1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(Amendment No. 1)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
for the transition period from ________ to ________
Commission file number 0-15242
DURAMED PHARMACEUTICALS, INC.
Incorporated Under the IRS Employer I.D.
Laws of the State No. 11-2590026
of Delaware
7155 East Kemper Road
Cincinnati, Ohio 45249
(513) 731-9900
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value; Preferred Stock Purchase Rights
Indicate by checkmark whether the Registrant (1) has filed reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
_____ _____
Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (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 Common Stock of the Registrant held by
non-affiliates of the Registrant was approximately $169,539,313 as of April 1,
1996. As of April 1, 1996, 9,789,877 shares of Common Stock with a par value
of $.01 per share were outstanding.
Documents Incorporated by Reference
Not applicable.
2
Note: This Form 10-K/A (Amendment No. 1) is being filed to provide the
information set forth in Part III, which the Company previously had
anticipated would be incorporated by reference from the Proxy Statement
for the Company's 1996 Annual Meeting of Stockholders. The remainder of
the document is being refiled without changes (except that certain
revisions have been made on the cover page) so as to set forth all Form
10-K information in one location.
PART I
ITEM 1. BUSINESS.
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GENERAL
Duramed Pharmaceuticals, Inc. (the "Company" or "Duramed") currently
manufactures and sells a limited line of prescription generic drug products in
tablet, capsule and liquid forms to customers throughout the United States.
Products sold by the Company include those of its own manufacture and those
which it markets under certain arrangements with other drug manufacturers. The
Company sells its products to drug wholesalers, private label distributors,
drug store chains, health maintenance organizations, hospitals, nursing homes,
retiree organizations, mail order distributors, other drug manufacturers, mass
merchandisers and governmental agencies.
Generic drugs are the chemical and therapeutic equivalents of brand name drugs
which have gained market acceptance while under patent protection. In general,
prescription generic drug products are required to meet the same governmental
standards as brand name pharmaceutical products and must receive Food and Drug
Administration ("FDA") approval prior to manufacture and sale. Generic drug
products are marketed after expiration of patents held by the innovator
company, generally on the basis of FDA approved Abbreviated New Drug
Applications ("ANDAs") submitted by the generic manufacturers. Generic drug
products typically sell at prices substantially below those of the equivalent
brand name products. The increasing emphasis on controlling health care costs,
the growth of managed care organizations and the significant number of drugs
for which patents will expire in the next few years are expected to create an
opportunity for continued growth in the generic drug market.
RECENT DEVELOPMENTS
Private Placement of Series C Convertible Preferred Stock
In November 1995, the Company issued $12.0 million of 8% Cumulative Convertible
Preferred Stock, Series C (the "Series C Preferred Stock") and obtained
commitments for an additional $12.0 million. The Company's Common Stock trades
on the Nasdaq National Market ("Nasdaq") under the symbol DRMD. Nasdaq
regulations required stockholder approval for the second stage, which was
obtained on January 24, 1996. The Company closed on the issuance of the $12.0
million second stage of the offering in February 1996.
Each share of Series C Preferred Stock is convertible at the option of the
holder, with respect to its stated value of $100, into shares of the Company's
Common Stock at a price which is 15% below the average closing price of the
Common Stock over the 10-day trading period ending two days prior to the date
of conversion (the "conversion price"). The conversion price may not be less
than $7.50 or more than $20.00. Half of the shares of Series C Preferred Stock
became convertible on February 12, 1996; the remaining half became convertible
on March 13, 1996.
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Any shares of Series C Preferred Stock remaining outstanding on November 14,
1997 will automatically be converted into shares of Common Stock on such date.
The Series C Preferred Stock pays a dividend of 8% annually, payable quarterly
in arrears, on all unconverted shares.
Through March 25, 1996, $17.0 million of the Series C Preferred Stock had been
converted to 1,175,794 shares of the Company's Common Stock at an average
conversion price of $14.46 per common share.
Financial Arrangements
During the third and fourth quarters of 1995, the Company reorganized the terms
of certain borrowing arrangements with its bank, which resulted in expanded
borrowing capacity under the Company's revolving credit facility and modified
repayment due dates on a term note. The amended terms of the revolving credit
facility permit the Company to borrow up to $12.5 million, based upon eligible
collateral, through March 30, 1997 when the principal balance is due. The
expressed intention of the Company and its bank is to review quarterly the
Company's financial condition and, if appropriate, extend the due date of the
revolving credit facility in order to maintain a fifteen month term. The
Company made a $1.0 million principal payment on its term note in December
1995. As amended, the $4.5 million balance of the term note at December 31,
1995 required a principal payment of $1.5 million on March 1, 1996, with the
remaining $3.0 million due on June 1, 1996. In February 1996 the Company made
the $1.5 million term note principal payment due on March 1, 1996. In March
1996, the bank made available to the Company an additional $1.5 million of term
financing collateralized by existing equipment. See "Notes to Consolidated
Financial Statements - Note D" for additional information on these obligations.
Mergers/Acquisitions
In October 1995, the Company signed a letter of intent to acquire Hallmark
Pharmaceuticals, Inc. ("Hallmark"), a privately held pharmaceutical development
company headquartered in Somerset, N.J. The Company believes that Hallmark's
technical expertise and capabilities with respect to advanced drug delivery
systems would contribute significantly to the long term success of the
Company's product development program. The Company is continuing discussions
with Hallmark directed toward the signing of a definitive acquisition
agreement. If the acquisition is consummated, it is probable that a
substantial non-cash charge will be recorded for the recognition of purchased
research and development.
STRATEGIC ALLIANCES/PRODUCT DEVELOPMENT STATUS
The Company's research and development efforts have been primarily focused on
the development of conjugated estrogens tablets, the generic equivalent for the
brand name product Premarin(R) marketed by the Wyeth-Ayerst Division of
American Home Products ("Wyeth-Ayerst"). FDA approval is required for Duramed
to market conjugated estrogens. On September
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27, 1994, the Company filed with the FDA an ANDA for the .625 mg strength of
conjugated estrogens. This product is formulated and designed to meet the
conjugated estrogens product composition standards and bioequivalency guidance
established by the FDA in 1991.
Since 1991, Wyeth-Ayerst has made several submissions to the FDA requesting
changes in the FDA's 1991 conjugated estrogens product composition standards
and bioequivalency guidance. Among other things, Wyeth-Ayerst requested that
the FDA change the product composition standards for conjugated estrogens by
requiring the generic version to include a specific equine estrogenic
substance, delta(8,9) dehydroestrone sulfate (Delta(8,9) DHES). In response to
each submission, the FDA determined that the information submitted by
Wyeth-Ayerst was insufficient to justify changes in the standards or guidance.
In so responding, the FDA let stand the 1991 product composition standards,
which established Delta(8,9) DHES as an impurity and not a necessary ingredient.
On November 30, 1994, Wyeth-Ayerst filed a Citizen Petition with the FDA which
reiterated some of its earlier arguments and again requested that the FDA
require the inclusion of Delta(8,9) DHES in generic conjugated estrogens. On
July 27-28, 1995, the FDA's Fertility and Maternal Health Drugs and Generic
Drugs Advisory Committees met to address this issue. The outcome of this
meeting was a unanimous vote by the advisory committees that there was
insufficient data presented to assess whether any individual component
(including Delta(8,9) DHES) or combination of components other than estrone
sulfate and equilin sulfate need to be present to achieve clinical safety and
efficacy in conjugated estrogens.
Duramed believes that the conclusions of the advisory committees reaffirm the
product composition standards for conjugated estrogens established by the FDA
in 1991, and that the FDA review of the Company's ANDA is continuing. In
support of its position, on October 6, 1995 the Company filed with the FDA an
extensive response to the Citizen Petition. Duramed 's filing includes
scientific and medical data, as well as the opinions of renowned experts, all
to the effect that Delta(8,9) DHES has no impact on the safety or efficacy of
conjugated estrogens and should not be a required component in a generic
equivalent to Premarin(R). Duramed further believes that its conjugated
estrogens product as filed meets the current product composition standards and
bioequivalency guidance established by the FDA in 1991. At this time, the
Company is unable to determine when, or if, it will obtain FDA approval to
market the .625 mg strength product. If approval is obtained and the product
is successfully manufactured and marketed, the resulting favorable financial
impact is expected to be significant. Work on other conjugated estrogens
strengths is continuing and results to date are encouraging.
The Company has an agreement with Schein Pharmaceutical, Inc. ("Schein") with
respect to the development, manufacture and marketing of its conjugated
estrogens products. Under the terms of the agreement, Schein provides project
funding and technical assistance while Duramed is responsible for the product
development and manufacturing; both firms will participate in the marketing and
distribution of the products.
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The Company's business strategy includes enhancing its market position and
research and development efforts by entering into strategic alliance
agreements. In June 1994 the Company entered into marketing, distribution and
related agreements with Ortho-McNeil Pharmaceutical Corporation
("Ortho-McNeil"). Under the terms of these agreements Duramed received the
non-exclusive distribution rights to the Ortho-McNeil products Acetaminophen
with Codeine, Tolmetin sodium, Tolmetin sodium DS and Oxycodone with
Acetaminophen as well as an extension of the distribution term for Estropipate
originally received from Ortho-McNeil pursuant to an agreement reached in
November 1993. The Company commenced marketing Estropipate in November 1993
and the four additional products during the fourth quarter of 1994. In addition
to the distribution rights for the products, Ortho-McNeil provided $2 million
in cash and other financial assistance. In exchange for the financial
assistance provided to the Company under the agreements, Ortho-McNeil will
receive a royalty on the future sales of the Company's conjugated estrogens
products. In addition, Ortho-McNeil will participate in marketing the
conjugated estrogens products, and share in the profits if the Company is
successful in bringing the products to market.
The Company has an agreement with Invamed, Inc. ("Invamed") for the exclusive
marketing rights of Verapamil S.R. (sustained release), which is the generic
equivalent to Isoptin S.R.(R) and Calan S.R.(R). Verapamil S.R. has been
formulated and will be manufactured by Invamed if an ANDA is filed with the FDA
and approval is received. The Company will market the product on a variable
profit basis with Invamed.
For the years ended December 31, 1995, 1994 and 1993, respectively, the
percentages of the Company's sales comprised of products marketed for others
were 31%, 28% and 36%. The gross profit generated by these sales was
approximately $3.3, $3.6 and $4.0 million in 1995, 1994 and 1993, respectively.
For additional information with respect to the Company's strategic alliance
agreements see "Notes to Consolidated Financial Statements - Note B."
REGULATORY
From May 1993 until January 1996, the Company operated under a consent decree,
which was established as part of a plea agreement between the Company and the
Department of Justice and the United States Attorney's Office (collectively
"Department"). Under the consent decree, among other things, the Company
agreed for a period of four years not to violate certain applicable laws, to
cooperate with the Department in any investigation of former or present
directors, officers or employees of the Company, and to cooperate with the FDA
with regard to
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future inspections of the Company's facilities or products. On January 2,
1996, the Company's petition to dissolve the consent decree was granted by the
United States District Court for the District of Maryland.
PRODUCTS
A summary by therapeutic classification of the products currently manufactured
or marketed by the Company is included below:
Therapeutic Category Duramed Manufactured Marketed for Others Total
- ------------------------------- ----------------------- ------------------------ ------------------------
Chemical Dosage Chemical Dosage Chemical Dosage
Entities Forms Entities Forms Entities Forms
-------- -------- ----------- --------- ----------- ---------
Adrenal Cortical Steroids 1 1 - - 1 1
Analgesic - - 5 12 5 12
Antibiotics - - 1 2 1 2
Anti-Inflammatory - - 1 3 1 3
Anti-Parkinson Agents - - 1 3 1 3
Anti-Psychotic - - 3 10 3 10
Anti-Tuberculosis 1 1 - - 1 1
Anti-Viral - - 1 1 1 1
Cardiovascular Therapy - - 2 6 2 6
Cough/Cold/Decongestant 6 6 3 5 9 11
Diuretic - - 1 2 1 2
Gastrointestinal - - 1 2 1 2
Stimulants
Hormonal Replacement - - 1 2 1 2
Musculoskeletal Disorders - - 3 4 3 4
Respiratory Therapy - - 1 1 1 1
Sympathicolytic Mydriatic - - 1 1 1 1
Thyroid Therapy - - 1 8 1 8
Vascular Headaches 1 1 - - 1 1
--------------------- --------------------- ------------------------
TOTALS 9 9 26 62 35 71
===================== ===================== ========================
Methylprednisolone, which is manufactured by Duramed, accounted for
approximately 53%, 55% and 39%, respectively, of the Company's sales in 1995,
1994 and 1993. Metoclopramide, to which the Company has marketing rights,
accounted for approximately 18% of sales in 1993.
The Company does not have patent protection for any of its products and
trademarks are of relatively minor importance at this time. The Company's
operating strategy includes developing brand identity for certain of its
products. Certain of the Company's products have a degree of seasonality, the
effect of which the Company is attempting to mitigate by adding complimentary
products to its line.
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PRODUCT DEVELOPMENT
The Company's product development activities have increased during the past
year, but the principal focus has been on the development of conjugated
estrogens products. The Company intends to increase significantly its
investment in product development activities based upon available resources.
The proposed acquisition of Hallmark is expected to significantly increase the
Company's technical capabilities with respect to more complex drug delivery
systems. Generic drug products with complex drug delivery systems typically
experience limited competition due to the technical barriers to developing
these products, and therefore generate higher margins.
The Company's product development strategy consists of three separate but
related components; (i) an internal research and development staff, (ii)
joint product development efforts with, or purchasing new product formulations
from, other parties and (iii) engaging outside experts to develop specified
products on a consulting basis. The Company's product development strategy has
been to focus its development activities primarily on generic hormone
replacement therapy ("HRT") opportunities and on other prescription drugs with
attractive market opportunities and potentially limited competition due to
technological barriers of entry. The Company will typically seek to develop
products that are either (i) soon to be off patent, (ii) not yet been
developed generically even though patents have expired (usually because of
technological barriers), or (iii) are logical extensions of the Company's
existing product line due to their marketing or production characteristics.
The successful introduction of new products depends upon favorable test results
and, where required, FDA approvals. During the fiscal years ended December 31,
1995, 1994 and 1993, product development expenditures were $5,953,000,
$1,861,000 and $859,000, respectively. Product development expenses in 1995
included a charge of approximately $1.5 million of product development costs
that the Company has advanced to Hallmark Pharmaceuticals, in exchange for
product marketing rights to Captopril and in anticipation of completing the
acquisition of Hallmark. Additionally, in 1995 product development expenditures
included approximately $1.6 million of certain costs incurred in preparation for
manufacturing the conjugated estrogens product in commercial quantities.
Product development expenditures are net of reimbursements received from Schein
under the agreement for the development of a new formulation of conjugated
estrogens tablets (see "Notes to Consolidated Financial Statements - Note B").
Formulations for all new products are subjected to laboratory testing and
stability studies, and when required or desirable, are tested for
bioequivalence to the reference product by qualified laboratories.
Bio-studies, used to demonstrate that the rate and extent of absorption of a
generic drug are not significantly different from the corresponding innovator
product, currently cost in the range of $250,000 to $700,000. Bio-studies for
certain product classes exceed that range. If the accumulated data
demonstrates bioequivalency, submission is then made to the FDA for its review
and approval to manufacture and market.
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The development of new generic products, including formulation, stability
testing and obtaining FDA approval, generally takes at least 18-24 months.
Development of sustained release prescription products typically requires at
least two bioequivalence studies for most products and, therefore, total
development time, including FDA approval, may be at least two or three years.
Liquid product development frequently does not require bioequivalence studies
and, including formulation, stability testing and FDA approval, generally takes
at least 12-18 months.
SALES AND MARKETING
Duramed sells its products to a broad range of over 200 customers located
throughout the United States. These customers include drug wholesalers,
private label distributors, direct buying retail chains, health maintenance
organizations, hospitals, nursing homes, retiree organizations, mail order
distributors, other drug manufacturers, mass merchandisers and government
agencies. The Company markets its products under the Duramed label as well as
under private label; on all prescription products which it manufacturers, the
Company is named on the label as the manufacturer. All marketing and sales
efforts are conducted principally by Duramed employees. Duramed promotes its
products through catalogs, trade shows, publications, telemarketing and direct
sales.
Although the highest profit margins are realized generally by the first generic
manufacturers to enter the market for a product, the Company's marketing
efforts are not dependent upon the Company being the first manufacturer to
develop generic equivalents of innovator products. Instead, the Company's
marketing expertise has enabled it to market products successfully even after
their introduction by several competitors.
The Company has continued to expand its sales and marketing activities and
increase its sales force in order to prepare for the commercial launch of
conjugated estrogens, develop strategic alliance opportunities, enhance service
to its existing customers and provide the resources to contact additional
prospective customers.
In 1995, 1994 and 1993, no single customer accounted for more than 10% of the
Company's net sales.
ORDER BACKLOG
The dollar amount of the Company's open orders at March 1, 1996 was
approximately $2.3 million as compared to approximately $2.0 million at March
1, 1995. Although open orders are subject to cancellation without penalty,
management expects to fill substantially all of such open orders within the
current fiscal year. The Company's backlog may not be indicative of net sales
during the following reporting period.
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COMPETITION
Competition in the generic prescription pharmaceutical industry is intense.
The Company competes with other generic drug product manufacturers, brand name
pharmaceutical companies which manufacture generic drug products and the
original manufacturers of brand name drug products which continue to produce
those products after patent expirations.
The Company believes that the primary competitive factors are the ability to
develop new products on a timely basis, price, product quality, customer
service, breadth of product line and reputation. Many of the Company's
competitors have greater financial and other resources than the Company and are
able to expend more for product development and marketing.
GOVERNMENT REGULATION
All pharmaceutical manufacturers are subject to extensive regulation by the
federal government, principally by the FDA and, to a lesser extent, by the Drug
Enforcement Administration and by state governments. The Federal Food, Drug
and Cosmetic Act, the Controlled Substance Act, the Generic Drug Enforcement
Act of 1992 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 products. Noncompliance
with applicable requirements can result in fines, seizure of products, total or
partial suspension of production, refusal of the government to enter into
supply contracts or to approve new drug applications, criminal prosecution and
corporate debarment. The FDA also has the authority to institute proceedings
to revoke previous approvals of drug products.
FDA approval is required before most prescription drug products can be
marketed. Each dosage form of a specific generic drug product, whether a
different form of administration or a different strength, is typically treated
as a separate drug product by the FDA and requires separate submission. There
are two types of applications currently used to obtain FDA approval of a new
drug product.
1. New Drug Application ("NDA"). With respect to drug products with active
ingredients not previously approved by the FDA or new uses for previously
approved active ingredients, a prospective manufacturer must conduct and
submit to the FDA complete clinical studies to prove that product's
safety and efficacy. An NDA may also be submitted for a drug product
with previously approved active ingredients if the abbreviated procedure
discussed below is not available.
2. Abbreviated New Drug Application ("ANDA"). The Drug Price Competition and
Patent Term Restoration Act of 1984 (the "Waxman-Hatch Act") established
an abbreviated procedure for obtaining FDA approval for those generic
drug products which are bioequivalent to brand name drugs. In contrast
to the NDA procedure, this procedure does not require conducting complete
animal and clinical studies for safety and efficacy, and instead requires
data illustrating that the generic drug formulation is bioequivalent to a
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previously approved drug. "Bioequivalence" indicates that the rate of
absorption and the levels of concentration of a generic drug in the body
are substantially equivalent to those of the previously approved equivalent
brand name drug and, therefore, that the drug will produce an equivalent
therapeutic effect.
The Company's product development pursuits are primarily focused on products
which can obtain regulatory approval through the ANDA submission process.
Among the requirements for new drug approval is that the prospective
manufacturer's methods conform to the FDA's Current Good Manufacturing
Practices ("CGMP Regulations"). The CGMP Regulations must be followed at all
times during which the approved drug is manufactured. To ensure compliance
with the standards set forth in these regulations, the Company must continue to
expend time, money and effort in the areas of production and quality control.
Failure to comply risks possible FDA action such as the suspension of
manufacturing or the seizure of drug products.
The Company also is subject to environmental protection laws and regulations of
federal, state and local governmental authorities, including the Clean Air Act
and Occupational Safety and Health Administration ("OSHA") requirements. Under
the Clean Air Act, the Company is required to meet certain air emissions
standards. Under OSHA, the Company is required to meet certain safety
standards, including those relating to equipment and procedures, indoor air
quality and data sheets on material used at the Company's facilities.
Compliance with these laws had no material effect on the Company's capital
expenditures, operating results or competitive position during fiscal 1995,
and the Company anticipates no such material effect during fiscal 1996.
RAW MATERIALS
The drugs and other raw materials used in the Company's products are purchased
through United States distributors for foreign and domestic manufacturers of
bulk pharmaceutical chemicals and are generally available from numerous
sources. The federal drug application process requires specification and
approval of raw material suppliers. If raw materials from all specified
suppliers become unavailable, FDA approval of a new supplier is required, which
can cause a delay of six months or more in the manufacture of the drug
involved. To date, the Company has not experienced any significant delays and
generally specifies two or more suppliers in all drug applications.
LIABILITY INSURANCE
Duramed's business exposes it to the potential liability which is inherent in
the production of drugs for human use. Although the Company makes every effort
to maintain strict quality control programs and carries product liability
insurance of $5.0 million per incident and $5.0 million in the aggregate per
year (with a deductible amount of $25,000 per claim and $250,000 in
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the aggregate per year), it cannot be fully protected from potential liability
in this area by any reasonable amount of insurance. Additionally, there can be
no assurance that the Company's product liability insurance can be renewed or
renewed at a rate comparable to that now being paid by the Company.
EMPLOYEES
As of March 25, 1996, the Company had approximately 353 full-time employees.
There are no collective bargaining agreements in effect at the Company.
ITEM 2. PROPERTIES.
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Duramed's manufacturing, laboratory, and product development activities are
conducted primarily in a 190,000 square foot plant located on 17 acres in
Cincinnati, Ohio, which includes a 38,000 square foot expansion designed to
meet the initial projected manufacturing requirements of conjugated estrogens
and other HRT products under development. The facility is collateral for
certain of the Company's borrowings.
The Company's executive offices, certain corporate support groups and
distribution activities are conducted from a 28,200 square foot facility in
Cincinnati, Ohio. The lease for this facility extends to February 28, 2000,
and contains options to renew for up to an additional three years.
The Company leases an approximately 7,200 square foot facility in Cincinnati,
Ohio which is used for sales, marketing and certain other corporate functions.
The lease for this facility expires May 31, 1996.
The Company also has two leased warehouses in Cincinnati, Ohio. One is
approximately 28,000 square feet and is being leased on a month to month basis.
The other facility is approximately 10,000 square feet and is leased through
March 16, 1997.
The Company believes its facilities and equipment are well maintained, in good
operating condition and, in general, suitable for the Company's purposes. The
Company is currently reviewing its facility requirements and will likely need
additional space and equipment to execute its business plan (see "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" for a discussion of anticipated facility and equipment resource
requirements).
ITEM 3. LEGAL PROCEEDINGS.
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The Company is involved in various lawsuits and claims which arise in the
ordinary course of business. Although the outcome of such lawsuits and claims
cannot be predicted with certainty, the disposition thereof will not, in the
opinion of management, result in a material adverse effect on the Company.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
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None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
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During the 1994 period prior to September 16, 1994, the Common Stock was traded
in the over-the-counter market due to the Company's inability to meet certain
listing requirements of the Nasdaq National Market. On September 16, 1994,
trading of the Common Stock on the Nasdaq recommenced under a listing exception
from the Nasdaq's tangible net asset requirements. On December 12, 1995 the
Company was notified that it was found to be in compliance with all Nasdaq
requirements, and the exception was removed. The table below sets forth the
high and low bid quotations for the Common Stock as reported by the Nasdaq.
Quotations prior to September 16, 1994 are the high and low bid quotations as
reported by the National Quotation Bureau, Inc. and reflect inter-dealer
prices, without retail mark-up, mark-down or commission, and may not
necessarily represent actual transactions.
High Low
1994:
First Quarter . . . . . . . . . . . . . $ 7.88 $ 5.50
Second Quarter . . . . . . . . . . . . 9.17 6.50
Third Quarter . . . . . . . . . . . . . 18.25 7.38
Fourth Quarter. . . . . . . . . . . . . 17.25 11.75
1995:
First Quarter. . . . . . . . . . . . . . $ 20.50 $ 14.25
Second Quarter . . . . . . . . . . . . . 18.75 12.00
Third Quarter. . . . . . . . . . . . . . 25.50 14.00
Fourth Quarter . . . . . . . . . . . . . 17.25 12.75
As of December 31, 1995, the Company had 1043 stockholders of record. The
Company has not paid any cash dividends on its Common Stock since its inception
and does not intend to pay cash dividends in the foreseeable future. Under the
terms of the Company's current loan agreements with its bank, no dividend
declaration is permitted. In addition, the terms of the Company's loan
agreement with the State of Ohio require that the Company not pay any dividends
to stockholders unless an amount equal to 30% of such dividends is paid to the
State of Ohio as an additional principal reduction.
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ITEM 6. SELECTED FINANCIAL DATA.
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The following table sets forth selected financial data, derived from the
audited financial statements of the Company, for the five years ended December
31, 1995. This information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
elsewhere herein.
Year ended December 31, 1995 1994 1993 1992 1991
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Net sales $49,624 $45,274 $30,293 $16,685 $10,531
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Pretax (loss) income (991) 5,765 1,240 (4,964) (4,229)
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Income tax provision (benefit) --- (3,786) 25 --- ---
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Net (loss) income (991) 9,551 1,215 (4,964) (4,229)
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Preferred dividends 123 --- --- --- ---
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Net (loss) income attributable to
common stockholders (1,114) 9,551 1,215 (4,964) (4,229)
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Net (loss) income per share
of common stock:
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Primary (.14) .93 .14 (.77) (.67)
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Fully diluted (.14) .91 .13 (.77) (.67)
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Cash dividends
per common share --- --- --- --- ---
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Total assets 45,177 37,002 22,959 16,128 15,678
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Long-term liabilities 19,837 18,267 23,201 1,703 769
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
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RESULTS OF OPERATIONS.
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RESULTS OF OPERATIONS
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The table below sets forth the components of the Company's results of
operations as a percentage of net sales, as well as the percentage change in
each item from year to year.
Percentage
Percentage of Sales ----------
Year Ended December 31, Increase or (Decrease)
----------------------- ----------------------
1995 1994 1993 1994-95 1993-94
---- ---- ---- ------- -------
Net sales 100.0% 100.0% 100.0% 9.6% 49.5%
Cost of goods sold 59.9 55.6 65.4 17.9 27.2
- -------------------------------------------------------------------------------------------------------
Product development 12.0 4.1 2.8 219.9 116.5
Selling 7.3 6.3 5.4 27.5 74.5
General and administrative 17.3 16.3 15.3 16.9 58.6
Interest expense 5.5 5.0 7.0 21.1 6.2
Income tax benefit * * (8.4) * *
- -------------------------------------------------------------------------------------------------------
Net (loss) income (2.2) 21.1 4.0 * 686.0
=======================================================================================================
*Not a meaningful percentage.
NET SALES
Net sales increased by $4.3 million (9.6%), and $15.0 million (49.5%) in 1995
and 1994, respectively. The sales increase in 1995 was primarily attributable
to continued growth in sales of the Ortho-McNeil products, which the Company
commenced marketing in the fourth quarter of 1994, and recognition of $1.5
million of deferred revenue (see "Notes to Consolidated Financial Statements -
Note D"). The marketing agreement under which the Company distributed products
manufactured by Invamed was discontinued in 1995. The Company has subsequently
obtained most of the products previously supplied by Invamed from alternative
sources. Net sales in the fourth quarter of 1995 were $10.4 million (excluding
$500,000 in incremental deferred revenue recognized in the fourth quarter).
Sales in the fourth quarter were lower by approximately $2.5 million than the
average of the prior quarters in 1995, primarily as a result of lower sales of
the Company's Methylprednisolone product. Net sales in the first quarter of
1996 are expected to be at a similar level as the fourth quarter of 1995. The
Company anticipates the sales level will increase in the second and third
quarters of 1996 as a result of entering the seasonal high sales period for
certain of its products and continued growth in sales of certain other
products. The increase in 1994 sales compared to 1993, resulted primarily from
increased sales of the Company's Methylprednisolone product and increased sales
resulting from the first full year's shipment of the Ortho-McNeil product,
Estropipate.
- 14 -
15
Methylprednisolone accounted for 53% of sales in 1995, 55% in 1994 and 39% in
1993. No other product accounted for more than 10% of net sales in 1995.
GROSS MARGIN
Gross margins, and the corresponding percentages of net sales for 1995, 1994
and 1993, were $19.9 million (40.1%), $20.0 million (44.4%) and $10.5 million
(34.6%), respectively. The lower gross margin in 1995 compared to 1994 is
attributable to the product sales mix and price erosion on certain of the
Company's products. The gross margin in 1995 was favorably impacted by the
recognition of $1.5 million in deferred revenues. The Company generated a
substantially lower gross margin in the fourth quarter compared to prior
quarters in 1995 as a result of lower sales and product mix. While gross
margin in the first quarter of 1996 is expected to be similar to the fourth
quarter of 1995, gross margin in the second and third quarters of 1996 is
expected to increase as a result of the expected increase in sales. In 1994,
the increases in the Company's gross margin were due primarily to increased
sales of Methylprednisolone along with the effects of higher overhead
absorption due to volume increases and manufacturing efficiencies. There can
be no assurance that, with the Company's current limited product line, the
present gross margin levels can be maintained if the Company's products,
particularly Methylprednisolone, should experience increased competition.
OPERATING EXPENSES
Product Development
Product development expenditures for the years ended December 31, 1995, 1994
and 1993 were approximately $5,953,000, $1,861,000 and $859,000, respectively.
Product development expenses in the fourth quarter of 1995 included a charge of
$1,459,000 to record the estimated net exposure associated with funds advanced
to Hallmark (see "Notes to Consolidated Financial Statements - Note B").
Additionally, in 1995 product development expenditures include approximately
$1.6 million of certain costs incurred in preparation for manufacturing the
conjugated estrogens product in commercial quantities. Product development
expenditures are net of reimbursements received from Schein pursuant to the
terms of the contractual agreement in connection with the development of a new
formulation of conjugated estrogens tablets. The increase in product
development expenditures reflects the Company's commitment to expanding its
product development activities.
The Company intends to significantly increase its investment in product
development as its available resources permit.
Selling
Selling expenses increased $782,000 in 1995 and $1,216,000 in 1994 as a result
of increased sales and marketing activities and expansion of the Company's
sales force in order to prepare for the commercial launch of conjugated
estrogens, develop strategic alliance opportunities, enhance service to
existing customers and provide additional resources to contact prospective
customers.
- 15 -
16
General and Administrative
In 1995, general and administration expenses increased by $1,242,000 due
in part to staff increases and professional fees associated with an increased
emphasis on business development activities. Additionally, in 1995 the Company
incurred expenses of approximately $756,000 in connection with responding to
various regulatory and legal issues associated with its pending ANDA for
conjugated estrogens. In 1994, general and administrative expenses increased
by $2,718,000 due primarily to increases in staffing and attendant costs
necessary to support and execute the Company's business plans and address the
requirements of its current and anticipated increased operating levels.
Interest Expense
The Company's borrowings are primarily variable rate facilities. The increase
in interest expense in 1995 compared to 1994 resulted from an increase in
average borrowings. The increase in interest expense in 1994 over 1993 was
attributable to increasing interest rates during the period.
Preferred Dividends
The preferred dividends of $122,739 in 1995 represent the dividend provision
associated with the $12.0 million of Series C Preferred Stock issued in
November 1995 (see " Notes to Consolidated Financial Statements - Note G").
Other Matters
As noted above, a conscious decision was made in early 1995 to increase
expenditures for manufacturing and other launch activities in anticipation of
the approval of the Company's conjugated estrogens product and to provide the
additional personnel and capital resources needed to implement the Company's
business plan. This planned investment in the future contributed substantially
to increased expenses, and therefore reduced levels of performance, in the
fourth quarter and the year ended December 31, 1995. This commitment has
increased through the first quarter of 1996 which could result in a first
quarter 1996 loss in excess of the reported loss for the fourth quarter of
1995, exclusive of the charge pertaining to Hallmark. The Company remains
optimistic regarding the approval of its conjugated estrogens product.
However, management also recognizes the importance of balancing the needs
between a strong product development commitment and conserving resources. In
keeping with this combined commitment, steps have been taken recently to
implement operational changes consistent with these two corporate goals (see
"Item 7. Management's Discussion and Analysis of Financial Condition And
Results of Operations/Liquidity and Capital Resources").
INCOME TAXES
At December 31, 1995 the Company had cumulative net operating loss
carryforwards of approximately $28.2 million for federal income tax purposes
which expire in the years 2004 to 2010. Additionally, the Company had
cumulative losses from Duramed Europe that amounted to approximately $1.8
million which are not deductible for U.S. tax purposes. In 1994, based upon a
forecast of future operating results, the Company concluded that it would, more
likely than not, be able to realize a portion of the benefit of its net
deferred tax assets. Accordingly, in the fourth quarter of 1994 the valuation
allowance was reduced and a $3.9 million deferred tax benefit was recorded.
The carrying value of the deferred tax asset and the related valuation
allowance are based on a forecast of future operating results, which excludes
potential revenues associated with products that are under development or have
not yet obtained regulatory approval. Full utilization of this $3.9 million
deferred tax benefit will require future taxable income of approximately $10.3
million. As of December 31, 1995, the Company had a $8.3 million valuation
allowance, which it deems appropriate, associated with the net value of the
operating loss carryforwards. Adjustments to the valuation allowance may be
required if circumstances change.
In 1995 the Company did not record a provision for income taxes. In 1994, the
Company recorded a current alternative minimum tax provision of $115,000.
- 16 -
17
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1995, the FASB issued Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. Statement No. 121 also addresses the accounting for
long-lived assets that are expected to be disposed of. The Company will adopt
Statement No. 121 in the first quarter of 1996 and, based on current
circumstances, does not believe the effect of adoption will be material.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," requires the Company either to adopt the fair value
method of accounting for stock options in its financial statements or to retain
its existing method and disclose the pro forma effects of using the fair value
method beginning in 1996. The Company intends to retain its existing method of
accounting for stock options and to include pro forma disclosures in the notes
to its consolidated financial statements. Accordingly, the standard will have
no effect on the Company's financial condition or results of operations.
INFLATION
Inflation has not had, and is not expected to have, a material impact upon the
Company's business.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
As explained in "Item 1. Business - Private Placement of Series C Convertible
Preferred Stock" the Company successfully raised $24.0 million through an
offering of Series C Preferred Stock, of which the first $12.0 million ($10.8
million net of issuance costs) was received in November 1995. As a result, the
Company had a capital surplus of $8.9 million at December 31, 1995 compared to
a capital deficiency of $1.2 million at December 31, 1994. The Company's
working capital situation also improved to a surplus of $4.6 million at
December 31, 1995 compared to a working capital deficiency of $2.5 million at
December 31, 1994. The Company closed on the second stage of the private
placement, which provided net proceeds of $11.1 million, in February 1996.
During the third and fourth quarters of 1995, the Company reorganized the terms
of certain borrowing arrangements with its bank, which resulted in expanded
borrowing capacity under the Company's revolving credit facility and modified
repayment due dates on the term note. The amended terms of the revolving
credit facility permit the Company to borrow up to $12.5 million, based upon
eligible collateral, through March 30, 1997 when the principal balance is due.
The expressed intention of the Company and its bank is to review quarterly the
Company's financial condition and, if appropriate, extend the due date of the
revolving credit facility in order to maintain a fifteen month term. The
Company made a $1.0 million principal payment on its
- 17 -
18
term note in December 1995. As amended, the $4.5 million balance of the term
note at December 31, 1995 required a principal payment of $1.5 million on March
1, 1996, with the remaining $3.0 million due on June 1, 1996. In February 1996
the Company made the $1.5 million term note principal payment due on March 1,
1996. Under a separate agreement in March 1996, the bank made available to the
Company an additional $1.5 million of term financing collateralized by existing
equipment. At March 25, 1996 the Company's borrowings on the revolving credit
facility were $2.3 million. Based on the eligible collateral value of $10.2
million on that date, the Company could borrow an additional $7.9 million under
this facility.
The current terms of the note payable to the State of Ohio require a balloon
payment of $1,021,000 in November 1996.
The Company's capital expenditures were $5.2 million in 1995 and $5.7 million
in 1994. The majority of these expenditures relate to a project which
commenced in 1994 to expand the Company's manufacturing facility by
approximately 38,000 square feet in order to meet the initial projected
manufacturing requirements of its HRT products, primarily its anticipated
conjugated estrogens products. The facility expansion and related facility
testing were completed in the second quarter of 1995. Investment in facility
and equipment with respect to the HRT facility is approximately $11.0 million,
approximately $9.5 million of which was satisfied under the Company's agreement
with Ortho-McNeil (see "Notes to Consolidated Financial Statements - Note B").
The Company funded the balance of the project with borrowings on its revolving
credit facility.
Operating activities in 1995 used approximately $6.0 million in cash primarily
as a result of an increase in accounts receivable associated with strong sales
in the latter part of the fourth quarter and extended payment terms offered to
certain customers. Inventory increased by approximately $1.0 million,
principally as a result of purchases of conjugated estrogens raw materials in
anticipation of the commercial launch of the product.
As a result of a reduction in sales and continued expenditures associated with
the anticipated commercial launch of conjugated estrogens the Company recorded
a net loss of $2.1 million (excluding the $1.5 million reserve against amounts
advanced to Hallmark and the $500,000 incremental deferred revenue recognized
in the fourth quarter) in the fourth quarter of 1995. The Company expects net
sales in the first quarter of 1996 to be at a similar level as the fourth
quarter of 1995. Net sales in the second and third quarters of 1996 are
expected to increase over the levels projected for the first quarter of 1996,
as a result of entering the seasonal high sales period for certain of the
Company's products and continued growth in sales of certain other products.
The Company continues to prepare for the anticipated commercial launch of
conjugated estrogens and, accordingly, is maintaining a higher level of
operational and corporate infrastructure than would otherwise be required. The
Company is monitoring the status of its conjugated estrogens application
closely and continues to remain optimistic on ultimate approval of the product;
- 18 -
19
however, approval is not assured. Pending approval of the product, management
of the Company is implementing steps designed to balance the merits of
continued preparedness for the launch of conjugated estrogens with the
resulting impact on the Company's operating results and financial condition.
If the Company receives approval from the FDA for its ANDA filing for the .625
mg. strength of conjugated estrogens and this product is successfully
manufactured and marketed, the resulting favorable financial impact is expected
to be significant. Accordingly, the Company's longer term operating plan is
significantly impacted by this event. If, however, conjugated estrogens is
ultimately not approved by the FDA, the Company will incur certain write offs
related to investments made to date in inventory and other pre-launch
activities, and provisions of certain of the Company's contractual agreements
would become applicable. (See "Notes to Consolidated Financial Statements -
Note B").
The Company is currently pursuing several business development opportunities,
which could result in additional products and profit contributions. On a
longer term basis, if Invamed is ultimately successful with its Verapamil S.R.
product development pursuits, or the Company is successful with certain of its
other product development pursuits, the availability of these products could
significantly improve the Company's operating results. Again, success is not
assured. The Company intends to increase its resource commitment to product
development pursuits as its resources permit. Continued expansion of the
Company's product development efforts will necessitate capital investment in
equipment and facility to provide the capabilities to produce the resulting
products in commercial quantities. While the Company has not finalized the
capital requirements related to its business plan, the resources required are
significant. To the extent the necessary capital is not available, either from
operations or other sources, implementation of the Company's plans will be
restricted or delayed. In addition, as described under "Results of Operation -
Operating Expenses," the Company's general and administrative expenses have
increased as needed to support and execute the Company's business plan and to
address the requirements of the Company's current and anticipated increased
operating levels. Management recognizes the importance of both the future
benefits from continuing these increased expenditures and the current necessity
of conserving the Company's resources. Accordingly, management is implementing
steps designed to balance these dual concerns. These steps will result in
reductions in operating expenses pending approval of the Company's conjugated
estrogens products or success in other pending business development
opportunities.
The need to balance the questions of spending for the future and conserving
current resources may become even more significant if the Company completes its
acquisition of Hallmark. The Company believes that Hallmark's technical
expertise and its capabilities with respect to advanced drug delivery systems
will contribute significantly to the long-term success of the Company's product
development program. However, the only commercial product currently
manufactured by Hallmark is Captopril. With the highly competitive market
conditions associated with this product, the Company does not anticipate that
Captopril will make a significant contribution to sales or profits.
Therefore, if the Company proceeds with the Hallmark acquisition and the
Company's revenue base is not
- 19 -
20
enhanced by the approval and marketing of the Company's conjugated estrogens
product or through other products, the Company expects that it will need to
execute certain restructurings and other additional cost-cutting efforts to
curtail operating expenses in order to support the Company's and Hallmark's
product development activities.
Item 8. Financial Statements and Supplementary Data.
- -----------------------------------------------------
The following financial statements are included in this report on Form 10-K:
Page
----
Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
Consolidated Balance Sheets as of
December 31, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Statements of Operations for
the Years Ended December 31, 1995,
1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-4
Consolidated Statements of Stockholders' Equity
for the Years Ended December 31, 1995,
1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5
Consolidated Statements of Cash Flows for
the Years Ended December 31, 1995, 1994 and 1993 . . . . . . . . . . . . . . . F-6
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . F-8
Item 9. Changes in and Disagreements with Accountants on Accounting and
- -------------------------------------------------------------------------
Financial Disclosure.
- ---------------------
None.
- 20 -
21
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
DIRECTORS
Pursuant to the Delaware General Corporation Law, as implemented by
the Company's Certificate of Incorporation and By-Laws, all corporate powers
are exercised, and the Company's business, property and affairs are managed, by
or under the direction of the Board of Directors. Directors of the Company are
elected at the Annual Meeting of Stockholders. Currently there are five
directors. Set forth below is certain information with respect to each
director.
E. THOMAS ARINGTON, age 59. Mr. Arington became the Company's
President and Chief Executive Officer in October 1987. He became a director of
the Company in December 1987 and its Chairman of the Board in May 1988. Prior
to joining the Company, he was President of MarketMaster, Inc., a health care
consulting firm which since September 1984 had the exclusive rights to market
the Company's products. MarketMaster, Inc. was acquired by the Company in
December 1987. Mr. Arington's career has also included 17 years with Lederle
Laboratories, a division of American Cyanamid, where he held a variety of
executive management positions.
GEORGE W. BAUGHMAN, age 58. Mr. Baughman was elected a director of
the Company in April 1989. Mr. Baughman has been President and Chairman of
Advanced Research Associates, a consulting firm specializing in information
systems and technology and in financial analysis and planning, for more than
the past five years. He was employed by The Ohio State University for
twenty-five years, retiring as Director of Special Projects, Office of
President.
DOANE F. DARLING, age 61. Mr. Darling has been a director of the
Company since May 1988 and has been Senior Vice-President, Corporate Planning
since April 1994. From 1989 through March 1994 he was Vice President,
Corporate Planning of the Company. For more than five years prior to 1989 he
was President and Chairman of Cedar Hill Associates Inc., a marketing-oriented
management consulting firm located in Worthington, Ohio.
STANLEY L. MORGAN, age 78. Mr. Morgan was elected a director of the
Company in April 1989. Mr. Morgan is the retired Executive Vice President of
Ben Venue Laboratories, Inc., a leading pharmaceutical manufacturer of sterile
dosage forms and bulk pharmaceutical products. He served Ben Venue in many
capacities including Chief Administrative Officer, Chief Engineer and Executive
Director of Research and Development. Since retirement he has been a
consultant to the pharmaceutical industry.
S. SUNDARARAMAN, age 59. Mr. Sundararaman is the Company's Secretary
and has been a director of the Company since 1982. Mr. Sundararaman is
Manager, Automation Marketing, USA for Lufthansa German Airlines and has been
with that company since 1961.
EXECUTIVE OFFICERS.
The current executive officers of the Company are as follows:
Name Age Title
- ---- --- -----
E. Thomas Arington 59 Chairman of the Board, President and Chief Executive Officer
Doane F. Darling 61 Senior Vice President, Corporate Planning and Director
S. Sundararaman 59 Secretary and Director
Jeffrey T. Arington 35 Senior Vice President, Marketing, Sales and Science
21
22
Timothy J. Holt 43 Senior Vice President, Finance and Administration, Treasurer and
Chief Financial Officer
Ivan E. Pusecker 53 Senior Vice President, Operations
Information about Messrs. E. Thomas Arington, Darling and Sundararaman
is given above. Information about the Company's other executive officers is as
follows:
JEFFREY T. ARINGTON. Mr. Arington has been Senior Vice President,
Marketing, Sales and Science since 1995. He served as the Company's Senior
Vice President, Marketing, Science and Operations from 1994 until 1995, as Vice
President, Sales and Marketing from 1989 until 1994 and as Executive Director
of Sales and Marketing from 1987 until 1989. From 1984 until 1987, he was
employed by MarketMaster in a variety of executive positions. Jeffrey T.
Arington is E. Thomas Arington's son.
TIMOTHY J. HOLT. Mr. Holt has been Senior Vice President, Finance and
Administration since April 1994. He served as Vice President, Finance of the
Company from 1985 through March 1994. Prior to joining the Company in 1985, Mr.
Holt was Vice President-Finance and Chief Financial Officer of Vortec
Corporation, a then publicly held company operating in the fields of specialty
manufacturing and home health care equipment, and also held financial
management positions with privately held companies including Eagle Software
Publishing.
IVAN E. PUSECKER. Mr. Pusecker has been Senior Vice President,
Operations since 1995. He served as the Company's Vice President, Corporate
Projects Administration from 1994 until 1995, as Vice President, Operations
from 1989 until March 1994 and as Executive Director of Operations from 1987
until 1989. He was Vice President of Corporate Development of MarketMaster
from 1986 to 1987 and served as President and Chief Executive Officer of
McNivan Foods, Inc., a marketer of specialized nutritional supplements, from
1984 to 1986.
Officers of the Company are elected by, and serve at the discretion
of, the Board of Directors.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's executive officers and directors, and persons who beneficially own
more than ten percent of the Company's equity securities, to file reports of
security ownership and changes in such ownership with the Securities and
Exchange Commission (the "SEC"). Officers, directors and greater than
ten-percent beneficial owners also are required by SEC regulations to furnish
the Company with copies of all Section 16(a) forms they file. Based upon a
review of copies of such forms and written representations from its executive
officers and directors, the Company believes that all Section 16(a) filing
requirements were complied with on a timely basis during and for 1995, except
that a Form 4 was filed after its due date reporting an anniversary award of
133 shares of Common Stock to Mr. Holt.
ITEM 11. EXECUTIVE COMPENSATION.
SUMMARY INFORMATION. The following table sets forth, for the fiscal
years indicated, amounts of cash and certain other compensation paid by the
Company to (i) Mr. E. Thomas Arington and (ii) each of the Company's four most
highly compensated executive officers other than Mr. Arington who were serving
as executive officers at the end of 1995 and whose salary and bonus exceeded
$100,000. Mr. Arington and these other executive officers are sometimes
referred to hereafter as the "named executive officers."
22
23
SUMMARY COMPENSATION TABLE
Long Term
Compensation
Annual Compensation Awards
------------------------ ------------
Other Securities
Annual Underlying
Compen- Stock Option All Other
Name and Bonus sation Grants Compensation
Principal Position Year Salary ($) ($) ($)(1) (#) ($)(2)
- ---------------------------------------------------------------------------------------------------------
E. Thomas Arington 1995 $422,142 $ --- --- --- $48,084
Chief Executive 1994 400,000 461,000 --- 95,158 27,699
Officer 1993 360,000 360,000 --- --- 29,095
Jeffrey T. Arington 1995 $155,262 $ --- --- --- $ 3,308
Senior Vice President 1994 137,885 50,000 --- --- 3,883
1993 118,896 25,000 --- --- 1,231
Doane F. Darling 1995 $117,827 $ --- --- --- $ 2,956
Senior Vice President 1994 107,846 30,000 --- --- 2,769
1993 92,631 12,000 --- --- 739
Timothy J. Holt 1995 $155,262 $ --- --- --- $ 5,540
Senior Vice President 1994 137,885 50,000 --- --- 4,115
and Treasurer 1993 116,350 25,000 --- --- 1,463
Ivan E. Pusecker 1995 $144,606 $ --- --- --- $ 3,830
Senior Vice President 1994 124,292 40,000 --- --- 4,030
1993 116,350 12,000 --- --- 1,753
- ----------------------------
(1) None, other than perquisites which did not exceed the lesser of
$50,000 or 10% of salary and bonus for any named executive officer.
(2) Amounts disclosed for 1995 are comprised of the following: (i) term
life insurance premium payments for the benefit of Mr. E. Thomas
Arington ($40,826), Mr. Jeffrey T. Arington ($308), Mr. Holt ($540)
and Mr. Pusecker ($830); (ii) disability insurance premium payments
for Mr. E. Thomas Arington ($4,258); (iii) matching contributions to
the Company's 401(k) Plan on behalf of Mr. E. Thomas Arington
($3,000), Mr. Jeffrey T. Arington ($3,000), Mr. Darling ($2,956), Mr.
Holt ($3,000) and Mr. Pusecker ($3,000) in respect of their
contributions to the Plan; and $2,000 representing the dollar value of
133 shares of Common Stock awarded to Mr. Holt in recognition of his
tenth anniversary of service with the Company.
STOCK OPTIONS. The Company has two existing plans pursuant to which
options for shares of Common Stock may be granted to employees: the 1986 Stock
Option Plan and the 1988 Stock Option Plan. Neither of the Plans provides for
the grant of stock appreciation rights. No options were granted to the named
executive officers during 1995.
23
24
With respect to each named executive officer, the following table sets
forth information concerning option exercises during 1995 and unexercised
options held at December 31, 1995.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION VALUES
Number of Securities Value of Unexercised
Value Realized ($) Underlying Unexercised In-the-Money Options
Options at FY-End (#) at FY- End ($)
(Market Price on
Shares Acquired Exercise Less Exercisable/ Exercisable/
Name on Exercise (#) Exercise Price) Unexercisable Unexercisable
- ----------------------------------------------------------------------------------------------------------------
E. Thomas Arington --- --- 849,843/0 $11,225,646/$0
Jeffrey T. Arington --- --- 101,001/2,000 $1,390,713/$29,000
Doane F. Darling --- --- 57,834/0 $781,576/$0
Timothy J. Holt --- --- 77,734/600 $1,061,301/$8,700
Ivan E. Pusecker 42,800 $545,250 60,600/600 $840,900/$8,700
COMPENSATION OF DIRECTORS. During 1995, nonemployee directors of the
Company received an annual fee of $10,000, fees of $1,200 for each Board
meeting attended, plus reimbursement of expenses, and fees of $500 for each
Board meeting held by conference telephone. Committee meeting fees are paid at
the same rates as fees for Board meetings; however, no fees are paid for
committee meetings held on the same dates as Board meetings. No fees are paid
to directors who are also employees of the Company. Each nonemployee director
also is annually awarded nondiscretionary options to purchase 5,000 shares of
the Company's Common Stock and is reimbursed by the Company for up to $7,500
per year in legal and financial consulting expenses.
During 1995 the Company adopted an unfunded pension plan covering
nonemployee directors who have served on the Board for at least five years. No
director who is, or at any time was, an employee of the Company may participate
in the plan. The plan provides an annual benefit, payable monthly from the
time a participating director ceases to be a member of the Board until death,
equal to the director's most recent annual Board fee, as adjusted annually to
reflect changes in the Consumer Price Index. The right of a director to
receive benefits under the plan is forfeited if the director engages in any
activity determined by the Board to be contrary to the best interests of the
Company.
EMPLOYMENT AGREEMENT. On March 30, 1994, the Company entered into an
Amended and Restated Employment Agreement (the "Agreement") with Mr. E. Thomas
Arington, which restated and amended Mr. Arington's prior agreement with the
Company. The initial term of the Agreement continues until December 31, 1998,
subject to automatic annual extensions if notice of termination is not given by
either party prior to specified dates. The effect of the Agreement is to
provide for an initial five year employment term, with subsequent "rolling
three year" minimum terms. The Agreement may be amended by agreement between
the Compensation Committee of the Board of Directors and Mr. Arington.
Under the Agreement, Mr. Arington is to receive a salary in an amount
to be set by the Compensation Committee, but not less than $33,333 per month.
For 1995, the salary was set at $36,000 per month; for 1996, the Compensation
Committee had determined to increase Mr. Arington's salary to $500,000 per
year. In view of the Company's operating results, however, Mr. Arington
declined the increase and his 1995 salary continued in effect; in February
1996, he voluntarily reduced his salary to $216,000 effective until such time
that he determines an adjusment is appropriate. In addition, the
Agreement entitles Mr. Arington to receive for each of the years 1994 through
1998 a separate annual bonus equal to the following percentages of the
Company's income before taxes: 8% for
24
25
1994; 7% for 1995; 6% for 1996; and 5% for each of 1997 and 1998. After 1998,
a bonus will be paid in such a manner and amount as the Compensation Committee
might at that time determine. This incentive compensation arrangement was
approved by the Company's stockholders at the 1994 Annual Meeting of
Stockholders. Mr. Arington received no bonus in respect of 1995.
The Agreement also provides for life and disability insurance and for
certain other customary benefits. Options to purchase 254,685 shares of Common
Stock of the Company granted to Mr. Arington under his prior Agreement are
continued by the new Agreement. If Mr. Arington's employment is voluntarily
terminated by him, or if he is terminated by the Company with cause, the
Agreement provides that he will not compete with the Company for a period of
one year after termination.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION. Mr. E.
Thomas Arington, the Company's Chief Executive Officer, determined the 1995
salaries and bonuses of the Company's other named executive officers, taking
into consideration the target range for total cash compensation established by
the Compensation Committee.
Certain indebtedness of the Company is guaranteed by Mr. Sundararaman,
the Company's Secretary and the Chairman of the Compensation Committee, as well
as by a former director and officer of the Company. As of December 31, 1995,
the amount of outstanding indebtedness subject to these guarantees was
approximately $1,061,000.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth, as of April 1, 1996, certain
information with regard to the beneficial ownership of the Company's Common
Stock by (i) each of the Company's stockholders known to hold more than 5% of
the outstanding shares of Common Stock, (ii) each director and each executive
officer named on the Summary Compensation Table, individually, and (iii) all
directors and executive officers of the Company as a group.
Name Beneficial Ownership
---- ------------------------------
Number Of Shares (1) Percent
-------------------- -------
E. Thomas Arington 1,655,851 15.6%
7155 East Kemper Road
Cincinnati, OH 45249
George W. Baughman 73,000 *
Doane F. Darling 66,344 *
Stanley L. Morgan 72,000 *
S. Sundararaman 233,716 2.4%
Jeffrey T. Arington 128,960 1.3%
Timothy J. Holt 103,710 1.1%
Ivan E. Pusecker 104,138 1.1%
All directors and 2,437,719 22.1%
executive officers
as a group (8 persons)
25
26
*Less than one percent.
_______________
(1) Excludes shares of Common Stock subject to options which cannot be
exercised within 60 days after April 1, 1996. Includes options to
purchase the following numbers of shares: Mr. E. Thomas Arington,
849,843 shares; Mr. Baughman, 37,000 shares; Mr. Darling, 57,834
shares; Mr. Morgan, 21,000 shares; Mr. Sundararaman, 28,000 shares;
Mr. Jeffrey T. Arington, 101,001 shares; Mr. Holt, 77,734 shares; Mr.
Pusecker, 60,600 shares; and all directors and executive officers as
a group, 1,233,012 shares.
In addition to the shares listed above, The Provident Bank, One East
Fourth Street, Cincinnati, Ohio (the "Bank"), owns 468,018 shares (4.8%) of the
Company's Common Stock, 42,130 shares of the Company's Series B Non-Voting
Convertible Preferred Stock (the "Series B Preferred Stock") which are
convertible into 421,300 shares of Common Stock and warrants exercisable at a
price of $18.125 per share for an additional 200,000 shares of Common Stock.
Because of regulatory requirements, the Series B Preferred Stock may not be
converted if, as a result, the Bank and certain of its affiliates would then
own in excess of 5.0% of any class of the Company's voting capital stock,
except that conversion is permitted immediately prior to and in conjunction
with certain transactions involving the sale of the underlying Common Stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
From 1988 until 1995, when the arrangement was terminated, the
Company marketed, and distributed under the Duramed label, substantially all
prescription products for Invamed, Inc. ("Invamed"), a New Jersey-based generic
drug manufacturer and the beneficial owner of approximately 5% of the Company's
Common Stock during 1995. The Company has a separate agreement with Invamed
pursuant to which it distributes the Invamed product, Cyclobenzaprine, and has
other agreements with Invamed covering the development and, if Food and Drug
Administration approval is received, manufacture by Invamed of Verapamil S.R.,
which will be marketed by the Company on a variable profit basis with Invamed.
In connection with these arrangements, the Company granted Invamed options
covering an aggregate of 435,000 shares of the Company's Common Stock.
26
27
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
- ---------------------------------------------------------------------------
(a) 1. All financial statements filed as a part of this report on Form 10-K
are listed under Item 8, above.
2. The following financial statement schedule is filed herewith:
Page
----
Valuation and Qualifying Accounts S-1
All other schedules are omitted because of the absence of conditions under
which they are required or because the information is shown in the financial
statements or notes thereto.
(b) Reports on Form 8-K
On November 17, 1995 the Company filed a current report on Form 8-K
(date of report: November 15, 1995) announcing the completion of the first
stage of the private placement offering of Series C Convertible Preferred
Stock.
(c) Exhibits
Exhibit Number Description
- -------------- -----------
3.1 Certificate of Incorporation (a)
3.2 By-Laws (b)
4.1 Certificate of Designation, Preferences and Rights of
Series A Preferred Stock (b)
4.2 Certificate of Designation, Preferences and Rights of Series B Preferred
Stock (k)
4.3 Certificate of Designation, Preferences and Rights of Series C Preferred
Stock (m)
4.4 Rights Agreement between Duramed Pharmaceuticals, Inc. and The
Provident Bank as Rights Agent dated as of August 17, 1988 (c)
10.1 Loan Agreement between the State of Ohio Department of Development and
the Company dated April 25, 1985 (a)
10.2 Product liability insurance policy issued to the Company by
Steadfast Insurance Company (d)
10.3 Agreement dated June 7, 1989 between the Company and
Invamed, Inc. relating to Verapamil S.R. (e)
10.4 Letter agreement dated December 18, 1992 between the
Company and Invamed, Inc. relating to Verapamil S.R. (f)
10.5 Assignment and Amendment of Lease dated as of May 31, 1990
among the Company, Charles J. Kubicki and Goldline
Laboratories, Inc. (g)
10.6 Development and Construction Loan Agreement dated as of September
16, 1994 between the Company and The Provident Bank (h)
10.7 Promissory Note - Variable Rate Mortgage Loan dated September 16,
1994 from the Company to The Provident Bank (h)
10.8 Amended and Restated Loan and Security Agreement dated as of
December 31, 1994 between the Company and The Provident Bank (k)
- 27 -
28
10.9 Amended and Restated Promissory Note (Revolving Credit) dated
December 31, 1994 from the Company to The Provident Bank (k)
10.10 Amended and Restated Promissory Note (Term Loan) dated December 31,
1994 from the Company to The Provident Bank (k)
10.11 First Amendment to Amended and Restated Loan and Security Agreement
dated August 22, 1995 between the Company and The Provident Bank (l)
10.12 Second Amendment to Amended and restated Loan and Security Agreement dated
September 30, 1995 between the Company and The Provident Bank (l)
10.13 Third Amendment to Amended and restated Loan and Security Agreement dated
December 22, 1995 between the Company and The Provident Bank
10.14 Promissory note of $3.0 million dated August 22, 1995 between the
Company and The Provident Bank (l)
10.15 Promissory note of $2.0 million dated September 30, 1995 between the
Company and The Provident Bank (l)
10.16 Warrant for the purchase of 200,000 shares of common stock between
the Company and The Provident Bank (l)
10.17 Executive Compensation Plans and Arrangements
(i) Amended and Restated Employment Agreement dated as of
March 30, 1994 between the Company and E. Thomas Arington (i)
(ii) Life and disability insurance policies for the benefit of E. Thomas
Arington (f)
(iii) Life insurance policy for the benefit of Ivan E. Pusecker (f)
(iv) Life insurance policy for the benefit of Timothy J. Holt (f)
(v) 1986 Stock Option Plan (f)
(vi) 1988 Stock Option Plan (j)
(vii) 1991 Stock Option Plan for Nonemployee Directors (j)
11 Statement regarding computation of earnings per share
23 Consent of Independent Auditors
24 Powers of Attorney
_________________
(a) Filed as an Exhibit to Registration Statement No. 33-8215-C and
incorporated herein by reference.
- 28 -
29
(b) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the year ended
December 31, 1988 and incorporated herein by reference.
(c) Filed as an Exhibit to the Company's Current Report on Form 8-K, Date of Report August
28, 1988, and incorporated herein by reference.
(d) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the year ended
December 31, 1991 and incorporated herein by reference.
(e) Filed as an Exhibit to Registration Statement No. 33-29517 and incorporated herein by
reference.
(f) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the year ended
December 31, 1992 and incorporated herein by reference.
(g) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the year ended
December 31, 1990 and incorporated herein by reference.
(h) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1994 and incorporated herein by reference.
(i) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the year ended
December 31, 1993 and incorporated herein by reference.
(j) Filed as an Exhibit to the Company's Proxy Statement relating to the 1993 Annual
Meeting of Stockholders and incorporated herein by reference.
(k) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the year ended
December 31, 1994 and incorporated herein by reference.
(l) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1995 and incorporated herein by reference.
(m) Filed as an Exhibit to Registration Statement No. 33-64561 and incorporated herein by
reference.
The Company will furnish to the Commission, upon request, its long-term debt
instruments not listed in this Item.
- 29 -
30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this amended report to be signed on
its behalf by the undersigned, thereunto duly authorized, as of the 29th day of
April 1996.
DURAMED PHARMACEUTICALS, INC.
BY: /s/ Timothy J. Holt
------------------------------
Timothy J. Holt, Senior
Vice President, Finance and
Administration
- 30 -
31
ERNST & YOUNG LLP 1300 Chiquita Center Phone 513 621 6454
250 East Fifth Street
Cincinnati, Ohio 45302
Report of Independent Auditors
The Board of Directors
Duramed Pharmaceuticals, Inc.
We have audited the accompanying consolidated balance sheets of Duramed
Pharmaceuticals, Inc. as of December 31, 1995 and 1994, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1995. Our audits also
included the financial statement schedule listed in the index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit 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
Duramed Pharmaceuticals, Inc. at December 31, 1995 and 1994, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material respects
the information set forth therin.
/s/ ERNST & YOUNG
Cincinnati, Ohio
March 27, 1996
Ernst & Young LLP is a member of Ernst & Young International, Ltd.
F-1
32
DURAMED PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31, 1995 1994
- ---------------------------------------------------------------------------------------
Current assets:
Cash $2,600 $2,900
Trade accounts receivable,
less allowance of $576,000
and $505,000, respectively 8,543,411 5,249,101
Inventories 9,423,326 8,423,687
Prepaid expenses and other assets 1,276,213 1,318,573
Deferred taxes 1,797,000 2,463,000
----------- -----------
Total current assets 21,042,550 17,457,261
----------- -----------
Property, plant and equipment - net 20,342,945 16,186,678
----------- -----------
Other assets:
Deposits and other assets 1,687,816 1,919,901
Deferred taxes 2,104,000 1,438,000
----------- -----------
Total other assets 3,791,816 3,357,901
----------- -----------
Total assets $45,177,311 $ 37,001,840
=========== ============
See accompanying notes.
F-2
33
DURAMED PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31, 1995 1994
- ----------------------------------------------------------------------------------------------------
Current liabilities:
Accounts payable $3,625,593 $3,840,069
Accrued liabilities 4,505,907 5,209,179
Current portion of long-term
debt and other liabilities 7,169,374 10,394,630
Current portion of capital lease obligations 1,140,658 521,444
----------- -----------
Total current liabilities 16,441,532 19,965,322
----------- -----------
Long-term debt, less current portion 17,236,736 15,309,349
Long-term capital leases, less current portion 1,706,836 879,062
Other long-term liabilities 893,885 2,079,007
----------- -----------
Total liabilities 36,278,989 38,232,740
----------- -----------
Stockholders' equity:
Convertible Preferred Stock Series B - authorized 500,000
shares, par value $.001; 74,659 shares issued
and outstanding 75 75
Convertible Preferred Stock Series C - authorized 250,000
shares; stated value $100; 120,000 shares issued
and outstanding 12,000,000 ---
Common stock - authorized 50,000,000
shares, par value $.01; issued and outstanding
8,074,449 and 7,968,108 shares in 1995 and 1994
respectively 80,744 79,680
Additional paid-in capital 24,686,871 25,567,765
Accumulated deficit (27,869,368) (26,878,420)
----------- -----------
Total stockholders' equity (deficiency) 8,898,322 (1,230,900)
----------- -----------
Total liabilities and stockholders' equity $45,177,311 $37,001,840
=========== ===========
See accompanying notes.
F-3
34
DURAMED PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31, 1995 1994 1993
- -----------------------------------------------------------------------------------------------
Net sales $49,623,526 $45,274,362 $30,293,239
Cost of goods sold 29,705,677 25,190,330 19,800,925
----------- ----------- -----------
Gross profit 19,917,849 20,084,032 10,492,314
----------- ----------- -----------
Operating expenses:
Product development 5,952,694 1,860,824 859,459
Selling 3,629,105 2,847,473 1,631,563
General and administrative 8,602,405 7,360,716 4,642,509
----------- ----------- -----------
18,184,204 12,069,013 7,133,531
----------- ----------- -----------
Operating income 1,733,645 8,015,019 3,358,783
Interest expense 2,724,593 2,249,902 2,118,697
----------- ----------- -----------
(Loss) income before income taxes
and preferred dividends (990,948) 5,765,117 1,240,086
Income tax (benefit) provision 0 (3,785,750) 25,000
----------- ----------- -----------
Net (loss) income ($990,948) $ 9,550,867 $ 1,215,086
Preferred stock dividends 122,739 --- ---
----------- ----------- -----------
Net (loss) income applicable to common stockholders ($1,113,687) $ 9,550,867 $ 1,215,086
=========== =========== ===========
Net (loss) income per average common
and common equivalent shares outstanding:
Primary ($0.14) $ .93 $ .14
=========== =========== ===========
Fully diluted ($0.14) $ .91 $ .13
=========== =========== ===========
Weighted average number of common and
common equivalent shares outstanding:
Primary 8,026,359 10,248,315 8,421,244
=========== =========== ===========
Fully diluted 8,026,359 10,509,695 9,035,834
=========== =========== ===========
See accompanying notes.
F-4
35
DURAMED PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock Preferred Stock Additional
---------------------------------------------- Paid-In
Shares Amount Series B Series C Capital
------------------------------------------------------------
BALANCE - DECEMBER 31, 1992 6,495,441 $64,954 $ --- $ --- $22,727,763
Issuance of stock in settlement
of certain liabilities 100,000 1,000 --- --- 249,000
Issuance of stock in connection
with the Company's 401 (k) plan 8,229 82 --- --- 46,888
Issuance of stock in connection
with bank Forbearance Agreement 346,718 3,467 75 --- 904,258
Amortization of deferred
financing charge --- --- --- --- ---
Issuance of stock in connection
with stock options 2,000 20 --- --- 2,240
Issuance of stock in connection
with exercised warrants 350,000 3,500 --- --- 1,046,500
Net income for 1993 --- --- --- --- ---
----------------------------------------------------------
BALANCE - DECEMBER 31, 1993 7,302,388 73,023 75 --- 24,976,649
Issuance of stock in connection
with the Company's 401 (k) plan 16,882 169 --- --- 149,675
Amortization of deferred
financing charge --- --- --- --- ---
Issuance of stock in connection
with stock options 598,838 5,988 --- --- 291,941
Issuance of stock in connection
with exercised warrants 50,000 500 --- --- 149,500
Net income for 1994 --- --- --- --- ---
----------------------------------------------------------
BALANCE - DECEMBER 31, 1994 7,968,108 79,680 75 --- 25,567,765
Issuance of stock in connection
with benefit plans 14,250 143 --- --- 228,174
Issuance of stock in connection
with stock options 92,091 921 --- --- 256,142
Issuance of Series C Convertible
Preferred Stock --- --- --- 12,000,000 (1,242,471)
Net loss for 1995 --- --- --- --- ---
Preferred stock dividends --- --- --- --- (122,739)
----------------------------------------------------------
BALANCE - DECEMBER 31, 1995 8,074,449 $80,744 $ 75 $12,000,000 $24,686,871
==========================================================
Deferred
Financing Accumulated
Charge Deficit Total
----------------------------------------
BALANCE - DECEMBER 31, 1992 $ --- $(37,644,373) $(14,851,656)
Issuance of stock in settlement
of certain liabilities --- --- 250,000
Issuance of stock in connection
with the Company's 401 (k) plan --- --- 46,970
Issuance of stock in connection
with bank Forbearance Agreement (907,800) --- ---
Amortization of deferred
financing charge 302,600 --- 302,600
Issuance of stock in connection
with stock options --- --- 2,260
Issuance of stock in connection
with exercised warrants --- --- 1,050,000
Net income for 1993 --- 1,215,086 1,215,086
----------------------------------------
BALANCE - DECEMBER 31, 1993 (605,200) (36,429,287) (11,984,740)
Issuance of stock in connection
with the Company's 401 (k) plan --- --- 149,844
Amortization of deferred
financing charge 605,200 --- 605,200
Issuance of stock in connection
with stock options --- --- 297,929
Issuance of stock in connection
with exercised warrants --- --- 150,000
Net income for 1994 --- 9,550,867 9,550,867
----------------------------------------
BALANCE - DECEMBER 31, 1994 --- (26,878,420) (1,230,900)
Issuance of stock in connection
with benefit plans --- --- 228,317
Issuance of stock in connection
with stock options --- --- 257,063
Issuance of Series C Convertible
Preferred Stock --- --- 10,757,529
Net loss for 1995 --- (990,948) (990,948)
Preferred Series C stock dividends --- --- (122,739)
----------------------------------------
BALANCE - DECEMBER 31, 1995 --- $(27,869,368) $ 8,898,322
========================================
See accompanying notes.
F-5
36
DURAMED PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, 1995 1994 1993
- --------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net (loss) income $ (990,948) $9,550,867 $1,215,086
Adjustments to reconcile net (loss) income to net
cash (used in) provided by operating activities:
Deferred tax benefit --- (3,901,000) ---
Depreciation and amortization 1,837,382 2,064,429 1,574,124
Recognition of deferred revenues (1,500,000) --- ---
Provision for doubtful accounts 84,773 119,140 214,160
Common stock issued in connection with
employee compensation plans 228,317 149,844 46,970
Changes in assets and liabilities:
Trade accounts receivable (3,365,757) (222,428) (3,230,352)
Inventories (999,639) (2,703,265) (3,478,732)
Prepaid expenses
and other assets 42,360 (299,443) (94,717)
Accounts payable (214,476) (1,174,933) 2,138,391
Accrued liabilities (1,063,073) (202,496) 2,617,614
Other (82,395) (124,069) (22,081)
----------- ---------- ----------
Net cash (used in) provided by operating activities (6,023,456) 3,256,646 980,463
----------- ---------- ----------
Investing activities:
Capital expenditures (5,174,323) (5,734,709) (1,145,677)
Deposits on capital equipment (74,287) (430,875) (344,530)
----------- ---------- ----------
Net cash (used for) investing activities (5,248,610) (6,165,584) (1,490,207)
F-6
37
DURAMED PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, 1995 1994 1993
- ------------------------------------------------------------------------------------------
Cash flows from financing activities:
Payments of long-term debt, including current
maturities (9,025,422) (810,721) (789,793)
Net increase (decrease) in
revolving credit facility 1,199,692 (2,723,330) (463,612)
Long-term borrowings 8,082,904 5,996,160 711,389
Issuance of preferred stock - net 10,757,529 --- ---
Issuance of common stock 257,063 447,929 1,052,260
---------- ---------- ---------
Net cash provided by financing
activities 11,271,766 2,910,038 510,244
---------- ---------- --------
Net change in cash (300) 1,100 500
Cash at beginning of year 2,900 1,800 1,300
---------- ---------- --------
Cash at end of year $ 2,600 $ 2,900 $ 1,800
========== ========== ========
Supplemental cash flow disclosures:
Interest paid $2,724,376 $1,776,457 $359,534
Income taxes paid 105,000 88,000 15,400
Supplemental schedule of non cash investing and
financing activities:
Common stock issued to settle certain
liabilities $ -- $ -- $250,000
Common and preferred stock issued in
connection with the Forbearance Agreement $ -- $ -- $907,800
See accompanying notes.
F-7
38
DURAMED PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A. ACCOUNTING POLICIES
The Company's Business
- ----------------------
Duramed Pharmaceuticals, Inc. (the "Company") develops, manufactures and
markets generic prescription pharmaceutical products in tablet, capsule and
liquid forms to customers throughout the United States.
A summary of the principal accounting policies followed in preparation of the
consolidated financial statements is set forth below.
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the accounts of the Company and
its subsidiaries, all of which are wholly owned. Significant intercompany
accounts and transactions have been eliminated in consolidation. Goodwill
related to acquisitions is being amortized over ten years.
Cash
- ----
The Company's cash balance represents only the balance maintained in the petty
cash funds. The Company's day to day operations are funded and financed
through its revolving credit facility (see Note D).
Inventories
- -----------
Inventories are stated at the lower of cost (first-in, first-out) or market.
Components of inventories include:
December 31,
----------------------------------------
1995 1994
------------- --------------
Raw materials $ 3,931,836 $ 1,939,890
Work-in-process 261,671 498,975
Finished goods 5,229,819 5,984,822
------------- --------------
$ 9,423,326 $ 8,423,687
============= ==============
As of December 31, 1995, inventories include approximately $1.3 million of
inventory costs, principally raw materials, relating to the conjugated
estrogens product, for which the Company is awaiting regulatory approval. The
drugs and other raw materials used in the Company's products are purchased
through United States distributors for foreign and domestic manufacturers of
bulk pharmaceutical chemicals and are generally available from numerous
sources. The federal drug application process requires specification and
approval of raw material suppliers. If raw materials from all specified
suppliers become unavailable, Food and Drug Administration ("FDA")
F-8
39
approval of a new supplier is required, which can cause a delay of six months
or more in the manufacture of the drug involved. To date, the Company has not
experienced any significant delays and generally specifies two or more
suppliers in all drug applications.
Property, Plant and Equipment
- -----------------------------
Property, plant and equipment are stated at cost. Depreciation and
amortization is provided using principally the straight-line method. Major
renewals and improvements are capitalized, while ordinary maintenance and
repairs are expensed. Property, plant and equipment consists of the following:
December 31,
-----------------------------------------
1995 1994
------------- --------------
Land $ 1,000,000 $ 1,000,000
Buildings and improvements 15,897,964 6,587,005
Equipment, furniture and fixtures 15,182,693 12,177,615
Construction in progress --- 6,394,406
------------- --------------
32,080,657 26,159,026
Less accumulated
depreciation and amortization 11,737,712 9,972,348
------------- --------------
$ 20,342,945 $ 16,186,678
============= ==============
Product Development Costs
- -------------------------
Product development costs are charged to expense when incurred, net of
reimbursements received per the contractual agreement described in Note B. The
reported costs include specifically identifiable expenses and an allocation of
certain expenses shared with the other departments within the Company.
Revenue Recognition
- -------------------
The Company recognizes revenue at the time it ships product and provides for
returns and allowances based upon historical trends.
Concentration of Risk
- ---------------------
The financial instrument that potentially subjects the Company to credit risk
is accounts receivable. The Company sells its products to drug wholesalers,
private label distributors, drug store chains, health maintenance
organizations, hospitals, nursing homes, retiree organizations, mail order
distributors, other drug manufacturers, mass merchandisers and governmental
agencies. The credit risk associated with this financial instrument is
believed by the Company to be limited due to the large number of customers (no
single customer accounts for more than 10% of the Company's sales), their
geographic dispersion and the performance of certain credit evaluation
procedures.
F-9
40
The Company's current product line is limited and the Company's current
operating results are heavily dependent on the performance of its
Methylprednisolone product. If the Company receives approval from the FDA on
its ANDA filing for the .625 mg strength of conjugated estrogens, the resulting
favorable financial impact is expected to be significant; however, approval is
not assured. See Note B.
In the absence of resources provided by new product sales, the additional
capital which will be required in order to execute the Company's expanded
business plan, which includes significantly expanded product development and
business development activities to broaden the Company's current product lines,
will have to be acquired from other sources or the business plan will have to
be scaled back.
Earnings (Loss) Per Share
- -------------------------
The fully diluted and primary earnings per share calculations are computed
using weighted average common shares outstanding and common equivalent shares,
which include dilutive options, warrants and convertible preferred stock. Loss
per share is computed using the weighted average of common shares outstanding
only. Recognition of outstanding options and warrants in computing loss per
share is not required as their effect would be antidilutive.
Use of Estimates
- ----------------
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Reclassification
- ----------------
Certain accounts from 1994 and 1993 have been reclassified to correspond to the
classification for the 1995 fiscal year.
Recently Issued Accounting Standards
- ------------------------------------
In March 1995, the FASB issued Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. Statement No. 121 also addresses the accounting for
long-lived assets that are expected to be disposed of. The Company will adopt
Statement No. 121 in the first quarter of 1996 and, based on current
circumstances, does not believe the effect of adoption will be material.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," requires the Company either to adopt the fair value
method of accounting for stock options in its financial statements or to retain
its existing method and disclose the pro forma effects of using the fair value
method beginning in 1996. The Company intends to retain
F-10
41
its existing method of accounting for stock options and to include pro forma
disclosures in the notes to its consolidated financial statements.
Accordingly, the standard will have no effect on the Company's financial
condition or results of operations.
NOTE B. STRATEGIC ALLIANCES
The Company has an agreement with Invamed, Inc. ("Invamed") for the marketing
rights to Verapamil S.R.,which has been formulated and will be manufactured by
Invamed if an ANDA is filed and FDA approval is obtained. As part of the
consideration, the Company issued 150,000 shares of common stock to Invamed.
The value of the 150,000 shares ($997,200) is included in Other Assets and will
be amortized over the estimated useful life of the product commencing with
approval by the FDA. At this time, to the Company's best knowledge, three
companies have received FDA approval to manufacture this generic product.
Although there can be no assurance Invamed's product will receive FDA approval,
based on current market conditions and the Company's sales projections, there
appears to have been no impairment of the value of the marketing rights held by
the Company for this product.
On June 26, 1992, the Company signed an agreement with Schein Pharmaceutical,
Inc. ("Schein") for the development, manufacture and marketing of a new
formulation of conjugated estrogens tablets, the generic equivalent of the brand
name product Premarin(R). Under the agreement, Schein provides project funding
and technical assistance while Duramed is responsible for product development
and manufacturing; both firms will participate in the marketing and distribution
of the products. The conjugated estrogens products have been formulated and are
designed to meet the bioequivalence guidance established by the FDA in late
1991. On September 27, 1994 the Company filed an Abbreviated New Drug
Application ("ANDA") for the .625 mg strength of conjugated estrogens. In order
to market the .625 mg strength product as well as other dosage strengths, FDA
approval is required. At this time, the Company is unable to determine when, or
if, it will obtain FDA approval to market the .625 mg strength product. If
approval is obtained and the product is successfully manufactured and marketed,
the resulting favorable financial impact is expected to be significant. Product
development expenditures in 1995, 1994 and 1993 are net of reimbursements
received from Schein pursuant to this agreement.
On June 2, 1994 the Company executed distribution, marketing and related
agreements with Ortho-McNeil Pharmaceutical Corporation ("Ortho- McNeil"). Under
the terms of the agreements Duramed received the non-exclusive distribution
rights to the Ortho-McNeil products Acetaminophen with Codeine, Tolmetin sodium,
Tolmetin sodium DS and Oxycodone with Acetaminophen as well as an extension of
the distribution term for the Ortho-McNeil product Estropipate. The term of the
distribution agreement for these products is ten years, subject to reduction to
three years from date of first sale, if certain requirements are not met. The
Company commenced marketing the new products during the fourth quarter of 1994,
and has been selling the Estropipate product since the fourth quarter of 1993.
In addition to the distribution rights for the products, Ortho-
F-11
42
McNeil provided $2 million in cash and the use of $4 million in equipment for
the Company's hormone replacement therapy ("HRT") facility expansion and
Ortho-McNeil's parent, Johnson & Johnson, guaranteed a $5.5 million
construction loan for the HRT facility expansion. Under the terms of the
agreement, if certain requirements are met, title to the equipment will
transfer to the Company over a specified period. If these requirements are not
met, the Company will be required, at Ortho-McNeil's option, either to return
the equipment or to purchase it at its fair market value at that time. If the
Company is required to purchase the equipment, the purchase price plus interest
at the current prime rate will be payable on a quarterly basis over three
years. In exchange for the financial assistance provided to the Company under
the agreements, Ortho-McNeil will receive a royalty on the future sales of the
conjugated estrogens products. In addition, Ortho-McNeil will participate in
marketing of the Company's conjugated estrogens products and share in the
profits if the Company is successful in bringing the products to market.
In October 1995, the Company signed a letter of intent to acquire Hallmark
Pharmaceuticals, Inc. ("Hallmark"), a privately held pharmaceutical development
company headquartered in Somerset, N.J. The Company believes that Hallmark's
technical expertise and capabilities with respect to advanced drug delivery
systems would contribute significantly to the long term success of the
Company's product development program. The Company is continuing discussions
with Hallmark directed toward the signing of a definitive acquisition
agreement. If the acquisition is consummated, it is probable that a
substantial non-cash charge will be recorded for the recognition of purchased
research and development.
In exchange for the exclusive North American marketing rights to Hallmark's
Captopril product, and in anticipation of completing the acquisition, Duramed
has advanced certain funds to Hallmark. Advances to Hallmark were $900,000 at
December 31, 1995 and $2.0 million as of March 25, 1996. If the acquisition is
not completed, the primary anticipated source for repayment of these advances is
the net profits from the sales of the Captopril product. The Company commenced
marketing Captopril in February 1996 in a highly competitive marketplace. Based
on activity to date, it is unlikely that the short term net profits for the
Captopril product will be sufficient to recover fully the advances.
Accordingly, in the fourth quarter of 1995 the Company recorded a charge of
$1,459,000 to recognize this exposure, net of associated Captopril receivables
and inventories. If the acquisition is consummated, the funds advanced are, in
effect, part of the purchase price for the acquisition of Hallmark.
For the years ended December 31, 1995, 1994 and 1993, respectively, the
percentages of the Company's sales comprised of products marketed for others
were 31%, 28%, and 36%. The gross profit generated by these sales was
approximately $3.3 million in 1995, $3.6 million in 1994 and $4.0 million in
1993.
F-12
43
NOTE C. ACCRUED LIABILITIES
The Company's accrued liabilities consist of the following:
December 31,
----------------------------------------
1995 1994
------------- --------------
Wages and other compensation $ 1,414,212 $ 2,153,039
Taxes, other than income taxes 582,272 662,711
Accrued interest 228,282 305,690
Other 2,281,141 2,087,739
------------- --------------
$ 4,505,907 $ 5,209,179
============= ==============
NOTE D. DEBT AND OTHER LONG-TERM LIABILITIES
The Company's debt consists of the following:
December 31,
----------------------------------------
1995 1994
------------- --------------
Revolving credit facility $ 8,664,861 $ 7,465,169
Term note 4,500,000 9,500,000
Note payable to State of Ohio 1,060,770 1,230,985
Industrial Revenue Bond --- 221,605
Construction loan 5,500,000 4,504,671
Equipment loan 1,080,155 685,061
Convertible note 2,121,465 ---
Installment notes payable 236,039 153,668
------------- --------------
23,163,290 23,761,159
Less amount classified as current 5,926,554 8,451,810
------------- --------------
$ 17,236,736 $ 15,309,349
============= ==============
Until mid-November 1995 the funds used by the Company in its operations had
been primarily provided through borrowings against its revolving credit
facility, additional extensions of credit granted by the Company's bank and
funds received from the issuance of a convertible debt security. In November
1995 the Company reached agreement and closed on the first $12.0 million ($10.8
million net of issuance costs) of a private placement offering of Series C
Preferred Stock (see Note G). With the additional capital, the Company
renegotiated terms of certain borrowing arrangements with its bank, which
included the elimination of penalty interest charges which were scheduled to
commence in January 1996. Under the terms of the amended and restated bank
agreement dated December 31, 1994 two facilities were established, a revolving
F-13
44
credit facility with a maximum borrowing limit of $10.5 million and a term note
in the amount of $9.5 million. These facilities, and the amendments thereto,
are collateralized by substantially all assets of the Company including
inventory, receivables and a mortgage interest on the manufacturing facility.
During both the third and fourth quarters of 1995 the Company reorganized the
terms of certain borrowing arrangements with its bank which resulted in
expanded borrowing capacity on the revolving credit facility and modified
repayment due dates on the term note.
The amended terms of the revolving credit facility permit the Company to borrow
up to $12.5 million based upon eligible collateral ($11.1 million as of
December 31, 1995) through March 31, 1997 when the principal balance is due.
The expressed intention of the Company and its bank is to review quarterly the
Company's financial condition and, if appropriate, extend the due date of its
revolving credit facility in order to maintain a fifteen month term. This
facility requires monthly interest payments at a rate of prime plus 1% (9.50%
at December 31, 1995). The weighted average interest rate in effect on the
revolving credit facility in 1995 was 9.8%.
The $9.5 million term note, prior to the amendments renegotiated in the second
half of 1995, had required quarterly principal payments in the amount of $2.0
million payable on the first day of March, June, September and December of 1995
with the remaining balance due on March 31, 1996. Through June 30, 1995, two
principal payments totalling $4.0 million had been made on the term note. In
December 1995 the Company repaid an additional $1.0 million of principal on the
term note. The amendments to the borrowing agreement extended the due dates
for the outstanding $4.5 million balance of the term note to $1.5 million due
on March 1, 1996 and the remaining $3.0 million due on June 1, 1996. In
February 1996 the Company made the $1.5 million term note principal payment due
on March 1, 1996. The term note requires monthly interest payments and bears
interest at the rate of prime plus 1%.
In consideration of the expanded borrowing arrangements, the Company granted to
the bank warrants to purchase 200,000 shares of common stock of the Company at
$18.125 per share.
The note payable to the State of Ohio is secured by the Company's manufacturing
facility. The loan bears interest at 7.5% and requires minimum monthly payments
of $20,394 and certain other payments as defined by the agreement. The final
balloon payment of approximately $1,021,000, is due November 1, 1996. This
debt is personally guaranteed by a former officer and by a director.
During 1985, Hamilton County, Ohio issued Industrial Revenue Bonds in the
amount of $995,000, the proceeds of which were used by the Company to purchase
new machinery and equipment. The balance was paid in April 1995 with the
proceeds of a $185,000 bank note. The interest rate of the note is prime plus
1%. The term of the note is three years and requires monthly payments of
principal and interest in the amount of $6,400.
F-14
45
The construction loan is a ten year $5.5 million facility which provided a
portion of the financing for the expansion of the Company's manufacturing
facility and is supported by a loan guaranty from Johnson & Johnson. Under the
terms of the construction loan, principal payments do not commence until the
occurrence of certain defined events or January 1, 1997, whichever occurs
first. Interest is payable monthly based upon the prime rate.
The equipment line of credit is a $1.5 million facility provided by the
Company's bank for financing equipment which is collateralized by the assets
financed. The term of the facility is five years at an interest rate of prime
plus 1%.
The $2.0 million convertible note represents funds advanced from a joint
venture partner. The note bears interest at a variable rate approximating prime
rate + 3% (initially 12%), and matures on July 10, 1998. Upon the occurrence
of certain events, or at the option of the lender, the principal amount of the
note and accrued interest may be convertible to shares of Duramed common stock
at a conversion price of $15.00 per share. If the Company repays this
obligation prior to maturity, the note holder is entitled to receive warrants,
in an amount equal to the principal amount plus accrued interest that is paid,
to purchase shares of the Company's common stock. The exercise price of such
warrants would be $15.00 per share.
Other long-term debt also includes facilities of varying amounts and terms
which are generally collateralized by the assets financed.
The carrying value of the Company's's debt approximates fair market value.
The Company's other long-term liabilities consist of the following:
December 31,
-----------------------------------------
1995 1994
------------- --------------
Abandoned facility obligation - net $ 1,636,705 $ 2,021,827
Deferred revenue 500,000 2,000,000
------------- --------------
2,136,705 4,021,827
Less amount classified as current 1,242,820 1,942,820
------------- --------------
$ 893,885 $ 2,079,007
============= ==============
The abandoned facility obligation represents the amounts due, net of sublease
income, under terms of a lease which extends through September 30, 1998. Due
to the Company's financial condition at the time, the Company was unable to
meet its commitments under the lease and vacated the facility in 1991. The
facility was sublet for a period of five years in 1992. In 1994 the Company
commenced payment of its current net obligations under the lease and also
commenced quarterly payments on the accumulated outstanding balance.
F-15
46
The $500,000 in deferred revenue at December 31, 1995 represents the
unamortized balance from the $2.0 million cash received from Ortho-McNeil
pursuant to the terms of distribution and marketing agreements entered into in
1994 (see Note B). In order to match the performance of certain activities
pursuant to the terms of the agreement, the Company amortized $250,000 a
quarter for the first three quarters of 1995 and $750,000 in the fourth
quarter. As of December 31, 1995, the remaining $500,000 of deferred revenue
is classified as current.
Maturities of long-term indebtedness and obligations for the abandoned facility
obligation for the ensuing five years are as follows:
Year ending December 31:
Abandoned Facility
Debt Obligation - Net Total
---- ------------------ -----
1996 $ 5,926,554 $ 742,820 $ 6,669,374
1997 9,557,272 449,393 10,006,665
1998 2,959,886 444,492 3,404,378
1999 806,064 --- 806,064
2000 613,514 --- 613,514
Thereafter 3,300,000 --- 3,300,000
----------- ----------- -----------
23,163,290 1,636,705 24,799,995
Less current installments 5,926,554 742,820 6,669,374
----------- ----------- -----------
$17,236,736 $ 893,885 $18,130,621
=========== =========== ===========
NOTE E. LEASES
In December 1994, the Company entered into a lease for approximately 28,200
square feet of a facility in Cincinnati, Ohio which is used for executive
offices, certain corporate support groups and distribution. The lease term for
this facility extends to February 28, 2000, with a provision for three one-year
renewals. Annual rents are $256,000 through 1997, and escalate to $265,000
during the final year of the lease.
In 1993, the Company entered into a lease for an approximately 7,200 square
foot facility in Cincinnati, Ohio, which is used for sales, marketing and
certain other corporate functions. The lease term extends through May 31, 1996
at an annual rate of $54,540.
The Company also has two leased warehouses in Cincinnati, Ohio. One is
approximately 28,000 square feet and is being leased on a month to month basis.
The other facility is approximately 10,000 square feet and is leased through
March 16, 1997, with an annual rent of $48,000.
F-16
47
The Company leases various equipment, offices, warehouse and distribution
facilities. Rental expense for the years ended December 31, 1995, 1994, 1993
was approximately $694,000, $286,000, and $222,000, respectively. The
following summarizes minimum future lease payments as of December 31, 1995:
Year Ending Operating Capital
December 31 Leases Leases
---------- ----------
1995 $ 368,394 $1,544,761
1996 290,769 1,065,653
1997 280,769 707,002
1998 274,601 278,253
1999 44,283 134,933
Thereafter -0- 47,014
---------- ----------
Total minimum lease payments $1,258,816 3,777,616
========== 930,122
Less amount representing interest ----------
Present value of net minimum lease payments 2,847,494
Less current installments (1,140,658)
Obligations under capital leases ----------
less current installments $1,706,836
==========
Assets under capital leases amounted to approximately $5.4 million and $3.0
million in 1995 and 1994, respectively, with related amortization of $2.6
million and $1.9 million.
NOTE F. EMPLOYEE RETIREMENT PLAN
The Company has a defined contribution plan, the "Duramed Pharmaceuticals, Inc.
401(k)/Profit Sharing Plan," available to eligible employees. Under the Plan
the Company matches 50% of employee contributions to a maximum of 2% of each
employee's compensation. The Company match of $206,000 and $150,000 in 1995
and 1994, respectively, was made with the Company's common stock, as permitted
by the Plan. The Plan also has a profit sharing provision at the discretion of
the Company's Board of Directors. The Company has not made a profit sharing
contribution to the Plan. All full-time employees are eligible to participate
in the deferred compensation and Company matching provisions of the Plan.
Employees who have completed one year of service with the Company and have
attained the age of 21 are eligible to participate in the profit sharing
provisions of the Plan. Employees are immediately vested with respect to the
Company matching provisions of the Plan. Employees vest in the profit sharing
provisions of the Plan at 20% after 3 years of service, with additional vesting
at a rate of 20% per year of service and full vesting after 7 years of service.
F-17
48
NOTE G. COMMON AND PREFERRED STOCK
Common Stock
- ------------
On May 19, 1995, the Company's stockholders approved an amendment to the
Company's Restated Certificate of Incorporation which increased the number of
authorized shares of common stock from 20,000,000 to 50,000,000 shares.
Preferred Stock
- ---------------
The Company's Restated Certificate of Incorporation authorizes the Board of
Directors (the "Board") to provide for the issuance of up to 500,000 shares of
Preferred Stock in one or more series, with such designated preferences,
rights, qualifications, powers, restrictions and limitations as may be
determined by the Board.
On July, 8, 1993, as part of an agreement with its bank, the Company issued
74,659 shares of Series B Convertible Preferred Stock. The Series B Preferred
Stock is non-voting and is convertible at any time into 746,590 shares of the
Company's common stock. Subsequent to December 31, 1995 the bank converted
42,130 shares of Series B Convertible Preferred Stock into 421,300 shares of
the Company's common stock.
On November 6, 1995, the Board authorized the issuance of up to 250,000 shares
of 8% Cumulative Convertible Preferred Stock, Series C (the "Series C Preferred
Stock"), having a stated value of $100 per share. In November 1995, the
Company issued $12.0 million (120,000 shares) of Series C Preferred Stock and
obtained commitments for the purchase of an additional 120,000 shares. Nasdaq
National Market ("Nasdaq") regulations required stockholder approval for the
second stage, which was obtained on January 24, 1996. The Company closed on
the issuance of the $12.0 million second stage of the offering in February
1996.
Each share of Series C Preferred Stock is convertible at the option of the
holder, with respect to its stated value of $100, into shares of the Company's
common stock at a price which is 15% below the average closing price of the
common stock over the 10-day trading period ending two days prior to the date
of conversion (the "conversion price"). The conversion price may not be less
than $7.50 or more than $20.00. Half of the shares of Series C Preferred
Shares became convertible on February 12, 1996; the remaining half became
convertible on March 13, 1996. Any shares of Series C Preferred Stock
remaining outstanding on November 14, 1997 will automatically be converted into
shares of common stock on such date. The Series C Preferred Stock pays a
dividend of 8% annually, payable quarterly in arrears, on all unconverted
shares.
Through March 25, 1996, $17.0 million of the Series C Preferred Stock had been
converted to 1,175,794 shares of the Company's common stock, at an average
conversion price of $14.46 per common share.
F-18
49
The Company has authorized the issuance of 100,000 shares of Series A Preferred
Stock, none of which has been issued.
The remaining 75,341 shares of authorized preferred stock are undesignated.
NOTE H. STOCK OPTIONS AND WARRANTS
Stock Option Plans
- ------------------
The Company has three stock option plans which have been approved by the
Company's stockholders. The 1986 Stock Option Plan (the "1986 Plan") permits
the granting of options for up to 160,000 shares of the Company's common stock.
The 1988 Stock Option Plan (the "1988 Plan") permits the granting of options
for up to 2,360,000 shares of common stock. Options may be granted under both
Plans to employees on the regular payroll of the Company. Options granted
under the 1986 and 1988 Plans become exercisable based upon the terms and
conditions established at the time of the grant. The 1991 Stock Option Plan
for Nonemployee Directors (the "Directors Plan") provides for the issuance of
non-qualified options for up to 150,000 shares of common stock. The Directors
Plan is a "formula plan" under which each new nonemployee director is granted,
at the close of business on the date he or she first becomes a director,
options to purchase 10,000 shares of common stock. Annually, each then serving
nonemployee director, other than a new director, is also automatically granted
options to purchase 5,000 shares of common stock at a price equal to the
closing market price on the date of grant.
As of December 31, 1995, options for 85,878 shares of common stock were
outstanding under the 1986 Plan and options for 62,891 shares had been
exercised; options for 1,572,205 shares of common stock were outstanding under
the 1988 Plan and options for 691,941 shares had been exercised; and options
for 65,000 shares of common stock were outstanding under the Directors Plan and
options for 25,000 shares had been exercised.
Other Options and Warrants
- --------------------------
In connection with an agreement terminating the employment of a former officer
and director, the Company exchanged stock options for 15,000 shares of common
stock previously granted under the 1986 and 1988 Plans for non-qualified stock
options. Of these, options for 10,000 shares (at $6.60) expire September 22,
1996 and options for 5,000 shares (at $5.75) expire January 2, 1998.
Pursuant to various provisions of an agreement with a consultant, the Company
granted options to purchase 10,000 shares (at $1.00), 50,000 shares (at $1.50),
and 60,000 shares (at $1.50) on August 1, 1991, June 1, 1992, and December 31,
1993, respectively. All options granted are fully vested at December 31, 1995
and expire five years from the date of grant.
F-19
50
On December 18, 1992, in consideration for certain defined business
arrangements, the Company granted options to Invamed to purchase 135,000 shares
of the Company's common stock at an exercise price of $3.25 per share. On
December 20, 1993, the Company granted additional options to purchase 300,000
shares of the Company's common stock at an exercise price of $6.5625 per share
as compensation for certain defined business arrangements. Options granted on
both dates vested immediately upon grant and expire five years from the date of
grant.
On August 22, 1995, in consideration of modifications to the Company's
borrowing arrangements and additional extensions of credit, the Company granted
to its bank warrants to purchase 200,000 shares of the Company's common stock
at an exercise price of $18.125 per share. These warrants vested immediately
upon grant and expire ten years from the date of grant.
At December 31, 1995, an aggregate of 5,402,874 shares of common stock were
reserved for issuance, which includes 1,600,000 shares of common shares in
connection with the $12.0 million of Series C Preferred Stock that was issued
and outstanding at December 31, 1995.
F-20
51
The following summarizes the activity in the 1986, 1988 and Directors Plans:
1986 Plan 1988 Plan Directors Plan
------------------------------------------------------------------------------------------
Shares Option Price Shares Option Price Shares Option Price
------------------------------------------------------------------------------------------
Outstanding at
December 31, 1992 . . . . . . . . . 155,369 $ 0.50 to $13.75 1,804,188 $ 0.50 to $ 7.25 45,000 $ 0.50 to $ 1.94
Granted . . . . . . . . . --- 54,000 $ 2.13 to $ 6.50 15,000 $ 4.00
Terminated . . . . . . . . . (700) $ 3.69 to $ 6.00 (8,700) $ 1.13 to $ 5.75 --- ---
Exercised . . . . . . . . . --- --- to --- --- --- to --- (2,000) $ 1.94
Outstanding at
December 31, 1993 . . . . . . . . . 154,669 $ 0.50 to $13.75 1,849,488 $ 0.50 to $ 7.25 58,000 $ 0.50 to $ 4.00
Granted . . . . . . . . . --- 233,008 $ 5.88 to $ 16.50 15,000 $ 7.50
Terminated . . . . . . . . . (6,400) $ 0.50 to $ 5.75 (33,100) $ 1.13 to $ 9.00 --- ---
Exercised . . . . . . . . . (43,063) $ 0.50 to $ 6.00 (628,933) $ 0.75 to $ 7.25 (22,000) $ 0.50 to $ 1.94
Outstanding at
December 31, 1994 . . . . . . . . . 105,206 $ 0.50 to $13.75 1,420,463 $ 0.50 to $16.50 51,000 $ 0.50 to $ 7.50
Granted . . . . . . . . . --- 241,950 $ 14.25 to $19.25 15,000 $ 16.50
Terminated . . . . . . . . . --- (27,800) $ 1.13 to $19.25 ---
Exercised . . . . . . . . . (19,328) $ 0.50 to $13.75 (62,408) $ 1.13 to $ 9.00 (1,000) $ 1.94
Outstanding at
December 31, 1995 . . . . . . . . . 85,878 $ 0.50 to $ 6.00 1,572,205 $ 0.50 to $19.25 65,000 $ 0.50 to $16.50
====================================================================================================================================
Exercisable at
December 31, 1993 . . . . . . . . . 88,949 $ 0.50 to $13.75 1,222,880 $ 0.50 to $ 7.25 45,000 $ 0.50 to $ 1.94
December 31, 1994 . . . . . . . . . 76,250 $ 0.50 to $13.75 1,135,646 $ 0.50 to $ 7.25 51,000 $ 0.50 to $ 7.50
December 31, 1995 . . . . . . . . . 72,078 $ 0.50 to $ 6.00 1,162,405 $ 0.50 to $19.25 65,000 $ 0.50 to $16.50
====================================================================================================================================
Available for future
grants at
December 31, 1995 . . . . . . . . . 11,231 95,854 60,000
====================================================================================================================================
F-21
52
NOTE I. INCOME TAXES
Effective January 1, 1993 the Company adopted Statement of Financial Accounting
Standards No. 109 "Accounting for Income Taxes" ("FAS 109"). The standard
requires the use of the liability method to recognize deferred income tax
assets and liabilities, using expected future tax rates. In 1993, a valuation
allowance was provided for the total amount of deferred tax assets, due to the
Company's limited historical profitability and other uncertainties. In 1994,
based upon a forecast of future operating results, the Company concluded that
it would, more likely than not, be able to realize a portion of the benefit of
its net deferred tax assets. Accordingly, in the fourth quarter of 1994 the
valuation reserve was reduced, and a $3.9 million deferred tax benefit was
recorded. At December 31, 1995 the Company continued to maintain the net
deferred tax asset at $3.9 million. Full utilization of this $3.9 million
deferred tax benefit will require future taxable income of approximately $10.3
million. The carrying value of the deferred tax asset and related valuation
allowance are based on a forecast of future operating results, which excludes
revenues associated with products that are under development or that have not
yet obtained regulatory approval. Adjustments to the valuation allowance may be
required if circumstances change.
Deferred income taxes provided under FAS 109 are determined based upon the
temporary differences between the financial statements and the tax basis of
assets and liabilities. The tax effects of temporary differences that give
rise to deferred income tax assets and liabilities at December 31, 1995 and
January 1, 1995 are presented below:
December 31, January 1,
1995 1995
---------------- -------------
(000's omitted)
Deferred tax assets:
Net operating loss carryforwards $ 11,369 $ 10,743
Abandoned facility obligations 546 546
Deferred revenue 190 760
Accrued employee benefits 293 499
Accounts receivable 219 192
Reserve for advances to Hallmark 562 ---
Other 231 495
---------- ----------
Total deferred tax assets 13,410 13,235
Less valuation allowance (8,281) (8,160)
---------- ----------
Net deferred tax assets 5,129 5,075
Deferred tax liabilities:
Property, plant and equipment 1,228 1,174
---------- ----------
Net deferred tax assets $ 3,901 $ 3,901
========== ==========
F-22
53
The components of the provision (benefit) for income taxes follow:
Year Ended December 31
(000's omitted)
1995 1994 1993
---- ---- ----
Current $ --- $ 115 $ 25
Deferred --- 1,235 ---
Reduction in valuation allowance* --- (5,136) ---
------- -------- -------
Net (benefit) provision $ --- $ (3,786) $ 25
======= ======== =======
*This credit represents the benefit of recognizing a portion of the Company's
net operating loss carryforward as required by FAS 109.
At December 31, 1995 the Company had cumulative net operating loss
carryforwards of approximately $28.2 million for federal income tax purposes
which expire in the years 2004 to 2010. Additionally, the Company had
cumulative losses from Duramed Europe that amounted to approximately $1.8
million which are not deductible for U.S. tax purposes. As of December 31,
1995, the Company had a valuation allowance of $8.3 million which it deems
appropriate, on the net value of the operating loss carryforwards.
The Company recorded no income tax provision in 1995. In 1994, the Company
recorded a current alternative minimum tax provision of $115,000.
The reconciliation of income tax at the U.S. federal statutory rate to income
tax (benefit expense) is:
Year Ended December 31
(000's omitted)
1995 1994 1993
---- ---- ----
Tax at U.S. statutory rate $ (347) $ 2,018 $ 434
Benefit of net operating loss
carryforward --- (2,018) (434)
Alternative minimum tax --- 115 25
Deferred tax benefit --- (3,901)
Losses for which benefit not provided 347 --- ---
------ ------- ------
Actual tax (benefit provision) $ --- $(3,786) $ 25
====== ======= ======
F-23
54
NOTE J. COMMITMENTS AND CONTINGENCIES
The Company is involved in various lawsuits and claims which arise in the
ordinary course of business. Although the outcome of such lawsuits and claims
cannot be predicted with certainty, the disposition thereof will not, in the
opinion of management, result in a material adverse effect on the Company.
The Company has entered into commitments of approximately $1.8 million to fund
certain strategic product development pursuits.
F-24
55
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
DURAMED PHARMACEUTICALS, INC. AND SUBSIDIARIES
- ---------------------------------------------------------------------------------------------------------------------------------
Col. A Col. B Col. C Col. D Col. E
- ---------------------------------------------------------------------------------------------------------------------------------
Additions
Balance at Beginning ------------------------------------ Deductions- Balance at End
DESCRIPTION of Period Describe of Period
Charged to Costs Charged to Other
and Expenses Accounts-Describe
- ----------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1995
Allowance for funds advanced to
Hallmark Pharmaceuticals, Inc. --- $ 1,458,952 --- $ 1,458,952
Allowance for doubtful trade
accounts receivable $ 504,850 $ 84,773 $ 13,326 (1) $ 576,297
Allowance for inventory obsolescence $ 741,864 $ 209,520 $ 399,929 (2) $ 551,455
YEAR ENDED DECEMBER 31, 1994
Allowance for doubtful trade
accounts receivable $ 385,710 $ 119,140 --- $ 504,850
Allowance for inventory obsolescence $ 257,764 $ 484,100 --- $ 741,864
YEAR ENDED DECEMBER 31, 1993
Allowance for doubtful trade
accounts receivable $ 200,000 $ 214,160 $ 28,450 (1) $ 385,710
Allowance for inventory obsolescence $ 186,904 $ 70,860 --- $ 257,764
(1) Uncollectible accounts written off, net of recoveries.
(2) Reversal due to change in status of product.
S-1