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SECURITIES AND EXCHANGE COMMISSION
FORM 10-K
(Mark One)
[x] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 [Fee Required]
For the fiscal year ended June 30, 1995 or
Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 [No Fee Required]
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
(I.R.S. Employer
incorporation or organization)
Identification No.)
460 Plainfield Avenue, Edison, NJ
08818
(Address of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code:
(908) 985-7100
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 filing requirements for the past 90 days. Yes
No
Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K
(Section 229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
The aggregate market value of the voting
stock held by non-affiliates (based upon the average of the high
and low bid prices) on September 1, 1995 was approximately
$3,342,000.
As of September 1, 1995, there were
29,324,924 shares of Common Stock, par value $.08 per share,
outstanding.
Certain exhibits listed in Item 14 of Part IV
have been incorporated by reference.
PART I
Item 1. Business
Introduction
Pharmaceutical Formulations, Inc. (the
"Company" or "PFI"), a Delaware corporation, is primarily
engaged in the manufacture and distribution of over 100
nonprescription ("over-the-counter" or "OTC") solid dosage
pharmaceutical products in tablet, caplet and capsule form
(collectively, "Generic OTC Products"), which are sold under its
customers' store brands or other private labels. These
private-label products account for substantially all of the
Company's revenues. The Company also manufactures products
for national brand companies, although sales of such products do
not presently represent a material portion of the Company's
sales. To a limited extent, the Company also sells Generic OTC
Products under its own trade name, Health+Cross*, which sales
account for less than 1% of the Company's total revenues. The
Company believes that the therapeutic benefits of its Generic
OTC Products are comparable to those of equivalent national
brand name products because the chemical compositions of the
active ingredients of the brand name products on which the
Company's products are patterned are identical to those of the
Company's products. The Company is subject to regulation by the
US Food and Drug Administration ("FDA"). The Company also
engages in a research and development program which seeks to
develop and gain regulatory approval of products which are
anticipated to be converted from prescription to OTC drug
status. In addition, in the past the Company has undertaken
development efforts with respect to other products, but
currently does not market such products. The Company's largest
customers include Revco D.S. Inc. ("Revco") and Walgreen Company
("Walgreen").
Prior to June 30, 1995, the Company operated
through its then-wholly-owned subsidiary, Private Formulations,
Inc., an Ohio corporation. Such subsidiary was merged into PFI
on June 30, 1995.
ICC Option Agreement and Change of Control; Other
Relationships with ICC
In September 1991, the Company entered into
an option agreement with ICC Industries Inc. ("ICC") (as
subsequently amended, the "ICC Option Agreement"). ICC is a
major international manufacturer and marketer of chemical,
plastic and pharmaceutical products which had 1994 sales of
approximately $880 million. ICC and its subsidiaries have
offices in key business centers around the world and owns
numerous manufacturing plants. The ICC Option Agreement
provided for the grant of a series of three options
and related preemptive rights to acquire a total of
approximately 66% of the shares of the Company's Common
Stock outstanding after the exercise of all options owned by ICC
and certain other outstanding options, warrants, convertible
rights and other rights to acquire shares of the Company's
Common Stock. As of the date hereof, ICC had exercised all of
its options and certain related preemptive rights to purchase an
aggregate of 19,559,968 shares of Common Stock, representing
66.7% of the Company's outstanding Common Stock. See "Certain
Relationships and Related Transactions."
Products
Generic OTC Products
Currently, the Company markets more than 100
different types of Generic OTC Products (including different
dosage strengths of the same chemical composition). These
include analgesics (such as ibuprofen and acetaminophen),
antacids, cough-cold preparations, antihistamines and laxatives.
In each of the fiscal years ended June 30, 1995, 1994 and 1993,
sales of ibuprofen accounted for 46%, 46%, and 48%
respectively, of the Company's total revenues, and sales of
acetaminophen products accounted for 14%, 18%, and 18%
respectively, of the Company's total revenues. "Generic"
pharmaceutical products are drugs which are sold under chemical
names rather than brand names and possess chemical compositions
(and the Company believes, therapeutic benefits), equivalent to
the brand name drugs on which they are patterned. OTC drugs
are drugs which can be obtained without a physician's
prescription. Generic drug products are subject to the
same governmental standards for safety and efficacy
(effectiveness) as their brand name equivalents and are
typically sold at prices substantially below the brand name
drug. The Company manufactures Generic OTC Products which it
believes are chemically and therapeutically equivalent to such
brand name products as AnacinR, TylenolR, BufferinR, EcotrinR,
MotrinR, AdvilR, ExcedrinR, SominexR, MaaloxR, SudafedR,
ComtrexR, SinutabR, DristanR, DimetappR, DexatrimR, DramamineR,
ActifedR, BenadrylR, AllerestR, and MetamucilR, among others.
Soluble Aspirin
In 1983, the Company acquired the exclusive
manufacturing and marketing rights in the United States and
Canada to an oral stabilized soluble sodium aspirin ("Soluble
Aspirin") patent in powder form and in 1985, acquired the
worldwide rights thereto (with the exception of South America).
In 1987, the Company obtained a patent for the Soluble Aspirin
in tablet form. In addition, the Company owns certain foreign
Soluble Aspirin patents. The Company believes that Soluble
Aspirin is not a new drug product requiring the Company to file
a new drug application prior to sale, and the Company believes
that, under the FDA's over-the-counter review regulations, it
may market Soluble Aspirin at the present time without FDA
approval. The FDA has made no determination whether Soluble
Aspirin may be marketed without FDA approval, and the Company is
not currently engaged in any further development or marketing
activities with respect to this product.
Products in Development
In October 1993, the Company entered into an
agreement with Farmacon, Inc. ("Farmacon"), the owner of certain
proprietary information and technology relating to sucralfate
tablets used for the treatment of ulcers, pursuant to which
Farmacon and the Company agreed to develop sucralfate tablets.
The contract grants the Company certain exclusive manufacturing,
marketing and distribution rights with respect to such
product in both the ethical and OTC markets. The agreement
(which expires ten years after approval by the FDA of
distribution of the product subject to certain rights to extend
the agreement) provides that the cost of all clinical studies
and the cost of obtaining regulatory approval will be borne by
Farmacon, while the costs of raw materials and components used
to produce clinical batches and to produce the product after
regulatory approval will be borne by the Company. The Company
has agreed, however, to contribute up to $600,000 (of
which $400,000 was contributed in fiscal year 1995) to the
development and approval process based on certain benchmarks as
defined in the agreement. The parties further agreed that any
"product profit" (as defined in the agreement) will be
distributed 75% to Farmacon and 25% to the Company. Currently,
the parties anticipate the receipt of regulatory approval with
respect to the sale of such product in calendar 1996, but there
is no assurance that governmental approval of such product will
be granted at such time or at all.
Manufacturing
In order to manufacture Generic OTC Products,
the Company acquires raw materials from suppliers located in the
United States and abroad, including ICC, an affiliate of the
Company. During the fiscal year ended June 30, 1995, the
Company purchased from ICC $1,219,000 of raw materials.
To date, the Company has obtained the raw
materials it needs and expects that such raw materials will
continue to be readily available in the future. Raw materials
delivered to the Company are first placed in quarantine so that
samples of each lot can be assayed for purity and potency by a
team of trained chemists and technicians employed by the
Company. Incoming materials are tested to assure that they are
free of objectionable microorganisms and that they meet chemical
and physical testing requirements. Throughout the manufacturing
process, samples are taken by quality assurance inspectors for
quality control testing. The raw materials must meet standards
established by the United States Pharmacopoeia, the National
Formulary and the FDA, as well as by the Company and its
customers.
To produce capsules and tablets, the Company
utilizes specialized equipment which compresses tablets and
fills powder and granules into hard gelatin capsules. At this
stage, certain tablets are film or sugar coated to achieve an
aesthetically appealing tablet. The customer chooses whether
its order of Generic OTC Products will be delivered in bulk
containers or in packages. Typically, the Company assists its
customers in developing the size, design and graphics of the
folding carton, label and container for the products. The
package can be automatically placed into shipping containers of
the customer's selection.
Since January 1992, the Company has entered
into various subleases of equipment from companies affiliated
with ICC, for which the Company pays such affiliates fixed
monthly fees. Such leases have various terms, expiring at
different times between 1995 and 2000. Upon expiration of the
term of each lease, the Company is entitled to purchase the
equipment for a price of $1.00. ICC's affiliates purchased such
equipment for approximately $5,848,000. The Company is
currently negotiating with ICC with respect to additional
capital leases having an aggregate purchase value of $2,000,000.
The Company leased manufacturing equipment through ICC in the
past because it had been unable to lease such equipment directly
on acceptable terms. See "Certain Relationships and Related
Transactions."
In response to drug tampering problems
affecting the industry generally, the Company has
instituted certain tamper-evident features in its packaging
operation. A tamper-evident package is one which
readily reveals any violation of the packaging or possible
contamination of the product. These include a foil
inner-seal which is electronically sealed after the capping
operation and, for some customers, a neck band or outer safety
seal applied to the bottle and cap as an additional
tamper-evident feature. In addition, the Company manufactures a
banded capsule which contains a heat-sealed band in the center
to deter ease of opening and/or closing the capsule product.
Although the Company takes steps to make its products
tamper-resistant, it believes that no product is "tamper-proof."
There can be no assurance that the Company's products will not
be tampered with. Any such tampering, even if it occurs in the
retail outlets, may have a material adverse effect on the
Company. See "Insurance."
Customers
The Company's customers consist of
wholesalers, distributors, retailers, mass-marketers and
brand-name pharmaceutical companies. Sales to retail drug and
supermarket chains and mass merchandisers accounted for
approximately 82%, 66% and 62%, of the Company's sales for the
fiscal years ended June 30, 1995, 1994 and 1993, respectively.
Bulk sales to wholesalers and distributors accounted for
approximately 12%, 28%, and 33% of the Company's sales during
the fiscal years ended June 30, 1995, 1994 and 1993.
Sales to brand-name pharmaceutical companies accounted for
approximately 5%, 6% and 5% in fiscal years ended June 30, 1995,
1994 and 1993 respectively. All of these sales consisted of
products which the Company's customers sell under their own
store brand or other labels.
Sales to Revco, one of the Company's largest
customers, accounted for $14,536,000 (25%), $8,756,000 (16%) and
$9,171,000 (20%) of the Company's revenues for fiscal years
ended June 30, 1995, 1994 and 1993, respectively. Sales to
Walgreen were $8,373,000 (14%), $8,684,000 (16%) and $7,740,000
(17%) for fiscal 1995, 1994 and 1993, respectively. Sales to
ICC were $0, $9,267,000 (17%) and $9,082,000 (20%) for fiscal
years ended June 30, 1995, 1994, and 1993 respectively.
Marketing and Promotion
The Company markets its Generic OTC Products
to potential customers through sales calls, trade journals and
trade shows. A staff of 16 employees works in the
sales/customer service department, responsible for sales and
promotion of house accounts and servicing all accounts. The
Company also has approximately 30 independent brokers and sales
representatives which promote and distribute its products.
Research and Development
The Company maintains a staff of six
employees in its product development department, as
well as other support staff to assist its customers. The
Company's research and development activities are
primarily related to the determination of the formula and
specifications of the product desired by a customer,
as well as the potency, dosage, flavor, quality, efficacy,
color, hardness, form (i.e. tablet, caplet or capsule)
and its packaging. The Company's research and development
expenditures in fiscal years 1995, 1994 and 1993
were $1,488,000; $574,000; and $482,000 respectively.
New Jersey Environmental Cleanup Responsibility Act
In 1986, Revco commenced a soil and
groundwater cleanup of the Company's facility, under
the New Jersey Industrial Site Recovery Act ("ISRA") in
connection with Revco's sale of all of its shares of
stock in Private Formulations, Inc. to the Company. Prior to
completing the sale, Revco entered into an Administrative
Consent Order ("ACO") with the New Jersey Department of
Environmental Protection and Energy ("NJDEPE"). The ACO named
Revco as the primary party to evaluate and remediate
environmental contamination at the facility. Environmental
testing by Revco has revealed soil and groundwater
contamination, primarily by methylene chloride. Revco posted a
financial assurance bond in the amount of $1,000,000 to secure
its cleanup obligations under ISRA and the ACO. The terms of
the Revco sale to the Company in 1987 included an agreement in
which Revco agreed to assume all costs which were attributable
to environmental cleanups relating to conditions at the facility
existing as of the closing of the sale, necessary to comply with
ISRA and the ACO. In August 1989, the Company entered into an
ACO with the NJDEPE in connection with the Company's sale and
lease-back of the facility. The Company is a guarantor ordered
party under the 1989 ACO for completing necessary environmental
cleanup work being conducted by the primary responsible party,
Revco. In 1990, NJDEPE determined that the soil remediation was
complete. In September 1992, the 1989 ACO was amended to
include the exercise by ICC of options to purchase a majority
of the outstanding shares of the Company's Common Stock. The
Company was not required to post a financial assurance bond
under the 1989 ACO or the 1992 ACO amendment. In May 1993,
NJDEPE approved the Revco groundwater remediation plan, subject
to certain conditions, and the financial assurance bond has been
reduced from $1,000,000 to $306,000 as specified in the cleanup
plan. Although Revco has agreed to be primarily responsible for
the entire cost of the cleanup, the Company has guaranteed the
cleanup under the terms of the 1989 ACO and the 1992 ACO
amendment. In addition, the Company agreed to indemnify the
owner of the facility under the terms of the 1989 sale
lease-back. If Revco defaults in its obligations to pay
the cost of the clean-up, and such costs exceed the amount of
the bond posted by Revco, the Company may be required to make
payment therefor.
