 14,915,000
Income tax receivable 1,161,000 -
Prepaid expenses and other current assets 747,000 696,000
Deferred tax asset 400,000 400,000
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 21,823,000 24,759,000
PROPERTY, PLANT AND EQUIPMENT, NET 16,802,000 14,346,000
OTHER ASSETS:
Deferred financing costs 94,000 130,000
Deferred tax asset 750,000 1,000,000
Other assets 192,000 221,000
- -------------------------------------------------------------------------------------------------------------------------------
$ 39,661,000 $ 40,456,000
- --------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
Current portion of long-term debt $ 587,000 $ 642,000
Current portion of capital lease obligations, including $1,296,000
and $1,117,000 due to ICC in 1996 and 1995, respectively 1,877,000 1,529,000
Accounts payable 9,441,000 9,829,000
Accrued expenses 1,990,000 549,000
Income taxes payable - 38,000
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 13,895,000 12,587,000
LONG-TERM DEBT, LESS CURRENT MATURITIES 16,284,000 18,207,000
LONG-TERM CAPITAL LEASE OBLIGATIONS, LESS CURRENT MATURITIES,
including $3,339,000 and $2,380,000 due to ICC in 1996
and 1995, respectively 9,468,000 8,731,000
DEFERRED GAIN ON SALE/LEASEBACK 425,000 477,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIENCY):
Preferred stock, par value $1.00 per share; 10,000,000 shares
authorized; 2,500,00 shares issued and outstanding 2,500,000 -
Common stock, par value $.08 per share; 40,000,000 shares
authorized; 29,508,814 and 29,311,816 shares issued and outstanding 2,361,000 2,347,000
Capital in excess of par value 37,286,000 37,200,000
Accumulated deficit (42,558,000) (39,093,000)
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIENCY) (411,000) 454,000
- -------------------------------------------------------------------------------------------------------------------------------
$ 39,661,000 $ 40,456,000
- -------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
<PAGE>
PHARMACEUTICAL FORMULATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<S> <C> <C> <C>
Years ended June 30, 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------------
GROSS SALES $57,572,000 $62,427,000 $57,386,000
LESS: SALES DISCOUNTS AND ALLOWANCES 3,245,000 3,320,000 2,056,000
- ----------------------------------------------------------------------------------------------------------------------------------
NET SALES 54,327,000 59,107,000 55,330,000
- ----------------------------------------------------------------------------------------------------------------------------------
COST AND EXPENSES:
Cost of goods sold 44,581,000 44,924,000 41,761,000
Selling, general and administrative 9,143,000 7,719,000 6,691,000
Special compensation expense 678,000 - -
Research and development 790,000 1,488,000 574,000
- ----------------------------------------------------------------------------------------------------------------------------------
55,192,000 54,131,000 49,026,000
- ----------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS (865,000) 4,976,000 6,304,000
- ----------------------------------------------------------------------------------------------------------------------------------
OTHER EXPENSES (INCOME):
Interest expense, including $488,000, $575,000 and
$906,000 in 1996, 1995 and 1994 from ICC 3,553,000 3,512,000 3,298,000
Other, net (42,000) (65,000) (85,000)
- ----------------------------------------------------------------------------------------------------------------------------------
3,511,000 3,447,000 3,213,000
- ----------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES (BENEFIT) (4,376,000) 1,529,000 3,091,000
INCOME TAXES (BENEFIT) (911,000) (517,000) 880,000
- ----------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $(3,465,000) $ 2,046,000 $ 2,211,000
- ----------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) PER SHARE:
Primary $ (.12) $ .07 $ .08
Fully diluted (.12) .06 .07
- ----------------------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING:
Primary 29,412,000 30,023,000 29,361,000
Fully diluted 29,412,000 32,520,000 32,350,000
- ----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
PHARMACEUTICAL FORMULATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
Years ended June 30, 1996, 1995 and 1994
- ---------------------------------------------------------------------------------------------------------------------------------
Preferred stock Common stock Capital In Accumulated
Excess Of Deficit
Par Value
Shares Amount at Shares Amount At
issued par value Issued Par Value
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1993 - $ - 25,192,661 $2,017,000 $36,637,000 $(43,350,000)
Shares issued in connection with exercise of stock options
and preemptive rights by ICC - - 3,246,789 260,000 264,000 -
Shares issued in connection with ICC agreement to
key Company employees - - 31,965 2,000 29,000 -
Shares issued in connection with Unit Purchase Options - - 296,835 24,000 98,000 -
Shares issued in connection with conversion of 8.25% debentures - - 2,166 - 3,000 -
Shares issued to lender - - 100,000 8,000 (8,000) -
Other - - (21) - - -
Net income - - - - - 2,211,000
- ------------------------------------------------------------------------------------------------------------------ --------------
BALANCE, JUNE 30, 1994 - - 28,870,395 2,311,000 37,023,000 (41,139,000)
Shares issued in connection with exercise by ICC of
preemptive rights - - 274,468 22,000 45,000 -
Shares issued to outside directors - - 45,000 4,000 17,000 -
Shares issued in connection with conversion of 8.25% debentures - - 121,727 10,000 115,000 -
Other - - 226 - - -
Net income - - - - - 2,046,000
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 1995 - - 29,311,816 2,347,000 37,200,000 (39,093,000)
Preferred stock issuance 2,500,000 2,500,000 - - - -
Shares issued in connection with exercise by ICC
of preemptive rights - - 75,926 6,000 13,000 -
Shares issued in connection with ICC agreement
to key Company employees - - 16,799 1,000 3,000 -
Shares issued in connection with conversion of
8.25% debentures - - 34,273 2,000 26,000 -
Shares issued to officer and outside directors - - 70,000 5,000 44,000 -
Net loss - - - - - (3,465,000)
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 1996 2,500,000 $2,500,000 29,508,814 $2,361,000 $37,286,000 $(42,558,000)
- ----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PHARMACEUTICAL FORMULATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended June 30, 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(3,465,000) $ 2,046,000 2,211,000
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 1,662,000 1,395,000 1,150,000
Amortization of bond discount and deferred financing costs 135,000 71,000 295,000
Amortization of deferred gain on sale of building (52,000) (52,000) (52,000)
Shares issued to key Company employees 4,000 - 31,000
Shares issued to officer and outside directors 49,000 21,000 -
Deferred income taxes 250,000 (1,000,000) (197,000)
Changes in current assets and liabilities:
Increase in accounts receivable (418,000) (599,000) (2,737,000)
(Increase) decrease in inventories 5,195,000 (3,656,000) (2,260,000)
(Increase) decrease in other current assets (51,000) 15,000 (74,000)
