SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
/x/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the Fiscal Year Ended June 30, 1997
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from ____ to ____
Commission file number: 0-11274
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PHARMACEUTICAL FORMULATIONS, INC.
(Exact name of Registrant as Specified in its Charter)
DELAWARE 22-2367644
(State or Other (IRS Employer
Jurisdiction of Identification No.)
Incorporation or
Organization)
460 PLAINFIELD AVENUE, EDISON,
NJ 08818 (Address of principal executive
offices, including zip code)
(732) 985-7100
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
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
reporting 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 is not contained herein, and will not be contained, to the
best of the 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, 1997 was
approximately $7,400,000.
As of August 20, 1997, there were 29,880,350 shares of Common Stock, par
value $.08 per share, outstanding
DOCUMENTS INCORPORATED BY REFERENCE
Various exhibits, as listed in Item 14 of Part IV, have been incorporated
by reference.
<PAGE>
PART I
ITEM 1. BUSINESS
THIS ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF THAT TERM IN THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995 (SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF
THE SECURITIES EXCHANGE ACT OF 1934). ADDITIONAL WRITTEN OR ORAL FORWARD-
LOOKING STATEMENTS MAY BE MADE BY THE COMPANY FROM TIME TO TIME, IN FILINGS WITH
THE SECURITIES EXCHANGE COMMISSION OR OTHERWISE. STATEMENTS CONTAINED HEREIN
THAT ARE NOT HISTORICAL FACTS ARE FORWARD-LOOKING STATEMENTS MADE PURSUANT TO
THE SAFE HARBOR PROVISIONS REFERENCED ABOVE. FORWARD- LOOKING STATEMENTS MAY
INCLUDE, BUT ARE NOT LIMITED TO, PROJECTIONS OF REVENUE, INCOME OR LOSS AND
CAPITAL EXPENDITURES; STATEMENTS REGARDING FUTURE OPERATIONS, FINANCING NEEDS,
COMPLIANCE WITH FINANCIAL COVENANTS IN LOAN AGREEMENTS, PLANS FOR ACQUISITION OR
SALE OF ASSETS OR BUSINESSES AND CONSOLIDATION OF OPERATIONS OF NEWLY ACQUIRED
BUSINESSES, AND PLANS RELATING TO PRODUCTS OR SERVICES OF THE COMPANY;
ASSESSMENTS OF MATERIALITY; AND PREDICTIONS OF FUTURE EVENTS AND THE EFFECTS OF
PENDING AND POSSIBLE LITIGATION, AS WELL AS ASSUMPTIONS RELATING TO THE
FOREGOING. IN ADDITION, WHEN USED IN THIS DISCUSSION, THE WORDS "ANTICIPATES,"
"BELIEVES," "ESTIMATES," "EXPECTS," AND "INTENDS," AND "PLANS," AND VARIATIONS
THEREOF AND SIMILAR EXPRESSIONS, ARE INTENDED TO IDENTIFY FORWARD-LOOKING
STATEMENTS.
FORWARD-LOOKING STATEMENTS ARE INHERENTLY SUBJECT TO RISKS AND
UNCERTAINTIES, SOME OF WHICH CANNOT BE PREDICTED OR QUANTIFIED BASED ON CURRENT
EXPECTATIONS. CONSEQUENTLY, FUTURE EVENTS AND ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE SET FORTH IN, CONTEMPLATED BY, OR UNDERLYING THE FORWARD-
LOOKING STATEMENTS CONTAINED IN THIS ANNUAL REPORT. STATEMENTS IN THIS ANNUAL
REPORT, PARTICULARLY IN "ITEM 1. BUSINESS", "ITEM 3. LEGAL PROCEEDINGS", THE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AND "ITEM 7. MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," DESCRIBE CERTAIN
FACTORS, AMONG OTHERS, THAT COULD CONTRIBUTE TO OR CAUSE SUCH DIFFERENCES. OTHER
FACTORS THAT COULD CONTRIBUTE TO OR CAUSE SUCH DIFFERENCES INCLUDE, BUT ARE NOT
LIMITED TO, UNANTICIPATED DEVELOPMENTS IN ANY ONE OR MORE OF THE FOLLOWING
AREAS: THE ABILITY TO OBTAIN APPROVALS FROM THE U.S. FOOD AND DRUG
ADMINISTRATION FOR NEW PRODUCTS AND OTHER REGULATORY MATTERS, THE RECEPTIVITY OF
CONSUMERS TO GENERIC DRUGS, THE RATE AND CONSUMER ACCEPTANCE OF NEW PRODUCT
INTRODUCTIONS, COMPETITION, THE NUMBER AND NATURE OF CUSTOMERS (INCLUDING,
WITHOUT LIMITATION, THE EFFECTS OF MERGERS AMONG CUSTOMERS) AND THEIR PRODUCT
ORDERS, PRICING, PRODUCTION BY THIRD PARTY VENDORS, BORROWING COSTS, CHANGES IN
TAXES, PENDING OR THREATENED LITIGATION, THE AVAILABILITY OF KEY PERSONNEL AND
OTHER RISKS FACTORS WHICH MAY BE DETAILED FROM TIME TO TIME IN THE COMPANY'S
SECURITIES AND EXCHANGE COMMISSION FILINGS.
READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON ANY
FORWARD-LOOKING STATEMENTS CONTAINED HEREIN, WHICH SPEAK ONLY AS OF THE DATE
HEREOF. THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY RELEASE THE RESULT OF
ANY REVISIONS TO THESE FORWARD-LOOKING STATEMENTS THAT MAY BE MADE TO REFLECT
EVENTS OR CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF
UNEXPECTED EVENTS.
INTRODUCTION
Pharmaceutical Formulations, Inc. (the "Company" or "PFI"), a Delaware
corporation, is the second largest publicly-traded private label manufacturer
and distributor of nonprescription ("over-the-counter" or "OTC") solid dose
pharmaceutical products (collectively, "Generic OTC Products") in the United
States. Such products, which are made in tablet, caplet or capsule form, as
applicable, are primarily sold under the Company's customers' store brands or
other private labels, manufactured under contract for national brand
pharmaceutical companies or sold in bulk to others who repackage them for sale
to small, typically independent, retailers and to other manufacturers who do not
have government approval to manufacture certain formulas such as ibuprofen. 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 U.S. Food
and Drug Administration ("FDA"). The Company's largest customers include Revco
D.S. Inc. ("Revco") (which merged with CVS Corp. in May 1997 (after the merger,
"Revco/CVS")), Walgreen Company ("Walgreen") and Costco Wholesale ("Costco").
Prior to June 30, 1995, the Company operated through its then-wholly- owned
subsidiary, Private Formulations, Inc., an Ohio corporation which was acquired
from Revco in 1987. 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 66.7% 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 calendar 1996 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
approximately 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
Currently, the Company markets more than 120 different types of
Generic OTC Products (including different dosage strengths of the same chemical
composition). These include analgesics (such as ibuprofen, acetaminophen and,
commencing in February 1997, naproxen sodium), cough-cold preparations,
sinus/allergy products and gastrointestinal relief products. The Company is the
second largest private label manufacturer of solid dose OTC analgesics in the
U.S. retail market. In the fiscal years ended June 30, 1997, 1996 and 1995,
sales of ibuprofen accounted for 38%, 41%, and 41%, 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
Aleve(R), 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) and
Allerest(R), among others.1
1 Such brand names, and other brand names mentioned herein, are
registered marks of companies unrelated to PFI, unless otherwise noted.
The Company has negotiated an alliance with A&S Pharmaceutical
Corporation pursuant to which A&S's complete range of aspirin products will be
made available to the Company's customers. This will enable the Company to
satisfy demand in a growth segment driven largely by the therapeutic benefits of
aspirin-based products for cardiovascular patients.
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, 1997, the
Company purchased from ICC $1,226,000 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 "Insurance."
CUSTOMERS
The Company's customers consist of over 50 retailers (including major
national and regional drugstore, supermarkets and mass-merchandise chains),
wholesalers, distributors, and brand-name pharmaceutical companies. For fiscal
1997, 1996 and 1995, respectively, sales to retail drug and supermarket chains
and mass merchandisers accounted for approximately 84%, 85% and 80% of the
Company's sales, bulk sales to wholesalers and distributors accounted for
approximately 10%, 13% and 14%, of the Company's sales and sales to brand-name
pharmaceutical companies accounted for approximately 6%, 2% and 6%, of the
Company's sales. All of these sales consisted of products which the Company's
customers sell under their own store brand or other labels.
Sales to Revco accounted for $12,950,000 (17%), $11,078,000 (20%) and
$14,536,000 (25%) of the Company's net sales for fiscal 1997, 1996 and 1995,
respectively. (In May 1997, Revco merged with CVS.) Sales to Walgreens were
$10,685,000 (14%), $7,609,000 (14%) and $8,373,000 (14%) for fiscal 1997, 1996
and 1995, respectively. Sales to Costco were $9,162,000 (12%), $6,508,000 (12%)
and $6,892,000 (12%) for fiscal 1997, 1996 and 1995, respectively.
Other retail customers include American Stores, a grocery chain;
AmeriSource, a drug wholesaler; BJ Wholesale Club, a warehouse discounter;
Eckerd, a drug store chain; Family Dollar, a discount chain; Fleming Cos., a
food wholesaler; H.E. Butt, a food chain; Kmart, a mass merchandise chain;
Pathmark Stores, a grocery store chain; Rite Aid, a drug store chain; Super
Valu, a food wholesaler; Wakefern/Shoprite, a grocery store co-op; and
Winn-Dixie, a grocery store chain.
The amounts of backlog orders at the end of fiscal 1997 and 1996 were
not significant. International sales are not significant at this time.
SALES AND MARKETING
The Company has 13 employees in sales and customer service. This staff
and 25 independent brokers sell the generic OTC pharmaceutical products and the
marketing services of the Company to current and potential customers. There
currently are five account teams servicing different geographic areas of the
U.S., each headed by a sales director who works with a marketing director, a
customer service representative and a management information systems specialist.
A team is assigned to each retail account to service that account, including
making marketing recommendations to help those customers build their store brand
business.
The Company has 12 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; PRODUCTS IN DEVELOPMENT
The Company engages in a research and development program which seeks
to develop and gain regulatory approval of products which are comparable to
national brand products under the FDA OTC Drug Monograph status or the RX/OTC
switch status. The Company has also recently engaged in R&D efforts related to
certain prescription ("ethical") products and is exploring potential acquisition
candidates or joint ventures to facilitate its entry into other drug categories.
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 1997, 1996 and 1995 were $867,000, $790,000 and $1,488,000, 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 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. The Company expects to spend in fiscal 1998 nearly
double the amount expended in fiscal 1997 on research and development activities
consistent with its goal of continually increasing the Company's product line.
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 $600,000 (all of which has been contributed through the
fiscal year 1997) 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. An ANDA for the product was filed with the FDA
in October 1996. This will be the Company's first entry with the generic
prescription market if the ANDA is approved.
The Company, in connection with ICC, is developing the OTC version of
a cimetidine based H2 antagonist, for the relief from heartburn, acid
indigestion and sour stomach. An ANDA for this product was filed with the FDA in
October 1996. If an ANDA is approved, sales could not commence before June 1998,
when the marketing exclusivity on the brand name equivalent expires.
Cimetidine and sucralfate will be, if approved, the Company's first
major entries into the gastrointestinal category. FDA approvals of ANDA's
generally take 18 to 24 months to obtain and there can be no assurance that the
Company's ANDA's will be approved.
ENVIRONMENTAL MATTERS
The prior owner of the Company's Edison, New Jersey manufacturing
facility, Revco, has conducted a soil and groundwater cleanup of such facility,
under the New Jersey Industrial Site Recovery Act ("ISRA"), as administered by
the New Jersey Department of Environmental Protection ("NJDEP"). NJDEP has
determined that the soil remediation was complete and has approved the
groundwater remediation plan, subject to certain conditions. Revco began
operating a groundwater remediation treatment system in 1995. Although Revco/CVS
is primarily responsible for the entire cost of the cleanup, the Company
guaranteed the cleanup. In addition, the Company agreed to indemnify the owner
of the facility under the terms of the 1989 sale lease-back. If Revco/CVS
defaults in its obligations to pay the cost of the clean-up, and such costs
exceed the amount of the bond posted by Revco/CVS, the Company may be required
to make payment therefor. The likelihood of Revco/CVS, being unable to satisfy
any claims which may be made against it in connection with the facility,
however, are remote in the opinion of the Company. 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 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 efficacy 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
different 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 such 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. The Company's naproxen sodium product
received ANDA approval in 1997.
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 $4,500,000,
will help the Company satisfy 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
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. While
the Company holds certain manufacturing, marketing and patent rights to an oral
stabilized soluble sodium aspirin in powder and tablet form, the Company does
not intend to engage in development or marketing activities with respect to this
product.
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
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. Some 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
price, product quality, customer service and marketing. 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
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 20, 1997, the Company employed approximately 348
full-time employees. Of such employees, 229 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, 5
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 20,
1997, the Company had 25 persons employed in sales and marketing, 49
administrative and operational employees and 40 laboratory technicians and
scientists. The Company believes that its relations with its employees are
satisfactory.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company as of September 15, 1997 are set
forth below:
NAME POSITIONS
Charles E. LaRosa President; Chief Executive
Officer; Director
Brian W. Barbee Vice President, Scientific
Affairs
David Belaga Vice President, Marketing
Victor Biller Vice President, Operations
Anthony Cantaffa Vice President, New Business
Development
George Chin Vice President, Sales
Frank Marchese Vice President, Finance;
Chief Financial Officer;
Treasurer; Secretary
The business experience of the Company's Executive Officers who are
not Directors is set forth below; for the business experience of Executive
Officers who are Directors, see Part III below:
BRIAN W. BARBEE, age 47, 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 41, has been Vice President, Marketing since April
1996. Prior thereto he was a Senior Product Manager in marketing with American
Home Food Products, a subsidiary of American Home Products Corporation
(1995-1997) and Block Drug (1986-1994) and an Assistant Brand Manager at
Pepsi-Cola Co. (1985-86).
VICTOR BILLER, age 52, has been Vice President, Operations since July
1997. Prior thereto he was Group Manager Engineer at Johnson & Johnson's McNeil
Consumer Products Company since 1988.
ANTHONY CANTAFFA, age 54, has been the Company's Vice President, New
Business Development since September 1997. He was Vice President, Mergers &
Acquisitions from August 1995 until September 1997, Chief Financial Officer and
Treasurer from 1988 until August 1990 and from April 1991 to August 1995 and
Chief Operating Officer from 1988 until May 1995.
GEORGE CHIN, age 44, 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 42, 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.
ITEM 2. PROPERTIES
The Company leases approximately 214,000 square feet of office,
manufacturing and warehousing space in Edison, New Jersey, under a lease which
expires in 2004. The Company has two five-year renewal options. The monthly
rental is currently $139,000 per month and will increase on each 30th month
after February 1997 by a cost of living increase. The rental during each of the
renewal options, if any, will be the higher of the "fair rental value" (as that
term is defined in the lease) of the premises at the commencement of each
renewal option or the rent in effect at the end of the lease. In addition, the
Company is obligated to pay all utilities, real estate taxes, assessments,
repairs, improvements, maintenance costs and expenses in connection with the
premises, comply with certain ISRA obligations and maintain certain minimum
insurance protection.
In March 1995, the Company entered into a ten-year lease for a 91,200
square foot building located adjacent to its present manufacturing facility. The
Company has two five-year renewal options. Rent payments are $26,600 per month
for the first five years and $28,500 per month for the balance of the initial
ten-year term. In addition, the Company is obligated to pay all utilities, real
estate taxes, assessments, repairs, improvements, maintenance costs and expenses
in connection with the premises, comply with certain ISRA obligations and
maintain certain minimum insurance protection.