In July 1993, the Company received
notification that the NJDEPE has determined that all areas
of environmental concern arising from and after September 1991
have been satisfactorily addressed and require no further action
on behalf of the Company. NJDEPE issued a "No Further Action"
letter in September 1993. This letter, however, related only to
the period since September 1991 and specifically does not apply
to the matters being addressed by the ACOs with Revco and the
Company for periods prior to September 1991.
Governmental Regulation
All pharmaceutical manufacturers are subject
to extensive regulation by the Federal government, principally
by the FDA, and, to a lesser extent, by state governments. The
Federal Food, Drug and Cosmetic Act, the Controlled Substance
Act and other federal statutes and regulations govern or
influence the testing, manufacture, safety, labeling, storage,
recordkeeping, approval, pricing, advertising and promotion
of the Company's drug products. Noncompliance with applicable
requirements can result in fines, recall and seizure of
products, total or partial suspension of production, and refusal
of the government to enter into supply contracts or to approve
new drug applications. The Company believes that it is
currently in compliance with FDA regulations. However, in
anticipation of more stringent and extensive requirements by
FDA, the Company has undertaken a major renovation and upgrade
of its manufacturing plant. The Company believes that these
improvements, scheduled for completion in December 1995 at a
cost of approximately $3,000,000, will assure the Company's
satisfaction of both present and future FDA regulations and
guidelines as well as facilitate the Company's ability to
produce state-of-the-art products for its customers.
Generic equivalents of many OTC drugs
generally do not require FDA approval prior to sale
if a published monograph exists with respect to the particular
segment of applicable OTC drugs. The FDA has not made a final
determination regarding the new drug status of products under
OTC Drug Review and the Company will be required to conform to
the final regulations once they become effective. If the final
regulations require the Company to expend substantial sums to
maintain FDA compliance, the Company could be materially,
adversely affected. In the past, the Company's Generic OTC
Products (with the exception of ibuprofen) have not required
approval of new drug applications ("NDA's") or abbreviated new
drug applications ("ANDA's") by the FDA. Rather, the FDA
requires that such products be manufactured based
upon "current good manufacturing practices," and in compliance
with a published monograph. Generic OTC Products which were
previously categorized as prescription drugs, typically require
ANDA's by the FDA, such as the Company's ibuprofen product, or,
at times, may require NDA's. The FDA has approved ANDA's in
200 mg., 300 mg., 400 mg., 600 mg. and 800 mg. dosage strengths
for the Company's ibuprofen product (although, at present, the
Company sells its ibuprofen products in the 200 mg. strength
only). The Company has also obtained FDA approval of certain
different colors and shapes for its 200 mg. ibuprofen product.
An ANDA is similar to an NDA, except that, unlike an NDA (which
requires thorough preclinical and clinical studies to prove a
drug's safety and efficacy in addition to the bioavailability
and/or bioequivalence studies), complete clinical studies of
safety and efficacy are not required for approval of an ANDA.
The FDA may, however, require bioavailability and/or
bioequivalence studies with respect to the ANDA's utilized by
the Company. The term "bioavailability" indicates the rate of
absorption and levels of concentration of a drug in
the blood stream needed to produce a therapeutic effect.
"Bioequivalence" compares one drug product with
another and, when established, indicates that the rate and
extent of absorption and the levels of concentration
of a generic drug in the body are substantially equivalent to
those of a previously approved drug.
Until recently, drugs which were similar or
identical to a drug first marketed before 1962 and which were reviewed for
efficacy under the FDA's Drug Efficacy Study Implementation program
generally could be approved by submitting an ANDA. Under the Drug Price
Competition and Patent Term Restoration Act of 1984 (commonly known as the
"Waxman-Hatch" Act), an ANDA may be submitted for a drug on the
basis that it is the equivalent of an approved drug, regardless
of when such other drug was approved.
The Waxman-Hatch Act created new statutory
protections for approved brand name drugs. Under the Waxman-Hatch Act, an
ANDA for a generic drug may not be made effective until all relevant
product and use patents for the equivalent, brand name drug have
expired or have been determined to be invalid. Prior to enactment of the
Waxman-Hatch Act, the FDA gave no consideration to the patent status of
a previously approved drug. Additionally, the Waxman-Hatch Act
extends for up to five years the term of a product or use patent covering a
drug to compensate the patent holder for the reduction of the effective
market life of a patent due to federal regulatory review. With respect
to certain drugs not covered by patents, the Waxman-Hatch Act sets specified
time periods of two to ten years during which ANDA's for generic drugs
cannot become effective or, under certain circumstances, be filed if the
equivalent brand name drug was approved after December 31, 1981.
Federal and/or state legislation and regulations
concerning various aspects of the health care industry are under almost
constant review and the Company is unable to predict, at this time, the
likelihood of passage of additional legislation, nor can it predict the
extent to which it may be affected by legislative and regulatory
developments concerning its products and the health care field generally.
Patents and Trademarks
In October 1976, the United States Patent
Office granted Letters Patent for the Soluble Aspirin (in powder form),
which the Company obtained from the inventor in 1983. In 1987, the United
States Patent Office granted Letters Patent to the Company for Soluble
Aspirin in tablet form. The United States patent for Soluble Aspirin in
powder form expired on October 12, 1993 and the United States patent for
Soluble Aspirin in tablet form expires in the year 2002. In addition, the
Company owns several Soluble Aspirin patents in Canada and certain other
foreign countries.
There can be no assurance that any patents
which have been or may be granted will enable the Company to prevent
infringement or that competitors will not develop functionally similar
systems and devices outside the protection that may be afforded by these
patents. In addition, the technologies involved in the Company's products
are dynamic and evolving, with substantial emphasis being placed on research
and development. Accordingly, future developments in these technologies
could render the Company's products obsolete.
AllerfedR, Leg EaseR and Health+CrossR are federally
registered trademarks owned by the Company. To the extent that the
Company's packaging and labeling of its Generic OTC Products may be
considered similar to the brand name products to which they are
comparable, and to the extent that a court may determine that such
similarity may constitute confusion over the source of the product, the
Company may be subject to legal actions under state and Federal statutes and
case law to enjoin the use of the packaging and for damages.
Insurance
The Company may be subject to product liability claims by
persons damaged by the use of its products. The Company maintains product
liability insurance for its Generic OTC Products covering up to
$10,000,000 in liability. Although there have been no material
product liability claims made against the Company to date, there can be no
assurance that such coverage will adequately cover any claims which may
be made or that such insurance will not significantly increase
in cost or become unavailable in the future. The inability of the Company
to maintain necessary product liability insurance would significantly
restrict its ability to sell any products and could result in a cessation of
its business.
Competition
Competition in the pharmaceutical industry is
intense. The Company competes not only with numerous manufacturers of
generic OTC products, but also with brand name drug manufacturers, most of
which are well known to the public. In addition, the Company's products
compete with a wide range of products, including well-known name brand
products, almost all of which are manufactured or distributed by major
pharmaceutical companies. Many of the Company's competitors, including all
of the manufacturers and distributors of brand name drugs, have
greater financial and other resources than the Company, and are
therefore able to expend more effort than the Company in areas
such as product development and marketing. The crucial competitive factors
are product quality, reliable delivery, customer service, merchandising
support and price. Although the Company believes that its present equipment
and facilities render its operations competitive as to price and quality,
many competitors may have far greater management expertise and physical
operations (in addition to financial resources) than those of the Company,
which may enable them to perform high quality services at lower prices than
the services performed by the Company. Additionally, some of the
Company's customers may acquire the same equipment and technology used by
the Company and perform for themselves the services which the Company now
performs for them.
Employees
As of September 1, 1995, the Company employed 335
full-time employees. Of such, 229 of its employees are engaged in
manufacturing activities and are covered by a collective bargaining
agreement between the Company and Local 522 Affiliated with the
International Brotherhood of Teamsters of New Jersey ("Local 522"), which
expires on October 24, 1995. Additionally, five of the Company's employees
are represented by Local 68 of the International Union of Operating
Engineers, affiliated with the AFL-CIO. As of September 1, 1995, the
Company had 16 persons employed in sales, 34 administrative and
operational employees, 48 laboratory technicians and scientists,
and three executive management personnel. The Company believes that its
relations with its employees are satisfactory.
Item 2. Properties
The Company leases approximately 214,000
square feet of office, manufacturing and warehousing space in
Edison, New Jersey, under a lease which expires in 2004. The
Company has two five-year renewal options. Under the terms of
the lease, the Company paid $107,000 per month base rent until
February 1992 and $120,000 per month until August 1994. The
monthly rental increased in September 1994 to $130,000 per month
and will increase on each 30th month thereafter by a cost of
living increase. The rental during each of the renewal options,
if any, will be the higher of the "fair rental value" (as that
term is defined in the lease) of the premises at the
commencement of each renewal option or the rent in effect at the
end of the lease. In addition, the Company is obligated to pay
all utilities, real estate taxes, assessments, repairs,
improvements, maintenance costs and expenses in connection with
the premises, comply with certain ISRA obligations and maintain
certain minimum insurance protection.
In March 1995, the Company entered into a
ten-year lease for a 91,200 square feet building located
adjacent to its present manufacturing facility. The Company has
two five-year renewal options. Rent payments are $26,600 per
month for the first five years and $28,500 per month for the
balance of the initial ten-year term. In addition, the Company
is obligated to pay all utilities, real estate taxes,
assessments, repairs, improvements, maintenance costs and
expenses in connection with the premises, comply with certain
ISRA obligations and maintain certain minimum insurance
protection.
The Company believes that both of these
facilities provide the potential for increased expansion
of manufacturing capacity, if necessary.
Item 3. Legal Proceedings
In or about October 1991, an action was
instituted in the Superior Court of New Jersey, County
of Middlesex, against the Company by an individual, Marvin
Rosenblum, seeking monies claimed to be due under an alleged
employment agreement. The Company believes that the amount
sought, $3,500,000, has been frivolously asserted to harass the
Company and that the allegations are completely baseless. The
Company has interposed counterclaims against plaintiff for fraud
and related claims and seeks damages in the amount of
$5,000,000. As a result of plaintiff's poor physical condition,
in April 1994, he moved to transfer the matter to the "inactive"
trial list which motion has been granted. Accordingly, no
further action will be taken by either party with respect to the
matter unless and until plaintiff seeks to restore the matter to
the active trial calendar.
In or about November 1992, an action was
instituted against the Company in the Supreme Court of New York,
County of New York, by Univest Technologies, alleging that the
Company breached its agreement by refusing to furnish Soluble
Aspirin to such entity. Plaintiff seeks "consequential damages"
of $1,500,000. The Company denies that any such agreement
existed and vigorously denies that any monies are
owed to plaintiff. The Company moved to dismiss the complaint,
which motion was granted with leave to replead. Plaintiff
served an amended complaint thereafter and the Company again
moved to dismiss the complaint. The Company is awaiting a
decision from the court with respect to the Company's second
motion. If the complaint is not dismissed, the Company intends
to assert counterclaims against plaintiff for amounts
in excess of the amount sought, on the basis of, among other
things, plaintiff's fraud and misrepresentation.
In or about July 1994, Puritan Quartz, Inc.
("Puritan") brought suit against the Company in the
U.S. District Court for the Southern District of New York,
alleging breach of (i) the Company's purported contractual
obligations to supply Puritan with acetaminophen and ibuprofen
for resale to an unrelated party and (ii) related
confidentiality obligations. The complaint seeks damages in the
aggregate amount of $3,600,000 plus $300,000 for each additional
month of continuing breach. The Company denies any liability to
Puritan. The Company believes that the clear meaning of the
language of the agreement between the parties was that
the agreement had a one-year term ending on October 26, 1993,
prior to the events of the alleged breach, and that such
agreement was never extended. Accordingly, in the Company's
view, it had no obligation whatsoever to Puritan at the time of
the alleged breach. The Company further believes that Puritan's
claims as to the aggregate amount of its alleged lost profits
are overstated. The Company has answered the complaint and
served preliminary discovery demands upon Puritan.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for the Registrant's Common Stock and Related
Security Holder Matters
The Company's Common Stock is registered
under Section 12(g) of the Securities Exchange
Act of 1934 and is traded on the over-the-counter market (Pink
Sheets symbol: PHFR). Trading to date has been limited and there
can be no assurance that an active trading market will ever
develop for the Common Stock. As of August 31, 1995, there were
1,610 holders of record of the Company's Common Stock. The
following table sets forth the range of high and low closing bid
quotations for the Common Stock as reported by National
Quotation Bureau. These quotations represent prices between
dealers, without adjustments for retail mark-ups, mark-downs or
other fees or commissions, and may not represent actual
transactions.
High Bid Low Bid
Fiscal Year Ended June 30, 1994
First Quarter. . . . . . . . . . . . . . . $ 1-3/8 $ 1/4
Second Quarter . . . . . . . . . . . . . . 1-3/4 7/8
Third Quarter. . . . . . . . . . . . . . . 1-9/16 3/4
Fourth Quarter . . . . . . . . . . . . . . 1-3/16 1/2
Fiscal Year Ended June 30, 1995
First Quarter. . . . . . . . . . . . . . . $ 1-1/8 $ 1/2
Second Quarter . . . . . . . . . . . . . . 1-3/32 15/32
Third Quarter. . . . . . . . . . . . . . . 1-1/32 3/8
Fourth Quarter . . . . . . . . . . . . . . 13/16 1/4
_____________
The high and low bid prices of the Common
Stock on September 1, 1995, as reported by the National
Quotation Bureau, were $5/8 and $1/8, respectively. On such
date, there were approximately 5,400 beneficial holders of the
Common Stock.
DIVIDEND POLICY
The Company has never paid any dividends on
its Common Stock. The Company anticipates that, for the
foreseeable future, earnings, if any, will be retained for use
in the business or for other corporate purposes, and it is not
anticipated that cash dividends will be paid. Further, the
Company's agreement with its institutional lender prohibits the
payment of dividends without the lender's consent.
Item 6. Selected Financial Data
CONSOLIDATED STATEMENTS OF OPERATIONS DATA
(in thousands, except per share amounts)
Years Ended June 30,
1995 1994 1993 1992 1991
Net sales $59,107 $55,330 $44,848 $30,383 $22,834
Profit (loss) from
continuing operations 2,046 2,211 1,706 (2,314) (5,669)
Net profit (loss) 2,046 2,211 1,706 (2,314) (5,760)
Profit (loss) from
continuing operations
per share of Common
Stock $.07 $.08 $.09 ($.45) ($3.25)
Net profit (loss) per share
of Common Stock:
Primary $.07 $.08 $.09 ($.45) ($3.30)
Fully diluted $.06 $.07 $.06
Weighted average common
and common equivalent
shares outstanding1 :
Primary 30,023 29,361 19,826 5,212 1,744
Fully diluted 32,520 32,350 26,522
CONSOLIDATED BALANCE SHEET DATA
(in thousands, except per share amounts)
June 30,
1995 1994 1993 1992 1991
Current assets $24,759 $21,076 $15,071 $ 9,110 $ 8,529
Current liabilities 12,587 10,811 7,223 7,138 11,008
Working capital (deficit) 12,172 10,265 7,848 1,972 (2,479)
Total assets 40,456 33,745 24,983 18,412 19,616
Long-term debt and
long-term capital
lease obligations 26,938 24,210 21,875 18,827 14,314
Stockholders' equity/(deficit) 454 (1,805) (4,696) (8,186) (6,391)
Net/(negative) tangible
book value per share $.02 ($.06) ($.19) ($.87) ($2.83)
1 See Note 2 of Notes to Consolidated Financial Statements as
to the calculation of weighted average common and common
equivalent shares outstanding.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Financial Condition at June 30, 1995
At June 30, 1995, the Company had working
capital of $12,172,000 compared to $10,265,000 at June 30, 1994.
The increase of $1,907,000 is primarily due to the net income of
$2,046,000 for the fiscal year ended June 30, 1995. The
increase includes increases in inventory of $3,656,000 and
accounts receivable of $599,000, offset by an increase in
accounts payable of $1,751,000 and a decrease in cash of
$557,000. The increases in inventory of $3,656,000 and accounts
payable of $1,751,000 are results of an increase in the
Company's store brand sales, which require a larger inventory
than the bulk manufacturing or contract manufacturing business.
The increase in accounts receivable of $599,000 is a result of
increased sales.
Capital expenditures were $3,459,000 for the
fiscal year ended June 30, 1995. The capital expenditures have
increased the Company's operating capacity and increased
efficiencies (lower unit costs). The Company expects to
complete a major plant renovation during the first six months of
the fiscal year ending June 30, 1996. The cost of this upgrade
is approximately $3,000,000 which will be financed primarily
through long-term capital leases with ICC. The Company believes
that other significant capital expenditures, if any, will be
financed through capital leases with ICC or other parties,
although there can be no assurances thereof.
Long-term debt and capital leases increased
by $2,728,000. The Company increased borrowing with its
institutional lender by $3,716,000 to partially finance the
increase in inventories and accounts receivable. During the
fiscal year ended June 30, 1995, the Company entered into
capital lease obligations with ICC for a total value of
$1,449,000. Payments of long-term debt and capital leases
totaled $2,115,000.
Stockholders' equity has increased by
$2,259,000 during fiscal 1995 from a capital deficit of
$1,805,000 to positive equity of $454,000. The increase was
primarily due to the net income generated for the fiscal year
ended June 30, 1995.
The Company has a $15,000,000 revolving line
of credit and equipment loan facility with an institutional
lender with interest at 1-3/4% above the prime lending rate.
The loan agreement expires February 2, 1999. The Company has
$1,711,000 available under this agreement, subject to the
lending formulas contained in the agreement. The Company has
completed negotiations on a $3,000,000 capital equipment line of
credit with this institutional lender.
The Company believes that its working capital
needs will be satisfied by funds generated from operations at
least through June 30, 1996. Significant capital expenditures,
however, will require additional financing through capital
leases or other sources. While the Company has, in the past,
had no difficulty obtaining capital leases, there can be no
assurance that the Company will obtain the additional financing
necessary for other significant capital expenditures.
Results of Operations for Fiscal 1995
Compared with Fiscal 1994
Revenues for the fiscal year ended June 30,
1995 were $59,107,000 compared to $55,330,000 in the prior
fiscal year. This increase of $3,777,000 or 7% resulted mainly
from increased sales of existing products to current customers
and new customers and, to a lesser extent, to sales of new
products (including cough and cold medications and allergy
products). Two customers, Revco and Walgreen, accounted for
approximately 39% of the Company's sales for the fiscal year
ended June 30, 1995. Sales to these two customers were
$22,909,000 (39%) in the fiscal year ended June 30, 1995
compared to $17,440,000 (32%) in the prior fiscal year. The
increase in sales for these two customers as well as increases
to other private label (store brand) customers was offset
somewhat by a decrease in sales in the Company's bulk
manufacturing and contract manufacturing business.
Cost of goods sold was $46,274,000 or 78% of
sales for the fiscal year ended June 30, 1995 compared to
$42,957,000 or 78% of sales in the prior fiscal year. The
Company continues to achieve manufacturing cost efficiencies
through cost containment. The decreases in the bulk and
contract manufacturing business, which traditionally has higher
margins, was partially offset by cost efficiencies resulting
primarily from higher sales in the store brand business, which
has lower margins than the other segments of the business. If
this trend continues, it will have a negative effect on future
profits.
Selling, general and administrative costs
were $6,369,000 for the fiscal year ended June 30, 1995 compared
to $5,495,000 in the prior fiscal year. The increase of
$874,000 is mainly due to increased marketing costs as a result
of on-going efforts to expand the customer and product base for
future sales growth. In addition, administrative costs have
increased (salaries, legal fees, etc.) to support the increased
sales volume.
Research and development costs were
$1,488,000 in the fiscal year ended June 30, 1995 compared to
$574,000 in the prior fiscal year. The increase of $914,000 is
due to the Company's continued commitment to research and
development to provide for new products to fund the Company's
future growth. The Company expects to continue research and
development expenditures at a higher level than 1994 to develop
new products.
Interest expense totaled $3,512,000 for the
fiscal year ended June 30, 1995 compared to $3,298,000 in the
prior fiscal year. The increase of $214,000 results from
increased borrowing on the Company's revolving line of credit to
finance growth in accounts receivable and inventory.
Net income was $2,046,000 for the fiscal year
ended June 30, 1995 compared to $2,211,000 in the prior fiscal
year. The fiscal year ended June 30, 1995 includes a reduction
in the deferred tax asset valuation allowance of $1,000,000
compared to $197,000 in the prior year. This is a result of a
change in estimate for deferred income taxes due to continued
operating profit.
Results of Operations for Fiscal 1994 Compared with Fiscal
1993
Revenues for the year ended June 30, 1994
were $55,330,000 compared to $44,848,000 in the prior fiscal
year. This increase of $10,482,000 or 23% resulted mainly from
increased sales of existing products to current customers and
new customers and, to a lesser extent, to sales of new products
(including cough and cold medications and allergy products).
The Company also manufactures products for other pharmaceutical
companies, although sales of such products do not presently
represent a material portion of the Company's sales. Three
customers accounted for approximately one half of the Company's
sales for the year ended June 30, 1994. These three customers
are Revco, Walgreen and ICC. Sales to these three customers
were $26,707,000 (48%) of total sales in the year ended June 30,
1994 compared to $25,993,000 (58%) in the prior fiscal year.
Cost of sales as a percentage of sales was
78% for the year ended June 30, 1994 compared to 81% in the
prior fiscal year. The 3% improvement is the result of
increased sales, manufacturing cost efficiencies (lower unit
manufacturing costs) and continued overall cost reductions and
containment.
Selling, general and administrative expenses
were $5,495,000 for the year ended June 30, 1994 compared to
$4,333,000 in the prior fiscal year. The increase of $1,162,000
is mainly due to increased marketing costs as a result of
increased sales volume. The increases are mainly the results of
increases in commissions and promotional expenses to expand the
Company's customer and product base. Research and development
costs were $574,000 in the fiscal year ended June 30, 1994
compared to $482,000 in the prior fiscal year. The increase is
a result of the Company's continuing commitment to research and
development to expand its product base.
Interest and other expenses totaled
$3,213,000 for the year ended June 30, 1994 compared to
$2,174,000 in the prior fiscal year. The increase is mainly due
to the increased borrowing on the Company's working capital line
of credit in order to finance inventory and receivables growth
and payments on capital leases for new equipment added to the
Company's manufacturing facility.
Net income for the year ended June 30, 1994
was $2,211,000 compared to $1,706,000 in the prior fiscal year.
The current fiscal period includes a tax provision of $880,000.
No such provision was recorded in the prior fiscal year due to
the availability of losses from the fiscal year ended June 30,
1991 to offset the tax provision. In the fiscal year ended June
30, 1994, a change in the estimate of deferred income taxes was
reflected due to the continued increase in operating profits.
Effects of Inflation
The Company does not believe that inflation
had a material effect on its operations for the fiscal years
ended June 30, 1995, 1994 or 1993, respectively.
Item 8. Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS
AND
FINANCIAL STATEMENT SCHEDULE
Page
Financial Statements for the Three Years Ended
June 30, 1995
Report of Independent Certified Public Accountants F-1
Consolidated Balance Sheets - June 30, 1995 and 1994 F-2
Consolidated Income Statements for the Years
Ended June 30, 1995, 1994 and 1993 F-3
Consolidated Statements of Changes in Stockholders'
Equity (Deficiency) for the Years Ended June 30,
1995, 1994 and 1993 F-4
Consolidated Statements of Cash Flows for the Years
Ended June 30, 1995, 1994 and 1993 F-5
Notes to Consolidated Financial Statements F-7
Financial Statement Schedule
Report of Independent Certified Public Accountants on
Financial Statement Schedule S-1
Schedule II - Valuation and Qualifying Accounts S-2
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
Pharmaceutical Formulations, Inc.
We have audited the accompanying consolidated balance sheets
of Pharmaceutical Formulations, Inc. and subsidiaries as of June
30, 1995 and 1994, and the related consolidated statements of
income, changes in stockholders' equity (deficiency) and cash
flows for each of the three years in the period ended June 30,
1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly in all material respects, the
consolidated financial position of Pharmaceutical Formulations,
Inc. and subsidiaries as of June 30, 1995 and 1994 and the
results of their operations and their cash flows for each of the
three years in the period ended June 30, 1995 in conformity with
generally accepted accounting principles.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
Woodbridge, New Jersey
August 30, 1995
PHARMACEUTICAL FORMULATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
------- June 30, -------
ASSETS 1995 1994
CURRENT ASSETS:
Cash and cash equivalents $ 655,000 $1,212,000
Accounts receivable - net of allowance
for doubtful accounts of $333,000 and
$188,000 8,093,000 7,494,000
Inventories 14,915,000 11,259,000
Prepaid expenses and other current assets 696,000 711,000
Deferred tax asset 400,000 400,000
Total current assets 24,759,000 21,076,000
PROPERTY, PLANT AND EQUIPMENT - NET 14,346,000 12,282,000
OTHER ASSETS:
Deferred financing costs 130,000 155,000
Deferred tax asset 1,000,000 -
Other assets 221,000 232,000
$40,456,000 $33,745,000
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
Current portion of long-term debt $ 642,000 $ 507,000
Current portion of capital lease
obligations 1,529,000 1,441,000
Accounts payable 9,829,000 8,078,000
Accrued expenses 549,000 705,000
Income taxes payable 38,000 80,000
Total current liabilities 12,587,000 10,811,000
LONG-TERM DEBT, LESS CURRENT MATURITIES 18,207,000 15,276,000
LONG-TERM CAPITAL LEASE OBLIGATIONS, LESS CURRENT
MATURITIES 8,731,000 8,934,000
DEFERRED GAIN ON SALE/LEASEBACK 477,000 529,000
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY (DEFICIENCY):
Common stock - par value $.08 per share:
Authorized - 40,000,000 shares
Issued and outstanding - 29,311,816
and 28,870,395 shares 2,347,000 2,311,000
Capital in excess of par value 37,200,000 37,023,000
Accumulated deficit ( 39,093,000) ( 41,139,000)
Total stockholders' equity (deficiency) 454,000 ( 1,805,000)
$ 40,456,000 $ 33,745,000
See accompanying notes to consolidated financial statements.
PHARMACEUTICAL FORMULATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
----- Years Ended June 30, -----
1995 1994 1993
NET SALES $ 59,107,000 $55,330,000 $44,848,000
COST AND EXPENSES:
Cost of goods sold 46,274,000 42,957,000 36,356,000
Selling, general
and administrative 6,369,000 5,495,000 4,333,000
Research and development 1,488,000 574,000 482,000
54,131,000 49,026,000 41,171,000
Income from operations 4,976,000 6,304,000 3,677,000
OTHER EXPENSES (INCOME):
Interest expense 3,512,000 3,298,000 2,033,000
Other, net ( 65,000) ( 85,000) 141,000
3,447,000 3,213,000 2,174,000
Income before income
taxes (benefit) 1,529,000 3,091,000 1,503,000
Income taxes (benefit) ( 517,000) 880,000 ( 203,000)
Net income $ 2,046,000 $ 2,211,000 $ 1,706,000
NET INCOME PER SHARE:
Primary $.07 $.08 $.09
Fully diluted $.06 $.07 $.06
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING:
Primary 30,023,000 29,361,000 19,826,000
Fully diluted 32,520,000 32,350,000 26,522,000
See accompanying notes to consolidated financial statements.
PHARMACEUTICAL FORMULATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1995, 1994 AND 1993
Common Stock Capital in
Shares Amount at Excess of Accumulated
Issued Par Value Par Value Deficit
BALANCES, JUNE 30, 1992 9,711,493 $ 778,000 $36,092,000 ($45,056,000)
Shares issued to lender 1,500,000 120,000 ( 120,000) -
Shares issued in connection
with exercise of stock
options by ICC Industries 13,619,954 1,090,000 527,000 -
Shares issued in connection
with ICC agreement to key
Company employees 180,876 15,000 50,000 -
Shares issued in connection
with conversion of 8.25%
Debentures 29,033 2,000 38,000 -
Shares issued in connection
with Unit Purchase Options 151,305 12,000 50,000 -
Net income - - - 1,706,000
BALANCES, JUNE 30, 1993 25,192,661 2,017,000 36,637,000 (43,350,000)
Shares issued in connection
with exercise of stock
options and preemptive
rights by ICC Industries 3,246,789 260,000 264,000 -
Shares issued in connection
with ICC agreement to key
Company employees 31,965 2,000 29,000 -
Shares issued in connection
with Unit Purchase Options 296,835 24,000 98,000 -
Shares issued in connection
with conversion of 8.25%
Debentures 2,166 - 3,000 -
Shares issued to lender 100,000 8,000 ( 8,000) -
Other ( 21) - -
Net income - - - 2,211,000
BALANCES, JUNE 30, 1994 28,870,395 2,311,000 37,023,000 ( 41,139,000)
Shares issued in connection
with exercise by ICC of
preemptive rights 274,468 22,000 45,000 -
Shares issued to outside
directors 45,000 4,000 17,000 -
Shares issued in connection
with conversion of 8.25%
Debentures 121,727 10,000 115,000 -
Other 226 - -
Net income - - - 2,046,000
BALANCES, JUNE 30, 1995 29,311,816 $2,347,000 $ 37,200,000 ( $39,093,000)
See accompanying notes to consolidated financial statements.
PHARMACEUTICAL FORMULATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
----- Years Ended June 30, -----
1995 1994 1993
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income $ 2,046,000 $ 2,211,000 $1,706,000
Adjustments to reconcile net
income to net cash provided
by (used in) operating activities:
Depreciation and amortization 1,395,000 1,150,000 962,000
Amortization of bond discount
and deferred financing costs 71,000 295,000 187,000
Amortization of deferred
gain on sale of building ( 52,000) ( 52,000) ( 52,000)
Shares issued to key management - 31,000 65,000
Shares issued to outside
directors 21,000 - -
Deferred income tax benefit ( 1,000,000) ( 197,000) ( 203,000)
Changes in current assets and
liabilities:
Increase in accounts receivable ( 599,000) ( 2,737,000) (1,051,000)
Increase in inventories ( 3,656,000) ( 2,260,000) (4,427,000)
Increase (decrease) in other
current assets 15,000 ( 74,000) ( 135,000)
Increase in accounts payable,
accrued expenses and
income taxes payable 1,553,000 3,524,000 999,000
Total adjustments ( 2,252,000) ( 320,000) ( 3,655,000)
Net cash provided by (used in)
operating activities ( 206,000) 1,891,000 ( 1,949,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and
equipment, net ( 2,010,000) ( 979,000) ( 541,000)
(Increase) decrease in other assets 11,000 ( 231,000) 456,000
Net cash used in
investing activities ( 1,999,000) ( 1,210,000) ( 85,000)
See accompanying notes to consolidated financial statements.
PHARMACEUTICAL FORMULATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Concluded)
----- Years Ended June 30, -----
1995 1994 1993
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under the line of credit $ 3,716,000 $1,745,000 $3,339,000
Proceeds from issuance of
long-term debt - 183,000 93,000
Principal repayments of long -
term debt ( 551,000) ( 602,000) ( 582,000)
Principal repayments of
capital leases ( 1,564,000) ( 1,121,000) ( 588,000)
Increase in deferred financing costs ( 20,000) ( 35,000) ( 70,000)
Issuance of common stock, less
offering and registration
costs 67,000 122,000 62,000
Net cash provided by financing
activities 1,648,000 292,000 2,254,000
Net increase (decrease) in cash
and cash equivalents ( 557,000) 973,000 220,000
Cash and cash equivalents,
beginning of year 1,212,000 239,000 19,000
Cash and cash equivalents,
end of year $ 655,000 $1,212,000 $ 239,000
See accompanying notes to consolidated financial statements.
PHARMACEUTICAL FORMULATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF THE BUSINESS AND RELATED PARTIES
Pharmaceutical Formulations, Inc. (the "Company"), a Delaware
corporation, operating substantially through its division,
Private Formulations("PFI"), 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. To a limited
extent, the Company also sells such products under its own brand
name label, Health+Cross. The Company supplies bulk products to
secondary distributors and repackers as well as smaller
competitors who do not have sophisticated research and
development departments. The Company also engages in contract
manufacturing of selected branded products for well known major
pharmaceutical companies. The Company also is engaged in the
testing and research and development of new drug and health care
products.
In September 1991, the Company entered into an option agreement
with ICC Industries Inc., ("ICC") which, as amended at various
dates (the "Option Agreement"), provided for a series of three
options to acquire a total of 66.67% of the number of shares of
the Company's common stock outstanding after exercise of all
three options. The initial option agreement entitled ICC to
purchase approximately 6,000,000 shares at an exercise price of
$.25 per share. As a result of the issuance of additional
shares of the Company's common stock, the option agreement was
amended at various dates to entitle ICC to additional options to
purchase shares of the Company's common stock and to adjust the
exercise price. As a result of the issuance of 3,813,093
shares in payment of interest on the Company's outstanding
debentures in January 1992, ICC was entitled to purchase
7,626,186 shares at the quoted market price of $.06 per share.
As a result of the issuance of 1,500,000 shares to various
lenders in September 1992, ICC was entitled to purchase
3,000,000 shares at the market price of $.10 per share. In
addition to the above, there were other adjustments as defined
in the amendments which entitled ICC to an additional 1,282,200
shares. ICC has exercised all of its options pursuant to the
Option Agreement. The number of shares issued to
ICC through June 30, 1994 was 17,908,386 at option prices
ranging from $.1036 to $.1553 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 will be the lesser of $.25
($.50 in the case of certain key management shares) or the
exercise price or conversion price of the Outstanding Rights as
the case may be.
ICC exercised the following preemptive rights in 1995, 1994 and
1993 at a price of $.25 per share:
1995 1994 1993
Shares under preemptive rights 274,468 999,048 58,066
PHARMACEUTICAL FORMULATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF THE BUSINESS AND RELATED PARTIES - CONCLUDED
In addition, ICC exercised miscellaneous options in 1994 for
300,000 shares at $.25 per share and 20,000 shares at $.75 per
share.
ICC, a major international manufacturer and marketer of
chemical, plastic and pharmaceutical products, with calendar
year 1994 sales of approximately $880 million, has offices in
key business centers around the world and owns numerous
manufacturing plants. From September 1991 through June 30,1994,
ICC had assisted PFI in the purchase of its requirements for
ibuprofen as well as other raw materials and a fee was charged
for the purchase of ibuprofen. Beginning July 1, 1994, the
Company is no longer purchasing ibuprofen from ICC. In
addition, ICC has in the past, and continues to provide
equipment financing to the Company. ICC has also indicated its
intention to pursue joint venture arrangements or other forms of
business transactions between the Company and foreign
pharmaceutical companies seeking to market, distribute and sell
products in the United States.
In connection with the ICC Option Agreement, several key
employees were granted shares of the Company's common stock.
The Company issued 233, 31,965 and 180,876 shares of common
stock to these employees in 1995, 1994 and 1993, respectively.
On September 30, 1992, the key employees were issued
warrants to purchase 400,000 shares of the Company's common
stock at $.50 per share, exercisable for a period of six years
from the date of grant.
The following transactions with ICC, an unaffiliated company
prior to September 1991, are reflected in the consolidated
financial statements as of or for the years ended June 30, 1995,
1994 and 1993:
------- June 30, -------
1995 1994 1993
Sales to ICC $ - $ 9,267,000 $ 9,082,000
Inventory purchases $ 1,219,000 $ 14,300,000 $ 13,277,000
Services and finance fees $ 575,000 $ 906,000 $ 831,000
Accounts payable to ICC $ 118,000 $ 3,233,000 $ 696,000
Equipment lease obliga-
tions due ICC (Note 5 (g)) $ 3,497,000 $ 3,251,000 $ 1,544,000
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. All
references to the "Company" include its wholly-owned
subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
Cash Equivalents
Cash equivalents consists of short-term, highly liquid
investments which are readily convertible into cash at cost.
Inventories
Inventories are stated at the lower of cost or market with cost
determined on a first- in, first-out basis.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation
and amortization is provided on the straight-line method over
the estimated useful lives of the assets (five to fifteen
years).
Deferred Financing Costs
Deferred financing costs represent direct issuance costs
incurred in connection with the Company's borrowings. Such
costs are amortized over the life of the related debt (three to
fifteen years).
Revenue Recognition
Sales of products are generally recorded when products are
shipped to customers.
Earnings Per Share
Earnings per share are based on the weighted average number of
common and common equivalent shares outstanding during the year.
Common equivalent shares consist of the dilutive effect of
unissued shares under options, warrants and in the case of
fully-diluted earnings per share, convertible debentures,
computed using the treasury stock method (using the average
stock prices for primary basis and the higher of average or
period end stock prices for fully diluted basis).
At June 30, 1995, 1994 and 1993 the primary and fully diluted
common equivalent shares amounted to 2,110,000 and 5,320,000,
2,804,000 and 5,793,000, and 1,329,000 and 8,025,000,
respectively.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to
credit risk consist principally of trade receivables. The
Company extends credit to a substantial number of its customers
and performs ongoing credit evaluations of those customers'
financial condition while, generally, requiring no
collateral. Customers that have not been extended credit by the
Company are on a cash on delivery basis only. At June 30, 1995,
approximately 42% of the accounts receivable balance is
represented by three 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.
Reclassification
Certain amounts appearing in the 1994 and 1993 financial
statements have been reclassified to conform to the 1995
presentation. There was no effect on net income due to the
reclassification.
NOTE 3 - INVENTORIES
Inventories consist of the following:
------- June 30, -------
1995 1994
Raw materials $ 5,321,000 $ 4,216,000
Work in process 375,000 364,000
Finished goods 9,219,000 6,679,000
$ 14,915,000 $11,259,000
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
------- June 30, -------
1995 1994
Leasehold improvements $ 323,000 $ 99,000
Machinery and equipment 9,526,000 8,367,000
Construction in progress 1,133,000 479,000
Assets under capital lease -
Land and building (Note 5 (f)) 8,348,000 8,348,000
Machinery and equipment
(Note 5 (g)) 5,848,000 4,492,000
25,178,000 21,785,000
Less accumulated depreciation
and amortization 10,832,000 9,503,000
$ 14,346,000 $12,282,000
The net book value of property, plant and equipment under
capital leases was $10,001,000 and $9,649,000 at June 30, 1995
and 1994, respectively.
NOTE 5 - LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt and capital lease obligations consist of the
following:
--------------------- June 30, --------------------
1995 1994
Long-Term Capital Long-Term Capital
Debt Leases Debt Leases
Revolving/Term Loans (a) $ 13,289,000 $9,741,000
Convertible subordinated
debentures, $1,000 face
value (less unamortized
discount of $2,016,000
and $2,042,000 (b)) 3,198,000 3,172,000
Convertible subordinated
debentures, $325 face
value (c) 927,000 1,100,000
New Jersey Economic
Development Authority
Loan (d) 840,000 900,000
Secured note (e) 295,000 475,000
Building sale/leaseback (f) $ 6,763,000 $7,124,000
Capital equipment lease
obligations (g) 3,497,000 3,251,000
Other 300,000 395,000
18,849,000 10,260,000 15,783,000 10,375,000
Less current portion 642,000 1,529,000 507,000 1,441,000
$18,207,000 $ 8,731,000 $15,276,000 $8,934,000
(a)In October 1994, PFI modified its line of credit and
equipment term loan with its lending institution. The maximum
available funds under this modification are $15,000,000.
Advances under the revolving loans are limited to the sum of
eligible accounts receivable and up to $6,000,000 of
eligible inventory, as defined. The term loan is payable in 48
monthly installments of $34,000 commencing February 5, 1995,
with the then outstanding balance due on February 4, 1999. The
revolving loan is also due on that date. The term loan and the
revolving loan are secured by substantially all of the assets of
PFI and bear interest, payable monthly, at the prime rate (9% at
June 30, 1995) plus 1/%. In the event of default, the interest
rate will increase by 2%.
The loan agreement contains certain loan covenants which, among
other things, prohibit the Company from making dividend
payments, limit the Company's annual capital expenditures and
net loss, and require the Company to maintain minimum working
capital and net worth. The Company complied with all covenants
in fiscal year ended June 30, 1995.
(b) At June 30, 1995, the Company has 5,214 units outstanding
consisting of a $1,000 principal amount 8% convertible
subordinated debenture due June 15, 2002 (the "8% Debentures")
with interest payable semiannually. 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.
In 1993, 655 units of 8% Debentures were issued in connection
with the exercise of unit purchase options. Upon exercise, a
bond discount of $562,000 was recorded on the transaction.
In 1994, 1,285 units of 8% Debentures, representing the final
number of options, were issued in connection with the exercise
of unit purchase options. Upon exercise, a bond discount of
$1,102,000 was recorded on the transaction.
(c) On June 30, 1995, the Company had 1,811 units
outstanding consisting of $325 principal amount 8.25%
convertible debentures due June 15, 2002 (which includes
$589,000 face value and interest through maturity of $338,000).
Interest is payable annually on June 30. The holders of the
8.25% 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 8.25% Debentures.
In 1995, 1994 and 1993, 206, 5 and 67 units, respectively, of
8.25% Debentures were converted to common stock. A total of
152,926 shares were issued to the debenture holders.
(d) The loan, which is secured by certain equipment, bears
interest at 6-3/8% and is due as follows: $60,000 at June 1,
1996; $70,000 at June 1, 1997 and 1998; $80,000 at June 1, 1999,
2000 and 2001; and $400,000 at June 1, 2002. A provision in the
loan agreement allows the lender to declare the loan immediately
due and payable if there has been an event of default in any of
the Company's other debt agreements.
(e) The Company has a variable interest rate secured
convertible note which bears interest at prime plus 2-3/4%
payable quarterly. The principal amount of the note may be
converted into shares of the Company's common stock at a
conversion price of $.50 per share, less adjustments. The note
is subordinated to the loans described in Note 5 (a) and (d) and
is secured by all assets of PFI. The note is payable
$15,000 per month with interest due quarterly. The noteholders
have waived their rights to convert the note into shares of
common stock, except in the event of default.
(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
September 30, 1994, the monthly base rent increased
to $130,000. 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 13.25% interest rate
factor, and is being amortized over the term of the lease.
(g) The Company leases various equipment from ICC under
capital lease agreements. The terms of the leases vary from
three to five years with monthly rentals of approximately
$135,000.
The Company's debt and obligations under capital leases mature
in fiscal years ending June 30 as follows:
Capital Lease Long-Term
Obligations Debt
1996 $ 2,955,000 $ 642,000
1997 2,732,000 587,000
1998 2,193,000 472,000
1999 2,138,000 12,163,000
2000 1,735,000 80,000
Thereafter 6,336,000 4,905,000
Total payments 18,089,000 $18,849,000
Less amount
representing interest 7,829,000
Present value of net
minimum lease payments $10,260,000
NOTE 6 - COMMITMENTS AND CONTINGENCIES
Commitments:
The Company has employment contracts with three employees.
These contracts provide aggregate minimum annual compensation
for the years ending June 30 as follows: 1996 - $421,000; 1997 -
$336,000; 1998 - $125,000.
The Company expects to complete an upgrade to its present
manufacturing facility in the first six months of fiscal year
ending June 30, 1996 at a cost of approximately $3,000,000. Of
this amount, approximately $2,000,000 is expected to be financed
through capital leases with ICC.
The Company entered into a long-term lease for a building
adjacent to the Company's present facility. The lease term is
ten years with two five-year renewal options. The lease is
classified as an operating lease. The rent payments are
$319,200 per annum for the first five years and $342,000 per
annum for the balance of the initial term.
Contingencies:
In or about October 1991, an action was instituted in the
Superior Court of New Jersey, County of Middlesex, against the
Company by an individual seeking monies claimed to be due under
an alleged employment agreement.
The Company believes that the amount sought, $3,500,000, has
been frivolously asserted to harass the Company and that the
allegations are completely baseless. The Company has interposed
counterclaims against plaintiff for fraud and related claims and
seeks damages in the amount of $5,000,000. As a result of
plaintiff's poor physical condition, in April 1992, he moved to
transfer the matter to the "inactive" trial list which motion
has been granted. Accordingly, no further action will be taken
by either party with respect to the matter unless and until
plaintiff seeks to restore the matter to the active trial
calendar.
In or about November 1992, an action was instituted against the
Company in the Supreme Court of New York, County of New York, by
Univest Technologies, alleging that the Company breached its
agreement by refusing to furnish Soluble Aspirin to such entity.
Plaintiff seeks "consequential damages" of $1,500,000. The
Company denies that any such agreement existed and vigorously
denies that any monies are owed to plaintiff. The Company moved
to dismiss the complaint, which motion was granted with leave to
replead. Plaintiff served an amended complaint thereafter and
the Company again moved to dismiss the complaint. The Company
is awaiting a decision from the court with respect to the
Company's second motion.
If the complaint is not dismissed, the Company intends to assert
counterclaims against plaintiff for amounts in excess of the
amount sought, on the basis of, among other things, plaintiff's
fraud and misrepresentation.
In or about July 1994, Puritan Quartz, Inc. ("Puritan") brought
suit against the Company, in the U.S. District Court for the
Southern District of New York, alleging breach of (i) the
Company's purported contractual obligations to supply Puritan
with acetaminophen and ibuprofen for resale to an
unaffiliated party; and (ii) related confidentiality
obligations. The complaint seeks damages in the aggregate
amount of $3,600,000, plus $300,000 for each additional month of
continuing breach. The Company denies that it has any liability
to Puritan. The Company believes that the clear meaning
of the language of the agreement between the parties was that
the agreement had a one year term, ending October 26, 1993,
prior to the events of the alleged breach, and that such
agreement was never extended. Accordingly, in the Company's
view, it had no obligation whatsoever to Puritan at the
time of the alleged breach. The Company further believes that
Puritan's claims as to the aggregate amount of its alleged lost
profits are overstated. The Company has answered the complaint
and served preliminary discovery demands upon Puritan.
Under the New Jersey Environmental Clean-Up Responsibility Act
("ECRA"), the purchase of the Company's manufacturing facilities
from Revco in 1987, the sale/leaseback of the premises in 1989
(see Note 5 (f)), and the exercise by ICC of options to purchase
a controlling interest in the Company's common stock required
the approval of the NJDEP (see Note 1).
Although Revco has agreed to be primarily liable for the cost of
clean-up efforts and has posted a $1,000,000 bond with the State
of New Jersey to secure clean-up obligations (reduced to
$306,000 in July 1993), the Company remains contingently liable
for the clean-up costs and could be called upon for some or all
of the clean-up effort in the event Revco defaults on its
clean-up obligation.
Management believes the final outcome of the above proceedings
will not have a material adverse effect upon the Company's
financial position.
The Company is a party to various other legal proceedings
arising in the normal conduct of business. Management believes
that the final outcome of these proceedings will not have a
material adverse effect upon the Company's financial position.
NOTE 7 - INCOME TAXES
In June 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes",
retroactive to July 1, 1992. The adoption had no effect on
prior year financial statements. Accordingly, there was no
cumulative effect adjustment required in the year ended June 30,
1993.
Income taxes (benefit) consist of the following:
1995 1994 1993
Current:
Federal $ 483,000 $1,077,000 $ -
State - - -
Total Current 483,000 1,077,000 -
Deferred - Federal (1,000,000) ( 197,000) ( 203,000)
Total income taxes (benefit) ($ 517,000) $ 880,000 ($ 203,000)
The Company's income taxes (benefit) differ from the amount of
income tax determined by applying the applicable statutory U.S.
Federal income tax rate to pretax income as a result of the
following:
1995 1994 1993
Statutory U.S. tax $ 520,000 $1,051,000 $ 511,000
Increase (decrease) resulting
from:
Utilization of federal net
operating loss carryforwards ( 56,000) ( 56,000) ( 511,000)
State income taxes,
net of federal tax benefit 108,000 185,000 90,000
Utilization of state net
operating loss carryforwards ( 108,000) ( 185,000) ( 90,000)
Net change in valuation account (1,000,000) ( 197,000) ( 203,000)
Other 19,000 82,000 -
Effective income taxes (benefit) ($ 517,000) $ 880,000 $203,000)
The Company utilized tax loss carryforwards of approximately
$166,000 for U.S. regular tax purposes during each of the fiscal
years ended June 30, 1995 and 1994.
The Company utilized tax loss carryforwards of approximately
$1,466,000 for U.S. regular tax purposes and $1,295,000 for U.S.
alternative minimum tax purposes during the fiscal year ended
June 30, 1993.
The availability of the Company's federal net operating loss
carryforward from the fiscal year ended June 30, 1991 for income
tax purposes has been substantially eliminated as a result of
the issuance of stock during fiscal year ended June 30, 1991 and
the ICC Option Agreement discussed in Note 1. As of June 30,
1995, the Company had available net operating losses of
approximately $2,002,000 for U.S. regular tax purposes, which
expire through 2007. The utilization of such losses is limited
to approximately $166,000 per year for U.S. regular tax
purposes. State income tax net operating loss carryforwards of
approximately $13,545,000 which expire through 2001, are
available to the Company.
Deferred tax assets are comprised of the following temporary
differences at June 30,:
1995 1994
Tax benefit of state income tax net
operating loss carryforwards $ 813,000 $ 1,179,000
Tax benefit of federal income tax net
operating loss carryforwards 681,000 734,000
Depreciation 54,000 207,000
Deferred gain on sale/leaseback of building 162,000 180,000
Basis difference 8.25% bonds as a result
of restructuring 115,000 151,000
Capitalized inventory costs 136,000 102,000
Allowance for doubtful accounts 82,000 65,000
Gross deferred tax asset 2,043,000 2,618,000
Valuation allowance ( 643,000) ( 2,218,000)
Net deferred tax asset $ 1,400,000 $ 400,000
The decreases in the deferred tax asset valuation allowance in
1995, 1994 and 1993 resulted from changes in management's
estimates of the utilization of such temporary differences
caused primarily by the Company's improved operating results.
NOTE 8 - COMMON STOCK, OPTIONS AND WARRANTS
The Company has granted options to employees, directors and
others under various stock option plans, lending arrangements,
legal settlement agreements and under the ICC Option Agreement
to key employees.
The following is a summary of stock options and warrants issued,
exercised, forfeited or cancelled for the period July 1, 1992
through June 30, 1995 (not including ICC preemptive rights or
additional shares issuable to management in connection with ICC
preemptive rights):
Shares Exercise price per share
Outstanding - June 30, 1992: 371,143 $ .50 to $124.00
Issued 710,000 $ .25 to $ .75
Forfeited ( 9,444) $ 8.00 to $ 80.00
Outstanding - June 30, 1993: 1,071,699 $ .25 to $124.00
Forfeited ( 35,895) $ 6.80 to $124.00
Outstanding - June 30, 1994 1,035,804 $ .25 to $ 43.00
Issued 888,375 $ .85 to $ .91
Forfeited (103,404) $ .85 to $ 43.04
Outstanding - June 30, 1995 1,820,775 $ .25 to $ .91
As of June 30, 1995, substantially all outstanding stock options
and warrants were exercisable and expire at various dates
through fiscal 2001. These options were granted at prices which
were at or above quoted market value on the dates granted.
NOTE 9 - MAJOR CUSTOMERS AND PRODUCTS
For the years ended June 30, 1995, 1994 and 1993, 25%, 16% and
20%, respectively, of consolidated net sales were derived from
Revco D.S. Inc. For the years ended June 30, 1995, 1994 and
1993, Walgreen Company accounted for 14%, 16% and 17% of
consolidated net sales, respectively. In addition, sales to
ICC accounted for 17% and 20% of consolidated net sales for the
years ended June 30, 1994 and 1993, respectively.
For the years ended June 30, 1995, 1994 and 1993, sales of
ibuprofen represented 46%, 46% and 48% of consolidated net
sales. For the years ended June 30, 1995, 1994 and 1993, sales
of acetaminophen products accounted for approximately 14%, 18%
and 18% of consolidated net sales.
NOTE 10 - SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental disclosures of cash flow information:
-------- Years Ended June 30, --------
1995 1994 1993
Cash paid during the year:
Interest $ 3,441,000 $ 3,455,000 $ 2,852,000
Income taxes 525,000 968,000 35,000
Supplemental non-cash investing and financing activities:
-------- Years Ended June 30, --------
1995 1994 1993
Issuance of common stock
upon conversion of
debentures: $ 125,000 $ 3,000 $ 40,000
In 1994, the Company repaid $524,000 of accounts payable to ICC
through the issuance of 3,246,789 shares of common stock in
connection with the ICC Option Agreement (see Note 1).
In 1993, the Company repaid $1,417,000 of accounts payable due
to ICC and $200,000 of notes payable due to lenders through the
issuance of 13,619,954 shares of common stock in connection with
the ICC Option Agreement (see Note 1).
Capital lease obligations of $1,449,000, $2,511,000 and
$1,463,000 were incurred when the Company entered into various
leases for equipment with ICC in 1995, 1994 and 1993,
respectively.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
The audits referred to in our report dated August 30, 1995
relating to the consolidated financial statements of
Pharmaceutical Formulations, Inc. and subsidiaries
which is contained in Item 8 of this Form 10K included the
audits of the financial statement schedule listed in the
accompanying index. This financial statement schedule is the
responsibility of the Company's management. Our responsibility
is to express an opinion on this financial statement schedule
based upon our audits.
In our opinion, such financial statement schedule presents
fairly, in all material respects, the information set forth
therein.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
Woodbridge, New Jersey
August 30, 1995
VALUATION AND QUALIFYING ACCOUNTS
SCHEDULE II
DESCRIPTION BALANCE AT ADDITIONS CHARGES TO DEDUCTIONS BALANCE AT
BEGINNING CHARGED TO OTHER WRITE-OFFS END OF
ALLOWANCE FOR OF PERIOD COSTS & ACCOUNTS UNCOLLECTABLE PERIOD
DOUBTFUL ACCOUNTS ACCOUNTS
YEAR ENDED JUNE 30, 1995
$ 188,000 $ 145,000 $ $ $ 333,000
----------- ----------- ----------- ----------- -----------
YEAR ENDED JUNE 30, 1994
$ 140,000 $ 272,000 $ $ 224,000 $ 188,000
----------- ----------- ----------- ----------- -----------
YEAR ENDED JUNE 30, 1993
$ 250,000 $ 132,000 $ $ 242,000 $ 140,000
----------- ----------- ----------- ----------- -----------
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 executive officers and directors of
the Company as of September 20, 1995 are set forth below:
Name Position
Dr. Max A. Tesler President, Chief Executive Officer and Director
Anthony Cantaffa Vice President, Mergers & Acquisitions
Sandra J. Brown Secretary
John L. Oram Director
Ray W. Cheesman Director
Ben A. Blackshire Director
Michael P. Callahan Director
Directors serve for one-year terms. At
the 1993 annual meeting held in January 1994, the stockholders
voted to eliminate what had been three classes of directorships
with staggered three-year terms. All directors will serve until
the 1995 annual meeting of stockholders.
ICC has advised the Company that it plans
to nominate members to the Company's Board of Directors from
time to time, in accordance with the laws of the State of
Delaware and the by-laws of the Company.
In August 1993, the Company formed Audit,
Compensation and Stock Option Committees of the Board of
Directors. The members of the Audit Committee and the Stock
Option Committee are Messrs. Cheesman, Blackshire and Callahan.
The members of the Compensation Committee are Messrs. Oram,
Cheesman, Blackshire, and Callahan.
Business Experience of the Company's
Directors and Executive Officers
DR. MAX TESLER, age 64, has been Chairman of
the Company's Board of Directors since its formation in June
1981 and Chief Executive Officer since July 1, 1983. Dr. Tesler
has been President of the Company from 1983 until August 1990,
and from April 1991 to the present. From 1962 to 1982, and from
1991 to the present, Dr. Tesler has been an attending physician
in charge of gastroenterology at St. Clare's Hospital in New
York City and an Assistant in Medicine at New York University
Hospital. Dr. Tesler was a director of MTG Capital Corp., a
publicly-held company, from November 1988 until or about
December 1991. Dr. Tesler received a degree from New York
University in 1951, and his Doctor of Medicine degree from New
York University-Bellevue Medical School in 1955. Although Dr.
Tesler still maintains a very limited private practice of
medicine, to which he devotes approximately eight hours per
week, he devotes substantially all of his business time to the
Company's affairs.
BEN BLACKSHIRE, age 58, has been a director
of the Company since December 1989. Since 1987, Mr. Blackshire
has been President and Chief Executive Officer of Strategem,
Inc., a company which licenses pharmaceutical products to United
States companies from international pharmaceutical companies.
From 1983 to 1987, Mr. Blackshire was Chairman and Chief
Executive Officer of B.C. Christopher & Co., of Kansas City,
Missouri, a securities and commodities broker-dealer.
MICHAEL P. CALLAHAN, age 47, has been a
director of the Company since July 1993. Since December 1994,
Mr. Callahan has been Chief Financial and Operating Officer and
a member of the Executive Committee of the Board of Directors of
Intersport Limited, a company engaged in the design, marketing
and distribution of athletic equipment. From March 1989 until
January 1994, Mr. Callahan was employed as Chief Financial
Officer and a director of Candie's, Inc. ("Candie's"), a
publicly traded company engaged in the design, marketing and
distribution of footwear. From February 1992 through February
1993, Mr. Callahan was also President of Candie's. From
February 1987 through March 1989, Mr. Callahan was Vice
President - Finance of Coherent Communications, a company
engaged in the manufacture of telecommunications equipment. Mr.
Callahan is a licensed Certified Public Accountant.
RAY W. CHEESMAN, age 64, has been a director
of the Company since July 1993, and has been a consultant to
KPMG Peat Marwick, an international accounting firm since 1987.
Prior thereto, Mr. Cheesman was a partner in such firm. Mr.
Cheesman is a licensed Certified Public Accountant.
JOHN L. ORAM, age 51, has been a director of
the Company since July 1993. 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
(Frutarom) Ltd., an Israeli subsidiary of ICC listed on the
Tel-Aviv and American Stock Exchanges, engaged in the
manufacture and distribution of chemical products.
Executive Officers Not Acting As Directors
ANTHONY CANTAFFA, age 53, has been the
Company's Vice President, Mergers & Acquisitions, since August
1995. He was also Chief Financial Officer and Treasurer from
December 1988 until August 1990 and from April 1991 to August
1995. Mr. Cantaffa was also the Company's Chief Operating
Officer from 1988 until May 1995. Mr. Cantaffa was also
employed as the Company's Vice President-Finance and Controller
from 1987 to August 1995. Mr. Cantaffa graduated from Fairleigh
Dickinson University in 1969 with a B.S. Degree in accounting
and obtained a Masters Degree in finance from that institution
in 1971.
SANDRA J. BROWN, age 50, has been Secretary
of the Company since its formation in June 1981 and was a
director of the Company from 1981 until 1988. Ms. Brown was
Treasurer of the Company from June 1981 to August 1983. Ms.
Brown received an Associate Degree in science from Dean College
in 1965.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act
of 1934 requires the Company's officers and directors and
persons who own more than ten percent of a registered class of
the Company's equity securities to file reports of ownership and
changes in ownership with the Securities and Exchange
Commission ("SEC") and any exchange on which the Company's
securities may be traded. Officers, directors and greater than
ten percent shareholders are required by SEC regulation to
furnish the Company with copies of all Section 16(a) forms they
file.
Based solely on its review of the copies of
such forms received by it or written representations from
certain reporting persons that no Forms 5 were required for
those persons, the Company believes that all such filing
requirements for the year ended June 30, 1995 were complied
with except as follows: one form each was filed late by Dr.
Tesler, Mr. Cantaffa and Ms. Brown with respect to the options
granted in August 1994; one form was filed late by Dr. Tesler
with respect to shares received in June 1995; one form each was
filed late by Messrs. Blackshire, Callahan and Cheesman with
respect to the options and stock bonuses which they received in
December 1994; and three forms were filed late by ICC with
respect to grants and exercises of preemptive rights in August
and September 1994 and May 1995.
Item 11. Executive Compensation
Compensation of Directors
Members of the Board of Directors who are not
employees of the Company or representatives of the Company's
majority stockholder are compensated at the rate of $2,500 per
year, plus $500 for each meeting attended. Members are also
paid for special projects undertaken on behalf of the Company
and for actual expenses incurred in connection with their
attendance at Board meetings. In fiscal 1995, the three
directors who were not officers of the Company or ICC also
received stock grants of 15,000 shares as additional
compensation for services performed as a director
(valued at $.375 per share) and options to purchase 75,000
shares of Common Stock at $.91 per share, 50,000 of which were
immediately exercisable and 25,000 of which become exercisable
on December 16, 1995).
Summary Compensation Table
The following table sets forth the
compensation by the Company for the most recent three fiscal
years as well as certain other compensation paid to or accrued
for the account of the Chief Executive Officer and each of the
other executive officers of the Company (the "Named Executives")
whose salaries and bonuses exceeded $100,000 for the fiscal year
ended June 30, 1995.
Annual Compensation Long-Term Compensation
Awards Payouts
Restricted Securities
Other Annual Stock Underlying LTIP
Name and Salary Bonus Compensation Awards Options Payouts All Other
Principal Position Year $ $ $ $ # $ Compensation
Max A. Tesler 1995 242,000 30,000 7,000 $50,000
President and 1994 223,000 22,000 $50,000
Chief Executive 1993 200,000 54,000 333,200 $42,000
Officer
Anthony Cantaffa 1995 145,000 15,000
Vice President , 1994 132,000 5,000
Mergers and 1993 122,500 5,000 26,800 _
Acquisitions
1 Consists of $50,000, $50,000, and $42,000 paid in fiscal 1995, 1994, and 1993, respectively, in
connection with the waiver of certain provisions of Dr. Tesler's employment agreement in
connection with the change of control provisions of such agreement. See "Employment
Agreements."
2 Issued in connection with the waiver of certain provisions of Dr. Tesler's employment agreement
in connection with the change of control provisions of such agreement.
The compensation of the Company's
President during the fiscal years ended June 30, 1995, 1994 and
1993 was determined pursuant to his employment agreement.
In connection with the ICC Option
Agreement, as amended, management was issued shares and warrants
to purchase shares of the Company's Common Stock. See "Certain
Relationships and Related Transactions."
Option Grants in Fiscal 1995
In August 1994, the Company's Board of
Directors approved a Stock Option Plan (the "Plan") which
provides for the grant of options to purchase Common Stock to
officers, directors and certain employees. The Plan provides
incentives in the form of incentive stock options as defined in
the Internal Revenue Code of 1986 and non-statutory stock
options. The Plan is administered by the Stock Option Committee
of the Board of Directors which determines the employees,
officers and directors who are to receive options, the type of
option to be granted, and the number of shares subject to each
option. A total of 1,000,000 shares were reserved for issuance
upon the exercise of the options granted under the Plan, and as
of September 1, 1995, 607,025 options had been issued to
employees at an exercise price of $.85 per share.
Incentive stock options under the Plan
may not be granted with a purchase price less than the fair
market value of the Common Stock on the date the options are
granted (or, for persons who own more than 10% of the Company's
outstanding voting stock, not less than 110% of such fair
market value.) Non-statutory stock options may be granted at
such prices as the Committee determines. Aside from the maximum
number of shares of Common Stock reserved for issuance under
the Plan, there is no minimum or maximum number of shares which
may be subject to options granted under the Plan. However, the
aggregate fair market value (determined as of the time the
option is granted) of shares of Common Stock with respect to
which incentive stock options become exercisable for the first
time by the optionee under the Plan during any calendar year may
not exceed $100,000. Options may not be transferred other than
by will and the laws of descent and distribution, and during
the lifetime of an optionee may be exercised only by the
optionee. The term of each option, which is fixed by the
Committee, may not exceed ten years from the date the option is
granted (except that the term may not exceed five years for
incentive stock options granted to persons who own more than
10% of the Company's outstanding stock).
Incentive stock options and non-statutory
stock options granted under the Plan are exercisable
immediately, or in one or more installments at such times and
upon such conditions as determined by the Committee.
On the date of grant of options under the
Plan, there were 5,625 options outstanding under the Company's
1984 Stock Option Plan and 48,304 options outstanding under the
Company's 1989 Stock Option Plan. Upon acceptance by grantees
under the Plan, the previous options held by them under the 1984
and 1989 plans were forfeited.
In December 1994, the Stock Option
Committee of the Board of Directors granted a total of 225,000
options to purchase Common Stock to its three outside directors.
The options are exercisable in installments prior to December
1999 at a price of $.91 per share.
The following table contains information
concerning the grant of stock options to the Named Executives
during fiscal 1995 (the Company has no outstanding stock
appreciation rights - "SARs" - and granted no SARs during fiscal
1995):
Individual Grants Potential Realizable
Value at Assumed Annual
No. of Percent of Rates of Stock Price
Securities Total Options Appreciation for
Underlying Granted to Exercise Option Term1
Options Employees in Price Expiration
Name Granted2 Fiscal Year ($/Share)3 Date 5%($) 10%($)
Max A. Tesler 162,500 27% $.85 1999-2001 $0 $24,000
Anthony Cantaffa 85,000 14% $.85 1999-2001 $0 $13,000
_______________________________
1 Executives may not sell or assign any stock grants, which have value only to the extent of stock price appreciation, which will
benefit all shareholders commensurately. The amounts set forth are based on assumed appreciation rates of 5% and 10% as
prescribed by the SEC rules and are not intended to forecast future appreciation, if any, of the stock price. The Company did
not use an alternate formula for a grant date valuation as it is not aware of any formmula which iwll determine with reasonable
accuracy a present value based on future unknown or volatile factors. Actual gains, if any, of stock option exercises and
Common Stock holdings are dependent on the future performance of the Common Stock and overall stock market conditions. There
can be no assurance that the amounts reflected in this table will be achieved.
