PHARMACEUTICAL FORMULATIONS, INC. AND SUBSIDIARIES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark one)
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
| For the Quarterly Period Ended: | June 28, 2003 |
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 (State or other jurisdiction of incorporation or organization) |
22-2367644 (IRS Employer Identification No.) |
| 460 Plainfield Avenue, Edison, NJ (Address of principal executive offices) |
08818 (Zip code) |
| (Registrant's telephone number, including area code) | (732) 985-7100 |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
|__| Yes | X | No
Indicated by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).
|__| Yes | X | No
The number of shares outstanding of common stock, $.08 par value, as of August 8, 2003 was 85,345,787.
PHARMACEUTICAL FORMULATIONS, INC. AND SUBSIDIARIES
PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
June 28,
2003 December 28,
ASSETS (Unaudited) 2002
------------------- ----------------
CURRENT ASSETS
Cash $ 154,000 $ 17,000
Accounts receivable - net of allowance for doubtful
accounts of $496,000 and $407,000 9,783,000 9,334,000
Inventories 14,646,000 13,131,000
Prepaid expenses and other current assets 2,111,000 1,547,000
------------------- ----------------
Total current assets 26,694,000 24,029,000
PROPERTY, PLANT AND EQUIPMENT
Net of accumulated depreciation and amortization
of $30,902,000 and $29,550,000 14,391,000 13,802,000
OTHER ASSETS
Goodwill 4,332,000 -
Other assets 283,000 130,000
-------------------- ----------------
Total other assets 4,615,000 130,000
-------------------- ----------------
$ 45,700,000 $ 37,961,000
==================== ================
LIABILITIES AND STOCKHOLDERS' (DEFICIENCY)
CURRENT LIABILITIES
Current portion of long-term debt $ 3,052,000 $ 2,484,000
Current portion of capital lease obligations 2,576,000 2,461,000
Due to ICC Industries Inc. 12,418,000 8,812,000
Accounts payable 7,864,000 7,744,000
Accrued expenses 1,437,000 1,733,000
-------------------- ----------------
Total current liabilities 27,347,000 23,234,000
------------------- ----------------
LONG-TERM DEBT DUE ICC INDUSTRIES INC. 16,452,000 17,117,000
------------------- -----------------
LONG-TERM DEBT 16,868,000 11,785,000
------------------- -----------------
LONG-TERM CAPITAL LEASE OBLIGATIONS 3,024,000 3,130,000
------------------- -----------------
COMMITMENTS AND CONTINGENCIES (Note 3)
STOCKHOLDERS' (DEFICIENCY)
Common stock, par value $.08 per share; 200,000,000 shares
authorized; 85,345,787 and 85,327,612 shares issued
and outstanding 6,828,000 6,827,000
Capital in excess of par value 52,024,000 51,796,000
Accumulated deficit (76,843,000) (75,928,000)
------------------- -----------------
Total stockholders' (deficiency) (17,991,000) (17,305,000)
------------------- ------------------
$ 45,700,000 $ 37,961,000
=================== ==================
See accompanying notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Six Months Ended Three Months Ended
---------------------------------------------------------------------
June 28, June 29, June 28, June 29,
2003 2002 2003 2002
------------------------------- ---------------------------------
REVENUES
Gross sales $ 34,647,000 $ 26,897,000 $ 18,114,000 $ 13,943,000
Less: Sales discounts and allowances 854,000 565,000 535,000 279,000
-------------- --------------- --------------- -------------
NET SALES 33,793,000 26,332,000 17,579,000 13,664,000
-------------- --------------- --------------- -------------
COST AND EXPENSES
Cost of goods sold 28,487,000 22,800,000 14,542,000 11,387,000
Selling, general and administrative 5,289,000 4,815,000 2,999,000 2,595,000
Research and development 147,000 135,000 89,000 66,000
-------------- --------------- --------------- -------------
33,923,000 27,750,000 17,630,000 14,048,000
-------------- --------------- --------------- -------------
INCOME (LOSS) FROM
OPERATIONS (130,000) (1,418,000) (51,000) (384,000)
-------------- --------------- --------------- -------------
OTHER INCOME (EXPENSE)
Interest expense (1,707,000) (2,085,000) (898,000) (1,077,000)
Other 292,000 324,000 248,000 232,000
-------------- --------------- --------------- -------------
(1,415,000) (1,761,000) (650,000) (845,000)
-------------- --------------- --------------- -------------
LOSS BEFORE INCOME TAX
BENEFIT (1,545,000) (3,179,000) (701,000) (1,229,000)
INCOME TAX BENEFIT 630,000 1,237,000 334,000 574,000
-------------- --------------- --------------- -------------
NET LOSS $ (915,000) $ (1,942,000) $ (367,000) $ (655,000)
============== =============== =============== =============
LOSS PER SHARE - BASIC AND DILUTED $ (0.01) $ (0.02) $ (0.00) $ (0.01)
============== =============== =============== =============
BASIC AND DILUTED AVERAGE COMMON SHARES
OUTSTANDING 85,340,000 85,260,000 85,346,000 85,268,000
============== =============== =============== =============
See accompanying notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
