SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from ____ to ____
Commission file number: 0-11274
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PHARMACEUTICAL FORMULATIONS, INC.
(Exact name of Registrant as Specified in its Charter)
DELAWARE 22-2367644
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
460 PLAINFIELD AVENUE, EDISON, NJ 08818
(Address of principal executive offices, 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 September 15, 1998
was approximately $5,774,000.
As of September 15, 1998, there were 30,253,320 shares of Common
Stock, par value $.08 per share, outstanding
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement to be filed with the Securities and
Exchange Commission (the "Commission") with respect to the registrant's Annual
Meeting of Shareholders to be held in 1998 (the "1998 Proxy Statement") are
incorporated by reference into Part III of this Form 10-K.
<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 AND MAINTAIN 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 IMPACT OF YEAR 2000 ISSUES, 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. The
Company also sells and markets a line of antifungal aerosols. To a limited
extent, the Company also sells generic OTC products under its own trade brand
names, including HEALTH+CROSS(R) and HEALTH PHARM(R), 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
Walgreen Company ("Walgreen"), Costco Wholesale ("Costco"), K-Mart ("K-Mart")
and CVS Corp. ("CVS"), which in May 1997 merged with Revco D.S., Inc. ("Revco").
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 1997 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 64.9% 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 previously
leased 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
naproxen sodium), cough-cold preparations, sinus/allergy products and anti
gastrointestinal relief products. In the fiscal years ended June 30, 1998, 1997
and 1996, sales of ibuprofen accounted for 39%, 38% and 41%, respectively, of
the Company's total revenues. New products introduced in Fiscal 1998 include
cimetidine, the generic equivalent to the brand name drug Tagamet(R) HB(TM)
which is an acid reducer providing relief from heartburn, acid indigestion and
sour stomach. The Company began shipping cimetidine in June 1998 after the FDA
approved its abbreviated new drug application ("ANDA"). In the first month of
fiscal 1999 the Company received FDA approval of its ANDA for ibuprofen
capsules, equivalent to the national brand Advil(R) Gel Caplets.
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
Advil(R), 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), Allerest(R) and Tagamet(R) HB(TM), among others.1
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1 Such brand names, and other brand names mentioned herein, are registered
marks of companies unrelated to PFI, unless otherwise noted.
In fiscal 1998 the Company entered into two cooperative endeavors to
expand its product offerings. In July, 1997 the Company entered into a joint
venture with APG, Inc., through PFI LLC, a limited liability company owned in
equal portions by APG, Inc. and the Company, to develop, manufacture and market
certain healthcare products. APG is the second largest privately-owned contract
packager of aerosol products in the United States. The first product marketed by
this joint venture was a line of anti-fungal aerosols, which were first sold in
July 1998.
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, 1998, the
Company purchased from ICC $2,707,000 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 1998 and 2001. In fiscal
1998, the Company assumed these subleases and is now making the lease payments
directly to the leasing company previously associated with ICC. Upon expiration
of the term of each lease, the Company is entitled to purchase the equipment for
a price of $1.00. The Company no longer leases equipment or other capital items
from ICC.
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 drug, supermarket and mass-merchandise chains),
wholesalers, distributors, and brand-name pharmaceutical companies. For fiscal
1998, 1997 and 1996, respectively, sales to retail drug and supermarket chains
and mass merchandisers accounted for approximately 86%, 84%, and 85% of the
Company's sales; bulk sales to wholesalers and distributors accounted for
approximately 8%, 10% and 13% of the Company's sales and sales to brand-name
pharmaceutical companies accounted for approximately 6%, 6% and 2% 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 Walgreens were $14,422,000 (17%), $10,685,000 (14%) and
$7,609,000 (14%) for fiscal 1998, 1997 and 1996, respectively. Sales to Costco
were $16,643,000 (20%), $12,343,000 (16%) and $6,508,000 (12%) for fiscal 1998,
1997 and 1996, respectively. Sales to Revco accounted for $12,930,000 (17%) and
$11,078,000 (20%) of the Company's net sales for fiscal 1997 and 1996,
respectively. (As noted above, in May 1997 Revco merged with CVS; sales to CVS
after the merger with Revco did not exceed 10% of the Company's sales in fiscal
1998).
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 1998 and 1997 were
not significant. International sales are not significant at this time.
SALES AND MARKETING
The Company has 14 employees in sales and customer service. This staff
and over 20 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 customer, to focus on servicing that customer
and make marketing recommendations to help build retail store brand business.
The Company has 13 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 process or the ANDA
process. 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 1998, 1997 and 1996 were $904,000, $867,000 and $790,000, 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. Expenditures in one year are not necessarily indicative of expenditures
in future years. The Company expects to spend in fiscal 1999 between $1,200,000
and $1,500,000 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 1998) 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.
The Company, in connection with ICC, has developed the OTC version of
a cimetidine based H2 antagonist, for the relief from heartburn, acid
indigestion and sour stomach. As noted above, an ANDA for this product was
approved by the FDA in June 1998 and the Company began selling the OTC version
of cimetidine immediately upon approval.
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 CVS (as
the successor to Revco) 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 CVS defaults in its obligations to pay the cost of the clean-up, and such
costs exceed the amount of the bond posted by Revco, the Company may be required
to make payment therefor. The likelihood of CVS, being unable to satisfy any
claims which may be made against it in connection with the facility, however,
are remote in the 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 new 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. FDA approvals of ANDA's generally take 18 to 24 months
to obtain. 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 fiscal 1997. The Company's cimetidine product received
ANDA approval in fiscal 1998. In addition, the Company received ANDA approval
for an ibuprofen capsule in the first month of fiscal 1999.
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), HEALTH+CROSS(R) and HEALTH PHARM(R) are
federally registered trademarks owned by the Company. To the extent that the
Company's packaging and labeling of its generic OTC products may be considered
similar to the brand name products to which they are comparable, and to the
extent that a court may determine that such similarity may constitute confusion
over the source of the product, the Company may be subject to legal actions
under state and Federal statutes and case law to enjoin the use of the packaging
and for damages.
INSURANCE
The Company may be subject to product liability claims by persons
damaged by the use of its products. The Company maintains product liability
insurance for its generic OTC products covering up to $10,000,000 in liability.
Although there have been no material product liability claims made against the
Company to date, there can be no assurance that such coverage will adequately
cover any claims which may be made or that such insurance will not significantly
increase in cost or become unavailable in the future. The inability of the
Company to maintain necessary product liability insurance would significantly
restrict its ability to sell any products and could result in a cessation of its
business.
COMPETITION
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 30, 1998, the Company employed approximately 378
full-time employees. Of such employees, 251 are engaged in manufacturing
activities and are covered by a collective bargaining agreement between the
Company and Local 522 affiliated with the International Brotherhood of Teamsters
of New Jersey ("Local 522"), which expires on October 24, 1998. Additionally,
five of the Company's employees are represented by Local 68 of the International
Union of Operating Engineers, affiliated with the AFL-CIO. The Company had 28
persons employed in sales and marketing, 43 administrative and operational
employees and 51 laboratory technicians and scientists. The Company believes
that its relations with its employees are satisfactory.
EXECUTIVE OFFICERS
The executive officers of the Company as of September 15, 1998 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 48, has been Vice President of Scientific Affairs
since 1995. He was Vice President, Quality Assurance/Quality Control and
Regulatory, between 1993 and 1995. He joined the Company in 1978 and became
Director of Quality Assurance in 1982 and Director of Regulatory Affairs in
1988.
DAVID BELAGA, age 42, has been Vice President, Marketing since 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 53, 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 55, 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 1990 and from 1991 to 1995 and Chief Operating Officer
from 1988 until 1995.
GEORGE CHIN, age 45, has been Vice President, Sales since 1991. 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 43, has been Vice President, Finance, Chief
Financial Officer and Treasurer since 1995 and Secretary since 1996. He was Vice
President, Finance and Administration of the Company's subsidiary Private
Formulations, Inc. from 1992 until 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 1989 to 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. In July 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, $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 outstanding. For claimed tortuous
conduct, the estate is seeking $20,000,000 for intentional infliction of
emotional distress and $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, at the 1996 annual
meeting and (c) death benefits. The claim for death benefits, however, was
subsequently released by the estate.
With respect to the claim for continuing salary, the Company has
advised the estate of counterclaims which the Company has, which exceed the
amount of such payments. The Company maintains that as a result of the
termination of Dr. Tesler's employment in December 1995, the Company ceased to
have any liability under the change-of-control and death benefit provisions of
the various agreements with Dr. Tesler, as well as having other defenses to such
claims. It is also the Company's position that certain provisions of the
warrants issued to Dr. Tesler were not as agreed and authorized.
The children and a former spouse of Dr. Tesler (the "Teslers") have
also raised certain claims arising out of the death of Dr. Tesler. The Teslers
are seeking $1.46 million in death benefits allegedly due under an employment
agreement and $550,000 in benefits allegedly due under a group life insurance
policy. The Teslers are also seeking punitive damages, interest and attorneys
fees in connection with the failure to pay benefits. The matter is presently
scheduled for arbitration. The Company believes the Teslers' claims are without
merit and intends to vigorously defend against the arbitration claim.
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 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 interposed counterclaims for fraud
and related claims and claimed damages in the amount of $5,000,000. The case was
dismissed with prejudice in April 1998. The plaintiff has filed an appeal
seeking to have the case reinstated.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable.
<PAGE>
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, 1998, there were 1,752 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, 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 Ended June 30, 1998
First Quarter................... $25/32 $ 9/16
Second Quarter.................. 4/5 17/32
Third Quarter................... 13/16 9/16
Fourth Quarter.................. 3/4 1/2
Fiscal Year Ending June 30, 1999
First Quarter (through September
15, 1998) ..................... $.55 $.53
The high bid and low asked price of the Common Stock on September 15,
1998, as reported by the National Quotation Bureau, were $.53 and $.60,
respectively. On such date, there were approximately 4,850 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, 1998 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, 1998
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,
-----------------------------------------------------------
1998 1997 1996 1995 1994
-----------------------------------------------------------
(in thousands, except per share amounts)
STATEMENT OF OPERATIONS DATA;
<S> <C> <C> <C> <C> <C>
Gross sales $85,179 $75,013 $57,572 $62,427 $57,386
Net sales 80,829 71,117 54,327 59,107 55,330
Net income (loss) 1,867 1,332 (3,465) 2,046 2,211
Net income (loss) per share
of Common Stock:
Basic .06 .04 (.12) .07 .08
Diluted .05 .04 (.12) .06 .07
Weighted average common
shares and dilutive securities
outstanding1:
Basic 30,199 29,559 29,312 30,023 29,361
Diluted 36,710 36,242 29,312 32,520 32,350
------------------------
1 See Note 2 of Notes to Consolidated Financial Statements as to the
calculation of weighted average common and dilutive securities
outstanding.
</TABLE>
<TABLE>
JUNE 30,
---------------------------------------------------------------
1998 1997 1996 1995 1994
---------------------------------------------------------------
(in thousands)
BALANCE SHEET DATA:
<S> <C> <C> <C> <C> <C>
Current assets $36,658 $29,939 $21,823 $24,759 $21,076
Current liabilities 25,952 18,550 13,895 12,587 10,811
Working capital 10,706 11,389 7,928 12,172 10,265
Total assets 59,864 48,734 39,661 40,456 33,745
Long-term debt and
long-term capital
lease obligations 30,536 28,734 25,752 26,938 24,210
Stockholders' equity (deficit) 3,055 1,077 (411) 454 (1,805)
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FINANCIAL CONDITION AT JUNE 30, 1998
At June 30, 1998, the Company had working capital of $10,706,000 as
compared to $11,389,000 in the prior year. Working capital at June 30, 1998
includes $14,861,000 of account receivable as compared to $8,917,000 in the
prior year. The accounts receivable increase of $5,944,000 is a result of higher
sales, especially sales which occurred in the last month of the fiscal year with
the introduction of the Company's new product, Cimetidine. Working capital in
1998 also includes $20,096,000 of inventory as compared to $17,708,000 in the
prior year. The inventory increase of $2,388,000 is a result of higher sales and
the need to maintain inventories to support new customers obtained by the
Company and increased purchases by previous customers. Working capital was
reduced by an increase in accounts payable of $6,511,000 from $14,440,000 in
1997 to $20,951,000 in 1998. The increase in accounts payable is related to the
increase in accounts receivable and inventory.
The Company generated $2,009,000 in cash from operations in fiscal
1998. These funds, along with proceeds from the line of credit were used to
purchase property and equipment ($2,993,000) and pay debt ($3,627,000).
Capital expenditures for fiscal year ended June 30, 1998 were
$5,703,000. Such expenditures related primarily to the continuing upgrade of the
Company's manufacturing equipment and plant facilities. In addition, the Company
is refining and improving its information systems to better serve its customers
and meet its continuing information system needs.
On August 7, 1998, the Company modified its line of credit and
equipment term loan with its financial institution. The maximum amount available
under the line of credit and term loan is $25,000,000. At June 30, 1998, the
maximum availability was $17,500,000. Borrowings under the modified agreement,
which expires August 7, 2001, bear interest at the prime rate of interest less
3/4%.
The Company has outstanding 2,500,000 shares of Series A cumulative
redeemable convertible preferred stock sold to ICC. Dividends from the date of
issue (April 8, 1996) through June 30, 1998 totaling $450,000 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 $1,831,000, before the
valuation allowance at June 30, 1998, which consists of future tax benefits of
net operating loss carry forwards and various other temporary differences. The
Company has forecasted profitable operations for at least the next few years and
therefore, has recorded a net deferred tax asset of $1,531,000 at June 30, 1998.
The benefits of net operating loss carry forwards and other temporary
differences that will take more than a few years to realize can not be
reasonably determined at this time. Accordingly, a valuation allowance of
$300,000 was recorded at June 30, 1998 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 aimed at increasing sales and
reducing costs to improve operating results and increase profitability. The
Company intends to spend an estimated $5,000,000 of capital improvements in the
fiscal year ending June 30, 1999 to increase manufacturing capacity and reduce
costs. The Company anticipates that these capital expenditures will be funded
through equipment lease financing. While the Company has in the past had no
difficulty in obtaining such financing or meeting working capital needs there
can be no assurance the Company will obtain the equipment lease financing or
meet working capital needs in the future.
RESULTS OF OPERATIONS FOR FISCAL 1998 COMPARED TO FISCAL 1997
Gross sales for the fiscal year ended June 30, 1998 were $85,179,000
compared to $75,013,000 in the prior fiscal year. This increase of $10,166,000
or 14% is the result of increased sales to existing customers and new customers
obtained by the Company. In addition, the increased sales are the result of new
products introduced by the Company such as Cimetidine, which was introduced late
in the fourth quarter of fiscal 1998.
Sales discounts and allowances were $4,350,000 or 5.1% of sales as
compared to $3,896,000 or 5.2% of sales in the prior fiscal year.
Two customers each represent over 10% of the Company's sales for the
fiscal year ended June 30, 1998. These two customers are Walgreens and Costco.
Sales to these two customers aggregated $31,065,000 (36%) as compared to
$23,028,000 (31%) in the prior fiscal year.
Cost of sales as a percentage of net sales was 76.6% of net sales as
compared to 75.9% in the prior fiscal year. The increase in cost of sales as a
percentage of net sales is due to the sales mix whereby a greater percentage of
sales are in the private label (store brand) component of the business verses
the bulk contract component, which component traditionally has a lower cost of
sales percentage. In addition, in fiscal 1998 the Company launched new products
utilizing new equipment which had higher waste and lower production efficiencies
due to the beginning trials of the equipment. It is anticipated that such waste
levels will be reduced and production efficiencies will increase as production
of the new product utilizing such equipment is increased.
Selling, general and administrative expenses were $12,296,000 in
fiscal 1998 as compared to $10,325,000 in the prior fiscal year. The increase of
$1,971,000 is mainly a result of increased marketing, sales and distribution
costs to continually expand the Company's customer and product base.
Research and development costs were $904,000 in the fiscal year ended
June 30, 1998, compared to $867,000 in the prior fiscal year. The increase of
$37,000 represents increased expenditures on research and development to develop
new products. The Company expects to spend significantly more funds on research
and development in the fiscal year ending June 30, 1999 as compared to the
fiscal year ended June 30, 1998 to develop new products for future growth.
Interest and other expenses were $3,903,000 in the fiscal year ended
June 30, 1998 as compared to $3,754,000 in the prior fiscal year. The increase
of $149,000 is mainly a result of increased borrowing to support higher accounts
receivable and inventory requirements for the increased sales.
Income tax expense in fiscal 1998 was a $39,000 benefit compared to a
$882,000 expense in fiscal 1997. The decrease in the income tax is a result of a
change in the deferred income tax asset of $741,000 which represents tax
benefits realized in fiscal year 1998 and the recognition of tax benefits
available for future years.
Net income was $1,867,000 or $.06 basic earnings per share in the
fiscal year ended June 30, 1998, as compared to $1,332,000 or $.04 basic
earnings per share in the prior year period.
The Company continues to take steps aimed at increasing profitability.
The Company's business continues to shift from the higher profit margin
bulk/contract business to the store brand (private label) business, which has
lower profit margins and is extremely competitive. The steps which the Company
is taking to increase profitability include: (a) adding both new customers and
new products to increase sales volume and (b) reducing material costs and taking
other cost-saving measures to improve profitability. There can be no assurance
that such efforts will be successful in maintaining or improving the
profitability of the Company.
