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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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, 1996 or
/ / Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act [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 X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (ss.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 August 20, 1996 was
approximately $6,690,000.
As of August 20, 1996, there were 29,508,814 shares of Common Stock, par
value $.08 per share, outstanding.
Portions of the definitive Information or Proxy Statement to be filed with
the Securities and Exchange Commission (the "Commission") not later than 120
days after the end of the fiscal year covered by this Form 10-K with respect to
the registrant's Annual Meeting of Shareholders to be held in 1996 are
incorporated by reference into Part III of this Form 10-K.
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 a large portion of the
Company's revenues. The Company also manufactures products for national brand
pharmaceutical companies, although sales of such products represent less than
10% of the Company's sales. To a limited extent, the Company also sells Generic
OTC Products under its own trade name, Health+Cross(TM), 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 comparable to
national brand products which have switched from prescription to OTC drug
status. The Company's largest customers include Revco D.S. Inc. ("Revco"),
Walgreen Company ("Walgreen") and Price-Costco, Inc. ("Price-Costco"). 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.
CERTAIN RELATIONSHIPS WITH ICC
In September 1991, the Company entered into an agreement with ICC
Industries Inc. ("ICC") pursuant to which ICC was granted a series of options
and related preemptive rights to acquire a total of approximately 66% of the
shares of the Company's Common Stock outstanding (as subsequently amended, the
"ICC Option Agreement"). ICC is a major international manufacturer and marketer
of chemical, plastic and pharmaceutical products which had 1995 sales in excess
of $1 billion. ICC and its subsidiaries have offices in key business centers
around the world and own numerous manufacturing plants. ICC has exercised all of
its options and certain of the related preemptive rights and currently owns an
aggregate of 19,635,894 shares of Common Stock, representing 66.5% of the
Company's outstanding Common Stock. In fiscal 1996, the Company sold 2,500,000
shares of Series A Cumulative Redeemable Preferred Stock to ICC. In addition,
the Company purchases certain raw materials from ICC and leases equipment from
ICC, or its affiliates. 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, sinus/allergy and laxatives. In each of the
fiscal years ended June 30, 1996, 1995 and 1994, sales of ibuprofen accounted
for 41%, 41%, and 46% respectively, of the Company's total revenues, and sales
of acetaminophen products accounted for 11%, 11% and 12% 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 Anacin(R), Tylenol(R), Bufferin(R), Ecotrin(R), Motrin(R), Advil(R),
Excedrin(R), Sominex(R), Maalox(R), Sudafed(R), Comtrex(R), Sinutab(R),
Dristan(R), Dimetapp(R), Dexatrim(R), Dramamine(R), Actifed(R), Benadryl(R),
Allerest(R), and Metamucil(R), among others.1
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 is not
currently engaged in development or marketing activities with respect to this
product.
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1 Such brand names are registered marks of companies unrelated to PFI.
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 through
the fiscal year 1996) 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
1997, but there is no assurance that governmental approval of such product will
be granted at such time or at all.
The Company, in connection with ICC, is developing the OTC version of
Cimetidine, an anti-ulcer drug. The Company expects to file an ANDA with the FDA
by December 1996.
The Company has filed an ANDA with the FDA for Naproxen Sodium, an
analgesic. The Company is awaiting approval for the product from the FDA.
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, 1996, the
Company purchased from ICC $795,000 of raw materials.
To date, the Company has obtained the raw materials it needs
and expects that such raw materials will continue to be readily available in the
future. Raw materials delivered to the Company are first placed in quarantine so
that samples of each lot can be assayed for purity and potency by a team of
trained chemists and technicians employed by the Company. Incoming materials are
tested to assure that they are free of objectionable microorganisms and that
they meet chemical and physical testing requirements. Throughout the
manufacturing process, samples are taken by quality assurance inspectors for
quality control testing. The raw materials must meet standards established by
the United States Pharmacopoeia, the National Formulary and the FDA, as well as
by the Company and its customers.
To produce capsules and tablets, the Company utilizes specialized
equipment which compresses tablets and fills powder and granules
into hard gelatin capsules. At this stage, certain tablets are film or sugar
coated to achieve an aesthetically appealing tablet. The customer chooses
whether its order of Generic OTC Products will be delivered in bulk containers
or in packages. Typically, the Company assists its customers in developing the
size, design and graphics of the folding carton, label and container for the
products. The package can be automatically placed into shipping containers of
the customer's selection.
Since January 1992, the Company has entered into various subleases
of equipment and leasehold improvements from companies affiliated with
ICC, for which the Company pays such affiliates fixed monthly fees. Such leases
have various terms, expiring at different times between 1997 and 2001. Upon
expiration of the term of each lease, the Company is entitled to purchase the
equipment for a price of $1.00.
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 retailers, wholesalers, distributors,
mass-marketers, and brand-name pharmaceutical companies. Sales to
retail drug and supermarket chains and mass merchandisers accounted for
approximately 85%, 80% and 66%, of the Company's sales for fiscal 1996, 1995 and
1994, respectively. Bulk sales to wholesalers and distributors accounted for
approximately 13%, 14% and 25%, of the Company's sales during fiscal years 1996,
1995 and 1994. Sales to brand-name pharmaceutical companies accounted for
approximately 2%, 6%, and 9% in fiscal 1996, 1995 and 1994 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 $11,078,000 (20%), $14,536,000 (25%) and $8,756,000 (16%) of the
Company's net sales for fiscal 1996, 1995 and 1994, respectively. Sales to
Walgreen were $7,609,000 (14%), $8,373,000 (14%) and $8,684,000 (16%) for fiscal
1996, 1995 and 1994, respectively. Sales to ICC were $9,267,000 (17%) for 1994.
Sales to Price-Costco were $6,508,000 (12%), $6,892,000 (12%) and $4,488,000
(8%) in fiscal 1996, 1995 and 1994, respectively.
MARKETING AND PROMOTION
The Company has 11 employees in sales and customer service.
This staff and 25 independent brokers sell the OTC pharmaceutical products and
the marketing services of the Company to current and potential customers.
The Company has 8 employees in marketing and graphic design
who work with customers to develop and execute customized marketing programs
directed at selling consumers on the therapeutic benefits of the OTC
pharmaceutical store brands products.
RESEARCH AND DEVELOPMENT
The Company maintains a staff of five employees in its product
development department, as well as other support staff to assist its customers.
The Company's research and development activities are primarily related to the
determination of the formula and specifications of the product desired by a
customer, as well as the potency, dosage, flavor, quality, efficacy, color,
hardness, form (i.e. tablet, caplet or capsule) and its packaging. The Company's
research and development expenditures in fiscal 1996, 1995 and 1994 were
$790,000, $1,488,000 and $574,000; respectively.
NEW JERSEY INDUSTRIAL SITE RECOVERY 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 ("NJDEP"). The ACO named Revco as the primary party to
evaluate and remediate environmental contamination at the facility.
Environmental testing by Revco 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 NJDEP 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, NJDEP 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, NJDEP
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. Revco began operating a groundwater remediation
treatment system in 1995. Although Revco has agreed to be primarily responsible
for the entire cost of the cleanup, the Company 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 NJDEP
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. NJDEP 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, which
were substantially completed in June 1996 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 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 tablet form expires in the year 2002. In addition,
the Company owns several Soluble Aspirin patents in Canada and certain other
foreign countries.
Allerfed(R), Leg Ease(R) and Health+Cross(R) are federally
registered trademarks owned by the Company. To the extent that the Company's
packaging and labeling of its Generic OTC Products may be considered similar to
the brand name products to which they are comparable, and to the extent that a
court may determine that such similarity may constitute confusion over the
source of the product, the Company may be subject to legal actions under state
and Federal statutes and case law to enjoin the use of the packaging and for
damages.
INSURANCE
The Company may be subject to product liability claims by persons
damaged by the use of its products. The Company maintains product
liability insurance for its Generic OTC Products covering up to $10,000,000 in
liability. Although there have been no material product liability claims made
against the Company to date, there can be no assurance that such coverage will
adequately cover any claims which may be made or that such insurance will not
significantly increase in cost or become unavailable in the future. The
inability of the Company to maintain necessary product liability insurance would
significantly restrict its ability to sell any products and could result in a
cessation of its business.
COMPETITION
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 August 1, 1996, the Company employed approximately 302
full-time employees. Of such employees, 188 are engaged in manufacturing
activities and are covered by a collective bargaining agreement between the
Company and Local 522 affiliated with the International Brotherhood of Teamsters
of New Jersey ("Local 522"), which expires on October 24, 1998. Additionally,
five of the Company's employees are represented by Local 68 of the International
Union of Operating Engineers, affiliated with the AFL-CIO. As of August 1, 1996,
the Company had 19 persons employed in sales and marketing, 48 administrative
and operational employees and 42 laboratory technicians and scientists. The
Company believes that its relations with its employees are satisfactory.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers and directors of the Company as of June 30, 1996
are set forth below:
Name Position
Charles E. LaRosa President; Chief Executive Officer;
Director
Brian W. Barbee Vice President, Scientific Affairs
David Belaga Vice President, Marketing
Anthony Cantaffa Vice President, Mergers & Acquisitions
George Chin Vice President, Sales
Frank Marchese Vice President, Finance; Chief
Financial Officer; Treasurer;
Secretary
Allessandro R. Pierpaoli Vice President, R&D Technical Affairs
John L. Oram Chairman of the Board; Director
Ben A. Blackshire Director
Michael P. Callahan Director
Ray W. Cheesman Director
Dr. Max A. Tesler Director
Directors serve from when elected to the next annual meeting of
stockholders. All directors will serve until the 1996 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
BEN A. BLACKSHIRE, age 59, 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 48, has been a director of the
Company since July 1993. Since January 1996, Mr. Callahan has been President and
Chief Executive Officer of Intersport Limited, a company engaged in the design,
marketing and distribution of athletic equipment. From December 1994 until
January 1996, Mr. Callahan was Chief Financial and Operating Officer of
Intersport. 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 65, has been a director of the Company
since July 1993, and has been a consultant to KPMG Peat Marwick an international
accounting firm from 1987 through June 1996. Prior thereto, Mr. Cheesman was a
partner in such firm. Mr. Cheesman is a licensed Certified Public Accountant.
CHARLES E. LAROSA, age 54, has been a director of the Company
and President and Chief Executive Office since December 1995. For the five years
prior thereto he was President of American Home Food Products, subsidiary of
American Home Products Corporation.
JOHN L. ORAM, age 52, has been a director of the Company since
July 1993. Mr. Oram was appointed Chairman of the Board in December 1995. 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. ("EIF"), an Israeli
subsidiary of ICC listed on the Tel-Aviv and American Stock Exchanges, engaged
in the manufacture and distribution of chemical products. From May 1996, Mr.
Oram has been a director of Frutarom Industries (1995) Limited, a company
spun-off from EIF and listed on the Tel-Aviv Stock Exchange engaged in the
flavor and fragrance industry.
DR. MAX A. TESLER, age 65, was Chairman of the Company's Board
of Directors from the Company's formation in June 1981 until December 1995 and
Chief Executive Officer from July 1983 until December 1995. Dr. Tesler has been
President of the Company from 1983 until August 1990, and from April 1991 until
December 1995. He is currently a director. 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. Dr. Tesler maintains a very limited private practice of
medicine.
BUSINESS EXPERIENCES OF THE COMPANY'S EXECUTIVE OFFICERS NOT ACTING AS
DIRECTORS
BRIAN W. BARBEE, age 46, has been Vice President of Scientific
Affairs since December 1995. He was Vice President, Quality Assurance/Quality
Control and Regulatory, between January 1993 and December 1995; such position
was made an executive office of the Company in September 1995. He joined the
Company in 1978 and became Director of Quality Assurance in December 1982 and
Director of Regulatory Affairs in May 1988.
DAVID BELAGA, age 40, has been Vice President, Marketing since
May 1996. Prior thereto he was a Senior Product Manager at American Home
Products (1994-1996) and Block Drug (1986-1994) and an Assistant Brand Manager
at Pepsi-Cola Co. (1985-86).
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 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 has also been employed as the Company's Vice
President-Finance since 1987 and Corporate Controller since 1983.
GEORGE CHIN, age 43, has been Vice President, Sales since
1991; such position was made an executive office of the Company in September
1995. Mr. Chin was Field Sales Manager from 1989 until 1991. Prior to joining
the Company, he was National Account Manager of Perrigo Company, a store brand
health and beauty aids manufacturer, from 1986 to 1989 and District Supervisor
of Beecham Products.
FRANK MARCHESE, age 41, has been Vice President, Finance,
Chief Financial Officer and Treasurer since September 1995 and Secretary since
April 1996. He was Vice President, Finance and Administration of the Company's
subsidiary Private Formulations, Inc. from October 1992 until June 1995 when it
was merged into the Company. Mr. Marchese was formerly Vice President, Finance
of Primex Plastics, Inc., a subsidiary of ICC Industries Inc, from August 1989
to September 1992. Mr. Marchese is a licensed Certified Public Accountant.
A. RANDALL PIERPAOLI, age 52, Ph.D., was Vice President, R&D
Technical Affairs from December 1995 until September 1996. He was Vice
President, Technical Affairs from September 1995 until December 1995. From
December 1991 to February 1994, he held directorships for Quality Control and
Analytical R&D and was senior GMP compliance officer at Barr Laboratories, Inc.,
producer of generic ethical drugs; he was Executive Director R&D Technical
Affairs, from February 1994 until his departure in 1995. From July 1984 to
December 1991, Dr. Pierpaoli was divisional Quality Control Manager and
Corporate QA Liaison for the Consumer Healthcare Division of Pfizer, Inc. Dr.
Pierpaoli holds a Ph.D. in Physical Chemistry and is an acknowledged expert in
regulatory, statistical, and analytical protocols appropriate to drug
manufacture and testing.
FORWARD LOOKING STATEMENTS
When used in this Form 10-K and in future filings by the Company
with the Securities and Exchange Commission, in the Company's press
releases and in oral statements made with the approval of an authorized
executive officer, the words or phrases "will likely result," "are expected to,"
"will continue," "is anticipated," "estimate," "project," "expect," "believe,"
"hope" or similar expressions are intended to identify "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from historically earnings and
those presently anticipated or projected. The Company wishes to caution readers
not to place undue reliance on such forward-looking statements, which speak only
as of the date made.
ITEM 2. PROPERTIES
The Company leases approximately 214,000 square feet of office,
manufacturing and warehousing space in Edison, New Jersey, under a lease
which expires in 2004. The Company has two five-year renewal options. The
monthly rental is currently $130,000 per month and will increase on each 30th
month after September 1994 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 16, 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. Discovery is ongoing and the Company intends to
move for summary judgment at the close of discovery.
In March 1996, the Company was named as a defendant in a lawsuit
filed in the United States District Court for the District of New Jersey
by Gary Sherman Investments, Inc., formerly known as Polystar Corporation
("GSI"). GSI filed this action against the Company based on a $400,000
promissory note allegedly executed in GSI's favor in or about March 1991,
seeking to recover the full face amount of the note plus accrued interest. The
Company is contesting the allegations of this complaint, and has filed
counterclaim alleging, inter alia, breaches of fiduciary duty and fraud by GSI.
The Company intends vigorously to defend against GSI's claims and to pursue its
counterclaims against GSI.
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 20, 1996, there were 1,600 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, 1996...
First Quarter................... $11/16 $ 9/16
Second Quarter.................. 21/32 13/32
Third Quarter................... 19/32 7/16
Fourth Quarter.................. 13/16 7/16
Fiscal Year Ended June 30, 1995
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
The high and low bid prices of the Common Stock on August 20,
1996, as reported by the National Quotation Bureau, were $.78 and $.72,
respectively. On such date, there were approximately 5,200 beneficial holders
of the Common Stock.
The Company has never paid any dividends on its Common Stock.
The Company anticipates that, for the foreseeable future, earnings, if any, will
be retained for use in the business or for other corporate purposes, and it is
not anticipated that cash dividends will be paid. Further, the Company's
agreement with its institutional lender prohibits the payment of dividends
without the lender's consent.
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data presented below as of
and for each of the fiscal years in the five-year period ended June 30, 1996 are
derived from the consolidated financial statements of Pharmaceutical
Formulation, Inc. and its subsidiaries, which financial statements have been
audited by BDO Seidman, LLP, independent public accountants, whose report
relating to the consolidated financial statements for the three years ended June
30, 1996 appears in this report. The selected consolidated financial data should
be read in conjunction with the consolidated financial statements and notes
thereto of the Company and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this report.
CONSOLIDATED STATEMENTS OF OPERATIONS DATA
(in thousands, except per share amounts)
Years Ended June 30,
1996 1995 1994 1993 1992
--------------------------------------------------------
Gross Sales $57,572 $62,427 $56,256 $46,413 $30,383
Net sales $54,327 $59,107 $55,330 $46,413 $30,383
Net income (loss) (3,465) 2,046 2,211 1,706 (2,314)
Net income (loss) per share
of Common Stock:
Primary ($.12) $.07 $.08 $.09 ($.45)
Fully diluted ( .12) $.06 $.07 $.06 --
Weighted average common and common
equivalent shares outstanding1 :
Primary 29,412 30,023 29,361 19,826 5,212
Fully diluted 29,412 32,520 32,350 26,522 --
See Note 2 of Notes to Consolidated Financial Statements as to the calculation of weighted average common and
common equivalent shares outstanding.
CONSOLIDATED BALANCE SHEET DATA
(in thousands, except per share amounts)
June 30,
1996 1995 1994 1993 1992
----------------------------------------------------------
Current assets $21,823 $24,759 $21,076 $ 15,071 $ 9,110
Current liabilities 13,895 12,587 10,811 7,223 7,138
Working capital 7,928 12,172 10,265 7,848 1,972
Total assets 39,661 40,456 33,745 24,983 18,412
Long-term debt and
long-term capital
lease obligations 25,752 26,938 24,210 21,875 18,827
Stockholders' equity/(deficit) (411) 454 (1,805) (4,696) (8,186)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FINANCIAL CONDITION AT JUNE 30, 1996
At June 30, 1996, the Company had working capital of $7,928,000
compared to $12,172,000 at June 30, 1995. The decrease of $4,244,000 is
primarily due to the net loss of $3,465,000 for the fiscal year ended June 30,
1996. The decrease includes a reduction in inventory of $5,195,000 offset by an
increase in accounts receivable of $418,000 and an increase in cash of $629,000.
The decrease is a result of the lower sales as the Company reduced its inventory
levels to conserve cash to fund operations and reduce long-term debt.
Capital expenditures were $4,118,000 for the fiscal year ended June 30,
1996. The majority of this amount related to a major plant renovation which
improved efficiencies and increased laboratory capacity. The balance of the
capital expenditures were to improve manufacturing capacity and reduce costs.
The cost of the plant upgrade as well as other capital acquisitions was
partially financed through capital leases entered-into with ICC.
The Company has a $15,000,000 asset-based line of credit with an
institutional lender. At June 30, 1996, the Company had $3,455,000 of unused
availability under this agreement. The line of credit expires February 4, 1999
and bears interest at 1-3/4% above the prime lending rate (currently 8 1/4%).
In the fiscal year ended June 30, 1996, certain of the 8.25% Debentures
were converted into common stock of the Company. The conversion reduced debt and
increased stockholders' equity by $28,000. In addition, ICC exercised its'
preemptive rights with respect to such conversions and purchased shares of
common stock, which increased stockholders' equity by $19,000.
In April 1996 the Company sold 2,500,000 shares of Series A Preferred
Stock to ICC for an aggregate of $2,500,000. The Preferred Stock increased
working capital and stockholder equity.
The Company continues to take steps to increase sales and reduce costs
to improve operating results and meet working capital needs. The Company intends
to add an estimated $2,500,000 of capital equipment in the fiscal year ending
June 30, 1997 to increase capacity and reduce costs. The Company intends for
these capital expenditures to be financed through capital leases with either ICC
or other parties. While the Company has in the past had no difficulty in
obtaining capital lease financing or meeting working capital needs, there can be
no assurance the Company will obtain the capital lease financing or meet working
capital needs in the future.
RESULTS OF OPERATIONS FOR FISCAL 1996 COMPARED TO FISCAL 1995
Revenues for the fiscal year ended June 30, 1996 were $57,572,000
compared to $62,427,000 in the prior fiscal year. This decrease of $4,855,000 or
8% is the result of reductions in the private label (store brand), bulk and
contract manufacturing sectors of the business. The majority of the reduction in
private label (store brand) is the result of a reduction in purchases by Revco
D.S., Inc. ("Revco") for which the prior year period included increased sales to
fill start-up requirements for a new acquisition by Revco. In addition, a major
contract manufacturing project from the prior fiscal year did not continue at
the same rate in the current year.
Sales discounts and allowances were $3,245,000 in the fiscal year ended
June 30, 1996 as compared to $3,320,000 in the prior fiscal year.
Three customers each represent over 10% of the Company's sales for the
fiscal year ended June 30, 1996. These three customers are Revco, Walgreen
Company ("Walgreen") and Price-Costco, Inc. ("Price-Costco"). Net sales to these
three customers were $25,195,000 (46%) as compared to $29,801,000 (50%) in the
prior year.
Cost of sales was 82% for the fiscal year ended June 30, 1996 as
compared to 76% in the prior fiscal year. The increase in cost of sales as a
percentage of sales is due to the lower sales volume, especially in the bulk and
contract manufacturing sectors which traditionally have lower cost of sales
percentages than the private label (store brand) sectors. In addition, there
were increases in certain operating costs such as raw materials and labor rates.
Selling, general and administration expenses were $9,143,000 as
compared to $7,719,000 in the prior year. The increase of $1,424,000 is a result
of increased selling and distribution costs to continually expand the customer
and product base. The Company has a new warehouse and distribution center to
facilitate the movement of inventory.
The Company incurred $678,000 of special compensation of which the
majority was for estimated costs of special compensation expense for a former
president and chief executive officer.
Research and development costs were $790,000 in the fiscal year ended
June 30, 1996 as compared to $1,488,000 in the prior fiscal year. The decrease
of $698,000 is due to research projects which are not being performed at the
same rate as the prior fiscal year.
Interest and other expenses were $3,511,000 in the fiscal year ended
June 30, 1996 as compared to $3,447,000 in the prior fiscal year.
The Company recorded an income tax benefit of $911,000, the majority of
which relates to the carryback of the current year net operating losses to the
prior three years to recover federal income taxes paid in prior years, offset by
an increase in the valuation allowance for deferred income taxes.
Net loss for the fiscal year ended June 30, 1996 was $3,465,000 or $.12
per share compared to net income of $2,046,000 or $.07 per share in the prior
fiscal year.
The Company continues to take steps to increase revenues and reduce
costs to reverse the losses incurred in fiscal year ended June 30, 1996. These
steps include: (a) adding customers and products to the current business to
increase sales volume, (b) continual reductions in material costs and (c) other
cost-saving measures as well as other actions to improve profitability. There
can be no assurance that such actions will reverse the current loss and return
the Company to profitability.
RESULTS OF OPERATIONS FOR FISCAL 1995 COMPARED WITH FISCAL 1994
Revenues for the fiscal year ended June 30, 1995 were $62,427,000
compared to $56,256,000 in the prior year. The increase of $6,171,000 or 11%
resulted mainly from increased sales of existing products to current customers
and new customers and, to a lesser degree, to sales of new products (including
cough and cold medications and allergy products). Three customers, Revco,
Price-Costco and Walgreen, accounted for approximately $29,801,000 (50%) of net
sales in the fiscal year ended June 30, 1995 as compared to $21,928,000 (40%) in
the prior fiscal year. The increase in sales for these 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 sectors.
Sales discounts and allowances were $3,320,000 in the fiscal year ended
June 30, 1995 as compared to $926,000 in the prior fiscal year. The increase is
the result of increased sales, especially in the private label section of the
business where discounts and allowances are more prevalent. In addition, the
Company has increased the allowances to certain private label customers to
respond to competitive pressures in the market place.
Cost of goods sold was 76% of sales for the fiscal year ended June 30,
1995 as compared to 75% in the prior fiscal year. The Company achieved
manufacturing cost efficiencies through increased sales volume and cost
containment. The decreases in the bulk and contract manufacturing sector of the
business, which traditionally has higher gross profit margins was offset by cost
efficiencies resulting primarily from higher sales in the private label (store
brand) business, which traditionally has lower gross profit margins.
Selling, general and administrative costs were $7,719,000 as compared
to $6,691,000 in the prior year. The increase of $1,028,000 is a result of
increased marketing and promotion costs to increase sales in the private label
sector of the business. These costs are incurred to expand the customer and
product base. In addition, administrative costs have increased (salaries, legal,
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 development of new products to fund future sales growth.
Interest expense was $3,512,000 in 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.
The Company recorded a reduction in the deferred tax valuation
allowance of $1,000,000 in fiscal year ended 1995 as compared to $197,000 in the
prior fiscal year. This is a result of a change in estimate for deferred income
taxes, which increased net income by $1,000,000 in fiscal year ended June 30,
1995.
Net income was $2,046,000 or $.07 per share as compared to $2,211,000
or $.08 per share in the prior year.
EFFECTS OF INFLATION
The Company does not believe that inflation had a material effect on
its operations for the fiscal years ended June 30, 1996, 1995 or 1994,
respectively.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED JUNE 30, 1996 FOR
PHARMACEUTICAL FORMULATIONS, INC. AND SUBSIDIARIES
Report of Independent Certified Public Accountants F-1
Consolidated Financial Statements
Balance Sheets at June 30, 1996 and 1995 F-2
Statements of Operations for the Years
Ended June 30, 1996, 1995 and 1994 F-3
Statements of Changes in Stockholders'
Equity (Deficiency) for the Years Ended
June 30, 1996, 1995 and 1994 F-4
Statements of Cash Flows for the
Years Ended June 30, 1996, 1995 and 1994 F-5
Notes to Consolidated Financial Statements F-6
FINANCIAL STATEMENT SCHEDULE
Report of Independent Certified Public Accountants
on Financial Statement Schedule F-22
Schedule II - Valuation and Qualifying Accounts F-23
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
That portion of PFI'S definitive Information or Proxy Statement
appearing under the caption "Election of Directors," to be filed with the
Commission pursuant to Regulation 14A within 120 days after June 30, 1996 and to
be used in connection with the Annual Meeting of Stockholders of PFI currently
scheduled to be held in 1996 (the "1996 Annual Meeting") is hereby incorporated
by reference. The information regarding the executive officers of PFI is
contained under "Directors and Executive Officers of the Registrant" under Item
1 to this Report.
ITEM 11. EXECUTIVE COMPENSATION.
That portion of PFI's definitive Information or Proxy Statement
appearing under the caption "Compensation of Executive Officers," to be
filed with the Commission pursuant to Regulation 14A within 120 days after June
30, 1996 and to be used in connection with PFI's 1996 Annual Meeting is hereby
incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
That portion of PFI's definitive Information or Proxy Statement
appearing under the caption "Security Ownership of Certain Beneficial
Owners and Management," to be filed with the Commission pursuant to Regulation
14A within 120 days after June 30, 1996 and to be used in connection with PFI's
1996 Annual Meeting is hereby incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
That portion of PFI's definitive Information or Proxy Statement
appearing under the caption "Certain Relationships and Related
Transactions," to be filed with the Commission pursuant to Regulation 14A within
120 days after June 30, 1996 and to be used in connection with PFI's 1996 Annual
Meeting is hereby incorporated by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(a) (1) and (2) Financial Statements and Financial Statement Schedule: See
Item 8, "Financial Statements and Supplementary Data".
(a) (3) and (c) Exhibits: Exhibits are numbered in accordance with Item 601
of Regulation S-K.
(3) Articles of Incorporation and By-Laws:
3.1 Articles of Incorporation, as amended (3)
3.2 By-laws, as amended (3)
(4) Instruments defining the rights of security holders, including indentures:
4.1 Indenture (1)
4.2 New Indenture (2)
(10) Material contracts:
10.1 Employment Agreement with Max A. Tesler, as extended (4)*
10.2 Employment Agreement with Anthony Cantaffa, as extended
(4)*
10.3 Employment Agreement with Charles E. LaRosa(10)*
10.4 Loan and Security Agreement between Fidelcor Business
Credit Corporation and the Registrant (formerly known as
PharmaControl Corp.) (5)
10.5 Agreement dated September 6, 1991 among the Registrant
(formerly known as PharmaControl Corp.), Private
Formulations, Inc. and ICC Industries Inc. (6)
10.6 Agreement dated September 24, 1992 among the Registrant
(formerly known as PharmaControl Corp.), Private
Formulations, Inc. and ICC Industries Inc. (7)
10.7 Agreement dated March 29, 1993 among the Registrant
(formerly known as PharmaControl Corp.), Private
Formulations, Inc. and ICC Industries Inc. (8)
10.8 Agreement dated May 8, 1992, among the Registrant
(formerly known as PharmaControl Corp.), Private
Formulations, Inc. and ICC Industries Inc. (7)
10.9 Agreement dated May 28, 1992, among the Registrant
(formerly known as PharmaControl Corp.)., Private
Formulations, Inc. and ICC Industries Inc. (7)
10.10 Agreement dated May 24, 1993, among the Registrant
(formerly known as PharmaControl Corp.), Private
Formulations, Inc. and ICC Industries Inc. (8)
10.11 Agreement dated September 26, 1996 between the Registrant
and ICC Chemical Corporation (11)
10.12 Agreement dated September 29, 1992 among Materials
Processing Technology, Inc. and the Registrant (formerly
known as PharmaControl Corp.)(7)
10.13 Form of Warrant Agreement dated October 1, 1992 between
the Registrant (formerly known as PharmaControl Corp.)
and Max A. Tesler, Anthony Cantaffa, George Chin and
Sandra J. Brown)(7).*
10.14 1994 Stock Option Plan (9)*
(11) Statement re computation of per share earnings: not applicable
(12) Statement computation of ratios: not applicable
(13) Annual report to security holders, Form 10-Q or quarterly report to
security holders: not applicable
(16) Letter re change in certifying accountant: not applicable
(18) Letter re change in accounting principles: not applicable
(21) Subsidiaries of the registrant: none
(22) Published report regarding matters submitted to vote of security holders:
not applicable
(23) Consent of experts and counsel: consent of the Independent Public
Accountants
(24) Power of attorney: not applicable
(27) Financial data schedule: attached
(28) Information from reports furnished to state insurance regulatory
authorities: not applicable
(29) Additional exhibits: not applicable
- ---------------------
* Management contracts or compensatory plans
(1) Incorporated herein by reference to the Registrant's Form S-1, File No.
33-13291
(2) Incorporated herein by reference to the Registrant's Form S-4, File No.
33-44033
(3) Filed with the Annual Report on Form 10-K for the year ended June 30,
1983 and incorporated by reference herein, except for (a) Amendment to
Certificate of Incorporation filed with the Delaware Secretary of State
on April 13, 1984 which was filed with the Registration Statement on Form
S-1 (File No. 2-88752), (b) Amendment to Certificate of Incorporation
filed with the Delaware Secretary of State on February 3, 1987 which was
filed with Post-Effective Amendment No. 3 to Registration Statement on
Form S-1 (File No. 33- 6731), (c) Amendment to Certificate of
Incorporation filed with the Delaware Secretary of State on November 16,
1991, which was filed with the Annual Report on Form 10-K for the year
ended June 30, 1991, (d) Amendment to Certificate of Incorporation filed
with the Delaware Secretary of State on January 26, 1994 which was filed
with the Quarterly Report on Form 10-Q for the period ended March 31,
1994, (e) Amendment to the Company's By-Laws filed with the Registrant's
Quarterly Report on Form 10-Q for the period ended March 31, 1994, and
(f) Certificate of Designations, Preferences and Rights of Series A
Cumulative Preferred Stock filed with the Registrant's Current Report on
Form 8-K for an event occurring on April 4, 1996, each of which is
incorporated by reference herein.
(4) Filed with the Registrant's Annual Report on Form 10-K for the year
ended June 30, 1993 and incorporated herein by reference.
(5) Incorporated herein by reference to the Registrant's Current Report on
Form 8-K dated August 2, 1989.
(6) Incorporated herein by reference to the Registrant's Current Report on
Form 8-K dated September 6, 1991.
(7) Filed with the Registrant's Annual Report on Form 10-K for the year
ended June 30, 1992 and incorporated herein by reference.
(8) Filed with the Registrant's Annual Report on Form 10-K for the year
ended June 30, 1994 and incorporated herein by reference.
(9) Filed with the Registrant's Annual Report on Form 10-K for the year
ended June 30, 1989 and incorporated herein by reference.
(10) Filed with the Registrant's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1996 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,
1996 except for a Form 8-K filed on April 26, 1996 reporting under Item 5 the
creation and sale of Series A Preferred Stock to ICC.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this Annual
Report on Form 10-K to be signed on its behalf by the undersigned, thereunto
duly authorized.
PHARMACEUTICAL FORMULATIONS, INC.
By:/s/CHARLES E. LAROSA
Charles E. LaRosa
President, Chief Executive Officer and
a Director
Dated: September 27, 1996
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
NAME TITLE DATE
/s/Charles E. LaRosa President; Chief Executive September 27, 1996
- ----------------------------------
Charles E. LaRosa Officer and a Director
(Principal Executive
Officer)
/s/Frank Marchese Vice President, Finance; September 27, 1996
- -----------------------
Frank Marchese Chief Financial Officer;
Secretary and Treasurer
(Principal Financial Officer)
/s/John L. Oram Chairman of the Board September 27, 1996
- ----------------------
John L. Oram
Director
- ---------------------
Ben A. Blackshire
/s/Ray W. Cheesman Director September 27, 1996
- ----------------------
Ray W. Cheesman
Director
- -----------------------------
Max A. Tesler
PHARMACEUTICAL FORMULATIONS, INC.
AND SUBSIDIARIES
CONTENTS
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-1
CONSOLIDATED FINANCIAL STATEMENTS:
Balance sheets F-2
Statements of operations F-3
Statements of changes in stockholders' equity (deficiency) F-4
Statements of cash flows F-5
Notes to consolidated financial statements F-6-F-21
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE F-22
FINANCIAL STATEMENT SCHEDULE:
Schedule II - Valuation and qualifying accounts F-23
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors
Pharmaceutical Formulations, Inc.
We have audited the accompanying consolidated balance sheets of
Pharmaceutical Formulations, Inc. and subsidiaries as of June 30, 1996 and 1995,
and the related consolidated statements of operations, changes in stockholders'
equity (deficiency) and cash flows for each of the three years in the period
ended June 30, 1996. 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, 1996 and 1995
and the results of their operations and their cash flows for each of the three
years in the period ended June 30, 1996 in conformity with generally accepted
accounting principles.
BDO Seidman, LLP
Woodbridge, New Jersey
August 26, 1996
PHARMACEUTICAL FORMULATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,284,000 $ 655,000
Accounts receivable, net of allowance for doubtful accounts of $300,000 and $333,000 8,511,000 8,093,000
Inventories 9,720,000 14,915,000
Income tax receivable 1,161,000 -
Prepaid expenses and other current assets 747,000 696,000
Deferred tax asset 400,000 400,000
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 21,823,000 24,759,000
PROPERTY, PLANT AND EQUIPMENT, NET 16,802,000 14,346,000
OTHER ASSETS:
Deferred financing costs 94,000 130,000
Deferred tax asset 750,000 1,000,000
Other assets 192,000 221,000
- -------------------------------------------------------------------------------------------------------------------------------
$ 39,661,000 $ 40,456,000
- --------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
Current portion of long-term debt $ 587,000 $ 642,000
Current portion of capital lease obligations 1,877,000 1,529,000
Accounts payable 9,441,000 9,829,000
Accrued expenses 1,990,000 549,000
Income taxes payable - 38,000
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 13,895,000 12,587,000
LONG-TERM DEBT, LESS CURRENT MATURITIES 16,284,000 18,207,000
LONG-TERM CAPITAL LEASE OBLIGATIONS, LESS CURRENT MATURITIES 9,468,000 8,731,000
DEFERRED GAIN ON SALE/LEASEBACK 425,000 477,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIENCY):
Preferred stock, par value $1.00 per share; 10,000,000 shares
authorized; 2,500,00 shares issued and outstanding 2,500,000 -
Common stock, par value $.08 per share; 40,000,000 shares
authorized; 29,508,814 and 29,311,816 shares issued and outstanding 2,361,000 2,347,000
Capital in excess of par value 37,286,000 37,200,000
Accumulated deficit (42,558,000) (39,093,000)
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIENCY) (411,000) 454,000
- -------------------------------------------------------------------------------------------------------------------------------
$ 39,661,000 $ 40,456,000
- -------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
PHARMACEUTICAL FORMULATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended June 30, 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------------
GROSS SALES $57,572,000 $62,427,000 $56,256,000
LESS: SALES DISCOUNTS AND ALLOWANCES 3,245,000 3,320,000 926,000
- ----------------------------------------------------------------------------------------------------------------------------------
NET SALES 54,327,000 59,107,000 55,330,000
- ----------------------------------------------------------------------------------------------------------------------------------
COST AND EXPENSES:
Cost of goods sold 44,581,000 44,924,000 41,761,000
Selling, general and administrative 9,143,000 7,719,000 6,691,000
Special compensation expense 678,000 - -
Research and development 790,000 1,488,000 574,000
- ----------------------------------------------------------------------------------------------------------------------------------
55,192,000 54,131,000 49,026,000
- ----------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS (865,000) 4,976,000 6,304,000
- ----------------------------------------------------------------------------------------------------------------------------------
OTHER EXPENSES (INCOME):
Interest expense 3,553,000 3,512,000 3,298,000
Other, net (42,000) (65,000) (85,000)
- ----------------------------------------------------------------------------------------------------------------------------------
3,511,000 3,447,000 3,213,000
- ----------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES (BENEFIT) (4,376,000) 1,529,000 3,091,000
INCOME TAXES (BENEFIT) (911,000) (517,000) 880,000
- ----------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $(3,465,000) $ 2,046,000 $ 2,211,000
- ----------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) PER SHARE:
Primary $ (.12) $ .07 $ .08
Fully diluted (.12) .06 .07
- ----------------------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING:
Primary 29,412,000 30,023,000 29,361,000
Fully diluted 29,412,000 32,520,000 32,350,000
- ----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
PHARMACEUTICAL FORMULATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
Years ended June 30, 1996, 1995 and 1994
- ---------------------------------------------------------------------------------------------------------------------------------
Preferred stock Common stock Capital In Accumulated
Excess Of Deficit
Par Value
Shares Amount at Shares Amount At
issued par value Issued Par Value
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE, 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 - - 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
- ------------------------------------------------------------------------------------------------------------------ --------------
BALANCE, 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
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 1995 - - 29,311,816 2,347,000 37,200,000 (39,093,000)
Preferred stock issuance 2,500,000 2,500,000 - - - -
Shares issued in connection with exercise by ICC
of preemptive rights - - 75,926 6,000 13,000 -
Shares issued in connection with ICC agreement
to key Company employees - - 16,799 1,000 3,000 -
Shares issued in connection with conversion of
8.25% debentures - - 34,273 2,000 26,000 -
Shares issued to officer and outside directors - - 70,000 5,000 44,000 -
Net loss - - - - - (3,465,000)
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 1996 2,500,000 $2,500,000 29,508,814 $2,361,000 $37,286,000 $(42,558,000)
- ----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
PHARMACEUTICAL FORMULATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended June 30, 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(3,465,000) $ 2,046,000 2,211,000
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 1,662,000 1,395,000 1,150,000
Amortization of bond discount and deferred financing costs 135,000 71,000 295,000
Amortization of deferred gain on sale of building (52,000) (52,000) (52,000)
Shares issued to key Company employees 4,000 - 31,000
Shares issued to officer and outside directors 49,000 21,000 -
Deferred income taxes 250,000 (1,000,000) (197,000)
Changes in current assets and liabilities:
Increase in accounts receivable (418,000) (599,000) (2,737,000)
(Increase) decrease in inventories 5,195,000 (3,656,000) (2,260,000)
(Increase) decrease in other current assets (51,000) 15,000 (74,000)
Increase in income tax receivable (1,161,000) - -
Increase in accounts payable, accrued expenses and income taxes payable 1,015,000 1,553,000 3,524,000
- ----------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 3,163,000 (206,000) 1,891,000
- ----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment, net (2,317,000) (2,010,000) (979,000)
(Increase) decrease in other assets 29,000 11,000 (231,000)
- ----------------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (2,288,000) (1,999,000) (1,210,000)
- ----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (repayments) under the line of credit (1,342,000) 3,716,000 1,745,000
Proceeds from issuance of long-term debt - - 183,000
Principal repayments of long-term debt (707,000) (551,000) (602,000)
Principal repayments of capital leases (1,684,000) (1,564,000) (1,121,000)
Refinancing of capital leases 968,000 - -
Increase in deferred financing costs - (20,000) (35,000)
Issuance of preferred stock 2,500,000 - -
Issuance of common stock, less offering and registration costs 19,000 67,000 122,000
- -----------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (246,000) 1,648,000 292,000
- ----------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 629,000 (557,000) 973,000
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 655,000 1,212,000 239,000
- ----------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 1,284,000 $ 655,000 $ 1,212,000
- -----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
PHARMACEUTICAL FORMULATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF THE Pharmaceutical Formulations, Inc. (the "Company")is
BUSINESS AND RELATED primarily engaged in the manufacture and distribution
PARTIES of over-the-counter solid dosage pharmaceutical
products in tablet, caplet and capsule form,
which are sold under customers' private
labels. 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 options to
acquire a total of 66.67% of the number
of shares of the Company's common stock
outstanding after exercise of all
options. ICC has exercised all of its
options pursuant to the Option
agreement. The number of shares issued
to ICC through June 30, 1996 was
19,635,894 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 1996,
1995 and 1994 at a price of $.25 per share:
1996 1995 1994
- ----------------------------------------------------------------------------
Shares under preemptive rights 75,926 274,468 999,048
- ----------------------------------------------------------------------------
PHARMACEUTICAL FORMULATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 1995 sales in excess of $1 billion,
has offices in key business centers
around the world and owns numerous
manufacturing plants. 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, and have the right in the
future to receive, shares of the
Company's common stock. The Company
issued 16,799, 233 and 31,965 shares of
common stock to these employees in 1996,
1995 and 1994, respectively.
The following transactions with ICC, are
reflected in the consolidated financial
statements as of or for the years ended
June 30, 1996, 1995 and 1994:
June 30, 1996 1995 1994
- ---------------------------------------------------------------------------
Sales to ICC $ - $ - $ 9,267,000
Inventory purchases 795,000 1,219,000 14,300,000
Services and finance fees 488,000 575,000 906,000
Accounts payable to ICC 334,000 118,000 3,233,000
Equipment lease obligations
due ICC 4,635,000 3,497,000 3,251,000
Other receivables from ICC 213,000 - -
- ------------------------------------------------------------------------------
2. SUMMARY OF Principles of Consolidation
SIGNIFICANT
ACCOUNTING POLICIES
The accompanying consolidated financial statements
include the accounts of the Company and its
wholly-owned subsidiaries. All references to the
"Company" include its wholly-owned subsidiaries. All
significant intercompany accounts and transactions
have been eliminated.
PHARMACEUTICAL FORMULATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cash Equivalents
Cash equivalents consists of short-term,
highly liquid investments, which are
readily convertible into cash at cost.
Inventories
Inventories are stated at the lower of
cost or market with cost determined on a
first-in, first-out (FIFO) basis.
Property, Plant and Equipment
Property, plant and equipment are stated
at cost. Depreciation and amortization
is provided on the straight-line method
over the estimated useful lives of the
assets (five to fifteen years).
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).
No effect has been given to shares
issuable for common stock equivalents
for the year ended June 30, 1996 as the
effect would be anti-dilutive.
At June 30, 1995 and 1994, the primary
and fully diluted common equivalent
shares amounted to 2,110,000 and
5,320,000, and 2,804,000 and 5,793,000,
respectively.
PHARMACEUTICAL FORMULATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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,
1996, 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.
Use of Estimates
The preparation of financial statements
in conformity with generally accepted
accounting principles requires
management to make estimates and
assumptions that affect the reported
amounts of assets and liabilities and
disclosure of contingent assets and
liabilities at the date of the financial
statements and the reported amounts of
revenues and expenses during the
reporting period. Actual results could
differ from those estimates.
Effect of New Accounting Pronouncements
In March 1995, the Financial Accounting
Standards Board ("FASB") issued
Statement of Financial Accounting
Standards ("FAS") No. 121, "Accounting
for the Impairment of Long-Lived Assets
and for Long- Lived Assets to Be
Disposed Of." The Company believes that
this pronouncement will not have a
material impact on the Company's results
of operations and financial condition.
In October 1995, the FASB issued FAS No.
123, "Accounting for Stock-Based
Compensation." As permitted under FAS
No. 123, the Company plans to continue
its current method of valuing stock
options granted to employees and will
disclose the proforma effect of the fair
value of such options.
PHARMACEUTICAL FORMULATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair Value of Financial Instruments
Financial instruments of the Company
include long-term debt. Based upon the
current borrowing rates available to the
Company, estimated fair values of the
revolving credit and term loans (see
Note 5) approximate their recorded
carrying amounts. It was not deemed
practical to determine the estimated
fair value of the remaining debt. The
carrying amounts for cash, accounts
receivable, accounts payable and accrued
expenses are reasonable estimates of
their fair value due to the short
maturity of these items.
Reclassifications
Certain amounts appearing in the 1995
and 1994 financial statements have been
reclassified to conform to the 1996
presentation. There was no effect on net
income due to the reclassification.
3. INVENTORIES Inventories consist of the following:
June 30, 1996 1995
- ---------------------------------------------------------------------------
Raw materials $3,849,000 $ 5,321,000
Work in process 648,000 375,000
Finished goods 5,223,000 9,219,000
- --------------------------------------------------------------------------
$9,720,000 $14,915,000
- --------------------------------------------------------------------------
4. PROPERTY,PLANT AND Property, plant and equipment consist of the following:
EQUIPMENT
June 30, 1996 1995
- -------------------------------------------------------------------------
Land and building $ 8,348,000 $ 8,348,000
Leasehold improvements 3,860,000 323,000
Machinery and equipment 15,804,000 15,374,000
Construction in progress - 1,133,000
Other 1,093,000 -
- -------------------------------------------------------------------------
29,105,000 25,178,000
Less: Accumulated
depreciation
and amortization 12,303,000 10,832,000
- -------------------------------------------------------------------------
$16,802,000 $14,346,000
- -------------------------------------------------------------------------
PHARMACEUTICAL FORMULATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The net book value of property, plant
and equipment under capital leases was
$10,485,000 and $10,000,000 at June 30,
1996 and 1995, respectively.
5. LONG-TERM DEBT AND Long-term debt and capital lease obligations consist
CAPITAL LEASE of the following:
OBLIGATIONS
June 30, 1996 1995
- -----------------------------------------------------------------------------------------
Long-Term Capital Long-Term Capital Leases
Debt Leases Debt
------------------------------ -----------------------------
Revolving/term loans (a) $11,545,000 $ - $13,289,000 $ -
Convertible subordinated 3,279,000 - 3,198,000 -
debentures, $1,000 face
value (less unamoritized
discount of $1,917,000
and $2,016,000) (b)
Convertible subordinated 852,000 927,000 -
debentures,$325,000 face
value (c)
New Jersey Economic Development 780,000 - 840,000 -
Authority Loan (d)
Secured note (e) 115,000 - 295,000 -
Building sale/leaseback (f) - 6,351,000 - 6,763,000
Capital equipment lease obligations (g) - 4,994,000 - 3,497,000
Other 300,000 - 300,000 -
- ------------------------------------------------------------------------------------------
16,871,000 11,345,000 18,849,000 10,260,000
Less: Current portion 587,000 1,877,000 642,000 1,529,000
- -----------------------------------------------------------------------------------------
$16,284,000 $9,468,000 $18,207,000 $ 8,731,000
- -----------------------------------------------------------------------------------------
PHARMACEUTICAL FORMULATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 (8 1/4% at June 30, 1996),
plus 1 3/4%. In the event of default, the interest
rate will increase by 2%.
The loan agreement contains certain loan covenants,
which, among other things, prohibit the Company from
making dividend payments, limit the Company's annual
capital expenditures and net loss and require the
Company to maintain minimum working capital and net
worth. The Company was in default in fiscal 1996 of
the minimum amount of loss allowed under the agreement,
which default was waived by the financial institution.
(b) At June 30, 1996, the Company has 5,196 units
outstanding consisting of a $1,000 principal amount 8%
convertible subordinated debenture due June 15, 2002
(the "8% Debentures") with interest payable
semi-annually. The holders of the 8% Debentures may
convert them at any time into common stock of the
Company at a conversion price of $48 per share. The
8% Debentures are redeemable at the option of the
Company under certain circumstances at par, plus an
applicable premium, as defined.
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.
In 1996, ICC purchased 29 units of the 8% Debentures
at a purchase price of $17,643. ICC offered and the
Company accepted these bonds at ICC's cost, which
approximated the Company's book value of the debt.
PHARMACEUTICAL FORMULATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(c) On June 30, 1996, the Company has 1,753 units
outstanding consisting of $325 principal amount
8 1/4% convertible debentures due June 15, 2002 (which
includes $570,000 face value and interest through
maturity of $282,000). Interest is payable annually
on June 30. The holders of the 8 1/4% Debentures may
convert them at any time into shares of common stock at
a conversion price of $.55 per share. The Company has
no right to redeem the 8 1/4% Debentures.
In 1996, 1995 and 1994, 58,206 and 5 units,
respectively, of 8 1/4% Debentures were converted
into common stock. A total of 158,166 shares were
issued to the debenture holders.
(d) The loan, which is secured by certain equipment, bears
interest at 63/8% and is due as follows: $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
note-holders have waived their rights to convert the
note into shares of common stock, except in the event
of default.
PHARMACEUTICAL FORMULATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 1/4% interest rate factor, and is being amortized
over the term of the lease.
(g) The Company leases various equipment primarily from ICC
under capital lease agreements. The terms of the leases
vary from three to five years with monthly rentals of
approximately $148,000.
The Company's debt and obligations under capital leases
mature in fiscal years ending June 30 as follows:
Capital Lease Long-Term
Obligations Debt
- ------------------------------------------------------------------------------
1997 $ 3,327,000 $ 587,000
1998 3,047,000 472,000
1999 2,945,000 10,821,000
2000 2,480,000 80,000
2001 1,786,000 80,000
Thereafter 4,784,000 4,831,000
- ------------------------------------------------------------------------------
Total payments 18,369,000 $16,871,000
----------------
Less: Amount
representing interest 7,024,000
- --------------------------------------------------------------
Present value of net
minimum lease payments $11,345,000
- --------------------------------------------------------------
PHARMACEUTICAL FORMULATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. COMMITMENTS AND Commitments
CONTINGENCIES
In fiscal 1996, the Company entered into a long-term
lease for a building adjacent to the Company's present
facility. The lease term is ten years with
two five-year renewal options. The lease is classified
as an operating lease. The rent payments are $319,200
per anum for the first five years and $342,000 per
annum for the balance of the initial term.
Contingencies
In or about October 1991, an action was instituted
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. This case
has been moved to the "inactive" trial list. No further
action will be taken by either party unless and until
plaintiff seeks to restore the matter.
In or about November 1992, an action was
instituted against the Company 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.
PHARMACEUTICAL FORMULATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In or about July 1994, Puritan Quartz, Inc.
("Puritan") brought suit against the Company, 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 16, 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. Discovery is on-going and the
Company intends to move for summary judgement at the
close of discovery.
Under the New Jersey Industrial Site
Recovery Act ("ISRA"), the purchase of
the Company's manufacturing facilities
from Revco in 1987, the sale/leaseback
of the premises in 1989 (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 (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 obligations.
Management believes the final outcome of
the above proceedings will not have a
material effect upon the Company's
financial position.
The Company is a party to various other
legal proceedings arising in the normal
conduct of business. Management believes
that the final outcome of these
proceedings will not have a material
adverse effect upon the Company's
financial position.
PHARMACEUTICAL FORMULATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. INCOME TAXES Income taxes (benefit) consist of the following:
1996 1995 1994
- -------------------------------------------------------------------------------
Current:
Federal $(1,161,000) $ 483,000 $1,077,000
State - - -
- ---------------------------------------------------------------------------------
Total current (1,161,000) 483,000 1,077,000
Deferred - federal 250,000 (1,000,000) (197,000)
- ---------------------------------------------------------------------------------
Total income taxes (benefit) $ (911,000) $ (517,000) $ 880,000
- ---------------------------------------------------------------------------------
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:
1996 1995 1994
- ------------------------------------------------------------------------------------
Statutory U.S. tax $(1,488,000) $ 520,000 $ 1,051,000
Increase (decrease) resulting from:
Utilization of federal net
operating loss carryforwards - (56,000) (56,000)
State income taxes, net of federal
tax benefit - 108,000 185,000
Utilization of state net
operating loss carryforwards - (108,000) (185,000)
Net change in valuation account 681,000 (1,000,000) (197,000)
Other (104,000) 19,000 82,000
- -------------------------------------------------------------------------------------
Effective income taxes (benefit) $ (911,000) $ (517,000) $ 880,000
- -------------------------------------------------------------------------------------
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.
As of June 30, 1996, the Company had available net
operating losses of approximately $3,000,000 for U.S.
regular tax purposes, which expire through 2111. The
utilization of losses generated prior to September
1991, which approximated $1,800,000, is limited to
approximately $166,000 per year for U.S. regular tax
purposes due to the change in ownership resulting from
the ICC investment. State income tax net operating
loss carryforwards of approximately $16,200,000, which
expire through 2003, are available to the Company.
Deferred tax assets are comprised of the following
temporary differences at June 30:
1996 1995
- -------------------------------------------------------------------------------------------------------
Tax benefit of state income tax net operating loss carryforwards $ 972,000 $ 813,000
Tax benefit of federal income tax net operating loss carryforwards 1,020,000 681,000
Depreciation (145,000) 54,000
Deferred gain on sale/leaseback of building 145,000 162,000
Basis difference 8 1/4% bonds as a result of restructuring 96,000 115,000
Capitalized inventory costs 136,000 136,000
Deferred compensation 148,000 -
Allowance for doubtful accounts 102,000 82,000
- ----------------------------------------------------------------------------------------------------------
Gross deferred tax asset 2,474,000 2,043,000
Valuation allowance (1,324,000) (643,000)
- -----------------------------------------------------------------------------------------------------------
Net deferred tax asset $1,150,000 $ 1,400,000
- -----------------------------------------------------------------------------------------------------------
8. COMMON STOCK, The Company has granted options to employees, directors
OPTIONS AND and others under various stock option plans, lending
WARRANTS arrangements, and under the ICC Option Agreement to key
employees.
PHARMACEUTICAL FORMULATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a summary of stock
options and warrants issued, exercised,
forfeited or cancelled for the period
July 1, 1993 through June 30, 1996 (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, 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 $ 43.00
- ------------------------------------------------------------------------------
Outstanding - June 30, 1995 1,820,775 $ .25 to $ .91
Issued 130,000 $ .56 to $ .66
Forfeited (213,975) $ .85 to $ 8.00
- ------------------------------------------------------------------------------
Outstanding - June 30, 1996 1,736,800 $ .25 to $ 1.60
- ------------------------------------------------------------------------------
As of June 30, 1996, 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.
9. PREFERRED STOCK On April 8, 1996, the Company sold 2,500,000 shares of
Series A Preferred Stock to ICC for an aggregate of
$2,500,000. The preferred stock is redeemable at the
option of PFI and convertible into common stock of the
Company by ICC at any time after 36 months at the lower
of market price of the common stock of the Company or
$2.00 per share. The preferred stock sold to ICC pays
dividends at the rate of $.08 per share, payable
semi-annually on January 1st and July 1st each
year and is cumulative and non-participating.
10.MAJOR CUSTOMER AND For the years ended June 30, 1996, 1995 and 1994, 20%,
PRODUCTS 25% and 16%, respectively, of consolidated net sales
were derived from Revco D.S. Inc. For the years ended
June 30, 1996, 1995 and 1994, Walgreen Company
accounted for 14%, 14% and 16% of
consolidated net sales, respectively. In
addition, sales to ICC accounted for 17%
of consolidated net sales for the year
ended June 30, 1994. Sales to Price
Costco were 12%, 12% and 8% of
consolidated net sales for the years
ended June 30, 1996, 1995 and 1994, respectively.
For the years ended June 30, 1996, 1995
and 1994, sales of ibuprofen represented
41%, 41% and 46% of consolidated net
sales, respectively. For the years ended
June 30, 1996, 1995 and 1994, sales of
acetaminophen products accounted for
approximately 11%, 12% and 12% of
consolidated net sales, respectively.
11.SPECIAL In December 1995, the Company replaced its former
COMPENSATION EXPENSE President and Chief Executive Officer. The Company
accrued the estimated remaining obligation due to this
individual under his employment contract.
12. SUPPLEMENTAL CASH Supplemental disclosures of cash flow information:
FLOW INFORMATION
1996 1995 1994
- ------------------------------------------------------------------------------
Cash paid during the year:
Interest $3,463,000 $3,441,000 $3,455,000
Income taxes - 525,000 968,000
- ------------------------------------------------------------------------------
PHARMACEUTICAL FORMULATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Supplemental non-cash investing and financing information:
1996 1995 1994
- ------------------------------------------------------------------------------
Issuance of common stock upon conversion of dates $28,000 $125,000 $3,000
- -------------------------------------------------------------------------------
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 (Note 1).
Capital lease obligations of $1,801,000,
$1,449,000 and $2,511,000 were incurred
when the Company entered into various
leases in 1996, 1995 and 1994, respectively.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
The audits referred to in our report dated August 26, 1996 relating to the
consolidated financial statements of Pharmaceutical Formulations, Inc. and
subsidiaries, which is contained in Item 8 of this Form 10-K, included the
audits of the financial statement schedule listed in the accompanying index.
This financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on this financial
statement schedule based upon our audits.
In our opinion, such financial statement schedule presents fairly, in all
material respects, the information set forth therein.
BDO Seidman, LLP
Woodbridge, New Jersey
August 26, 1996
PHARMACEUTICAL FORMULATIONS, INC.
AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Additions Deductions
Balance at charged to write-offs
beginning of costs & Charge to uncollectible Balance at end
Allowance for doubtful accounts period expense other accounts accounts of period
- --------------------------------------------------------------------------------------------------------------------
Year ended June 30, 1996 $333,000 $ 68,000 $ - $101,000 $300,000
Year ended June 30, 1995 188,000 145,000 - - 333,000
Year Ended June 30, 1994 140,000 272,000 - 224,000 188,000
- --------------------------------------------------------------------------------------------------------------------
EXHIBIT INDEX
Number Description
10.11 Agreement dated September 26, 1996 between
the Registrant and ICC Chemical Corporation
(11)
23 Consent of the Independent Public Accountants
27 Financial data schedule