----------------------------------
June 28, June 29,
2003 2002
----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) $ (915,000) $ (1,942,000)
Adjustments to reconcile net (loss) to net cash provided by (used in)
operating activities:
Income tax (benefit) (630,000) (1,237,000)
Depreciation and amortization of property, plant and equipment 1,352,000 1,096,000
Amortization of bond discount and deferred financing costs 70,000 636,000
Amortization of deferred gain on sale/leaseback (25,000) (47,000)
Changes in current assets and liabilities:
(Increase) decrease in accounts receivable 1,225,000 (495,000)
(Increase) decrease in inventories 614,000 (1,537,000)
(Increase) in prepaid expenses and other current assets (159,000) (393,00
Increase in due to ICC Industries Inc. 1,329,000 942,000
(Decrease) in accounts payable and accrued expenses (830,000) (4,275,000)
----------------- -----------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 2,031,000 (7,252,000)
----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of Konsyl Pharmaceuticals, Inc., net of cash acquired (8,802,000) -
(Increase) decrease in other assets (38,000) 500,000
(Increase) in property, plant and equipment (962,000) (1,026,000)
----------------- -----------------
NET CASH (USED IN) INVESTING ACTIVITIES (9,802,000) (526,000)
----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in due to ICC Industries Inc. 2,242,000 11,025,000
Proceeds from equipment financing
1,216,000 -
Repayments of capital lease obligations (1,207,000) (359,000)
Long-term debt in connection with Konsyl acquisition 6,200,000 -
(Repayments) of long-term debt (549,000) (2,929,000)
Proceeds from issuance of common stock under rights offering
6,000 -
----------------- -----------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 7,908,000 7,737,000
----------------- -----------------
NET INCREASE (DECREASE) IN CASH 137,000 (41,000)
CASH, BEGINNING OF PERIOD 17,000 149,000
----------------- -----------------
CASH, END OF PERIOD $ 154,000 $ 108,000
================= =================
See accompanying notes to consolidated financial statements
PHARMACEUTICAL FORMULATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| Note 1 | Interim Financial Reporting and Change in Fiscal Year During December 2002, we changed our fiscal year-end from the 52-53 week period which ends on the Saturday closest to June 30 to the 52-53 week period which ends on the Saturday closest to December 31. The consolidated balance sheet as of December 28, 2002 has been derived from the audited consolidated balance sheet of that date and is presented for comparative purposes. Certain amounts have been reclassified to conform to the current period presentation. The accompanying financial statements should be read in conjunction with the audited financial statements for the six months ended December 28, 2002 as filed in the Company’s Form 10-K. Accordingly, footnotes that would substantially duplicate such disclosure have been omitted. The interim financial statements reflect all adjustments, which are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. Such adjustments are of a normal recurring nature. The results of operations for the six months ended June 28, 2003 are not necessarily indicative of the results to be expected for a full year or any other period. Stock Based Compensation The Company follows SFAS No. 123, “Accounting for Stock-Based Compensation.” We chose to apply Accounting Principle Board Opinion 25 and related interpretations in accounting for stock options granted to our employees. The Company provides proforma disclosures of compensation expense under the fair value method of SFAS No. 123, “Accounting for Stock-Based Compensation,” and SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure.” The weighted average assumptions used for the period presented are as follows: |
Six Months Ended Three Months Ended
---------------- --------------- --------------- -- --------------
June 28, 2003 June 29, 2002 June 28, 2003 June 29, 2002
--------------- --------------- --------------- --------------
Risk free interest rate 2.4% 3.5% 2.4% 3.5%
Expected dividend yield 0 0 0 0
Expected lives 5 years 5 years 5 years 5 years
Expected volatility 125% 125% 125% 125%
| Had compensation cost for the Company’s option plans been determined using the fair value method at the grant dates, the effect on the Company’s net loss and loss per share would have been as follows: |
Six Months Ended Three Months Ended
------------------------ ------------------------
June 28, June June June 29,
2003 29, 2002 28, 2003 2002
----------- --------- --------- ----------
Net loss as reported $(915) $(1,942) $(367) $(655)
Add: Stock based employee compensation
expense included in reported net loss, net
of related tax effects - - - -
Deduct: Total stock based employee
compensation determined under the value
method for all awards, net of related tax (68) (24) (34) (12)
effects
