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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the Fiscal Year Ended July 1, 2000 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
----------------------------
PHARMACEUTICAL FORMULATIONS, INC.
(Exact name of Registrant as Specified in its Charter)
DELAWARE 22-2367644
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
460 PLAINFIELD AVENUE, EDISON, NJ 08818
(Address of principal executive offices, including zip code)
(732) 985-7100
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.08 PAR VALUE, AND COMMON STOCK PURCHASE WARRANTS
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
reporting requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
The aggregate market value of the voting stock held by non-affiliates
(based upon the average of the high and low bid prices) on November 20, 2000 was
approximately $1,472,112. As of November 20, 2000, there were 30,329,671 shares
of Common Stock, par value $.08 per share, outstanding. See Item 5 ("Market for
Registrant's Common Stock and Related Security Holder Matters") regarding the
Company's stock after November 20, 2000.
DOCUMENTS INCORPORATED BY REFERENCE: None
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
(PAYMENT OF THE REVOLVING LOAN WITH CIT IS DUE ON AUGUST 7, 2001),
O RELATIONS WITH OUR CONTROLLING SHAREHOLDER, INCLUDING ITS CONTINUING
WILLINGNESS TO PROVIDE FINANCING AND OTHER RESOURCES,
O OUR ABILITY TO HAVE OUR SHARES QUOTED ON THE OTC BULLETIN BOARD OR
ANOTHER QUOTATION SYSTEM, STOCK EXCHANGE OR STOCK MARKET,
O PENDING OR NEW LITIGATION, 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 a
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 Dollar General Stores, 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
1999 sales in excess of $1.2 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 64.7% 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 $2.00 per share
(subject to certain antidilution adjustments). (The current market price is
defined as the average of the daily market prices (as defined) for the common
stock for 30 consecutive trading days commencing 45 days prior to the conversion
date, which is the third monthly anniversary date of the date of notice of
conversion). If ICC elected to convert such shares of preferred stock and it is
assumed that the applicable current market price is equal to the average of the
high and low asked price for the common stock on November 20, 2000 ($.15), then
the 2,500,000 shares of preferred stock would convert into 16,666,666 shares of
common stock. After such conversion ICC would then own 36,302,560 shares of
common stock, which would be 77.2% of the outstanding common stock. If the
market price for the common stock is greater than $.15 per share at the
conversion date ICC would own fewer shares, and if the market price is less than
$.15 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." On April 1, 1999, ICC provided a term
loan of $3,000,000, which was increased to $7,752,000 on July 1, 2000 and
increased to $11,837,000 on September 30, 2000. It also provided a temporary
guarantee of $2,500,000 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
$100,000 each commencing in November 2001 with the balance due in November 2002.
PRODUCTS
Currently, we market more than 80 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 36% in fiscal
2000, 34% in fiscal 1999 and 39% in fiscal 1998 of our total revenues.
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),
Excedrin(R), Sominex(R), Sudafed(R), Comtrex(R), Sinutab(R), Dramamine(R),
Actifed(R), Benadryl(R), Allerest(R) and Tagamet(R) HB(TM), among other
products.1
______________________
1 Such brand names, and other brand names mentioned in this report, are
registered marks of companies unrelated to PFI, unless otherwise noted.
In November 1997 we entered into a joint venture with APG, Inc.,
through Healthcare Industries, LLC (formerly 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 marketed by the joint
venture is a line of cough/cold liquids, sales of which commenced in October
1999.
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 fiscal 2000, we purchased from ICC $3,145,000
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 paid 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 40 retailers (including major national
and regional drug, supermarket and mass-merchandise chains), wholesalers, club
stores, distributors and brand-name pharmaceutical companies. Sales to our
various categories of customers in fiscal 2000, 1999 and 1998 by percentage of
total sales were as follows:
PERCENTAGE OF SALES
CATEGORY 2000 1999 1998
-------- ---- ---- ----
Retail drug and supermarket chains and mass 89% 93% 86%
merchandisers
Wholesalers and distributors (in bulk) 8% 5% 8%
Brand-name pharmaceutical companies 3% 2% 6%
All of these sales consisted of products which our customers sell under their
own store brand or other labels.
Sales to customers which represented more than 10% of sales in any one
or more of the years 2000, 1999 and 1998 were as follows:
SALES ($ AND PERCENTAGE OF TOTAL SALES)
CUSTOMER 2,000 1999 1998
-------- ----- ---- ----
Costco $13,778,000 (17%) $12,522,000 (14%) $16,643,000 (20%)
Walgreens $10,037,000 (12%) $15,412,000 (17%) $14,422,000 (17%)
Other retail customers include American Stores, a grocery chain;
Costco and BJ Wholesale Club, warehouse discounters; CVS, a drug store chain;
Dollar General, a discount chain; 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; Rite Aid, a drug store chain; Save-A-Lot, a discount
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 2000 and 1999 were
not significant. International sales are not significant at this time.
SALES AND MARKETING
We have 13 employees in sales and customer service. This staff and
over 14 independent brokers sell our generic OTC pharmaceutical products and our
marketing services to current and potential customers. There are account teams
servicing different geographic areas of the U.S., each headed by a sales
director. A team is assigned to each retail customer, to focus on servicing that
customer and making recommendations to help build retail store brand business.
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 ANDAs 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 be approved via an NDA or ANDA.
Many OTC drug monographs have not yet been finalized, however, 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. The FDA has approved ANDAs
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 an experienced 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 $537,000 in fiscal 2000, $667,000 in fiscal 1999 and $904,000 in fiscal
1998. 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 2001 between $500,000 and $1,000,000
on research and development activities consistent with our goal of continually
increasing and improving our product line.
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 us and perform for themselves the services
which we now perform for them.
EMPLOYEES
As of December 31, 2000, we employed approximately 330 full-time
employees. Of such employees, approximately 250 are engaged in manufacturing
activities and approximately 220 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, three employees are represented by Local 68 of the
International Union of Operating Engineers, affiliated with the AFL-CIO. We had
9 persons employed in sales and graphic arts, 29 administrative and operational
employees and 45 laboratory technicians and scientists. We believe that our
relations with our employees are satisfactory.
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 $158,343 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, the Company received an
arbitration demand from the estate of Dr. Max Tesler, a former President of the
Company, who died in 1996. For breaches of employment and other agreements
between the Company and Dr. Tesler, the estate claimed an award of compensatory
damages, punitive damages, a certain number of shares of common stock of the
Company and attorneys' fees. The Company also brought counterclaims against the
estate.
In March 2000, the American Arbitration Association panel in New York
awarded amounts to both the estate of Dr. Tesler and the Company. The
arbitration panel awarded the Tesler estate the amount of Tesler's salary for
approximately two years, which salary amount had been accrued in 1995. The
arbitration panel also awarded the estate a portion of its legal fees. The award
dismissed all other of the estate's claims and also ruled in favor of the
Company on certain of its counterclaims. The net result of the arbitrators'
award is that the Company paid the Tesler estate approximately $45,000 plus
$75,000 of the estate's legal fees. The accrual recorded by the Company in 1995
more than offset the amount paid to the estate.
The final outcome did not have a material effect upon the Company's
financial position, liquidity or operating results.
In May 1998, the Company brought an action against one of its former
outside corporate counsels arising out of matters related to Dr. Tesler seeking
damages for conflict of interest, breaches of fiduciary duty and loyalty,
negligence and malpractice during its representation of the Company. The action
is still pending.
APOTEX CORPORATION AND TORPHARM V. PFI. In July 2000, an action was
instituted in the Circuit Court of Cook County, Illinois County Department,
Chancery Division, against us by Apotex Corporation and Torpharm Inc. seeking an
unspecified amount in damages and specific performance in the nature of
purchasing a certain product from Apotex. The Complaint alleges that PFI would
purchase a certain product exclusively from Apotex. The counts specified in the
Complaint include breach of contract, negligent misrepresentation, breach of
implied covenant of good faith and fair dealing, breach of implied covenant to
use best efforts, specific performance, breach of fiduciary duty, reformation
and a UCC action for the price of 3 million tablets. We believe the lawsuit is
without merit and intend to vigorously defend against it.
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.
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 was traded on the over-the-counter market (OTC Bulletin
Boardsm, Pink Sheetstm symbol: PHFR) until November 20, 2000. Effective November
20, 2000 the Company's common stock ceased to be quoted on the OTC Bulletin
Board. While there may be isolated sales of the stock, there are no regular
published quotations at this time. The Company will seek to have one or more
market makers reapply to have the stock quoted after the Company becomes current
in its SEC filings. There can be no assurance that the stock will be quoted on
the OTC Bulletin Board or on any other issuer listing service, market or
exchange. Previous trading on the OTC Bulletin Board had been limited. There can
be no assurance that an active trading market will ever develop for the common
stock. As of November 20, 2000, there were 1,485 holders of record of the common
stock. The following table sets forth the range of high and low closing bid
quotations for the common stock as reported by Pink Sheets LLC through November
20, 2000. 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 July 3, 1999
First Quarter........................... $ .72 $ .51
Second Quarter.......................... .52 .35
Third Quarter........................... .39 .23
Fourth Quarter.......................... .36 .20
Year Ended July 1, 2000
First Quarter........................... $.35 $.21
Second Quarter.......................... .31 .18
Third Quarter........................... .81 .20
Fourth Quarter.......................... .45 .20
Year Ending June 30, 2001
First Quarter........................... $.26 $.20
Second Quarter (through
November 20, 2000) ................... .25 .14
The high bid and low asked price of the common stock on November 20,
2000, as reported by Pink Sheets LLC, were $.14 and $.155, respectively.
We have never paid 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 payment of
any common stock dividend.
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data presented below for each of
the five-years ended July 1, 2000 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 for the three years
ended July 1, 2000 appears in this report. During 1999 the Company changed its
fiscal year end 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.
July 1, July 3, June 30, June 30 June 30
years ended 2000 1999 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts)
STATEMENT OF OPERATIONS DATA;
Gross sales $82,869 $89,821 $85,179 $75,013 $57,572
Net sales 76,579 82,174 80,829 71,117 54,327
Net income (loss) (7,918) (6,565) 1,867 1,332 (3,465)
Net income (loss) per share
of common stock:
Basic (.26) (.22) .06 .04 (.12)
Diluted (.26) (.22) .05 .04 (.12)
Weighted average common
shares and dilutive securities
outstanding1 :
Basic 30,260 30,253 30,199 29,559 29,312
Diluted 30,260 30,253 36,710 36,242 29,312
BALANCE SHEET DATA:
Current assets $27,779 $38,003 $36,658 $29,939 $21,823
Current liabilities 25,214 29,615 25,952 18,550 13,895
Working capital 2,565 8,388 10,706 11,389 7,928
Total assets 44,565 59,653 59,864 48,734 39,661
Long-term debt and
capital lease obligations 30,732 33,548 30,536 28,734 25,752
Stockholders' equity (deficit) (11,381) (3,510) 3,055 1,077 (411)
1 See Note 13 of Notes to Consolidated Financial Statements as to
the calculation of weighted average common and dilutive securities
outstanding.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FINANCIAL CONDITION AT JULY 1, 2000
At July 1, 2000, the Company had a working capital of $2,565,000 as
compared to working capital of $8,388,000 in the prior year. Working capital at
July 1, 2000 included $11,947,000 of accounts receivable as compared to
$16,600,000 in the prior year. The accounts receivable decrease of $4,653,000
was primarily a result of reduced sales, especially sales which occurred in the
last quarter of the fiscal year. Working capital in 2000 also included
$14,810,000 of inventory as compared to $17,916,000 in the prior year. The
inventory decrease of $3,106,000 was a result of improved inventory management
during the latter part of fiscal 2000.
The Company used $4,950,000 in cash provided by operations in fiscal
2000 primarily for repayment of long-term debt.
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 1, 2000, borrowings were
$15,347,000. Borrowings under the modified agreement, which expires August 7,
2001, bore interest at the prime rate less 3/4%. Such borrowing rate was
increased by 2% effective April 1, 1999. In addition on May 19, 2000 the line
was further increased up to $2,500,000 over eligible receivables and
inventories, as defined, up to the contractual limit. Such increase was
guaranteed by ICC. As of July 1, 2000, 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 July 1, 2000 totaling $850,000 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 July 1, 2000 the Company
entered into a loan agreement with ICC for $7,752,000 with interest at 1% above
the prime rate, which loan was increased to $11,837,000 on September 30, 2000.
The Company has a deferred tax asset of $5,395,000, before the
valuation allowance at July 1, 2000, which consists of future tax benefits of
net operating loss carry forwards and various other temporary differences. Based
on the assessment of all available evidence including the loss for fiscal 2000,
its inconsistent operating results in prior years, the current status of the
Company's business and the uncertainty with respect to generating taxable income
in future years, management has recorded a valuation allowance on the total of
the deferred tax assets. Reductions in the valuation allowance, which will
increase net income in the future, will be recorded when, in the opinion of
management, the Company's ability to generate taxable income is considered more
likely than not. Any realization of this asset in future periods would improve
the liquidity of the Company.
The Company intends to spend an estimated $500,000 to $1,000,000 on
capital improvements in the fiscal year ending June 30, 2001 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, there can be no assurance the Company will obtain the
equipment lease financing in the future.
ICC supports the Company by the provision of loans, replacing loans
from its asset-based lenders, and providing the Company with working capital.
The Company continues its initiatives to increase revenues and improve
operational efficiencies to restore profitability. As part of the restructuring
and operational efforts, the Company has taken the following initiatives:
o During calendar year 2000, the Company initiated major
restructuring in its management team, culminating in the
appointment of James Ingram as President of the Company as of
October 10, 2000.
o In late calendar 1999 and early 2000, the Company eliminated
several unprofitable product lines.
o Starting in fiscal 1999 and continuing until today, the Company
has improved the efficiency of its manufacturing, introduced
major initiatives in inventory management, and concentrated on
its customer service level.
o In December 2000, certain assets were refinanced, providing an
additional infusion of cash to support new product launches
scheduled for early 2001, to improve operations and to provide
additional working capital. The refinancing was done with the
support of ICC, which has agreed to continue to provide ongoing
financial support to the Company where necessary.
o At July 1, 2000, the Company was in violation of certain
financial covenants; however, the violation has been waived.
Management and its lending institution have also modified the
covenants in the credit agreement such that further compliance
will be more likely.
o The Company initiated at the end of calendar 1999 a cost
reduction program which has begun, at the end of 2000, to show
considerable benefits. A new operational and financial
restructuring plan has been formulated to cover calendar 2001.
o The Company has also appointed Josephthal & Co., Inc., a New York
based investment banking firm, to explore its strategic options
for the Company and it expects to have discussions with potential
investors or merger partners in the near future.
The Company believes that cash flow from operations, together with
revolving credit and equipment and term loan financing plus continued financial
support from ICC, will be sufficient to fund the Company's currently anticipated
working capital, capital spending and debt service requirements through the end
of calendar 2001. The Company expects these working capital needs will require
it to obtain new revolving credit facilities in August 2001, when 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 2000 COMPARED TO FISCAL 1999
Gross sales for the fiscal year ended July 1, 2000 were $82,869,000 as
compared to $89,821,000 in the prior fiscal year. The decrease of $6,952,000 was
mainly due to a decrease in the private label sector of the business. Private
label sales were $73,733,000 as compared to $83,222,000 in the prior year. The
bulk/contract manufacturing sector had sales of $9,136,000 as compared to
$6,599,000 in the prior year. Sales to two customers, Walgreen Company and
Costco Wholesale, were $23,815,000 or 28.7% of sales as compared to $27,934,000
or 31.1% of sales in the comparable period in the prior fiscal year.
Net sales for the fiscal year ended July 1,2000 were $76,579,000 as
compared to $82,174,000 in the prior year. The decrease was due to a reduction
in gross sales which was partially offset by a decrease in discounts and
allowances.
Cost of sales as a percentage of net sales was 82.8% for the fiscal
year ended July 1, 2000 as compared to 86.4% in the prior fiscal year. The
decrease was partly due to the change in sales mix as mentioned above whereby
less 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,
during fiscal 1999 the Company 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 fiscal 1999. The Company estimates that costs incurred relating
to the computer system conversion and other related disruptions which occurred
during fiscal year 1999 were approximately $7,000,000. The disruptions which
resulted from the computer system conversion also had a negative effect on
fiscal 2000 sales, as certain customers reduced their levels of purchases.
Selling, general and administrative expenses were $11,892,000 or 15.5%
of net sales for the fiscal year ended July 1, 2000 as compared to $14,547,000
or 17.7% of net sales for the prior fiscal year. The decrease of $2,655,000 was
mainly a result of decreased sales, legal and distribution expenses.
Research and development costs were $537,000 for fiscal 2000 as
compared to $667,000 for the prior fiscal year.
Interest expense was $4,904,000 for the fiscal year ended July 1, 2000
as compared to $4,675,000 in the prior fiscal year. The net increase of $229,000
resulted primarily from increased borrowings from ICC, partly offset by a
decrease in long-term debt.
In fiscal 1999, the Company settled claims relating to the children
and a former spouse of Dr. Tesler, a former President of the Company who died in
December 1996. Accordingly, the Company recorded a lawsuit settlement expense of
$1,179,000 for the fiscal year ended July 3, 1999.
Income tax expense for fiscal 2000 was $3,868,000 compared to a
benefit of $3,171,000 for fiscal 1999. As a result of the pre-tax loss of
$4,050,000 for fiscal 2000 and its inconsistent operating results in prior
years, the current status of the Company's business and the uncertainty with
respect to generating taxable income in future years, management recorded a one
time charge for income tax expense. This charge was made to recognize the
uncertainty with respect to realization of future benefits of deferred tax
assets which had been recorded in prior years.
Net loss for the fiscal year ended July 1, 2000 was $7,918,000 or $.26
per share as compared to $6,565,000, or $.22 per share in the prior fiscal year.
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. This increase of $4,642,000 or
5.4% was mainly due to an increase in the private label sector of the business.
Private label sales were $83,222,000 as compared to $73,254,000 in the prior
year. This increase of $9,968,0000 or 13.6% is a result of the addition of new
customers, the introduction of new products and growth with existing customers.
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 fiscal year
1999. Sales to two customers, Walgreen Company and Costco Wholesale, were
$27,934,000 or 31% of sales as compared to $31,065,000 or 37% of sales in the
comparable period in the prior fiscal year.
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,
during fiscal 1999 the Company 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 fiscal 1999. The Company estimates that costs incurred relating
to the computer system conversion and other related disruptions which occurred
during fiscal year 1999 were 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 $667,000 in the fiscal year ended
July 3, 1999 as compared to $904,000 in 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.
In fiscal 1999, the Company settled claims relating 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.
RECENT 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 on the
Company's financial reporting.
In December 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements". This Staff Accounting Bulletin, as amended, is effective no later
than the fourth quarter of 2001. We currently do not believe the adoption will
have a material annual impact on our financial statements.
EFFECTS OF INFLATION
We do not believe that inflation had a material effect on our
operations for the fiscal years 2000, 1999 and 1998.
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 1, 2000 FOR
PHARMACEUTICAL FORMULATIONS, INC. AND SUBSIDIARIES
Report of Independent Certified Public Accountants F-1
Consolidated Financial Statements
Balance Sheets at July 1, 2000 and July 3, 1999 F-2
Statements of Operations for the Years
Ended July 1, 2000, July 3, 1999 and
June 30, 1998 F-3
Statements of Changes in Stockholders'
Equity (Deficiency) for the Years Ended
July 1, 2000, July 3, 1999 and
June 30, 1998 F-4
Statements of Cash Flows for the Years
Ended July 1, 2000, July 3, 1999 and
June 30, 1998 F-5
Notes to Consolidated Financial Statements F-6
FINANCIAL STATEMENT SCHEDULE
Report of Independent Certified Public Accountants
on Financial Statement Schedule F-26
Schedule II - Valuation and Qualifying Accounts F-27
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.
The directors of the Company as of December 31, 2000 were:
o RAY W. CHEESMAN, age 69, has been a director of the Company since
July 1993, and was a consultant to KPMG Peat Marwick LLP, an
international accounting firm from 1987 through June 1996. Prior
thereto, Mr. Cheesman was a partner in such firm. Mr. Cheesman is
a licensed Certified Public Accountant.
o JAMES C. INGRAM, age 59, has been the Company's President, Chief
Operating Officer and a director of the Company since October
2000. Prior to joining the Company, he was Vice President of
K.S.H. Corporation from 1986-1989, Vice President of Goodson
Polymer Corp. from 1989-1991 and Executive Vice President of
Primex Plastics Corp. from 1991-1996
o JOHN L. ORAM, age 56, has been a director of the Company since
July 1993. He was appointed Chairman of the Board in December
1995 and Chief Executive Officer in February 2000. Mr. Oram has
been President and Chief Operating Officer of ICC since 1987.
ICC, an affiliate of the Company, is a major international
manufacturer and marketer of chemical, plastic and pharmaceutical
products. Since 1980, Mr. Oram has been a director of
Electrochemical Industries (1952) Ltd. ("EIL"), an Israeli
subsidiary of ICC listed on the Tel- Aviv and American Stock
Exchanges engaged in the manufacture and distribution of chemical
products. From May 1996, Mr. Oram has been a director of Frutarom
Industries Limited, a company spun-off from EIL and listed on the
Tel-Aviv Stock Exchange engaged in the flavor and fragrance
industry.
The executive officers of the Company as of December 31, 2000 were:
NAME POSITIONS
John Oram Chairman, Chief Executive Officer, Director
James Ingram President, Chief Operating Officer, Director
Susan Baer Vice President, General Counsel, Secretary
Brian Barbee Vice President, Scientific Affairs
Ward Barney Vice President, Operations
Anthony Cantaffa Vice President, New Business Development
R. Bradley Conner Vice President , Chief Financial Officer,
Controller
Alexander Schobel Vice President, Research & Development
The business experience of the Company's executive officers is set
forth below;
JOHN ORAM - see above under directors of the Company.
JAMES INGRAM - see above under directors of the Company.
SUSAN BAER, age 49, has been the Company's Vice President and General
Counsel since October 1999. She was elected Secretary in December 1999. Prior to
joining the Company, she was Vice President and General Counsel of Haarmann &
Reimer Corporation from 1993 to 1999, its General Counsel from 1989 to 1993 and
had been employed by affiliates of Haarmann & Reimer Corporation since 1979.
BRIAN BARBEE, age 50, has been Vice President, 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.
WARD BARNEY, age 49, 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.
ANTHONY CANTAFFA, age 57, 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.
R. BRADLEY CONNER, age 54, has been the Company's Vice President and
Chief Financial Officer since February 2000. Prior to joining the Company, he
was a consultant and Chief Financial Officer of Whitney Rand Manufacturing
Corporation. Having begun his career at Price Waterhouse & Co., Mr. Conner has
been in finance, operations and marketing for over 25 years.
ALEXANDER SCHOBEL, age 44, 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.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires our
officers and directors and persons who own more than ten percent of a registered
class of our equity securities to file reports of ownership and changes in
ownership with the Securities and Exchange Commission ("SEC") and any exchange
on which our securities may be traded. Officers, directors and greater than
ten-percent stockholders are required by SEC regulation to furnish us with
copies of all Section 16(a) forms they file.
Based solely on our review of the copies of such forms received by us,
or written representations from certain reporting persons that no Forms 5 were
required for those persons, we believe that all such filing requirements for the
year ended July 1, 2000 were complied with.
ITEM 11. EXECUTIVE COMPENSATION.
The following table contains compensation data for our (i) Chief
Executive Officer ("CEO"), (ii) our most highly compensated executive officers
other than the CEO who were serving as executive officers at July 1, 2000, to
the extent that salary and bonuses exceeded $100,000 and (iii) two persons for
whom disclosure would have been provided pursuant to clause (ii) but for the
fact that the individuals were not executive officers at July 1, 2000 (together,
these 7 persons are sometimes referred to as the "Named Executives"), for the
most recent three fiscal years:
Annual Compensation Long-Term Compensation
Awards Payouts
Other
Annual Restricted Securities All
Compen- Stock Underlying LTIP Other
Name and Salary Bonus sation Awards Options Payouts Compensation
PRINCIPAL POSITION YEAR $ $ $ $ # $ $
John Oram 2000 --- --- --- --- --- --- ---
Chairman, CEO 1999 --- --- --- --- --- --- ---
1998 --- --- --- --- --- --- ---
Ward Barney 2000 $180,000 --- $6,000 1 --- --- --- ---
Vice President, 1999 --- --- --- --- 50,000 --- ---
Operations 1998 --- --- --- --- --- --- ---
Anthony Cantaffa 2000 $148,462 --- --- --- 50,000 --- ---
Vice President, 1999 126,635 --- --- --- 7,000 --- ---
New Business 1998 125,000 6,500 --- --- --- --- ---
Development
Brian Barbee 2000 113,538 --- --- 18,000 --- ---
Vice President, 1999 111,000 --- --- --- 7,000 --- ---
Scientific Affairs 1998 109,000 8,000 --- --- 7,000 --- ---
Susan Baer 2000 105,961 --- --- --- 40,000 --- ---
Vice President and 1999 --- --- --- --- --- --- ---
General Counsel 1998 --- --- --- --- --- --- ---
Charles E. LaRosa 2 2000 181,147 --- 118,841 4 --- --- --- ---
former President 1999 299,988 --- --- --- --- --- ---
and Chief Executive 1998 287,500 140,000 --- 25,0005 250,000 5 --- ---
Officer
George Chin 3 2000 112,500 --- 54,269 4 --- 15,000 5 --- ---
former Vice 1999 164,000 --- --- --- 15,000 5 --- ---
President, 1998 162,000 30,000 --- --- 15,000 5 --- ---
Sales
____________________________
1 Mr. Barney's car allowance
2 Mr. LaRosa's employment ended in February 2000
3 Mr. Chin's employment ended in February 2000
4 Severance paid as a result of termination of employment
5 The stock options terminated after Mr. Chin's employment ended
OPTION GRANTS IN FISCAL 2000
The following table contains information concerning the grant of stock
options to the Named Executives during fiscal 2000 (we have no outstanding stock
appreciation rights -"SARs"- and granted no SARs during fiscal 2000):
INDIVIDUAL GRANTS
Number of Percent of Potential Realizable Value at
Securities Total Options Assumed Annual Rates of Stock
Underlying Granted to Exercise Price Appreciation for
Options Employees in Price Expiration OPTION TERM 1
NAME GRANTED FISCAL YEAR ($/SHARE) 2 DATE 5%($) 10%($)
John Oram --- --- --- --- --- ---
Ward Barney --- --- --- --- --- ---
Anthony Cantaffa 50,000 17% $.27 10/04 $3,500 $8,000
Brian Barbee 18,000 6% $.27 10/04 1,260 2,880
Susan Baer 40,000 14% $.33 10/04 2,800 6,400
Charles LaRosa --- --- --- --- --- ---
George Chin 3 15,000 --- --- --- --- ---
__________________________
1 Executives may not sell or assign any option grants, which have value only
to the extent of stock price appreciation, which will benefit all
stockholders commensurately. The amounts set forth are based on assumed
appreciation rates of 5% and 10% as prescribed by the Securities and
Exchange Commission rules and are not intended to forecast future
appreciation, if any, of the stock price. We did not use an alternate
formula for a grant date valuation as we are not aware of any formula which
will determine with reasonable accuracy a present value based on future
unknown or volatile factors. Actual gains, if any, on stock option
exercises and common stock holdings are dependent on the future performance
of the common stock and overall stock market conditions. There can be no
assurance that the amounts reflected in this table will be achieved.
2 The exercise price is equal to or higher than the fair market value of our
common stock on the date of the grant.
3 The stock options terminated after Mr. Chin's employment ended.
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES IN FISCAL 2000
No options were exercised by any of our executive officers during
fiscal 2000. The following table sets forth information with respect to the
Named Executives concerning unexercised options held at fiscal year-end:
Number of Unexercised Value of Unexercised
Securities Underlying In-the-Money Options
OPTIONS AT 7/1/00 AT 7/1/00($) 1
Shares Realized
Acquired on Value
NAME EXERCISE(#) ($) EXERCISABLE UNEXERCISABE EXERCISABLE UNEXERCISABLE
- ---- ----------- ---------- ----------- ------------ ----------- -------------
John Oram --- --- --- --- --- ---
Ward Barney --- --- 50,000 --- --- ---
Anthony Cantaffa --- --- 70,667 50,000 --- ---
Brian Barbee --- --- 48,500 18,000 --- ---
Susan Baer --- --- --- 40,000 --- ---
Charles E. LaRosa --- --- --- --- --- ---
George Chin --- --- --- --- --- ---
- --------------------
1 Market value of underlying securities at year end, as applicable, minus the
exercise price. The high bid and low asked prices on the OTC Bulletin Board
on June 30, 2000 were $ .26 and $ .25 respectively. All options are
excluded since they are out of the money.
CHANGE OF CONTROL ARRANGEMENTS
OPTIONS
Options granted under our 1994 Stock Option Plan include provisions
accelerating the vesting schedule in the case of a defined "Change of Control."
A "Change of Control" shall be deemed to have occurred if (i) any person or
group of persons acquires (or has acquired during the twelve-month period ending
on the date of the most recent acquisition by such person) the beneficial
ownership, directly or indirectly, of our securities representing 20% or more of
the combined voting power of our then-outstanding securities; (ii) during any
period of twelve months, individuals who at the beginning of such period
constitute the Board of Directors, and any new director whose election or
nomination was approved by the directors in office who either were directors at
the beginning of the period or whose election or nomination was previously so
approved, cease for any reason to constitute at least a majority thereof; (iii)
a person acquires beneficial ownership of our stock that, together with stock
held immediately prior to such acquisition by such person, possesses more than
50% of the total fair market value of total voting power of our stock, unless
the additional stock is acquired by a person possessing, immediately prior to
such acquisition, beneficial ownership of 40% or more of the common stock; or
(iv) a person acquires (or has acquired during the twelve-month period ending on
the date of the most recent acquisition by such person) assets from us that have
a total fair market value equal to or more than one-third of the total fair
market value of all of our assets immediately prior to such acquisition.
Notwithstanding the foregoing, for purposes of clauses (i) and (ii), a Change in
Control will not be deemed to have occurred if the power to control (directly or
indirectly) the management and our policies is not transferred from a person to
another person; and for purposes of clause (iv), a Change in Control will not be
deemed to occur if the assets of the Company are transferred: (A) to a
stockholder in exchange for his stock, (B) to an entity in which we have
(directly or indirectly) 50% ownership, or (C) to a person that has (directly or
indirectly) at least 50% ownership of the Company with respect to its stock
outstanding, or to any entity in which such person possesses (directly or
indirectly) 50% ownership.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table shows information, as of December 31, 2000, with
respect to the beneficial ownership of common stock by (i) each director, (ii)
each Named Executive, (iii) each person or group known to us to own beneficially
more than 5% of the outstanding common stock, and (iv) all executive officers
and directors as a group (the addresses of all the persons named below is c/o
Pharmaceutical Formulations, Inc. 460 Plainfield Avenue, Edison, NJ 08818 except
for ICC Industries Inc., Dr. John J. Farber, John Oram, whose address is 460
Park Avenue, New York, NY 10022; Mr. Charles LaRosa, whose address is 801
Dartmoor; Westfield, NJ 07090 and Mr. George Chin, whose address is 59 Deerfield
Lane, Upper Saddle River, NJ 07840):
Name and Address of Amount and Nature of Percentage
BENEFICIAL OWNER BENEFICIAL OWNERSHIP1 OF CLASS
---------------------- -------------------- ----------
ICC Industries Inc. 19,635,8942 64.7%
Dr. John Farber 19,635,8942 64.7%
John L. Oram 161,536 *
Charles E. LaRosa 83,0773 *
Ray W. Cheesman 275,0003 *
Anthony Cantaffa 162,7883 *
George Chin 70,4553 *
Brian Barbee 57,7503 *
Officers and Directors as
a Group (9 persons) 747,0743 2.0%
---------------------------
* Less than 1%.
1 Unless it is stated otherwise in any of the following notes, each holder
owns the reported shares directly and has sole voting and investment power
with respect to such shares. The number of shares beneficially owned by a
person also includes all shares which can be acquired by such person within
60 days, including by way of exercise of outstanding options or the
conversion of convertible securities which are, or during such 60-day
period, become exercisable or convertible.
2 Does not include 2,330,148 shares includable in connection with ICC's
limited preemptive rights since such rights are not currently exercisable
nor can there be any assumption that they will become exercisable within 60
days after December 31, 2000. Such shares are issuable only upon the
issuance by the Company of certain shares to other persons pursuant to
agreements which were outstanding as of September 24, 1992. The issuance of
shares to ICC pursuant to the limited preemptive rights is intended to
maintain the preexisting equity ownership of ICC of approximately
two-thirds of the outstanding shares (excluding shares which ICC may
acquire upon conversion of convertible preferred shares). It also does not
include any shares which may be issuable upon conversion of outstanding
convertible preferred stock since such conversion can not occur until after
three months prior written 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 $2.00 per
share (subject to certain antidilution adjustments). (The current market
price is defined as the average of the daily market prices (as defined) for
the common stock for 30 consecutive trading days commencing 45 days prior
to the conversion date, which is the third monthly anniversary date of the
date of notice of conversion). If ICC elected to convert such shares of
preferred stock and it is assumed that the applicable current market price
is equal to the average of the high and low asked price for the common
stock on November 20, 2000 ($.15), then the 2,500,000 shares of preferred
stock would convert into 16,666,666 shares of common stock. After such
conversion ICC would then own 36,302,560 shares of common stock, which is
77.2% of the outstanding common stock. If the market price for the common
stock is greater than $.15 per share at the conversion date, ICC would own
fewer shares, and if the market price is less than $.15 per share ICC would
own more shares, after any such conversion. Dr. Farber is the majority
stockholder of ICC. See "Certain Relationships and Related Transactions."
3 Includes shares of common stock subject to stock options exercisable as of
November 20, 2000 or within 60 days thereof as follows: Ms. Baer 40,000,
Mr. Barbee 52,750; Mr. Barney 50,000, Mr. Cantaffa: 92,333; Mr. Cheesman:
75,000; and all officers and directors as a group: 310,083.
ITEM 13. CERTAIN RELATIONSHIPS AND TRANSACTIONS.
TRANSACTIONS WITH ICC
OPTION AGREEMENT
In September 1991, we entered into the ICC Option Agreement pursuant
to which ICC was granted a series of options to acquire a total of 66.67% of the
number of shares of our common stock outstanding after the exercise of all
options owned by ICC and certain other outstanding options, warrants, rights and
convertible securities. All of the options under such agreement have been
exercised. As a result of the exercise of certain options, ICC acquired voting
control of the Company as of October 1992. The last option was fully exercised
in May 1994.
Under the ICC Option Agreement, ICC was also granted certain
preemptive rights (the "Limited Preemptive Rights") at a price equal to the
lesser of the exercise price (or conversion price, as the case may be), of
certain additional outstanding options, warrants and other rights to purchase
shares of common stock (the "Convertible Securities") or $.25. The Limited
Preemptive Rights are exercisable for a period of 45 days after we send notice
to ICC that shares have been issued in connection with any outstanding
Convertible Securities. We cannot predict whether any shares will be issued
pursuant to the exercise of outstanding Convertible Securities or whether ICC
will exercise any resulting preemptive rights.
As of December 31, 2000, ICC owned a total of 19,635,894 shares of our
common stock, representing approximately 64.7% of the total number of shares
outstanding on that date, and it held rights to acquire additional shares under
the Limited Preemptive Rights.
SALE OF PREFERRED STOCK
Effective April 4, 1996, we filed a Certificate of Designations,
Preferences and Rights creating 3,000,000 shares of Series A Cumulative
Redeemable Convertible Preferred Stock, par value $1.00 per share (the "Series A
Preferred Stock"). The holders of Series A Preferred Stock are entitled to a
dividend at the lower of $.08 per share or $1.00 times the prime rate of
interest at the time of the sale of the Series A Preferred Stock, payable
semiannually when declared. Dividends cumulate if not paid and we cannot declare
or pay dividends on any other class of stock until dividends on the Series A
Preferred Stock are paid. The holders of Series A Preferred Stock are entitled
to a liquidation preference of $1.00 per share. We may redeem shares of Series A
Preferred Stock at any time at a price equal to the liquidation preference plus
accrued and unpaid dividends. Shares of Series A Preferred Stock may be
converted at the option of the holder into shares of common stock, par value
$.08 per share, at any time after 36 months from issuance upon three months
prior notice at a rate such that each share of Series A Preferred Stock shall be
converted into such number of shares of common stock as equals the liquidation
preference plus accrued and unpaid dividends, divided by the lower of the
current market price (as defined) at the conversion date or $2.00 per share
(subject to certain antidilution adjustments). The shares of Series A Preferred
Stock are accorded only such voting rights as required by applicable law. We may
not, however, take certain enumerated action prejudicial to the interest of the
holders of Series A Preferred Stock without the approval of the holders of a
majority of the Series A Preferred Stock.
We sold 2,500,000 shares of Series A Preferred Stock to ICC pursuant
to a Stock Purchase Agreement between the Company and ICC dated April 8, 1996
for a payment of $2,500,000. See footnote 2 to the table at "Securities
Ownership of Certain Beneficial Owners and Management" above for more
information on how many shares would be issued upon conversion under certain
assumed circumstances. Pursuant to the Stock Purchase Agreement, we agreed to
(a) redeem some or all of the Series A Preferred Stock owned by ICC if we have
made a registered public offering of our common stock and the proceeds of such
offering shall have been sufficient to pay the redemption price and (b) allow
ICC to surrender shares of Series A Preferred Stock, valued at the liquidation
preference therefor plus accrued and unpaid dividends, in exercise of any
warrants, options or other rights to purchase common stock which ICC may have or
in payment of any shares of common stock purchased in any public offering. The
foregoing covenants are conditioned upon our ability to undertake the required
actions under applicable law and that the redemption or surrender of shares
would not thereby cause us to fail to meet all requirements for listing or
continued listing of our common stock on the Nasdaq Stock Market or such other
exchange on which the common stock may be listed.
PURCHASE OF RAW MATERIALS
We purchased $3,145,000 of raw materials from ICC in 2000, $ 2,667,000
in 1999 and $2,707,000 in 1998.
LEASE FINANCING
ICC has also assisted us in obtaining certain machinery and equipment
for the expansion of our production capacity. In such cases, ICC, or its
affiliates, typically acted as lessor of the equipment for which fixed monthly
fees are paid by us. As a result of our general financial condition, we would
not otherwise have been able to secure such leases and credit facilities in the
amounts required for our continuing and planned operations.
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. Such leases have various terms,
expiring at different times between 1999 and 2001. In fiscal 1999, we assumed
these subleases and are now making the lease payments directly to the leasing
company previously associated with ICC. Upon expiration of the term of each
lease, we are entitled to purchase the equipment for a price of $1.00. We no
longer lease equipment from ICC.
LOANS
On April 1, 1999, ICC provided a term loan of $3,000,000 which was
increased to $7,752,000 on July 1, 2000. It also provided a temporary guarantee
of $2,500,000 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 our assets
and is repayable in 12 monthly installments of $100,000 each commencing in
August 2001 with a final payment of $6,552,000 in August 2002. Interest is
payable at 1% over prime. On September 30, 2000, the term loan was increased to
$11,837,000 and the payment terms were modified. It is repayable in 12 monthly
installments of $100,000 each commencing in November 2001 with the balance due
in November 2002.
The Company believes that cash flow from operations, together with
revolving credit and equipment and term loan financing plus continued financial
support from ICC will be sufficient to fund the Company's currently anticipated
working capital, capital spending and debt service requirements through the end
of 2001. The Company expects these working capital needs will require it to
obtain new revolving credit facilities in August 2001, when 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.
CIMETIDINE AGREEMENT
In August 1993, we entered into a cooperative joint venture with ICC
Chemical Corporation, an affiliate of ICC, regarding the manufacture of
Cimetidine, a pharmaceutical product used for the relief from heartburn, acid
indigestion and sour stomach (the "Cimetidine Agreement"). Such agreement was
amended in September 1996. Pursuant to the agreement as amended, ICC will be our
sole source of raw materials for Cimetidine. It also provided, at its expense,
the raw materials and paid the outside costs related to the preparation of the
OTC ANDA. We prepared and filed an ANDA for OTC cimetidine, which approval was
granted in June 1998. ICC is entitled to a royalty of 10% of net sales of OTC
Cimetidine up to a return of 8.75% compounded annually on its investment. ICC,
if we agree, may buy Cimetidine for resale to export customers, for which ICC
will pay 10% less than the price to ICC's customers. The term of the agreement
is ten years from the date of FDA approval of the sale and distribution of the
product. At the expiration of the term of the agreement, if not renewed, the
assets of the venture shall be distributed to the two co-venturers as shall be
agreed.
LEGAL SERVICES
The law firm of Stroock & Stroock & Lavan LLP has performed legal
services for the Company and, in matters unrelated to us, for ICC.
OTHER RELATED TRANSACTIONS
STOCK ISSUANCE
Pursuant to the ICC Option Agreement and the waiver of certain
provisions of former President Dr. Tesler's employment agreement, as amended,
certain employees (as defined) were issued shares of our common stock in the
last three fiscal years. A total of 10,768 shares were issued in the last three
fiscal years. We are also obligated to issue to such individuals an aggregate of
up to 133,966 additional shares if convertible securities existing at September
24, 1992 are converted into common stock.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(a)(1) and (2) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE:
See Item 8, "Financial Statements and Supplementary Data".
(a) (3) and (c) EXHIBITS: Exhibits are numbered in accordance with
Item 601 of Regulation S-K.
(3) ARTICLES OF INCORPORATION AND BY-LAWS:
3.1 Articles of Incorporation, as amended (3)
3.2 By-laws, as amended (3)
(4) INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING
INDENTURES:
4.1 Indenture (1)
4.2 New Indenture (2)
(10) MATERIAL CONTRACTS:
10.3(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.) (4)
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")(10)
10.3(C) Letter Agreement dated April 1, 1999 between CIT and the
Registrant amending the CIT Loan Agreement (12)
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 (12)
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 (12)
10.3(F) Limited Guaranty dated April 1, 1999 by ICC in favor of CIT
with respect to the CIT Loan Agreement (12)
10.3(G) Letter Agreement dated April 26, 1999 between CIT and the
Registrant amending the CIT Loan Agreement (12)
10.3(H) Letter Agreement dated June 2, 1999 between CIT and the
Registrant amending the CIT Loan Agreement (12)
10.3(I) Letter Agreement dated October 20, 1999 between CIT and the
Registrant amending the CIT Loan Agreement
10.3(J) Letter Agreement dated April 11, 2000 between CIT and the
Registrant amending the CIT Loan Agreement
10.3(K) Limited Guaranty dated April 11,2000 by ICC in favor of CIT
with respect to the CIT Loan Agreement
10.3(L) Letter Agreement dated May 19, 2000 between CIT and the
Registrant amending the CIT Loan Agreement
10.3(M) Limited Guaranty dated May 19, 2000 by ICC in favor of CIT
with respect to 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. (5)
10.5 Agreement dated September 24, 1992 among the Registrant (formerly
known as PharmaControl Corp.), Private Formulations, Inc. and ICC Industries
Inc. (6)
10.6 Agreement dated March 29, 1993 among the Registrant (formerly
known as PharmaControl Corp.), Private Formulations, Inc. and ICC Industries
Inc. (7)
10.7 Agreement dated May 8, 1992, among the Registrant (formerly known
as PharmaControl Corp.), Private Formulations, Inc. and ICC Industries Inc. (6)
10.8 Agreement dated May 28, 1992, among the Registrant (formerly
known as PharmaControl Corp.), Private Formulations, Inc. and ICC Industries
Inc. (6)
10.9 Agreement dated May 24, 1993, among the Registrant (formerly
known as PharmaControl Corp.), Private Formulations, Inc. and ICC Industries
Inc. (7)
10.10 Agreement dated September 26, 1997 between the Registrant and
ICC Chemical Corporation regarding Cimetidine (8)
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)(6)*
10.12(A) 1994 Stock Option Plan, as amended October 15, 1997*
10.12(B) Form of option agreement under 1994 Stock Option Plan (9)*
10.13 1997 Stock Incentive Plan adopted October 15, 1997, as amended
February 10, 2000
10.14 Term Loan and Security Agreement dated as of April 1, 1999
between ICC and the Registrant (12)
10.15 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 (11)
10.16(A) Term Loan and Security Agreement dated as of July 1, 2000
between ICC and the Registrant
10.16(B) Term Loan and Security Agreement dated as of September 30,
2000 between ICC and the Registrant
(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 Current Report on Form 8-K dated August 2,
1989; amended as set forth in Exhibit 10.3 and incorporated herein.
(5) Filed with the Registrant's Current Report on Form 8-K dated September 6,
1991 and incorporated herein.
(6) Filed with the Registrant's Annual Report on Form 10-K for the year ended
June 30, 1992 and incorporated herein by reference.
(7) Filed with the Registrant's Annual Report on Form 10-K f or the year ended
June 30, 1994 and incorporated herein by reference.
(8) Filed with the Registrant's Annual Report on Form 10-K for the year ended
June 30, 1996 and incorporated herein by reference.
(9) Filed with the Registrant's Annual Report on Form 10-K for the year ended
June 30, 1997 and incorporated herein by reference.
(10) Filed with the Registrant's Annual Report on Form 10-K for the year ended
June 30, 1998 and incorporated herein by reference
(11) Incorporated by reference to the Registrant's Current Report on Form 8-K
for an event occurring on April 4, 1996
(12) Filed with the Registrant's Annual Report on Form 10-K for the year ended
July 3, 1999 and incorporated herein by reference
(b) REPORTS ON FORM 8-K - The Registrant filed the following reports
on Form 8-K during the last quarter of the fiscal year ended July 1, 2000:
DATE OF REPORT ITEM NUMBER (SUMMARY)
June 21, 2000 5 (regarding delay in payment of interest on
debentures)
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/ JAMES INGRAM
------------------------------------
James Ingram, President
Dated: January 31, 2001
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/ JAMES INGRAM President, Chief Operating Officer January 31, 2001
- ------------------------------- & Director
James Ingram
/S/ R. BRADLEY CONNER Chief Financial Officer, Controller January 31, 2001
- ------------------------------- (Principal Financial Officer)
R. Bradley Conner
/S/ JOHN L. ORAM Chairman of the Board January 31, 2001
- -------------------------------
John L. Oram
/S/ RAY W. CHEESMAN Director January 31, 2001
- -------------------------------
Ray W. Cheesman
EXHIBIT INDEX
10.3(I) Letter Agreement dated October 20, 1999 between CIT and the Registrant
amending the CIT Loan Agreement
10.3(J) Letter Agreement dated April 11, 2000 between CIT and the Registrant
amending the CIT Loan Agreement
10.3(K) Limited Guaranty dated April 11,2000 by ICC in favor of CIT with
respect to the CIT Loan Agreement
10.3(L) Letter Agreement dated May 19, 2000 between CIT and the Registrant
amending the CIT Loan Agreement
10.3(M) Limited Guaranty dated May 19, 2000 by ICC in favor of CIT with
respect to the CIT Loan Agreement
10.12(A) 1994 Stock Option Plan, as amended October 15, 1997
10.13 1997 Stock Incentive Plan, adopted October 15, 1997, as amended
February 10, 2000
10.16(A) Term Loan and Security Agreement dated as of July 1, 2000 between ICC
and the Registrant
10.16(B) Term Loan and Security Agreement dated as of September 30, 2000
between ICC and the Registrant
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 (deficiency) F-4
Statements of cash flows F-5
Notes to consolidated financial statements F-6 - F-25
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON FINANCIAL
STATEMENT SCHEDULE F-26
SUPPLEMENTAL SCHEDULE:
Schedule II - Valuation and Qualifying Accounts F-27
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 1, 2000 and July 3, 1999, 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
1, 2000. 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 1, 2000 and July
3, 1999, and the results of their operations and their cash flows for each of
the three years in the period ended July 1, 2000 in conformity with generally
accepted accounting principles.
/s/ BDO Seidman, LLP
Woodbridge, New Jersey
November 20, 2000, except for Note 2
which is as of January 4, 2001
PHARMACEUTICAL FORMULATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
F-3
JULY 1, 2000 July 3, 1999
- -------------------------------------------------------------------------------------- ---------------------- ---------------------
ASSETS
CURRENT ASSETS:
Cash $ 130,000 $ 122,000
Accounts receivable, net of allowance for doubtful accounts of $406,000 and 11,947,000 16,600,000
$255,000
Inventories 14,810,000 17,916,000
Prepaid expenses and other current assets 892,000 1,268,000
Income taxes recoverable 947,000
Deferred tax asset 1,150,000
- -------------------------------------------------------------------------------------- ---------------------- ---------------------
TOTAL CURRENT ASSETS 27,779,000 38,003,000
PROPERTY, PLANT AND EQUIPMENT, NET 15,917,000 18,636,000
OTHER ASSETS:
Deferred tax asset 2,606,000
Other assets 869,000 408,000
- -------------------------------------------------------------------------------------- ---------------------- ---------------------
$ 44,565,000 $ 59,653,000
- -------------------------------------------------------------------------------------- ---------------------- ---------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
Current portion of capital lease obligations $ 2,280,000 $ 2,879,000
Current portion of long-term debt 1,684,000 2,135,000
Accounts payable 18,546,000 21,196,000
Income taxes payable 210,000
Accrued expenses 2,704,000 3,195,000
- -------------------------------------------------------------------------------------- ---------------------- ---------------------
TOTAL CURRENT LIABILITIES 25,214,000 29,615,000
- -------------------------------------------------------------------------------------- ---------------------- ---------------------
LONG-TERM CAPITAL LEASE OBLIGATIONS, LESS CURRENT MATURITIES 4,464,000 6,614,000
- -------------------------------------------------------------------------------------- ---------------------- ---------------------
LONG-TERM DEBT, LESS CURRENT MATURITIES:
Revolving/term loans 14,187,000 19,749,000
Convertible debentures 4,329,000 4,335,000
Note payable to ICC Industries, Inc. 7,752,000 2,850,000
- -------------------------------------------------------------------------------------- ---------------------- ---------------------
TOTAL LONG-TERM DEBT, LESS CURRENT MATURITIES 26,268,000 26,934,000
- -------------------------------------------------------------------------------------- ---------------------- ---------------------
STOCKHOLDERS' EQUITY (DEFICIENCY):
Preferred stock, par value $1.00 per share; 10,000,000 shares authorized; 2,500,000 2,500,000
2,500,000 shares issued and outstanding
Common stock, par value $.08 per share; 40,000,000 shares authorized; 30,329,671 2,427,000 2,421,000
and 30,253,320 shares issued and outstanding;
Capital in excess of par value 37,534,000 37,493,000
Accumulated deficit (53,842,000) (45,924,000)
- -------------------------------------------------------------------------------------- ---------------------- ---------------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIENCY) (11,381,000) (3,510,000)
- -------------------------------------------------------------------------------------- ---------------------- ---------------------
$ 44,565,000 $ 59,653,000
- -------------------------------------------------------------------------------------- ---------------------- ---------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PHARMACEUTICAL FORMULATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JULY 1, 2000 July 3, 1999 June 30, 1998 June 30, 1997
- ------------------------------------------------------- ------------------- -------------------- ------------------ ----------------
GROSS SALES $82,869,000 $89,821,000 $85,179,000 $75,013,000
LESS: SALES DISCOUNTS AND ALLOWANCES 6,290,000 7,647,000 4,350,000 3,896,000
- ------------------------------------------------------- ------------------- -------------------- ------------------ ----------------
NET SALES 76,579,000 82,174,000 80,829,000 71,117,000
- ------------------------------------------------------- ------------------- -------------------- ------------------ ----------------
COST AND EXPENSES:
Cost of goods sold 63,390,000 70,970,000 61,898,000 53,957,000
Selling, general and administrative 11,892,000 14,547,000 12,296,000 10,325,000
Research and development 537,000 667,000 904,000 867,000
- ------------------------------------------------------- ------------------- -------------------- ------------------ ----------------
75,819,000 86,184,000 75,098,000 65,149,000
- ------------------------------------------------------- ------------------- -------------------- ------------------ ----------------
INCOME (LOSS) FROM OPERATIONS 760,000 (4,010,000) 5,731,000 5,968,000
- ------------------------------------------------------- ------------------- -------------------- ------------------ ----------------
OTHER EXPENSES (INCOME):
Interest expense 4,904,000 4,675,000 3,982,000 3,865,000
Lawsuit settlement 1,179,000
Other, net (94,000) (128,000) (79,000) (111,000)
- ------------------------------------------------------- ------------------- -------------------- ------------------ ----------------
4,810,000 5,726,000 3,903,000 3,754,000
- ------------------------------------------------------- ------------------- -------------------- ------------------ ----------------
INCOME (LOSS) BEFORE INCOME TAXES (BENEFIT) (4,050,000) (9,736,000) 1,828,000 2,214,000
INCOME TAXES (BENEFIT) 3,868,000 (3,171,000) (39,000) 882,000
- ------------------------------------------------------- ------------------- -------------------- ------------------ ----------------
NET INCOME (LOSS) (7,918,000) (6,565,000) 1,867,000 1,332,000
PREFERRED STOCK DIVIDEND REQUIREMENT 200,000 200,000 200,000 200,000
- ------------------------------------------------------- ------------------- -------------------- ------------------ ----------------
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS $(8,118,000) $ (6,765,000) $ 1,667,000 $ 1,132,000
- ------------------------------------------------------- ------------------- -------------------- ------------------ ----------------
NET INCOME (LOSS) PER SHARE:
Basic $ (0.26) $ (0.22) $ 0.06 $ 0.04
Diluted (0.26) (0.22) 0.05 0.04
- ------------------------------------------------------- ------------------- -------------------- ------------------ ----------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
PHARMACEUTICAL FORMULATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
Years ended July 1, 2000, July 3, 1999, and June 30, 1998
- ------------------------------------------------- -------------------------------------- -- ---------------------------------------
Preferred Stock Common Stock
Shares issued Amount at par Shares issued Amount at Par
value Value
- ------------------------------------------------- ------------------ ------------------- -- ------------------- -------------------
BALANCE, JUNE 30, 1997 2,500,000 $2,500,000 29,880,350 $2,391,000
- -------------------------------------------------
Shares issued in connection with exercise of 300,000 24,000
common stock options
- -------------------------------------------------
Shares issued to employees 72,970 6,000
- -------------------------------------------------
Net income
- ------------------------------------------------- ------------------ ------------------- -- ------------------- -------------------
BALANCE, JUNE 30, 1998 2,500,000 2,500,000 30,253,320 2,421,000
- -------------------------------------------------
Net loss
- ------------------------------------------------- ------------------ ------------------- -- ------------------- -------------------
BALANCE, JULY 3, 1999 2,500,000 2,500,000 30,253,320 2,421,000
- -------------------------------------------------
CONVERSION OF DEBENTURES 76,351 6,000
- -------------------------------------------------
NET LOSS
- ------------------------------------------------- ------------------ ------------------- -- ------------------- -------------------
BALANCE, JULY 1, 2000 2,500,000 $2,500,000 30,329,671 $2,427,000
- ------------------------------------------------- ------------------ ------------------- -- ------------------- -------------------
Years ended July 1, 2000, July 3, 1999, and June 30, 1998
- ------------------------------------------------- --------------------- --------------------
Capital in Excess
of Par Value
Accumulated Deficit
- ------------------------------------------------- --------------------- --------------------
BALANCE, JUNE 30, 1997 $37,412,000 $(41,226,000)
- -------------------------------------------------
Shares issued in connection with exercise of 51,000
common stock options
- -------------------------------------------------
Shares issued to employees 30,000
- -------------------------------------------------
Net income 1,867,000
- ------------------------------------------------- --------------------- --------------------
BALANCE, JUNE 30, 1998 37,493,000 (39,359,000)
- -------------------------------------------------
Net loss (6,565,000)
- ------------------------------------------------- --------------------- --------------------
BALANCE, JULY 3, 1999 37,493,000 (45,924,000)
- -------------------------------------------------
CONVERSION OF DEBENTURES 41,000
- -------------------------------------------------
NET LOSS (7,918,000)
- ------------------------------------------------- --------------------- --------------------
BALANCE, JULY 1, 2000 $37,534,000 $(53,842,000)
- ------------------------------------------------- --------------------- --------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
PHARMACEUTICAL FORMULATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JULY 1, 2000 July 3, 1999 June 30, 1998
- ---------------------------------------------------------------------- ------------------ ------------------- -------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(7,918,000) $(6,565,000) $ 1,867,000
Adjustments to reconcile net income (loss) to net cash provided
by (used in ) operating activities:
Depreciation and amortization 3,193,000 2,895,000 2,509,000
Amortization of bond discount and deferred financing costs 282,000 255,000 162,000
Amortization of deferred gain on sale of building (94,000) (95,000) (52,000)
Shares issued to key employees 17,000
Shares issued to officer and outside directors 19,000
Deferred income taxes 3,756,000 (2,224,000) (741,000)
Changes in current assets and liabilities:
(Increase) decrease in accounts receivable 4,653,000 (1,739,000) (5,944,000)
(Increase) decrease in inventories 3,106,000 2,180,000 (2,388,000)
(Increase) decrease in other current assets 376,000 (476,000) 134,000
(Increase) decrease in income tax receivable 947,000 (947,000)
Increase in deferred gain on sale / leaseback 170,000
Increase (decrease) in accounts payable, accrued expenses and (3,351,000) 1,633,000 6,426,000
income taxes payable
- ---------------------------------------------------------------------- ------------------ ------------------- -------------------
NET CASH PROVIDED BY (USED IN ) OPERATING ACTIVITIES 4,950,000 (4,913,000) 2,009,000
- ---------------------------------------------------------------------- ------------------ ------------------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment, net (474,000) (90,000) (2,993,000)
Decrease (increase) in other assets (461,000) 126,000 (304,000)
- ---------------------------------------------------------------------- ------------------ ------------------- -------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (935,000) 36,000 (3,297,000)
- ---------------------------------------------------------------------- ------------------ ------------------- -------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under line of credit 2,342,000 3,361,000
Borrowings (repayments) of long-term debt (1,258,000) 3,007,000 (520,000)
Principal repayments of capital leases (2,749,000) (2,958,000) (3,107,000)
Refinancing of capital leases 2,000,000
Issuance of common stock 75,000
- ---------------------------------------------------------------------- ------------------ ------------------- -------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (4,007,000) 4,391,000 (191,000)
- ---------------------------------------------------------------------- ------------------ ------------------- -------------------
NET INCREASE (DECREASE) IN CASH 8,000 (486,000) (1,479,000)
CASH AND EQUIVALENTS, BEGINNING OF YEAR 122,000 608,000 2,087,000
- ---------------------------------------------------------------------- ------------------ ------------------- -------------------
CASH AND EQUIVALENTS, END OF YEAR $ 130,000 $ 122,000 $ 608,000
- ---------------------------------------------------------------------- ------------------ ------------------- -------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
PHARMACEUTICAL FORMULATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF THE BUSINESS Pharmaceutical Formulations, Inc. (the
AND RELATED PARTIES "Company") is primarily engaged in the
manufacture and distribution of
over-the-counter solid dosage pharmaceutical
products in tablet, caplet and capsule form,
which are sold under customers' private
labels. The Company also supplies bulk
products to secondary distributors and
re-packers as well as smaller competitors who
do not have sophisticated research and
development departments. It 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
1, 2000 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 or the exercise price
or conversion price of the Outstanding Rights
as the case may be. No preemptive rights were
exercised by ICC in 1998, 1999 and 2000.
ICC, a major international manufacturer and
marketer of chemical, plastic and
pharmaceutical products, with calendar year
1999 sales in excess of $1.2 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,
on April 1, 1999, ICC provided a term loan
for $3,000,000 which was increased to
$7,752,000 on July 1, 2000. It also provided
a temporary guarantee on $2,500,000 in
advances under a revolving loan from a
lending institution. 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
1, 2000, July 3, 1999 and June 30, 1998:
JULY 1, 2000 July 3, 1999 June 30, 1998
------------------------------------ ------------------ ------------------ -------------------
Inventory purchases $3,145,000 $2,667,000 $2,707,000
Services and finance fees 720,000 277,000 276,000
Accounts payable 3,598,000 2,639,000 3,254,000
Note payable 7,752,000 3,000,000
------------------------------------ ------------------ ------------------ -------------------
2. FINANCIAL RESULTS For the fiscal year ended July 1, 2000, the
AND LIQUIDITY Company incurred a pre-tax loss of $4,050,000
and fully reserved its deferred tax asset in
the amount of $3,868,000 resulting in a net
loss of $7,918,000.
The Company will report losses for the two
quarters ended September 30, 2000 and
December 30, 2000. ICC Industries Inc. has
demonstrated its confidence in the Company's
management and business plan by the provision
of loans to the Company, replacing loans from
its asset-based lenders, and providing the
Company with working capital.
The Company continues its initiatives to
increase revenues and improve operational
efficiencies to restore profitability. As
part of the restructuring and operational
efforts, the Company has taken the following
initiatives:
o During calendar year 2000, the Company
initiated major restructuring in its
management team, culminating in the
appointment of James Ingram as President
of the Company as of October 9, 2000.
o In late 1999 and early 2000, the Company
eliminated several unprofitable product
lines consisting mainly of items
purchased from third parties and
repackaged end products for smaller
customers.
o Starting in the first quarter of 1999
and currently continuing, the Company
has improved the efficiency of its
manufacturing, introduced major
initiatives in inventory management, and
concentrated on its customer service
level.
o In December 2000, certain assets were
refinanced, providing an additional
infusion of cash to support new product
launches scheduled for early 2001, to
improve operations and provide
additional working capital. At July 1,
2000, the Company was in violation of
certain of its financial covenants. Such
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. The refinancing was done
with the support of the Company's
principal stockholder, ICC Industries
Inc., which has agreed to continue to
provide ongoing financial support to the
Company where necessary.
o The Company initiated at the end of 1999
a cost reduction program which has
begun, at the end of 2000, to show
considerable benefits. A new operational
and financial restructuring plan has
been formulated to cover 2001.
The Company has also appointed Josephthal &
Co., Inc., a New York based investment
banking firm, to explore the best strategic
options for the company and it expects to
have discussions with potential investors or
merger partners in the near future.
The Company believes that cash flow from
operations, together with revolving credit
and equipment and term loan financing plus
continued financial support from ICC will be
sufficient to fund the Company's currently
anticipated working capital, capital spending
and debt service requirements through the end
of 2001. The Company expects these working
capital needs will require it to obtain new
revolving credit facilities in August 2001,
when 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.
Management believes that, despite the
financial difficulties, its business plan, if
successfully executed, will significantly
improve operating results.
3. SUMMARY OF SIGNIFICANT PRINCIPLES OF CONSOLIDATION
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.
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 1, 2000,
approximately 49% of the accounts receivable
balance was represented by five customers. At
July 3, 1999, approximately 50% 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. No impairment
losses have occurred through July 1, 2000.
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 granted to
employees.
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 on
the Company's financial reporting.
In December 1999, the Securities and Exchange
Commission (SEC) issued Staff Accounting
Bulletin No. 101, "Revenue Recognition in
Financial Statements". This Staff Accounting
Bulletin, as amended, is effective no later
than the fourth quarter of 2001. The Company
does not believe the adoption will have a
material annual impact on our financial
statements
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.
4. COSTS RELATED TO In order to upgrade services to customers,
COMPUTER SYSTEM improving operating efficiencies and insure
CONVERSION 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. 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.
5. INVENTORIES Inventories consist of the following:
JULY 1, 2000 July 3, 1999
---------------------------------------------- ---------------------- -----------------------
Raw materials $ 3,967,000 $ 6,253,000
Work in process 914,000 862,000
Finished goods 9,929,000 10,801,000
---------------------------------------------- ---------------------- -----------------------
$14,810,000 $17,916,000
---------------------------------------------- ---------------------- -----------------------
6. PROPERTY, PLANT AND Property, plant equipment consist of the
EQUIPMENT following:
JULY 1, 2000 July 3, 1999
---------------------------------------------- ---------------------- -----------------------
Land and building $ 8,348,000 $ 8,348,000
Leasehold improvements 6,783,000 6,692,000
Machinery and equipment 23,346,000 21,783,000
Other 296,000 1,476,000
---------------------------------------------- ---------------------- -----------------------
38,773,000 38,299,000
Less: Accumulated depreciation and 22,856,000 19,663,000
amortization
---------------------------------------------- ---------------------- -----------------------
$15,917,000 $ 18,636,000
---------------------------------------------- ---------------------- -----------------------
The net book value of property, plant and
equipment under capital leases was $9,572,000
and $10,635,000 at July 1, 2000 and July 3,
1999, respectively.
7. LONG-TERM DEBT AND Long-term debt and capital lease obligations
CAPITAL LEASE OBLIGATIONS consist of the following:
JULY 1, 2000 July 3, 1999
--------------------------------- -------------- ------------- -------------- -------------
LONG-TERM CAPITAL Long-Term Capital
DEBT LEASES Debt Leases
--------------------------------- -------------- ------------- -------------- -------------
Revolving/term loans (a) $15,347,000 $21,076,000
Term loan due ICC (b) 7,752,000 3,000,000
Convertible subordinated 3,760,000 3,722,000
debentures, $1,000 face value
less unamortized discount
of $1,300,000 and
$1,374,000 (c)
Convertible subordinated 613,000 711,000
debentures, $528,000 face
value (d)
New Jersey Economic 480,000 560,000
Develop-ment Authority Loan
(e)
Building sale/leaseback (f) $4,033,000 $4,731,000
Capital equipment lease 2,711,000 4,762,000
obligations (g)
--------------------------------- -------------- ------------- -------------- -------------
27,952,000 6,744,000 29,069,000 9,493,000
Less Current portion: 1,684,000 2,280,000 2,135,000 2,879,000
--------------------------------- -------------- ------------- -------------- -------------
$26,268,000 $4,464,000 $26,934,000 $6,614,000
--------------------------------- -------------- ------------- -------------- -------------
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
May 19, 2000, the line was further
amended to provide up to a $2,500,000
advance beyond contractual ratios
described above, which is guaranteed by
ICC. Such advances are to be repaid in
monthly installments of $100,000
commencing June 1, 2000. 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 covenants, which, among other
things, prohibit the Company from making
dividend payments and limit the
Company's annual capital expenditures.
At July 1, 2000, 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 July 1, 2000, the Company entered
into a term loan and security agreement
with ICC for $7,752,000 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. Principal payments are to
commence in August 2001 at $100,000 per
month with a final payment of $6,552,000
in August 2002.
c) At July 1, 2000, the Company has 5,061
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) At July 1, 2000, the Company has 1,624
units outstanding consisting of $325
principal amount 8 1/4% convertible
debentures due June 15, 2002 (which
includes $528,000 face value and
interest through maturity of $85,000).
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 6 3/8% and
is due as follows: $80,000 at June 1,
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 January 1, 2000,
the monthly base rent increased to
$145,000. 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 $137,000.
The Company's debt and obligations under
capital leases mature in fiscal years as
follows:
Capital Lease Long-Term Debt
Obligations
- ------------------------------------------------ ------------------ ------------------
2001 $ 2,922,000 $ 1,684,000
2002 1,903,000 19,616,000
2003 1,762,000 6,652,000
2004 1,523,000
2005 107,000
- ------------------------------------------------ ------------------ ------------------
Total Payments 8,217,000 $27,952,000
- ------------------------------------------------ ------------------
Less: Amount representing interest (1,473,000)
- ------------------------------------------------ ------------------
Present value of net minimum lease payments $ 6,744,000
- ------------------------------------------------ ------------------ ------------------
8. 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, a former President of the Company,
who died in 1996. For breaches of employment
and other agreements between the Company and
Dr. Tesler, the Estate claimed an award of
compensatory damages, punitive damages, a
certain number of shares of common stock of
the Company and attorneys' fees. The Company
also brought counterclaims against the
Estate.
In March 2000, the American Arbitration
Association panel in New York awarded amounts
to both the Estate and the Company. The panel
awarded the Estate the amount of Tesler's
salary for approximately two years, which
salary had been accrued in 1995. The panel
also awarded the Estate a portion of its
legal fees. The award dismissed all other
Estate claims and ruled in favor of the
Company on certain of its counterclaims. The
net result of the arbitrators' award is that
the Company paid the Tesler Estate
approximately $45,000 plus $75,000 of the
Estate's legal fees. The provision recorded
by the Company in 1995 more than offset the
amount paid to the Estate.
The children and a former spouse of Dr.
Tesler also raised certain claims arising out
of the death of Dr. Tesler. The Company
settled their claims in December 1998.
Accordingly, the Company 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 May 1998, the Company brought an action
against one of its former outside corporate
counsels seeking damages for conflict of
interest, breaches of fiduciary duty and
loyalty, negligence and malpractice during
its representation of the Company. The action
is still pending.
In July 2000, an action was instituted in the
Circuit Court of Cook County, Illinois
against the Company by Apotex Corporation and
Torpharm, Inc. seeking an unspecified amount
in damages and specific performance in the
nature of purchasing a certain product from
Apotex. The complaint alleges that PFI would
purchase a certain product exclusively from
Apotex. The counts specified in the complaint
include breach of contract, negligent
misrepresentation, breach of implied covenant
of good faith and fair dealing, breach of
implied covenant to use best efforts,
specific performance, breach of fiduciary
duty, reformation and a UCC action for the
price of 3 million tablets. Management
believes the lawsuit is without merit and
intends to vigorously defend against it.
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.
9. INCOME TAXES Income tax expense (benefit) consist of the
following federal taxes:
2000 1999 1998
- ------------------------------------------ ---------------- ----------------- -----------------
Current $ 112,000 $ (947,000) $ 702,000
Deferred 3,756,000 (2,224,000) (741,000)
- ------------------------------------------ ---------------- ----------------- -----------------
Total income tax expense (benefit) $3,868,000 $(3,171,000) $ (39,000)
- ------------------------------------------ ---------------- ----------------- -----------------
The Company's income tax expense (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:
2000 1999 1998
- ------------------------------------------ ---------------- ----------------- -----------------
Statutory U.S. tax (benefit) $(1,241,000) $(3,310,000) $ 622,000
Increase (decrease) resulting from:
State income taxes 110,000
Expiration of state net operating 71,000 42,000
loss carry forwards
Net change in valuation account 4,731,000 364,000 (1,054,000)
Other 307,000 (225,000) 241,000
- ------------------------------------------ ---------------- ----------------- -----------------
Effective income tax expense (benefit) $3,868,000 $(3,171,000) $ (39,000)
- ------------------------------------------ ---------------- ----------------- -----------------
The Company utilized tax loss carry forwards
of $166,000 for U.S. regular tax purposes
during the fiscal year ended June 30, 1998.
As of July 1, 2000, the Company had available
net operating losses of approximately
$10,877,000 for U.S. regular tax purposes,
which expire through 2020. The utilization of
losses that were generated prior to September
1991, which approximate $1,494,000 is limited
to $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 $20,641,000, which expire
through 2007, are available to the Company.
Deferred tax assets are comprised of the
following temporary differences:
JULY 1, 2000 July 3, 1999
- ------------------------------------------------------- ------------------ -------------------
Tax benefit of state income tax net operating loss
carry forwards $1,238,000 $1,139,000
Tax benefit of federal income tax net operating loss
carry forwards 3,698,000 2,580,000
Depreciation 40,000 61,000
Deferred gain on sale/leaseback of building 102,000 135,000
Basis difference 8 1/4% debentures as a result of
restructuring 29,000 48,000
Inventory valuation 46,000 111,000
Deferred compensation 155,000
Allowance for doubtful accounts 138,000 87,000
Alternative minimum tax carry forward 104,000 104,000
- ------------------------------------------------------- ------------------ -------------------
Gross deferred tax asset 5,395,000 4,420,000
Valuation allowance (5,395,000) (664,000)
- ------------------------------------------------------- ------------------ -------------------
Net deferred tax asset $ - $3,756,000
- ------------------------------------------------------- ------------------ -------------------
Based on the assessment of all available
evidence including the pre-tax loss of
$4,050,000 for fiscal 2000, its inconsistent
operating results in prior years, the current
status of the Company's business and the
uncertainty with respect to generating
taxable income in future years, management
has recorded a valuation allowance on the
total of the deferred tax assets. Reductions
in the valuation allowance, which will
increase net income in the future, will be
recorded when, in the opinion of management,
the Company's ability to generate taxable
income is considered more likely than not.
10. COMMON STOCK, OPTIONS The Company has granted options to employees,
AND WARRANTS directors and others under various stock
option plans, lending arrangements, and under
the ICC Option Agreement.
The following is a summary of stock options
and warrants issued, exercised, forfeited or
canceled during the period July 1, 1997
through July 1, 2000 (not including ICC
preemptive rights or additional shares
issuable to management in connection with ICC
preemptive rights):
Shares Weighted-Average
- ---------------------------------------------------- ---------------------
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
Issued 360,300 $.27
Forfeited (748,600) $.77
- ---------------------------------------------------- --------------------
Outstanding - July 1, 2000 855,000 $.49
- ---------------------------------------------------- --------------------
Exercisable - July 1, 2000 516,200 $.64
- ---------------------------------------------------- --------------------
The following table summarizes information
about stock options outstanding at July 1,
2000:
Options Outstanding Options Exercisable
- ----------------- --------------- --------------- -------------- -------------- --------------
Range of Number Weighted Weighted Number Weighted
Exercise Prices Outstanding Average Average Exercisable Average
at July 1, Remaining Exercise at July 1, Exercise
2000 Life (Years) Price 2000 Price
- ----------------- --------------- --------------- -------------- -------------- --------------
- ----------------- --------------- --------------- -------------- -------------- --------------
$0.85 121,200 0.2 $0.85 121,200 $0.85
0.84 84,500 2.4 0.84 84,500 0.84
0.80 7,000 2.4 0.80 7,000 0.80
0.41 85,500 3.4 0.41 85,500 0.41
0.22 to 0.89 123,000 4.1 0.33 58,000 0.37
0.75 110,000 3.8 0.75 110,000 0.75
0.23 75,000 4.5 0.23 50,000 0.23
0.27 248,800 4.4 0.27
- ----------------- --------------- --------------- -------------- -------------- --------------
855,000 516,200
- ----------------- --------------- --------------- -------------- -------------- --------------
The weighted average fair market value of
options granted during the fiscal years 2000,
1999 and 1998 were $.12, $.17 and $.54,
respectively.
As of July 1, 2000, substantially all
outstanding stock options expire at various
dates through fiscal year 2005. 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:
JULY 1, 2000 July 3, 1999 June 30, 1998
- ------------------------------------- ----------------- ------------------ -------------------
Net income (loss) - as reported $(7,918,000) $(6,565,000) $1,867,000
Net income (loss) - pro forma $(7,948,000) $(6,568,000) $1,772,000
- ------------------------------------- ----------------- ------------------ -------------------
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 51%, 46%
and 47% for 2000, 1999 and 1998,
respectively, risk-free interest rate of 6%,
4.4% and 5.9% for 2000, 1999 and 1998,
respectively, expected lives of 5 years and
no dividend yield for all three years ended
July 1, 2000.
11. 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 $850,000 at July
1, 2000.
12. MAJOR CUSTOMERS AND For the years ended July 1, 2000, July 3,
PRODUCTS 1999 and June 30, 1998, 17%, 14% and 20%,
respectively, of net sales were derived from
Costco Wholesale. Walgreen Company accounted
for 12%, 17%, and 17% of net sales for 2000,
1999 and 1998, respectively. Sales to CVS,
Inc. accounted for 9% of net sales for the
year ended July 1, 2000.
For the years 2000, 1999 and 1998, sales of
ibuprofen represented 36%, 32% and 39% of net
sales, respectively.
13. EARNINGS PER SHARE The following data shows the amounts used in
computing earnings (loss) per share and the
effect on income (loss) and the weighted
average number of shares of dilutive
potential common stock:
2000 1999 1998
- ------------------------------------ ------------------ ------------------ -------------------
Net income (loss) $(7,918,000) $(6,565,000) $1,867,000
Preferred dividends 200,000 200,000 200,000
- ------------------------------------ ------------------ ------------------ -------------------
Net income (loss) attributable to (6,765,000) 1,667,000
common shareholders used in (8,118,000)
basic earnings per share
Convertible preferred stock 200,000 200,000 200,000
dividends
- ------------------------------------ ------------------ ------------------ -------------------
Net income (loss) attributable to (7,918,000) $(6,565,000) $1,867,000
common shareholders after
assumed conversions of dilutive
securities
- ------------------------------------ ------------------ ------------------ -------------------
Weighted average number of common 30,260,000 30,253,000 30,199,000
shares used in basic earnings
per share
Effect of dilutive securities:
Stock options/warrants 400,000
Convertible preferred stock 3,788,000
Convertible bonds 2,323,000
- ------------------------------------ ------------------ ------------------ -------------------
Weighted average number of common 30,260,000 30,253,000 36,710,000
shares and dilutive securities
- ------------------------------------ ------------------ ------------------ -------------------
Options, warrants, preferred stock and
convertible debentures amounting to 9,341,000
shares and 10,014,000 shares of common stock
in fiscal 2000 and 1999, respectively, were
not included in computing diluted earnings
because the effect was antidilutive. In 1998,
options and warrants for 1,137,000 shares of
common stock were not included in computing
diluted earnings per share because the effect
was antidulutive.
14. SUPPLEMENTAL CASH FLOW Supplemental disclosures of cash flow
INFORMATION information:
2000 1999 1998
- ----------------------------------- ------------------ ------------------ -------------------
Cash paid during the year:
Interest $4,470,000 $4,195,000 $3,820,000
Income taxes 150,000 330,000
- ----------------------------------- ------------------ ------------------ -------------------
SUPPLEMENTAL NON-CASH INVESTING AND FINANCING
INFORMATION:
Capital lease obligations of $0, $0 and
$1,801,000 were incurred when the Company
entered into various leases in 2000, 1999 and
1998, respectively. The Company converted
debentures totaling $41,000 for the year
ended July 1, 2000.
15. QUARTERLY DATA (UNAUDITED)
Three Months Ended
October 2 January 1 April 1 July 1
(In thousands, except per share data)
2000
Net revenues 20,978 23,059 19,045 13,497
Gross profit 4,730 5,520 4,292 (1,353)
Operating income (loss) 1,525 1,706 1,541 (4,012)
Net income (loss) 201 284 156 (8,559)
Net income (loss) attributable to common shareholders 151 234 106 (8,609)
Earnings (loss) per share, basic and diluted 0.01 0.01 0.01 (0.29)
QUARTERLY DATA (UNAUDITED)
- CONTINUED
Three Months Ended
September 30 December 31 March 31 July 3
(In thousands, except per share data)
1999
Net revenues 17,425 22,129 20,247 22,373
Gross profit 1,179 2,174 2,839 5,012
Operating income (loss) (2,709) (1,862) (938) 1,499
Net income (loss) (2,588) (2,744) (1,348) 115
Net income (loss) attributable to common shareholders (2,638) (2,794) (1,398) 65
Earnings (loss) per share, basic and diluted (0.09) (0.09) (0.05) 0.01
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
The audits referred to in our report dated November 20, 2000, except for Note 2
which is as of January 4, 2001, 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 audit of the financial
statement schedule listed in the accompanying index. This schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this financial statement schedule based upon our audits.
In our opinion, such financial statement schedule presents fairly, in all
material respects, the information set forth therein.
BDO Seidman, LLP
Woodbridge, New Jersey
November 20, 2000, except for Note 2
which is as of January 4, 2001
PHARMACEUTICAL FORMULATIONS, INC.
AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Allowance for doubtful accounts Balance at Additions Charge to other Deductions Balance at end
beginning of charged to accounts write-offs of period
period costs & expenses uncollectible
accounts
- -------------------------------------- ------------------ ----------------- ------------------ ----------------- ------------------
Year ended July 1, 2000 $255,000 $212,000 $ 61,000 $406,000
- -------------------------------------- ------------------ ----------------- ------------------ ----------------- ------------------
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
- -------------------------------------- ------------------ ----------------- ------------------ ----------------- ------------------