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 aggregated $35,958,000 (50.6%) 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 increased 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 took steps to increase sales and reduce costs to increase
the profitability of the Company. One of the Company's largest customers, Revco,
merged with CVS in May of 1997. At the time of such merger, preliminary
information indicated that sales and profits with the merged entity would be
lower than the Company's previous sales and profits with Revco. The steps the
Company took to reverse the possible negative effect of the Revco/CVS merger
included: (a) adding customers and products to the current business to increase
sales volume, (b) undertaking continued material costs reductions and other
cost-saving measures as well as other actions to improve profitability.
EFFECTS OF INFLATION
The Company does not believe that inflation had a material effect on
its operations for the fiscal years ended June 30, 1998, 1997 or 1996,
respectively.
YEAR 2000 COMPLIANCE
The Company is in the process of analyzing and addressing what is
known as the year 2000 (or "Y2K") issue. This issue has arisen because many
existing computer programs use only two dates to identify a year in the data
field. These programs were designed and developed without considering the impact
of the upcoming change in the century. The failure of such applications or
systems to properly recognize the dates beginning in the year 2000 could result
in miscalculations or systems failures. For instance, in connection with the
Company's business it is necessary for the computers to calculate and place on
product packaging the expiration dates of the Company's products, which
currently run to years past 2000. The Company has at all times been able to
address such problems, under prior and current computer systems. In fiscal 1998
the Company purchased and installed a completely new computer system, and
installed all new software on such system. While such system and software were
purchased to satisfy the needs of the Company caused by its expanded business,
and would accordingly have been done whether or not there was a Y2K issue, such
purchase also obviated the need to analyze the previous system and software for
Y2K compliance and to fix any problems which such analysis disclosed. The
Company believes that all of the newly-installed hardware and software is Y2K
compliant and that the transfer of data from the previous system did not entail
the transfer of non-complaint software or other Y2K deficiencies. The Company
has a management information system ("MIS") director who has assessed the
Company's compliance situation and the Company accordingly believes that all of
its internal computer systems (both hardware and software) and embedded
technology (to the extent that it is date sensitive) are currently Y2K
compliant. The Company has not retained any outside services to conduct
independent verification of the Company's compliance status and does not intend
to hire any such service.
The Company is currently commencing the process of contacting its key
customers and vendors to ascertain their Y2K compliance to the extent that their
problems could affect the Company. The Company expects to have completed that
process by the end of fiscal 1999. The Company at this time cannot make any
predictions as to the degree of compliance by such vendors and customers or the
consequence of any noncompliance. The Company has not devised any back-up plans
should any such customers' or vendors' Y2K problems affect the Company. After
completion of its review of queries sent to such customers and vendors, the
Company will assess the need for any contingency plans.
No information technology projects have been deferred due to Y2K
efforts. The Company is not in a position to determine what would be its most
reasonably likely worst case Y2K scenario or any plan for handling such
scenario. The expenses incurred to-date to achieve year 2000 compliance have not
had a material impact on the Company's results of operations or financial
condition. Based on the Company's current status of internal Y2K compliance and
other preliminary information, the Company does not anticipate that any expenses
yet to be incurred to achieve year 2000 compliance will have any material impact
on the Company's results of operations or financial condition during the next
two fiscal years. This prediction, however, may change if its later ascertained
that one or more key customers or vendors may have Y2K compliance problems which
could adversely affect the Company.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED JUNE 30, 1998 FOR
PHARMACEUTICAL FORMULATIONS, INC. AND SUBSIDIARIES
Report of Independent Certified Public Accountants F-1
Consolidated Financial Statements
Balance Sheets at June 30, 1998 and 1997 F-2
Statements of Operations for the Years
Ended June 30, 1998, 1997 and 1996 F-3
Statements of Changes in Stockholders'
Equity (Deficiency) for the Years Ended
June 30, 1998, 1997 and 1996 F-4
Statements of Cash Flows for the
Years Ended June 30, 1998, 1997 and 1996 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.
That portion of the Company's definitive 1998 Proxy Statement appearing
under the caption "ELECTION OF DIRECTORS," is hereby incorporated by reference.
The information regarding the executive officers of the Company who are not
directors is contained under "Executive Officers" under Item 1 to this Report.
ITEM 11. EXECUTIVE COMPENSATION.
That portion of the Company's definitive 1998 Proxy Statement appearing
under the caption "EXECUTIVE COMPENSATION" is hereby incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
That portion of the Company's definitive 1998 Proxy Statement appearing
under the caption "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT" is hereby incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
That portion of the Company's definitive 1998 Proxy Statement appearing
under the caption "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" is hereby
incorporated by reference.
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,
1997 (9)*
10.3 Loan and Security Agreement dated August 4, 1989 between
Fidelcor Business Credit Corporation (subsequently assumed by The CIT
Group/Credit Finance, Inc. 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, 1997 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(A) 1994 Stock Option Plan, as amended September 1998 (11)*
10.12(B) Form of option agreement under 1994 Stock Option Plan
(11)*
10.13 Amendment, dated February 20, 1998, to Employment Agreement
with Charles E. LaRosa (11)*
10.14 Letter Agreement dated August 7, 1998 between The CIT
Group/Credit Finance, Inc. and the Registrant amending the Loan and Security
Agreement between the Registrant and Fidelcor Business Credit Corporation as
assumed by The CIT Group/Credit Finance, Inc. (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; amended as set forth in Exhibit 10.14.
(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.
(11) Filed with the Registrant's Annual Report on Form 10-K for the year ended
June 30, 1997 and incorporated herein by reference.
(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,
1998.
<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 28, 1998
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:
NAME TITLE DATE
/S/CHARLES E. LAROSA President; Chief Executive September 28, 1998
Charles E. LaRosa Officer and a Director
(Principal Executive
Officer)
/S/FRANK MARCHESE Vice President, Finance; September 28, 1998
Frank Marchese Chief Financial Officer;
Secretary and Treasurer
(Principal Financial Officer)
/S/JOHN L. ORAM Chairman of the Board September 28, 1998
John L. Oram
/S/RAY W. CHEESMAN Director September 28, 1998
Ray W. Cheesman
<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-22
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE F-23
FINANCIAL STATEMENT SCHEDULE:
Schedule II - Valuation and qualifying accounts F-24
<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, 1998 and 1997, 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, 1998. 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, 1998 and 1997
and the results of their operations and their cash flows for each of the three
years in the period ended June 30, 1998 in conformity with generally accepted
accounting principles.
/S/ BDO Seidman, LLP
BDO Seidman, LLP
Woodbridge, New Jersey
August 21, 1998
<PAGE>
PHARMACEUTICAL FORMULATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, 1998 1997
- --------------------------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 608,000 $ 2,087,000
Accounts receivable, net of allowance for doubtful accounts of
$238,000 and $301,000 14,861,000 8,917,000
Inventories 20,096,000 17,708,000
Prepaid expenses and other current assets 793,000 927,000
Deferred tax asset 300,000 300,000
- --------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 36,658,000 29,939,000
PROPERTY, PLANT AND EQUIPMENT, NET 21,441,000 18,075,000
OTHER ASSETS:
Deferred tax asset 1,231,000 490,000
Other assets 534,000 230,000
- --------------------------------------------------------------------------------------------------------------------
$ 59,864,000 $ 48,734,000
====================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 482,000 $ 472,000
Current portion of capital lease obligations (including
$1,073,000 due to ICC in 1997) 2,898,000 2,104,000
Accounts payable 20,951,000 14,440,000
Accrued expenses 1,394,000 1,509,000
Income taxes payable 227,000 25,000
- --------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 25,952,000 18,550,000
LONG-TERM DEBT, LESS CURRENT MATURITIES 22,983,000 19,990,000
LONG-TERM CAPITAL LEASE OBLIGATIONS, LESS CURRENT MATURITIES
(INCLUDING $2,195,000 DUE TO ICC IN 1997) 7,553,000 8,744,000
DEFERRED GAIN ON SALE/LEASEBACK 321,000 373,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, par value $1.00 per share; 10,000,000 shares
authorized; 2,500,000 shares issued outstanding 2,500,000 2,500,000
Common stock, par value $.08 per share; 40,000,000 shares
authorized; 30,253,320 and 29,880,350 shares issued and
outstanding 2,421,000 2,391,000
Capital in excess of par value 37,493,000 37,412,000
Accumulated deficit (39,359,000) (41,226,000)
- --------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 3,055,000 1,077,000
- --------------------------------------------------------------------------------------------------------------------
$ 59,864,000 $ 48,734,000
====================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
PHARMACEUTICAL FORMULATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30, 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
GROSS SALES $85,179,000 $75,013,000 $57,572,000
LESS: SALES DISCOUNTS AND ALLOWANCES 4,350,000 3,896,000 3,245,000
- -----------------------------------------------------------------------------------------------------------------------------------
NET SALES 80,829,000 71,117,000 54,327,000
- -----------------------------------------------------------------------------------------------------------------------------------
COST AND EXPENSES:
Cost of goods sold 61,898,000 53,957,000 44,581,000
Selling, general and administrative 12,296,000 10,325,000 9,143,000
Special compensation expense - - 678,000
Research and development 904,000 867,000 790,000
- -----------------------------------------------------------------------------------------------------------------------------------
75,098,000 65,149,000 55,192,000
- -----------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS 5,731,000 5,968,000 (865,000)
- -----------------------------------------------------------------------------------------------------------------------------------
OTHER EXPENSES (INCOME):
Interest expense, including $276,000, $428,000
and $488,000 in 1998, 1997 and 1996 from ICC 3,982,000 3,865,000 3,553,000
Other, net (79,000) (111,000) (42,000)
- -----------------------------------------------------------------------------------------------------------------------------------
3,903,000 3,754,000 3,511,000
- -----------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES (BENEFIT) 1,828,000 2,214,000 (4,376,000)
INCOME TAXES (BENEFIT) (39,000) 882,000 (911,000)
- -----------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) 1,867,000 1,332,000 (3,465,000)
PREFERRED STOCK DIVIDEND REQUIREMENT 200,000 200,000 50,000
- -----------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS $ 1,667,000 $ 1,132,000 $ (3,515,000)
===================================================================================================================================
NET INCOME (LOSS) PER SHARE:
Basic $ .06 $ .04 $ (.12)
Diluted .05 .04 (.12)
===================================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
PHARMACEUTICAL FORMULATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Preferred stock Common stock
----------------------------- ----------------------- Capital In
Amount at Shares Amount At Excess Of Par Accumulated
Shares issued par value Issued Par Value Value Deficit
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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)
Shares issued in connection with
exercise of common stock options - - 300,000 24,000 51,000 -
Shares issued to officer and key
Company employees - - 72,970 6,000 30,000 -
Net income - - - - - 1,867,000
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 1998 2,500,000 $2,500,000 30,253,320 $2,421,000 $37,493,000 $(39,359,000)
===================================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
PHARMACEUTICAL FORMULATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30, 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income (loss) $ 1,867,000 $ 1,332,000 $(3,465,000)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization 2,509,000 2,271,000 1,662,000
Amortization of bond discount and deferred financing costs 162,000 141,000 135,000
Amortization of deferred gain on sale of building (52,000) (52,000) (52,000)
Shares issued to key Company employees 17,000 - 4,000
Shares issued in settlement of litigation - 50,000 -
Shares issued to officer and outside directors 19,000 - 49,000
Deferred income taxes (741,000) 360,000 250,000
Changes in current assets and liabilities:
Increase in accounts receivable (5,944,000) (406,000) (418,000)
(Increase) decrease in inventories (2,388,000) (7,988,000) 5,195,000
(Increase) decrease in other current assets 134,000 (180,000) (51,000)
(Increase) decrease in income tax receivable - 1,161,000 (1,161,000)
Increase in accounts payable, accrued expenses
and income taxes payable 6,426,000 4,543,000 1,015,000
- -----------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,009,000 1,232,000 3,163,000
- -----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment, net (2,993,000) (2,007,000) (2,317,000)
Decrease (increase) in other assets (304,000) 41,000 29,000
- -----------------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (3,297,000) (1,966,000) (2,288,000)
- -----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (repayments) under the line of credit 3,361,000 4,399,000 (1,342,000)
Principal repayments of long-term debt (520,000) (934,000) (707,000)
Principal repayments of capital leases (3,107,000) (2,034,000) (1,684,000)
Refinancing of capital leases - - 968,000
Issuance of preferred stock - - 2,500,000
Issuance of common stock, less offering and registration costs 75,000 106,000 19,000
- -----------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (191,000) 1,537,000 (246,000)
- -----------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,479,000) 803,000 629,000
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 2,087,000 1,284,000 655,000
- -----------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 608,000 $ 2,087,000 $ 1,284,000
===================================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
PHARMACEUTICAL FORMULATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF THE Pharmaceutical Formulations, Inc. (the "Company" or
BUSINESS AND "PFI") is primarily engaged in the manufacture and
RELATED 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, 1998 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 and
1996 (no preemptive rights were exercised in 1998) at a
price of $.25 per share:
1997 1996
----------------------------------------------------------
Shares under preemptive rights 221,536 75,926
==========================================================
ICC, a major international manufacturer and marketer of
chemical, plastic and pharmaceutical products, with
calendar year 1997 sales in excess of $1 billion, has
offices in key business centers around the world and owns
numerous manufacturing plants. In addition, ICC supplies
certain inventory and has in the past provided equipment
financing to the Company (in 1998, these leases were
assigned 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 10,768 and 16,799 shares of common stock to these
employees in 1998 and 1996, respectively.
The following transactions with ICC, are reflected in the
consolidated financial statements as of or for the years
ended June 30, 1998, 1997 and 1996:
JUNE 30, 1998 1997 1996
----------------------------------------------------------
Inventory purchases $2,707,000 $1,226,000 $ 795,000
Services and finance
fees 276,000 428,000 488,000
Accounts payable
to ICC 3,254,000 786,000 334,000
Equipment lease
obligations due ICC - 3,268,000 4,635,000
Other receivables
from ICC - 213,000 213,000
==========================================================
2. SUMMARY OF PRINCIPLES OF CONSOLIDATION
SIGNIFICANT The accompanying consolidated financial statements
ACCOUNTING include the accounts of the Company and its
POLICIES wholly-owned subsidiaries. All references to the
"Company" include its wholly-owned subsidiaries. All
significant intercompany accounts and transactions have
been eliminated.
CASH EQUIVALENTS
Cash equivalents consists of short-term, highly liquid
investments, which are readily convertible into cash at
cost.
INVENTORIES
Inventories are stated at the lower of cost or market with
cost determined on a first-in, first-out (FIFO) basis.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost.
Depreciation and amortization is provided on the
straight-line method over the estimated useful lives of the
assets (five to fifteen years).
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
Effective December 15, 1997, the Company accounts for
earnings per share under the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings
Per Share," which requires a dual presentation of basic and
diluted earnings per share. Basic earnings per share
excludes dilution and is computed by dividing income
available to common stockholders by the weighted average
number of common shares outstanding for the period. Diluted
earnings per share is computed assuming the conversion of
convertible preferred stock and the exercise or conversion
of common equivalent shares, if dilutive, consisting of
unissued shares under options and warrants. As required,
SFAS 128 was retroactively applied to the prior periods
presented. There was no impact to the prior period amounts.
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, 1998, approximately 54% of the accounts receivable
balance was represented by five customers. At June 30,
1997, approximately 47% of the accounts receivable balance
was represented by four customers.
INCOME TAXES
The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," which requires the
recognition of deferred tax liabilities and assets at
currently enacted tax rates for the expected future tax
consequences of events that have been included in the
financial statements or tax returns.
USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires
management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual
results could differ from those estimates.
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. No impairment losses have
occurred through June 30, 1998.
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.
NEW ACCOUNTING PRONOUNCEMENTS
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 adoption of these pronouncements is not expected
to effect the Company's financial statements.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments of the Company include long-term
debt. Based upon the current borrowing rates available to
the Company, estimated fair values of the revolving credit
and term loans (see Note 5) approximate their recorded
carrying amounts. It was not deemed practical to determine
the estimated fair value of the remaining debt. The
carrying amounts for cash, accounts receivable, accounts
payable and accrued expenses are reasonable estimates of
their fair value due to the short maturity of these items.
COLLECTIVE BARGAINING AGREEMENT
Substantially all of the Company's non-management employees
are covered by a collective bargaining agreement which
expires in October 1998.
3. INVENTORIES Inventories consist of the following:
JUNE 30, 1998 1997
-----------------------------------------------------------
Raw materials $ 6,589,000 $ 5,707,000
Work in process 717,000 841,000
Finished goods 12,790,000 11,160,000
----------------------------------------------------------
$20,096,000 $17,708,000
==========================================================
4. PROPERTY, PLANT Property, plant and equipment consist of the following:
AND EQUIPMENT
JUNE 30, 1998 1997
----------------------------------------------------------
Land and building $ 8,348,000 $ 8,348,000
Leasehold improvements 5,175,000 4,337,000
Machinery and equipment 21,875,000 18,057,000
Other 3,126,000 1,907,000
----------------------------------------------------------
38,524,000 32,649,000
Less: Accumulated
depreciation and
amortization 17,083,000 14,574,000
----------------------------------------------------------
$21,441,000 $18,075,000
----------------------------------------------------------
The net book value of property, plant and equipment under
capital leases was $11,817,000 and $10,280,000 at June 30,
1998 and 1997, respectively.
5. LONG-TERM DEBT Long-term debt and capital lease obligations consist
AND CAPITAL of the following:
LEASE OBLIGATIONS
<TABLE>
<CAPTION>
JUNE 30, 1998 1997
----------------------------------------------------------------------------
LONG-TERM CAPITAL Long-Term Capital
DEBT LEASES Debt Leases
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revolving/
term loans (a) $18,500,000 $ - $15,542,000 $ -
Convertible subordinated
debentures, $1,000
face value (less
unamortized discount
of $1,629,000 and
$1,791,000)(b) 3,567,000 - 3,405,000 -
Convertible
subordinated debentures,
$570,000 face value (c) 758,000 - 805,000 -
New Jersey Economic
Development Authority
Loan (d) 640,000 - 710,000 -
Building sale
/leaseback (e) - 5,343,000 - 5,880,000
Capital equipment
lease obligations (f) - 5,108,000 - 4,968,000
-----------------------------------------------------------------------------------
23,465,000 10,451,000 20,462,000 10,848,000
Less: Current portion 482,000 2,898,000 472,000 2,104,000
------------------------------------------------------------------------------------
$22,983,000 $ 7,553,000 $19,990,000 $ 8,744,000
====================================================================================
</TABLE>
(a) On August 7, 1998, the Company modified its line of
credit and equipment term loan with its lending
institution. The maximum available funds under this
modification are $25,000,000. Advances under the
revolving loans are limited to the sum of eligible
accounts receivable and up to $12,500,000 of eligible
inventory, as defined. The term loan was refinanced to
a total of $1,200,000 and is payable in 36 monthly
installments of $30,000, with the then outstanding
balance due on August 7, 2001. 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, 1998), minus 3/4%. In
the event of default, the interest rate will increase
by 2%.
The loan agreement contains certain loan covenants,
which, among other things, prohibit the Company from
making dividend payments, limit the Company's annual
capital expenditures and require the Company to
maintain minimum working capital and net worth.
(b) At June 30, 1998, 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.
(c) On June 30, 1998, 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 $188,000). 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.
(d) The loan, which is secured by certain equipment, bears
interest at 6 3/8% and is due as follows: $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% inter- est rate factor, and is being amortized
over the term of the lease.
(f) The Company leases various equipment under capital
lease agreements. The terms of the leases vary from
three to five years with monthly rentals of
approximately $240,000.
The Company's debt and obligations under capital leases
mature in fiscal years ending June 30 as follows:
Capital Lease Long-Term
Obligations Debt
-----------------------------------------------------------
1999 $ 4,084,000 $ 482,000
2000 3,627,000 315,000
2001 2,655,000 80,000
2002 1,809,000 22,588,000
2003 1,669,000 -
Thereafter 1,807,000 -
----------------------------------------------------------
Total payments 15,651,000 $23,465,000
=============
Less: Amount
representing interest 5,200,000
------------------------------------
Present value of net
minimum lease payments $10,451,000
====================================
6. COMMITMENTS AND COMMITMENTS
CONTINGENCIES
In fiscal 1996, the Company entered into a long-term lease
for a building adjacent to the Company's present facility.
The lease term is ten years with two five-year renewal
options. The lease is classified as an operating lease. The
rent payments are $319,200 per anum for the first five
years and $342,000 per annum for the balance of the initial
term.
CONTINGENCIES
In July 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 $5,500,000 in
compensatory damages, $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 outstanding.
For claimed tortuous conduct, the estate is seeking
$20,000,000 for intentional infliction of emotional
distress and $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, at the 1996 annual meeting and (c)
death benefits. The claim for death benefits, however, was
subsequently released by the Estate.
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.
The children and a former spouse of Dr. Tesler (the
"Teslers") have also raised certain claims arising out of
the death of Dr. Tesler. The Teslers are seeking $1.46
million in death benefits allegedly due under an employment
agreement and $550,000 in benefits allegedly due under a
group life insurance policy. The Teslers are also seeking
punitive damages, interest and attorneys fees in connection
with the failure to pay benefits. The matter is presently
scheduled for arbitration. The Company believes the
Teslers' claims are without merit and intends to vigorously
defend against the arbitration claims.
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
claims 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 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 interposed counterclaims for fraud
and related claims and claimed damages in the amount of
$5,000,000. The case was dismissed with prejudice in April
1998. The plaintiff has filed an appeal seeking to have the
case reinstated.
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:
1998 1997 1996
-----------------------------------------------------------
Current $ 702,000 $522,000 $(1,161,000)
Deferred (741,000) 360,000 250,000
----------------------------------------------------------
Total income
taxes (benefit) $(39,000) $882,000 $ (911,000)
==========================================================
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:
1998 1997 1996
-----------------------------------------------------------
Statutory U.S. tax $ 622,000 $753,000 $(1,488,000)
Increase (decrease)
resulting from:
State income taxes 110,000 133,000 (262,000)
Expiration of state
net operating loss
carryforwads 42,000 - -
Net change in valuation
account (1,054,000) 30,000 681,000
Other 241,000 (34,000) 158,000
----------------------------------------------------------
Effective income
taxes (benefit) $ (39,000) $882,000 $(911,000)
==========================================================
The Company utilized tax loss carryforwards of
approximately $165,000, $1,150,000, $0 for U.S. regular tax
purposes during each of the fiscal years ended June 30,
1998, 1997 and 1996, respectively.
As of June 30, 1998, the Company had available net
operating losses of approximately $1,485,000 for U.S.
regular tax purposes, which expire through 2007. The
utilization of such losses, which were generated prior to
September 1991 is limited to approximately $166,000 per
year for U.S. regular tax purposes due to the change in
ownership resulting from the ICC investment. State income
tax net operating loss carryforwards of approximately
$11,254,000, which expire through 2003, are available to
the Company.
Deferred tax assets are comprised of the following
temporary differences at June 30:
1998 1997
----------------------------------------------------------
Tax benefit of state income tax
net operating loss carryforwards $ 675,000 $ 827,000
Tax benefit of federal income tax
net operating loss carryforwards 505,000 564,000
Depreciation (41,000) (95,000)
Deferred gain on sale/leaseback
of building 109,000 127,000
Basis difference 8 1/4% bonds as
a result of restructuring 64,000 80,000
Capitalized inventory costs 120,000 153,000
Deferred compensation 155,000 155,000
Allowance for doubtful accounts 81,000 102,000
Alternative minimum tax carryforward 163,000 231,000
----------------------------------------------------------
Gross deferred tax asset 1,831,000 2,144,000
Valuation allowance (300,000)(1,354,000)
----------------------------------------------------------
Net deferred tax asset $1,531,000 $ 790,000
==========================================================
The Company has forecasted profitable operations for at
least the next few years and, therefore, has recorded a net
deferred tax asset of $1,531,000 at June 30, 1998. The
benefits of net operating loss carryforwards 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
$300,000 was recorded at June 30, 1998 to provide for this
uncertainty.
8. COMMON STOCK, The Company has granted options to employees, directors
OPTIONS AND and others under various stock option plans, lending
WARRANTS arrangements, and under the ICC Option Agreement to key
employees.
The following is a summary of stock options and warrants
issued, exercised, forfeited or cancelled for the period
July 1, 1995 through June 30, 1998 (not including ICC
preemptive rights or additional shares issuable to
management in connection with ICC preemptive rights):
Weighted - Average
Shares Exercise Price
-----------------------------------------------------------
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 501,750 $ .84
Exercised (100,000) $ .50
Forfeited (399,850) $ .96
-----------------------------------------------------------
Outstanding - June 30, 1997 1,738,700 $ .62
Issued 349,000 $ .85
Exercised (300,000) $ .25
Forfeited (40,700) $ .85
-----------------------------------------------------------
Outstanding - June 30, 1998 1,747,000 $ .77
===========================================================
Exercisable - June 30, 1998 1,254,000 $ .76
===========================================================
The following table summarizes information about stock
options outstanding at June 30, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------- ---------------------
Number Out- Weighted Number
Range of standing at Average Re- Weighted Exercisable Weighted
Exercise June 30, maining Life Average Ex- at June 30, Average Ex-
Prices 1998 (Years) ercise Price 1998 ercise Price
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ .48 to $.91 788,000 2.0 $ .84 644,000 $ .84
$ .78 to .84 349,000 4.4 .84 - -
$ .75 110,000 .6 .95 110,000 .75
$ .50 400,000 .3 .50 400,000 .50
$1.00 100,000 2 1.00 100,000 1.00
------------------------------------------------------------------------------------------------
1,747,000 1,254,000
================================================================================================
</TABLE>
The weighted average fair market value of options granted
during the years ended June 30, 1998, 1997 and 1996 were
$.54, $.36 and $.37, respectively.
As of June 30, 1998, 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
determined based on the fair value at the date of grant
consistent with the provisions of SFAS No. 123, the
Company's net income and net income per share would have
been reflected in the pro forma amounts indicated below:
JUNE 30, 1998 1997 1996
-----------------------------------------------------------
Net income (loss)
-as reported $1,867,000 $1,332,000 $(3,465,000)
Net income-pro forma 1,772,000 1,282,000 (3,480,000)
===========================================================
The application of SFAS No. 123 had no effect on the
Company's net income per share-basic and net income per
share-diluted during the years ended June 30, 1998, 1997
and 1996.
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 47%, 35% and 35% for
1998, 1997 and 1996, respectively, risk-free interest rate
of 5.9%, 6.06% and 6.06% for 1998, 1997 and 1996,
respectively, expected lives of 5 years and no dividend
yield for all three years ended 1998.
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 $450,000 as of June 30, 1998.
10. MAJOR CUSTOMER For the years ended June 30, 1998, 1997 and 1996, 17%, 14%
AND PRODUCTS and 14%, respectively, of consolidated net sales were
derived from Walgreen Company. Costco Wholesale accounted
for 20%, 16% and 12% of consolidated net sales for each of
the three years in the period ended June 30, 1998, 1997 and
1996, respectively. Sales to Revco accounted for 17% and
20% of consolidated net sales for the years ended June 30,
1997 and 1996, respectively.
For the years ended June 30, 1998, 1997 and 1996, sales of
ibuprofen represented 39%, 38% and 41% of consolidated net
sales, respectively.
<PAGE>
PHARMACEUTICAL FORMULATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. EARNINGS PER The following data shows the amounts used in computing
SHARE earnings per share and the effect on income and the
weighted average number of shares of dilutive potential
common stock:
1998 1997 1996
----------------------------------------------------------
Net income (loss) $1,867,000 $1,332,000 $(3,465,000)
Less: Preferred
dividends 200,000 200,000 50,000
----------------------------------------------------------
Net income available
to common shareholders
used in basic earnings
per share 1,667,000 1,132,000 (3,515,000)
Convertible preferred
stock dividends 200,000 200,000 50,000
----------------------------------------------------------
Income available to
common stockholders
after assumed
conversions of
dilutive securities $1,867,000 $1,332,000 $(3,465,000)
===========================================================
Weighted average number
of common shares
used in basic earnings
per share 30,199,000 29,559,000 29,312,000
Effect of dilutive
securities:
Stock options/warrants 400,000 688,000 -
Convertible preferred
stock 3,788,000 3,472,000 -
Convertible bonds 2,323,000 2,523,000 -
-----------------------------------------------------------
Weighted average number
of common shares
and dilutive securities 36,710,000 36,242,000 29,312,000
===========================================================
In 1998, options and warrants for 1,137,000 shares of
common stock were not included in computing diluted
earnings per share nor were bonds convertible into 108,000
common shares because their effects were antidilutive.
In 1997, options and warrants for 829,000 shares of common
stock were not included in computing diluted earnings per
share nor were bonds convertible into 108,000 common shares
because their effects were antidilutive.
In 1996, no options, warrants or other dilutive securities
were included in diluted earnings per share due to the net
loss.
12. SUPPLEMENTAL Supplemental disclosures of cash flow information:
CASH FLOW
INFORMATION
1998 1997 1996
-----------------------------------------------------------
Cash paid during the year:
Interest $3,820,000 $3,724,000 $3,463,000
Income taxes 330,000 300,000 -
===========================================================
Supplemental non-cash investing and financing information:
1998 1997 1996
-----------------------------------------------------------
Issuance of common stock
upon conversion of
debentures $ - $ - $ 28,000
===========================================================
Capital lease obligations of $2,710,000, $1,537,000 and
$1,801,000 were incurred when the Company entered into
various leases in 1998, 1997 and 1996, respectively.
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
The audits referred to in our report dated August 21, 1998 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.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
Woodbridge, New Jersey
August 21, 1998
<PAGE>
PHARMACEUTICAL FORMULATIONS, INC.
AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Additions Deductions
Balance at charged to write-offs
beginning of costs & Charge to uncollectible Balance at end
Allowance for doubtful accounts period expense other accounts accounts of period
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended June 30, 1998 $301,000 $60,000 $ - $123,000 $238,000
Year ended June 30, 1997 300,000 1,000 - - 301,000
Year Ended June 30, 1996 333,000 68,000 - 101,000 300,000
===================================================================================================================================
</TABLE>
<PAGE>
EXHIBIT INDEX
(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, 1997 (9)*
10.3 Loan and Security Agreement dated August 4, 1989 between Fidelcor
Business Credit Corporation (subsequently assumed by The CIT Group/Credit
Finance, Inc. 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, 1997 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(A) 1994 Stock Option Plan, as amended September 1998 (11)*
10.12(B) Form of option agreement under 1994 Stock Option Plan (11)*
10.13 Amendment, dated February 20, 1998, to Employment Agreement with
Charles E. LaRosa (11)*
10.14 Letter Agreement dated August 7, 1998 between The CIT Group/Credit
Finance, Inc. and the Registrant amending the Loan and Security Agreement
between the Registrant and Fidelcor Business Credit Corporation as assumed by
The CIT Group/Credit Finance, Inc. (filed herewith)
(23) CONSENT OF EXPERTS AND COUNSEL: consent of the Independent Public
Accountants
(27) FINANCIAL DATA SCHEDULE: attached
- ---------------------
* 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; amended as set forth in Exhibit 10.14.
(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.
(11) Filed with the Registrant's Annual Report on Form 10-K for the year ended
June 30, 1997 and incorporated herein by reference.
EXHIBIT 10.14
August 7, 1998
Pharmaceutical Formulations, Inc.
460 Plainfield Ave.
Edison, New Jersey 08817
Re: Loan and Security Agreement, dated August 4, 1989, between The CIT
Group/Credit Finance, Inc., assignee of Fidelcor Business Credit
Corporation, and Private Formulations, Inc., predecessor by merger of
Pharmaceutical Formulations, Inc., ("Pharmaceutical") as amended by letters
dated February 16, 1990, April 9, 1991, August 21, 1991, March 6, 1992,
April 7, 1992, August 17, 1992, September 30, 1992, October 9, 1992, March
25, 1993, May 20, 1994, October 14, 1994, October 21, 1994, January 19,
1995, May 16, 1995, July 5, 1995, September 11, 1995, August 14, 1996,
January 23, 1997, April 8, 1997 and April, 1998 (the "Loan Agreement") and
all related security agreements, documents and instruments (collectively,
the "Financing Agreements")
Gentlemen:
You have requested and we have agreed to amend the Financing Agreements as set
forth below, effective as of the date hereof unless otherwise indicated.
Capitalized terms appearing below that are not defined below shall have the
meanings given in the Loan Agreement.
1. Section 3.3 of the Loan Agreement is hereby amended so as to read
in its entirety as follows:
"COLLATERAL HANDLING FEE. Borrower shall pay Lender annually,
commencing August 4, 1998 and on each August 4 thereafter during
the Term, a Collateral Handling Fee in the amount set forth in
Section 10.4(c)."
2. Section 3.4 of the Loan Agreement is hereby amended so as to read
in its entirety as follows:
"UNUSED LINE FEE. Borrower shall pay Lender monthly, on the first
day of each month, in arrears, an Unused Line Fee for each month
during the Term at the rate per annum set forth in Section
10.4(d), calculated upon the amount, if any, by which the Maximum
Credit exceeds the average outstanding daily principal balance
during the preceding month of all Revolving Loans, Accommodations
and any Term Loan."
3. Section 9.1 of the Loan Agreement is hereby amended so as to read
in its entirety as follows:
"TERM. This Agreement shall only become effective upon execution
and delivery by Borrower and Lender and shall continue in full
force and effect until August 4, 2001 and shall be deemed
automatically renewed for successive terms of two (2) years
thereafter unless terminated as of the end of the initial or any
renewal term (each a "Term") by either party giving the other
written notice at least sixty (60) days prior to the end of the
then-current Term."
4. Section 9.2 of the Loan Agreement is hereby amended so as to read
in its entirety as follows:
"9.2 Borrower may also terminate this Agreement by giving Lender
at least thirty (30) days prior written notice at any time upon
payment in full of all of the obligations as provided herein,
including the early termination fee provided below. Lender shall
also have the right to terminate this Agreement at any time upon
or after the occurrence of an Event of Default. If Lender
terminates this Agreement upon or after the occurrence of an
Event of Default, or if Borrower shall terminate this Agreement
as permitted herein effective prior to the end of the
then-current Term, in addition to all other obligations, Borrower
shall pay to Lender, upon the effective date of termination, in
view of the impracticality and extreme difficulty of ascertaining
actual damages and by mutual agreement of the parties as to a
reasonable calculation of Lender's lost profits, an early
termination fee equal to (i) one and one-half percent (1 1/2%) of
the Maximum Credit, as set forth in Section 10.1(a) hereof, if
the effective date of termination occurs on or prior to August 4,
1999; and (ii) one percent (1%) of the Maximum Credit if the
effective date of termination occurs after August 4, 1999 and on
or prior to August 4, 2000."
5. Section 10.1(a) of the Loan Agreement is hereby amended so as to
read in its entirety as follows:
"(a) Maximum Credit $25,000,000."
6. Section 10.1(b) of the Loan Agreement is hereby amended so as to
read in its entirety as follows:
"(b) Gross Availability Formulas:
Eligible Accounts Percentage: 85%
Eligible Inventory Percentages:
Primary Raw Materials 60%
Other raw materials 60%
Packaged finished goods 60%
Bulk finished goods 60%
Bottles and caps 35%
Gelatin capsules 60%."
7. Section 10.1(c) of the Loan Agreement is hereby amended so as to
read in its entirety as follows:
"(c) Sublimits for:
Walgreen Accounts $1,750,000
Eligible Inventory Whichever is less, $12,500,000
or 125% of the Accounts
Availability."
8. Section 10.3 of the Loan Agreement is hereby amended so as to read
in its entirety as follows:
"10.3 Accommodations:
(a) Lender's Charge for
Accommodations: 2% per annum
(b) Sublimit for
Accommodations: $1,000,000."
9. Section 10.4 of the Loan Agreement is hereby amended by adding the
following to the end thereof:
"(c) Collateral Handling Fee: $20,000 per annum
(d) Unused Line Fee: .20% per annum."
10. Section 10.4 of the Loan Agreement is hereby amended so as to read
in its entirety as follows:
"10.5 Financial Covenants:
(a) Net Worth:
As of the fiscal year end 6/30/99 $3,800,000
As of the fiscal year end 6/30/00 $4,800,000
As of the fiscal year end 6/30/01 $5,800,000
(b) Capital Expenditures:
During the period 7/l/98--6/30/99 $6,600,000
During the period 7/l/99--6/30/00 $6,100,000
During the period 7/l/00--6/30/01 $5,800,000
(c) Net Income: Not less than $150,000 per fiscal quarter and
not less than $1,000,000 per fiscal year."
11. The currently outstanding principal balance of the Third
Replacement Promissory Note, dated January 19, 1995, in the original principal
amount of $2,012,068, made payable by you and payable to us (the "Old Note") is
$570,000. We have concurrently herewith made an advance to you in the amount of
$630,000 (the "New Advance"). The New Advance, and the principal indebtedness of
$570,000 evidenced by the Old Note shall be evidenced by and payable in
accordance with the terms of the Fourth Replacement Promissory Note (the "New
Note"), in the original principal amount of $1,200,000, made by you on the date
hereof, which supersedes and replaces the Old Note. Accordingly, the terms "Term
Loan" and "Promissory Note" appearing in the Financing Agreements shall be
deemed to mean and include the New Note and the New Advance, and the New Advance
shall constitute an Obligation. You hereby affirm that accrued interest on the
Old Note is due and owing by you and shall be payable at the rate specified
therein through the date hereof and that accrued interest on the New Note on and
after the date hereof is due and owing by you and shall be payable by you as
accrued interest in accordance with the terms of the New Note. You hereby
consent to a new appraisal (the "Appraisal") of your machinery and equipment to
be performed on a walk-through basis by an appraiser acceptable to us, at your
expense. You understand and agree that notwithstanding the fact that the New
Advance is being made concurrently herewith in the amount of $630,000, the
results of the Appraisal may result in an adjustment to the amount of the Term
Loan if the then-outstanding amount of the Term Loan exceeds 80% of the auction
sale value of the eligible machinery and equipment as determined by the
Appraisal.
12. Section 2.1 of the Loan Agreement is hereby amended by adding the
following new sentence at the end of the first paragraph thereof, i.e., the
paragraph containing the definition of Revolving Loans:
"Revolving Loans may consist of Prime Rate Loans or Eurodollar
Rate Loans (as such terms are defined in Section 3.1A below),
subject to the limitations, however, set forth in this Agreement
in the case of Eurodollar Rate Loans."
13. The first and second sentences of Section 3.1(a) of the Loan
Agreement are hereby amended and restated in their entirety as follows:
"(a) Interest on the Revolving Loans shall be payable by Borrower
on the first day of each month, calculated upon the closing daily
balances in the loan account of Borrower for each day during the
immediately preceding month, at the per annum rate set forth as
the Interest Rate in Section 3.1A(d). The Interest Rate in
respect of Prime Rate Loans shall increase or decrease by an
amount equal to each increase or decrease, respectively, in the
Prime Rate, effective as of the date of each such change."
14. Section 3 of the Loan Agreement is hereby amended by adding
thereto a new Section 3.6 as follows:
"3.6 (a) Borrower may from time to time request that Lender make
Eurodollar Rate Loans or that Prime Rate Loans be converted to
Eurodollar Rate Loans or that any existing Eurodollar Rate Loans
continue for an additional Interest Period. Such request from
Borrower shall specify W the amount of the Prime Rate Loans (if
any) which will constitute Eurodollar Rate Loans or the amount of
the Eurodollar Rate Loan requested to be made or continued
(subject to the limits set forth below) and (y) the Interest
Period to be applicable to such Eurodollar Rate Loans. A request
for a borrowing of a Eurodollar Rate Loan which would exceed the
limitations set forth in this Section 3.6(a) or failure of
Borrower to request that an existing Eurodollar Rate Loan be
continued as a Eurodollar Rate Loan shall be deemed and shall in
each case constitute Borrower's election that such proposed
borrowing shall be a Prime Rate Loan; and failure by Borrower to
make such election described in clause (y) of the immediately
preceding sentence shall be deemed and shall constitute
Borrower's election that the Interest Period with respect to the
proposed borrowing shall be a one (1) month period. Subject to
the terms and conditions contained herein, three (3) Business
Days after receipt by Lender of such a request from Borrower,
Lender shall make such requested Eurodollar Rate Loan, such Prime
Rate Loans shall be converted to Eurodollar Rate Loans or such
Eurodollar Rate Loans shall continue, as the case may be,
PROVIDE, THAT, (i) no Event of Default, or event which with
notice or passage of time or both would constitute an Event of
Default exists or has occurred and is continuing, (ii) no party
hereto shall have sent any notice of termination or non-renewal
of this Agreement, (iii) Borrower shall have complied with such
customary procedures as are established by Lender and specified
by Lender to Borrower from time to time for requests by Borrower
for Eurodollar Rate Loans, (iv) no more than four (4) Interest
Periods may be in effect at any one time, M the aggregate amount
of the Eurodollar Rate Loans must be in an amount not less than
$5,000,000 or an integral multiple of $1,000,000 in excess
thereof, (vi) after giving effect to any Eurodollar Rate Loan at
any time requested by Borrower, the aggregate principal amount of
all Eurodollar Rate Loans then outstanding shall not exceed the
lower of (A) $20,000,000 and (B) eighty (80%) percent of the
lowest principal amount of the Revolving Loans which it is
anticipated will be outstanding during the applicable Interest
Period, as determined by Lender (but with no obligation of Lender
to make such Revolving Loans, except as provided for in this
Agreement), and (vii) Lender shall have determined that the
Interest Period or Eurodollar Rate is available to Lender through
the Reference Bank and can be readily determined as of the date
of the request for such Eurodollar Rate Loan by Borrower. Any
request by Borrower that Lender make a Eurodollar Rate Loan, to
convert Prime Rate Loans to Eurodollar Rate Loans or to continue
any existing Eurodollar Rate Loans shall be irrevocable.
Notwithstanding anything to the contrary contained herein, Lender
and Reference Bank shall not be required to purchase United
States Dollar deposits in the London interbank market or other
applicable Eurodollar Rate market to fund any Eurodollar Rate
Loans, but the provisions hereof shall be deemed to apply as if
Lender and Reference Bank had purchased such deposits to fund the
Eurodollar Rate Loans.
(b) Any Eurodollar Rate Loans shall automatically convert to
Prime Rate Loans upon the last day of the applicable Interest
Period, unless Lender has received and approved a request to
continue such Eurodollar Rate Loan at least three (3) Business
Days prior to such last day in accordance with the terms hereof.
Any Eurodollar Rate Loans shall, at Lender's option, upon notice
by Lender to Borrower, convert to Prime Rate Loans in the event
that (i) an Event of Default or event which, with notice or
passage of time, or both, would constitute an Event of Default,
shall exist, (ii) this Agreement shall terminate or not be
renewed, or (iii) the aggregate principal amount of the Prime
Rate Loans which have previously been converted to Eurodollar
Rate Loans and Eurodollar Rate Loans made or continued, as the
case may be, at the beginning of an Interest Period shall at any
time during such Interest Period exceed the sum of the then
outstanding principal amount of the Term Loan (if any) plus the
Revolving Loans then available to Borrower under Section 2
hereof. Borrower shall pay to Lender, upon demand by Lender (or
Lender may, at its option, charge any loan account of Borrower)
any amounts required to compensate Lender, the Reference Bank or
any participant with Lender for any loss (including loss of
anticipated profits), cost or expense incurred by such person, as
a result of the conversion of Eurodollar Rate Loans to Prime Rate
Loans pursuant to any of the foregoing."
15. The Loan Agreement is hereby amended by adding thereto a new
Section 3.7 as follows:
"3.7 CHANGES IN LAWS AND INCREASED COSTS OF LOANS.
(a) Notwithstanding anything to the contrary contained
herein, all Eurodollar Rate Loans shall, upon notice by Lender to
Borrower, convert to Prime Rate Loans in the event that W any
change in applicable law or regulation (or the interpretation or
administration thereof) shall either (A) make it unlawful for
Lender, Reference Bank or any participant to make or maintain
Eurodollar Rate Loans or to comply with the terms hereof in
connection with the Eurodollar Rate Loans, or (2) shall result in
the increase in the costs to Lender, Reference Bank or any
participant of making or maintaining any Eurodollar Rate Loans by
an amount deemed by Lender to be material, or (C) reduce the
amounts received or receivable by Lender in respect thereof by an
amount deemed by Lender to be material or (ii) the cost to
Lender, Reference Bank or any participant of making or
maintaining any Eurodollar Rate Loans shall otherwise increase by
an amount deemed by Lender to be material. Borrower shall pay to
Lender, upon demand by Lender (or Lender may, at its option,
charge any loan account of Borrower) any amounts required to
compensate Lender, the Reference Bank or any participant with
Lender for any loss (including loss of anticipated profits), cost
or expense incurred by such person as a result of the foregoing,
including, without limitation, any such loss, cost or expense
incurred by reason of the liquidation or reemployment of deposits
or other funds acquired by such person to make or maintain the
Eurodollar Rate Loans or any portion thereof. A certificate of
Lender setting forth the basis for the determination of such
amount necessary to compensate Lender as aforesaid shall be
delivered to Borrower and shall be conclusive, absent manifest
error.
(b) If any payments or prepayments in respect of the
Eurodollar Rate Loans are received by Lender other than on the
last of the applicable Interest Period (whether pursuant to
acceleration, upon maturity or otherwise), including any payments
pursuant to the application of collections under Section 5 or any
other payments made with the proceeds of Collateral, Borrower
shall pay to Lender upon demand by Lender (or Lender may, at its
option, charge any loan account of Borrower) any amounts required
to compensate Lender, the Reference Bank or any participant with
Lender for any additional loss (including loss of anticipated
profits), cost or expense incurred by such person as a result of
such prepayment or payment, including, without limitation, any
loss, cost or expense incurred by reason of the liquidation or
reemployment of deposits or other funds acquired by such person
to make or maintain such Eurodollar Rate Loans or any portion
thereof."
16. The Loan Agreement is hereby amended by adding thereto new Section
3.1A as follows:
"SECTION 3.1A. ADDITIONAL DEFINITIONS
(a) "BUSINESS DAY" shall mean any day other than a Saturday,
Sunday, or other day on which commercial banks are authorized or
required to close under the laws of the State of New York, and a
day on which the Reference Bank and Lender are open for the
transaction of business, except that if a determination of a
Business Day shall relate to any Eurodollar Rate Loans, the term
Business Day shall also exclude any day on which banks are closed
for dealings in dollar deposits in the London interbank market or
other applicable Eurodollar Rate market.
(b) "EURODOLLAR RATE LOANS" shall mean any Revolving Loans
or portion thereof on which interest is payable based on the
Eurodollar Rate in accordance with the terms hereof.
(c) "EURODOLLAR RATE" shall mean with respect to the
Interest Period for a Eurodollar Rate Loan, the interest rate per
annum equal to the arithmetic average of the rates of interest
per annum (rounded upwards, if necessary, to the next
one-sixteenth (1/16) of one (1%) percent) at which Reference Bank
is offered deposits of United States dollars in the London
interbank market (or other Eurodollar Rate market selected by
Borrower and approved by Lender) on or about 9:00 a.m. (New York
time) two (2) Business Days prior to the commencement of such
Interest Period in amounts substantially equal to the principal
amount of the Eurodollar Rate Loans requested by and available to
Borrower in accordance with the Agreement, with a maturity of
comparable duration to the Interest Period selected by Borrower.
(d) "INTEREST PERIOD" shall mean for any Eurodollar Rate
Loan, a period of approximately one (1), two (2), three (3) or
six (6) months duration as Borrower may elect, the exact duration
to be determined in accordance with the customary practice in the
applicable Eurodollar Rate market; PROVIDED, that, (i) any
Interest Period that would otherwise end on a day that is not a
Business Day shall be extended to the next succeeding Business
Day, unless such Business Day falls in another calendar month, in
which case such Interest Period shall end on the next preceding
Business Day; (ii) any Interest Period that begins on the last
Business Day of a calendar month or on a day for which there is
no numerically corresponding day in the calendar month or on a
day for which there is no numerically corresponding day in the
calendar month at the end of such Interest Period shall end on
the last Business Day of the applicable calendar month; and (iii)
Borrower may not elect an Interest Period which will end after
the last day of the then-current Term of this Agreement.
(e) "INTEREST RATE" shall mean, as to Prime Rate Loans, a
rate per annum of the Prime Rate less three-quarters (0.75%)
percent and, as to Eurodollar Rate Loans, a rate of two and
one-eighth (2.125%) percent per annum in excess of the Eurodollar
Rate (based on the Eurodollar Rate applicable for the Interest
Period selected by Borrower as in effect three (3) Business Days
after the date of receipt by Lender of the request of Borrower
for such Eurodollar Rate Loans in accordance with the terms
hereof, whether such rate is higher or lower than any rate
previously quoted to Borrower).
(f) "PRIME RATE LOANS" shall mean any Revolving Loans or
portion thereof on which interest is payable based on the Prime
Rate in accordance with the terms hereof.
(g) "REFERENCE BANK" shall mean The Chase Manhattan Bank,
New York, New York, or its successor, or such other bank as
Lender may from time to time designate."
17. Section 10.4(a) of the Loan Agreement is hereby deleted in its
entirety and replaced with the following:
"[Intentionally Deleted.]"
We have agreed to the amendments set forth above in consideration of your
agreement to pay to us a facility fee in the amount of $75,000, which facility
fee is in addition to the facility fees heretofore charged to your account in
connection with other requests for changes in your accommodations, and which
shall be deemed fully earned, and may be charged to your account with us, on the
date hereof.
Except as herein above specifically provided, the Financing Agreements shall
remain unmodified and in full force and effect.
This amendment shall be null and void if not executed on or before August 7,
1998.
Please signify your agreement with the foregoing by signing and returning to us
the enclosed copy of this letter.
Very truly yours,
THE CIT GROUP/CREDIT FINANCE, INC.
By: /S/ ERNIE ABATI
Title: VICE PRESIDENT
AGREED:
PHARMACEUTICAL FORMULATIONS, INC.
By: /S/ FRANK MARCHESE
Title: VICE PRESIDENT/FINANCE
CONFIRMED:
EXTRA PARENT CORP.
By: /S/ FRANK MARCHESE
Title: VICE PRESIDENT/FINANCE
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 21, 1998, 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, 1998.
/s/ BDO Seidman, LLP
Woodbridge, New Jersey
September 24, 1998
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 608,000
<SECURITIES> 0
<RECEIVABLES> 14,861,000
<ALLOWANCES> 238,000
<INVENTORY> 20,096,000
<CURRENT-ASSETS> 36,658,000
<PP&E> 21,441,000
<DEPRECIATION> 17,083,000
<TOTAL-ASSETS> 59,864,000
<CURRENT-LIABILITIES> 25,952,000
<BONDS> 0
0
2,500,000
<COMMON> 2,421,000
<OTHER-SE> 37,493,000
<TOTAL-LIABILITY-AND-EQUITY> 59,864,000
<SALES> 85,179,000
<TOTAL-REVENUES> 0
<CGS> 61,898,000
<TOTAL-COSTS> 75,098,000
<OTHER-EXPENSES> 3,903,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,982,000
<INCOME-PRETAX> 1,828,000
<INCOME-TAX> (39,000)
<INCOME-CONTINUING> 1,867,000
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