Pro forma net loss $(983) $(1,966) $(401) $(667)
Basic and diluted loss per share $(0.01) $ (0.02) $(0.00) $(0.01)
| New Accounting Pronouncements In January 2003, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 46, Consolidation of Variable Interest Entities (“FIN 46”). FIN 46 requires a variable interest entity to be consolidated by a company, if that company is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns or both. FIN 46 also requires disclosures about variable interest entities that a company is not required to consolidate but in which it has a significant variable interest. The consolidation requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003 and to existing entities in the first fiscal year or interim period beginning after June 15, 2003. Certain of the disclosure requirements apply to all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. The initial adoption of this accounting pronouncement did not have a material impact on the Company's consolidated financial statements. In April 2003, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends SFAS No. 133 for decisions made as part of the FASB's Derivatives Implementation Group process, other FASB projects dealing with financial instruments, and in connection with implementation issues raised in relation to the application of the definition of a derivative. This statement is generally effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The Company does not believe the adoption of this standard will have a material impact on its consolidated financial statements. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150 clarifies the definition of a liability as currently defined in FASB Concepts Statement No. 6, "Elements of Financial Statements," as well as other planned revisions. This statement requires a financial instrument that embodies an obligation of an issuer to be classified as a liability. In addition, the statement establishes standards for the initial and subsequent measurement of these financial instruments and disclosure requirements. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003. The Company does not believe the adoption of this standard will have a material impact on its consolidated financial statements. |
| Note 2; | Acquisition of Konsyl Pharmaceuticals, Inc. On May 15, 2003 Pharmaceutical Formulations, Inc. completed its acquisition of the stock of Konsyl Pharmaceuticals, Inc. of Fort Worth, Texas for approximately $8.9 million and warrants to purchase 1.2 million shares of PFI’s common stock. Per FAS 141, the fair value prescribed to the net assets acquired were preliminarily determined to be as follows: |
Cash $ 143,000
Accounts receivable, net 1,674,000
Inventories, net 2,129,000
Other current assets 474,000
Property, plant and equipment, net 979,000
Other assets 116,000
Accounts payable (164,000)
Accrued expenses (300,000)
Deferred tax liability (215,000)
-------------
Net assets acquired $4,836,000
=============
| The balance of the purchase price was ascribed to goodwill. The transaction was financed by a combination of asset-based and term loan financing aggregating $3,700,000 from PFI’s existing lender, The CIT Group/Credit Finance, Inc., as well as $1,627,000 advanced by PFI’s major stockholder, ICC Industries Inc. (“ICC”), $595,000 of equipment financing, facilitated by ICC, $450,000 in cash, and a five year note to Mr. Frank X. Buhler, the former stockholder of Konsyl, in the amount of $2.5 million. In addition, as part of the purchase price, PFI issued warrants to purchase 1.2 million shares of common stock of PFI at an exercise price of $.204 per share, valued at $223,000. The warrants are exercisable until April 15, 2010. Konsyl is a manufacturer and distributor of powdered, dietary natural fiber supplements. The products are manufactured at its plant in Easton, Maryland and are sold, both domestically and internationally, to pharmaceutical wholesalers, drugstore chains, mass merchandisers, grocery store chains, and grocery distributors. Products are sold under both the “Konsyl®” brand name and various private labels. Equipment and other physical property of Konsyl which were acquired are used for the manufacture, marketing and distribution of powdered dietary natural supplements; the Company plans to continue to use these assets for the same purpose. In connection with PFI’s acquisition of Konsyl, PFI, Konsyl and Mr. Frank X. Buhler, the former majority stockholder of Konsyl, entered into a consultancy agreement. In addition, Mr. Buhler was elected to the Board of Directors of PFI at the annual meeting of the stockholders of PFI. Konsyl also entered into a lease with ANDA Investments Ltd., a company owned by Mr. Buhler, regarding the company’s manufacturing facility in Maryland. The following unaudited pro forma summary presents the financial information as if the acquisition of Konsyl had occurred on January 1, 2003 for the six months ended June 28, 2003 information and January 1, 2002 for the six months ended June 29, 2002 information. These pro forma results have been prepared for comparative purposes and do not purport to be indicative of what would have occurred had the acquisition been made on January 1, 2002 or January 1, 2003, nor is it indicative of future results. |