Increase in income tax receivable (1,161,000) - -
Increase in accounts payable, accrued expenses and income taxes payable 1,015,000 1,553,000 3,524,000
- ----------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 3,163,000 (206,000) 1,891,000
- ----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment, net (2,317,000) (2,010,000) (979,000)
(Increase) decrease in other assets 29,000 11,000 (231,000)
- ----------------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (2,288,000) (1,999,000) (1,210,000)
- ----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (repayments) under the line of credit (1,342,000) 3,716,000 1,745,000
Proceeds from issuance of long-term debt - - 183,000
Principal repayments of long-term debt (707,000) (551,000) (602,000)
Principal repayments of capital leases (1,684,000) (1,564,000) (1,121,000)
Refinancing of capital leases 968,000 - -
Increase in deferred financing costs - (20,000) (35,000)
Issuance of preferred stock 2,500,000 - -
Issuance of common stock, less offering and registration costs 19,000 67,000 122,000
- -----------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (246,000) 1,648,000 292,000
- ----------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 629,000 (557,000) 973,000
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 655,000 1,212,000 239,000
- ----------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 1,284,000 $ 655,000 $ 1,212,000
- -----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
</TABLE>
PHARMACEUTICAL FORMULATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF THE Pharmaceutical Formulations, Inc. (the "Company")is
BUSINESS AND RELATED primarily engaged in the manufacture and distribution
PARTIES of over-the-counter solid dosage pharmaceutical
products in tablet, caplet and capsule form,
which are sold under customers' private
labels. The Company supplies bulk
products to secondary distributors and
repackers as well as smaller competitors
who do not have sophisticated research
and development departments. The Company
also engages in contract manufacturing
of selected branded products for well
known major pharmaceutical companies.
The Company also is engaged in the
testing and research and development of
new drug and health care products.
In September 1991, the Company entered
into an option agreement with ICC
Industries Inc. ("ICC"), which, as
amended at various dates (the "Option
Agreement"), provided for options to
acquire a total of 66.67% of the number
of shares of the Company's common stock
outstanding after exercise of all
options. ICC has exercised all of its
options pursuant to the Option
agreement. The number of shares issued
to ICC through June 30, 1996 was
19,635,894 at option prices ranging from
$.1036 to $.1553 per share.
In the event of any future issuance of
shares of common stock of the Company
pursuant to the exercise of existing
options, warrants, conversion rights and
other rights as they existed at
September 24, 1992 ("Outstanding
Rights"), issuance of common stock in
settlement of the Company's outstanding
debts as of September 24, 1992, or
issuance of shares of stock to key
management, ICC shall be entitled to
acquire additional shares to maintain
the ownership percentage it holds
immediately before such shares of common
stock are issued (the "Limited
Preemptive Rights").
ICC's exercise price for the shares will
be the lesser of $.25 ($.50 in the case
of certain key management shares) or the
exercise price or conversion price of
the Outstanding Rights as the case may
be.
ICC exercised the following preemptive rights in 1996,
1995 and 1994 at a price of $.25 per share:
1996 1995 1994
- ----------------------------------------------------------------------------
Shares under preemptive rights 75,926 274,468 999,048
- ----------------------------------------------------------------------------
<PAGE>
In addition, ICC exercised miscellaneous options in
1994 for 300,000 shares at $.25 per share and 20,000
shares at $.75 per share.
ICC, a major international manufacturer
and marketer of chemical, plastic and
pharmaceutical products, with calendar
year 1995 sales in excess of $1 billion,
has offices in key business centers
around the world and owns numerous
manufacturing plants. In addition, ICC
has in the past and continues to provide
equipment financing to the Company. ICC
has also indicated its intention to
pursue joint venture arrangements or
other forms of business transactions
between the Company and foreign
pharmaceutical companies seeking to
market, distribute and sell products in
the United States.
In connection with the ICC Option
Agreement, several key employees were
granted, and have the right in the
future to receive, shares of the
Company's common stock. The Company
issued 16,799, 233 and 31,965 shares of
common stock to these employees in 1996,
1995 and 1994, respectively.
The following transactions with ICC, are
reflected in the consolidated financial
statements as of or for the years ended
June 30, 1996, 1995 and 1994:
June 30, 1996 1995 1994
- ---------------------------------------------------------------------------
Sales to ICC $ - $ - $ 9,267,000
Inventory purchases 795,000 1,219,000 14,300,000
Services and finance fees 488,000 575,000 906,000
Accounts payable to ICC 334,000 118,000 3,233,000
Equipment lease obligations
due ICC 4,635,000 3,497,000 3,251,000
Other receivables from ICC 213,000 - -
- ------------------------------------------------------------------------------
2. SUMMARY OF Principles of Consolidation
SIGNIFICANT
ACCOUNTING POLICIES
The accompanying consolidated financial statements
include the accounts of the Company and its
wholly-owned subsidiaries. All references to the
"Company" include its wholly-owned subsidiaries. All
significant intercompany accounts and transactions
have been eliminated.
Cash Equivalents
Cash equivalents consists of short-term,
highly liquid investments, which are
readily convertible into cash at cost.
Inventories
Inventories are stated at the lower of
cost or market with cost determined on a
first-in, first-out (FIFO) basis.
Property, Plant and Equipment
Property, plant and equipment are stated
at cost. Depreciation and amortization
is provided on the straight-line method
over the estimated useful lives of the
assets (five to fifteen years).
Deferred Financing Costs
Deferred financing costs represent
direct issuance costs incurred in
connection with the Company's
borrowings. Such costs are amortized
over the life of the related debt (three
to fifteen years).
Revenue Recognition
Sales of products are recorded when products
are shipped to customers. Provisions for
estimated sales returns and losses, which
are not material, are accrued at the time
revenues are recorded.
Earnings Per Share
Earnings per share are based on the
weighted average number of common and
common equivalent shares outstanding
during the year. 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, computed using the treasury
stock method (using the average stock
prices for primary basis and the higher
of average or period end stock prices
for fully diluted basis).
No effect has been given to shares
issuable for common stock equivalents
for the year ended June 30, 1996 as the
effect would be anti-dilutive.
At June 30, 1995 and 1994, the primary
and fully diluted common equivalent
shares amounted to 2,110,000 and
5,320,000, and 2,804,000 and 5,793,000,
respectively.
Concentration of Credit Risk
Financial instruments that potentially
subject the Company to credit risk
consist principally of trade
receivables. The Company extends credit
to a substantial number of its customers
and performs ongoing credit evaluations
of those customers' financial condition
while, generally, requiring no
collateral. Customers that have not been
extended credit by the Company are on a
cash on delivery basis only. At June 30,
1996, approximately 42% of the accounts
receivable balance is represented by
three customers.
Income Taxes
The Company accounts for income taxes in
accordance with Statement of Financial
Accounting Standards No. 109,
"Accounting for Income Taxes," which
requires the recognition of deferred tax
liabilities and assets at currently
enacted tax rates for the expected
future tax consequences of events that
have been included in the financial
statements or tax returns.
Use of Estimates
The preparation of financial statements
in conformity with generally accepted
accounting principles requires
management to make estimates and
assumptions that affect the reported
amounts of assets and liabilities and
disclosure of contingent assets and
liabilities at the date of the financial
statements and the reported amounts of
revenues and expenses during the
reporting period. Actual results could
differ from those estimates.
Effect of New Accounting Pronouncements
In March 1995, the Financial Accounting
Standards Board ("FASB") issued
Statement of Financial Accounting
Standards ("FAS") No. 121, "Accounting
for the Impairment of Long-Lived Assets
and for Long- Lived Assets to Be
Disposed Of." The Company believes that
this pronouncement will not have a
material impact on the Company's results
of operations and financial condition.
In October 1995, the FASB issued FAS No.
123, "Accounting for Stock-Based
Compensation." As permitted under FAS
No. 123, the Company plans to continue
its current method of valuing stock
options granted to employees and will
disclose the proforma effect of the fair
value of such options.
Fair Value of Financial Instruments
Financial instruments of the Company
include long-term debt. Based upon the
current borrowing rates available to the
Company, estimated fair values of the
revolving credit and term loans (see
Note 5) approximate their recorded
carrying amounts. It was not deemed
practical to determine the estimated
fair value of the remaining debt. The
carrying amounts for cash, accounts
receivable, accounts payable and accrued
expenses are reasonable estimates of
their fair value due to the short
maturity of these items.
Reclassifications
Certain amounts appearing in the 1995
and 1994 financial statements have been
reclassified to conform to the 1996
presentation. There was no effect on net
income due to the reclassification.
3. INVENTORIES Inventories consist of the following:
June 30, 1996 1995
- ---------------------------------------------------------------------------
Raw materials $3,849,000 $ 5,321,000
Work in process 648,000 375,000
Finished goods 5,223,000 9,219,000
- --------------------------------------------------------------------------
$9,720,000 $14,915,000
- --------------------------------------------------------------------------
4. PROPERTY,PLANT AND Property, plant and equipment consist of the following:
EQUIPMENT
June 30, 1996 1995
- -------------------------------------------------------------------------
Land and building $ 8,348,000 $ 8,348,000
Leasehold improvements 3,860,000 323,000
Machinery and equipment 15,804,000 15,374,000
Construction in progress - 1,133,000
Other 1,093,000 -
- -------------------------------------------------------------------------
29,105,000 25,178,000
Less: Accumulated
depreciation
and amortization 12,303,000 10,832,000
- -------------------------------------------------------------------------
$16,802,000 $14,346,000
- -------------------------------------------------------------------------
The net book value of property, plant
and equipment under capital leases was
$10,485,000 and $10,000,000 at June 30,
1996 and 1995, respectively.
5. LONG-TERM DEBT AND Long-term debt and capital lease obligations consist
CAPITAL LEASE of the following:
OBLIGATIONS
<TABLE>
<CAPTION>
June 30, 1996 1995
- -----------------------------------------------------------------------------------------
Long-Term Capital Long-Term Capital Leases
Debt Leases Debt
------------------------------ -----------------------------
<S> <C> <C> <C> <C>
Revolving/term loans (a) $11,545,000 $ - $13,289,000 $ -
Convertible subordinated 3,279,000 - 3,198,000 -
debentures, $1,000 face
value (less unamoritized
discount of $1,917,000
and $2,016,000) (b)
Convertible subordinated 852,000 927,000 -
debentures,$325,000 face
value (c)
New Jersey Economic Development 780,000 - 840,000 -
Authority Loan (d)
Secured note (e) 115,000 - 295,000 -
Building sale/leaseback (f) - 6,351,000 - 6,763,000
Capital equipment lease obligations (g) - 4,994,000 - 3,497,000
Other 300,000 - 300,000 -
- ------------------------------------------------------------------------------------------
16,871,000 11,345,000 18,849,000 10,260,000
Less: Current portion 587,000 1,877,000 642,000 1,529,000
- -----------------------------------------------------------------------------------------
$16,284,000 $9,468,000 $18,207,000 $ 8,731,000
- -----------------------------------------------------------------------------------------
</TABLE>
<PAGE>
(a) In October 1994, PFI modified its line of credit and
equipment term loan with its lending institution.
The maximum available funds under this modification
are $15,000,000. Advances under the revolving loans
are limited to the sum of eligible accounts receivable
and up to $6,000,000 of eligible inventory, as defined.
The term loan is payable in 48 monthly installments of
$34,000 commencing February 5, 1995, with the then
outstanding balance due on February 4, 1999. The
revolving loan is also due on that date. The term loan
and the revolving loan are secured by substantially
all of the assets of PFI and bear interest, payable
monthly, at the prime rate (8 1/4% at June 30, 1996),
plus 1 3/4%. In the event of default, the interest
rate will increase by 2%.
The loan agreement contains certain loan covenants,
which, among other things, prohibit the Company from
making dividend payments, limit the Company's annual
capital expenditures and net loss and require the
Company to maintain minimum working capital and net
worth. The Company was not in compliance in fiscal
1996 of the minimum amount of loss allowed under the
agreement, which non-compliance was waived by the
financial institution.
(b) At June 30, 1996, the Company has 5,196 units
outstanding consisting of a $1,000 principal amount 8%
convertible subordinated debenture due June 15, 2002
(the "8% Debentures") with interest payable
semi-annually. The holders of the 8% Debentures may
convert them at any time into common stock of the
Company at a conversion price of $48 per share. The
8% Debentures are redeemable at the option of the
Company under certain circumstances at par, plus an
applicable premium, as defined.
In 1994, 1,285 units of 8% Debentures, representing the
final number of options, were issued in connection
with the exercise of unit purchase options. Upon
exercise, a bond discount of $1,102,000 was recorded
on the transaction.
In 1996, ICC purchased 29 units of the 8% Debentures
at a purchase price of $17,643. ICC offered and the
Company accepted these bonds at ICC's cost, which
approximated the Company's book value of the debt.
(c) On June 30, 1996, the Company has 1,753 units
outstanding consisting of $325 principal amount
8 1/4% convertible debentures due June 15, 2002 (which
includes $570,000 face value and interest through
maturity of $282,000). Interest is payable annually
on June 30. The holders of the 8 1/4% Debentures may
convert them at any time into shares of common stock at
a conversion price of $.55 per share. The Company has
no right to redeem the 8 1/4% Debentures.
In 1996, 1995 and 1994, 58,206 and 5 units,
respectively, of 8 1/4% Debentures were converted
into common stock. A total of 158,166 shares were
issued to the debenture holders.
(d) The loan, which is secured by certain equipment, bears
interest at 63/8% and is due as follows: $70,000 at
June 1, 1997 and 1998; $80,000 at June 1, 1999, 2000
and 2001; and $400,000 at June 1, 2002. A provision in
the loan agreement allows the lender to declare the
loan immediately due and payable if there has been an
event of default in any of the Company's other debt
agreements.
(e) The Company has a variable interest rate secured
convertible note which bears interest at prime, plus
2 3/4%, payable quarterly. The principal amount of the
note may be converted into shares of the Company's
common stock at a conversion price of $.50 per share,
less adjustments. The note is subordinated to the
loans described in Note 5(a) and (d) and is
secured by all assets of PFI. The note is payable
$15,000 per month with interest due quarterly. The
note-holders have waived their rights to convert the
note into shares of common stock, except in the event
of default.
(f) In August 1989, PFI entered into a sale and leaseback
of its land and building in Edison, New Jersey. The
term of the lease is 15 years, plus two five-year
renewal options. Monthly base rent is $107,000 for the
first 30 months increased by the change in the Consumer
Price Index on the thirty-first month after
commencement and on each thirtieth month thereafter.
On September 30, 1994, the monthly base rent increased
to $130,000. The Company is obligated to pay all
utilities, real estate taxes, assessments and repair
and maintenance costs in connection with the premises.
The land and building has been recorded as a capital
lease and the gain on the sale and leaseback of
approximately $750,000 has been deferred and is
being amortized over the term of the lease. The lease
has been capitalized at the net present value of the
future minimum rental payments ($8,348,000), assuming
a 13 1/4% interest rate factor, and is being amortized
over the term of the lease.
(g) The Company leases various equipment primarily from ICC
under capital lease agreements. The terms of the leases
vary from three to five years with monthly rentals of
approximately $148,000.
The Company's debt and obligations under capital leases
mature in fiscal years ending June 30 as follows:
Capital Lease Long-Term
Obligations Debt
- ------------------------------------------------------------------------------
1997 $ 3,327,000 $ 587,000
1998 3,047,000 472,000
1999 2,945,000 10,821,000
2000 2,480,000 80,000
2001 1,786,000 80,000
Thereafter 4,784,000 4,831,000
- ------------------------------------------------------------------------------
Total payments 18,369,000 $16,871,000
----------------
Less: Amount
representing interest 7,024,000
- --------------------------------------------------------------
Present value of net
minimum lease payments $11,345,000
- --------------------------------------------------------------
6. COMMITMENTS AND Commitments
CONTINGENCIES
In fiscal 1996, the Company entered into a long-term
lease for a building adjacent to the Company's present
facility. The lease term is ten years with
two five-year renewal options. The lease is classified
as an operating lease. The rent payments are $319,200
per anum for the first five years and $342,000 per
annum for the balance of the initial term.
Contingencies
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 believes that the amount sought,
$3,500,000, has been frivolously asserted to harass the
Company and that the allegations are completely
baseless. 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.
In or about November 1992, an action was
instituted against the Company by Univest Technologies,
alleging that the Company breached its agreement by
refusing to furnish Soluble Aspirin to such entity.
Plaintiff seeks "consequential damages" of $1,500,000.
The Company denies that any such agreement existed and
vigorously denies that any monies are owed to
plaintiff. The Company moved to dismiss the
complaint, which motion was granted with
leave to replead. Plaintiff served an amended complaint
thereafter, and the Company again moved to dismiss the
complaint. The Company is awaiting a
decision from the court with respect to the Company's
second motion.
If the complaint is not dismissed, the Company intends
to assert counterclaims against plaintiff for amounts
in excess of the amount sought, on the basis of,
among other things, plaintiff's fraud and
misrepresentation.
In or about July 1994, Puritan Quartz, Inc.
("Puritan") brought suit against the Company, alleging
breach of (i) the Company's purported contractual
obligations to supply Puritan with acetaminophen and
ibuprofen for resale to an unaffiliated party; and (ii)
related confidentiality obligations. The complaint
seeks damages in the aggregate amount of $3,600,000,
plus $300,000 for each additional month of continuing
breach. The Company denies that it has any liability to
Puritan. The Company believes that the clear meaning
of the language of the agreement between the
parties was that the agreement had a one
year term, ending October 16, 1993, prior to the
events of the alleged breach, and that such agreement
was never extended. Accordingly, in the Company's view,
it had no obligation whatsoever to Puritan at the time
of the alleged breach. The Company further
believes that Puritan's claims as to the
aggregate amount of its alleged lost
profits are overstated. Discovery is on-going and the
Company intends to move for summary judgement at the
close of discovery.
Under the New Jersey Industrial Site
Recovery Act ("ISRA"), the purchase of
the Company's manufacturing facilities
from Revco in 1987, the sale/leaseback
of the premises in 1989 (Note 5(f)), and
the exercise by ICC of options to
purchase a controlling interest in the
Company's common stock required the
approval of the NJDEP (Note 1).
Although Revco has agreed to be
primarily liable for the cost of
clean-up efforts and has posted a
$1,000,000 bond with the State of New
Jersey to secure clean-up obligations
(reduced to $306,000 in July 1993), the
Company remains contingently liable for
the clean-up costs and could be called
upon for some or all of the clean-up
effort in the event Revco defaults on
its clean-up obligations.
Management believes the final outcome of
the above proceedings will not have a
material effect upon the Company's
financial position.
The Company is a party to various other
legal proceedings arising in the normal
conduct of business. Management believes
that the final outcome of these
proceedings will not have a material
adverse effect upon the Company's
financial position.
<TABLE>
<CAPTION>
7. INCOME TAXES Income taxes (benefit) consist of the following:
1996 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $(1,161,000) $ 483,000 $1,077,000
State - - -
- ---------------------------------------------------------------------------------
Total current (1,161,000) 483,000 1,077,000
Deferred - federal 250,000 (1,000,000) (197,000)
- ---------------------------------------------------------------------------------
Total income taxes (benefit) $ (911,000) $ (517,000) $ 880,000
- ---------------------------------------------------------------------------------
The Company's income taxes (benefit)
differ from the amount of income tax
determined by applying the applicable
statutory U.S. Federal income tax rate
to pretax income as a result of the
following:
1996 1995 1994
- ------------------------------------------------------------------------------------
Statutory U.S. tax $(1,488,000) $ 520,000 $ 1,051,000
Increase (decrease) resulting from:
Utilization of federal net
operating loss carryforwards - (56,000) (56,000)
State income taxes, net of federal
tax benefit - 108,000 185,000
Utilization of state net
operating loss carryforwards - (108,000) (185,000)
Net change in valuation account 681,000 (1,000,000) (197,000)
Other (104,000) 19,000 82,000
- -------------------------------------------------------------------------------------
Effective income taxes (benefit) $ (911,000) $ (517,000) $ 880,000
- -------------------------------------------------------------------------------------
</TABLE>
The Company utilized tax loss carryforwards of
approximately $166,000 for U.S. regular tax purposes
during each of the fiscal years ended June 30, 1995
and 1994.
As of June 30, 1996, the Company had available net
operating losses of approximately $3,000,000 for U.S.
regular tax purposes, which expire through 2111. The
utilization of losses generated prior to September
1991, which approximated $1,800,000, is limited to
approximately $166,000 per year for U.S. regular tax
purposes due to the change in ownership resulting from
the ICC investment. State income tax net operating
loss carryforwards of approximately $16,200,000, which
expire through 2003, are available to the Company.
Deferred tax assets are comprised of the following
temporary differences at June 30:
<TABLE>
<CAPTION>
1996 1995
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Tax benefit of state income tax net operating loss carryforwards $ 972,000 $ 813,000
Tax benefit of federal income tax net operating loss carryforwards 1,020,000 681,000
Depreciation (145,000) 54,000
Deferred gain on sale/leaseback of building 145,000 162,000
Basis difference 8 1/4% bonds as a result of restructuring 96,000 115,000
Capitalized inventory costs 136,000 136,000
Deferred compensation 148,000 -
Allowance for doubtful accounts 102,000 82,000
- ----------------------------------------------------------------------------------------------------------
Gross deferred tax asset 2,474,000 2,043,000
Valuation allowance (1,324,000) (643,000)
- -----------------------------------------------------------------------------------------------------------
Net deferred tax asset $1,150,000 $ 1,400,000
- -----------------------------------------------------------------------------------------------------------
</TABLE>
The net deferred tax asset of $2,474,000, before the valuation allowance, at
June 30, 1996, consists of future tax benefits of net operating loss
carryforwards and various other temporary differences. The Company has
forecasted profitable operations for at least the next few years and, therefore,
has recorded a net deferred tax asset of $1,150,000 at June 30 1996. The
benefits of net operating loss carryforwards and other temporary differences
that will take more than a few years to realize can not be reasonably determined
at this time due to the dynamics in the industry and the Company's inconsistent
operating results in the past. Accordingly, a valuation allowance of $1,324,000
was recorded at June 30, 1996, to provide for this uncertainty.
8. COMMON STOCK, The Company has granted options to employees, directors
OPTIONS AND and others under various stock option plans, lending
WARRANTS arrangements, and under the ICC Option Agreement to key
employees.
The following is a summary of stock
options and warrants issued, exercised,
forfeited or cancelled for the period
July 1, 1993 through June 30, 1996 (not
including ICC preemptive rights or
additional shares issuable to management
in connection with ICC preemptive
rights):
Shares Exercise price per share
- ------------------------------------------------------------------------------
Outstanding - June 30, 1993 1,071,699 $ .25 to $124.00
Forfeited (35,895) $6.80 to $124.00
- ------------------------------------------------------------------------------
Outstanding - June 30, 1994 1,035,804 $ .25 to $ 43.00
Issued 888,375 $ .85 to $ .91
Forfeited (103,404) $ .85 to $ 43.00
- ------------------------------------------------------------------------------
Outstanding - June 30, 1995 1,820,775 $ .25 to $ .91
Issued 130,000 $ .56 to $ .66
Forfeited (213,975) $ .85 to $ 8.00
- ------------------------------------------------------------------------------
Outstanding - June 30, 1996 1,736,800 $ .25 to $ 1.60
- ------------------------------------------------------------------------------
As of June 30, 1996, substantially all
outstanding stock options and warrants
were exercisable and expire at various
dates through fiscal 2001. These options
were granted at prices which were at or
above quoted market value on the dates
granted.
9. PREFERRED STOCK On April 8, 1996, the Company sold 2,500,000 shares of
Series A Preferred Stock to ICC for an aggregate of
$2,500,000. The preferred stock is redeemable at the
option of PFI and convertible into common stock of the
Company by ICC at any time after 36 months at the lower
of market price of the common stock of the Company or
$2.00 per share. The preferred stock sold to ICC pays
dividends at the rate of $.08 per share, payable
semi-annually on January 1st and July 1st each
year and is cumulative and non-participating.
10.MAJOR CUSTOMER AND For the years ended June 30, 1996, 1995 and 1994, 20%,
PRODUCTS 25% and 16%, respectively, of consolidated net sales
were derived from Revco D.S. Inc. For the years ended
June 30, 1996, 1995 and 1994, Walgreen Company
accounted for 14%, 14% and 16% of
consolidated net sales, respectively. In
addition, sales to ICC accounted for 17%
of consolidated net sales for the year
ended June 30, 1994. Sales to Price
Costco were 12%, 12% and 8% of
consolidated net sales for the years
ended June 30, 1996, 1995 and 1994, respectively.
For the years ended June 30, 1996, 1995
and 1994, sales of ibuprofen represented
41%, 41% and 46% of consolidated net
sales, respectively. For the years ended
June 30, 1996, 1995 and 1994, sales of
acetaminophen products accounted for
approximately 11%, 12% and 12% of
consolidated net sales, respectively.
11.SPECIAL In December 1995, the Company replaced its former
COMPENSATION EXPENSE President and Chief Executive Officer. The Company
accrued the estimated remaining obligation due to this
individual under his employment contract.
12. SUPPLEMENTAL CASH Supplemental disclosures of cash flow information:
FLOW INFORMATION
1996 1995 1994
- ------------------------------------------------------------------------------
Cash paid during the year:
Interest $3,463,000 $3,441,000 $3,455,000
Income taxes - 525,000 968,000
- ------------------------------------------------------------------------------
Supplemental non-cash investing and financing information:
1996 1995 1994
- ------------------------------------------------------------------------------
Issuance of common stock upon conversion of dates $28,000 $125,000 $3,000
- -------------------------------------------------------------------------------
In 1994, the Company repaid $524,000 of
accounts payable to ICC through the
issuance of 3,246,789 shares of common
stock in connection with the ICC Option
Agreement (Note 1).
Capital lease obligations of $1,801,000,
$1,449,000 and $2,511,000 were incurred
when the Company entered into various
leases in 1996, 1995 and 1994, respectively.
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
The audits referred to in our report dated August 26, 1996 relating to the
consolidated financial statements of Pharmaceutical Formulations, Inc. and
subsidiaries, which is contained in Item 8 of this Form 10-K, included the
audits of the financial statement schedule listed in the accompanying index.
This financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on this financial
statement schedule based upon our audits.
In our opinion, such financial statement schedule presents fairly, in all
material respects, the information set forth therein.
BDO Seidman, LLP
Woodbridge, New Jersey
August 26, 1996
<PAGE>
PHARMACEUTICAL FORMULATIONS, INC.
AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Additions Deductions
Balance at charged to write-offs
beginning of costs & Charge to uncollectible Balance at end
Allowance for doubtful accounts period expense other accounts accounts of period
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended June 30, 1996 $333,000 $ 68,000 $ - $101,000 $300,000
Year ended June 30, 1995 188,000 145,000 - - 333,000
Year Ended June 30, 1994 140,000 272,000 - 224,000 188,000
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
ITEM 10. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the compensation by the Company for the
most recent three fiscal years as well as certain other compensation paid to or
accrued for the account of the two persons who were Chief Executive Officer in
Fiscal 1996 and each of the four other executive officers of the Company who
were most highly compensated for Fiscal 1996 (such six individuals are sometimes
referred to as the "Named Executives") to the extent that salaries and bonuses
exceeded $100,000 for Fiscal 1996.
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
Awards Payouts
Restricted Securities
Other Annual Stock Underlying LTIP
Name and Salary Bonus Compensation Awards Options Payouts All Other
Principal Position Year $ $ $ $ # $ Compensation
- ------------------ ---- ------------------------- -------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Charles E. LaRosa 1996 $110,000 --- --- $19,000 105,000 --- ---
President and 1995 --- --- --- --- --- --- ---
Chief Executive 1994 --- --- --- --- --- --- ---
Officer1
Max A. Tesler 1996 242,000 --- --- 2,0003 --- --- 50,0002
President and 1995 242,000 30,000 --- 7,0003 162,500 --- 50,0002
Chief Executive 1994 223,000 --- --- 22,0003 --- --- 50,0002
Officer1
Anthony Cantaffa 1996 145,000 --- --- --- --- --- ---
Vice President, 1995 145,000 15,000 --- 5,0003 85,000 --- ---
Mergers and 1994 132,000 --- --- 5,0003 --- --- ---
Acquisitions
George Chin 1996 140,000 30,000 --- --- --- --- ---
Vice President, 1995 --- --- --- --- --- --- ---
Sales4 1994 --- --- --- --- --- --- ---
Frank Marchese 1996 106,000 --- --- --- --- --- ---
Vice President; 1995 --- --- --- --- --- --- ---
Chief Financial 1994 --- --- --- --- --- --- ---
Officer; Secretary
and Treasurer4
Brian Barbee 1996 102,000 --- --- --- --- --- ---
Vice President, 1995 --- --- --- --- --- --- ---
Scientific Affairs4 1994 --- --- --- --- --- --- ---
---------------------
1 Dr. Tesler was President until December 1995, when Mr. LaRosa was elected to that position.
2 Consists of payments in connection with the waiver of certain provisions of Dr. Tesler's employment agreement in connection
with the change of control provisions of such agreement. See "Employment Agreements.
3 In connection with the ICC Option Agreement, as amended, management was issued shares and warrants to purchase shares of
the Company's Common Stock. See "Certain Relationships and Related Transactions."
4 The positions occupied by such individuals were not considered executive offices until Fiscal 1996.
</TABLE>
OPTION GRANTS IN FISCAL 1996
The following table contains information concerning the grant of stock
options to the Named Executives during Fiscal 1996 (the Company has no
outstanding stock appreciation rights - "SARs" - and granted no SARs during
Fiscal 1996):
<TABLE>
<CAPTION>
Individual Grants
Number of Percent of Potential Realizable Value at
Securities Total Options Assumed Annual Rates of
Underlying Granted to Exercise Stock Price Appreciation for
Options Employees in Price Expiration Option Term1
Name Granted Fiscal Year ($/Share)2 Date2 5%($) 10%($)
- ------------------------- ---------- ------------------ ---------- ----------- ----- ------
(#)2
<S> <C> <C> <C> <C> <C> <C>
Charles E. LaRosa 30,000 23% $.66 12/2000 $9,000 $16,000
Charles E. LaRosa 75,000 58% $.56 4/2001 $30,000 $49,000
1 Executives may not sell or assign any stock grants, which have value only
to the extent of stock price appreciation, which will benefit all
shareholders commensurately. The amounts set forth are based on assumed
appreciation rates of 5% and 10% as prescribed by the Securities and
Exchange Commission rules and are not intended to forecast future
appreciation, if any, of the stock price. The Company did not use an
alternate formula for a grant date valuation as it is not aware of any
formula which will determine with reasonable accuracy a present value based
on future unknown or volatile factors. Actual gains, if any, on stock
option exercises and Common Stock holdings are dependent on the future
performance of the Common Stock and overall stock market conditions. There
can be no assurance that the amounts reflected in this table will be
achieved.
2 The exercise price is equal to or higher than the fair market value of the
Company's Common Stock on the date of the grant. The options for 30,000
shares were granted on January 25, 1996, and become exercisable in full on
June 7, 1996 and expire on the later of September 4, 1996 or the date of
termination of the employee's employment (but in no event later than
December 6, 2000), whichever is later. The options for 75,000 shares were
granted on June 7, 1996 and become exercisable in full on October 4, 1996
and expire on April 4, 2001.
</TABLE>
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES IN FISCAL 1996
No options or SARs were exercised by any executive officer of the
Company during Fiscal 1996. The following table sets forth information with
respect to the Named Executive concerning unexercised options held at fiscal
year-end (as noted above, the Company has no outstanding SARs, and no SARs were
exercised in the current fiscal year):
<TABLE>
<CAPTION>
Number of Unexercised Value of Unexercised
Securities Underlying In-the-Money Options
Options at 6/30/96 at 6/30/96($)1
Shares Realized
Acquired on Value
Name Exercise(#) ($) Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ----- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Charles E. LaRosa --- --- 30,000 75,000 $ 3,000 14,000
Max Tesler --- --- 395,700 --- 83,000 ---
George Chin --- --- 70,550 --- 7,000 ---
Anthony Cantaffa --- --- 111,800 --- 7,000 ---
Frank Marchese --- --- 40,000 --- --- ---
Brian Barbee --- --- 41,250 --- --- ---
--------------------
1 Market value of underlying securities at year end, as applicable, minus the
exercise price. The high bid and low asked prices on the OTC Bulletin Board
on June 28, 1996, were $25/32 and $29/32 respectively. Certain options are
excluded since they are Aout of the money.
</TABLE>
EMPLOYMENT CONTRACTS AND CHANGE OF CONTROL ARRANGEMENTS
LAROSA EMPLOYMENT AGREEMENT
Mr. LaRosa entered into an employment agreement with the Company dated
April 4, 1996, pursuant to which he agreed to be retained as President and Chief
Executive Officer at a salary of $250,000 per year beginning June 7, 1996. Mr.
LaRosa was paid $200,000 per annum for the period from December 7, 1995 to June
7, 1996. Mr. LaRosa is entitled to a bonus at the end of each fiscal year based
upon Company results and performance, which bonus is at the sole discretion of
the Board of Directors with no guaranteed minimum or maximum bonus. Pursuant to
such agreement, effective June 7, 1996 he was awarded a grant of 25,000 shares
of stock pursuant to the employment agreement and stock options for 75,000
shares of common stock, at $.56 per share, such options being exercisable in
full on October 4, 1996 and expiring April 4, 2001. Mr. LaRosa had previously
received 30,000 options at $.66 per share, such options were exercisable on June
7, 1996 and expire June 7, 2001. He is also entitled to certain insurance and
similar benefits of a customary nature, plus reimbursement of financial planning
services up to a maximum of $5,200 per year. Mr. LaRosa's employment may be
terminated at any time by the Company upon three months notice, but in such
instance he will continue to receive compensation for 12 months from the date on
which the Company chooses to cease his employment activities. Mr. LaRosa may
terminate his employment upon two weeks notice.
TESLER EMPLOYMENT AGREEMENT
Dr. Tesler entered into an employment agreement with the Company in
1984, which was amended at various subsequent times. His employment with the
Company was ended in December 1995. The employment agreement provided that in
the event of termination by the Company other than for cause, Dr. Tesler is
entitled to receive his full base salary and all benefits for the balance of the
remaining term of the employment agreement plus one year, but in no event for
more than three years. The agreement also provides that in the event of his
death during this period, his surviving ex-spouse or estate will receive $50,000
per year for ten years.
In connection with the execution of the ICC Option Agreement, as
amended, Dr. Tesler executed an amendment to his employment agreement, pursuant
to which the term of the employment agreement was extended and modified and Dr.
Tesler further waived his rights to receive 5% of pre-tax profits and specified
warrants to receive Common Stock. Also, in connection with the ICC Option
Agreement, as well as the amendment to Dr. Tesler's employment agreement, Dr.
Tesler has received 250,000 shares of Common Stock and 272,533 additional shares
of Common Stock as a result of rights granted to Dr. Tesler in the event that
Common Stock was issued by the Company to third parties pursuant to agreements
in effect at that date. Dr. Tesler's employment agreement also provided that, in
the event of a "Change of Control" of the Company, as defined in his agreement,
he was entitled to receive cash compensation equal to two times his last annual
salary and 10% of the total number of shares outstanding on the date of such
Change of Control on a fully diluted basis (i.e., giving effect to the exercise
of all outstanding warrants, options and other rights to shares of the Company's
Common Stock). Dr. Tesler received the shares as noted above, and $50,000 per
year for four years and 400,000 warrants to purchase Common Stock at $.50 per
share, in lieu of this provision. In September, 1992 Dr. Tesler, on behalf of
the Company, agreed in an amendment to the ICC Option Agreement, to the
Company's distribution of 66,800 of these warrants to other key management
personnel.
Upon review of such warrants by the Board of Directors, certain
directors felt that the provisions of such warrants as issued were not in
accordance with the terms agreed and authorized. Specifically, some directors
believe that the warrants should have been in the same format as other warrants
issued in the same time period, and specifically were to include antidilution
provisions consistent with traditional warrants that are customary both for the
Company and for such warrants, and that the warrants should proportionately
adjust in the case of a reverse stock split or similar recapitalization of the
Company. The Company understands that Dr. Tesler takes a position with respect
to the terms of such warrants which is contrary to the position taken by such
directors.
CANTAFFA EMPLOYMENT AGREEMENT
Mr. Cantaffa has an employment agreement with the Company which
provides for an annual base salary, subject to approved increases, and expires
on December 31, 1996.
OPTIONS
Options granted under the Company's 1994 Stock Option Plan include
provisions accelerating the vesting schedule in the case of a defined "Change of
Control." A "Change of Control" shall be deemed to have occurred if (i) any
person or group of persons acquires (or has acquired during the twelve-month
period ending on the date of the most recent acquisition by such person) the
beneficial ownership, directly or indirectly, of securities of the Company
representing 20% or more of the combined voting power of the then outstanding
securities of the Company; (ii) during any period of twelve months, individuals
who at the beginning of such period constitute the Board of Directors, and any
new director whose election or nomination was approved by the directors in
office who either were directors at the beginning of the period or whose
election or nomination was previously so approved, cease for any reason to
constitute at least a majority thereof; (iii) a person acquires beneficial
ownership of stock of the Company that, together with stock held immediately
prior to such acquisition by such Person, possesses more than 50% of the total
fair market value of total voting power of the stock of the Company, unless the
additional stock is acquired by a person possessing, immediately prior to such
acquisition, beneficial ownership of 40% or more of the Common Stock; or (iv) a
person acquires (or has acquired during the twelve-month period ending on the
date of the most recent acquisition by such person) assets from the Company that
have a total fair market value equal to or more than one-third of the total fair
market value of all of the assets of the Company immediately prior to such
acquisition. Notwithstanding the foregoing, for purposes of clauses (i) and
(ii), a Change in Control will not be deemed to have occurred if the power to
control (directly or indirectly) the management and policies of the Company is
not transferred from a person to another person; and for purposes of clause
(iv), a Change in Control will not be deemed to occur if the assets of the
Company are transferred: (A) to a shareholder in exchange for his stock, (B) to
an entity in which the Company has (directly or indirectly) 50% ownership, or
(C) to a Person that has (directly or indirectly) at least 50% ownership of the
Company with respect to its stock outstanding, or to any entity in which such
person possesses (directly or indirectly) 50% ownership.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table shows information, as of September 1, 1996, with
respect to the beneficial ownership of Common Stock by (i) each director, (ii)
each Named Executive, (iii) each person or group known to the Company to own
beneficially more than 5% of the outstanding Common Stock, and (iv) all
executive officers and directors as a group:
Name and Address of Amount and Nature of Percentage
Beneficial Owner Beneficial Ownership 1 of Class
- ---------------- -------------------- ----------
Dr. Max A. Tesler 988,3262 3.3%
30 Central Park South
New York, NY 10019
ICC Industries Inc. 19,635,8943 66.5%
460 Park Avenue
New York, NY 10022
Dr. John Farber 19,635,8943 66.5%
c/o ICC Industries Inc.
460 Park Avenue
New York, NY 10022
John L. Oram 20,000 *
c/o ICC Industries Inc.
460 Park Avenue
New York, NY 10022
Charles E. LaRosa 140,0004 *
c/o Pharmaceutical Formulations, Inc.
460 Plainfield Avenue
Edison, NJ 08818
Anthony Cantaffa 176,8714 *
c/o Pharmaceutical Formulations, Inc.
460 Plainfield Avenue
Edison, NJ 08818
Ben A. Blackshire 105,0004 *
c/o Stratagem, Inc.
8012 State Line Road
Leawood, KS 66208
Michael P. Callahan 105,0004 *
21048 Starflower Way
Ashburn, VA 22011
Ray W. Cheesman 135,0004 *
c/o Pharmaceutical Formulations, Inc.
460 Plainfield Avenue
Edison, NJ 08818
George Chin 135,6214 *
c/o Pharmaceutical Formulations, Inc.
460 Plainfield Avenue
Edison, NJ 08818
Brian W. Barbee 41,2504 *
c/o Pharmaceutical Formulations, Inc.
460 Plainfield Avenue
Edison, NJ 08818
Frank Marchese 40,0004 *
c/o Pharmaceutical Formulations, Inc.
460 Plainfield Avenue
Edison, NJ 08818
David Belaga 25,0004 *
c/o Pharmaceutical Formulations, Inc.
460 Plainfield Ave.
Edison, NJ 08818
Officers and Directors 1,912,0684 6.3%
as a Group (11 persons)
- ------------------------------
* Less than 1%.
1 Unless it is stated otherwise in any of the following notes, each holder
owns the reported shares directly and has sole voting and investment power
with respect to such shares. The number of shares beneficially owned by a
person also includes all shares which can be acquired by such person within
60 days, including by way of exercise of outstanding options or the
conversion of convertible securities which are, or during such 60-day
period, become exercisable or convertible.
2 Includes (i) 340,442 shares of Common Stock owned by NuMatco, Inc.
("NuMatco"), a company of which Dr. Tesler is sole officer, director and
stockholder; (ii) currently exercisable warrants to purchase 333,200 shares
of Common Stock, exercisable at a price of $.50 per share until October 1,
1998 (see the discussion above under "Tesler Employment Agreement" with
respect to such warrants); (iii) 20 shares issuable upon conversion of each
of 327 8% Convertible Debentures for a total of 6,813 shares, which
debentures are owned by the pension plan for BTS Therapeutics Corp., a
company wholly-owned by Dr. Tesler; and (iv) 30,652 shares owned by HTA
Co., Inc. which shares represent Dr. Tesler's 50% ownership interest in the
total 61,304 shares owned by HTA.
3 Does not include approximately 3,777,000 shares includable in connection
with ICC's limited preemptive rights since such rights are not currently
exercisable nor can there be any assumption that they will become
exercisable within 60 days after September 1, 1996. Such shares are
issuable only upon the issuance by the Company of certain shares to other
persons; the issuance of shares to ICC pursuant to the limited preemptive
rights is intended to maintain the preexisting equity ownership of ICC of
approximately two-thirds of the outstanding shares (excluding shares which
ICC may acquire upon conversion of convertible preferred shares). It also
does not include any shares which may be issuable upon conversion of
outstanding convertible preferred stock since such conversion can not occur
until April 8, 1999. Dr. Farber is the majority stockholder of ICC. See
"Certain Relationships and Related Transactions."
4 Includes shares of Common Stock subject to stock options exercisable as of
September 1, 1996 or within 60 days thereof as follows: Mr. Barbee: 41,250;
Mr. Belaga: 25,000; Mr. Blackshire: 75,000; Mr. Callahan: 75,000; Mr.
Cantaffa: 111,800; Mr. Cheesman: 75,000; Mr. Chin: 70,550; Mr. LaRosa:
105,000; Mr. Marchese: 40,000; Dr. Tesler: 340,013; and all officers and
directors as a group: 958,613.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Amendment No. 3 to the
Registrant's Annual Report on Form 10-K to be signed on its behalf by the
undersigned, thereunto duly authorized.
PHARMACEUTICAL FORMULATIONS, INC.
By:/s/ Frank Marchese
Frank Marchese, Vice President, Finance
Dated: April 15, 1997
