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 July 3, 1999
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 / / No /x/
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 24, 1999
was approximately $2,033,295.
As of September 24, 1999, 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 Stockholders to be held in 1999 (the "1999 Proxy Statement") are
incorporated by reference into Part III of this Form 10-K.
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 US FROM TIME TO TIME, IN FILINGS WITH THE SECURITIES
EXCHANGE COMMISSION OR OTHERWISE. STATEMENTS CONTAINED IN THIS REPORT THAT ARE
NOT HISTORICAL FACTS ARE FORWARD-LOOKING STATEMENTS MADE PURSUANT TO THESE SAFE
HARBOR PROVISIONS. FORWARD-LOOKING STATEMENTS MAY INCLUDE 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; ASSESSMENTS OF MATERIALITY; AND PREDICTIONS OF FUTURE
EVENTS AND THE EFFECTS OF PENDING AND POSSIBLE LITIGATION, AS WELL AS
ASSUMPTIONS RELATING TO THESE STATEMENTS. IN ADDITION, WHEN WE USE THE WORDS
"ANTICIPATES," "BELIEVES," "ESTIMATES," "EXPECTS," AND "INTENDS," AND "PLANS,"
AND VARIATIONS THEREOF AND SIMILAR EXPRESSIONS, WE INTEND 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 REPORT. STATEMENTS IN THIS 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 THAT COULD CONTRIBUTE TO OR CAUSE SUCH DIFFERENCES. OTHER FACTORS THAT
COULD CONTRIBUTE TO OR CAUSE SUCH DIFFERENCES INCLUDE UNANTICIPATED DEVELOPMENTS
IN ANY ONE OR MORE OF THE FOLLOWING AREAS:
o OUR ABILITY, AND THE ABILITY OF CERTAIN OF OUR VENDORS, TO OBTAIN AND
MAINTAIN APPROVALS FROM THE U.S. FOOD AND DRUG ADMINISTRATION FOR NEW
PRODUCTS AND OTHER REGULATORY MATTERS, AND OUR ABILITY TO QUALIFY
ADDITIONAL VENDORS FOR SIGNIFICANT RAW MATERIAL,
o THE RECEPTIVITY OF CONSUMERS TO GENERIC DRUGS,
o THE RATE OF OUR NEW PRODUCT INTRODUCTIONS AND THE RECEPTIVITY OF OUR
CUSTOMERS TO SUCH PRODUCTS,
o COMPETITION, INCLUDING PRESSURES WHICH MAY REQUIRE US TO REDUCE OUR
PRICES,
o THE NUMBER AND NATURE OF CUSTOMERS AND THEIR PRODUCT ORDERS, INCLUDING
MATERIAL CHANGES IN ORDERS FROM OUR MOST SIGNIFICANT CUSTOMERS,
o ABILITY OF OUR VENDORS TO CONTINUE TO SUPPLY OUR NEEDS, ESPECIALLY
WITH RESPECT TO OUR KEY PRODUCTS SUCH AS IBUPROFEN,
o BORROWING COSTS, AND OUR ABILITY TO GENERATE CASH FLOW TO PAY INTEREST
AND SCHEDULED AMORTIZATION PAYMENTS AS WELL AS OUR ABILITY TO
REFINANCE SUCH INDEBTEDNESS OR TO SELL ASSETS WHEN IT COMES DUE,
o RELATIONS WITH OUR CONTROLLING SHAREHOLDER, INCLUDING ITS CONTINUING
WILLINGNESS TO PROVIDE FINANCING AND OTHER RESOURCES,
o PENDING OR NEW LITIGATION,
o THE IMPACT OF YEAR 2000 ISSUES, AND
o THE CONTINUED INVOLVEMENT OF KEY PERSONNEL OR THE ABILITY TO OBTAIN
SUITABLE REPLACEMENT PERSONNEL,
AS WELL AS OTHER RISKS FACTORS WHICH MAY BE DETAILED FROM TIME TO TIME IN OUR
SECURITIES AND EXCHANGE COMMISSION FILINGS.
YOU ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON ANY FORWARD-LOOKING
STATEMENTS CONTAINED IN THIS REPORT, WHICH IS ACCURATE ONLY AS OF THE DATE OF
THIS REPORT. WE UNDERTAKE 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 OF THIS REPORT OR TO REFLECT THE OCCURRENCE OF
UNEXPECTED EVENTS.
INTRODUCTION
Pharmaceutical Formulations, Inc. (PFI), a Delaware corporation, is
the second largest publicly-traded private label manufacturer and distributor of
nonprescription (sometimes called "over-the-counter" or "OTC") solid dose
pharmaceutical products (which are referred to in this report as "generic OTC
products") in the United States. Such products, which are made in tablet, caplet
or capsule form are primarily sold under our 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. We also
sell and market a line of antifungal aerosols. To a limited extent, we also sell
generic OTC products under our own brand names, including HEALTH+CROSS(R) anD
HEALth PHARM(R), which sales account for less than 1% of our total revenues.
We believe that the therapeutic benefits of our 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 our products are patterned are identical to those of our products. We are
subject to regulation by the U.S. Food and Drug Administration (FDA). Our
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, we 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 outstanding
shares of our common stock. ICC is a major international manufacturer and
marketer of chemical, plastic and pharmaceutical products which had calendar
1998 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 our outstanding common stock. In fiscal 1996, we sold
2,500,000 shares of Series A Cumulative Redeemable Convertible Preferred Stock
to ICC. The preferred stock is currently convertible into common stock at the
option of ICC on three months notice to the Company. Each share of preferred
stock is convertible to such number of shares of common stock as equals the
then-current liquidation preference for such shares of preferred stock
(currently $1.00) divided by the lower of the current market price for the
common stock (as defined) at the conversion date (as defined) or $2.00 per share
(subject to certain antidilution adjustments). (The current market price is
defined as the average of the daily market prices (as defined) for the common
stock for 30 consecutive trading days commencing 45 days prior to the conversion
date, which is the third monthly anniversary date of the date of notice of
conversion). If ICC elected to convert such shares of preferred stock and it is
assumed that the applicable current market price is equal to the average of the
high and low asked priced for the common stock on September 24, 1999 ($.29),
then the 2,500,000 shares of preferred stock would convert into 8,620,689 shares
of common stock. After such conversion, ICC would then own 28,256,583 shares of
common stock, which is 72.7% of the outstanding common stock. If the market
price for the common stock is greater than $.29 per share at the conversion
date ICC would own fewer shares, and if the market price is less than $.29 per
share ICC would own more shares, after any such conversion.
In addition, the Company purchases certain raw materials from ICC and
previously leased equipment from ICC, and its affiliates. See "Certain
Relationships and Related Transactions." Also, on April 1, 1999, ICC provided a
term loan of $3,000,000 and a temporary guarantee of $1,500,000 in advances
under a line of credit and term loan from a lending institution. The term loan
is secured by a subordinated pledge of all the assets of the Company and is
repayable in 12 monthly installments of $75,000 each commencing May 2000 and 12
monthly installments of $100,000 each commencing in May 2001 with a final
payment of $900,000 in May 2002. Interest is payable at 1% over prime. On
October 1, 1999 the guaranteed advance was reduced by $100,000.
PRODUCTS
Currently, we market more than 90 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
gastrointestinal relief products. Sales of ibuprofen accounted for 34%, in
fiscal 1999, 39% in fiscal 1998 and 38% in fiscal 1997 of our total revenues.
New products introduced in fiscal 1999 include ibuprofen capsules.
Generic pharmaceutical products are drugs which are sold under
chemical names rather than brand names and possess chemical compositions (and,
we believe, 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. We manufacture generic OTC products which we believe 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), Mylanta(R), Sudafed(R), Comtrex(R), Sinutab(R),
Dramamine(R), Actifed(R), Benadryl(R), Allerest(R) and Tagamet(R) HB(TM), among
other products.(1)
In fiscal 1998 we entered into wo cooperative endeavors to expand our
product offerings. In July 1997 we entered into an alliance with A&S
Pharmaceutical Corporation to which A&S's complete range of aspirin products are
now made available to our customers. This enables us to satisfy demand in a
growth segment driven largely by the therapeutic benefits of aspirin-based
products for cardiovascular patients. In November 1997 we erneted 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. A second product to be marketed by the joint venture is a line of
cough/cold liquids, which commenced in October 1999.
- ----------
1 Such brand names, and other brand names mentioned in this report, are
registered marks of companies unrelated to PFI, unless otherwise notes.
MANUFACTURING
In order to manufacture generic OTC products, we acquire raw materials
from suppliers located in the United States and abroad, including ICC, an
affiliate of the Company. During the fiscal year ended July 3, 1999, we
purchased from ICC $2,667,000 of raw materials.
To date, we have obtained the raw materials we need and expect that
such raw materials will continue to be readily available in the future. Our raw
materials are first placed in quarantine so that samples of each lot can be
assayed for purity and potency by a team of our trained chemists and
technicians. 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 us and our customers.
To produce capsules and tablets, we utilize 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, we assist our 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, we have entered into various subleases of
equipment and leasehold improvements from companies affiliated with ICC, for
which we pay such affiliates fixed monthly fees. In fiscal 1999, we assumed
these subleases and are now making the lease payments directly to a leasing
company, which is not associated with ICC. We no longer lease equipment or other
capital items from ICC.
In response to drug tampering problems affecting the industry
generally, we have instituted certain tamper-evident features in our 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, we manufacture a banded
capsule which contains a gelatin band in the center to deter ease of opening
and/or closing the capsule product. Although we take steps to make our products
tamper-resistant, we believe that no product is "tamper-proof." There can be no
assurance that our products will not be tampered with. Any such tampering, even
if it occurs in the retail outlets, may have a material adverse effect on our
business. See "Insurance."
CUSTOMERS
Our customers consist of over 50 retailers (including major national
and regional drug, supermarket and mass-merchandise chains), wholesalers,
distributors, and brand-name pharmaceutical companies. Sales to our various
categories of customers in fiscal 1999, 1998 and 1997 by percentage of total
sales were as follows:
PERCENTAGE OF SALES
-----------------------
CATEGORY 1999 1998 1997
- -------- ---- ---- ----
Retail drug and supermarket chains and mass 93% 86% 84%
merchandisers
Bulk sales to wholesalers and distributors 5% 8% 10%
Brand-name pharmaceutical companies 2% 6% 6%
All of these sales consisted of products which our customers sell under their
own store brand or other labels.
Sales to customers who represented more than 10% of sales in any one
or more of the years 1999, 1998 and 1997 were as follows:
SALES ($ AND PERCENTAGE OF TOTAL SALES)
--------------------------------------
CUSTOMER 1999 1998 1997
- -------- ---- ---- -----
Walgreens $15,412,000 (17%) $14,422,000 (17%) $10,685,000 (14%)
Costco $12,522,000 (14%) $16,643,000 (20%) $12,343,000 (16%)
Revco * - - $12,930,000 (17%)
*As noted above, in May 1997 Revco merged with CVS; sales to Revco/CVS after the
merger did not exceed 10% of our sales in fiscal 1998 or 1999.
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
Value, 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 1999 and 1998 were
not significant. International sales are not significant at this time.
SALES AND MARKETING
We have 14 employees in sales and customer service. This staff and
over 20 independent brokers sell our generic OTC pharmaceutical products and our
marketing services to current and potential customers. There currently are four
account teams servicing different geographic areas of the U.S., each headed by a
sales director who works with the marketing group, 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.
We have six employees in marketing and graphic design area 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.
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 our 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 new 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 the 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.
Generic drug products are capable of being approved for marketing by
the FDA via the ANDA process. An ANDA is submitted to the FDA in order to
demonstrate that a drug product is "bioequivalent" to a drug product that has
already been approved by the 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. Instead, ANDAs for orally administered
dosage forms typically contain "bioavailability" studies to demonstrate
"bio-equivalence." 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. There are certain exceptions, however, such as when an
"innovator's" 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's" 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 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 OTC
products not 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 us to expend substantial sums to
maintain FDA compliance, we could be materially adversely affected. In the past,
our generic OTC products (with the exception of ibuprofen) have not required
approval of NDAs or ANDAs. Certain products which we recently introduced or are
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 our ibuprofen product (although, at present, we
sell our ibuprofen products in the 200 mg. strength only). We have also obtained
FDA approval of certain different colors and shapes for our 200 mg. ibuprofen
product. Our naproxen sodium product received ANDA approval in fiscal 1997 and
our cimetidine product received ANDA approval in fiscal 1998. In addition, we
received ANDA approval for an ibuprofen capsule in July 1998.
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.
The 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
subject to state regulatory requirements, which may differ from one state to
another.
We believe that we are currently in compliance with FDA regulations.
However, in anticipation of more stringent and extensive requirements by FDA, we
undertook a major renovation and upgrade of our manufacturing plant. We believe
that these improvements, which were substantially completed in June 1996 at a
cost of approximately $4,500,000, will help to satisfy both present and future
FDA regulations and guidelines as well as facilitate our ability to produce
state-of-the-art products for our customers.
Federal and/or state legislation and regulations concerning various
aspects of the health care industry are under almost constant review and we are
unable to predict, at this time, the likelihood of passage of additional
legislation, nor can we predict the extent to which we may be affected by
legislative and regulatory developments concerning our products and the health
care field generally.
ENVIRONMENTAL MATTERS
The prior owner of our 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, we guaranteed the
cleanup. In addition, we 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, we may be required to make payment for any cleanup. The likelihood of
CVS, being unable to satisfy any claims which may be made against it in
connection with the facility, however, are remote in our opinion. Accordingly,
we believe that we will not have to bear any costs associated with remediation
of the facility and we will not need to make any material capital expenditures
for environmental control facilities.
RESEARCH AND DEVELOPMENT; NEW PRODUCTS AND PRODUCTS IN DEVELOPMENT
We are engaged 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. We are also engaged in R&D efforts related to certain prescription
(sometimes referred to as ethical) products and are exploring potential
acquisition candidates or joint ventures to facilitate entry into other drug
categories.
We maintain a staff of five employees in our product development
department, as well as other support staff to assist our customers. Our research
and development activities are primarily related to the determination of the
formula and specifications of the products desired by customers, as well as the
potency, dosage, flavor, quality, efficacy, color, hardness, form (I.E. tablet,
caplet or capsule) and packaging of such products, as well as costs related to
new products in development including costs associated with regulatory
approvals. Our research and development expenditures were $667,000 in fiscal
1999, $904,000 in fiscal 1998 and $867,000 in fiscal 1997. The rate of R&D
expenditures fluctuates significantly from year to year depending primarily on
what branded products are coming off patent in the near future and whether or
not such products are appropriate for development by us. Expenditures in one
year are not necessarily indicative of expenditures in future years. We expect
to spend in fiscal 2000 between $800,000 and $1,300,000 on research and
development activities consistent with our goal of continually increasing and
improving our product line.
In October 1993, we 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 we
agreed to develop sucralfate tablets with Farmacon. The contract grants us
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 us. We agreed, however, to contribute $600,000 (all of which has been
contributed through fiscal 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 us. An ANDA for the product was filed with the FDA in
October 1996.
In connection with ICC, we have developed the OTC version of a
cimetidine based H2 antagonist, for the relief from heartburn, acid indigestion
and sour stomach. An ANDA for this product was approved by the
FDA in June 1998 and we began selling the OTC version of cimetidine immediately
upon approval.
PATENTS AND TRADEMARKS
ALLERFED(R), LEG EASE(R), HEALTH+CROSS(R) AND HEALTH PHARM(R) are
federally registered trademarks owned by us. To the extent that our packaging
and labeling of 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, we 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
We may be subject to product liability claims by persons damaged by
the use of our products. We maintain product liability insurance for our generic
OTC products covering up to $10,000,000 in liability. Although there have been
no material product liability claims made against us 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 to maintain necessary product liability
insurance would significantly restrict our ability to sell any products and
could result in a cessation of our business.
COMPETITION
We compete 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, our 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 our
competitors, including all of the manufacturers and distributors of brand name
drugs, have greater financial and other resources than we have, and are
therefore able to expend more effort than we do in areas such as product
development and marketing. The crucial competitive factors are price, product
quality, customer service and marketing. Although we believe that our present
equipment and facilities render our operations competitive as to price and
quality, many competitors may have far greater resources than we have, which may
enable them to perform high quality services at lower prices than the services
performed by the Company. Additionally, some of our customers may acquire the
same equipment and technology used by ourselves and perform for themselves the
services which we now perform for them.
EMPLOYEES
As of September 15, 1999, we employed approximately 450 full-time
employees. Of such employees, approximately 340 are engaged in manufacturing
activities and approximately 260 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 in October
2001. Additionally, five of our employees are represented by Local 68 of the
International Union of Operating Engineers, affiliated with the AFL-CIO. We had
20 persons employed in sales and marketing, 35 administrative and operational
employees and 51 laboratory technicians and scientists. We believe that our
relations with our employees are satisfactory.
EXECUTIVE OFFICERS
The executive officers of the Company as of September 15, 1999 are set
forth below:
NAME POSITIONS
Charles E. LaRosa President; Chief Executive Officer; Director
Clifford H. Straub, Jr. Senior Vice President-Chief Administrative
Officer; Chief Financial Officer
Ward Barney Vice President, Operations
Brian W. Barbee Vice President, Scientific Affairs
Anthony Cantaffa Vice President, New Business Development
George Chin Vice President, Sales
Alexander M. Schobel Vice President, Research & Development
The business experience of the Company's executive officers is set
forth below;
CHARLES E. LAROSA, age 57, has been a director of the Company and
President and Chief Executive Officer since December 1995. For the five years
prior to joining the Company he was President of American Home Food Products, a
subsidiary of American Home Products Corporation.
CLIFFORD H. STRAUB, JR., age 55, has been Senior Vice President-Chief
Administrative Officer and Chief Financial Officer since March 1999. Prior to
joining the Company, Mr. Straub was a consultant and from 1996 to 1998 was Vice
President and Chief Financial Officer of Prins Recycling and from 1998 to 1995
was Vice President and Chief Financial Officer of West Pharmaceutical Services
Inc. (formerly Paco Pharmaceutical Services, Inc.). Mr. Straub is a Certified
Public Accountant.
WARD BARNEY, age 48, has been the Company's Vice President, Operations
since June 1999. Prior to joining the Company, he was Vice President, Operations
of Schein Pharmaceuticals Inc. from 1997 to 1999 and Senior Vice President from
1994 to 1997 and has been in operations and engineering in the pharmaceutical
industry for over 20 years.
BRIAN W. BARBEE, age 49, 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.
ANTHONY CANTAFFA, age 56, has been the Company's Vice President, New
Business Development since September 1997. Mr. Cantaffa also acted as Vice
President-Operations from December 1998 to June 1999. He was Vice President,
Mergers and Acquisitions from August 1995 until September 1997, Chief Financial
Officer from 1998 until 1990 and from 1991 to 1995; and Chief Operating Officer
from 1988 until 1995.
GEORGE CHIN, age 46, 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.
ALEXANDER M. SCHOBEL, age 43, joined the Company in November 1997 and
has been Vice President of Research and Development since March 1999. Mr.
Schobel was Director of Research and Development for the Consumer Products
Division of Warner-Lambert Company where he spent 13 years.
ITEM 2. PROPERTIES
We lease approximately 214,000 square feet of office, manufacturing
and warehousing space in Edison, New Jersey, under a lease which expires in 2004
with two five-year renewal options. The monthly rental is currently $151,847 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, we are obligated to pay all utilities, real
estate taxes, assessments, repairs, improvements, maintenance costs and expenses
in connection with the premises, comply with certain environmental obligations
and maintain certain minimum insurance protection.
In March 1995, we entered into a ten-year lease for a 91,200 square
foot building located adjacent to our present manufacturing facility. We have
two additional 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, we are obligated to pay all utilities, real estate
taxes, assessments, repairs, improvements, maintenance costs and expenses in
connection with the premises, comply with certain environmental obligations and
maintain certain minimum insurance protection.
We believe 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, we received an arbitration
demand from the estate of Dr. Max Tesler, the former President of PFI who died
in December 1996. For alleged breaches of employment and other agreements
between the Company and Dr. Tesler, the Dr. Tesler's 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 as would equal 10% of the
total number of shares outstanding (approximately 4,000,000 shares, which had a
value as of the alleged "change of control" date of approximately $3.5 million.
For claimed tortuous conduct, the Dr. Tesler's 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 it sought 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 claims for death
benefits and a revised warrant, however, were subsequently released by Dr.
Tesler's estate. Dr. Tesler's estate subsequently increased its claim for shares
from four million shares (10% of the outstanding stock) to approximately
15,594,000 shares (including shares for claimed interest through September 30,
1999) (which would be approximately 34% of the post-issuance outstanding shares)
due to reductions in the value of such shares from the time when the estate
alleges they should have been issued.
With respect to the claim for continuing salary, we have advised Dr.
Tesler's estate of counterclaims which we have, which exceed the amount of such
payments. We maintain that as a result of the termination of Dr. Tesler's
employment in December 1995, we ceased to have any liability under the
change-of-control provisions of the various agreements with Dr. Tesler, as well
as having other defenses to such claims.
The children and a former spouse of Dr. Tesler also raised certain
claims arising out of the death of Dr. Tesler. They sought $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. They also sought
punitive damages, interest and attorneys fees in connection with the failure to
pay benefits. The matter was settled in December 1998 for $1,178,000 including
legal fees and other costs related to the settlement.
In December 1995, the Company accrued the continuing salary due to Dr.
Tesler for the period through December 1998. The Company has not made provision
for any of the other amounts claimed or accrued any amounts due from Dr.
Tesler's estate. As noted above, we believe that the claims by Dr. Tesler's
estate are without merit and that it has valid offsetting claims. We intend to
vigorously defend against the arbitration claim and to prosecute our claims
against Dr. Tesler's estate.
ROSENBLUM V. PFI. In 1991, an action was instituted in the Superior
Court of New Jersey, County of Middlesex, against us by Marvin Rosenblum,
seeking $3,500,000 in damages and other relief for claimed breach of an alleged
employment agreement. We 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 filed an appeal seeking to have the case
reinstated and such appeal was denied in 1999.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
Our 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 24, 1999, there were 1,464 holders of record of the
common. 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
-------- ---------
Year Ended June 30, 1998
First Quarter ................................ $ .78 $ .56
Second Quarter ............................... .80 .53
Third Quarter ................................ .81 .56
Fourth Quarter ............................... .75 .50
Year Ended July 3, 1999
First Quarter ................................ .72 .51
Second Quarter ............................... .52 .35
Third Quarter ................................ .39 .23
Fourth Quarter ............................... .36 .20
Year Ending July 1, 2000
First Quarter (through September
24, 1999) .................................. $ .35 $ .21
The high bid and low asked price of the common stock on September 24,
1999, as reported by the National Quotation Bureau, were $.27 and $.31,
respectively.
We have never paid any dividends on our common stock. We anticipate
that for the foreseeable future any earnings will be retained for use in our
business or for other corporate purposes, and we do not anticipate that cash
dividends will be paid. Furthermore, the agreement with our institutional lender
prohibits the payment of dividends without the lender's consent. Also, any
dividends 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 for the
five-years ending July 3, 1999 and June 30, 1998, 1997, 1996 and 1995 are
derived from the consolidated financial statements of the Company which
financial statements have been audited by BDO Seidman, LLP, independent public
accountants, whose report the three years ended July 3, 1999 appears in this
report. During 1999 the Company changed its fiscal year from June 30 to a 52
week period ended on the last Saturday closest to June 30. The selected
consolidated financial data should be read in conjunction with the consolidated
financial statements and notes thereto and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included elsewhere in this
report.
<TABLE>
<CAPTION>
Year Ended Years Ended
July 3, June 30,
1999 1998 1997 1996 1995
------------- ----------------------------------------
(in thousands, except per share amounts)
STATEMENT OF OPERATIONS DATA;
<S> <C> <C> <C> <C> <C>
Gross sales $ 89,821 $ 85,179 $ 75,013 $ 57,572 $ 62,427
Net sales 82,174 80,829 71,117 54,327 59,107
Net income (loss) (6,565) 1,867 1,332 (3,465) 2,046
Net income (loss) per share
of common stock:
Basic (.22) .06 .04 (.12) .07
Diluted (.22) .05 .04 (.12) .06
Weighted average common
shares and dilutive securities
outstanding(1):
Basic 30,253 30,199 29,559 29,312 30,023
Diluted 30,253 36,710 36,242 29,312 32,520
BALANCE SHEET DATA:
Current assets $ 38,003 $ 36,658 $ 29,939 $ 21,823 $ 24,759
Current liabilities 29,219 25,952 18,550 13,895 12,587
Working capital 8,784 10,706 11,389 7,928 12,172
Total assets 59,653 59,864 48,734 39,661 40,456
Long-term debt and
capital lease obligations 33,548 30,536 28,734 25,752 26,938
Stockholders' equity (deficit) (3,510) 3,055 1,077 (411) 454
1 See Note 2 of Notes to Consolidated Financial Statements as to the
calculation of weighted average common and dilutive securities outstanding.
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FINANCIAL CONDITION AT JULY 3, 1999
At July 3, 1999, the Company had working capital of $8,784,000 as
compared to $10,706,000 in the prior year. Working capital at July 3, 1999
included $16,600,000 of account receivable as compared to $14,861,000 in the
prior year. The accounts receivable increase of $1,739,000 was a result of
higher sales, especially sales which occurred in the last month of the fiscal
year. Working capital in 1999 also included $17,916,000 of inventory as compared
to $20,096,000 in the prior year. The inventory decrease of $2,180,000 was a
result of improved inventory management during the later part of fiscal 1999.
Additionally, working capital was increased by a decrease in accounts payable of
$151,000 from $20,951,000 in 1998 to $20,800,000 in 1999.
The Company used $4,913,000 in cash from operations in fiscal 1999
that was provided by an increase in borrowings.
On August 7, 1998, the Company modified its line of credit and
equipment term loan with its financial institution. The maximum amount of the
line of credit and term loan is $25,000,000. At July 3, 1999, borrowings were
$21,076,000. Borrowings under the modified agreement, which expires August 7,
2001, bear interest at the prime rate less 3/4%. Such borrowing rate was
increased by 2% effective April 1, 1999. In addition on April 1, 1999 the line
was further increased up to $1,500,000 over eligible receivables and
inventories, as defined, up to the contractual limit. Such increase was
guaranteed by ICC. As of July 3, 1999, the Company was in violation of certain
financial loan covenants, which were subsequently waived. Future financial
covenants have been modified. In addition, the Company has convertible
subordinated debentures and capitalized lease obligations, which together with
the line of credit borrowings have a substantial impact on the working capital
requirements in terms of principal and interest payments.
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, 1999 totaling $650,000 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. On April 1, 1999 the Company
entered into a loan agreement with ICC for $3,000,000 with interest at 1% above
the prime rate.
The Company has a deferred tax asset of $4,420,000, before the
valuation allowance at July 3, 1999, 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.
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
$664,000 was recorded at July 3, 1999 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 $1,500,000 to $2,000,000 of capital
improvements in the fiscal year ending July 1, 2000 to increase manufacturing
capacity and reduce costs. The Company anticipates that these capital
expenditures will be funded through equipment lease financing and working
capital. 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.
The Company believes that cash flow from operations, together with
revolving credit and equipment and term loan financing, will be sufficient to
fund the Company's currently anticipated working capital, capital spending and
debt service requirements until the maturity of the facility in August 2001, but
there can be no assurance in this regard. The Company expects that its working
capital needs will require it to obtain new revolving credit facilities at the
time that the credit and equipment term facility matures, whether by extending,
renewing, replacing or otherwise refinancing the facility. No assurance can be
given that any such extension, renewal, replacement or refinancing can be
successfully accomplished.
RESULTS OF OPERATIONS FOR FISCAL 1999 COMPARED TO FISCAL 1998
Gross sales for the fiscal year ended July 3, 1999 were $89,821,000 as
compared to $85,179,000 in the prior fiscal year. The increase in sales of
$4,642,000 or 5.4% was mainly due to an increase in the private label sector of
the business. The private label sales were $83,222,000 as compared to
$73,254,000 in the prior year. This increase of $9,968,000 or 13.6 % is a result
of the addition of new customers, the introduction of new products, and growth
with existing customers. This increase offset the pressure on shipment levels
created by the Company's conversion to a new computer system. The bulk/contract
manufacturing sector had sales of $6,599,000 as compared to $11,925,000 in the
prior year. The decrease was due to lost business in the
bulk/contract-manufacturing sector which had not been replaced in the current
fiscal year. Sales to two customers, Walgreen Company and Costco Wholesale, were
$27,934,000 or 31.1% of sales as compared to $31,065,000 or 36.5% of sales in
the comparable period in the prior fiscal year.
Net sales for the fiscal year ended July 3, 1999 were $82,174,000 as
compared to $80,829,000 in the prior year. The increase was due to higher gross
sales which was partially offset by an increase in discounts and allowances net
of an increase in gross sales.
Cost of sales as a percentage of net sales was 86.4% for the fiscal
year ended July 3, 1999 as compared to 76.6% in the prior fiscal year. The
increase was partly due to the change in sales mix as mentioned above whereby
more of the Company's business is in the private label (store brand) sector,
which has a higher cost of sales percentage than the bulk/contract manufacturing
business. To improve operating efficiencies and insure year 2000 compliance, the
Company, during fiscal 1999, installed and implemented a new integrated computer
system. This major system conversion caused serious disruptions in inventory
control, shipping, production and planning resulting in reduced sales and
increased cost of sales. Cost of sales was also affected by the increased cost
of packaging due to new equipment installed in fiscal 1998 which caused
production inefficiencies and higher waste due to the beginning trials of the
equipment during the current year. The Company estimates that such costs
incurred relating to the computer system conversion and other related
disruptions which occurred during fiscal 1999 to be approximately $7,000,000.
Selling, general and administrative expenses were $14,547,000 or 17.7%
of net sales for the fiscal year ended July 3, 1999 as compared to $12,296,000
or 15.2% of net sales for the prior fiscal year. The increase of $2,251,000 was
mainly a result of increased sales, legal, distribution and hiring expenses. The
increased distribution costs are related to shipping problems impacted by the
new computer system. The increased hiring costs are due to the Company's
commitment to having qualified people at all levels of the organization.
Research and development costs were $675,000 for the fiscal year ended
July 3, 1999 as compared to $904,000 for the prior fiscal year.
Interest expense was $4,675,000 for the fiscal year ended July 3, 1999
as compared to $3,982,000 in the prior fiscal year. As a result of the
implementation of the new computer system the Company experienced delays in
billings and collections which caused a substantial increase in accounts
receivable which required increased borrowing and additional interest expense.
The increase in interest expense is primarily a result of increases in capital
lease obligations and borrowings under the revolving credit agreement to support
the additional capital expenditures and working capital requirements of
increased receivables partially offset by reduced interest rates to March 31,
1999 on the new revolving credit agreement.
The Company settled claims relating to the children and a former
spouse of Dr. Tesler, the former President of the Company who died in December
1996. Accordingly, the Company has recorded a lawsuit settlement expense of
$1,179,000 for the fiscal year ended July 3, 1999.
Net loss for the fiscal year ended July 3, 1999 was $6,565,000 or $.22
per share as compared to net income of $1,867,000, or $.06 per share in the
prior fiscal year.
The Company continues to take steps aimed at increasing profitability.
These steps include: (a) seeking new customers and products to increase sales
volume, (b) continuing efforts to reduce material costs and (c) other
cost-saving measures. There can be no assurance that such actions will be
successful in returning the Company to profitability.
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% was the result of increased sales to existing customers and new customers
obtained by the Company. In addition, the increased sales were 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 was 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 was 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 represented increased expenditures on research and development to
develop new products.
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 was mainly a result of increased borrowing to support higher
accounts receivable and inventory requirements for the increased sales.
Income tax benefit in fiscal 1998 was a $39,000 compared to a $882,000
expense in fiscal 1997. The decrease in the income tax was a result of a change
in the deferred income tax asset of $741,000 which represented 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.
EFFECTS OF INFLATION
We do not believe that inflation had a material effect on our
operations for the fiscal years ended July 3, 1999 and June 30, 1998 and 1997.
YEAR 2000 COMPLIANCE
We are 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 our business it is
necessary for the computers to calculate and place on product packaging the
expiration dates of our products, which currently run to years past 2000. We
have at all times been able to address such problems, under prior and current
computer systems. In fiscal 1999 we purchased and installed a completely new
computer system, and installed all new software on the system. While such system
and software were purchased to satisfy our needs caused by our 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. We believe 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. We
have a management information system (MIS) director who has assessed our
compliance situation and we accordingly believe that all of our internal
computer systems (both hardware and software) and embedded technology (to the
extent that it is date sensitive) are currently Y2K compliant. We have not
retained any outside services to conduct independent verification of our
compliance status and do not intend to hire any such service.
We are currently contacting our key customers and vendors to ascertain
their Y2K compliance to the extent that their problems could affect us. We
expect to have completed that process by November 1, 1999. At this time we
cannot make any predictions as to the degree of compliance by such vendors and
customers or the consequence of any noncompliance. We have not devised any
back-up plans should any such customers' or vendors' Y2K problems affect us.
After completion of our review of queries sent to such customers and vendors, we
will assess the need for any contingency plans.
No information technology projects have been deferred due to Y2K
efforts. We are 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 our results of operations or financial condition. Based on
our current status of internal Y2K compliance and other preliminary information,
we do not anticipate that any expenses yet to be incurred to achieve year 2000
compliance will have any material impact on our 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 us.
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 JULY 3, 1999 FOR
PHARMACEUTICAL FORMULATIONS, INC. AND SUBSIDIARIES
Report of Independent Certified Public Accountants F-1
Consolidated Financial Statements
Balance Sheets at July 3, 1999 and June 30, 1998 F-2
Statements of Operations for the Years
Ended July 3, 1999 and June 30, 1998 and 1997 F-3
Statements of Changes in Stockholders'
Equity (Deficiency) for the Years Ended
July 3, 1999 and June 30, 1999 and 1998 F-4
Statements of Cash Flows for the Years
Ended July 3, 1999 and June 30, 1999 and 1998 F-5
Notes to Consolidated Financial Statements F-6
FINANCIAL STATEMENT SCHEDULE
Report of Independent Certified Public Accountants
on Financial Statement Schedule F-23
Schedule II - Valuation and Qualifying Accounts F-24
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 1999 Proxy Statement
appearing under the caption "ELECTION OF DIRECTORS," is hereby incorporated by
reference. The information regarding the executive officers of the Company is
contained under "Executive Officers" under Item 1 to this Report.
ITEM 11. EXECUTIVE COMPENSATION.
That portion of the Company's definitive 1999 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 1999 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 1999 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(A) Employment Agreement with Charles E. LaRosa dated April 4,
1997 (9)*
10.2(B) Amendment, dated February 20, 1998, to Employment Agreement
with Charles E. LaRosa (11)*
10.3(A) 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)
10.3(B) Letter Agreement dated August 7, 1998 between The CIT
Group/Credit Finance, Inc. ("CIT") 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 (the "CIT Loan
Agreement")(12)
10.3(C) Letter Agreement dated April 1, 1999 between CIT and the
Registrant amending the CIT Loan Agreement
10.3(D) Letter Agreement dated April 1, 1999 between CIT and ICC
Industries Inc. ("ICC") amending the Intercreditor Agreement between ICC and CIT
dated March 25, 1992, as attached
10.3(E) Letter Agreement dated April 1, 1999 between CIT and the
Registrant amending Warrant Certificates dated April 1, 1992 for the purchase of
100,000 shares and March 30, 1993 for the purchase of 10,000 shares of common
stock of the Registrant extending the expiration dates to March 31, 2004
10.3(F) Limited Guaranty dated April 1, 1999 by ICC in favor of CIT
with respect to the CIT Loan Agreement
10.3(G) Letter Agreement dated April 26, 1999 between CIT and the
Registrant amending the CIT Loan Agreement
10.3(H) Letter Agreement dated June 2, 1999 between CIT and the
Registrant amending the CIT Loan Agreement
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 1999 (11)*
10.12(B) Form of option agreement under 1994 Stock Option Plan (11)*
10.13 Term Loan and Security Agreement dated as of April 1, 1999
between ICC and the Registrant
10.14 Stock Purchase Agreement between the Company and ICC Industries
Inc. dated April 8, 1996 regarding the purchase of 2,500,000 shares of Series A
Cumulative Redeemable Convertible Preferred Stock (13)
(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) Filed with the Registrant's Current Report on Form 8-K dated August 2,
1989; amended as set forth in Exhibit 10.14 and incorporated herein.
(6) Filed with the Registrant's Current Report on Form 8-K dated September
6, 1991 and incorporated herein.
(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.
(12) Filed with the Registrant's Annual Report on Form 10-K for the year
ended June 30, 1998 and incorporated herein by reference.
(13) Incorporated by reference to the Registrant's Current Report on Form 8-K
for an event occurring on April 4, 1996
(b) REPORTS ON FORM 8-K - The Registrant filed the following reports
on Form 8-K during and since the last quarter of the fiscal year ended July 3,
1999:
DATE OF REPORT ITEM NUMBER (SUMMARY)
- -------------- ---------------------
May 18, 1999 5 and 7 (regarding planned restatement of quarterly results)
June 15, 1999 5 (regarding delay in payment of interest on debentures)
July 14, 1999 5 (regarding payment of interest on debentures)
<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: October 29, 1999
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 October 29, 1999
- -------------------------- Officer and a Director
Charles E. LaRosa (Principal Executive
Officer)
/S/CLIFFORD STRAUB Senior Vice President, Chief October 29, 1999
- -------------------------- Administrative Officer; and
Clifford Straub Chief Financial Officer
(Principal Financial Officer)
/S/JOHN L. ORAM Chairman of the Board October 29, 1999
- --------------------------
John L. Oram
/S/RAY W. CHEESMAN Director October 29, 1999
- --------------------------
Ray W. Cheesman
<PAGE>
PHARMACEUTICAL FORMULATIONS, INC.
AND SUBSIDIARIES
Contents
INDEPENDENT AUDITORS' REPORT F-1
CONSOLIDATED FINANCIAL STATEMENTS:
Balance sheets F-2
Statements of operations F-3
Statements of changes in stockholders' equity F-4
(deficiency)
Statements of cash flows F-5
Notes to consolidated financial statements F-6 - F-22
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON F-23
FINANCIAL STATEMENT SCHEDULE
SUPPLEMENTAL SCHEDULE:
Schedule II - Valuation and Qualifying Accounts F-24
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None
<PAGE>
INDEPENDENT AUDITORS' REPORT
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 July 3, 1999 and June 30, 1998, 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 July 3, 1999. 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 July 3, 1999 and June
30, 1998, and the results of their operations and their cash flows for each of
the three years in the period ended July 3, 1999 in conformity with generally
accepted accounting principles.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
Woodbridge, New Jersey
September 22, 1999
<PAGE>
<TABLE>
<CAPTION>
Pharmaceutical Formulations, Inc.
and Subsidiaries
CONSOLIDATED BALANCE SHEETS
July 3, 1999 June 30, 1998
- ----------------------------------------------------------------------------------------------------------
Assets
CURRENT ASSETS:
<S> <C> <C>
Cash $ 122,000 $ 608,000
Accounts receivable, net of allowance for doubtful accounts of $255,000 16,600,000 14,861,000
and $ 238,000
Inventories 17,916,000 20,096,000
Prepaid expenses and other current assets 1,268,000 793,000
Income taxes recoverable 947,000
Deferred tax asset 1,150,000 300,000
- ---------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 38,003,000 36,658,000
PROPERTY, PLANT AND EQUIPMENT, NET 18,636,000 21,441,000
OTHER ASSETS:
Deferred tax asset 2,606,000 1,231,000
Other assets 408,000 534,000
- --------------------------------------------------------------------------------------------------------
$ 59,653,000 $ 59,864,000
========================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
Current portion of long-term debt $ 2,135,000 $ 482,000
Current portion of capital lease obligations 2,879,000 2,898,000
Accounts payable 20,800,000 20,951,000
Income taxes payable 210,000 227,000
Accrued expenses 3,195,000 1,394,000
- ---------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 29,219,000 25,952,000
- ---------------------------------------------------------------------------------------------------------
LONG-TERM DEBT, LESS CURRENT MATURITIES 26,934,000 22,983,000
- ---------------------------------------------------------------------------------------------------------
LONG-TERM CAPITAL LEASE OBLIGATIONS, LESS CURRENT MATURITIES 6,614,000 7,553,000
- ---------------------------------------------------------------------------------------------------------
DEFERRED GAIN ON SALE/LEASEBACK 396,000 321,000
- ---------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY (DEFICIENCY):
Preferred stock - par value $1.00 per share; 10,000,000 shares
authorized; 2,500,000 shares issued and outstanding 2,500,000 2,500,000
Common stock, par value $.08 per share; authorized; 40,000,000,
30,253,320 shares issued and outstanding; 2,421,000 2,421,000
Capital in excess of par value 37,493,000 37,493,000
Accumulated deficit (45,924,000) (39,359,000)
- ---------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIENCY) (3,510,000) 3,055,000
- ---------------------------------------------------------------------------------------------------------
$ 59,653,000 $ 59,864,000
=========================================================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Pharmaceutical Formulations, Inc.
and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JULY 3, 1999 JUNE 30, 1998 JUNE 30, 1997
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
GROSS SALES $ 89,821,000 $ 85,179,000 $ 75,013,000
LESS: SALES DISCOUNTS AND ALLOWANCES 7,647,000 4,350,000 3,896,000
- ------------------------------------------------------------------------------------------------
NET SALES 82,174,000 80,829,000 71,117,000
- ------------------------------------------------------------------------------------------------
COST AND EXPENSES:
Cost of goods sold 70,970,000 61,898,000 53,957,000
Selling, general and administrative 14,547,000 12,296,000 10,325,000
Research and development 667,000 904,000 867,000
- ------------------------------------------------------------------------------------------------
86,184,000 75,098,000 65,149,000
- ------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS (4,010,000) 5,731,000 5,968,000
- ------------------------------------------------------------------------------------------------
OTHER EXPENSES (INCOME):
Interest expense 4,675,000 3,982,000 3,865,000
Lawsuit settlement 1,179,000
Other, net (128,000) (79,000) (111,000)
- ------------------------------------------------------------------------------------------------
5,726,000 3,903,000 3,754,000
- ------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES (BENEFIT) (9,736,000) 1,828,000 2,214,000
INCOME TAXES (BENEFIT) (3,171,000) (39,000) 882,000
- ------------------------------------------------------------------------------------------------
NET INCOME (LOSS) (6,565,000) 1,867,000 1,332,000
PREFERRED STOCK DIVIDEND REQUIREMENT 200,000 200,000 200,000
- ------------------------------------------------------------------------------------------------
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON
SHAREHOLDERS $ (6,765,000) $ 1,667,000 $ 1,132,000
================================================================================================
NET INCOME (LOSS) PER SHARE:
Basic $ (0.22) $ 0.06 $ 0.04
Diluted (0.22) 0.05 0.04
================================================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Pharmaceutical Formulations, Inc.
and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
Years ended July 3, 1999, June 30, 1998 and 1997
- -----------------------------------------------------------------------------------------------------------------------------------
PREFERRED STOCK COMMON STOCK CAPITAL IN ACCUMULATED
EXCESS OF DEFICIT
PAR VALUE
------------------------- -------------------------
SHARES AMOUNT AT SHARES AMOUNT AT
ISSUED PAR VALUE ISSUED PAR VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 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 -- -- 300,000 24,000 51,000 --
EXERCISE OF COMMON STOCK OPTIONS
SHARES ISSUED TO 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)
NET LOSS -- -- -- -- -- (6,565,000)
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, JULY 3, 1999 2,500,000 $ 2,500,000 30,253,320 $ 2,421,000 $ 37,493,000 $(45,924,000)
===================================================================================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Pharmaceutical Formulations, Inc.
and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JULY 3, 1999 JUNE 30, 1998 JUNE 30, 1997
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(6,565,000) $ 1,867,000 $ 1,332,000
Adjustments to reconcile net income (loss) to net cash
provided by (used in ) operating activities:
Depreciation and amortization 2,895,000 2,509,000 2,271,000
Amortization of bond discount and deferred
financing costs 255,000 162,000 141,000
Amortization of deferred gain on sale of building (95,000) (52,000) (52,000)
Shares issued to key employees 17,000
Shares issued in settlement of litigation 50,000
Shares issued to officer and outside directors 19,000
Deferred income taxes (2,224,000) (741,000) 360,000
Changes in current assets and liabilities:
Increase in accounts receivable (1,739,000) (5,944,000) (406,000)
(Increase) decrease in inventories 2,180,000 (2,388,000) (7,988,000)
(Increase) decrease in other current assets (476,000) 134,000 (180,000)
(Increase) decrease in income tax receivable (947,000) 1,161,000
Increase in deferred gain on sale / leaseback 170,000
Increase in accounts payable, accrued expenses and
income taxes payable 1,633,000 6,426,000 4,543,000
- -----------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN ) OPERATING (4,913,000) 2,009,000 1,232,000
ACTIVITIES
- -----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment, net (90,000) (2,993,000) (2,007,000)
Decrease (increase) in other assets 126,000 (304,000) 41,000
- -----------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING 36,000 (3,297,000) (1,966,000)
ACTIVITIES
- -----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under the line of credit 2,342,000 3,361,000 4,399,000
Borrowings (repayments) of long-term debt 3,007,000 (520,000) (934,000)
Principal repayments of capital leases (2,958,000) (3,107,000) (2,034,000)
Refinancing of capital leases 2,000,000
Issuance of common stock 75,000 106,000
- -----------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING 4,391,000 (191,000) 1,537,000
ACTIVITIES
----------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH (486,000) (1,479,000) 803,000
CASH AND EQUIVALENTS, BEGINNING OF YEAR 608,000 2,087,000 1,284,000
- -----------------------------------------------------------------------------------------------------------
CASH AND EQUIVALENTS, END OF YEAR $ 122,000 $ 608,000 $ 2,087,000
===========================================================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
<PAGE>
PHARACEUTICAL FORMULATIONS INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF THE Pharmaceutical Formulations, Inc. (the "Company") is
BUSINESS AND primarily engaged in the manufacture and distribution
RELATED PARTIES 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
re-packers 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 July 3, 1999 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
221,536 shares under preemptive rights in 1997 (no
preemptive rights were exercised in 1998 and 1999) at a
price of $.25 per share.
ICC, a major international manufacturer and marketer of
chemical, plastic and pharmaceutical products, with
calendar year 1998 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). In addition to
making advances to the Company, ICC also provided a
term loan for $3,000,000 and a temporary guarantee on
$1,500,000 in advances under a revolving loan from a
lending institution on April 1, 1999. 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 shares of common stock to
these employees in 1998. The following transactions
with ICC, are reflected in the consolidated financial
statements as of or for the years ended July 3, 1999,
June 30, 1998 and 1997:
<TABLE>
<CAPTION>
JULY 3, 1999 JUNE 30, 1998 JUNE 30, 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Inventory purchases $2,667,000 $2,707,000 $1,226,000
Services and finance fees 277,000 276,000 428,000
Accounts payable 2,639,000 3,254,000 786,000
Equipment lease obligations - - 3,268,000
Note payable 3,000,000 - -
Other receivables - - 213,000
=====================================================================================================
</TABLE>
2. SUMMARY OF PRINCIPLES OF CONSOLIDATION
SIGNIFICANT
ACCOUNTING
POLICIES
The accompanying consolidated financial statements
include the accounts of the Company and its
wholly-owned subsidiaries. All references to the
"Company" include its wholly-owned subsidiaries. All
significant inter-company accounts and transactions
have been eliminated.
CHANGE IN FISCAL YEAR
Effective in the fourth quarter of fiscal 1999 the
Company changed its fiscal year-end from June 30 to the
52 or 53-week period which ends on the Saturday closest
to June 30. Accordingly, in future years quarterly
periods will generally be comprised of 13 weeks and end
on Saturday. The impact of the change between June 30,
1999 and July 3, 1999 was not significant.