Six Months Ended
-----------------------------------------
June 28, 2003 June 29, 2002
---------------- ------------------
Net sales $37,802,000 $32,180,000
Net loss $(630,000) $(1,653,000)
Basic and diluted earnings per common share $(.01) $(.02)
| Note 3 | Commitments and Contingencies In March 2002, action was brought against PFI in the United States District Court for the Southern District of New York seeking $20 million in damages and $40 million in punitive damages related to the sales of allegedly defective product. Management believes the lawsuit is without merit and is vigorously defending against it. In May 1998, PFI 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 the Company 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 Uniform Commercial Code action for the price of 3 million tablets. Management believes the lawsuit is without merit and is vigorously defending against it. PFI is a party to various other legal proceedings arising in the normal conduct of business. Management believes that the final outcome of all current legal matters will not have a material adverse effect upon our financial position or results of operations. |
| Note 4 |
Inventories Inventories consist of the following: |
June 28, 2003 December 28, 2002
---------------- ------------------
Raw materials $ 4,596,000 $ 4,423,000
Work in progress 962,000 1,315,000
Finished goods 9,088,000 7,393,000
-------------- --------------
$14,646,000 $13,131,000
============== ==============
| Note 5 | Related Party Transactions ICC, a major international manufacturer and marketer of chemical, plastic and pharmaceutical products, is our principal shareholder. The following transactions with ICC are reflected in the consolidated financial statements as of or for the six months ended June 28, 2003 and June 29, 2002: |
2003 2002
--------------- -----------------
Inventory purchases $ 3,245,000 $ 454,000
Interest charges 514,000 408,000
Accounts payable 9,109,000 4,845,000
Note payable 19,842,000 18,322,000
| ITEM 2 | MANAGEMENT;S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
RESULTS OF OPERATIONS
|
On May 15, 2003 Pharmaceutical Formulations, Inc. completed its acquisition of
the stock of Konsyl Pharmaceuticals, Inc. of Fort Worth, Texas. The results of
operations for Konsyl are included in the consolidated results of operations
from May 16, 2003. Gross sales for the six months ended June 28, 2003 were $34,647,000 as compared to $26,897,000 in the comparable period in the prior year, an increase of $7,750,000 or 28.8%. Konsyl’s gross sales were $1,339,000 in the current three and six month periods. In July 2002, PFI began shipments to a major national retailer. This new relationship contributed approximately $3.5 million of gross sales in the current six months and $1.6 million in the current quarter. The balance of the sales increase came from established private label customers. Gross sales for the current quarter were $18,114,000 as compared to $13,943,000 in the comparable period in the prior year, an increase of $4,171,000 or 29.9%. Net sales for the six months ended June 28, 2003 were $33,793,000 as compared to $26,332,000 in the comparable period in the prior fiscal year, an increase of $7,461,000 or 28.3% due to higher gross sales. Net sales for the three months ended June 28, 2003 were $17,579,000 as compared to $13,664,000 in the comparable period in the prior fiscal year, an increase of $3,915,000 or 28.7% due to higher gross sales. Sales discounts and allowances in the three months and six months ended June 28, 2003 increased over the respective prior year periods due to volume related rebate programs. Cost of sales as a percentage of net sales was 84.3% for the six months ended June 28, 2003 as compared to 86.6% in the prior year period. This decrease of 2.3% resulted primarily from the inclusion of Konsyl (1.3%) and the efficiencies gained from the increased levels of production. Selling, general and administrative expenses were $5,289,000 for the six months ended June 28, 2003 as compared to $4,815,000 in the prior year period, an increase of $474,000 or 9.8%, of which $448,000 was related to the inclusion of Konsyl and related transition costs. Interest expense was $1,707,000 for the six months ended June 28, 2003 as compared to $2,085,000 for the prior year period. Interest expense was $898,000 for the three months ended June 28, 2003 as compared to $1,077,000 for the prior year period. The decrease is primarily a result of lower interest rates. Interest expense arising from the Konsyl acquisition was approximately $60,000 in the current quarter and six months ended June 28, 2003. In December 2001, ICC became an 85.6% owner of