The Company believes that both of these facilities provide the
potential for increased expansion of manufacturing capacity, if necessary.
ITEM 3. LEGAL PROCEEDINGS
CLAIMS RELATED TO MAX TESLER. On July 3, 1997, the Company received an
arbitration demand from the estate of Dr. Max Tesler, the former President of
the Company who died in December 1996. For alleged breaches of employment and
other agreements between the Company and Dr. Tesler, the estate is seeking an
award of not less than $5,500,000 in compensatory damages, not less than
$10,000,000 in punitive damages and such number of shares of common stock of the
Company as would equal 10% of the total number of shares. For claimed tortuous
conduct, the estate is seeking not less than $20,000,000 for intentional
infliction of emotional distress and no less than $10,000,000 for PRIMA FACIE
tort. The estate is also seeking attorney's fees and a revised warrant agreement
pursuant to claimed antidilution provisions. The claimed breaches of contract
include failure to pay (a) salary through December 1998, (b) change of control
payments on the assumption that there was a change of control as defined in the
agreements with Dr. Tesler with the election of a new Board of Directors at the
November 1996 annual meeting and (c) death benefits. The children and a former
spouse of Dr. Tesler have also raised certain claims for compensation arising
out of the death of Dr. Tesler, which such claims are substantially duplicative
of those asserted by the estate of Dr. Tesler.
With respect to the claim for continuing salary, the Company has
asserted counterclaims which the Company has, which exceed the amount of such
payments. The Company maintains that as a result of the termination of Dr.
Tesler's employment in December 1995, the Company ceased to have any liability
under the change-of-control and death benefit provisions of the various
agreements with Dr. Tesler, as well as having other defenses to such claims. It
is also the Company's position that certain provisions of the warrants issued to
Dr. Tesler were not as agreed and authorized. Specifically, the warrants should
have been in the same format as other warrants issued in the same time period,
and 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.
In December 1995, the Company accrued the continuing salary due to Dr.
Tesler for the period through December 1998. It has not made provision for any
of the other amounts claimed, nor has it accrued any amounts due from the
estate. As noted above, the Company believes that the unreserved- for claims by
the estate are without merit and that the Company has valid offsetting claims.
The Company intends to vigorously defend against the arbitration claim and to
prosecute its claims against the estate.
ROSENBLUM V. PFI. In 1991, an action was instituted in the Superior
Court of New Jersey, County of Middlesex, against the Company by Marvin
Rosenblum, seeking $3,500,000 in damages and other relief for claimed breach of
an alleged employment agreement. The Company has interposed counterclaims for
fraud and related claims and seeks damages in the amount of $5,000,000. As a
result of plaintiff's poor physical condition, the matter was transferred to the
"inactive" trial and no further action will be taken by either party unless the
plaintiff seeks to restore the matter to the active trial calendar.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
The Company's Common Stock is registered under Section 12(g) of the
Securities Exchange Act of 1934 and is traded on the over-the-counter market
(OTC Bulletin Boardsm, Pink Sheetstm symbol: PHFR). Trading to date has been
limited and there can be no assurance that an active trading market will ever
develop for the Common Stock. As of September 15, 1997, there were 1,558 holders
of record of the Company's Common Stock. The following table sets forth the
range of high and low closing bid quotations for the Common Stock as reported by
National Quotation Bureau. These quotations represent prices between dealers,
without adjustments for retail mark-ups, mark-downs or other fees or
commissions, and may not represent actual transactions.
HIGH BID LOW BID
Fiscal Year Ended June 30, 1996
First Quarter.................. $11/16 $9/16
Second Quarter................. 21/32 13/32
Third Quarter.................. 19/32 7/16
Fourth Quarter................. 13/16 7/16
Fiscal Year Ended June 30, 1997
First Quarter................... 1 3/16 11/16
Second Quarter.................. 1 25/32
Third Quarter................... 1 11/16
Fourth Quarter.................. 1 3/16 5/8
Fiscal Year Ending June 30, 1998
First Quarter (through September 15, 1997) 25/32 9/16
The high bid and low asked price of the Common Stock on September 15,
1997, as reported by the National Quotation Bureau, were $25/32nds and
$13/16ths, respectively. On such date, there were approximately 4,700 beneficial
holders of the Common Stock.
The Company has never paid any dividends on its Common Stock. The
Company anticipates that, for the foreseeable future, earnings, if any, will be
retained for use in the business or for other corporate purposes, and it is not
anticipated that cash dividends will be paid. Further, the Company's agreement
with its institutional lender prohibits the payment of dividends without the
lender's consent. Also, dividends, if any, must first be paid on Preferred Stock
to the extent in arrears prior to payments of any common stock dividend.
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data presented below as of and for
each of the fiscal years in the five-year period ended June 30, 1997 are derived
from the consolidated financial statements of Pharmaceutical Formulations, Inc.
and its subsidiaries, which financial statements have been audited by BDO
Seidman, LLP, independent public accountants, whose report relating to the
consolidated financial statements for the three years ended June 30, 1997
appears in this report. The selected consolidated financial data should be read
in conjunction with the consolidated financial statements and notes thereto of
the Company and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this report.
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
1997 1996 1995 1994 1993
---------------------------------------------------------
(in thousands, except per share amounts)
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
Gross sales $75,013 $57,572 $62,427 $57,386 $46,413
Net sales 71,117 54,327 59,107 55,330 44,848
Net income (loss) 1,332 (3,465) 2,046 2,211 1,706
Net income (loss) per share
of Common Stock:
Primary .04 (.12) .07 .08 .09
Fully diluted .04 (.12) .06 .07 .06
Weighted average common
and common equivalent
shares outstanding1:
Primary 30,420 29,412 30,023 29,361 19,826
Fully diluted 36,243 29,412 32,520 32,350 26,522
<FN>
- ------------------------
1 See Note 2 of Notes to Consolidated Financial Statements as to the calculation
of weighted average common and common equivalent shares outstanding.
</FN>
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
1997 1996 1995 1994 1993
----------------------------------------------------------
(in thousands)
BALANCE SHEET DATA:
<S> <C> <C> <C> <C> <C>
Current assets $29,939 $21,823 $24,759 $21,076 $ 15,071
Current liabilities 18,550 13,895 12,587 10,811 7,223
Working capital 11,389 7,928 12,172 10,265 7,848
Total assets 48,734 39,661 40,456 33,745 24,983
Long-term debt and
long-term capital
lease obligations 28,734 25,752 26,938 24,210 21,875
Stockholders' equity (deficit) 1,077 (411) 454 (1,805) (4,696)
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FINANCIAL CONDITION AT JUNE 30, 1997
At June 30, 1997, the Company had working capital of $11,389,000 as
compared to $7,928,000 in the prior year. The increase of $3,461,000 is due to
the net income for the fiscal year ended June 30, 1997, and an increase in
borrowing from the Company's institutional lender to finance the growth in
accounts receivable and inventory. The increase in working capital includes
increases in accounts receivable ($406,000) and inventory ($7,988,000) offset by
increases in accounts payable of $4,999,000. The increase in accounts receivable
is due to the higher sales. The increase in inventories is necessary to support
the customer service requirements of the new customers obtained by the Company
and the increased sales to current customers.
The Company received $1,232,000 cash from operations in fiscal 1997.
These funds, along with proceeds from the line of credit were used to purchase
property and equipment of $2,007,000 and pay debt of $2,968,000.
Capital expenditures for the fiscal year ended June 30, 1997 were
$3,544,000. Such expenditures relate primarily to the continuing upgrade of the
manufacturing equipment and plant facilities.
The Company has a $17,500,000 asset-based line of credit with an
institutional lender. At June 30, 1997, the company has $1,958,000 of unused
availability under this agreement. The line of credit expires February 4, 1999,
and bears interest of 1 1/4% above the prime lending rate (currently 8.5%). The
Company intends to refinance this loan as it has done in the past by extending
the debt agreement or initiating a new loan agreement with another financial
institution and the Company does not expect any problems in obtaining such
extension or replacement financing. See Note 5 to the financial Statements.
The Company has outstanding 2,500,000 shares of Series A cumulative
redeemable convertible preferred stock sold to ICC. Dividends from April 8,
1996, through June 30, 1997 (totaling $250,000), have accumulated and are in
arrears. There is no obligation or intention to pay dividends currently on the
preferred stock. Dividends will continue to accrue at the rate of $200,000 per
year until declared and paid.
The Company has a deferred tax asset of $2,144,000, before the
valuation allowance, at June 30, 1997, 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 $790,000 at June 30,
1997. 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 Company's inconsistent operating
results in the past. Accordingly, a valuation allowance of $1,354,000 was
recorded at June 30, 1997 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 $3,000,000 of capital equipment in the fiscal year ending June
30, 1998 to increase manufacturing capacity and reduce costs. The Company
intends for these capital lease to be financed through 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 1997 COMPARED TO FISCAL 1996
Gross sales for the fiscal year ended June 30, 1997, were $75,013,000
compared to $57,572,000 in the prior fiscal year. This increase of $17,441,000
or 30.3% is the result of new customers obtained by the Company and increased
sales to existing customers. All three sectors of the Company's business -
private label (store brand), bulk and contract manufacturing had an increase in
sales as compared to the prior period.
Sales discounts and allowances were $3,896,000, or 5.2% of sales, in
the fiscal year ended June 30, 1997, as compared to $3,245,000, or 5.6% of
sales, in the prior fiscal year.
Three customers each represent over 10% of the Company's sales for the
fiscal year ended June 30, 1997. These three customers are Revco, Walgreens and
Costco. Net sales to these three customers were $32,797,000 (46.1%) as
compared to $25,195,000 (46.4%) in the prior fiscal year. Revco merged with CVS
in May 1997.
Cost of sales as a percentage of net sales was 75.9% as compared to
82.1% in the prior fiscal year. The decrease in the cost of sales as a
percentage of net sales is due to the higher sales volume, improved
manufacturing efficiencies and overall cost containment.
Selling, general and administrative expenses were $10,325,000 as
compared to $9,143,000 in the prior fiscal year. The increase of $1,182,000 is
mainly a result of increase marketing, selling and distribution costs to
continually expand the customer and product base.
Research and development costs were $867,000 in the fiscal year ended
June 30, 1997, as compared to $790,000 in the prior fiscal year. The increase of
$77,000 represents increased expenditures on research and development to develop
new products. The Company expects to spend significantly more funds on research
and development in fiscal year ending June 30, 1998, as compared to fiscal year
ended June 30, 1997.
Interest and other expenses were $3,754,000 as compared to $3,511,000
in the prior fiscal year. The increase of $243,000 is mainly a result of
increased borrowing to support higher accounts receivable and inventory
requirements for the increased sales.
Income tax expense was $882,000 in the fiscal year ended June 30,
1997, as compared to an income tax benefit of $911,000 in the prior fiscal year.
Net income was $1,332,000, or $.04 per share, in fiscal year ended
June 30, 1997, as compared to a net loss of $3,465,000, or $.12 per share, in
the prior fiscal year.
The Company continues to take steps to increase sales and reduce costs
to increase the profitability of the Company. As noted earlier, one of the
Company's largest customers, Revco, merged with CVS in May of 1997. Preliminary
information indicates that sales and profits with the merged entity will be
lower than the Company's previous sales and profits with Revco. The steps the
Company is taking to reverse the possible negative effect of the Revco/CVS
merger include: (a) adding customers and products to the current business to
increase sales volume, (b) continued material costs reductions and other
cost-saving measures as well as other actions to improve profitability. There
can be no assurance that such actions will be successful in maintaining or
improving the profitability of the Company.
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 7.8%, 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 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.
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 and
Costco. Net sales to these three customers were $25,195,000 (46.4%) as compared
to $29,801,000 (50.4%) in the prior 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.
Cost of sales was 82.1% 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 were 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.
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.
EFFECTS OF INFLATION
The Company does not believe that inflation had a material effect on
its operations for the fiscal years ended June 30, 1997, 1996 or 1995,
respectively.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED JUNE 30, 1997 FOR
PHARMACEUTICAL FORMULATIONS, INC. AND SUBSIDIARIES
Report of Independent Certified Public Accountants F-1
Consolidated Financial Statements
Balance Sheets at June 30, 1997 and 1996 F-2
Statements of Operations for the Years
Ended June 30, 1997, 1996 and 1995 F-3
Statements of Changes in Stockholders'
Equity (Deficiency) for the Years Ended
June 30, 1997, 1996 and 1995 F-4
Statements of Cash Flows for the
Years Ended June 30, 1997, 1996 and 1995 F-5
Notes to Consolidated Financial Statements F-6
FINANCIAL STATEMENT SCHEDULE
Report of Independent Certified Public Accountants
on Financial Statement Schedule F-22
Schedule II - Valuation and Qualifying Accounts F-23
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
See "Executive Officers of the Registrant" in Part I regarding the
executive officers of the Company who are not directors. The directors of the
Company as of September 15, 1997 are set forth below:
NAME POSITION
John L. Oram Chairman of the Board
Charles E. LaRosa President; Chief Executive
Officer; Director
Ray W. Cheesman Director
Directors serve from when elected to the next annual meeting of
stockholders. All directors will serve until the 1997 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.
The business experience of the Company's directors is as follows:
RAY W. CHEESMAN, age 66, has been a director of the Company since July
1993, and has been a consultant to KPMG Peat Marwick, LLP, 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 55, has been a director of the Company and
President and Chief Executive Officer 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 53, 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 (1982) Ltd. ("EIL") (formerly known as
Electrochemical Industries (Frutarom) Ltd., 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 Limited, a company spun-off from EIL and listed on the
Tel-Aviv Stock Exchange engaged in the flavor and fragrance industry.
COMPENSATION OF DIRECTORS; BOARD MEETINGS
Members of the Board of Directors who are not employees of the Company
or representatives of ICC are compensated at the rate of $2,500 per year, plus
$500 for each meeting attended. Members are also paid for special projects
undertaken on behalf of the Company and for actual expenses incurred in
connection with their attendance at Board and Committee meetings.
The Company's Board of Directors met four times during Fiscal 1997.
All of the directors attended at least 75% of the meetings of the Board and
committees of which they are members in Fiscal 1997.
BOARD COMMITTEES
The Board of Directors has Audit and Compensation Committees but does
not have any Nominating Committee. The Board also appoints the members of the
Stock Option Committee constituted under the Company's 1994 Stock Option Plan.
The sole member of the Audit Committee is Ray W. Cheesman. The members of the
Stock Option Committee are Ray W. Cheesman and John L. Oram. The members of the
Compensation Committee are Ray W. Cheesman, Charles E. LaRosa and. John L. Oram.
The Audit Committee reviews the findings and reports of the
independent certified public accountants and makes recommendations, relating to
the accounting controls, audit and financial statements of the Company. It met
two times in Fiscal 1997. The Compensation Committee reviews compensation
issues; approves salaries, reviews benefit programs for the executive officers;
reviews and recommends incentive compensation (including stock compensation)
plans; and approves any employment contracts with, or other contractual benefits
for, executive officers. It met two times in Fiscal 1997. The Stock Option
Committee makes awards under, prescribes rules for and interprets the provisions
of the Company's 1994 Stock Option Plan. It met two times during Fiscal 1997.
ITEM 11. EXECUTIVE COMPENSATION
This section of the Form 10-K discloses Fiscal 1997 plan and non-plan
compensation awarded or paid to, or earned by, the (i) Company's Chief Executive
Officer ("CEO") and (ii) the Company's four most highly compensated executive
officers other than the CEO who were serving as executive officers at June 30,
1997, to the extent that salary and bonuses exceeded $100,000 (together, these
five persons are sometimes referred to as the "Named Executives").