CASH EQUIVALENTS
Cash equivalents consist 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 customer volume
discounts, estimated sales returns and allowances, 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 July 3, 1999, approximately 50% of the
accounts receivable balance was represented by five
customers. At June 30, 1998, approximately 54% of the
accounts receivable balance was represented by five
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 based on non-discounted
cash flows. 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 July 3, 1999.
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 1998, SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"), was
issued. SFAS 133 standardizes accounting and reporting
for derivative instruments and for hedging activities.
This statement is effective in the year 2001. The
Company does not have derivative instruments,
therefore, this pronouncement should not have any
impact to the Company's financial reporting.
FAIR VALUE AND 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 6) 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 2001.
SALE/LEASEBACK TRANSACTIONS
The Company periodically enters into sale/leaseback
transactions in connection with obtaining machinery and
equipment. Gains recorded on such transactions, when
appropriate, are deferred and amortized over the
applicable lease terms.
3. COSTS RELATED TO In order to upgrade services to customers, improving
COMPUTER SYSTEM operating efficiencies and insure year 2000
CONVERSION compliance, the Company, during fiscal 1999, installed
and implemented a new integrated computer system. This
major system conversion caused major disruptions in
inventory control, shipping, production and planning
resulting in reduced sales and increased cost of sales.
In addition, the Company experienced delays in billings
and collections which required an increase in borrowing
levels resulting in additional interest expense. The
Company was not able to identify all of the additional
costs related to the conversion to the new computer
system.
4. INVENTORIES Inventories consist of the following:
JULY 3, 1999 JUNE 30, 1998
------------------------------------------------------
Raw materials $ 6,253,000 $ 6,589,000
Work in process 862,000 717,000
Finished goods 10,801,000 12,790,000
------------------------------------------------------
$17,916,000 $20,096,000
======================================================
5. PROPERTY, PLANT Property, plant equipment consist of the following:
AND EQUIPMENT
JULY 3, 1999 JUNE 30, 1998
------------------------------------------------------
Land and building $ 8,348,000 $8,348,000
Leasehold improvements 6,692,000 5,175,000
Machinery and equipment 21,783,000 21,875,000
Other 1,476,000 3,126,000
------------------------------------------------------
38,299,000 38,524,000
Less: Accumulated
depreciation 19,663,000 17,083,000
and amortization
------------------------------------------------------
$ 18,636,000 $21,441,000
======================================================
The net book value of property, plant and equipment
under capital leases was $10,635,000 and $11,817,000 at
July 3, 1999 and June 30, 1998, respectively.
6. LONG-TERM DEBT Long-term debt and capital lease obligations consist
AND CAPITAL LEASE of the following:
OBLIGATIONS
<TABLE>
<CAPTION>
JULY 3, 1999 June 30, 1998
--------------------------------------------------------------------------------------------------------
Long-Term Capital Long-Term Capital
Debt Leases Debt Leases
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revolving/term loans (a) $21,076,000 $ - $18,500,000 $ -
Term loan due ICC (b) 3,000,000 - -
Convertible subordinated
debentures, $1,000 face value
(less unamortized discount
of $1,374,000 and
$1,629,000 (c) 3,722,000 - 3,567,000 -
Convertible subordinated
debentures, $570,000 face
value (d) 711,000 - 758,000 -
New Jersey Economic Develop-
ment Authority Loan (e) 560,000 - 640,000 -
Building sale/leaseback (f) 4,731,000 5,343,000
Capital equipment lease
obligations (g) 4,762,000 5,108,000
--------------------------------------------------------------------------------------------------------
29,069,000 9,493,000 23,465,000 10,451,000
Less Current portion: 2,135,000 2,879,000 482,000 2,898,000
--------------------------------------------------------------------------------------------------------
$26,934,000 $6,614,000 $22,983,000 $7,553,000
========================================================================================================
</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. In addition, on April 1, 1999, the line was further
amended to provide up to a $1,500,000 advance beyond contractual
ratios described above, which is guaranteed by ICC. Such advances
are to be repaid during the current fiscal year. The term loan
was refinanced in 1998 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. Interest, payable
monthly, at the prime rate, minus3/4% was increased by 2%
effective April 1, 1999 resulting from the modification of
certain contractual ratios.
The loan agreement as modified contains certain loan covenants,
which, among other things, prohibits the Company from making
dividend payments, limit the Company's annual capital
expenditures and require the Company to maintain financial
ratios.
At July 3, 1999, the Company was in violation of certain of its
financial covenants. The aforementioned covenant violations have
been waived by the lending institution. Management and the
lending institution have modified the covenants in the credit
agreement such that further compliance will be more likely.
b) On April 1, 1999, the Company entered into a term loan and
security agreement with ICC for $3,000,000 with interest payable
monthly at 1% above the prime rate. The loan is secured by a
security interest in all the assets of the Company behind other
secured indebtedness. Principle payments are to commence in May
2000 at $75,000 per month and are increased to $100,000 in May
2001 with a final payment of $900,000 in May 2002.
c) At July 3, 1999, the Company has 5,196 units outstanding
consisting of a $1,000 principal amount convertible subordinate
debenture due June 15, 2002 (the "8% Debentures") with interest
payable semi-annually. The holders of the 8% Debentures may
convert them at any time into common stock of the Company at a
conversion price of $48 per share. The 8% Debentures are
redeemable at the option of the Company under certain
circumstances at par, plus an applicable premium, as defined.
d) On July 3, 1999, 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 $141,000). 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.
e) The loan, which is secured by certain equipment, bears interest
at 6D% and is due as follows: $80,000 at June 1, 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.
f) In August 1989, PFI entered into a sale and leaseback of its land
and building in Edison, New Jersey. The term of the lease is 15
years, plus two five-year renewal options. Monthly base rent is
$107,000 for the first 30 months increased by the change in the
Consumer Price Index on the thirty-first month after commencement
and on each thirtieth month thereafter. On February 1, 1997, the
monthly base rent increased to $139,000. The Company is obligated
to pay all utilities, real estate taxes, assessments and repair
and maintenance costs in connection with the premises. The land
and building has been recorded as a capital lease and the gain on
the sale and leaseback of approximately $750,000 has been
deferred and is being amortized over the term of the lease. The
lease has been capitalized at the net present value of the future
minimum rental payments ($8,348,000), assuming a 13 1/4% interest
rate factor, and is being amortized over the term of the lease.
g) 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 $332,000.
The Company's debt and obligations under capital leases mature
in fiscal years as follows:
<TABLE>
<CAPTION>
Capital Lease Long-Term
Obligations Debt
--------------------------------------------------------------------------
<S> <C> <C>
2000 $ 3,769,000 $ 2,135,000
2001 2,795,000 1,055,000
2002 1,903,000 25,879,000
2003 1,762,000
2004 1,523,000
Thereafter 107,000
-------------------------------------------------------------------------
Total Payments 11,859,000 $29,069,000
=============
Less: Amount representing interest (2,366,000)
--------------------------------------------------
Present value of net minimum lease $9,493,000
payments
==================================================
</TABLE>
7. Commitments and COMMITMENTS
Contingencies.
In fiscal 1996, the Company entered into a long-term
lease for a building adjacent to the Company's
manufacturing 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 annum 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, 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 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
warrants expired October 1, 1998.
The children and a former spouse of Dr. Tesler have
also raised certain claims arising out of the death of
Dr. Tesler. The Company settled their claims in
December 1998. Accordingly, the Company has recorded a
lawsuit expense of $1,179,000 which includes legal and
other costs related to the settlement. Payments to date
were advanced by ICC on behalf of the Company.
In December 1995, the Company accrued the continuing
salary due to Dr. Tesler for the period through
December 1998. It has not made provision for any of the
other amounts claimed, nor has it accrued any amounts
due from the Estate. As noted above, the Company
believes that the 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 $5,500,000. The case was
dismissed with prejudice in April 1998. The plaintiff
filed an appeal seeking to have the case reinstated and
such appeal was denied.
Management believes the final outcome of the above
proceedings will not have a material effect upon the
Company's financial position, liquidity or operating
results.
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.
8. Income Taxes Income taxes (benefit) consist of the following
federal taxes:
<TABLE>
<CAPTION>
1999 1998 1997
----------------------------------------------------------------------------------
<S> <C> <C> <C>
Current $ (947,000) $ 702,000 $522,000
Deferred (2,224,000) (741,000) 360,000
----------------------------------------------------------------------------------
Total income taxes (benefit) $ (3,171,000) $ (39,000) $882,000
==================================================================================
</TABLE>
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:
<TABLE>
<CAPTION>
1999 1998 1997
----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory U.S. tax (benefit) $(3,310,000) $ 622,000 $753,000
Increase (decrease) resulting from: 110,000 133,000
State income taxes
Expiration of state net operating 42,000
loss carry forwards
Net change in valuation account 364,000 (1,054,000) 30,000
Other (225,000) 241,000 (34,000)
-----------------------------------------------------------------------------------------------
Effective income taxes (benefit) $(3,171,000) $ (39,000) $882,000
-----------------------------------------------------------------------------------------------
</TABLE>
The Company utilized tax loss carry forwards of
approximately $165,000 and $1,150,000 for U.S. regular
tax purposes during the fiscal years ended June 30,
1998 and 1997, respectively.
As of July 3, 1999, the Company had available net
operating losses of approximately $7,589,000 for U.S.
regular tax purposes, which expire through 2019. The
utilization of losses that were generated prior to
September 1991, which approximates $1,485,000 is
limited to approximately $166,000 per year for U.S.
regular tax purposes due to the change in ownership
resulting from the ICC investment. State income tax net
operating loss carry forwards of approximately
$18,977,000, which expire through 2007, are available
to the Company.
Deferred tax assets are comprised of the following
temporary differences:
<TABLE>
<CAPTION>
July 3,1999 June 30, 1998
-----------------------------------------------------------------------------------------------
<S> <C> <C>
Tax benefit of state income tax net operating $1,139,000 $ 675,000
loss carry forwards
Tax benefit of federal income tax net operating 2,580,000 505,000
loss carry forwards
Depreciation 61,000 (41,000)
Deferred gain on sale/leaseback of building 135,000 109,000
Basis difference 8 1/4% debentures as a result of 48,000 64,000
restructuring
Capitalized inventory costs 111,000 120,000
Deferred compensation 155,000 155,000
Allowance for doubtful accounts 87,000 81,000
Alternative minimum tax carry forward 104,000 163,000
-----------------------------------------------------------------------------------------------
Gross deferred tax asset 4,420,000 1,831,000
Valuation allowance (664,000) (300,000)
-----------------------------------------------------------------------------------------------
Net deferred tax asset $3,756,000 $1,531,000
===============================================================================================
</TABLE>
The Company anticipates profitable operations for at
least the next few years and, therefore, has recorded a
net deferred tax asset of $3,756,000 at July 3, 1999.
The benefits of net operating loss carry forwards and
other temporary differences that are estimated to take
more than a few years to realize cannot be reasonably
determined at this time due to the Company's
inconsistent operating results in the past.
Accordingly, a valuation allowance of $664,000 was
recorded at July 3, 1999 to provide for this
uncertainty.
9. Common Stock, The Company has granted options to employees,
Options and directors and others under various stock option plans,
Warrants lending arrangements, and under the ICC Option
Agreement.
The following is a summary of stock options and
warrants issued, exercised, forfeited or canceled for
the period July 1, 1996 through July 3, 1999 (not
including ICC preemptive rights or additional shares
issuable to management in connection with ICC
preemptive rights):
<TABLE>
<CAPTION>
Shares Weighted-
Average
----------------------------------------------------------------------------------------
<S> <C> <C>
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
Issued 346,000 $.39
Forfeited (849,700) $.65
----------------------------------------------------------------------------------------
Outstanding - July 3, 1999 1,243,300 $.72
========================================================================================
Exercisable - July 3, 1999 987,300 $.80
========================================================================================
</TABLE>
The following table summarizes information about stock
options outstanding at July 3, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------------------------------------------------------------
Range of Number Weighted Weighted Number Weighted
Exercised Outstanding Average Average Exercisable Average
Prices at July 3, Remaining Exercise at July 3, Exercise
1999 Life (Years) Price 1999 Price
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$0.85 227,800 1.2 $0.85 227,800 $0.85
0.84 186,500 3.4 0.84 186,500 0.84
0.80 272,000 3.4 0.80 272,000 0.80
0.41 115,000 4.4 0.41
0.25 to 0.56 141,000 4.8 0.38
0.56 to 0.89 116,000 2.0 0.61 116,000 0.61
0.75 110,000 4.8 0.75 110,000 0.75
0.91 75,000 0.6 0.91 75,000 0.91
--------------------------------------------------------------------------------------------------------
1,243,300 987,300
========================================================================================================
</TABLE>
The weighted average fair market value of options
granted during the fiscal years 1999, 1998 and 1997
were $.17, $.54, and $.36, respectively.
As of July 3, 1999, substantially all outstanding stock
options expire at various dates through fiscal year
2003. 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 options granted. Had
compensation cost been determined based on the fair
value at the date of grant consistent with provisions
of SFAS No. 123, the Company's financial statements
would have included the following:
<TABLE>
<CAPTION>
JULY 3, 1999 June 30, 1998 June 30, 1997
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income (loss) - as $(6,565,000) $1,867,000 $1,332,000
reported
Net income (loss) - pro forma $(6,562,000) $1,772,000 $1,282,000
======================================================================================================
</TABLE>
The application of SFAS No. 123 had no effect on the
Company's net income (loss) per share-basic and diluted
during the years presented herein.
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 46%, 47% and 35% for 1999, 1998 and 1997,
respectively, risk-free interest rate of 4.4%, 5.9% and
6.06% for 1999, 1998 and 1997, respectively, expected
lives of 5 years and no dividend yield for all three
years ended 1999.
10. 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 is currently convertible into common
stock of the Company by ICC at the lower of market
price of the common stock or $2.00 per share. The
preferred stock accrues dividends at the rate of $.08
per share, payable semi-annually and is cumulative and
non-participating. Dividends in arrears totaled
$650,000 at July 3, 1999.
11. Major Customers For the years ended July 3, 1999, June 30, 1998 and
and Products 1997, 17%, 17% and 14% respectively, of consolidated
net sales were derived from Walgreen Company. Costco
Wholesale accounted for 14%, 20%, and 16% of
consolidated net sales for 1999, 1998 and 1997,
respectively. Sales to Revco accounted for 17% of
consolidated net sales for the year ended June 30,
1997.
For the years 1999, 1998 and 1997, sales of ibuprofen
represented 32%, 39% and 38% of consolidated net sales,
respectively.
12. Earnings Per The following data shows the amounts used in computing
Share earnings (loss) per share and the effect on income
(loss) and the weighted average number of shares of
dilutive potential common stock:
<TABLE>
<CAPTION>
1999 1998 1997
----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income (loss) $(6,565,000) $1,867,000 $1,332,000
Less: Preferred dividends 200,000 200,000 200,000
----------------------------------------------------------------------------------------------
Net income available (loss) (6,765,000) 1,667,000 1,132,000
attributable to common
shareholders used in basic
earnings per share
Convertible preferred stock 200,000 200,000 200,000
dividends
----------------------------------------------------------------------------------------------
Income available (loss) $(6,565,000) $1,867,000 $1,332,000
attributable to common
shareholders after
assumed conversions of
dilutive securities
----------------------------------------------------------------------------------------------
Weighted average number 30,253,000 30,199,000 29,559,000
of common shares used in
basic earnings per share
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 30,253,000 36,710,000 36,242,000
of common shares and
dilutive securities
==============================================================================================
</TABLE>
Notes to Consolidated Financial Statements
In 1999, options, warrants, preferred stock and
convertible debentures amounting to 10,014,000 shares
of common stock were not included in computing diluted
earnings because the effect was antidilutive options.
In 1998 and 1997 options and warrants for 1,137,000 and
829,000, shares of common stock respectively, were not
included in computing diluted earnings per share
because their effects were antidulutive.
13. Supplemental Cash Supplemental disclosures of cash flow information:
Flow Information
<TABLE>
<CAPTION>
1999 1998 1997
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash paid during the year:
Interest $4,195,000 $3,820,000 $3,724,000
Income taxes 150,000 330,000 300,000
======================================================================================================
</TABLE>
SUPPLEMENTAL NON-CASH INVESTING AND FINANCING
INFORMATION:
Capital lease obligations of $0, $1,801,000 and
$1,537,000 were incurred when the Company entered into
various leases in 1999, 1998 and 1997, respectively.
14. Quarterly The Company recorded certain adjustments, primarily
Financial Data related to inventory, sales and accounts receivable
(Unaudited) allowances, which were required to properly reflect
financial results previously reported in its 1st and
2nd quarters filed on Form 10-Q for fiscal 1999. The
Company plans to restate these Form 10-Q filings in the
near future to reflect these adjustments. The adjusted
net loss amounts, by quarter, are reflected below:
<TABLE>
<CAPTION>
Fiscal 1999 quarter Net loss, as Adjustments Net loss, as
originally adjusted
reported
----------------------------------------------------------------------------------------
<S> <C> <C> <C>
First $ (85,000) $(2,503,000) $(2,588,000)
Second (1,414,000) (1,330,000) (2,744,000)
========================================================================================
</TABLE>
In addition, the Company did not file the third quarter
Form 10-Q. The net loss reported for the third quarter
ended March 31, 1999 when filed will be approximately
$1,348,000.
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
The audits referred to in our report dated September 22, 1999 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 statements schedule presents fairly, in all
material respects, the information set forth therein.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
Woodbridge, New Jersey
September 22, 1999
PHARMACEUTICAL FORMULATIONS, INC.
and Subsidiaries
Schedule II - Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Allowance for doubtful Balance at Additions Charge to Deductions Balance at
accounts beginning of charged to other write-offs end of period
period costs & accounts uncollectible
expenses accounts
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended July 3, 1999 $238,000 $125,000 $ - $108,000 $255,000
- ------------------------------------------------------------------------------------------------------------------------------
Year ended June 30, 1998 $301,000 $ 60,000 $ - $123,000 $238,000
- ------------------------------------------------------------------------------------------------------------------------------
Year ended June 30, 1997 $300,000 $ 1,000 $ - $ - $301,000
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
EXHIBIT INDEX
10.3(C) Letter Agreement dated April 1, 1999 between CIT and the Registrant
amending the CIT Loan Agreement
10.3(D) Letter Agreement dated April 1, 1999 between CIT and ICC Industries
Inc. ("ICC") amending the Intercreditor Agreement between ICC and CIT
dated March 25, 1992, as attached
10.3(E) Letter Agreement dated April 1, 1999 between CIT and the Registrant
amending Warrant Certificates dated April 1, 1992 for the purchase of
100,000 shares and March 30, 1993 for the purchase of 10,000 shares of
common stock of the Registrant extending the expiration dates to March
31, 2004
10.3(F) Limited Guaranty dated April 1, 1999 by ICC in favor of CIT with
respect to the CIT Loan Agreement
10.3(G) Letter Agreement dated April 26, 1999 between CIT and the Registrant
amending the CIT Loan Agreement
10.3(H) Letter Agreement dated June 2, 1999 between CIT and the Registrant
amending the CIT Loan Agreement
10.13 Term Loan and Security Agreement dated as of April 1, 1999 between ICC
and the Registrant
23 Consent of the Independent Public Accountants
27 Financial Data Schedule
EXHIBIT 10.3(C)
THE The CIT Group/
CIT Credit Finance
GROUP 1211 Avenue of the Americas
New York, NY 10036
Tel: 212 790-9100
Fax: 212 790-9123
April 1, 1999
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 ("Lender"), and Private Formulations, Inc., predecessor by
merger of Pharmaceutical Formulations, Inc., ("Borrower") (as amended, 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. You have requested a temporary advance of $1,500,000 in excess of the
contractual ratios set forth in Section 10 of the Loan Agreement ("the
Overadvance"), through March 1, 2000. We have agreed to make the Overadvance
subject to the terms of this letter agreement and contingent upon the execution
by ICC Industries Inc. of a Limited Guaranty in favor of CIT and in the form
attached hereto as Exhibit A. Borrower agrees that the Overadvance will be
reduced at the rate of $100,000 per month on the first business day of each
month commencing on October 1, 1999, continuing until February 1, 2000.
Thereafter, the Overadvance will be recaptured in full with a final reduction in
the amount of $1,000,000 to be made on March 1, 2000.
2. Section 10.5(a) of the Loan Agreement is hereby amended so as to read in
its entirety as follows:
"(a) Net Worth:
As of the fiscal year end 6/30/99 $1,856,000
As of the fiscal year end 6/30/00 $2,856,000
As of the fiscal year end 6/30/01 $3,856,000"
3. Section 10.5(c) of the Loan Agreement is hereby amended so as to read in
its entirety as follows:
"(c) Net Income: Not less than $300,000 for the period beginning
January 1, 1999 and ending June 30, 1999 and
thereafter not less than $150,000 per fiscal quarter
and not less than $1,000,000 per fiscal year.
For purposes of this Section 10.5(c), Net Income shall be
calculated before extraordinary items and non-recurring items in
accordance with generally accepted accounting principles,
consistently applied. Further, Borrower understands and agrees
that if Borrower fails to meet the Net Income requirement set
forth herein for the period commencing January 1, 1999 and ending
June 30, 1999, the default Interest Rate charged pursuant to
Section 3.1 of the Agreement shall be retroactive to April 1,
1999."
Your financial statements for the fiscal quarters ending September 30, 1998 and
December 31, 1998 show a net income of less than the $150,000 requirement set
forth in Section 10.5(c) of the Loan Agreement. Subject to the condition set
forth below, Lender hereby waives any Event of Default (as defined in the Loan
Agreement) that would be caused by the failure to meet the net income
requirement for the above-specified periods. The granting of the aforementioned
waiver is conditioned upon payment by you to Lender of a fee in the amount of
$50,000 (the "Waiver Fee"). The Waiver Fee shall be earned in full as of the
date hereof and payable in monthly installments of $10,000 per month commencing
on April 2, 1999. The waiver made herein is made only on this occasion with
regard to the specific default set forth above and is not a waiver of any other
rights of Lender. Lender reserves the right to declare an Event of Default under
the Financing Agreements if there are other outstanding Events of Default under
the Financing Agreements now existing or hereafter arising.
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 April 2,
1999.
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/
--------------------------------
Title: VICE PRESIDENT
AGREED:
PHARMACEUTICAL FORMULATIONS, INC.
By: /S/ CHARLES E. LAROSA
-------------------------------
Title: PRESIDENT & CEO
CONFIRMED:
EXTRA PARENT CORP.
By: /S/ CHARLES E. LAROSA
---------------------------------
Title: PRESIDENT & CEO
ICC INDUSTRIES INC.
By: /S/ JOHN L. ORAM
---------------------------------
Title: PRESIDENT
EXHIBIT 10.3(D)
THE The CIT Group/
CIT Credit Finance
GROUP 1211 Avenue of the Americas
New York, NY 10036
Tel: 212-790-9100
Fax: 212-790-9123
April 1, 1999
ICC Industries Inc.
720 Fifth Avenue
New York, New York 100 19
Re: Pharmaceutical Formulations, Inc., successor by merger to Private
Formulaitons, Inc. (THE "BORROWER")
Gentlemen:
Reference is made to that certain letter Re: Private Formulations, Inc.
(the "Intercreditor Agreement") between us dated March 25, 1992 (a copy of which
is attached hereto as "Exhibit A"). This letter will confirm our agreement to
amend the Intercreditor Agreement as follows (capitalized terms appearing below
shall have the meanings given in the Intercreditor Agreement, unless otherwise
indicated):
1. The name of the Borrower set forth in the Intercreditor Agreement hereby
be amended to the name set forth above.
2. CIT's address set forth in the Intercreditor Agreement shall hereby be
amended to read in its entirety as follows:
The CIT Group/Credit Finance, Inc.
1211 Avenue of the Americas
New York, New York 10036
3. The definition of "ICC Agreements" in the Intercreditor Agreement shall
hereby be amended to include the promissory note in the principal amount of
$3,000,000, made by Borrower in favor of ICC, dated April 1, 1999.
4. The paragraph immediately preceding paragraph I of the Intercreditor
Agreement shall be deleted in its entirety, and the following substituted in
lieu thereof.
"This letter sets forth our agreement concerning (i) the respective
interests of CIT and ICC in property of Borrower and Pharmacontrol Corp.
(collectively, "Obligors") and (ii) the subordination of payment of all
obligations of Borrower to ICC to the payment of all obligations of
Borrower to CIT."
5. The last sentence of paragraph 3 of the Intercreditor Agreement s
deleted in its entirety.
6. Paragraph 4 of the Intercreditor Agreement shall be deleted in its
entirety, and the following substituted in lieu thereof-
"4. SUBORDINATION.
(a) ICC hereby subordinates its rights to payment and satisfaction of
any and all ICC Obligations of Borrower to ICC (the "Junior Debt") to the
prior indefeasible payment and satisfaction in full of the $1,500,000
overadvance facility granted by CIT to Borrower pursuant to an amendment to
the CIT Loan Agreement dated April T , 1999.
(b) Borrower and ICC agree in favor of CIT that until all CIT
Obligations of Borrower to CIT (the "Senior Debt") is indefeasibly paid and
satisfied in full:
(i) Borrower shall not, directly or indirectly, make, and ICC
shall not, directly or indirectly, accept or receive, any payment of
principal or interest or any prepayment or non-mandatory payment or
any payment pursuant to acceleration or claims of breach or to acquire
Junior Debt or otherwise in respect of any Junior Debt;
(ii) ICC shall not seek to collect against Borrower any Junior
Debt or otherwise enforce any of its rights against Borrower upon a
default by Borrower under the ICC Agreements;
(iii) Borrower shall not grant to ICC and ICC shall not acquire
any additional collateral or guarantees for any Junior Debt, unless
the same are (x) consented to in writing by CIT and (y) subordinate to
CIT in all respects to CIT's satisfaction;
(iv) Borrower and ICC shall not amend, modify, alter or change
the terms of any of the ICC Agreements or any other arrangements
related to the Junior Debt without the prior written consent of CIT;
(v) Borrower shall not directly or indirectly, make, and ICC
shall not, directly or indirectly, accept or receive from Borrower,
any loan, gift or distribution of assets to ICC;
(vi) ICC shall furnish to CIT copies of all notices or demands
sent to Borrower under the ICC Agreements simultaneously with the
sending or delivery of same to Borrower; and
(vii) ICC and Borrower shall, at any time or times upon request
by CIT, promptly furnish to CIT a true, correct and complete statement
of the outstanding Junior Debt.
(c) (i) A legend shall be written by ICC on any instrument at any
time evidencing the Junior Debt to the effect that it is subordinate
in right of payment to the Senior Debt and subject to the terms and
conditions of this Agreement, and there shall be endorsed and
delivered to CIT upon its request after a default or event of default
under the CIT Agreements, all original notes, guarantees or other
instruments at any time evidencing Junior Debt. All hereafter arising
Junior Debt shall be and is subject to the same terms and conditions
of this Agreement as the existing Junior Debt and is included in the
term "Junior Debt" as defined herein.
(ii) In the event any legend or endorsement is omitted, CIT is
hereby irrevocably authorized on behalf of ICC to make the same.
However, no specific legend, further assignment or endorsement or
delivery of notes, guarantees or instruments shall be necessary to
subject any Junior Debt to the subordination thereof contained in this
Agreement.
(d) Borrower and ICC warrant to CIT that (i) ICC is and will be the
exclusive legal and beneficial owner of all Junior Debt and related
collateral and guarantees, and (11) none of the Junior Debt or collateral
or guarantees is or will be subject to any lien, security interest,
financing statement, subordination, assignment or other claim, except in
favor of CIT or as otherwise consented to in writing by CIT or as expressly
permitted hereunder.
(e) In the event of any insolvency or bankruptcy case or any
receivership, liquidation, reorganization or similar proceedings in
connection therewith relative to Borrower or its property or in the event
of any cases for voluntary liquidation, dissolution or other winding up of
Borrower or in the event of any assignment for the benefit of creditors
("Insolvency Case"), CIT shall first be entitled to receive indefeasible
payment in full of all Senior Debt before ICC shall be entitled to receive
and retain any payment on account of the Junior Debt, and, as between CIT
and ICC, CIT shall be entitled to receive for application in payment of the
Senior Debt any payment or distribution of any kind or character, whether
in cash, property or securities, which may be payable or deliverable in any
such Insolvency Case in respect of the Junior Debt. In any Insolvency Case,
CIT is irrevocably authorized by ICC to take any action which ICC might
otherwise be entitled to take.
(f) Should any payment of or distribution on account of any Junior
Debt be received or collected by ICC, such payment shall be held in trust
by ICC for the benefit of CIT and shall be delivered forthwith to CIT for
application to Senior Debt, in the form received with any necessary
endorsement or assignment.
(g) ICC shall not be subrogated to, or be entitled to any assignment
of any Senior Debt or Junior Debt, or of any collateral for or guarantees
or evidence of any Senior Debt or Junior Debt, until all Senior Debt is
indefeasibly paid in full to CIT.
(h) Borrower and ICC waive notice of acceptance hereof by CIT, and
waive notice of and consent to the creation of any Senior Debt, extensions
granted or other action taken by CIT in reliance hereon, the acquisition or
release of collateral for or guarantors of the payment of Senior Debt, the
releasing of any other subordinating creditor, if applicable. Borrower and
ICC waive demand, presentment, protest, notice of protest and of default
and any and all other notices (except as expressly provided for herein) to
which any of them might otherwise be entitled."
Except as hereinabove specifically provided, the Intercreditor Agreement
shall remain UNMODIFIED and in full force and effect in accordance with its
terms and is hereby ratified and confirmed in all respects by the parties
thereto.
If you are in agreement with the foregoing, please so indicate by signing
arid returning to us the enclosed copy of this letter.
Very truly yours,
THE CIT GROUP/CREDIT FINANCE, INC.
By: /S/
----------------------------
Title: VICE PRESIDENT
AGREED TO:
ICC INDUSTRIES INC.
By: /S/ JOHN L. ORAM
------------------------
Title: PRESIDENT
In consideration of the continued financing arrangements between The CIT
Group/Credit Finance, Inc. and ICC Industries Inc., Borrower and Pharmacontrol
Corp. hereby acknowledge and consent to the terms and conditions of the
Intercreditor Agreement as amended hereby and agree to be bound thereby to the
extent any obligations are required of them. The undersigned further acknowledge
and agree that (i) although the undersigned may sign this amendment to the
Intercreditor Agreement, the undersigned are not parties thereto and do not and
will not receive any right, benefit, priority or interest under or because of
the existence of the Intercreditor Agreement and (ii) the undersigned will take
such action and execute and deliver such additional documents as may be
necessary or desirable in the opinion of CIT or ICC to effectuate the provisions
and purposes of the Intercreditor Agreement as amended hereby.
PHARMACEUTICAL FORMULATIONS, INC. successor
by merger to Private Formulations, Inc.
By: /S/ CHARLES E. LA ROSA
-----------------------------
Title: PRESIDENT & CEO
PHARMACONTROL CORP.
By: /S/ CHARLES E. LA ROSA
-------------------------------
Title: PRESIDENT & CEO
<PAGE>
THE The CIT Group/
CIT Credit Finance
GROUP 1211 Avenue of the Americas
New York, NY 10036
Tel: 212-790-9100
Fax: 212-790-9123
EXHIBIT A
March 25, 1992
ICC Industries Inc.
720 Fifth Avenue
New York, New York 100 19
Re: PRIVATE FORMULATIONS, INC. ("BORROWER")
Gentlemen:
Reference is made to certain financing arrangements entered into between
Borrower and The CIT Group/Credit Finance, Inc. ("CIT") pursuant to certain
agreements including, without limitation, the Loan and Security Agreement by and
between Borrower and CIT (hereinafter the "CIT Loan Agreement"), the Promissory
Note in the original Amount of $1,600,000.00 by Borrower in favor of CIT, the
Guaranty executed by Pharmacontrol Corp. in favor of CIT, each dated August 4,
1989, and other agreements creating or evidencing indebtedness or granting
collateral security and guarantees with respect thereto (all of the foregoing,
together with all agreements and instruments related thereto or delivered in
connection therewith, as the same may have heretofore. been or may hereafter be
amended, supplemented, extended, replaced or renewed, are hereinafter
collectively referred to as the "CIT Agreements").
Reference is also made to certain financing arrangements entered into
between Borrower and ICC Industries Inc. ("ICC") pursuant to certain agreements
including, without limitation, the Agreement by and among ICC, Borrower and
Pharmacontrol Corp. dated September 6, 1991 regarding assistance by ICC to
Borrower in connection with a number of matters, including inventory financing,
raw materials purchases by ICC from third parties which raw materials are
located or to be located at Borrower's premises and a credit line to be granted
to Borrower, the Credit Line Agreement by and among ICC, Borrower and
Pharmacontrol Corp. dated September 6, 1991, and the Toll Conversion Agreement
by and between Borrower and ICC, dated August 12, 1991, various other toll
conversion agreements between Borrower and ICC and other agreements creating or
evidencing indebtedness or granting collateral security and guarantees with
respect thereto (all of the foregoing together with all agreements and
instruments related thereto or delivered in connection therewith as the same may
have heretofore been or may hereafter be amended, supplemented, extended,
replaced or renewed, are hereinafter collectively referred to as the "ICC
Agreements").
This letter sets forth our agreement concerning (i) the respective
interests of CIT and ICC in property of Borrower and Pharmacontrol Corp.
(collectively, "Obligors") and (ii) certain property of ICC located or to be
located at Borrower's p . remises, notwithstanding the terms and provisions of
any agreements or arrangements heretofore, now or hereafter entered into by CIT
or ICC with Obligors or either of them and irrespective of any rule of law.
1. SECURITY INTERESTS IN PROPERTY OF OBLIGORS
(a) ICC hereby acknowledges that CIT, pursuant to the CIT
Agreements, hag been granted by Obligors a security interest in and
lien upon all of the present and future personal property of the
Obligors (collectively, the "Collateral") including, without
limitation, all Obligors' present and future Accounts, Contract
Rights, Chattel Paper, General Intangibles, Documents, Instruments,
Inventory, Equipment, Fixtures, and Products and Proceeds, to secure
all present and future obligations of Obligors to CIT (hereinafter,
the, "CIT Obligations").
(b) CIT hereby acknowledges that pursuant to the ICC Agreements,
ICC has been or may be granted or otherwise holds a security interest
and lien upon the Collateral to secure the now existing or hereafter
incurred obligations of Obligors to ICC under the ICC Agreements
(hereinafter, the "ICC Obligations").
2. PRIORITIES
Notwithstanding any provision to the contrary contained in the CIT
Agreements or the ICC Agreements and notwithstanding the time, date, order or
method of attachment or perfection of the security interest granted hereby, and
notwithstanding anything contained in any filing or agreement to which CIT or
ICC may now or hereafter be a party, and notwithstanding any provisions of the
Uniform Commercial Code or other applicable law, all security interests and
liens of CIT in and upon the Collateral are and shall be prior in right and
interest to the security interests and liens of ICC in and upon the Collateral
and the security interests and the liens of ICC in and upon the Collateral are
and shall be subject and subordinate to the security interests and liens of CIT
in and upon the Collateral.
3. STANDSTILL AND RELEASES
ICC agrees that unless and until all of the CIT Obligations have been
fully. and indefeasibly paid and satisfied, ICC shall not, without the prior
written consent of CIT, exercise any rights or assert any claim with respect to
any Collateral, nor seek to enforce any security interest it may have therein,
nor take any action, directly or indirectly, that would interfere with the
rights of CIT with respect to the Collateral or any other property of obligors
or either of them now or hereafter constituting collateral security for the CIT
Obligations. ICC agrees to release or otherwise terminate any security interest
any and all Collateral which may otherwise disposed of either by CIT, its
agents, or either Obligor with CIT's consent, whether in the ordinary course of
business or after the declaration of an event of default pursuant to the CIT
Agreements, immediately upon CIT's request, and to immediately deliver Uniform
Commercial Code financing or termination statements and such other documents as
CIT may require in connection therewith. Nothing contained in this Paragraph 3
shall preclude ICC from exercising its right in respect of ICC Inventory, but
only in respect of ICC Inventory, or with respect to the item of equipment
described as a Killian High-Speed Double Tablet Press Model No. RX55 AST, Serial
Number 705764 which is leased by ICC to Borrower and or any other equipment
which ICC may acquire in the future for lease to Borrower.
4. ICC PROPERTY LOCATED AT BORROWER'S PREMISES
(a) CIT hereby acknowledges that ICC is and will be the owner of
certain raw materials purchased or to be purchased by ICC (the "ICC raw
materials") which are utilized by Borrower in the manufacture of certain
products pursuant to toll conversion agreements between ICC and Borrower.
ICC has requested CIT to acknowledge that ICC is the owner of the work in
process into which the ICC raw materials are incorporated (the "ICC work in
process") and the finished goods manufactured from the ICC raw materials
(the "ICC finished goods"), notwithstanding that the ICC work in process
and ICC finished goods may contain Borrower materials which would otherwise
constitute Collateral. CIT acknowledges that ICC is the owner of the ICC
work in process and ICC finished goods which items are therefore excluded
from Collateral as referred to in this Agreement, and, subject to Paragraph
4(b) hereof, agrees that it will assert no interest in or claim against the
ICC work in process or the ICC finished goods upon the condition that, and
so long as, ICC shall hereafter provide to CIT updated lists of ICC raw
materials and ICC finished goods at least once each week, or more
frequently if requested by CIT. The ICC raw materials, ICC work in process
and ICC finished goods are herein referred to collectively as the "ICC
Inventory".
(b) With respect to (i) ICC raw materials mixed or combined with
Borrower materials' I during the manufacturing process and (ii) ICC
finished goods packaged in Borrower packaging, it is agreed that such
Borrower raw materials and packaging shall be deemed to have been sold and
shall be sold by PFI to ICC and that such work in process and finished
products shall, subject to Paragraph 4(c) hereof, be property of ICC. In
the event that Borrower defaults under the CIT Loan Agreement and CIT gives
ICC written notice of such default and of CIT taking action to collect any
of the CIT obligations or realize upon any of the Collateral, then ICC
shall not remove any work in process or finished products from Borrower's
premises unless prior to removal ICC pays to CIT the difference between the
standard cost of such work in process or finished products and the standard
cost of the ICC raw materials contained therein. Standard cost shall be
calculated in conformity with generally accepted accounting principles,
consistently applied.
(c) CIT understands that pursuant to the various toll conversion
agreements between ICC and Borrower, upon completion of manufacturing,
Borrower may have the option to purchase the ICC finished goods. ICC hereby
agrees that upon Borrower's sale and delivery to third parties of finished
products containing or constituting ICC finished goods, Borrower shall be
deemed to have purchased and shall purchase from ICC such ICC finished
goods on the terms agreed upon between Borrower and ICC. ICC acknowledges
that under Borrower's financing agreements with CIT, all of PFI's present
and future Accounts have been. assigned to CIT as collateral security for
the CIT Obligations. ICC further acknowledges that all sales of finished
products by Borrower shall be for Borrower's own account and that all
Accounts arising from such sales shall be Accounts owned by Borrower
subject to the first perfected security interest of CIT.
5. NOTICES
Notice to any party hereunder shall be in writing and shall be sent by
certified mail, return receipt requested, to the parties at the addresses set
forth above and shall be deemed sent upon deposit in the U.S. mail, postage
prepaid.
6. FURTHER ASSURANCES
The parties hereto shall execute and deliver such additional documents
and take such additional action as shall be reasonably necessary to effectuate
the provisions and purposes of this Agreement.
7. SUCCESSORS AND ASSIGNS
All terms, covenants and conditions herein contained shall inure to
the benefit of, and be binding upon, the parties hereto, their successors and
assigns.
8. ENTIRE AGREEMENT
This Agreement sets forth the entire agreement of the parties hereto
with respect to the subject matter hereof. Neither this Agreement nor any
agreement hereof may be modified, altered, waived, discharged or terminated
orally, but only by an instrument in writing executed by the party to be
charged.
9. UNIFORM COMMERCIAL CODE DEFINITIONS
All capitalized terms used herein which are defined in the Uniform
Commercial Code in effect in the State of New York shall have the meanings set
forth therein unless otherwise defined herein.
10. GOVERNING LAW
This Agreement shall be governed by, and construed in accordance with,
the laws of the State of New York.
If the foregoing correctly states our understanding and agreement,
please sign a counterpart of this letter in the space provided below.
Very truly yours,
THE CIT GROUP/CREDIT
FINANCE, INC.
By: /S/
--------------------------
Title: VICE PRESIDENT
Agreed to:
ICC INDUSTRIES, INC.
By: /S/ JOHN L. ORAM
----------------------
Title: PRESIDENT
In consideration of the financing arrangements with The CIT Group/Credit
Finance, Inc. and ICC Industries" Inc. Private Formulations, Inc. and
Pharmacontrol Corp. hereby acknowledge and consents to the terms and conditions
of the above agreement (the "Intercreditor Agreement") and agree to be bound
thereby to the extent any obligations are required of them.
The undersigned acknowledge and agree that (i) although the undersigned may sign
the Intercreditor Agreement, the undersigned are not parties thereto and do not
and will not receive any right, benefit, priority or interest under or because
of the existence of the Intercreditor Agreement and (ii) the undersigned will
take such action and execute and deliver such additional documents as may be
necessary or desirable in the opinion of CIT or ICC to effectuate the provisions
and purposes of the Intercreditor Agreement.
PRIVATE FORMULATIONS, INC. PHARMACONTROL CORP.
By: /S/ MAX T. TESLER By: /S/ MAX T. TESLER
-------------------------- -----------------------------
Title: /S/ PRESIDENT/CFO Title: /S/ PRESIDENT/CFO
EXHIBIT 10.3(E)
THE The CIT Group/
CIT Credit Finance
GROUP 1211 Avenue of the Americas
New York, NY 10036
Tel: 212-790-9100
Fax: 212-790-9123
April 1, 1999
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 ("Lender"), and Private Formulations, Inc., predecessor by
merger of Pharmaceutical Formulations, Inc., ("Borrower") (as amended, the
"Loan Agreement") and all related security agreements, documents and
instruments (collectively, the "Financing Agreements")
Gentlemen:
Reference is made to the Warrant Certificates (the "Warrant Certificates") dated
April 1, 1992 and March 30, 1993 issued to Lender for the purchase of 100,000
and 10,000 shares, respectively, of the common stock of Borrower. You have
requested and we have agreed to amend the Financing Agreements pursuant to an
amendment thereto being executed as of the date hereof. In consideration of the
Lender making the amendments contained therein, you hereby agree to amend the
Warrant Certificates as follows:
Effective as of the date hereof, the expiration dates of each of the Warrant
Certificates shall be extended to March 31, 2004.
Except as herein above specifically provided, the Warrant Certificates shall
remain unmodified and in full force and effect.
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/
------------------------------
Title: VICE PRESIDENT
AGREED:
PHARMACEUTICAL FORMULATIONS, INC.
By: /S/ CHARLES E. LA ROSA
------------------------------
Title: PRESIDENT & CEO
CONFIRMED:
EXTRA PARENT CORP.
By: /S/ CHARLES E. LA ROSA
------------------------------
Title: PRESIDENT & CEO
ICC INDUSTRIES INC.
By: /S/ JOHN L. ORAM
-------------------------------
Title: PRESIDENT
EXHIBIT 10.3(F)
LIMITED GUARANTY
April 1, 1999
The CIT Group/Credit
Finance, Inc.
1211 Avenue of the Americas
New York, New York 10036
Re: PHARMACEUTICAL FORMULATIONS, INC., SUCCESSOR BY MERGER TO
PRIVATE FORMULATIONS, INC. (THE "BORROWER")
Gentlemen:
Reference is made to the financing arrangements between The CIT
Group/Credit Finance, Inc. ("Lender") and Borrower, pursuant to which Lender may
extend loans, advances and other financial accommodations to Borrower as set
forth in the Loan and Security Agreement dated August 4, 1989 (the "Loan
Agreement") between Borrower and Lender and various other agreements, documents
and instruments now or at any time executed and/or delivered in connection
therewith or otherwise related thereto, including, but not limited to, this
Guaranty (all of the foregoing, as the same now exist or may hereafter be
amended, modified, supplemented, extended, renewed, restated or replaced, being
collectively referred to herein as the "Financing Agreements").
Due to the close business and financial relationships between Borrower
and the undersigned ("Guarantor"), in consideration of the benefits which will
accrue to Guarantor, and as an inducement for and in consideration of Lender
providing the overadvance (the "Overadvance") to Borrower pursuant to an
amendment to the Loan Agreement dated of even date herewith Guarantor hereby,
irrevocably and unconditionally (a) guarantees and agrees to be liable for the
prompt indefeasible and full payment of the amount of the Overadvance
outstanding at any given point in time as determined by Lender in its sole
discretion (subject to the limitations specified in the last paragraph of page 4
below) owing by Borrower to Lender and/or its affiliates, and (b) agrees to pay
to Lender on demand the amount of all expenses (including, without limitation,
reasonable attorneys' fees and legal expenses) incurred by Lender in connection
with the administration, collection, liquidation, enforcement and defense of the
aforesaid liabilities and indebtedness and Lender's rights under this Guaranty,
whether such expenses are incurred before, during or after the present or any
renewal term of the Financing Agreements or after the commencement of any case
with respect to Borrower, Guarantor or any other Obligor under the United States
Bankruptcy Code or any similar statute (all of which being collectively referred
to herein as the "Guaranteed Obligations").
Notice of acceptance of this Guaranty, the making of loans, advances
and extensions of credit or other financial accommodations to, and the incurring
of any expenses by or in respect of, Borrower, and presentment, demand, protest,
notice of protest, notice of nonpayment or default and all other notices to
which Borrower or Guarantor are or may be entitled are hereby waived. Guarantor
also waives notice of, and hereby consents to, (i) any amendment, modification,
supplement, renewal, restatement or extensions of time of payment of or increase
or decrease in the amount of any of the Guaranteed Obligations or to the
Financing Agreements and any collateral, and the guarantee made herein shall
apply to the Guaranteed Obligations as so amended, modified, supplemented,
renewed, restated or extended, increased or decreased, (ii) the taking,
exchange, surrender and releasing of collateral or guarantees now or at any time
held by or available to Lender for the obligations of Borrower or any other
party at any time liable for or in respect of the Guaranteed Obligations
(individually and collectively, the "Obligors"), (iii) the exercise of, or
refraining from the exercise of any rights against Borrower, Guarantor or any
other Obligor or any collateral, and (iv) the settlement, compromise or release
of, or the waiver of any default with respect to, any Guaranteed Obligations.
Guarantor agrees that the amount of the Guaranteed Obligations shall not be
diminished and the liability of Guarantor hereunder shall not be otherwise
impaired or affected by any of the foregoing.
This Guaranty is a guaranty of payment and not of collection.
Guarantor agrees that Lender need not attempt to collect any Guaranteed
Obligations from Borrower or any other Obligor or to realize upon any
collateral, but may require Guarantor to make immediate payment of the
Guaranteed Obligations to Lender when due or at any time thereafter. Lender may
apply any amounts received in respect of the Guaranteed Obligations to any of
the Guaranteed Obligations, in whole or in part (including reasonable attorneys'
fees and legal expenses incurred by Lender with respect thereto or otherwise
chargeable to Borrower or Guarantor) and in such order as Lender may elect,
whether or not then due. Notwithstanding the foregoing, Lender shall give
Guarantor three (3) business days written notice of Borrower's Event of Default
under, and as defined in, the Loan Agreement before Guarantor shall be liable
under this Guaranty.
No invalidity, irregularity or unenforceability of all or any part of
the Guaranteed Obligations shall affect, impair or be a defense to this
Guaranty, nor shall any other circumstance which might otherwise constitute a
defense available to, or legal or equitable discharge of Borrower in respect of
any of the Guaranteed Obligations or Guarantor in respect of this Guaranty,
affect, impair or be a defense to this Guaranty. Without limitation of the
foregoing, the liability of Guarantor hereunder shall not be discharged or
impaired in any respect by reason of any failure by Lender to perfect or
continue perfection of any lien or security interest in any collateral for the
Guaranteed Obligations or any delay by Lender in perfecting any such lien or
security interest. As to interest, fees and expenses, whether arising before or
after the commencement of any case with respect to Borrower under the United
States Bankruptcy Code or any similar statute, Guarantor shall be liable
therefor, even if Borrower's liability for such amounts does not, or ceases to,
exist by operation of law.
This Guaranty is absolute, unconditional and continuing. Payment by
Guarantor shall be made to Lender at its office from time to time on demand as
Guaranteed Obligations become due. One or more successive or concurrent actions
may be brought hereon against Guarantor either in the same action in which
Borrower or any other Obligors are sued or in separate actions.
Payment of all amounts now or hereafter owed to Guarantor by Borrower
or any other Obligor is hereby subordinated in right of payment to the
indefeasible payment in full to Lender of the Guaranteed Obligations and is
hereby assigned to Lender as security therefor. Guarantor hereby irrevocably and
unconditionally waives and relinquishes all statutory, contractual, common law,
equitable and all other claims against Borrower, any collateral for the
Guaranteed Obligations or other assets of Borrower or any other Obligor, for
subrogation, reimbursement, exoneration, contribution, indemnification, setoff
or other recourse in respect of sums paid or payable to Lender by Guarantor
hereunder and Guarantor hereby further irrevocably and unconditionally waives
and relinquishes any and all other benefits which Guarantor might otherwise
directly or indirectly receive or be entitled to receive by reason of any
amounts paid by or collected or due from Guarantor, Borrower or any other
Obligor upon the Guaranteed Obligations or realized from their property.
All sums at any time owed by Lender to Guarantor or to the credit of
Guarantor and any property of Guarantor on which Lender at any time has a lien
or security interest or of which Lender at any time has possession, shall secure
payment and performance of all Guaranteed Obligations and all other obligations
of Guarantor to Lender however arising.
In case proceedings be instituted by or against Borrower or Guarantor
or any other Obligor, in bankruptcy or insolvency, or for reorganization,
arrangement, receivership, or the like, or if Borrower or Guarantor or any other
Obligor calls a meeting of creditors or makes any assignment for the benefit of
creditors, or upon the occurrence of any event which constitutes a default or
event of default under the Financing Agreements, the liability of Guarantor for
the entire Guaranteed Obligations shall mature, even if the liability of
Borrower or any other Obligor therefor does not.
Guarantor shall continue to be liable hereunder until the earlier of
(i) the date on which the Overadvance is repaid in full and (ii) when one of
Lender's officers actually receives a written termination notice by certified
mail; but the termination shall not relieve Guarantor from liability for any
Guaranteed Obligations incurred before termination or for post-termination
collection expenses and interest pertaining to any Guaranteed Obligations
arising before termination.
Guarantor agrees that this Guaranty shall remain in full force and
effect or be reinstated, as the case may be, if at any time payment of any of
the Guaranteed Obligations is rescinded or otherwise restored by Lender to
Borrower or to any other person who made such payment, or to the creditors or
creditors' representative of Borrower or such other person.
Lender's books and records showing the account between Lender and
Borrower shall be admissible in evidence in any action or proceeding as prima
facie proof of the items therein set forth, and any written statements rendered
by Lender to Borrower, to the extent to which no written objection is made
within sixty (60) days after the date thereof, shall be considered correct and
be binding on Guarantor as an account stated for purposes of this Guaranty.
No delay on Lender's part in exercising any rights hereunder or
failure to exercise the same shall constitute a waiver of such rights. No notice
to, or demand on, Guarantor shall be deemed to be a waiver of the obligation of
Guarantor to take further action without notice or demand as provided herein. No
waiver of any of Lender's rights hereunder, and no modification or amendment of
this Guaranty, shall be deemed to be made by Lender unless the same shall be in
writing, duly signed on Lender's behalf, and each such waiver, if any, shall
apply only with respect to the specific instance involved and shall in no way
impair Lender's rights or the obligations of Guarantor to Lender in any other
respect at any other time.
This Guaranty is binding upon Guarantor, its successors and assigns
and shall benefit Lender and its successors, endorses, transferees and assigns.
If the undersigned are more than one, this Guaranty shall be binding jointly and
severally upon them and their respective successors and assigns and the term
"Guarantor" wherever used herein shall mean all the undersigned and any one or
more of them and their successors and assigns. If there are more then one
Borrower, the term "Borrower" whenever used herein shall mean all or any one of
them and each of their respective successors and assigns. All references to
Lender herein shall include its successors and assigns. This instrument shall be
governed by, and construed and interpreted in accordance with, the laws of the
State in which the office of Lender set forth above is located.
Guarantor and Lender waive all rights to trial by jury in any action
or proceeding instituted by either of them against the other which pertains
directly or indirectly to this Guaranty, any alleged tortious conduct by
Guarantor or Lender, or, in any way, directly or indirectly, arising out of or
related to the relationship between Guarantor and Lender or Borrower and Lender.
In no event will Lender be liable for lost profits or other special or
consequential damages.
Guarantor waives all rights to interpose any claims, deductions,
setoffs or counterclaims of any kind, nature or description in any action or
proceeding instituted by Lender with respect to this Guaranty or any matter
arising herefrom or relating hereto, except compulsory counterclaims;
notwithstanding the foregoing, Guarantor shall have the right to bring a
separate action against Lender in a court referred to in the immediately
following paragraph.
Guarantor hereby irrevocably submits and consents to the non-exclusive
jurisdiction of the State and Federal Courts located in the State of New York
with respect to any action or proceeding arising out of this Guaranty or any
matter arising herefrom or relating hereto. Any such action or proceeding
commenced by Guarantor against Lender will be litigated only in a Federal Court
located in the Southern District of New York, or a State Court in the State and
County of New York and Guarantor waives any objection based on forum non
conveniens and any objection to venue in connection therewith.
In any such action or proceeding, Guarantor waives personal service of
the summons and complaint or other process and papers therein and agrees that
any process or notice of motion or other application to any of said Courts or a
judge thereof, or any notice in connection with any proceedings hereunder may be
served (1) inside or outside such State by registered or certified mail, return
receipt requested, addressed to Guarantor at the address set forth below or
which Guarantor has previously advised Lender in writing and as indicated in the
records of Lender and service or notice so served shall be deemed complete five
(5) days after the same shall have been posted or (ii) in such other manner as
may be permissible under the rules of said Courts.
Notwithstanding anything to the contrary contained herein, the
liability of Guarantor for the Guaranteed Obligations shall not exceed the
principal amount of $1,500,000, plus interest thereon at the then applicable
rate provided for in the Financing Agreements, plus any and all costs and
expenses of collection hereunder, including, without limitation, reasonable
attorneys' fees and legal expenses.
IN WITNESS WHEREOF, Guarantor has executed and delivered this Guaranty
as of the day and year first above written.
ICC INDUSTRIES INC.
By: /S/ JOHN L. ORAM
------------------------------
Title: PRESIDENT
STATE OF NEW JERSEY )
) ss.:
COUNTY OF MIDDLESEX )
On this 1st day of April, 19__ before me personally came John Oram,
who being by me duly sworn, did depose and say that he is the President of ICC
Industries, the corporation described in and which executed the foregoing
instrument; and that he signed his name thereto by order of the Board of
Directors of said corporation.
/S/ JAMES STAB
--------------------
Notary Public
EXHIBIT 10.3(G)
THE The CIT Group/
CIT Credit Finance
GROUP 1211 Avenue of the Americas
New York, NY 10036
Tel: 212-790-9100
Fax: 212-790-9123
April 26, 1999
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 Corpration
("Lender"), and Private Formulations, Inc., predecessor by merger of
Pharmaceutical Formulations, Inc., ("Borrower") (as amended, the "Loan
Agreement") and all related guaranties, 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. You have requested a temporary advance of $2,000,000 in excess of the
contractual ratios set forth in Section 10 of the Loan Agreement ("the
Overadvance"), through March 1, 2000. We have agreed to make the Overadvance
subject to the terms of this letter agreement. Borrower agrees that the
overadvance will be reduced to $1,500,000 by April 30, 1999 and further reduced
at the rate of $100,000 per month on the first business day of each month
commencing on October 1, 1999, continuing until February 1, 2000. Thereafter,
the Overadvance will be recaptured in full with a final reduction in the amount
of $1,000,000 to be made on March 1, 2000.
2. In consideration of the foregoing, Borrower agrees to pay to Lender a
transaction fee in the amount of $10,000 payable and fully earned upon the
execution of this amendment and which transaction fee shall be in addition to
all other fees set forth in the Loan Agreement.
Except as herein above specifically provided, the Loan Agreement, the Guaranty
and all of the other Financing Agreements shall remain unmodified and in full
force and effect.
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/
---------------------------
Title: VICE PRESIDENT
AGREED:
PHARMACEUTICAL FORMULATIONS, INC.
By: /S/ C. H. STRAUB
---------------------------------
Title: SENIOR VICE PRESIDENT - CFO
EXHIBIT 10.3(H)
THE The CIT Group/
CIT Credit Finance
GROUP 1211 Avenue of the Americas
New York, NY 10036
Tel: 212-790-9100
Fax: 212-790-9123
June 2, 1999
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 ("Lender"), and Private Formulations, Inc., predecessor by
merger of Pharmaceutical Formulations, Inc., ("Borrower") (as amended, the
"Loan Agreement") and all related guaranties, 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 April 1, 1999. Capitalized terms appearing below
that are not defined below shall have the meanings given in the Loan Agreement.
1. Notwithstanding anything to the contrary contained in any of the
Financing Agreements as amended, the interest rate to be charged pursuant to the
Loan Agreement is hereby amended effective April 1, 1999 to be the Prime Rate
plus one and one quarter percent (1.25%) per annum. The default interest rate
provided for in the Loan Agreement shall remain unchanged.
Except as herein above specifically provided, the Loan Agreement, the Guaranty
and all of the other Financing Agreements shall remain unmodified and in full
force and effect.
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/
------------------------------
Title: VICE PRESIDENT
AGREED:
PHARMACEUTICAL FORMULATIONS, INC.
By: /S/ C.H. STRAUB
-------------------------------
Title: SENIOR VICE PRESIDENT
CONFIRMED:
EXTRA PARENT CORP.
By: /S/ C.H. STRAUB
-------------------------------
Title: SENIOR VICE PRESIDENT
ICC INDUSTRIES INC.
By: /S/ JOHN L. ORAM
-------------------------------
Title: PRESIDENT
EXHIBIT 10.13
TERM LOAN AND SECURITY AGREEMENT
TERM LOAN AGREEMENT dated as of April 1, 1999 between PHARMACEUTICAL
FORMULATIONS INC., 460 Plainfield Avenue, Edison, New Jersey 08818, a New Jersey
corporation (the "Borrower"), and ICC INDUSTRIES INC., 460 Park Avenue, New
York, New York 10022, a New York corporation (the "Lender")).
RECITALS
WHEREAS, the Borrower is presently indebted to the Lender in the sum of
$3,000,000 in connection with the invoices for goods sold and delivered, which
invoices are identified in EXHIBIT A attached hereto; and
WHEREAS, the Lender has agreed to convert said indebtedness into a loan to
Borrower in the sum of $3,000,000, on the terms and conditions contained herein,
the proceeds of said loan to be used by Borrower for working capital; and
NOW, THEREFORE, in consideration of the foregoing and the covenants
contained herein, the Borrower and the Lender agree as follows:
ARTICLE I
AMOUNTS AND TERMS OF THE ADVANCES
SECTION 1.1. THE LOAN. The Lender agrees, on the terms and conditions
hereinafter set forth, to make an advance (the "Loan") to the Borrower on the
date hereof in an aggregate amount of three million dollars ($3,000,000).
SECTION 1.2. INTEREST AND REPAYMENT. The Borrower shall repay, and shall
pay interest on, the aggregate unpaid principal amount of the Loan in accordance
with a promissory note of the Borrower, in the form of EXHIBIT B hereto (the
"Note"), evidencing the indebtedness resulting from such Loan and delivered to
the Lender pursuant to Article 11.
SECTION 1.3. OPTIONAL PREPAYMENTS. The Borrower may prepay the Note in
whole or in part with accrued interest to the date of such prepayment on the
amount prepaid.
SECTION 1.4. CONVERSION OF INVOICES. The amounts due to Lender under the
invoices identified in EXHIBIT A are no longer due and payable under the terms
set forth in said invoices. Instead, said indebtedness to Lender is hereby
converted to the indebtedness covered by the Loan set forth herein.
SECTION 1.5. PAYMENTS AND COMPUTATIONS. The Borrower shall make each
payment under any Loan Document (as hereinafter defined) not later than 3:00
p.m. (New York City time) on the day when due in lawful money of the United
States of America to the Lender at its address referred to in Section 6.2 in
same day funds. All computations of interest under the Note shall be made by the
Lender on the basis of a year of 360 days, for the actual number of days elapsed
(including the first day but excluding the last day).
SECTION 1.6. PAYMENT ON NON-BUSINESS DAYS. Whenever any payment to be made
hereunder or under the Note shall be stated to be due on a Saturday, Sunday or a
public or bank holiday or the equivalent for banks generally under the laws of
the State of New York (any other day being a "Business Day"), such payment may
be made on the next succeeding Business Day, and such extension of time shall in
such case be included in the computation of payment of interest.
ARTICLE II
CONDITIONS OF LENDING
SECTION 2.1. CONDITIONS OF LENDING. The obligation of the Lender to make
the Loan is subject to the satisfaction of the following conditions precedent:
(A) The Lender shall have received the Note, dated as of the date
hereof, in form and substance satisfactory to the Lender:
(B) The following statements shall be true as of the date hereof
and the Lender shall have received a certificate signed by a duly
authorized officer of Borrower, dated the date hereof, stating that:
(i) The representations and warranties contained in Section
3.1 of this Agreement are correct on and as of the date hereof;
and
(ii) No event has occurred and is continuing, or would
result from such Loan, which constitutes an Event of Default (as
hereinafter defined) or would constitute an Event of Default but
for the requirement that notice be given or time elapse or both;
(C) The Lender shall have received a certified copy of the
resolutions of the Board of Directors of Borrower, approving each Loan
Document to which it is a party, and of all documents evidencing other
necessary corporate action, if any, with respect to each such Loan
Document;
(D) The Lender shall have received such other approvals, opinions
or documents as the Lender may reasonably request.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
SECTION 3.1. REPRESENTATIONS AND WARRANTIES OF THE BORROWER. The Borrower
represents and warrants as follows:
(A) The Borrower is a corporation duly incorporated, validly
existing and in good standing under the laws of the state of Delaware,
has the power to own its assets and to transact the business in which
it is now engaged and is duly qualified as a foreign corporation in
good standing under the laws of each jurisdiction where its ownership
or lease of property or the conduct of its business requires such
qualification.
(B) The execution, delivery and performance by the Borrower of
this Agreement are within the Borrowers corporate powers, have been
duly authorized by all necessary corporate action, do not contravene
(i) the Borrower's charter or by-laws or (ii) any law or contractual
restriction binding on or affecting the Borrower, and do not result in
or require the creation of any lien, security interest or other charge
or encumbrance (other than pursuant hereto) upon or with respect to
any of its properties.
(C) No authorization or approval or other action by, and no
notice to or filing with, any governmental authority or regulatory
body is required for the due execution, delivery and performance by
the Borrower of this Agreement.
(D) This Agreement is a legal, valid and binding obligation of
the Borrower enforceable against the Borrower in accordance with its
terms.
(E) There is no pending or threatened action or proceeding
affecting the Borrower before any court, governmental agency or
arbitrator, which may materially adversely affect the financial
condition or operations of the Borrower.
(F) The proceeds of the Loan will be used solely for the purpose
of Borrowers working capital and will not be used to acquire any
security in any transaction which is subject to Sections 13 and 14 of
the Securities Exchange Act of 1934.
ARTICLE IV
COVENANTS OF THE BORROWER
SECTION 4.1 AFFIRMATIVE COVENANT. So long as the Note shall remain unpaid,
the Borrower will, unless the Lender shall otherwise consent in writing:
(A) COMPLIANCE WITH LAWS, ETC. Comply, and cause each of its
subsidiaries to comply, in all material respects, with all applicable
laws, rules, regulations and orders, such compliance to include,
without limitation, paying before the same become delinquent all
taxes, assessments and governmental charges imposed upon it or upon
its property except to the extent contested in good faith.
SECTION 4.2. NEGATIVE COVENANT. So long as the Note shall remain unpaid,
the Borrower will not, witho6t the written consent of the Lender:
(A) LIENS, ETC. Other then those liens that presently exist,
create or suffer to exist any lien, security interest or other charge
or encumbrance, or any other type of preferential arrangement, upon or
with respect to any of its properties or assets, whether now owned or
hereafter acquired, or assign any right to receive income.
ARTICLE V
SECURITY INTEREST
SECTION 5.1. SECURITY INTEREST. In order to secure Borrower's loans under
this agreement, the Borrower shall provide to the Lender a security interest in
all of its assets in form and substance satisfactory to Lender's counsel,
including the execution of UCC 1 forms appropriate for filing with the State of
New Jersey and county of Middlesex.
ARTICLE VI
EVENTS OF DEFAULT
SECTION 6.1. EVENTS OF DEFAULT. If any of the following events ("Events of
Default") shall occur and be continuing:
(A) The Borrower shall fail to pay any installment of principal
of, or interest on, the Note within one Business Day of title date
when due; or
(B) Any representation or warranty made by Borrower (or any of
its respective officers) under or in connection with any Loan Document
shall prove to have been incorrect in any material respect when made;
or
(C) Borrower shall fail to perform or observe any other term,
covenant or agreement contained in any Loan Document on their
respective parts to be performed or observed; or
(D) Borrower or any of its subsidiaries shall generally not pay
their respective debts as such debts become due, or shall admit in
writing their inability to pay their respective debts generally, or
shall make a general assignment for the benefit of creditors; or any
proceeding shall be instituted by or against Borrower or any of its
subsidiaries seeking to adjudicate it a bankrupt or insolvent, or
seeking liquidation, winding up, reorganization, arrangement,
adjustment, protection, relief, or composition of it or its debts
under any law relating to bankruptcy, insolvency or reorganization or
relief of debtors, or seeking the entry of an order for relief or the
appointment of a receiver, trustee, or other similar official for it
or for any substantial part of its property; or Borrower or any of its
subsidiaries shall take any corporate action to authorize any of the
actions set forth above in this subsection (E); or
(E) Any judgment or order for the payment of money shall be
rendered against Borrower or any of its subsidiaries and either (i)
enforcement proceedings shall have been commenced by any creditor upon
such judgment or order or (ii) there shall be any period of 10
consecutive days during which a stay of enforcement of such judgment
or order, by reason of a pending appeal or otherwise, shall not be in
effect; or
ARTICLE VII
MISCELLANEOUS
SECTION 7.1. AMENDMENT, ETC. No amendment or waiver of any provision of
this Agreement or the Note, nor consent to any departure by the Borrower
therefrom, shall in any event be effective unless the same shall be in writing
and signed by the Lender and then such waiver or consent shall be effective only
in the specific instance and for the specific purpose for which given.
SECTION 7.2. NOTICES, ETC. Any notice, demand, request or other
communication hereunder shall be in w6ting and shall be delivered by personal
service or mailed certified mail, postage prepaid, return receipt requested, to
the parties at the addresses for such notices set forth below, with a copy also
sent by telefax to the telefax number listed below. Such notices shall be
effective upon receipt by the respective addresses thereof. The parties hereto
may change their respective addresses for such notices by delivering or mailing
to the other party hereto, as aforesaid, a notice of such change.
If to the Borrower:
PHARMACEUTICAL FORMULATIONS INC.
460 Plainfield Avenue
Edison, New Jersey 08818
Attention: President
Fax No.: 732-819-3330
If to the Lender:
ICC INDUSTRIES INC.
460 Park Avenue
New York, New York 10022
Attention: President
Fax No.: 212-521-1949
SECTION 7.3. NO WAIVER: REMEDIES. No failure on the part of the Lender to
exercise, and no delay in exercising, any right under any Loan Document shall
operate as a waiver thereof; nor shall any single or partial exercise of any
right under any Loan Document preclude any other or further exercise thereof or
the exercise of any other right. The remedies provided in the Loan Documents are
cumulative and not exclusive of any remedies provided by law.
SECTION 7.4. ACCOUNTING TERMS. All accounting terms not specifically
defined herein shall be construed in accordance with generally accepted
accounting principles consistently applied, except as otherwise stated herein.
SECTION 7.5. COSTS, EXPENSES AND TAXES. The Borrower agrees to pay on
demand all costs and expenses in connection with the preparation, execution,
delivery, filing, recording and administration of the Loan Documents and the
other documents to be delivered under the Loan Documents, including, without
limitation, the fees and out-of-pocket expenses of counsel for the Lender, with
respect thereto and with respect to advising the Lender as to its rights and
responsibilities under the Loan Documents, and all costs and expenses, if any
(including counsel fees and expenses), in connection with the enforcement of the
Loan Documents and the other documents to be delivered under the Loan Documents.
In addition, the Borrower shall pay any and all stamp and other taxes and fees
payable or determined to be payable in connection with the execution, delivery,
filing and recording of the Loan Documents and the other documents to be
delivered under the Loan Documents, and agrees to save the Lender harmless from
and against any and all liabilities with respect to or resulting from any delay
in paying or omission to pay such taxes and fees.
SECTION 7.6. RIGHT OF SET-OFF. Upon the occurrence and during the
continuance of any Event of Default the Lender is hereby authorized at any time
and from time to time, to the fullest extent permitted by law, to set off and
apply any and all deposits (general or special, time or demand, provisional or
final) at any time held and other indebtedness at any time owing by the Lender
to or for the credit or the account of the Borrower against any and all of the
obligations of the Borrower now or hereafter existing under any Loan Document,
irrespective of whether or not the Lender shall have made any demand under such
Loan Document and although such obligations may be unmatured. The Lender agrees
promptly to notify the Borrower after any such set-off and application, provided
that the failure to give such notice shall not affect the validity of such
set-off and application. The rights of the Lender under this section are in
addition to other rights and remedies (including, without limitation, other
rights of set-off) which the Lender may have.
SECTION 7.7. BINDING EFFECT; GOVERNING LAW: JURISDICTION.
(A) This Agreement shall be binding upon and inure to the benefit
of the Borrower and the Lender and their respective successors and
assigns, except that the Borrower shall not have the right to assign
its rights hereunder or any interest herein without the prior written
consent of the Lender. This Agreement and the Note shall be governed
by, and construed in accordance with, the laws of the State of New
York.
(B) The Borrower agrees that any legal action or proceeding with
respect to this Agreement or to enforce any judgment obtained against
the Borrower in connection herewith may be brought by the Lender in
the courts of the State of New York or in the United States District
Court for the Southern District of New York, or any other court to the
jurisdiction of which the Borrower or any of the Borrower's property
is or may be subject. The Borrower irrevocably submits to the
jurisdiction of the courts of the State of New York or of the United
States District Court for the Southern District of New York, and
irrevocably waives any present or future claim that any such court is
an inconvenient forum, in connection with any action or proceeding
arising out of this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers thereunto duly authorized, as of the date
first above written.
PHARMACEUTICAL FORMATIONS INC. ICC INDUSTRIES INC.
(Borrower) (Lender)
By: /S/ CHARLES E. LAROSA By: /S/ SUSAN AIBINDER
-------------------------- ---------------------------
Name: Charles E. LaRosa Name: Susan Aibinder
Title: President & CEO Title: V.P. Treasurer
<PAGE>
EXHIBIT A
The list of PFI outstanding invoices as of 03/30/99:
INV# AMOUNT DUE DATE PRODUCT
ICC CHEMICAL
14414 $395,000.00 10/04/98 CIMETIDINE
14460 $121,000.00 10/10/98 PSEUDOEPHEDRINE
14776 $32,335.001 1/13/98 DEXTROMETHORPHAN
14909 $21,800.001 1/30/98 DEXTROMETHORPHAN
14916 $121,000.00 12/04198 PSEUDOEPHEDRINE
105490 ($6,400.00) (6.400.00) CREDIT
14991 $76,300.00 12/11/98 DEXTROMETHORPHAN
15042 $121,000.00 12/18198 PSEUDOEPHEDRINE
15077 $32,000.00 12/21/98 ASPRIN
15222 $32,000.00 01/15/99 ASPIRIN
15240 $32,700.00 01/08/99 DEXTROMETHORPHAN
15465 $47,200.00 01/30/99 ASPIRIN
15469 $121,000.00 02/02/99 PSEUDOEPHEDRINE
15483 $32,000.00 02/06/99 ASPIRIN
15576 $3,750.00 02/19/99 FAMOTIDINE
15625 $123,863.60 02/28/99 PSEUDOEPHEDRINE
15663 $32,000.00 03/09/99 ASPIRIN .
15776 $32,700.00 03/09/99 DEXTROMETHORPHAN
DNI03/98 $12,979.99 INTEREST-SEPT'98
DN113/98 $20,147.85 INTEREST-OCT'98
DN126/98 $19,146.43 INTEREST-NOV'98
DN135/98 $6,935.93 INTEREST-DEC'98
DN002/99 $7,174.46 INTEREST-JAN'99
DN010/99 $8,037.78 INTEREST-FEB'99
DN018/99 $802.57 PARTIAL INTEREST-MAR'99
-------
TOTAL $1,446,473.61
-------------
ICC INDUSTRIES:
09/01/98 $85,065.00 BOND
$250,000.00 12/31/98 LOAN DATED 12/31/98
$350,000.00 01/11/99 LOAN DATED 01/11/99
$252,688.91 02/01/99 LOAN DATED 02/11/99
$320,000.00 02123/99 LOAN DATED 2/23/99
$282,000.00 03/17199 LOAN DATED 3/17199
DN1 36/98 $2,612.80 SEPT-DEC98 INT. ON BOND
DNO03/99 $3,670.14 JAN-INT. ON LOAN
DNO04/99 $640.94 JAN-INT. ON BOND
DN011/99 $6,269.69 FEB-INT. ON LOAN
DNO12/99 $578.91 FEB-INT. ON BOND
TOTAL $1,553,526.39
-------------
Grand Total $3,000,000.00
-------------
<PAGE>
EXHIBIT B
PROMISSORY NOTE
$3,000,000 New York, New York
(Three Million Dollars) April 1, 1999
FOR VALUE RECEIVED, the undersigned, PHARMACEUTICAL FORMULATIONS INC., 460
Plainfield Avenue, Edison, New Jersey-08818, a New Jersey corporation (the
"Borrower") HEREBY PROMISES TO PAY to the order of ICC INDUSTRIES INC., 460 Park
Avenue, New York, New York 10022, a New York corporation (the "Lender") the
principal sum of three million dollars ($3,000,000) on the following dates in
the following amounts:
DATE AMOUNT TO BE REPAID
- ---- ----------------------
From present date until April 1, 2000 Interest-only payments on
the 1st of each month
May 1, 2000 $75,000 plus interest
June 1, 2000 $75,000 plus interest
July 1 , 2000 $75,000 plus interest
August 1, 2000 $75,000 plus interest
September 1, 2000 $75,000 plus Interest
October l, 2000 $75,000 plus Interest
November 1, 2000 $75,000 plus interest
December 1, 2000 $75,000 plus interest
January 1, 2001 $75,000 plus interest
February 1, 2001 $75,000 plus interest
March 1, 2001 $75,000 plus interest
April 1, 2001 $75,000 plus interest
May 1, 2001 $100,000 plus interest
June 1, 2001 $100,000 plus interest
July 1, 2001 $100,000 plus interest
August 1, 2001 $100,000 plus interest
September 1, 2001 $100,000 plus interest
October 1, 2001 $100,000 plus interest
November 1, 2001 $100,000 plus interest
December 1, 2001 $100,000 plus interest
January 1, 2002 $100,000 plus interest
February 1, 2002 $100,000 plus interest
March 1, 2002 $100,000 plus interest
April 1, 2002 $100,000 plus interest
May 1, 2002 $900,000 plus interest
The interest shall be on any and all principal amounts remaining unpaid
hereunder from time to time outstanding from the date hereof until said
principal amounts are paid in full, payable monthly in arrears commencing April
1, 2000, and thereafter during the term hereof and on the final day when said
principal amounts are paid and, with respect to interest on any overdue
principal amount, payable on demand, at a fluctuating interest rate per annum
equal to eleven per cent (11%) per annum above the rate of interest announced
publicly by Standard Chartered Bank in New York, New York, USA, from time to
time as said bank's prime or base rate (the "Base Rate"). The Borrower
acknowledges that the Base Rate does not necessarily reflect the lowest rate of
interest charged by said bank to any class of customer or in respect of any
class of loan. Each change in the fluctuating interest rate hereunder shall take
effect simultaneously with the corresponding change in the Base Rate and all
computations of interest shall be made on the basis of a year of 360 days, for
the actual number of days elapsed.
Both principal and interest are payable in lawful money of the United
States of America to the Lender at 460 Park Avenue, New York, New York 10022,
not later than 12:00 noon (New York City time) on the day when due in same day
funds, or at such other address as the holder hereof may direct. Whenever any
payment shall be stated to be due on a Saturday, Sunday or a public or bank
holiday or the equivalent for banks generally under the laws of the State of New
York (any other day being a "Business Day"), such payment may be made on the
next succeeding Business Day, and such extension of time shall in such case be
included in the computation of payment of interest.
In the event of any default in connection with any payment under the
aforementioned payment schedule, all remaining unpaid amounts shall immediately
become due and payable demand.
The Loan made by the Lender to the Borrower pursuant to the Term Loan
Agreement between the Borrower and the Lender of even date herewith (the "Term
Loan Agreement") and all payments made on account of principal hereof shall be
recorded by the Lender and, prior to any transfer hereof, endorsed on the grid
attached hereto which is part of this Note.
This Note is the Note referred to in, and is entitled to the benefits of,
the Term Loan Agreement. The Term Loan Agreement, among other things, contains
provisions for acceleration of the maturity hereof upon the happening of certain
stated events and also for prepayments on account of principal hereof prior to
the maturity hereof upon the terms and conditions therein specified.
This Note shall be governed by and construed in accordance with the laws of
the State of New York applicable to agreements made and to be performed therein
(without giving effect to any principles of conflicts of law).
The Borrower unconditionally and irrevocably agrees that any legal action,
suit or proceeding against it with respect to its obligations or liabilities
hereunder or arising out of or in connection with this Note or the transactions
contemplated hereby for recognition or enforcement of any judgment rendered in
any such action, suit or proceeding may be brought in the United States Federal
Court for the Southern District of New York or in the courts of the State of New
York, as the holder hereof may elect.
PHARMACEUTICAL FORMULATIONS INC.
By:_____________________________
Name:
Title:
EXHIBIT 23
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement filed on Form S-8 dated July 11, 1996 (Registration No. 333-09139) of
our report dated September 22, 1999, 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 July 3,
1999.
/s/ BDO Seidman, LLP
Woodbridge, New Jersey
October 28, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-03-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUL-03-1999
<CASH> 122,000
<SECURITIES> 0
<RECEIVABLES> 16,855,000
<ALLOWANCES> 255,000
<INVENTORY> 17,916,000
<CURRENT-ASSETS> 38,006,000
<PP&E> 38,299,000
<DEPRECIATION> 19,663,000
<TOTAL-ASSETS> 59,653,000
<CURRENT-LIABILITIES> 29,219,000
<BONDS> 7,181,000
0
2,500,000
<COMMON> 2,421,000
<OTHER-SE> 37,493,000
<TOTAL-LIABILITY-AND-EQUITY> 59,658,000
<SALES> 89,821,000
<TOTAL-REVENUES> 82,174,000
<CGS> 70,970,000
<TOTAL-COSTS> 86,184,000
<OTHER-EXPENSES> (128,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,675,000
<INCOME-PRETAX> (9,736,000)
<INCOME-TAX> (3,171,000)
<INCOME-CONTINUING> (6,565,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,565,000)
<EPS-BASIC> (.22)
<EPS-DILUTED> (.22)
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