our common stock. As a result of the increase in ICC’s ownership of PFI, we file a consolidated tax return with ICC. In accordance with a tax sharing agreement between the two companies, we will be reimbursed for the tax savings generated from ICC’s use of our losses. In addition, the agreement provides for an allocation of the group’s tax liability, based upon the ratio that each member’s contribution of taxable income bears to the consolidated taxable income of the group. In connection with this tax sharing agreement, we recorded a tax benefit of $630,000 for the six months ended June 28, 2003 and a benefit of $1,237,000 for the six months ended June 29, 2002. The tax benefit was $334,000 for the three months ended June 28, 2003 as compared to $574,000 for the prior year period. PFI reported a net loss of $915,000 or $.01 per share for the six months ended June 28, 2003 as compared to a net loss of $1,942,000 or $.02 per share in the prior year period. For the three months ended June 28, 2003, PFI reported a net loss of $367,000 or $.00 per share as compared with a net loss of $655,000 or $.01 per share in the prior year period. |
LIQUIDITY AND CAPITAL RESOURCES
| Cash increased $137,000 during the six months ended June 28, 2003. Total funds provided by operating activities were $2,031,000 for the six months ended June 28, 2003. This was primarily attributable to non-cash charges of $1,422,000 for depreciation and amortization, a decrease in accounts receivable of $1,225,000, a decrease in inventories of $614,000, offset by a pretax loss of $1,545,000 and a decrease in accounts payable and accrued expenses of $830,000. Net cash used in investing activities for the six months ended June 28, 2003 was $9,802,000, principally attributable to the acquisition of Konyl for $8.8 million (net of $143,000 of cash acquired) and $962,000 of expenditures for capital equipment. Net cash provided by financing activities for the six months ended June 28, 2003 was $7,908,000, from new borrowings of long term debt of $6,200,000 related to the Konsyl acquisition, advances from ICC of $2,242,000 (including $1,627,000 related to the Konsyl acquisition), and new capital equipment leases of $1,216,000 (including $595,000 related to Konsyl), offset by repayments of capital lease obligations of $1,207,000 and repayments of long-term debt of $549,000. In June 2003, holders of $1,509,000 in principal amount of our 8% and 8.25% convertible subordinated debentures agreed to extend the payment terms on those bonds, which were due to mature on June 16, 2003, to June 15, 2004, at the current interest rate of 8% or 8.25%, depending on which bonds are held. In exchange for the bondholders’ signed agreement to extend the maturity date on the bonds, they received a one-time up-front fee of $10 per $1,000 of bond principal held by them. In addition, the bondholders retained the right to convert the bonds into our common stock at $.34 per share. The outstanding remaining balances are $1,179,000 on the 8% debentures and $330,000 on the 8.25% debentures. The remaining principal balance of $541,000, due to debenture holders who did not accept the extension offer, was repaid in cash, principally from an advance of $400,000 made to PFI by ICC. Current assets at June 28, 2003 include $9,783,000 of accounts receivable, of which $1,362,000 represents accounts receivable from Konsyl sales as compared to $9,334,000 at December 28, 2002. The remaining accounts receivable decrease of $913,000 is a result of the lower gross sales due to seasonal factors. Working capital also includes $14,646,000 of inventory, of which $2,016,000 represents Konsyl inventory, as compared to $13,131,000 at December 28, 2002. The remaining inventory decrease of $501,000 also reflects seasonal factors. Current liabilities include $12,418,000 due ICC at June 28, 2003, compared to $8,812,000 at December 28, 2002. The increase primarily relates to advances to fund the Konsyl acquisition, offset by credit for the tax benefit of $630,000. Current liabilities also include $9,301,000 of accounts payable and accrued expenses (of which Konsyl is $977,000) as compared to $9,477,000 at December 28, 2002. The remaining decrease reflects our efforts to re-establish vendor relationships and a shift to increased purchases of materials from ICC. There were no significant backorders of purchases at June 28, 2003. We intend to spend up to an estimated $1,500,000 for capital improvements during the fiscal year ending January 3, 2004, of which we have spent $962,000 through June 28, 2003, to increase manufacturing capacity and reduce costs. We anticipate that these capital expenditures will be funded through equipment lease financing and working capital. While we have in the past had no difficulty in obtaining such financing, there can be no assurance that we will obtain the financing in the future. We believe that cash flow from operations, our revolving credit facility and equipment and term