2 All of the noted options are exercisable in three installments, commencing immediately and on the two subsequent anniversaries
of the date of grant.
3 The exercise price is equal to or higher than the fair market value of the Company's Common Stock on the date of the grant.
Aggregated Option Exercises and Fiscal
Year-End Option Values in Fiscal 1995
No options or SARs were exercised by any
executive officer of the Company during fiscal 1995. The
following table sets forth information with respect to the Named
Executive concerning unexercised options held at fiscal year-end
(as noted above, the Company has no outstanding SARs, and no
SARs were exercised in the current fiscal year):
Number of Unexercised Value of Unexercised
Securities Underlying In-the-Money Options
Options at 6/30/95 at 6/30/95 ($)1
Shares Realized
Acquired on Value Unexer- Exer- Unexer-
Name Exercise(#) ($) Exercisable cisable cisable cisable
Max A. Tesler -0- N/A 504,033 54,167 $33,000 -0-
Anthony Cantaffa -0- N/A 83,467 28,333 $3,000 -0-
____________________
1 Market value of underlying securities at year end, as applicable, minus the exercise price. The
"bid" and "asked" prices on the OTC Bulletin Board on June 30, 1995, were $.45 and $.83
respectively. Certain options are excluded since they are "out of the money."
Employment Contracts and Change in Control Arrangements
Dr. Tesler, Mr. Cantaffa and Ms. Brown
each have an employment agreement with the Company. Dr.
Tesler's agreement, as amended, provides for an annual base
salary of $200,000 and expires on December 31, 1997; Mr.
Cantaffa's agreement, as amended, provides for an annual base
salary of $125,000 and expires on December 31, 1996; Ms. Brown's
agreement provides for an annual base salary of $46,000 and
expires December 31, 1996. In connection with the execution of
the ICC Option Agreement, as amended, Dr. Tesler, Mr. Cantaffa
and Ms. Brown each executed an amendment to their employment
agreements, pursuant to which the term of the agreements were
extended and the provisions for cost of living increases and
other provisions were deleted. Dr. Tesler's employment
agreement also provided that, in the event of a "Change of
Control" of the Company, as defined in his agreement, he was
entitled to receive cash compensation equal to two times his
last annual salary and 10% of the total number of shares
outstanding on the date of such Change of Control on a fully
diluted basis (i.e. giving effect to the exercise of all
outstanding warrants, options and other rights to shares
of the Company's Common Stock). In addition, the employment
agreement provided for Dr. Tesler to receive 5% of pre-tax
profits and specified warrants to receive Common Stock. Dr.
Tesler waived the right to receive 5% of pre-tax profits and
certain warrants provided for in the employment agreement in
connection with the ICC Option Agreement. Also in connection
with the ICC transaction, Dr. Tesler waived the right to receive
$400,000 (twice his last annual salary) and instead agreed to
receive $50,000 per year for four years and also agreed to
receive 400,000 warrants to purchase Common Stock at $.50 per
share, of which 66,800 warrants were distributed to other key
management personnel. See "Certain Relationships and Related
Transactions."
Options granted under the Company's 1994 Stock
Option Plan may include provisions accelerating the vesting
schedule in the case of defined changes in control. Options
granted to date under such plan have included such provision.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
The following table shows information, as
of September 20, 1995, with respect to the beneficial ownership
of Common Stock by (i) each director, (ii) each Named Executive,
(iii) each person or group known to the Company to own
beneficially more than 5% of the outstanding Common Stock, and
(iv) all executive officers and directors as a group.
Name and Address of Amount and Nature of Percentage
Beneficial Owner Beneficial Ownership of Class
Dr. Max A. Tesler2 1,204,160 4.0%
30 Central Park South
New York, NY 10019
Anthony Cantaffa 275,338 *
c/o Pharmaceutical Formulations, Inc.
460 Plainfield Ave
Edison, NJ 08818
ICC Industries Inc.3 19,635,894 66.7%
460 Park Avenue
New York, NY 10022
Dr. John Farber3 19,635,894 66.7%
c/o ICC Industries Inc.
460 Park Avenue
New York, NY 10022
John L. Oram -0- -0-
c/o ICC Industries Inc.
460 Park Avenue
New York, NY 10022
Ben A. Blackshire 65,000 *
c/o Strategem, Inc.
8012 State Line Road
Leawood, KS 66208
Ray W. Cheesman 95,000 *
c/o Pharmaceutical Formulations, Inc.
460 Plainfield Avenue
Edison, NJ 08818
Michael P. Callahan 65,000 *
c/o Pharmaceutical Formulations, Inc.
460 Plainfield Avenue
Edison, NJ 08818
Officers and Directors 1,133,391 5.5%
as a Group (7 persons)
_______________________
* Less than 1%.
1 Except as described in the following notes, beneficial ownership assumes each person or group
owns the shares directly and has sole voting and investment power with respect to such shares.
A person is deemed to be the beneficial owner of securities that can be acquired by such person
within 60 days upon the exercise of outstanding options.
2 Includes (i) 340,442 shares of Common Stock owned by NuMatco, Inc. ("NuMatco"), a company
of which Dr. Tesler is sole officer, director and stockholder; (ii) currently exercisable warrants to
purchase 333,200 shares of Common Stock, exercisable at a price of $.50 per share until
October 1, 1998; (iii) exercisable incentive stock options to purchase a total of 78,431 shares, at a price of
$.85 per share, expiring August 29, 1999 through August 29, 2001; (iv) exceriseable non-qualified options to
purchase 29,902 shares at $.85 expiring on August 29, 1999; (v) currently exercisable warrants to
purchase 62,500 shares at $1.60 per share until August 22, 1996; and (vi) 20 shares issuable upon
conversion of each of 327 8% Convertible Debentures for a total of 6,813 shares, which Debentures are owned by BTS
Therapeutics Corp., a company wholly-owned by Dr. Tesler; and (vi) 75,652 shares owned by
HTA Co. which shares represent Dr. Tesler's 50% ownership interest in the total 151,305 shares
owned by HTA Co.
3 Does not include approximately 3,700,000 shares issuable in connection with ICC's Limited
Preemptive Rights. Dr. Farber is the majority stockholder of ICC. See "Certain Relationships and
Related Transactions."
4 Includes shares of Common Stock subject to stock options exercisable as of September 20, 1995 or
within 60 days thereof as follows: Mr. Cantaffa: 83,467; Mr. Blackshire: 50,000; Mr. Chessman: 50,000; Mr.
Callahan: 50,000; and all officers and directors as a group: 766,680
Item 13. Certain Relationships and Related Transactions
Option Agreement with ICC
In September 1991, the Company entered into
the ICC Option Agreement, pursuant to which ICC was granted a
series of three options to acquire a total of 66.67% of the
number of shares of the Company's Common Stock outstanding after
the exercise of all options owned by ICC and certain other
outstanding options, warrants, rights and convertible
securities. At the time of the execution of the ICC Option
Agreement, the market price of the Common Stock ranged from
approximately $.02 to $.08 per share. The ICC Option Agreement
provides for certain anti-dilution adjustments and preemptive
rights in the event of additional issuances of Common Stock
subsequent to the execution of the ICC Option Agreement. The
ICC Option Agreement was amended on May 8, May 28, and September
24, 1992 and March 29 and May 24, 1993 to adjust the exercise
price and the number of shares issuable upon exercise of the
options granted to ICC, resulting from the issuance of
additional shares of Common Stock to other parties. The May 8
and May 28, 1992 amendments quantified the reduction in the
exercise price and the increase in the number of shares of
Common Stock issuable which resulted from the January 1992
issuance of 3,813,092 shares of Common Stock as an interest
payment on the Company's 8% Convertible Debentures (at which
time the market price of the Common Stock was approximately $.06
per share). The September 24, 1992 and March 29, 1993
amendments quantified the reduction in exercise price and the
increase in the number of shares of Common Stock issuable which
resulted from the September 1992 issuance of 1,500,000 shares of
Common Stock in settlement of certain outstanding obligations to
unaffiliated parties (which shares were valued by an independent
investment banker at $.10 per share). The May 24, 1993
amendment requires the Company to refrain from issuing stock, or
rights to acquire stock, without ICC's approval prior to the
next annual meeting of stockholders (which was held on July 14,
1993) except as otherwise authorized thereby.
Option No. 1 granted ICC the right to acquire
up to 2,418,757 shares of the Company's Common Stock at a price
of $.13555 per share, exercisable until June 16, 1992, which
option was exercised in full on May 8, 1992 (at which time the
market price of the Common Stock was approximately $.20 per
share). As permitted by the ICC Option Agreement, payment for
the shares in the amount of $327,850 was made by crediting
certain indebtedness owed by the Company to ICC under a credit
line agreement and toll conversion agreement, each dated
September 6, 1991, and various trust receipt and security
agreements (collectively, the "ICC Credit Agreements"). The
indebtedness, which totaled $1,018,000 on May 8, 1992 (prior to
exercise of Option No. 1), was incurred for the purchase of raw
materials, and was reduced to $690,150 by the exercise of Option
No. 1.
Option No. 2 granted ICC the right to acquire
up to 6,535,436 shares of the Company's Common Stock, at a price
of $.1036286 per share, exercisable until September 16, 1992,
which date was extended to October 14, 1992. On September 24,
1992, ICC exercised its right to acquire 2,138,600 shares under
Option No. 2, payment for which was made in cash totaling
$221,620. On October 1, 1992, ICC exercised the balance of
Option No. 2 and acquired pursuant thereto an additional
4,396,836 shares of the Company's Common Stock, payment for
which in the amount of $455,638 was made by crediting
indebtedness owed by the Company to ICC under the ICC Credit
Agreements which totaled $1,429,000 on October 1, 1992 (prior to
exercise of Option No. 2), thereby reducing the Company's
indebtedness to ICC to $973,362. The indebtedness to ICC was
incurred for the purchase of raw materials. The market price for
the Common Stock at the time of the foregoing option exercise
was approximately $.31 per share.
Option No. 3 granted ICC the right to acquire
up to 8,954,193 shares of the Company's Common Stock, at a price
of $.1553 ($.11225 prior to March 29, 1993) per share,
exercisable until July 10, 1993. On October 1, 1992, ICC
exercised its right to acquire 2,000,000 shares under Option
No. 3, payment for which was made by crediting indebtedness
totaling $224,500 owed by the Company to ICC under the ICC
Credit Agreements. As a result of the exercise of Option No. 2
and the partial exercise of Option No. 3, ICC acquired voting
control of the Company as of October 1, 1992 (the "Change of
Control Date"). As of the Change of Control Date, ICC owned a
total of 10,954,193 shares of the Company's Common Stock,
representing approximately 55% of the total number of shares
outstanding on that date. The Company's indebtedness to ICC
after the exercise of Option No. 3 was $748,862. The market
price for the Common Stock at the time of the foregoing
ption exercise was approximately $.31 per share. Pursuant to
the amendment to the ICC Option on March 29, 1993, the exercise
price for the 6,954,192 shares remaining under Option No. 3 was
increased to $.1553 per share and the option expiration date on
1,927,741 shares was extended until the earlier of July 10, 1995
or the effective date of any registration statement filed with
the Commission with respect to a public offering of the
Company's securities (the expiration date on the other 5,026,452
shares remaining at July 10, 1993). The increase in exercise
price resulted from a revaluation of 1,500,000 shares of Common
Stock issued in September 1992 in settlement of certain
outstanding obligations to unaffiliated parties. On March 29,
1993, ICC exercised its right to acquire 4,000,000 shares under
Option No. 3, payment for which was made by crediting
indebtedness totaling $622,000 owed by the Company to ICC under
the ICC Credit Agreements. On June 22, 1993, ICC exercised its
right to acquire 1,026,452 shares under Option No. 3, payment
for which was made by crediting indebtedness totaling $159,408
owed by the Company to ICC under the ICC Credit Agreements. The
Company's indebtedness to ICC after the exercise of such portion
of Option No. 3 was $7,031. The market price for the Common
Stock at the time of the foregoing option exercise was
approximately $.75 per share. On May 16, 1994, ICC exercised
the remaining 1,927,741 shares under Option No. 3. Payment for
the shares of $299,378 was made by crediting certain
indebtedness owed by ICC to the Company.
Under the ICC Option Agreement, as amended,
ICC was also granted certain preemptive rights (the "Limited
Preemptive Rights") at a price equal to the lesser of the
exercise price (or conversion price, as the case may be), of
certain additional outstanding options, warrants and other
rights to purchase shares of Common Stock (the "Convertible
Securities") or $.25 (except with respect to certain warrants to
purchase 400,000 shares of the Company's Common Stock granted to
management in September 1992, in which case the price is $.50).
The following events have necessitated the
following antidilution adjustments or preemptive rights with
respect to the ICC Option Agreement since the options were last
amended: (a) on April 7, 1993, ICC exercised its right to
purchase 58,066 shares of Common Stock at a per share purchase
price of $.25, which right arose as a result of the conversion
in 1993 of 8.25% Convertible Debentures into 29,033 shares of
Common Stock, payment for which was made by crediting
indebtedness totaling $14,517; (b) on August 26, 1993, ICC
exercised its right to purchase 38,838 shares of Common Stock
at a per share purchase price of $.25, which right arose as a
result of the issuance of 19,420 shares to Management in 1993,
payment for which was made by crediting indebtedness totaling
$9,710; (c) on November 9, 1993, ICC exercised its right to
purchase 960,210 shares of Common Stock at a per share
purchase price of $.25, which right arose as a result of the
exercise of unit purchase options by certain of the Company's
Unit Purchase Option holders in 1993 and 1994 to purchase
448,140 shares of Common Stock and the resulting issuance of
31,964 shares to management in 1993 and 1994 and, payment for
which was made by crediting indebtedness totaling $240,053; (d)
in connection with the issuance of warrants to CIT and a bridge
lender, ICC received warrants for the purchase of an aggregate
of 320,000 shares of Common Stock at a purchase price of $.75
with respect to 20,000 shares and $.25 with respect to 300,000
shares, which warrants were exercised by ICC in June 1994;
(e) in July 1994, ICC exercised its right to purchase 4,798
shares of common stock at a per-share purchase price of $.25,
which right arose as a result of the conversion in June 1994 of
8.25% Convertible Debentures into 2,167 shares of Common Stock
and the issuance of 233 shares to key management, payment for
which was made in cash; (f) on May 16, 1995, ICC exercised its
right to purchase 269,670 shares of Common Stock at a per-share
purchase price of $.25, which right arose as a result of the
conversion in April 1995 of 8.25% Convertible Debentures into
121,727 shares of Common Stock and the issuance of 13,108 shares
to key management, payment for which was made in cash and (g) on
September 20, 1995 ICC exercised its right to purchase 76,926
shares of Common stock at a per share price of $.25, which right
arose as a result of the conversion in August 1995 of 8.25%
Convertible Debentures into 34,272 shares of Common Stock and
the issuance of 3,691 shares to key management, payment for
which was made in cash. The Limited Preemptive Rights are
exercisable for a period of 45 days after the Company sends
notice to ICC that shares have been issued in connection with
any outstanding Convertible Securities. The Company cannot
predict whether any shares will be issued pursuant to the
exercise of outstanding Convertible Securities or whether ICC
will exercise any preemptive rights.
Accordingly, as of September 27, 1995, ICC
owned a total of 19,635,894 shares of the Company's Common
Stock, representing approximately 66.7% of the total number of
shares outstanding on that date, and it held rights to acquire
additional shares under the Limited Preemptive Rights.
Raw Materials Financing and Purchasing of Finished Product
During fiscal 1993, ICC purchased all of the
Company's requirements for ibuprofen as well as a number of
other raw materials. Finished products using such raw material
were sold to ICC as well as independent third parties. In
consideration for ICC's participation, ICC received payments of
5% of ICC's cost for the purchase of ibuprofen for sales to
customers other than ICC. In connection with the foregoing
transactions, as of June 30, 1993, $1,138,000 of inventory owned
by ICC was being stored at the Company's manufacturing facility.
In connection with finished products purchased by ICC directly
from the Company, ICC received payments from the Company equal
to 3% of the gross sales price of such products. ICC's total
purchases of raw materials on behalf of the Company totaled
$13,277,000 for fiscal 1993. ICC's payments for goods purchased
from the Company were typically credited against amounts owed by
the Company under the ICC Credit Agreements. ICC received total
payments from the Company of $688,000 for its services pursuant
to the foregoing arrangements in fiscal 1993. For fiscal 1993,
ICC's purchases of goods from the Company represented 20% of the
Company's total sales.
During the fiscal year ended June 30, 1994,
ICC purchased, on the Company's behalf, all of the Company's
requirements for ibuprofen, for which ICC received payment of 3%
of ICC's cost for the purchase of ibuprofen for sales to
customers other than ICC. ICC also sold to the Company
other raw materials. In addition, ICC purchased finished
ibuprofen products from the Company as its customer, and in each
case, receives payment from the Company of 1.5% of the gross
sales price of such products. ICC's total purchases of raw
materials, including ibuprofen as mentioned above, on behalf of
the Company totaled $14,300,000 for the fiscal year ended June
30, 1994, and total fees paid to ICC for such purchases totaled
$453,000. Beginning July 1, 1994, the Company no longer
purchased ibuprofen products from ICC nor was the Company
selling finished ibuprofen products to ICC. The Company is
purchasing ibuprofen directly from the manufacturer and is
selling the finished products to the unaffiliated party rather
than ICC. Accordingly, no ICC inventory is currently stored
at the Company's facilities.
During the fiscal year ended June 30, 1995,
the Company purchased $1,219,000 of raw materials from ICC.
Lease Financing
ICC has also assisted the Company in
obtaining certain machinery and equipment for the expansion of
the Company's production capacity. In such cases, ICC, or its
affiliates, typically acted as lessor of the equipment for which
a fee is paid by the Company. Prior to the fiscal year ended
June 30, 1993, the Company had experienced continuing losses.
As a result of such losses and the general financial condition
of the Company at that time, the Company would not otherwise
have been able to secure such leases and credit facilities in
the amounts required for the Company's continuing and planned
operations.
There are currently several leases entered
into pursuant to the Master Equipment Lease Agreements with ICC.
ICC's cost for the leased equipment was approximately
$5,848,000; monthly rent is currently approximately $135,000.
The terms of the rentals are scheduled to expire at various
imes in the years 1995 through 2000. The Company has options to
purchase the leased equipment at the expiration of the lease
terms.
Although the Company's financial condition
has improved and it reported net income for fiscal years ended
June 30, 1995, 1994 and 1993, the Company encountered some
difficulty in obtaining significant capital equipment financing
from unaffiliated sources on acceptable terms. The Company
believes that its leasing and financing transactions are on
terms which are at least as favorable as the Company could
receive from an unaffiliated third party. In September 1995,
the Company completed a $3,000,000 capital equipment line with a
financial institution. The Company will use this line for
future capital equipment purchases.
Cimetidine Agreement
In August 1993, the Company and ICC Chemical
Corporation, an affiliate of ICC, entered into a cooperative
joint venture regarding the manufacture of cimetidine, an
anti-ulcer drug (the "Cimetidine Agreement"). Pursuant to the
Cimetidine Agreement, ICC will be the sole source of raw
material at competitive prices; ICC shall pay all outside
expenses relating to the preparation of prescription and OTC
ANDAs; the Company will prepare and file ANDA's for
prescription and over-the-counter cimetidine; the Company will
manufacture FDA-approved products; and ICC will be the
exclusive sales agent for which it will receive 20% of the sale
price (to the extent that ICC authorizes the Company to sell
directly, ICC will receive a 10% commission) and ICC, if the
Company agrees, may buy cimetidine for resale, for which ICC
will pay 10% less than the price to the customer. The
term of the agreement is 10 years from the date of FDA approval
of the sale and distribution of such product. As of June 30,
1995, the Company has not expended any funds on this project.
Related Transactions
Pursuant to the ICC Option Agreement and the
waiver of certain provisions of Dr. Tesler's employment
agreement, as amended, management was issued shares and warrants
to purchase shares of the Company's Common Stock as follows:
Number of
Name Shares or Warrants1 Date of Issue
Max A. Tesler2 250,000 shares September 6, 1991
340,442 shares May 8, 1992
134,495 shares September 24, 1992
333,200 warrants September 24, 1992
2,089 shares May 12, 1993
10,886 shares June 25, 1993
5,235 shares October 19, 1993
16,122 shares December 3, 1993
156 shares September 1, 1994
13,108 shares June 30, 1995
3,691 shares September 20, 1995
Anthony Cantaffa2 20,000 shares September 6, 1991
27,383 shares May 8, 1992
10,817 shares September 24, 1992
26,800 warrants September 24, 1992
416 shares May 12, 1993
2,169 shares June 25, 1993
1,043 shares October 19, 1993
3,212 shares December 3, 1993
31 shares September 1, 1994
Sandra J. Brown2 10,000 shares September 6, 1991
13,486 shares May 8, 1992
5,328 shares September 24, 1992
13,200 warrants September 24, 1992
205 shares May 12, 1993
1,069 shares June 25, 1993
515 shares October 19, 1993
1,583 shares December 3, 1993
15 shares September 1, 1994
1 All of the foregoing management warrants are exercisable at a price of $.50 per share for a period
of six years from grant. The exercise price per share and number of shares issuable upon exercise
of the warrants are subject to certain anti-dilution rights and other adjustments as set forth in the
warrant agreements. There is, however, no adjustment for reverse stock splits, such that the
warrant holder is entitled, after a reverse stock split, to purchase the same number of shares which
he or she was entitled to purchase before the reverse stock split at a price of $.50 per share. The
warrant agreements also contain certain demand and "piggy back" registration rights in connection
with the shares underlying the warrants and such shares were registered for sale to the public in
August 1993 pursuant to Registration Statement No. 33-52704.
2 Such individuals are also entitled to an aggregate of up to approximately 148,300 additional
shares in the event that convertible securities existing at September 24, 1992 are converted into
Common Stock.
The Company utilizes a third-party
administrator to control its partially-self-insured health
benefits program. This entity leases a portion of a
1,600-square-feet office at 30 Central Park South in New York
City at a monthly rental of $3,000 from a corporation in which
the President of the Company has a minority interest.
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 "Index to Financial
Statements" set forth in Item 8, "Financial Statements and
Supplementary Data".
(a) (3) and (c) Exhibits: Exhibits are
numbered in accordance with Item 601 of Regulation S-K.
Exhibit
Numbers Description
1a Indenture (1)
1b New Indenture (2)
3a Articles of Incorporation, as amended (3)
3b By-laws, as amended (3)
10a Employment Agreement with Max A. Tesler, as extended (4)*
10b Employment Agreement with Anthony Cantaffa, as extended (4)*
10c Employment Agreement with Sandra J. Brown, as extended (4)*
10d Loan and Security Agreement between Fidelcor Business Credit Corporation and the
Registrant (formerly known as PharmaControl Corp.) (5)
10e Warrant Agreement between the Registrant and Max A. Tesler,
dated August 23, 1990 (6)*
10f 1989 Stock Option Plan (7)
10g Agreement dated September 6, 1991 among the Registrant (formerly known
as PharmaControl Corp.), Private Formulations, Inc. and ICC Industries Inc.
(8)
10h Agreement dated September 24, 1992 among the Registrant (formerly known as
PharmaControl Corp.), Private Formulations, Inc. and ICC Industries Inc. (9)
10i Agreement dated March 29, 1993 among the Registrant (formerly known as
PharmaControl Corp.), Private Formulations, Inc. and ICC Industries Inc. (10)
10j Agreement dated May 8, 1992, among the Registrant (formerly known as
PharmaControl Corp.), Private Formulations, Inc. and ICC Industries Inc. (9)
10k Agreement dated May 28, 1992, among the Registrant (formerly known as
PharmaControl Corp.)., Private Formulations, Inc. and ICC Industries Inc. (9)
10l Agreement dated May 24, 1993, among the Registrant (formerly known as
PharmaControl Corp.), Private Formulations, Inc. and ICC Industries Inc. (10)
10m Agreement dated September 29, 1992 among Materials Processing Technology, Inc.
and the Registrant (formerly known as PharmaControl Corp.).(9)
10o 1994 Stock Option Plan (11)*
10n Warrant Agreements dated October 1, 1992 between the Registrant (formerly known
as PharmaControl Corp.) and Max A. Tesler, Anthony Cantaffa, George Chin and
Sandra J. Brown (9).*
22 List of the Registrant's Subsidiaries: None
_____________________
* 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, and (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,
each of which is incorporated by reference herein.
(4) Filed with the Registrant's Annual Report on Form 10-K for the year ended June 30, 1993 and
incorporated herein by reference.
(5) Incorporated herein by reference to the Registrant's Current Report on Form 8-K dated
August 2, 1989.
(6) Incorporated herein by reference to the Registrant's Current Report on Form 8-K dated
August 23, 1990.
(7) Filed with the Registrant's Annual Report on Form 10-K for the year ended June 30, 1989 and
incorporated herein by reference.
(8) Incorporated herein by reference to the Registrant's Current Report on Form 8-K dated
September 6, 1991.
(9) Filed with the Registrant's Annual Report on Form 10-K for the year ended June 30, 1992
and incorporated herein by reference.
(10) Filed with the Registrant's Annual Report on Form 10-K for the year ended June 30, 1994
and incorporated herein by reference.
(11) Filed herewith.
(b) Reports on Form 8-K - The Registrant
did not file any reports on Form 8-K during and since the last
quarter of the fiscal year ended June 30, 1995.
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/MAX A. TESLER
Max A. Tesler, M.D.
President, Chief
Executive Officer and a
Director
Dated: September 27, 1995
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/MAX A. TESLER President, Chief Executive September 27, 1995
Max A. Tesler, M.D. Officer, and a Director
(Principal Executive
Officer)
/s/FRANK MARCHESE Vice President - Finance, September 27, 1995
Frank Marchese Chief Financial Officer,
and Treasurer (Principal
Financial Officer)
/s/JOHN L. ORAM Director September 27, 1995
John L. Oram
/s/RAY W. CHEESMAN Director September 27, 1995
Ray W. Cheesman
/s/MICHAEL P. CALLAHAN Director September 27, 1995
Michael P. Callahan
/s/BEN A. BLACKSHIRE Director September 27, 1995
Ben A. Blackshire
EXHIBIT INDEX
Number Description
10(o) 1994 Stock Option Plan
27 Financial Data Schedule