SUMMARY COMPENSATION TABLE
The following table contains compensation data for the Named
Executives for the most recent three fiscal years:
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
Awards Payouts
Name and Other Restricted Securities
Principal Position Annual Stock Underlying LTIP All Other
Salary Bonus Compensation Awards Options Payouts Compensation
Year $ $ $ $ # $ $
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Charles E. LaRosa 1997 $262,000 $100,000 --- --- 75,000 --- ---
President and 1996 110,000 --- --- $19,000 105,000 --- ---
Chief Executive 1995 --- --- --- --- --- --- ---
Officer1
David Belaga 1997 127,000 19,000 --- --- 7,000 --- ---
Vice President, 1996 21,000 --- --- --- --- --- ---
Marketing 1995 --- --- --- --- --- --- ---
Anthony Cantaffa, 1997 135,000 5,000 --- --- 5,000 --- ---
Vice President of 1996 145,000 --- --- --- --- --- ---
New Business 1995 145,000 --- --- --- 85,000 --- ---
Development
George Chin 1997 160,000 40,000 --- --- 12,000 --- ---
Vice President, 1996 140,000 30,000 --- --- --- --- ---
Sales2 1995 --- --- --- --- --- --- ---
Frank Marchese 1997 111,000 22,000 --- --- 20,000 --- ---
Vice President; 1996 106,000 --- --- --- --- --- ---
Chief Financial 1995 --- --- --- --- --- --- ---
Officeer; Secretary
and Treasurer2
<FN>
- -------------------------
1 Mr. LaRosa was elected President in December 1995
2 The positions occupied by such individuals were not considered executive
offices until Fiscal 1996.
</FN>
</TABLE>
OPTION GRANTS IN FISCAL 1997
The following table contains information concerning the grant of stock
options to the Named Executives during Fiscal 1997 (the Company has no
outstanding stock appreciation rights - "SARs" and granted no SARs during Fiscal
1997):
<TABLE>
<CAPTION>
Individual Grants
Number of Percent of Total Potential Realizable Value at
Securities Options Assumed Annual Rates of Stock
Underlying Granted to Exercise Price Appreciation for
Options Employees in Price Expiration Option Term1
Name Granted Fiscal Year ($/Share)2 Date 5%($) 10%($)
<S> <C> <C> <C> <C> <C> <C>
Charles E. LaRosa 75,000 25% $.84 11/01 $6,000 $24,000
David Belaga 7,000 2% $.84 11/01 560 2,240
Anthony Cantaffa 5,000 2% $.84 11/01 400 1,600
George Chin 12,000 4% $.84 11/01 960 3,840
Frank Marchese 20,000 7% $.84 11/01 1,600 6,400
<FN>
- --------------------
1 Executives may not sell or assign any option grants, which have value
only to the extent of stock price appreciation, which will benefit
all stockholders commensurately. The amounts set forth are based on
assumed appreciation rates of 5% and 10% as prescribed by the
Securities and Exchange Commission rules and are not intended to
forecast future appreciation, if any, of the stock price. The
Company did not use an alternate formula for a grant date valuation
as it is not aware of any formula which will determine with
reasonable accuracy a present value based on future unknown or
volatile factors. Actual gains, if any, on stock option exercises
and Common Stock holdings are dependent on the future performance of
the Common Stock and overall stock market conditions. There can be
no assurance that the amounts reflected in this table will be
achieved.
2 The exercise price is equal to or higher than the fair market value of the
Company's Common Stock on the date of the grant.
</FN>
</TABLE>
AGGREGATED OPTION EXERCISES AND
FISCAL YEAR-END OPTION VALUES IN FISCAL 1997
No options were exercised by any executive officer of the Company
during Fiscal 1997. The following table sets forth information with respect to
the Named Executives concerning unexercised options held at fiscal year-end:
<TABLE>
<CAPTION>
Number of Unexercised Value of Unexercised
Securities of Underlying In-the-Money Options
Options at 6/30/97 at 6/30/97($)1
Shares Realized
Acquired on Value
Name Exercised(#) ($) Exercisable Unexercisable Exercisable Unexercisable
<S> <C> <C> <C> <C> <C> <C>
Charles E. LaRosa --- --- 105,000 75,000 $13,800 $0
David Belaga --- --- 25,000 7,000 6,000 0
Anthony Cantaffa --- --- 111,800 7,000 5,896 0
George Chin --- --- 70,550 12,000 5,896 0
Frank Marchese --- --- 40,000 20,000 0 0
<FN>
- --------------------
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 30, 1997, were $13/16 and $5/8 respectively. Certain options are
excluded since they are Out of the money.
</FN>
</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. Pursuant to such
agreement, effective June 7, 1996 he was awarded a grant of 25,000 shares of
stock 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 options for 30,000 shares of Common
Stock exerciseable at $.66 per share, such options were exercisable on June 7,
1996 and expire June 7, 2001. Effective January 1, 1997, Mr. LaRosa's salary was
increased to $275,000 per annum and he was awarded a grant of 37,202 shares on
July 1, 1997. 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.
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 stockholder 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 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table shows information, as of September 14, 1997, 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 (the addresses of all the persons
named below is c/o Pharmaceutical Formulations, Inc. 460 Plainfield Avenue,
Edison, NJ 08818 except for ICC Industries Inc., Dr. John J. Farber and John
Oram, whose address is 460 Park Avenue, New York, NY 10022):
Name and Address of Amount and Nature of Percentage
Beneficial Owner Beneficial Ownership1 of Class
ICC Industries Inc. 19,635,894 2 66.5%
Dr. John Farber 19,635,894 2 66.5%
John L. Oram 161,536 *
Charles E. LaRosa 184,077 3 *
Ray W. Cheesman 135,000 3 *
David Belaga 27,500 3 *
Anthony Cantaffa 182,255 3 *
George Chin 144,695 3 *
Frank Marchese 44,000 3 *
Officers and
Directors as a
Group (9 persons) 950,313 3 3%
---------------------------
* 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 Does not include approximately 3,556,000 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 14, 1997. 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."
3 Includes shares of Common Stock subject to stock options exercisable as of
September 14, 1997 or within 60 days thereof as follows: Mr. Belaga:
25,000; Mr. Cantaffa: 111,800; Mr. Cheesman: 75,000; Mr. Chin: 70,550;
Mr. LaRosa: 105,000; Mr. Marchese: 40,000; and all officers and directors
as a group: 468,600.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors and persons who own more than ten percent of a
registered class of the Company's equity securities to file reports of ownership
and changes in ownership with the Securities and Exchange Commission ("SEC") and
any exchange on which the Company's securities may be traded. Officers,
directors and greater than ten-percent stockholders are required by SEC
regulation to furnish the Company with copies of all Section 16(a) forms they
file.
Based solely on its review of the copies of such forms received by it,
or written representations from certain reporting persons that no Forms 5 were
required for those persons, the Company believes that all such filing
requirements for the year ended June 30, 1997 were complied with except as
follows: Messrs. Belaga, Cantaffa and LaRosa each filed two forms late; Messrs.
Barbee, Chin, Marchese and Oram each filed one form late; and ICC Industries
Inc. filed three forms (for fiscal 1996) late.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS WITH ICC
OPTION AGREEMENT
In September 1991, the Company entered into the ICC Option Agreement
pursuant to which ICC was granted a series of options to acquire a total of
66.67% of the number of shares of the Company's Common Stock outstanding after
the exercise of all options owned by ICC and certain other outstanding options,
warrants, rights and convertible securities. All of the options under such
agreement have been exercised. As a result of the exercise of certain options,
ICC acquired voting control of the Company as of October 1992. The last option
was fully exercised in May 1994.
Under the ICC Option Agreement, ICC was also granted certain
preemptive rights (the "Limited Preemptive Rights") at a price equal to the
lesser of the exercise price (or conversion price, as the case may be), of
certain additional outstanding options, warrants and other rights to purchase
shares of Common Stock (the "Convertible Securities") or $.25 (except with
respect to certain warrants to purchase 400,000 shares of the Company's Common
Stock granted to management in September 1992, to the extent enforceable, in
which case the price is $.50). The Limited Preemptive Rights are exercisable for
a period of 45 days after the Company sends notice to ICC that shares have been
issued in connection with any outstanding Convertible Securities. The Company
cannot predict whether any shares will be issued pursuant to the exercise of
outstanding Convertible Securities or whether ICC will exercise any resulting
preemptive rights.
In fiscal 1997, ICC exercised preemptive rights for 221,536 shares at
$.25 per share, which shares it then sold privately to certain employees of ICC.
As of August 20, 1997, ICC owned a total of 19,635,894 shares of the Company's
Common Stock, representing approximately 66.5% of the total number of shares
outstanding on that date, and it held rights to acquire additional shares under
the Limited Preemptive Rights.
PURCHASE OF PREFERRED STOCK
Effective April 4, 1996, the Company filed a Certificate of
Designations, Preferences and Rights creating 3,000,000 shares of Series A
Cumulative Redeemable Convertible Preferred Stock, par value $1.00 per share
(the "Series A Preferred Stock"). The holders of Series A Preferred Stock are
entitled to a dividend at the lower of $.08 per share or $1.00 times the prime
rate of interest at the time of the sale of the Series A Preferred Stock,
payable semiannually when declared. Dividends cumulate if not paid and the
Company can not declare or pay dividends on any other class of stock until
dividends on the Series A Preferred Stock are paid. The holders of Series A
Preferred Stock are entitled to a liquidation preference of $1.00 per share. The
Company may redeem shares of Series A Preferred Stock at any time at a price
equal to the liquidation preference plus accrued and unpaid dividends. Shares of
Series A Preferred Stock may be converted at the option of the holder into
shares of Common Stock, par value $.08 per share, at any time after 36 months
from issuance upon three months prior notice at a rate such that each share of
Series A Preferred Stock shall be converted into such number of shares of Common
Stock as equals the liquidation preference plus accrued and unpaid dividends,
divided by the lower of the current market price (as defined) at the conversion
date or $2.00 per share (subject to certain antidilution adjustments). The
shares of Series A Preferred Stock are accorded only such voting rights as
required by applicable law. The Company, however, may not take certain
enumerated action prejudicial to the interest of the holders of Series A
Preferred Stock without the approval of the holders of a majority of the Series
A Preferred Stock.
The Company sold 2,500,000 shares of Series A Preferred Stock to ICC
pursuant to a Stock Purchase Agreement between the Company and ICC dated April
8, 1996 for a payment of $2,500,000. Pursuant to the Stock Purchase Agreement,
the Company agreed to (a) redeem some or all of the Series A Preferred Stock
owned by ICC if the Company has made a registered public offering of its common
stock and the proceeds thereof shall have been sufficient to pay the redemption
price and (b) allow ICC to surrender shares of Series A Preferred Stock, valued
at the liquidation preference therefor plus accrued and unpaid dividends, in
exercise of any warrants, options or other rights to purchase Common Stock which
ICC may have or in payment of any shares of Common Stock purchased in any public
offering. The foregoing covenants are conditioned upon the Company's ability to
undertake the required actions under applicable law and that the redemption or
surrender of shares would not thereby cause the Company to fail to meet all
requirements for listing or continued listing of the Company's Common Stock on
the Nasdaq Stock Market or such other exchange on which the Common Stock may be
listed.
PURCHASE OF RAW MATERIALS
During Fiscal 1997, 1996 and 1995 the Company purchased $1,226,000,
$795,000 and $1,219,000, respectively of raw materials from ICC.
LEASE FINANCING
ICC has also assisted the Company in obtaining certain machinery and
equipment for the expansion of the Company's production capacity. In such cases,
ICC, or its affiliates, typically acted as lessor of the equipment for which
fixed monthly fees are paid by the Company. As a result of the general financial
condition of the Company, the Company would not otherwise have been able to
secure such leases and credit facilities in the amounts required for the
Company's continuing and planned operations.
There are currently several leases entered into pursuant to the Master
Equipment Lease Agreements with ICC. Monthly rent is currently approximately
$130,000. The terms of the rentals are scheduled to expire at various times in
the years 1997 through 2001. The Company has options to purchase the leased
equipment for $1.00 at the expiration of the lease terms.
The Company has entered into the following lease obligations with ICC
within the past three fiscal years:
Fiscal Year
Original Lease Interest
Description Lease Amount Entered Into Term Rate
Equipment $1,162,502 6/95 48 to 11% to 12%
60 months
Equipment $ 450,000 1 6/95 48 months Prime plus 1%
(currently 9.25%)
Equipment $1,312,500 2 6/96 60 months 10.6%
FDA update $1,342,000 6/96 60 months 9.5%
of plant
facility
- -----------------------
1 This reflects a refinancing, effective June 1995, of a previous lease with
ICC commencing July 1993 previously bearing interest at 19.3%.
2 This includes a refinancing, effective September 1995, of previous leases
with ICC in order to generate funds to finance FDA upgrades (a $425,000
lease entered into in April 1992 bore interest at 23% and a $455,000 lease
entered into in October 1992 bore interest at 18.2%).
CIMETIDINE AGREEMENT
In August 1993, the Company and ICC Chemical Corporation, an affiliate
of ICC, entered into a cooperative joint venture regarding the manufacture of
cimetidine, for the relief from heartburn, acid indigestion and sour stomach
(the "Cimetidine Agreement"), such agreement was amended in September 1996.
Pursuant to the agreement, as amended, ICC will be the sole source of raw
materials. It will also provide at its expense the raw materials (estimated to
cost $32,000) and the outside expenses (estimated at $185,000), relating to the
preparation of OTC ANDA's. The Company will prepare and file ANDA's for OTC
cimetidine and will manufacture FDA-approved products. ICC shall be entitled to
a royalty of 10% of net sales of OTC cimetidine up to a return of 8.75%
compounded annually on its investment. ICC, if the Company agrees, may buy
cimetidine for resale to export customers, for which ICC will pay 10% less than
the price to ICC's customers. The term of the agreement is ten years from the
date of FDA approval of the sale and distribution of the product. At the
expiration of the term of the cimetidine agreement, if not renewed, the assets
of the venture shall be distributed to the two co-venturers as shall be agreed.
As of June 30, 1997, the Company has expended approximately $219,000 on this
project, of which $213,000 is due from ICC.
LEGAL SERVICES
In Fiscal 1996 the Company appointed the law firm of Whitman Breed
Abbott & Morgan ("Whitman") as its general counsel and the law firm of Stroock &
Stroock & Lavan LLP ("Stroock") as its securities counsel. Both Whitman and
Stroock have performed and continue to perform legal services for ICC in matters
unrelated to the Company.
OTHER RELATED TRANSACTIONS
STOCK ISSUANCE
Pursuant to the ICC Option Agreement and the waiver of certain
provisions of former President Dr. Tesler's employment agreement, as amended,
certain employees (as defined) were issued shares of the Company's Common Stock
in the last three fiscal years. A total of 24,094 shares were issued in the last
three fiscal years. The Company is also obligated to issue to such individuals
an aggregate of up to approximately 134,000 additional shares if convertible
securities existing at September 24, 1992 are converted into Common Stock.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(a)(1) and (2) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT
SCHEDULE: See Item 8, "Financial Statements and Supplementary Data".
(a) (3) and (c) EXHIBITS: Exhibits are numbered in accordance
with Item 601 of Regulation S-K.
(3) ARTICLES OF INCORPORATION AND BY-LAWS:
3.1 Articles of Incorporation, as amended (3)
3.2 By-laws, as amended (3)
(4) INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING
INDENTURES:
4.1 Indenture (1)
4.2 New Indenture (2)
(10) MATERIAL CONTRACTS:
10.1 Employment Agreement with Max A. Tesler dated February 1,
1984, as extended and amended (4)*
10.2 Employment Agreement with Charles E. LaRosa dated April
4, 1996 (9)*
10.3 Loan and Security Agreement between Fidelcor Business
Credit Corporation and the Registrant (formerly known as PharmaControl Corp.)
(5)
10.4 Agreement dated September 6, 1991 among the Registrant
(formerly known as PharmaControl Corp.), Private Formulations, Inc. and ICC
Industries Inc. (6)
10.5 Agreement dated September 24, 1992 among the Registrant
(formerly known as PharmaControl Corp.), Private Formulations, Inc. and ICC
Industries Inc. (7)
10.6 Agreement dated March 29, 1993 among the Registrant
(formerly known as PharmaControl Corp.), Private Formulations, Inc. and ICC
Industries Inc. (8)
10.7 Agreement dated May 8, 1992, among the Registrant
(formerly known as PharmaControl Corp.), Private Formulations, Inc. and ICC
Industries Inc. (7)
10.8 Agreement dated May 28, 1992, among the Registrant
(formerly known as PharmaControl Corp.), Private Formulations, Inc. and ICC
Industries Inc. (7)
10.9 Agreement dated May 24, 1993, among the Registrant
(formerly known as PharmaControl Corp.), Private Formulations, Inc. and ICC
Industries Inc. (8)
10.10 Agreement dated September 26, 1996 between the
Registrant and ICC Chemical Corporation regarding Cimetidine (10)
10.11 Form of Warrant Agreement dated October 1, 1992 between
the Registrant (formerly known as PharmaControl Corp.) and Max A. Tesler,
Anthony Cantaffa, George Chin and Sandra J. Brown)(7)*
10.12 1994 Stock Option Plan, as amended, and form of option
agreement (filed herewith)*
10.13 Amendment, dated February 20, 1997, to Employment
Agreement with Charles E. LaRosa (filed herewith)*
(11) STATEMENT RE COMPUTATION OF PER SHARE EARNINGS: not applicable
(12) STATEMENT RE COMPUTATION OF RATIOS: not applicable
(13) ANNUAL REPORT TO SECURITY HOLDERS, FORM 10-Q OR QUARTERLY REPORT
TO SECURITY HOLDERS: not applicable
(16) LETTER RE CHANGE IN CERTIFYING ACCOUNTANT: not applicable
(18) LETTER RE CHANGE IN ACCOUNTING PRINCIPLES: not applicable
(21) SUBSIDIARIES OF THE REGISTRANT: none other than such subsidiaries
which, considered in the aggregate, would not constitute a significant
subsidiary as of the end of the year covered by this report
(22) PUBLISHED REPORT REGARDING MATTERS SUBMITTED TO VOTE OF SECURITY
HOLDERS: not applicable
(23) CONSENT OF EXPERTS AND COUNSEL: consent of the Independent Public
Accountants
(24) POWER OF ATTORNEY: not applicable
(27) FINANCIAL DATA SCHEDULE: attached
(28) INFORMATION FROM REPORTS FURNISHED TO STATE INSURANCE REGULATORY
AUTHORITIES: not applicable
(29) ADDITIONAL EXHIBITS: not applicable
- ---------------------
* Management contracts or compensatory plans
(1) Incorporated herein by reference to the Registrant's Form S-1,
File No. 33-13291
(2) Incorporated herein by reference to the Registrant's Form S-4,
File No. 33-44033
(3) Filed with the Annual Report on Form 10-K for the year ended June
30, 1983 and incorporated by reference herein, except for
(a) Amendment to Certificate of Incorporation filed with the Delaware
Secretary of State on April 13, 1984 which was filed with the
Registration Statement on Form S-1 (File No. 2-88752),
(b) Amendment to Certificate of Incorporation filed with the
Delaware Secretary of State on February 3, 1987 which was filed
with Post-Effective Amendment No. 3 to Registration Statement on Form
S-1 (File No. 33-6731), (c) Amendment to Certificate of Incorporation
filed with the Delaware Secretary of State on November 16, 1991, which
was filed with the Annual Report on Form 10-K for the year ended June
30, 1991, (d) Amendment to Certificate of Incorporation filed with the
Delaware Secretary of State on January 26, 1994 which was filed with
the Quarterly Report on Form 10-Q for the period ended March 31, 1994,
(e) Amendment to the Company's By-Laws filed with the Registrant's
Quarterly Report on Form 10-Q for the period ended March 31, 1994, and
(f) Certificate of Designations, Preferences and Rights of Series A
Cumulative Preferred Stock filed with the Registrant's Current Report
on Form 8-K for an event occurring on April 4, 1996, each of which is
incorporated by reference herein.
(4) Filed with the Registrant's Annual Report on Form 10-K for the year
ended June 30, 1993 and incorporated herein by reference.
(5) Incorporated herein by reference to the Registrant's Current Report on
Form 8-K dated August 2, 1989.
(6) Incorporated herein by reference to the Registrant's Current Report on
Form 8-K dated September 6, 1991.
(7) Filed with the Registrant's Annual Report on Form 10-K for the year
ended June 30, 1992 and incorporated herein by reference.
(8) Filed with the Registrant's Annual Report on Form 10-K for the year
ended June 30, 1994 and incorporated herein by reference.
(9) Filed with the Registrant's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1996 and incorporated herein by reference.
(10) Filed with the Registrant's Annual Report on Form 10-K for the year
ended June 30, 1996 and incorporated herein by reference.
<PAGE>
(b) REPORTS ON FORM 8-K - The Registrant did not file any reports on
Form 8-K during and since the last quarter of the fiscal year ended June 30,
1997 except for Form 8-Ks dated June 27, 1997 and July 2, 1997 reporting under
Item 5 certain claims by the estate of former President. Max Tesler.
<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 Annual Report on Form
10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
PHARMACEUTICAL FORMULATIONS, INC.
By: /s/ CHARLES E. LAROSA
Charles E. LaRosa
President, Chief Executive Officer
and a Director
Dated: September 24, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
NAME TITLE DATE
<S> <C> <C>
/S/CHARLES E. LAROSA President; Chief Executive September 24, 1997
Charles E. LaRosa Officer and a Director
(Principal Executive
Officer)
/S/FRANK MARCHESE Vice President, Finance; September 24, 1997
Frank Marchese Chief Financial Officer;
Secretary and Treasurer
(Principal Financial Officer)
/S/JOHN L. ORAM Chairman of the Board September 24, 1997
John L. Oram
/S/RAY W. CHEESMAN Director September 24, 1997
Ray W. Cheesman
</TABLE>
<PAGE>
PHARMACEUTICAL FORMULATIONS, INC.
AND SUBSIDIARIES
CONTENTS
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-1
CONSOLIDATED FINANCIAL STATEMENTS:
Balance sheets F-2
Statements of operations F-3
Statements of changes in stockholders' equity (deficiency) F-4
Statements of cash flows F-5
Notes to consolidated financial statements F-6 F-21
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE F-22
FINANCIAL STATEMENT SCHEDULE:
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, 1997 and 1996, 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, 1997. 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, 1997 and 1996
and the results of their operations and their cash flows for each of the
three years in the period ended June 30, 1997 in conformity with generally
accepted accounting principles.
BDO Seidman, LLP
Woodbridge, New Jersey
August 15, 1997
<PAGE>
PHARMACEUTICAL FORMULATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $2,087,000 $ 1,284,000
Accounts receivable, net of allowance for doubtful accounts of 8,917,000 8,511,000
$301,000 and $300,000
Inventories 17,708,000 9,720,000
Income tax receivable - 1,161,000
Prepaid expenses and other current assets 927,000 747,000
Deferred tax asset 300,000 400,000
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 29,939,000 21,823,000
PROPERTY, PLANT AND EQUIPMENT, NET 18,075,000 16,802,000
OTHER ASSETS:
Deferred financing costs 79,000 94,000
Deferred tax asset 490,000 750,000
Other assets 151,000 192,000
- -----------------------------------------------------------------------------------------------------------------------------------
$48,734,000 $39,661,000
===================================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
Current portion of long-term debt $ 472,000 $ 587,000
Current portion of capital lease obligations, including $1,073,000 and 2,104,000 1,877,000
$1,296,000 due to ICC in 1997 and 1996, respectively
Accounts payable 14,440,000 9,441,000
Accrued expenses 1,509,000 1,990,000
Income taxes payable 25,000 -
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 18,550,000 13,895,000
LONG-TERM DEBT, LESS CURRENT MATURITIES 19,990,000 16,284,000
LONG-TERM CAPITAL LEASE OBLIGATIONS, LESS CURRENT MATURITIES, INCLUDING 8,744,000 9,468,000
$2,195,000 AND $3,339,000 DUE TO ICC IN 1997 AND 1996, RESPECTIVELY
DEFERRED GAIN ON SALE/LEASEBACK 373,000 425,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIENCY):
Preferred stock, par value $1.00 per share; 10,000,000 shares 2,500,000 2,500,000
authorized; 2,500,000 shares issued and outstanding
Common stock, par value $.08 per share; 40,000,000 shares authorized; 2,391,000 2,361,000
29,880,350 and 29,508,814 shares issued and outstanding
Capital in excess of par value 37,412,000 37,286,000
Accumulated deficit (41,226,000) (42,558,000)
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIENCY) 1,077,000 (411,000)
- -----------------------------------------------------------------------------------------------------------------------------------
$ 48,734,000 $39,661,000
===================================================================================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
<PAGE>
PHARMACEUTICAL FORMULATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30, 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
GROSS SALES $75,013,000 $57,572,000 $62,427,000
LESS: SALES DISCOUNTS AND ALLOWANCES 3,896,000 3,245,000 3,320,000
- ----------------------------------------------------------------------------------------------------------------------------------
NET SALES 71,117,000 54,327,000 59,107,000
- ----------------------------------------------------------------------------------------------------------------------------------
COST AND EXPENSES:
Cost of goods sold 53,957,000 44,581,000 44,924,000
Selling, general and administrative 10,325,000 9,143,000 7,719,000
Special compensation expense - 678,000 -
Research and development 867,000 790,000 1,488,000
- -----------------------------------------------------------------------------------------------------------------------------------
65,149,000 55,192,000 54,131,000
- -----------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS 5,968,000 (865,000) 4,976,000
- -----------------------------------------------------------------------------------------------------------------------------------
OTHER EXPENSES (INCOME):
Interest expense, including $428,000, $488,000 and 3,865,000 3,553,000 3,512,000
$575,000 in 1997, 1996 and 1995 from ICC
Other, net (111,000) (42,000) (65,000)
- -----------------------------------------------------------------------------------------------------------------------------------
3,754,000 3,511,000 3,447,000
- -----------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES 2,214,000 (4,376,000) 1,529,000
(BENEFIT)
INCOME TAXES (BENEFIT) 882,000 (911,000) (517,000)
- -----------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) 1,332,000 (3,465,000) 2,046,000
PREFERRED STOCK DIVIDEND REQUIREMENT 200,000 50,000 -
- -----------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) ATTRIBUTABLE TO
COMMON SHAREHOLDERS $ 1,132,000 $ (3,515,000) $ 2,046,000
===================================================================================================================================
NET INCOME (LOSS) PER SHARE:
Primary $ .04 $ (.12) $ .07
Fully diluted $ .04 (.12) .06
- -----------------------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON
EQUIVALENT SHARESOUTSTANDING:
Primary 30,420,000 29,412,000 30,023,000
Fully diluted 36,243,000 29,412,000 32,520,000
==================================================================================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
<PAGE>
PHARMACEUTICAL FORMULATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
- -----------------------------------------------------------------------------------------------------------------------------------
Preferred stock Common stock Capital In Accumulated
Excess of Par Deficit
Shares Amount at Shares Amount At Value
issued par value Issued Par Value
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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)
Shares issued in connection with exercise
by ICC of preemptive rights - - 221,536 18,000 38,000 -
Shares issued in connection with
settlement of litigation - - 50,000 4,000 46,000 -
Shares issued in connection with exercise
of common stock warrants - - 100,000 8,000 42,000 -
Net income - - - - - 1,332,000
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 1997 2,500,000 $2,500,000 29,880,350 $2,391,000 $37,412,000 $(41,226,000)
===================================================================================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
<PAGE>
PHARMACEUTICAL FORMULATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30, 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $1,332,000 $(3,465,000) $2,046,000
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 2,271,000 1,662,000 1,395,000
Amortization of bond discount and deferred financing costs 141,000 135,000 71,000
Amortization of deferred gain on sale of building (52,000) (52,000) (52,000)
Shares issued to key Company employees - 4,000 -
Shares issued in settlement of litigation 50,000 - -
Shares issued to officer and outside directors - 49,000 21,000
Deferred income taxes 360,000 250,000 (1,000,000)
Changes in current assets and liabilities:
Increase in accounts receivable (406,000) (418,000) (599,000)
(Increase) decrease in inventories (7,988,000) 5,195,000 (3,656,000)
(Increase) decrease in other current assets (180,000) (51,000) 15,000
Increase (decrease) in income tax receivable 1,161,000 (1,161,000) -
Increase in accounts payable, accrued expenses and income taxes 4,543,000 1,015,000 1,553,000
payable
- -----------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 1,232,000 3,163,000 (206,000)
- -----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment, net (2,007,000) (2,317,000) (2,010,000)
Decrease in other assets 41,000 29,000 11,000
- -----------------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (1,966,000) (2,288,000) (1,999,000)
- -----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (repayments) under the line of credit 4,399,000 (1,342,000) 3,716,000
Principal repayments of long-term debt (934,000) (707,000) (551,000)
Principal repayments of capital leases (2,034,000) (1,684,000) (1,564,000)
Refinancing of capital leases - 968,000 -
Increase in deferred financing costs - - (20,000)
Issuance of preferred stock - 2,500,000 -
Issuance of common stock, less offering and registration costs 106,000 19,000 67,000
- -----------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 1,537,000 (246,000) 1,648,000
- -----------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 803,000 629,000 (557,000)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,284,000 655,000 1,212,000
- -----------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $2,087,000 $1,284,000 $ 655,000
===================================================================================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
<PAGE>
PHARMACEUTICAL FORMULATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of the Pharmaceutical Formulations, Inc. (the
Business and Related "Company") is primarily engaged in the manufacture
Parties and distribution of over-the-counter solid dosage
pharmaceutical products in tablet, caplet and
capsule form, which are sold under customers'
private labels. The Company also 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 and
related preemptive rights 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 and
certain preemptive rights and miscellaneous
options pursuant to the Option agreement. The
number of shares issued to ICC through June 30,
1997 was 19,857,430 at option prices ranging from
$.1036 to $.75 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 is
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 1997, 1996 and 1995 at a price of $.25
per share:
1997 1996 1995
--------------------------------------------------------
Shares under preemptive rights 221,536 75,926 274,468
-------------------------------------------------------
<PAGE>
PHARMACEUTICAL FORMULATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ICC, a major international manufacturer
and marketer of chemical, plastic and
pharmaceutical products, with calendar year 1996
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 and 233 shares of common stock to these
employees in 1996 and 1995, respectively.
The following transactions with ICC, are
reflected in the consolidated financial statements
as of or for the years ended June 30, 1997, 1996
and 1995:
JUNE 30, 1997 1996 1995
-----------------------------------------------------
Inventory purchases $1,226,000 $795,000 $1,219,000
Services and finance
fees 428,000 488,000 575,000
Accounts payable
to ICC 786,000 334,000 118,000
Equipment lease
obligations due ICC 3,268,000 4,635,000 3,497,000
Other receivables
from ICC 213,000 213,000 -
-----------------------------------------------------
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.
<PAGE>
PHARMACEUTICAL FORMULATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 equiva-lents for the year ended June 30, 1996 as
the effect would be anti-dilutive.
At June 30, 1997 and 1995, the primary and fully
diluted common equivalent shares amounted to 860,000
and 6,684,000, and 2,110,000 and 5,320,000,
respectively.
<PAGE>
PHARMACEUTICAL FORMULATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1997, approximately 47% of the
accounts receivable balance is represented by four
customers.
INCOME TAXES
The Company accounts for income taxes in accordance
with Statement of Financial Accounting Standards
("SFAS") 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.
LONG-LIVED ASSETS
Effective July 1, 1996, the Company adopted SFAS No.
121, "Accounting for the Impairment of Long-Lived
Assets and Long-Lived Assets Being Disposed Of," which
provides guidance on how and when impairment losses
are recognized on long-lived assets. This statement
did not have a material impact on the financial
position or results of operations of the Company.
STOCK BASED COMPENSATION
Effective July 1, 1996, the Company adopted SFAS No.
123, "Accounting for Stock-Based Compensation." The
Company chose to apply APB Opinion 25 and related
interpretations in accounting for its stock options.
As a result, this statement did not have an effect on
the financial position or results of operations of the
Company.
<PAGE>
PHARMACEUTICAL FORMULATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, SFAS No. 128, "Earnings Per Share,"
was issued. The pronouncement, which is effective for
periods ending after December 15, 1997, requires dual
presentation of basic and diluted earnings per share.
This statement is not expected to have a material
impact on the primary earnings per share of the
Company.
In June 1997, SFAS No. 130, "Reporting Comprehensive
Income" and SFAS No. 131, "Disclosure about Segments
of an Enterprise and Related Information," were
issued. SFAS No. 130 addresses standards for reporting
and display of comprehensive income and its components
and SFAS No. 131 requires disclosure of reportable
operating segments. Both statements are effective for
the Company's 1999 fiscal year. The Company will be
reviewing these pronouncements to determine their
applicability, if any.
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) approx-imate 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.
COLLECTIVE BARGAINING AGREEMENT
Substantially all of the Company's non-management
employees are covered by a collective bargaining
agreement.
3. Inventories Inventories consist of the following:
JUNE 30, 1997 1996
-----------------------------------------------------
Raw materials $ 5,707,000 $ 3,849,000
Work in process 841,000 648,000
Finished goods 11,160,000 5,223,000
-----------------------------------------------------
$17,708,000 $ 9,720,000
=====================================================
<PAGE>
PHARMACEUTICAL FORMULATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Property, Property, plant and equipment consist of
Plant and the following:
Equipment
JUNE 30, 1997 1996
-----------------------------------------------------
Land and building $ 8,348,000 $ 8,348,000
Leasehold improvements 4,337,000 3,860,000
Machinery and equipment 18,057,000 15,804,000
Other 1,907,000 1,093,000
-----------------------------------------------------
32,649,000 29,105,000
Less: Accumulated
depreciation and
amortization 14,574,000 12,303,000
------------------------------------------------------
$18,075,000 $16,802,000
------------------------------------------------------
The net book value of property, plant and equipment
under capital leases was $10,280,000 and $10,485,000
at June 30, 1997 and 1996, respectively.
5. Long-Term Debt and Long-term debt and capital lease obligations consist
Capital Lease of the following:
Obligations
<TABLE>
<CAPTION>
JUNE 30, 1997 1996
---------------------------------------------------------------
Long-term Capital Long-term Capital
Debt Leases Debt Leases
----------- -------------- ----------- --------
<S> <C> <C> <C> <C>
Revolving/term loans (a) $15,542,000 $ - $11,545,000 $ -
Convertible subordinated 3,405,000 - 3,279,000 -
debentures, $1,000 face value
(less unamortized discount of
$1,791,000 and $1,917,000)(b)
Convertible subordinated 805,000 - 852,000 -
debentures, $570,000 face
value(c)
New Jersey Economic Develop-
ment Authority Loan (d) 710,000 - 780,000 -
Secured note - - 115,000 -
Building sale/leaseback (e) - 5,880,000 - 6,351,000
Capital equipment lease - 4,968,000 - 4,994,000
obligations (f) -
Other - - 300,000 -
- -----------------------------------------------------------------------------------------------------------------------
20,462,000 10,848,000 16,871,000 11,345,000
Less: Current portion 472,000 2,104,000 587,000 1,877,000
---------------------------------------------------------------------------------------------------------------------
$19,990,000 $ 8,744,000 $16,284,000 $ 9,468,000
</TABLE>
<PAGE>
PHARMACEUTICAL FORMULATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(a) In fiscal year ended June 30, 1997, the Company
modified its line of credit and equipment term loan
with its lending institution. The maximum available
funds under this modification are $17,500,000.
Advances under the revolving loans are limited to the
sum of eligible accounts receivable and up to
$6,000,000 ($7,500,000 during certain times of the
year) 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
the Company and bear interest, payable monthly, at the
prime rate (8 1/2% at June 30, 1997), plus 8 1/4%. 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.
(b) At June 30, 1997, the Company has 5,196 units
outstanding con- sisting 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 circum-stances at par, plus an
applicable premium, as defined.
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, 1997, 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 $235,000). 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.
<PAGE>
PHARMACEUTICAL FORMULATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In 1996 and 1995, 58 and 206 units, respectively, of
8 1/4% Debentures were converted into common stock.
A total of 156,000 shares were issued to the debenture
holders.
(d) The loan, which is secured by certain equipment,
bears interest at 6 3/8% and is due as follows:
$70,000 at June 1, 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) 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 commence-ment and on each thirtieth month
thereafter. On February 1, 1997, the monthly base rent
increased to $139,000. 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.
(f) The Company leases various equipment primarily
from ICC and other sources under capital lease
agreements. The terms of the leases vary from three to
five years with monthly rentals of approximately
$183,000.
<PAGE>
PHARMACEUTICAL FORMULATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company's debt and obligations under capital
leases mature in fiscal years ending June 30 as
follows:
Capital Long-Term
Lease Debt
Obligations
-----------------------------------------------------
1998 $ 3,536,000 $ 472,000
1999 3,434,000 15,220,000
2000 2,970,000 80,000
2001 2,253,000 80,000
2002 1,669,000 4,610,000
Thereafter 3,477,000 -
----------------------------------------------------
Total payments 17,339,000 $20,462,000
Less: Amount representing
interest 6,491,000 --
----------------------------------------------------
Present value of net
minimum lease payments $10,848,000
---------------------------------------------------
6. Commitments COMMITMENTS
and
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
On July 3, 1997, the Company received an arbitration
demand dated June 27, 1997 from the estate of Dr. Max
Tesler, the former President of the Company who died
in December 1996. For alleged breaches of employment
and other agreements between the Company and Dr.
Tesler, the estate is seeking an award of $5,500,000
in compensatory damages, $10,000,000 in punitive
damages, $10,000,000 for special damages and such
number of shares of common stock of the Company as
would equal 10% of the total number of shares
outstanding. For claimed tortuous conduct, the estate
is seeking $20,000,000 for intentional infliction of
emotional distress and $5,000,000 for PRIMA FACIE
TORT. The estate is also seeking attorney's fees and a
revised warrant agreement pursuant to claimed
antidilution provisions.
<PAGE>
PHARMACEUTICAL FORMULATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The claimed breaches of contract include failure to
pay (a) salary through December 1998, (b) change of
control payments on the assumption that there was a
change of control, as defined, in a 1996 annual
meeting and (c) death benefits.
With respect to the claim for continuing salary, the
Company has advised the estate of counterclaims which
the Company has, which exceeds the amount of such
payments. The Company maintains that as a result of
the termination of Dr. Tesler's employment in December
1995, the Company ceased to have any liability under
the change-of-control and death benefit provisions of
the various agreements with Dr. Tesler, as well as
having other defenses to such claims. It is also the
position of the Company that certain provisions of the
warrants issued to Dr. Tesler were not as agreed and
authorized.
In December 1995, the Company accrued the continuing
salary due to Dr. Tesler for the period through
December 1998 (see Note 11). It has not made provision
for any of the other amounts claimed, nor has it
accrued any amounts due from the estate. As noted
above, the Company believes that the claims in excess
of the amounts reserved for are without merit and that
the Company has valid offsetting claims. The Company
intends to vigorously defend against the arbitration
claim and to prosecute its claims against the estate.
In or about October 1991, an action was instituted
against the Company by an individual seeking monies
claimed to be due under an alleged employment
agreement.
The Company has interposed counterclaims against
plaintiff for fraud and related claims and seeks
damages in the amount of $5,000,000. This case has
been moved to the "inactive" trial list. No further
action will be taken by either party unless and until
plaintiff seeks to restore the matter. Under the New
Jersey Industrial Site Recovery Act ("ISRA"), the
pur-chase of the Company's manufacturing facilities
from Revco in 1987, the sale/leaseback of the premises
in 1989 (Note 5(e)), 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).
<PAGE>
PHARMACEUTICAL FORMULATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 or results of
operations.
7. Income Taxes Income taxes (benefit) consist of the following
federal taxes:
1997 1996 1995
-----------------------------------------------------
Current $ 522,000 $(1,161,000) $483,000
Deferred 360,000 250,000 (1,000,000)
-----------------------------------------------------
Total income
taxes (benefit) $882,000 $(911,000) $ (517,000)
-----------------------------------------------------
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:
1997 1996 1995
-----------------------------------------------------
Statutory U.S. tax $753,000 $(1,488,000) $520,000
Increase (decrease)
resulting from:
Utilization of
federal net operating
loss carryforards - - (56,000)
Net change in
valuation account 30,000 681,000 (1,000,000)
Other 99,000 (104,000) 19,000
-----------------------------------------------------
Effective income taxes
(benefit) $ 882,000 $ (911,000) $ (517,000)
-----------------------------------------------------
<PAGE>
PHARMACEUTICAL FORMULATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company utilized tax loss carryforwards of
approximately $1,150,000, $0 and $166,000 for U.S.
regular tax purposes during each of the fiscal years
ended June 30, 1997, 1996 and 1995, respectively.
As of June 30, 1997, the Company had available net
operating losses of approximately $1,660,000 for U.S.
regular tax purposes, which expire through 2007. The
utilization of such losses were generated prior to
September 1991 and are 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 $13,778,000, which
expire through 2003, are available to the Company.
Deferred tax assets are comprised of the following
temporary differences at June 30:
1997 1996
-----------------------------------------------------
Tax benefit of state income
tax net operating
loss carryforwards $ 827,000 $ 972,000
Tax benefit of federal
income tax net operating
loss carryforwards 564,000 1,020,000
Depreciation (95,000) (145,000)
Deferred gain on
sale/leaseback of building 127,000 145,000
Basis difference 8 1/4%
bonds as a result of
restructuring 80,000 96,000
Capitalized inventory costs 153,000 136,000
Deferred compensation 155,000 148,000
Allowance for doubtful
accounts 102,000 102,000
Alternative minimum tax
carryforward 231,000 -
-----------------------------------------------------
Gross deferred tax asset 2,144,000 2,474,000
Valuation allowance (1,354,000) (1,324,000)
-----------------------------------------------------
Net deferred tax asset $ 790,000 $1,150,000
-----------------------------------------------------
<PAGE>
PHARMACEUTICAL FORMULATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The net deferred tax asset of $2,144,000, before the
valuation allowance, at June 30, 1997, 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 $790,000 at June
30, 1997. The benefits of net operating loss
carry-forwards and other temporary differences that
are estimated to take more than a few years to realize
cannot be reasonably determined at this time due to
the Company's inconsistent operating results in the
past. Accordingly, a valuation allowance of $1,354,000
was recorded at June 30, 1997 to provide for this
uncertainty.
8. Common Stock, The Company has granted options to employees,
Options and directors and others under various stock option
Warrants plans, lending 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, 1994 through June 30, 1997 (not
including ICC preemptive rights or additional shares
issuable to management in connection with ICC
preemptive rights):
Shares Weighted -
Average
Exercise Price
-----------------------------------------------------
Outstanding - June 30, 1994 1,035,804 $ .98
Issued 888,375 .87
Forfeited (103,404) .86
-----------------------------------------------------
Outstanding - June 30, 1995 1,820,775 .93
Issued 130,000 .62
Forfeited (213,975) 2.96
-----------------------------------------------------
Outstanding - June 30, 1996 1,736,800 .64
Issued 401,750 .84
Exercised (100,000) .50
Forfeited (399,850) .96
-----------------------------------------------------
Outstanding - June 30, 1997 1,638,700 $ .62
-----------------------------------------------------
Exercisable - June 30, 1997 1,258,450 $ .58
-----------------------------------------------------
<PAGE>
PHARMACEUTICAL FORMULATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information about stock
options outstanding at June 30, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
Range of Number Weighted Weighted Number Weighted
Exercise Outstanding Averagee Average Exercisable at Average
Prices at Remaining Exercise June 30, 1997 Exercise
June 30, Life Price Price
1997 (Years)
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$.48 to .84 466,450 2.1 $.83 373,450 $.83
.85 287,250 4.4 .85 - -
.91 75,000 2.4 .91 75,000 .91
.75 110,000 1.6 .75 110,000 .75
.25 300,000 .8 .25 300,000 .25
.50 400,000 1.3 .50 400,000 .50
--------------------------------------------------------------------------------------
1,638,700 1,258,450
--------------------------------------------------------------------------------------
</TABLE>
The weighted average fair market value of options
granted during the years ended June 30, 1997 and 1996
were $.36 and $.37, respectively.
As of June 30, 1997, substantially all outstanding
stock options expire at various dates through fiscal
2002. These options were granted at prices which were
at or above quoted market value on the dates granted.
The Company has adopted the disclosures only
provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation." Accordingly, no
compensation cost has been recognized for the stock
option plans. Had compensation cost been recognized
for the stock option plans been determined based on
the fair value at the date of grant consistent with
the provisions of SFAS No. 123, the Company's net
income (loss) and net income (loss) per share would
have been reflected in the pro forma amounts indicated
below:
JUNE 30, 1997 1996
----------------------------------------------------
Net income (loss)-as reported $1,332,000 $(3,465,000)
Net income (loss)-pro forma 1,282,000 (3,480,000)
Net income (loss) per share
- as reported .04 (.12)
Net income (loss) per share
- pro forma .04 (.12)
-------------------------------------------------------
<PAGE>
PHARMACEUTICAL FORMULATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fair market value of each option grant is
estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted
average assumptions used for grants: expected
volatility of 35%, risk-free interest rate of 6.06% to
6.48%, expected lives of 5 years and no dividend
yield.
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.
Preferred stock dividends in arrears totaled $250,000
as of June 30, 1997.
10. Major Customer For the years ended June 30, 1997, 1996 and 1995,
and Products 17%, 20% and 25%, respectively, of consolidated
net sales were derived from Revco D.S. Inc.. Walgreen
Company accounted for 14% and Costco Wholesale 12% of
consolidated net sales for each of the three years in
the period ended June 30, 1997 1996 and 1995. For the
years ended June 30, 1997, 1996 and 1995, sales of
ibuprofen represented 38%, 41% and 41% of consolidated
net sales, respectively.
11. Special Compensation In December 1995, the Company replaced its former
Expense President and Chief Executive Officer. The
Company accrued the estimated remaining obligation due
to this individual under his employment contract (see
Note 6).
<PAGE>
PHARMACEUTICAL FORMULATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. Supplemental Supplemental disclosures of cash flow information:
Cash Flow Information
1997 1996 1995
-----------------------------------------------------
Cash paid during the year:
Interest $3,724,000 $3,463,000 $3,441,000
Income taxes 300,000 - 525,000
-----------------------------------------------------
Supplemental non-cash investing and financing
information:
1997 1996 1995
-----------------------------------------------------
Issuance of common stock
upon conversion of
debentures $ - $28,000 $ 125,000
-----------------------------------------------------
Capital lease obligations of $1,537,000, $1,801,000
and $1,449,000 were incurred when the Company entered
into various leases in 1997, 1996 and 1995,
respectively.
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
The audits referred to in our report dated August 15, 1997 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 15, 1997
<PAGE>
PHARMACEUTICAL FORMULATIONS, INC.
AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Allowance for Balance at Additions Charge to Deductions Balance at
doubtful accounts beginning charged to other write-offs end of
of period costs & accounts uncollectible period
expense accounts
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended June 30, 1997 $300,000 $ 1,000 $ - $ - $301,000
Year ended June 30, 1996 333,000 68,000 - 101,000 300,000
Year Ended June 30, 1995 188,000 145,000 - - 333,000
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
EXHIBIT INDEX
NUMBER DESCRIPTION
10.12(A) 1994 Stock Option Plan, as amended September 1997
10.12(b) Form of option agreement under 1994 Stock Option Plan
10.13 Amendment, dated February 20, 1997, to Employment Agreement
with Charles E. LaRosa
23 Consent of Independent Certified Public Accountants
27 Financial Data Schedule
EXHIBIT 10.12 (a)
PHARMACEUTICAL FORMULATIONS, INC.
AND SUBSIDIARIES
1994 STOCK OPTION PLAN
ADOPTED AUGUST 30, 1994
AMENDED SEPTEMBER 19, 1997
I. GENERAL PROVISIONS
1. PURPOSE OF THE PLAN. This stock option plan (the "Plan") of
Pharmaceutical Formulations, Inc. and its subsidiaries (the "Company"), is
intended to provide incentives to employees and officers of the Company. The
Plan is also intended to encourage such persons to accept or continue
employment, and to attract to the Company individuals of experience and ability.
This Plan provides opportunities for such persons to purchase shares of common
stock of the Company pursuant to (i) Incentive Stock Options of the Company; and
(ii) Nonqualified Stock Options of the Company.
2. DEFINITIONS.
(a) "Board of Directors" shall mean the Board of Directors of
the Company.
(b) "Code" shall mean the Internal Revenue Code of 1986, as
amended from time to time, or any successor tax law.
(c) "Change of Control" shall be deemed to have occurred if (i)
any "person" or group of "persons" (as the term "person" is used in Sections
13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act")) ("Person"), 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 ("50% Ownership") 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.
(d) "Committee" shall mean the Stock Option Plan Committee of
the Board of Directors of the Company, or any other committee appointed by the
Board.
(e) "Common Stock" shall mean shares of the common stock of the
Company.
(f) "Date of Grant" has the meaning set forth in SECTION 7(A).
(g) "Disability" shall mean the condition of an employee who is
unable to engage in any substantial gainful activity by reason of any medically
determinable physical or mental impairment which can be expected to result in
death or which has lasted or can be expected to last for a continuous period of
not less than twelve (12) months.
(h) "Employee" shall mean an individual (who may be an officer
or a director) employed by the Company (within the meaning of Section 3401 of
the Code and the regulations promulgated thereunder).
(i) "Exercise Price" shall mean the price per Share of Common
Stock, determined by the Committee, at which an Option may be exercised.
(j) "Fair Market Value" of a Share as of a specified date shall
mean the closing price of a Share on the principal securities exchange or NASDAQ
on which such Shares are traded on the day immediately preceding the date as of
which Fair Market Value is being determined, or on the next preceding date on
which such Shares are traded if no Shares were traded on such immediately
preceding day, or if the Shares are not traded on a securities exchange or on
NASDAQ, Fair Market Value snail be deemed to be the average of the high bid and
low asked prices of the Shares in the over-the-counter market on the date
Immediately preceding the date as of which Fair Market Value is being determined
or on the next preceding date on which such high bid and low asked prices were
recorded. If the Shares are not publicly traded, Fair Market Value shall be
determined by the Committee or the Board.
(k) "Incentive Stock Option" shall mean an option to purchase
Common Stock of the Company within the meaning of Section 422A(b) of the Code.
(l) "Key Employee" shall mean employees of the Company who are
not officers of the Company or members of the Board of Directors of the Company.
(m) "Nonqualified Stock Option" shall mean an option to
purchase Common Stock of the Company not in conformity with Section 422A(b),
Section 422(b), Section 423(b) or Section 424(b) of the Code.
(n) "Option" shall mean a stock option granted pursuant to the
Plan.
(o) "Option Agreement" shall mean any agreement to provide
Options under the Plan.
(p) "Optionee" shall mean an Employee to whom an Option has
been granted.
(q) "Plan" shall mean this 1994 Stock Option Plan
(r) "Purchase Price" shall mean the Exercise Price times the
number of whole Shares with respect to which an Option is exercised.
(s) "Share" shall mean a share of Common Stock.
(t) "Subsidiary" shall mean any corporation which at the time
of the granting of an Option qualifies as a subsidiary of the Company under the
definition of "subsidiary corporation" in Section 425(n of the Code, or any
similar provision hereinafter enacted.
(u) "Ten Percent Shareholder" shall mean an individual who owns
stock possessing ten percent (10%) or more of the total combined voting power of
all classes of stock of the Company.
3. EFFECTIVE DATE. This Plan shall become effective on the date of its
adoption by the Board; provided, however, that the Plan shall automatically
terminate and all Options granted under the Plan shall be deemed null and void
for all purposes in the event that, within one year from the date of the
adoption of the Plan by the Board, the Plan shall not have been approved by the
holders of a majority of outstanding Common Stock.
4. STOCK SUBJECT TO THE PLAN.
(a) Subject to adjustments in accordance with SECTION 9
hereof, one million (1,000,000)1 Shares are reserved for issuance upon the
exercise of the Options granted under this Plan. Upon the exercise of Options,
the Company may either issue authorized but unissued Shares of Common Stock or
transfer Shares of Common Stock held in its treasury.
(b) In the event that any outstanding Option under the Plan
for any reason expires or is terminated prior to the end of the period during
which the Option may be exercised, the Shares allocable to the unexercised
portion of such Option may again be subjected to Options under the Plan.
5. ADMINISTRATION.
(a) The Plan shall be administered by the Committee. The
Committee shall consisting of not less than two directors of the Company
appointed by the Board of Directors, which members shall, to the extent that
such persons are available, be "nonemployee directors" (as defined below). A
member of the Board shall be deemed to be a non-employee director only if he or
she satisfies (a) such requirements as the Securities and Exchange Commission
may establish for non-employee directors administering plans intended to
qualify for exemption under Rule 16b-3 (or its successor) under the Securities
Exchange Act of 1934, as amended, and (b) such requirements as the Internal
Revenue Service may establish for outside directors acting under plans intended
to qualify for exemption under Section 162(m) (4)(C) of the Code. The Board may
also appoint one or more separate committees of the Board, each composed of one
or more directors of the Company who need not be non-employee directors, who may
administer the Plan with respect to recipients who are not considered officers
or directors of the Company under Section 16 of the Exchange Act, may make
grants under the Plan to such recipients and may determine all terms of such
grants. If the Company does not have at least two directors who satisfy the
non-employee director standard, as defined above, awards granted under the Plan
may not qualify under Rule 16b-3 or be deemed to be performance-based
compensation under regulations issued pursuant to Section 162(m) of the Code.
The Board may at any time remove any member of the Committee with or without
cause. Any vacancy occurring in the membership of the Committee shall be filled
by appointment by the Board.
(b) Subject to the provisions of the Plan, the Committee shall
have the power to (a) authorize the granting of Options; (b) determine and
designate from time to time those employees of the Company to whom Options are
to be granted; provided, however, that no employee who is at the time of grant a
Ten Percent Shareholder, shall be eligible to receive any Incentive Option under
the Plan except as may be permitted by Section 422A of the Code; (c) determine
the number of shares subject to each Option: (d) determine whether said Option
is to be considered an Incentive Option or a Nonqualified Option; and (e)
determine the time or times and the manner when each Option shall be exercisable
and the duration of the exercise period. No director of the Company who is not
also an employee of the Company shall be entitled to receive any Option under
the Plan. The Committee may Condition the grant of any Option on the surrender
of any option under this or any other plan.
(c) The Board or the Committee shall have authority to
interpret and construe the Plan or any provision thereof, or any agreements
entered into pursuant to the Plan, and to make determinations with respect
thereto. The Board or the Committee may also prescribe, amend or rescind rules
and regulations relating to the Plan and make all other determinations necessary
or advisable for the administration of the Plan. Any interpretation,
determination or other action made or taken by the Board or the Committee shall
be made in accordance with its judgment as to the best interests of the Company
and its shareholders, in accordance with the purposes of the Plan and shall be
final, binding and conclusive. Any decision or determination reduced to writing
and signed by all members of the Committee shall be fully as effective as if
made by unanimous vote at a meeting duly called and held.
(d) The Board or the Committee may authorize the modification,
extension or renewal of any Option outstanding under the Plan, or accept the
exchange of outstanding Options (to the extent not theretofore exercised) for
the granting of new Options in substitution therefor, when, and subject to such
conditions as are deemed to be in the best interests of the Company and in
accordance with the purposes of the Plan, provided that. notwithstanding the
foregoing, no such modification of an Option shall, without the consent of the
Optionee, increase the Purchase Price set forth in such Option, except for
antidilution adjustments made in accordance with SECTION 9 hereof, or alter or
impair any rights or obligations under an Option, theretofore granted under the
Plan.
(e) The Committee small determine the nature and extent of the
restrictions, if any, to be imposed on the exercise of the Option and/or on the
Shares which may be purchased under each Option. Such restrictions may include,
without limitation, the right of the Company to repurchase Shares which have
been purchased under an Option in the event that the Optionee's employment by
the Company or any subsidiary terminates during the Option Period
(f) The Committee may employ such legal counsel, consultants
and agents as it may deem desirable for the administration of the Plan and may
rely upon any opinion received from any such counsel or consultant and any
computation received from any such consultant or agent.
(g) No member or former member of the Committee or of the
Board shall be liable for any action or determination made in good faith with
respect to the Plan or any Option awarded under it.
(h) In addition to such other rights of indemnification as
they may have as directors or otherwise, the Board and the members (and former
members) of the Committee shall be indemnified and held harmless by the Company
against any costs and expenses (including attorney's fees, which fees may be
advanced by the Company) actually incurred in connection with defense of any
action, suit or proceeding, or in connection with any appeal therefrom, to which
they or any of them may be a party by reason of any action taken or failure to
act under or in connection with the Plan or any Option granted thereunder,
unless arising out of such members or former members own fraud or bad faith, and
against ail amounts paid ,by them in settlement thereof (provided such
settlement is approved by independent legal counsel selected by the Company) or
paid by them in satisfaction of judgment in any action, suit or proceeding,
provided that the indemnification provided therein shall be effective so long
as, within 60 days after institution of any such action, suit or proceeding, the
member of the Committee shall in writing offer the Company the opportunity, at
its own expense, to handle and defend such action, suit or proceeding.
(i) The maximum number of Shares which may be the subject of
Options granted to any individual in any calendar year shall not
exceed 300,000 (three hundred thousand) Shares. If the Shares that would be
issued or transferred pursuant to any Option are not issued or transferred and
cease to be issuable or transferable for any reason, the number of Shares
subject to such Option will no longer be charged against the limitation provided
for herein and may again be made subject to Options; provided, that the counting
of Shares subject to Options granted under the Plan against the number of Shares
available for further Options shall in all cases conform to the requirements of
Rule 16b-3 under the Exchange Act; and provided, further, that with respect to
any Option granted to any person who is a "covered employee" as defined in
Section 162(m) of the Internal Revenue Code and the regulations promulgated
thereunder that is canceled, the number of Shares subject to such Option shall
continue to count against the maximum number of Shares which may be the subject
of Options granted to such Eligible Person.
II. INCENTIVE STOCK OPTIONS
6. ELIGIBILITY FOR PARTICIPATION.
(a) Incentive Stock Options may be granted to Employees of the
Company. An Optionee who has been granted an Option hereunder may be granted an
additional Option or Options.
7. TERMS AND CONDITIONS OF INCENTIVE STOCK OPTIONS. Incentive Stock
Options granted pursuant to the Plan shall be evidenced by written agreements in
such form as the Board or the Committee shall from time to time determine, which
agreements shall comply with and be subject to the following terms and
conditions:
(a) DATE OF GRANT. Each Incentive Stock Option shall specify
its effective date (the "Date of Grant") which snail De the date specified by
the Board or the Committee, as the case may be, in its action relating to the
grant of the Option. Any grant of Incentive Stock Options made prior to
obtaining the approval of the Plan by the shareholders of the Company shall be
made contingent upon receiving said shareholder approval within one (1) year
from August 30, 1994. Incentive Stock Options may be granted pursuant to the
Plan until the termination of the Plan on August 29, 2004.
(b) OPTION AGREEMENT. The Option Agreement shall be subject to
the terms and conditions contained in this SECTION 7.
(c) NUMBER OF SHARES. Each Incentive Stock Option shall state
the number of Shares to which it pertains and shall provide for the adjustment
thereof in accordance with the provisions of SECTION 9 hereof.
(d) INCENTIVE STOCK OPTION PERIOD. Incentive Stock Options
shall become exercisable at such time or times as the Board or the Committee
shall determine. Each Incentive Stock Option agreement shall specify the period
for which the Option thereunder is granted and provide that the Option shall
expire at the end of such period. In no case shall such period exceed ten years
from the Date of Grant or, in the case of an Option granted to a Ten Percent
Shareholder, five years from the Date of Grant. No options granted to executive
officers, directors and Ten Percent Shareholders may be exercised in part or in
full prior to the later of six months from the date of grant of the Option or
six months from date of approval of the Plan by the shareholders of the Company.
(e) EXERCISE PRICE. Each Incentive Stock Option shall state
the Exercise Price, which price shall be determined as set forth in SECTION 6(F)
below.
(f) INCENTIVE STOCK OPTION PRICE. The Exercise Price shall be
determined by the Board or the Committee at the time any Incentive Stock Option
is granted, and shall not be less than (i) one hundred percent (100%) of the
Fair Market Value of a Share at the time the Option is granted. or (ii) in the
case of an Incentive Stock Option granted to a Ten Percent Shareholder, not less
than one hundred and ten percent (110%) of the Fair Market Value of one Share on
the Date of Grant as determined by the Committee.
(g) EXERCISE OF INCENTIVE STOCK OPTION.
(i) Subject to SECTIONS 7(D) AND 7(G)(II) below, each
Incentive Stock Option shall become exercisable immediately or
in one or more installments at the time or times and upon the
satisfaction of such conditions as may be provided in the
Option Agreement.
(ii) In the event of a Change of Control of the
Company, all Incentive Stock Options shall
become immediately exercisable.
(h) MANNER OF EXERCISE. Upon the exercise of an Incentive Stock
Option, the Purchase Price shall be payable (i) in United States dollars by
personal check, bank draft, or money order payable to the order of the Company,
or (ii) with the consent of the Board or the Committee, by the delivery or
attestation to the ownership of Shares with a Fair Market Value on the date of
exercise equal to the Purchase Price, or (iii) by a combination of the methods
described in (i) and (ii). The Option Agreement will describe the method of
exercising the Incentive Stock Option and payment of the Purchase Price. No
Shares shall be issued until full payment therefor has been made.
(i) LIMITATION ON INCENTIVE STOCK OPTIONS. In the case of each
Incentive Stock Option granted to an employee the aggregate Fair Market Value
(determined at the time the Incentive Stock Option is granted) of the Common
Stock with respect to which any Incentive Stock Options are exercisable for the
first time by such employee during any calendar year (under all plans of the
Company, and any subsidiary company thereof) may not exceed $100,000. Options
with respect to which no designation is made by the Committee shall be deemed to
be Incentive Stock Options to the extent that the $100,000 limitation described
in the preceding sentence is met. This paragraph shall be applied by taking
Options into account in the order in which they are granted.
(j) RESTRICTION ON DISPOSITION OF SHARES. To qualify as an
Incentive Stock Option, no disposition of Shares issued to the Optionee pursuant
to the exercise of an Incentive Stock Option shall be made by the Optionee
within two (2) years from the Date of Grant, or within one (1) year after the
transfer of such Shares to him.
(k) TERMINATION OF EMPLOYMENT In the event that an Optionee's
employment by the Company is terminated due to death, disability, retirement, or
any other reason, the following provisions shall apply as the case may be:
(i) DEATH OF OPTIONEE. If an Optionee dies, any
Option previously granted to the Optionee may be exercisable
by the personal representative or administrator of the
deceased Optionee's estate, or by any trustee, heir, legatee
or beneficiary who shall have acquired the Option directly
from the Optionee by will or by the laws of descent and
distribution at any time or times within three (3) months
after the Optionee's death. provided that the deceased
Optionee was entitled to exercise such Option at the time of
such death and provided that any exercise must occur. within
the period of time that the decedent, if alive, could have
exercised the Option.
(ii) RETIREMENT. if an Optionee's employment with the
Company terminates by reason of retirement any Option
previously granted to such Optionee shall be exercisable
within three (3) months after the date of such termination.
provided that the Option was exercisable at the time of such
termination by retirement and provided that any exercise must
occur within the period of time that the Option originally was
exercisable. However, if the Optionee dies within three months
after the termination by retirement, any unexercised Incentive
Stock Option, to the extent to which it was exercisable at the
time of such death shall thereafter be exercisable in
accordance with SECTION 7(K)(I).
(iii) DISABILITY. If an Optionee becomes "disabled" as
that term is defined in SECTION 2(G) hereof and at the time
of such disability, the Optionee is entitled to exercise
such Option, the Optionee shall have the right to exercise
such Option within one year after such disability, provided
that the Option was exercisable at the time of such
disability and provided that any exercise must occur within
the period of time that the Option originally was
exercisable. However, if the Optionee dies within one year
after termination by disability, any unexercised Incentive
Stock Option, to the extent to which it was exercisable at
the time of such death, shall thereafter be exercisable in
accordance with SECTION 7(K)(I)
(iv) OPTIONEE'S TERMINATION. If an Optionee's
employment by the Company is terminated for any reason other
than death, retirement, disability, or for cause, any option
previously granted to the Optionee shall be exercisable
within thirty (30) days after the date of such termination,
provided that the Option was exercisable at the time of such
termination and provided that any exercise must occur within
the period of time that the Option originally was
exercisable. However, if the Optionee dies within thirty
(30) days after the termination, any unexercised Option, to
the extent to which it was exercisable at the time of such
death, shall thereafter be exercisable in accordance with
Section 7(k)(i). if an Optionee's employment by the Company
is terminated for cause, the existence of which shall be
determined by the Committee in its sole discretion (which
determination by the Committee shall be conclusive), any
Option previously granted to the Optionee shall immediately
terminate upon such termination.
(l) NONTRANSFERABILITY OF INCENTIVE STOCK OPTION. No Incentive
Stock Option granted under the Plan shall be transferable by the Optionee other
than by will or the laws of descent and distribution. During the lifetime of the
Optionee, the Incentive Stock Option shall be exercisable only by the Optionee.
III. NONQUALIFIED STOCK OPTIONS
8. TERMS AND CONDITIONS OF NONQUALIFIED STOCK OPTIONS.
(a) GRANT OF NONQUALIFIED STOCK OPTIONS. Each Option shall
specify its Date of Grant, which shall be the date specified by the Board or the
Committee, as the case may be, in its action relating to the grant of the
Option. Any grant of Options made prior to obtaining the approval of the Plan by
the shareholders of the Company shall be made contingent upon receiving
shareholder approval from within one (1) year of August 30, 1994. Nonqualified
Stock Options may be granted pursuant to the Plan until the termination of the
Plan on August 29, 2004. Nonqualified Stock Options may be granted under this
Plan to any Employee of the Company, at such times and for such number of Shares
as the Board or the Committee shall designate.
(b) OPTION AGREEMENT. The Option Agreement shall be subject to
the terms and conditions contained in this SECTION 8.
(c) NUMBER OF SHARES. Each Nonqualified Stock Option shall
state the number of Shares to which it pertains and shall provide for the
adjustments thereof in accordance with the provisions of SECTION 9 hereof
(d) NONQUALIFIED STOCK OPTION PERIOD. Nonqualified Stock
Options shall become exercisable at such times as the Board or the Committee may
decide. Each Nonqualified Stock Option agreement shall specify the period for
which the Option thereunder is granted and provide that the Option shall expire
at the end of such period In no case shall such period exceed ten years from the
Date of Grant.
(e) EXERCISE PRICE. Each Option shall state the Exercise
Price, which price shall be determined as set forth in SECTION 8(F) below.
(f) NONQUALIFIED STOCK OPTION PRICE. The Exercise Price shall
be determined by the Board or the Committee at the time the Nonqualified Stock
Option is granted and may be less than, equal to or greater than the Fair Market
Value of one Share of Common Stock on the date the Option is granted.
(g) EXERCISE OF NONQUALIFIED STOCK OPTION.
(i) Subject to SECTION 8(G)(II) below, each
Nonqualified Stock Option shall become exercisable immediately
or in one or more installments at the time or times and upon
the satisfaction of such conditions as may be
provided in the Option Agreement:
(ii) In the event of a Change of Control of the
Company, all Nonqualified Stock Options shall become
immediately exercisable.
(h) MANNER OF EXERCISE. Upon the exercise of an Option, the
Purchase Price shall be payable (i) in United States Dollars by personal check,
bank draft, or money order payable to the order of the Company, or (ii) with the
consent of the Board or the Committee, by the delivery or attestation to the
ownership of Shares of Common Stock of the Company with a Fair Market Value
equal to the Purchase Price, or (iii) by a combination of the methods described
in (i) and (ii). The Option Agreement will describe the methods of exercising
the Option and payment of the Purchase Price. No Shares shall be issued until
full payment therefor has been made.
(i) TERMINATION OF EMPLOYMENT. In the event that an Optionee's
employment by the Company is terminated due to death, disability, retirement, or
any other reason, the following provisions shall apply as the case may be:
(A) DEATH OF OPTIONEE. If an Optionee dies, any
Option previously granted to the Optionee may be exercisable
by the personal representative or administrator of the
deceased Optionee s estate, or by any trustee, heir, legatee
or beneficiary who shall have acquired the Option directly
from the Optionee by will or by the laws of descent and
distribution at any time or times within one (1) year after
the Optionee's death, provided that the deceased Optionee was
entitled to exercise such Option at the time of such death and
provided that any exercise must occur within the pence of time
that the decedent, if alive, could have exercised the option.
(B) RETIREMENT. If an Optionee's employment with the
Company terminates by reason of retirement, any Option
previously granted to such Optionee shall be exercisable
within three (3) months after the bate of such termination,
provided that the Option was exercisable at the time of such
termination by retirement and provided that any exercise must
occur within the period of time that the Option originally was
exercisable. However, if the Optionee dies within three (3)
months after the termination by retirement, any unexercised
Option, to the extent to which it was exercisable at the time
of such death shall thereafter be exercisable in accordance
with SECTION 8(I)(A).
(C) DISABILITY. If an Optionee becomes disabled as
that term is defined in SECTION 2(9) hereof, and at the time
of such disability the Optionee is entitled to exercise such
Option, the Optionee shall have the right to exercise such
Option within one year after such disability, provided that
the Option was exercisable at the time of such disability and
provided that any exercise must occur within the period of
time that the Option Originally was exercisable. However, if
the Optionee dies within one year after termination by
disability, any unexercised Option, to the extent to which it
was exercisable at the time of such death, shall thereafter be
exercisable in accordance with SECTION 8(I)(A).
(D) OPTIONEE'S TERMINATION. If an Optionee's
employment by the Company is terminated for any reason other
than death, retirement, disability or cause, any Option
previously granted to him shall be, exercisable within thirty
(30) days after the date of such termination, provided that
the Option was exercisable at the time of such termination and
provided that any exercise must occur within the period of
time that the Option was exercisable. However, if the Optionee
dies within thirty (30) days after the termination, any
unexercised Option, to the extent to which it was exercisable
at the time of such death, shall thereafter be exercisable in
accordance with Section 8(i)(A). if an Optionee's employment
with the Company IS terminated for cause, the existence of
which shall be determined by the Committee in its sole
discretion (which determination by the Committee shall be
conclusive), any Option previously granted to the Optionee
shall thereupon terminate.
(j) NONTRANSFERABILITY OF OPTION. No Nonqualified Stock Option
granted under this Plan shall be transferable by the Optionee other than by will
or the laws of descent and distribution. During the lifetime of the Optionee,
the Nonqualified Stock Options shall be exercisable only by the Optionee
IV. MISCELLANEOUS PROVISIONS
9. RECAPITALIZATION.
(a) In the event that the outstanding Shares which are eligible
for the granting of Options hereunder, or subject to Options theretofore
granted, shall at any time be changed or exchanged by declaration of a stock
dividend, split-up, subdivision or combination of Shares, recapitalization,
merger, consolidation or other corporate reorganization in which the Company is
the surviving corporation, the number and kind of Shares subject to the Plan or
subject to any Options previously granted, and the Exercise Prices, shall be
appropriately and equitably adjusted. so as to maintain the proportionate number
of Shares without changing the aggregate Purchase Price.
(b) Except as heretofore expressly provided in this SECTION 9,
the Optionee shall have no rights by reason of any subdivision or consolidation
of Common Stock or stock of any class, stock split, or the payment of any stock
dividend or any other increase or decrease in the number of shares of any class
or by reason of any dissolution,- liquidation, merger, or consolidation or
spin-off of assets or stock of another corporation, any issue by the Company of
shares of any class or securities convertible into Shares of any Class, shall
not affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of Shares subject to the Option.
(c) The grant of an Option pursuant to the Plan shall not
affect in any way the right or power of the Company to make adjustments,
reclassifications, reorganizations or changes of its capital or business
structure or to merge or consolidate or to dissolve, liquidate, sell or transfer
all or any part of its business or assets.
10. SUBSTITUTION OR ASSUMPTION OF OPTIONS. Notwithstanding any
provision of the Plan to the contrary (but subject to the provisions of SECTION
3), by action of the Board, the Company may as an incident to or by reason of
any corporate merger, consolidation, acquisition of property or stock,
separation, reorganization or liquidation, substitute new Options on Common
Stock of the Company for Options granted by another employer to its employee on
stock of such employer or may assume Options granted by another employer to its
employees, at such purchase prices and under such conditions, as may be
permitted by Section 425(a) of the Code, and the Board or the Committee is
hereby expressly authorized to take such action as may be required to effectuate
any such issuance or assumption. Shares subject to any Option so issued or
assumed shall be charged against the total number of Shares available for
issuance under the Plan.
11. USE OF PROCEEDS. Proceeds from the sale of Common Stock pursuant to
Options granted under the Plan shall constitute general funds of the Company.
12. SECURITIES LAW REQUIREMENTS.
(a) No Shares shall be issued upon the exercise of any Option
unless and until the Company has determined that:
(i) it and the Optionee have taken all actions
required to register the Shares under the Securities Act of
1933, as amended (the "Act"), or perfect an exemption from the
registration requirements thereof
(ii) any applicable listing requirements of any stock
exchange on which the Common Stock is listed (or similar
requirement of Nasdaq) have been satisfied; and
(iii) any other applicable provision of state or
federal law has been satisfied.
Nothing herein is deemed nor shall be construed to confer any
registration rights upon the Optionee for an Option or the Shares, and, except
as set forth to the contrary in the Option Agreement, no such registration right
with respect to any Option or Share is provided to any Optionee by the Company.
Without limiting the generality of the foregoing, the Company
may require from the Optionee, upon exercise, such investment representations or
agreements, if any, as counsel for the Company may consider necessary to comply
with federal and state securities laws before issuing Shares.
(b) Unless the offering of such Shares is registered under the
Act, all Shares acquired by an Optionee upon exercise of an Incentive Stock
Option or Nonqualified Stock Option granted under the Plan and issued by the
Company shall be deemed to be "restricted securities" as defined in Rule 144
promulgated under the Act and may be subject to stop orders, and the certificate
evidencing such Shares shall contain a legend substantially as follows:
"The securities presented by this Certificate may not be
offered for sale, sold or otherwise transferred except
pursuant to an effective registration statement under the
Securities Act of 1933, as amended (the "Act"), or pursuant to
an exemption from registration under the Act, the availability
of which is to be established to the satisfaction of the
Company."
13. ADDITIONAL RIGHTS.
(a) NO RIGHTS AS SHAREHOLDER. The Optionee shall have no
rights as a shareholder of the Company with respect to any Shares subject to an
Incentive Stock Option or a Nonqualified Stock Option prior to the date of
issuance to such Optionee of a certificate or certificates for such shares.
(b) NO RIGHT TO CONTINUED EMPLOYMENT. The Options granted
under this Plan shall not confer upon the Optionee any right with respect to
continuance of employment by the Company, nor shall it interfere in any way with
the right of the Company to terminate the Optionee's employment at any time.
(c) NO OBLIGATION TO EXERCISE. The granting of an Option shall
impose no obligation upon the Optionee to exercise the Option.
14. AMENDMENTS.
(a) Insofar as permitted by law, the Board of Directors may
amend, alter, suspend, abandon or terminate the Plan, but no amendment,
alteration, suspension or abandonment shall be made which would impair the
rights of any Optionee under any Options previously granted, without the
Optionee's consent, or which (except for the adjustments under SECTIONS 9 AND 10
above), without the approval of the shareholders of the Company, would:
(i) Increase the total number of Shares issuable under
the Plan or to any individual employee;
(ii) Decrease the Exercise Price of the Common Stock on
the date of the granting of an Option;
(iii) Change the persons (or class or persons) eligible
to receive Options under the Plan; or
(iv) Amend this SECTION 14 to defeat the Plan's
purposes.
(b) Subject to the limitations set forth in this SECTION 14,
the Board may make such changes and revisions in and additions to the Plan as it
may deem proper and in the best interests of the Company or as may be necessary
to comply with Sections 421-425 of the Code and the regulations promulgated
thereunder, or other applicable laws or regulations.
15. GOVERNING LAW. This Plan shall be governed by the laws of the
State of mew Jersey.
16. WITHHOLDING. The holder of an Incentive Stock Option or a
Non-Qualified Stock Option shall, upon notification of the amount due, and prior
to or concurrently with delivery to such holder of a certificate representing
such shares of Common Stock, pay promptly any amount necessary to satisfy
applicable federal, state, local or other tax requirements.
17. NAME. The Plan shall be known as the Pharmaceutical Formulations
1994 Stock Option Plan.
- --------
1 An increase in the number of shares subject to options under the plan from
1,000,000 to 1,500,000 was authorized by the Board of Directors on September 19,
1997 but such increase is subject to approval by the stockholders of the
Company, at the Annual Meeting of Stockholders scheduled for October 15, 1997.
<PAGE>
EXHIBIT 10.12 (B)
FORM OF OPTION AGREEMENT
Optionee:
Address:
No. of Shares:
PHARMACEUTICAL FORMULATIONS, INC.
1994 STOCK OPTION PLAN
QUALIFIED OPTION AGREEMENT
OPTION AGREEMENT, dated , between PHARMACEUTICAL FORMULATIONS, INC., a
Delaware corporation (hereinafter called the "Company"), and the employee whose
name is set forth above (hereinafter called the "Optionee").
W I T N E S S E T H :
WHEREAS, the Company has adopted a 1994 Stock Option Plan (the
"Plan"), and pursuant to the Plan, the Board of Directors of the Company has
this day granted to the Optionee an Incentive Stock Option (the "Option") to
purchase the number of shares of Common Stock, par value $.08 per share, of the
Company, at the Option price, all as hereinafter stated and to be subject to all
of the terms and conditions set forth in the Plan; and
WHEREAS, the Optionee is willing to accept said Option and to be bound
by the terms and conditions set forth in the Plan.
IT IS AGREED as follows:
GRANT OF OPTION: ADJUSTMENT OF SHARES COVERED BY OPTION
1.1 By the determination of the Board the Company hereby grants to the
Optionee the right and Option to purchase from the Company, upon the terms and
conditions hereinafter set forth, a total of shares of Common Stock, par value
$.08 per share of the Company (the "Shares"), for a cash consideration of $. per
Share, exercisable for the periods set forth in paragraph 2.1 below.
1.2 The number of Shares above stated and the purchase price thereof,
shall be subject to adjustment from time to time as provided in the Plan.
OPTION PERIOD
2.1 The Option granted hereby shall be exercisable commencing one year
from the date hereof. The Option shall expire five (5) years after the exercise
commencement date, subject to earlier termination as provided in the Plan.
EXERCISE OF OPTION
3.1 The Optionee may exercise the Option (to the extent it is then
exercisable) by delivering to the Company at its principal executive offices, a
written notice of his or her election to exercise all or a part of the Option,
which notice shall specify the date and time for the exercise of the Option;
shall be duly signed by the Optionee; shall state the number of shares that the
Optionee has elected to purchase and shall be accompanied by payment (i) in U.S.
dollars in the manner specified by the Plan, or (ii) with the consent of the
Board or the Stock Option Committee, by the delivery or attestation to the
ownership, of Shares of Common Stock of the Company owned by the Optionee and
having a Fair Market Value on the date of exercise equal to the Option price, or
in any combination of cash and Shares, so long as the cash and/or Shares
aggregates an amount equal to the full purchase price for the Shares to be
purchased. The date specified in such notice shall be a business day and the
time specified shall be during regular business hours of the Company. Following
receipt by the Company of such notice and full payment, the Company shall issue,
as soon as practicable, the Shares in the name of the Optionee and deliver the
certificate therefore to the Optionee. The Company, however, is not required to
issue or deliver a certificate for any Shares until it has complied with all
requirements of the Securities Act of 1933 as amended, the Securities Exchange
Act of 1934, any securities exchange on which the Company's stock may be listed
and all applicable state laws in connection with the issuance of such Shares.
Until the date of issuance of the certificate for such Shares, the Optionee
shall have none of the rights of a shareholder in respect of such shares.
EMPLOYMENT
4.1 Nothing contained in this Option Agreement shall confer upon the
Optionee any right to be continued in the employ of the Company or shall prevent
the Company from terminating his or her employment at any time, with or without
cause. If the Optionee's employment with the Company is terminated for any
reason other than for cause, this Option shall be exercisable only as to those
Shares immediately purchasable by him or her at the date of termination and only
for a period of thirty (30) days after such termination, or for one year in the
case of permanent and total disability, or for three (3) months in the case of
Optionee's death or retirement. If the Optionee's employment with the Company is
terminated for cause, this Option shall terminate immediately upon such notice
of termination.
4.2 If the Optionee dies within three (3) months after termination of
his or her employment by reason of retirement or within one (1) year in the case
of disability, or within thirty (30) days in the case of termination without
cause, that portion of this Option which was exercisable by the Optionee at the
time of death shall be exercisable by his or her legal representatives or
beneficiaries at any time within three (3) months after the Optionee's death.
NON-TRANSFERABILITY OF OPTION
5.1 This Option shall not be transferable other than by will or by the
laws of descent and distribution, and may be exercised during the Optionee's
lifetime only by him or her.
RESTRICTION ON EXERCISE OF OPTION AND SALE OF STOCK
6.1 No Shares of Common Stock acquired upon exercise of this Incentive
Stock Option may be sold or otherwise disposed of, within the meaning of (425(c)
of the Internal Revenue Code, at any time within two (2) years from the date of
the granting of this Incentive Stock Option, or within one (1) year after the
issuance by the Company of such Shares of Common Stock pursuant to the exercise
of this Incentive Stock Option. Optionee understands that if he or she disposes
of any shares received under this Incentive Stock Option within two (2) years
after the date of this Agreement or within one (1) year after such Shares were
issued, he or she will be treated for federal income tax purposes as having
received ordinary income (rather than capital gain income) at the time of such
disposition in an amount equal to the gain on the sale of the Shares (the net
proceeds realized from the sale of the Shares minus the price paid for the
Shares). Optionee hereby agrees to notify the Company in writing within thirty
(30) days of any such disposition. Optionee understands that if he or she is
still an Employee of the Company at the time of such disposition, the Company
may have a compensation withholding obligation for tax purposes.
6.2 This Option shall not be exercisable:
(a) If the exercise thereof will involve a violation of any
applicable state securities law; or
(b) If the exercise thereof will require registration under
the Securities Act of 1933, as amended, of the Shares to be purchased by the
Optionee pursuant to such exercise, unless such registration is
otherwise agreed to by the Company.
6.3 The Optionee acknowledges that the Option and underlying Shares
are not transferable without compliance with registration requirements of the
federal and state securities laws; that the Optionee has no right to transfer
either the Option or the underlying Shares; that he or she has no registration
rights to transfer or otherwise dispose of the Options or underlying Shares and
the Shares underlying the Option are being issued pursuant to a non-public
offering exemption under the Securities Act of 1933, as amended and will have a
legend on the face thereof indicating the restrictive nature of the Shares and
that the Shares are subject to this Agreement; and will have stop transfer
instructions issued against the Shares.
6.4 At the time of any exercise of this Option, the Company may
require that Optionee represent and agree with the Company in writing that he or
she is acquiring the Shares in respect of which the Option is being exercised,
for the purpose of investment and not for the purpose of distribution.
6.5 The Optionee agrees that he or she will not sell or otherwise
dispose of any Shares purchased by him or her pursuant to the exercise of all or
any portion of this Option at any time under circumstances which would require
the filing of a registration statement in respect of such Shares under the
provisions of the Securities Act of 1933, as amended, unless otherwise agreed to
by the Company.
INCORPORATION OF PLAN
7.1 The Option granted hereby is subject to, and governed by, the
terms and conditions of the Plan, which are hereby incorporated by reference.
This Option Agreement, including the Plan incorporated by reference herein, is
the entire agreement among the parties hereto with respect to the subject matter
hereof and supersedes all prior agreements and understandings.
ADJUSTMENTS UPON CHANGES IN CAPITALIZATION
If at any time after the date of grant of this Option, the Company
shall, by stock dividend, split-up, combination, reclassification or exchange,
or through merger or consolidation, or otherwise, change its Shares into a
different number or kind or class of shares or other securities or property,
then the number of Shares covered by this Option and the price of each such
Share shall be proportionately adjusted for any such change by the Board of
Directors or the Stock Option Committee whose determination shall be conclusive.
Any fraction of a share resulting from any adjustment shall be eliminated and
the price per Share of the remaining Shares subject to this Option shall be
adjusted accordingly.
REGISTRATION
9.1 REGISTRATION OF OPTION COMMON STOCK. If the Company shall at any
time and from time to time after the date hereof propose the registration under
the Securities Act of 1933 (which Act, together with any similar Federal Statute
in force in the future, is hereinafter referred to as the "Act") of any
securities of the Company (other than on a Form S-4 or S-8 under the Act or
related to a "rights" offering to stockholders or in connection with a call of
outstanding debentures) or the Company receives a written request for a
registration of its common stock from a holder of such stock entitled thereto
(other than the Optionee), the Company shall give written notice of' such
proposed registration to the holder and will permit the Optionee to offer for
sale, sell or otherwise dispose of such number of shares of Option Common Stock
(as such term is defined below) as the Optionee, by written notice (delivered to
the Company within 30 days of the Optionee's receipt of the notice of the
proposed registration) specifies, by including such shares of Option Common
Stock in the proposed registration. For purposes of this Option, "Option Common
Stock" shall mean shares of Common Stock issued or issuable upon the exercise of
this Option.
9.2 COSTS AND EXPENSES. The Optionee shall bear all costs and expenses
of any registrations and qualifications pursuant to SUBSECTION 9.1 directly
attributable to the inclusion in any such registration of any Option Common
Stock. The Company, however, shall bear all costs and expenses attributable to
any such registration which the Company would have borne had no Option Common
Stock been included therein.
9.3 INDEMNIFICATION. The Company shall indemnify and hold harmless the
Optionee and any underwriter (as defined in the Act) for such Optionee, and each
person, if any, who controls the Optionee or underwriter within the meaning of
the Act, against all losses, claims, damages or liabilities, joint or several,
to which such Optionee or underwriter or controlling person may be subject,
insofar as such losses, claims, damages or liabilities, joint or several, to
which such Optionee or underwriter or controlling person may be subject, are
caused by any untrue statement or alleged untrue statement of a material fact
contained in any registration statement under which shares of Option Common
Stock were registered under the Act, or qualified under the Blue Sky laws of
applicable jurisdictions, pursuant to this SECTION 9, any prospectus contained
therein, or any amendment or supplement thereto, or arising out of or based upon
the omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading,
except insofar as such losses, claims, damages or liabilities arise out of or
are based upon any untrue statement or alleged untrue statement or omission
based upon and made in conformity with information furnished to the Company in
writing by the Optionee or by any underwriter for the Optionee expressly for use
therein, in which case the Optionee shall indemnify, hold harmless and defend
the Company against all such losses, claims, damages or liabilities.
9.4 LEGEND. The Company shall imprint on all certificates representing
shares of Option Common Stock, or shares issued in substitution or exchange
therefor, the following legend:
"The securities presented by this certificate may not be
offered for sale, sold or otherwise transferred except
pursuant to an effective registration statement under the
Securities Act of 1933, as amended (the "Act"), or pursuant to
an exemption from registration under the Act, the availability
of which is to be established to the satisfaction of the
Company."
9.5 ADDITIONAL ACTS. The Optionee shall take all actions, as may be
required by the Company, to comply with all applicable rules and regulations
promulgated pursuant to the Act and the Securities Exchange Act of 1934, as
amended.
9.6 REGISTRATION OF OPTION. Notwithstanding anything to the contrary
in this Agreement, SUBSECTIONS 9.1 THROUGH 9.4 shall not be applicable to the
extent the offering of the Option Common Stock is registered with the Securities
and Exchange Commission under Form S-8 and such registration is effective.
NOTICES
Any notice to be given by the Optionee hereunder shall be sent to the
Company at its principal executive office, and any notice from the Company to
the Optionee shall be sent to the Optionee at his or her address set forth
above; all such notices shall be in writing and shall be delivered in person or
by registered or certified mail. Either party may change the address to which
notices are to be sent by notice in writing given to the other in accordance
with the terms thereof.
GOVERNING LAW
11.1 The parties hereto hereby acknowledge and agree that the Option
granted hereby is granted in the State of New Jersey and any Shares issued upon
exercise of the Option will be issued in the State of New Jersey. This
Agreement, as well as the grant of such Option and issuance of such Shares, is
and shall be governed by and construed in accordance with the laws of the State
of New Jersey applicable to agreements made and to be performed entirely within
such State.
MISCELLANEOUS
12.1 This Option Agreement shall be binding upon and inure to the
benefit of the Company and its successors and upon the Optionee and his or her
successors, assigns, including without limitation the estate of the Optionee and
the executors, administrators and/or trustees of such estate, or representative
of any such Optionee.
12.2 This Option Agreement shall become effective as of the date
hereof and, unless sooner terminated, shall remain in effect for a period of six
(6) years from the date hereof. This Option Agreement may be terminated at any
time by mutual consent of the parties hereto, but no modification or amendment
of this Option Agreement shall become effective until such modification or
amendment shall have been approved by the Board.
IN WITNESS WHEREOF, the Company has caused this Option Agreement to be
executed by its President, thereunto duly authorized, and the Optionee has
executed this Option Agreement, the day and year first above written.
PHARMACEUTICAL FORMULATIONS, INC.
By:_______________________________
The Optionee hereby accepts and agrees to be bound by all the terms
and conditions hereof.
----------------------------
Optionee
----------------------------
Date
ATTEST:
- -------------------------
Date:_____________________
EXHIBIT 10.13
February 20, 1997
Mr. Charles E. LaRosa
801 Dartmoor
Westfield, New Jersey 07090
Dear Mr. LaRosa:
This letter will confirm adjustments to the terms and conditions under which you
shall continue your employment with Pharmaceutical Formulations, Inc. (the
"Company") in the position of President and Chief Executive Officer.
Your salary will be increased to $275,000 per annum, effective January 1, 1997.
Providing that you are an employee in good standing of the Company on July 1,
1997 and have not given notice of termination of your employment, you shall
receive a stock grant of common shares equal to $25,000. The company is
reviewing the procedure for registration of the stock, which shall take place
providing the cost is minimal.
The Company will also be considering additional grants of stock options after
the issuance of results to the public for fiscal year ending June 30, 1997. The
non-executive Directors shall recommend a stock option for you of 250,000 common
shares of stock at that time, under the Company's stock option plan. This option
will be a qualified option, to the extent possible.
The non-executive Directors have also decided to recommend that at an
appropriate time prior to the Company being listed on an exchange, the Board
will consider a further grant of stock options to you in anticipation of such a
listing.
All other terms and conditions of your employment agreement dated April 4, 1996
with the Company shall remain in full force and effect.
Very truly yours,
PHARMACEUTICAL FORMULATIONS, INC.
By:/S/ JOHN L. Oram
John L. Oram
Chairman
EXHIBIT 23
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement filed on Form S-8 dated July 11, 1996 (Registration No. 333-09139) of
our reports dated August 15, 1997, relating to the consolidated financial
statements and schedule of Pharmaceutical Formulations, Inc. and Subsidiaries
appearing in the Company's Annual Report on Form 10-K for the year ended June
30, 1997.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
Woodbridge, New Jersey
September 16, 1997
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<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 2,087,000
<SECURITIES> 0
<RECEIVABLES> 8,917,000
<ALLOWANCES> 300,000
<INVENTORY> 17,708,000
<CURRENT-ASSETS> 29,939,000
<PP&E> 18,075,000
<DEPRECIATION> 14,574,000
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<CURRENT-LIABILITIES> 18,550,000
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0
2,500,000
<COMMON> 2,391,000
<OTHER-SE> 37,412,000
<TOTAL-LIABILITY-AND-EQUITY> 48,734,000
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<CGS> 53,957,000
<TOTAL-COSTS> 65,149,000
<OTHER-EXPENSES> 3,754,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,865,000
<INCOME-PRETAX> 2,214,000
<INCOME-TAX> 882,000
<INCOME-CONTINUING> 0
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