loan financing, plus continued financial support from ICC, will be sufficient to fund our currently anticipated working capital, capital spending and debt service through calendar 2003. We have reached agreement with The CIT Group/Business Credit, Inc. to extend our existing revolving credit facilities to December 31, 2006 and the credit line with CIT was increased from $15 million to $20 million, including a term loan of $2 million to be repaid over forty months with interest at prime plus 0.75%. While no assurance can be given that cash flow will be sufficient to fund operations, ICC has committed to provide us with the necessary financing to continue our operations through December 31, 2004. ICC has supported us in the past by providing loans, replacing loans from our asset-based lenders and providing us with working capital. |
| ITEM 3 |
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK PFI would be adversely affected by an increase in interest rates. Each 1% change in the prime rate will change the Company’s annual expenditure by approximately $450,000. |
| ITEM 4 |
CONTROLS AND PROCEDURES The Company maintains a system of internal controls and procedures designed to provide reasonable assurance that information required to be disclosed in its filings under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. The Company’s principal executive and financial officers have evaluated the disclosure controls and procedures within 90 days prior to the filing of this Quarterly Report on Form 10-Q and have determined that such disclosure controls and procedures are effective. There have been no significant changes in the Company’s internal controls or in other factors, which could significantly affect internal controls subsequent to the completion of the evaluation. |
PART II. OTHER INFORMATION
| ITEM 1 |
LEGAL PROCEEDINGS See Note 3 to Notes to Consolidated Financial Statements. |
| ITEM 2 |
CHANGES IN SECURITIES AND USE OF PROCEEDS None. |
| ITEM 3 |
DEFAULTS UPON SENIOR SECURITIES None. |
| ITEM 4 |
SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS At the Company’s annual meeting held on June 18, 2003, the following are the results of issues presented for shareholder approval: 1. Election of Directors. |
For Withheld
---------- ------
Balram Advani 84,292,213 50,600
Frank X. Buhler 84,303,264 39,549
Ray W. Cheesman 84,291,194 51,619
James C. Ingram 84,304,119 38,694
Steve Jacoff 84,291,400 51,413
John L. Oram 84,304,104 38,709
| 2. Proposal to approve the appointment of BDO Seidman, LLP as independent auditors for the Company for the year ending January 3, 2004. |
| For 84,306,021 |
Against 14,166 |
Abstain 22,626 |
| ITEM 5 | OTHER INFORMATION When used in the Form 10-Q and in future filings by the Company with the Securities and Exchange Commission, in the Company’s press releases and in oral statements made with the approval of an authorized executive officer, the words or phrases “will likely result,” “are expected to,” “will continue,” “is anticipated”, “estimate,” “project,” “expect,” “believe,” “hope,” or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. The Company wishes to caution readers not to place undue reliance on such forward-looking statements, which speak only as of the date made. |
| ITEM 6 |
EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits |
| 10.1 | Employment Agreement between the Registrant and Michael Zeher, dated June 25, 2003 |
| 31 | Certifications of the Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| 32 | Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| (b) | Reports on Form 8-K - The Registrant filed the following report on Form 8-K during the second quarter of the fiscal year ending January 3, 2004: |
| Date of Report | Item Number (Summary) |
| April 15, 2003 | 9 (regarding acquisition of Konsyl Pharmaceuticals, Inc.) |
| May 13, 2003 | 9 (regarding Regulation FD disclosure of first quarter, 2003 results) |
| May 30, 2003 |
2 (regarding acquisition of Konsyl Pharmaceuticals,Inc.) 7 (regarding Financial Statements, Pro Forma Financial Information and Exhibits relating to the acquisition of Konsyl Pharmaceuticals, Inc.) 9 (regarding a Regulation FD disclosure of a press release announcing the acquisition of Konsyl and PFI had reached agreement with The CIT Group/Business Credit, Inc. to extend and increase its existing revolving credit facilities with CIT). |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
PHARMACEUTICAL FORMULATIONS, INC.
(REGISTRANT)
| Date: August 12, 2003 |
By: /s/James Ingram James Ingram Chairman and Chief Executive Officer (Principal Executive Officer) |
| Date: August 12, 2003 |
By: /s/Walter Kreil Walter Kreil Chief Financial Officer (Principal Accounting Officer) |
Exhibit Index
| 10.1 | Employment Agreement between the Registrant and Michael Zeher, dated June 25, 2003 |
| 31. | Certifications of the Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| 32. | Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |