1
EXHIBIT 99.2
DURAMED PHARMACEUTICALS, INC.
COMMON STOCK, $.01 PAR VALUE
640,000 SHARES
COMMON STOCK WARRANTS
400,000 WARRANTS
PROSPECTUS
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HALLMARK PHARMACEUTICALS, INC.
PROXY STATEMENT
This Prospectus of Duramed Pharmaceuticals, Inc., a Delaware
corporation ("Duramed"), relates to 640,000 shares of Common Stock, $.01 par
value per share ("Duramed Common Stock"), of Duramed, warrants to purchase
400,000 shares of Duramed Common Stock (the "Warrants"), and the shares of
Duramed Common Stock issuable upon exercise of the Warrants (the "Warrant
Shares") (the Warrant Shares, the Duramed Common Stock and the Warrants being
together referred to as the "Duramed Securities") which may be issued in the
Transaction (as defined herein) in exchange for substantially all of the assets
of Hallmark Pharmaceuticals, Inc., a New Jersey corporation ("Hallmark"). This
Prospectus also relates to the resale of the Duramed Common Stock, the Warrants
and the Warrant Shares for the account of and by the persons named under the
caption "Resales-Selling Shareholders." The Selling Shareholders have advised
Duramed that the Duramed Securities may be sold from time to time in the
over-the-counter market or in negotiated transactions, in each case at prices
satisfactory to the seller. See "Resales-Plan of Distribution." Duramed will not
receive any proceeds from such sales of Duramed Securities.
This Prospectus also serves as a proxy statement of Hallmark in
connection with the solicitation of proxies of holders of Hallmark Common Stock,
no par value ("Hallmark Common Stock"), by the Hallmark Board of Directors for
use at the Special Meeting of Hallmark shareholders (the "Special Meeting") to
be held on September 11, 1996, at 400 Campus Drive, Somerset, New Jersey,
commencing at 1:00 p.m., local time, and at any adjournment or postponement
thereof.
THE SECURITIES TO BE ISSUED IN THE TRANSACTION DESCRIBED HEREIN HAVE
NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE
COMMISSION OR BY ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
-----------------
All information contained in this Proxy Statement/Prospectus relating
to Hallmark has been supplied by Hallmark, and all information relating to
Duramed has been supplied by Duramed.
This Proxy Statement/Prospectus and the accompanying form of proxy are
first being mailed to shareholders of record of Hallmark as of July 15, 1996 on
or about August 9, 1996.
The date of this Proxy Statement/Prospectus is August 8, 1996.
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NO PERSONS HAVE BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS IN
CONNECTION WITH THE SOLICITATION OF PROXIES OR THE OFFERING OF SECURITIES MADE
HEREBY AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS SHOULD NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROXY STATEMENT/PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY
SECURITIES, OR THE SOLICITATION OF A PROXY, IN ANY JURISDICTION TO OR FROM ANY
PERSON TO WHOM IT IS NOT LAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION IN SUCH
JURISDICTION. NEITHER THE DELIVERY OF THIS PROXY STATEMENT/PROSPECTUS NOR ANY
DISTRIBUTION OF SECURITIES MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF DURAMED OR
HALLMARK SINCE THE DATE HEREOF OR THAT THE INFORMATION HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO ITS DATE.
AVAILABLE INFORMATION
Duramed is subject to the informational requirements of the Securities
Exchange Act of 1934 (the "Exchange Act") and, in accordance therewith, files
reports, proxy statements and other information with the Securities and Exchange
Commission (the "Commission"). The reports, proxy statements and other
information filed by Duramed with the Commission can be inspected and copied at
the public reference facilities maintained by the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Commission's Regional Offices at Suite 1300, 7 World Trade Center, New York, New
York 10048; and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511. Copies of such material also may be obtained from the
Public Reference Section of the Commission, Washington, D.C. 20549 at prescribed
rates.
Duramed's Common Stock is quoted on the Nasdaq National Market and
reports and other information concerning Duramed also may be inspected and
copied at the offices of The Nasdaq Stock Market, Inc., 9513 Key West Avenue,
Rockville, Maryland 20850.
Duramed has filed with the Commission a Registration Statement on Form
S-4 (together with any amendments thereto, the "Registration Statement") under
the Securities Act of 1933 (the "Securities Act") with respect to the Duramed
Securities to be issued pursuant to the Asset Purchase Agreement (the "Asset
Purchase Agreement"), dated as of April 9, 1996, between Duramed and Hallmark.
This Proxy Statement/Prospectus does not contain all the information set forth
in the Registration Statement. Such additional information may be obtained from
the Commission's principal office in Washington, D.C. Statements contained in
this Proxy Statement/Prospectus or in any document incorporated by reference in
this Proxy Statement/Prospectus as to the contents of any contract or other
document referred to herein or
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therein are not necessarily complete, and in each instance reference is made to
the copy of such contract or other document filed as an exhibit to the
Registration Statement or such other document, each such statement being
qualified in all respects by such reference.
THIS PROXY STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE
WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. SUCH DOCUMENTS (OTHER THAN
EXHIBITS TO SUCH DOCUMENTS UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY
REFERENCE) ARE AVAILABLE TO ANY PERSON, INCLUDING ANY BENEFICIAL OWNER TO WHOM
THIS PROXY STATEMENT/PROSPECTUS IS DELIVERED, ON WRITTEN OR ORAL REQUEST,
WITHOUT CHARGE, DIRECTED TO DURAMED PHARMACEUTICALS, INC., 7155 EAST KEMPER
ROAD, CINCINNATI, OHIO 45249 (TELEPHONE (513) 731-9900), ATTENTION: TIMOTHY J.
HOLT, SENIOR VICE PRESIDENT-FINANCE AND ADMINISTRATION. IN ORDER TO ENSURE
TIMELY DELIVERY, ANY REQUESTS SHOULD BE MADE BY SEPTEMBER 4, 1996.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission by Duramed (File No.
0-15242) pursuant to the Exchange Act are incorporated by reference in this
Proxy Statement/Prospectus:
1) Duramed's Annual Report on Form 10-K, as amended, for
the year ended December 31, 1995.
2) Duramed's Current Reports on Form 8-K dated February 22
and April 11, 1996.
3) Duramed's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1996.
4) The descriptions of Duramed's Common Stock and related
Preferred Stock Purchase Rights contained in Duramed's Forms
8-A dated December 11, 1986 and January 11, 1989, including
any amendments or reports filed for the purpose of updating
such descriptions.
All documents and reports subsequently filed by Duramed pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this
Proxy Statement/Prospectus and prior to the termination of the offering made
hereunder shall be deemed to be incorporated by reference in this Proxy
Statement/Prospectus and to be a part hereof from the date of filing of such
documents or reports. Any statement contained in a document incorporated or
deemed to be incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Proxy Statement/Prospectus to the extent that a
statement contained herein, or in any other subsequently filed document which
also is or is deemed to be incorporated by reference herein, modifies or
supersedes such statement. Any such statement so modified or
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superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Proxy Statement/Prospectus.
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TABLE OF CONTENTS
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Page
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AVAILABLE INFORMATION........................................................................................... ii
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE.................................................................iii
SUMMARY ....................................................................................................... 1
THE COMPANIES.......................................................................................... 1
THE PROXY SOLICITATION................................................................................. 1
THE PLAN OF LIQUIDATION................................................................................ 3
DURAMED SUMMARY HISTORICAL FINANCIAL INFORMATION....................................................... 6
HALLMARK SUMMARY HISTORICAL FINANCIAL INFORMATION...................................................... 7
SUMMARY UNAUDITED PRO FORMA FINANCIAL INFORMATION...................................................... 8
COMPARATIVE PER SHARE DATA............................................................................. 9
MARKET INFORMATION..................................................................................... 10
RECENT EVENTS.......................................................................................... 11
INTRODUCTION.................................................................................................... 13
General .............................................................................................. 13
Special Meeting........................................................................................ 13
Record Date; Shares Entitled to Vote; Vote Required.................................................... 14
Proxies; Proxy Solicitation............................................................................ 14
SPECIAL FACTORS................................................................................................. 15
Background of and Reasons for the Plan of Liquidation
and the Transaction........................................................................... 15
Description of Reasons for Business Combination with
Duramed....................................................................................... 17
Recommendation of Hallmark Board of Directors.......................................................... 18
Interests of Certain Persons........................................................................... 18
THE TRANSACTION................................................................................................. 20
Sale of the Assets..................................................................................... 20
Purchase Price......................................................................................... 20
Escrow .............................................................................................. 21
Closing of the Transaction............................................................................. 21
Representations and Warranties......................................................................... 21
Business of Hallmark Pending the Closing............................................................... 22
Conditions; Waivers.................................................................................... 23
Amendment; Termination................................................................................. 24
Accounting Treatment................................................................................... 25
Indemnification........................................................................................ 25
Treatment of Hallmark Stock Options.................................................................... 25
Expenses and Fees...................................................................................... 25
Certain Federal Income Tax Consequences................................................................ 26
Rights of Dissenting Shareholders...................................................................... 28
INFORMATION CONCERNING DURAMED.................................................................................. 30
INFORMATION CONCERNING HALLMARK................................................................................. 31
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION OF HALLMARK.................................................................. 34
SECURITY OWNERSHIP OF HALLMARK.................................................................................. 36
PRO FORMA FINANCIAL INFORMATION................................................................................. 38
DESCRIPTION OF DURAMED STOCK AND WARRANTS....................................................................... 43
Common Stock........................................................................................... 43
Preferred Stock........................................................................................ 44
Warrants .............................................................................................. 45
COMPARATIVE RIGHTS OF DURAMED STOCKHOLDERS
AND HALLMARK SHAREHOLDERS....................................................................................... 46
Appraisal Rights....................................................................................... 46
Transactions with Affiliates........................................................................... 47
Dividends.............................................................................................. 48
Liability of Directors................................................................................. 48
Indemnification........................................................................................ 49
RESALES - SELLING SHAREHOLDERS.................................................................................. 50
RESALES - PLAN OF DISTRIBUTION.................................................................................. 50
LEGAL OPINION................................................................................................... 51
EXPERTS ....................................................................................................... 51
INDEX TO HALLMARK FINANCIAL STATEMENTS.......................................................................... 52
Appendix A - Plan of Liquidation and Dissolution of Hallmark
Pharmaceuticals, Inc.
Appendix B - Asset Purchase Agreement
Appendix C - Section 14A:11-1 of the New Jersey Business
Corporation Act
Appendix D - Articles of Incorporation and By-laws of Hallmark
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SUMMARY
The following is a summary of certain information contained elsewhere
in this Proxy Statement/Prospectus. Reference is made to, and this summary is
qualified in its entirety by, the more detailed information contained, or
incorporated by reference, in this Proxy Statement/Prospectus and the Appendices
hereto. Unless otherwise defined herein, capitalized terms used in this summary
have the respective meaning ascribed to them elsewhere in this Proxy
Statement/Prospectus. Hallmark shareholders are urged to read this Proxy
Statement/Prospectus and the Appendices hereto in their entirety.
THE COMPANIES
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DURAMED................ 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. The principal executive
offices of Duramed are located at 7155
East Kemper Road, Cincinnati, Ohio
45249, and its telephone number is (513)
731-9900. See "INFORMATION CONCERNING
DURAMED."
HALLMARK............... Hallmark is a late-stage start-up
company engaged in the research,
development and manufacturing of generic
prescription drugs. Hallmark has also
developed proprietary drug delivery
systems designed to enable alternate
formulation of pharmaceutical compounds.
The principal executive offices of
Hallmark are located at 400 Campus
Drive, Somerset, New Jersey 08873, and
its telephone number is (908) 563-2245.
See "INFORMATION CONCERNING HALLMARK."
THE PROXY SOLICITATION
- ----------------------
This Proxy Statement/Prospectus is being furnished to shareholders of Hallmark
in connection with the Proxy Solicitation. During the Proxy Solicitation,
Hallmark shareholders will be asked to consider and vote upon a proposal to sell
substantially all of Hallmark's assets to Duramed and to liquidate Hallmark
following that sale.
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TIME, DATE AND PLACE... The Special Meeting will be held on
September 11, 1996 at 400 Campus Drive,
Somerset, New Jersey at 1:00 p.m., local
time, subject to any adjournment or
postponement thereof. See "INTRODUCTION
-- Special Meeting."
PURPOSE OF THE MEETING. The purpose of the Special Meeting is to
consider and vote upon (i) a proposal to
adopt a Plan of Liquidation and
Dissolution of Hallmark (the "Plan")
providing for the sale of substantially
all of the assets of Hallmark to Duramed
(the "Transaction") and (ii) such other
matters as may properly be brought
before the Special Meeting. See
"INTRODUCTION - Special Meeting."
RECORD DATE; SHARES
ENTITLED TO VOTE...... Holders of record of shares of Hallmark
Common Stock at the close of business on
July 15, 1996, are entitled to notice of
and to vote at the Special Meeting. At
July 15, 1996, there were 6,156,240
shares of Hallmark Common Stock
outstanding, held by approximately 53
holders of record. Voting rights are
vested in the holders of Hallmark Common
Stock, with each share of Hallmark
Common Stock entitled to one vote on
each matter coming before the
shareholders. See "INTRODUCTION --
Record Date; Shares Entitled to Vote;
Vote Required."
VOTE REQUIRED.......... Under applicable law the approval by
Hallmark shareholders of the Transaction
will require the affirmative vote of the holders of a
majority of the outstanding shares of Hallmark Common
Stock. However, the Asset Purchase Agreement also
requires the affirmative vote of the holders of a
majority of the outstanding shares of Hallmark Common
Stock actually voted on the proposal, other than
shares of Hallmark Common Stock beneficially owned by
Duramed or its affiliates. See "INTRODUCTION --
Record Date; Shares Entitled to Vote; Vote Required."
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THE PLAN OF LIQUIDATION
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BACKGROUND OF THE
TRANSACTION............ For a description of the events leading
to the approval of the Transaction by
the Board of Directors of Hallmark, see
"SPECIAL FACTORS -- Background and
Reasons for the Transaction and the Plan
of Liquidation."
EFFECT OF THE
TRANSACTION............ Upon consummation of the Transaction,
pursuant to the Asset Purchase
Agreement, Duramed will acquire
substantially all of the assets of
Hallmark and will assume certain of
Hallmark's liabilities, including its
bank indebtedness and certain of its
accounts payable, and Hallmark's
indebtedness to Duramed ($3,480,520 at
July 15, 1996 in the aggregate) will be
released. Duramed will issue to
Hallmark for distribution to its
creditors and shareholders in accordance
with the Plan of Liquidation 640,000
shares of Duramed Common Stock and
warrants to purchase 400,000 shares of
Duramed Common Stock at $25.00 per share
(the "Warrants"). Hallmark will retain
certain of its liabilities, including
indebtedness to certain of its shareholders
($6,447,638 at July 15, 1996) and
obligations to a partnership owned by
certain of its shareholders ($367,059 at
July 15, 1996) (collectively, the
"Shareholder Debt"). Based on the April 10,
1996 closing price (the day prior to signing
the Asset Purchase Agreement) of $18.88 per
share, the aggregate market value of the
shares of Duramed Common Stock and the
Warrants to be issued in the Transaction
would have been approximately $12,940,000
(assuming a fair market value of $2.15 per
Warrant, as determined by an independent
appraiser retained by Duramed).
PLAN OF LIQUIDATION... Pursuant to the Plan of Liquidation,
Hallmark will distribute a portion of
the Duramed Common Stock (or cash
obtained upon the sale of such stock) to
its creditors as payment in full of its
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obligations, other than those to be
assumed by Duramed. Hallmark estimates
that approximately 113,834 shares of
Duramed Common Stock and 400,000
Warrants will be available for
distribution to its shareholders.
OUTSTANDING DURAMED
COMMON STOCK........... As of July 15, 1996, there were
outstanding 10,687,821 shares of Duramed
Common Stock. In the Transaction,
640,000 shares of Duramed Common Stock
will be issued (1,040,000 shares if all
Warrants are exercised), which would
represent approximately 6.0% (9.7% if
all Warrants are exercised) of such
outstanding Duramed Common Stock.
DURAMED'S REASONS
FOR THE TRANSACTION.... Duramed desires to complete the
Transaction because it will bring to
Duramed a research and development
pipeline which includes controlled
release technology. Duramed believes
that combining Duramed and Hallmark
product development programs will
position Duramed for long-term growth
through the introduction of products
requiring sophisticated technology.
RECOMMENDATION OF
HALLMARK'S BOARD OF
DIRECTORS.............. The Board of Directors of Hallmark
ratified the Transaction at its April
12, 1996 Board Meeting and unanimously
recommends that Hallmark shareholders
vote in favor of the Transaction. See
"SPECIAL FACTORS -Background and Reasons
for the Plan of Liquidation and the
Transaction" and "SPECIAL FACTORS --
Recommendation of Hallmark Board of
Directors."
CLOSING OF THE
TRANSACTION............ It is expected that the Transaction will
be consummated as promptly as
practicable after the requisite approval
of Hallmark's shareholders has been
obtained and all other conditions to the
Transaction have been satisfied or
waived. See "THE TRANSACTION --
Conditions; Waivers."
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CONDITIONS TO THE
TRANSACTION;
TERMINATION OF THE
ASSET PURCHASE
AGREEMENT............. The obligations of Duramed and Hallmark
to consummate the Transaction are
subject to the satisfaction, or in
certain cases waiver, of certain
conditions, including (i) obtaining
requisite shareholder and regulatory
approvals, and (ii) the absence of any
injunction prohibiting consummation of
the Transaction. See "THE TRANSACTION
-- Conditions; Waivers."
The Asset Purchase Agreement is
subject to termination at the option
of either Duramed or Hallmark if the
Transaction is not consummated on or
before September 30, 1996, and prior
to such time upon the occurrence of
certain other events. See "THE
TRANSACTION -- Amendment;
Termination."
APPRAISAL RIGHTS...... Holders of Hallmark Common Stock who do
not vote in favor of the Transaction and
who perfect their rights in accordance
with the requirements of New Jersey law
will be entitled to appraisal rights if
the Transaction is consummated. See
"THE TRANSACTION -- Appraisal Rights."
CERTAIN FEDERAL INCOME
TAX CONSEQUENCES....... For a discussion of certain federal
income tax consequences of the
Transaction, see "THE TRANSACTION --
Certain Federal Income Tax
Consequences."
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DURAMED SUMMARY HISTORICAL FINANCIAL INFORMATION
The summary financial information of Duramed set forth below has been
derived from, and should be read in conjunction with, the financial statements
and other financial information which are incorporated into this Proxy
Statement/Prospectus by reference. See "AVAILABLE INFORMATION" and
"INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE."
DURAMED PHARMACEUTICALS, INC.
(In thousands, except per share data)
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
(unaudited)
1996 1995 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ---- ----
STATEMENT OF OPERATIONS
DATA:
Net Sales $10,700 $12,581 $49,624 $45,274 $30,293 $16,685 $10,531
Operating (loss) income (1,610) 1,537 1,734 8,015 3,359 (1,577) (3,356)
Pretax (loss)
income (2,161) 1,037 (991) 5,765 1,240 (4,964) (4,229)
Net (loss)
income (2,161) 1,008 (991) 9,551 1,215 (4,964) (4,229)
Preferred dividends 275 --- 123 --- --- --- ---
Net (loss)
income applicable
to common
stockholders (2,436) 1,008 (1,114) 9,551 1,215 (4,964) (4,229)
Net (loss) income per
share of common stock:
Primary (.28) .09 (.14) .93 .14 (.77) (.67)
Fully diluted (.28) .09 (.14) .91 .13 (.77) (.67)
Cash dividends per
common share --- --- --- --- --- --- ---
BALANCE SHEET DATA:
Total assets $49,715 $41,546 $45,177 $37,002 $22,959 $16,128 $15,678
Long-term liabilities $16,194 $20,778 $19,837 $18,267 $23,201 $ 1,703 $ 769
Stockholders' equity $17,544 $ (134) $ 8,898 $(1,231) $(11,985) $(14,852) $(10,047)
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HALLMARK SUMMARY HISTORICAL FINANCIAL INFORMATION
The summary financial data of Hallmark set forth below as of and for
the years ended December 31, 1995, 1994 and 1993 has been derived from, and
should be read in conjunction with, Hallmark's audited financial statements and
notes thereto included elsewhere herein. The summary financial data of Hallmark
as of March 31, 1996 and for the three month periods ended March 31, 1996 and
1995 is unaudited and should be read in conjunction with Hallmark's interim
financial statements also included elsewhere herein. The unaudited balance sheet
data as of March 31, 1995 has been derived from Hallmark's interim balance sheet
not included herein. See "INDEX TO HALLMARK FINANCIAL STATEMENTS."
HALLMARK PHARMACEUTICALS, INC.
(In thousands, except per share data)
Three months ended Years ended December 31,
------------------------------ -----------------------------
MARCH 31, 1996 MARCH 31, 1995 1995 1994 1993
STATEMENT OF OPERATIONS DATA: (UNAUDITED)
Net sales $ 837 --- --- --- ---
Operating (loss) ($1,388) ($945) ($4,068) ($3,572) ($2,281)
Net (loss) ($1,585) ($1,071) ($4,815) ($3,981) ($2,607)
Net loss per common share ($.26) ($.18) ($.79) ($.71) ($.75)
BALANCE SHEET DATA:
Total assets $ 4,332 $3,913 $4,402 $3,508 $1,774
Bank and other debt $10,267 $5,360 $9,025 $4,148 $2,350
Stockholders' deficiency ($ 6,611) ($1,622) ($5,076) ($872) ($782)
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SUMMARY UNAUDITED PRO FORMA FINANCIAL INFORMATION
The summary unaudited pro forma financial information set forth below
(i) gives effect to the proposed Transaction and (ii) should be read in
conjunction with the pro forma financial information appearing under "PRO FORMA
FINANCIAL INFORMATION." This pro forma information is not necessarily indicative
of actual or future operating results or financial position that would have
occurred or will occur upon consummation of the Transaction.
UNAUDITED PRO FORMA FINANCIAL INFORMATION
(In thousands, except per share data)
AT OR FOR QUARTER ENDED MARCH 31, 1996 Duramed
- -------------------------------------- As Reported Pro forma
----------- ---------
STATEMENT OF OPERATIONS DATA:
Net sales $10,700 $10,700
Operating (loss) (1,610) (2,737)
Net (loss) (2,161) (3,319)
Net (loss) applicable to common
stockholders (2,436) (3,594)
Net (loss) per share of common stock ($ .28) ($ .39)
BALANCE SHEET DATA:
Total assets $49,715 $54,943
Long-term liabilities $16,194 $16,194
Stockholders' equity $17,544 $19,966
YEAR ENDED DECEMBER 31, 1995 Duramed
- ---------------------------- As Reported Pro forma
----------- ---------
STATEMENT OF OPERATIONS DATA:
Net sales $49,624 $49,624
Operating profit (loss) 1,734 (2,114)
Net (loss) (991) (4,963)
Net (loss) applicable to common stockholders (1,114) (5,086)
Net (loss) per share of common stock ($ .14) ($ .59)
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COMPARATIVE PER SHARE DATA
The following table presents certain per share data derived from the
historical financial statements of Duramed and Hallmark and unaudited pro forma
per share data adjusted to reflect consummation of the Transaction. The pro
forma information is not necessarily indicative of actual or future operating
results or financial position that would have occurred or will occur upon
consummation of the Transaction. The information presented below should be read
in conjunction with the pro forma financial information appearing under "PRO
FORMA FINANCIAL INFORMATION" and the separate historical consolidated financial
statements of Duramed and Hallmark which are incorporated by reference or appear
herein.
At or for Quarter ended At or for Year ended
March 31, December 31,
------------------------ -----------------------
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
Historical: (Unaudited)
Per share of Duramed Common
Stock:
Book value $ 1.79 $(.02) $1.10 $(.15) $(1.64)
Cash dividends --- --- --- --- -----
Net (loss) income $(.28) $.09 $(.14) $.91 $ .13
At or for Quarter ended At or for Year ended
March 31, December 31,
------------------------ -----------------
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
(Unaudited)
Per share of Hallmark Common
Stock:
Book value $(1.07) $(.27) $(.83) $(.15) $(.16)
Cash dividends --- --- --- --- ---
Net (loss) $ (.26) $(.18) $(.79) $(.71) $(.75)
At or for Quarter ended At or for Year ended
Pro Forma: March 31, 1996 December 31, 1995
------------------------ --------------------
(Unaudited)
Per share of Duramed Common Stock:
Book value $1.91 $1.48
Cash dividends --- ---
Net (loss) $(.39) $(.59)
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MARKET INFORMATION
During the 1994 period prior to September 16, 1994, the Duramed Common
Stock was traded in the over-the-counter market due to Duramed's inability to
meet certain listing requirements of the Nasdaq National Market ("Nasdaq"). On
September 16, 1994, trading of the Duramed Common Stock on the Nasdaq
recommenced under a listing exception from the Nasdaq's tangible net asset
requirements. On December 12, 1995 Duramed 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 trades for the Duramed 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
1996:
First Quarter 23.50 $14.00
Second Quarter 20.00 $14.50
Third Quarter 17.00 $13.75
(Through
August 5, 1996)
As of July 15, 1996, Duramed had 1,185 stockholders of record. Duramed
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
Duramed's current loan agreements with its bank, no dividend declaration is
permitted. In addition, the terms of Duramed's loan agreement with the State of
Ohio require that Duramed not pay any dividends to its 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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Duramed does not intend to list the Warrants for trading on Nasdaq or
any stock exchange. There can be no assurance that any over-the-counter trading
market for the Warrants will develop.
Hallmark Common Stock is held of record by 53 persons and no trading
market for Hallmark Common Stock exists. Hallmark 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 Hallmark's current
loan agreements with its bank, no dividend declaration is permitted.
On October 9, 1995, the last full day of trading before the issuance of
a press release by Duramed and Hallmark announcing that they had entered into a
letter of intent for the acquisition of Hallmark by Duramed, the reported
closing price per share of Duramed Common Stock was $13.88. On April 10, 1996,
the last full day of trading immediately preceding the public announcement of
the signing of the Asset Purchase Agreement the closing price of Duramed Common
Stock was $18.88. On August 5, 1996, the closing price per share of Duramed
Common Stock was $14.375.
RECENT EVENTS
On August 7, 1996, Duramed completed the issuance of 200,000 shares of
Series D Convertible Preferred Stock. The net proceeds of this offering of
approximately $19 million will be directed primarily toward Duramed's new
product development activities. Beginning October 16, 1996, the Series D
Preferred Shares are convertible at the option of the holders at 15% below the
average closing bid price of the common shares of the Company over the 10-day
trading period ending two days prior to the date of conversion (the "conversion
price"). No more than 2,130,895 common shares will be issued upon conversion,
and any Series D Shares which remain outstanding after the issuance of such
maximum number of common shares would not be converted but would be subject to
cash redemption at a redemption price designed to yield the same economic
benefit to the holders as the conversion price. The conversion price for the
Series D Preferred Shares may not be less than $7 per share, nor more than $20
per share. Series D Preferred Shares will pay a dividend of 8% annually, payable
quarterly in arrears, on all unconverted Preferred Shares. Any of the Series D
Preferred Shares which remain outstanding will be converted (or redeemed)
automatically on July 18, 1998.
Under the terms of agreements with Ortho-McNeil Pharmaceutical
Corporation, Duramed has non-exclusive distribution rights to the Ortho-McNeil
products Acetaminophen with Codeine, Tolmetin Sodium, Tolmetin Sodium DS,
Oxycodone with Acetaminophen and Estropipate. The term of the distribution
agreement for each of these products is ten years subject to reduction to three
years (if not extended) from date of first sale if the Duramed's conjugated
estrogens product has not been
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18
approved by the FDA by June 30, 1996. Such approval was not received by June 30,
1996. Duramed commenced marketing Estropipate during the fourth quarter of 1993
and the other Ortho-McNeil products during the fourth quarter of 1994. Duramed
is discussing an extension of these rights with Ortho-McNeil. Loss of these
distribution rights would be likely to have an adverse effect upon the Company's
results of operations.
As indicated in Duramed's Form 10-Q for the quarter ended March 31,
1996, Duramed has experienced a decline in the sales price of certain of its
products including its Methylprednisolone product. While net sales and gross
margins in the second quarter of 1996 are expected to exceed the first quarter
levels this is primarily attributable to unit increases of Duramed's
Methylprednisolone product resulting from the seasonal nature of the product.
Operating expenses increased in the second quarter as a result of increased
product development expenses. Duramed expects to report a pre-tax loss in the
second quarter in line with the first quarter. The competitive environment is
expected to remain intense which may result in further declines in the sales
prices of certain of Duramed's products including Methylprednisolone.
As of March 31, 1996, Duramed had a net deferred tax asset of $3.9
million. Full utilization of this deferred tax benefit would require future
taxable income of $10.3 million. Duramed evaluates the valuation of its deferred
tax asset on a quarterly basis. The evaluation excludes forecasted profits from
products under development or on file with the Food and Drug Administration.
Given Duramed's operating performance with its current product line and planned
expenditures resulting from its commitment to an expanded product development
program, Duramed may restore the valuation reserve associated with the deferred
tax asset which would result in a non-cash charge to earnings for the quarter
during which such action is taken.
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INTRODUCTION
GENERAL
The principal executive offices of Duramed Pharmaceuticals, Inc., a
Delaware corporation ("Duramed"), are located at 7155 East Kemper Road,
Cincinnati, Ohio 45249, and Duramed's telephone number is (513) 731-9900. The
principal executive offices of Hallmark Pharmaceuticals, Inc., a New Jersey
corporation ("Hallmark"), are located at 400 Campus Drive, Somerset, New Jersey
08873, and Hallmark's telephone number is (908) 563-2245.
As used herein, Duramed means Duramed Pharmaceuticals, Inc.
and its subsidiaries, unless the context indicates otherwise.
SPECIAL MEETING
This Proxy Statement/Prospectus is being furnished to Hallmark
shareholders in connection with the solicitation of proxies (the "Proxy
Solicitation") by the Board of Directors of Hallmark for use at a Special
Meeting of Shareholders of Hallmark to be held on September 11, 1996,
commencing at 1:00 p.m., local time, at 400 Campus Drive, Somerset, New Jersey
and at any adjournments or postponements thereof (the "Special Meeting").
At the Special Meeting, Hallmark shareholders will consider and vote
upon a proposal to approve the proposed Plan of Liquidation and Dissolution of
Hallmark (the "Plan") providing for the sale of substantially all of the assets
of Hallmark to Duramed (the "Transaction") pursuant to the terms of the Asset
Purchase Agreement dated as of April 9, 1996 between Hallmark and Duramed (the
"Asset Purchase Agreement"). Pursuant to the Asset Purchase Agreement, upon
consummation of the Transaction, Duramed will acquire substantially all of the
assets of Hallmark and will assume certain of Hallmark's liabilities, including
its bank indebtedness and certain of its accounts payable, and Hallmark's
indebtedness to Duramed ($3,480,520 at July 15, 1996) will be released. Duramed
will issue an aggregate of 640,000 shares of Duramed Common Stock and warrants
to purchase 400,000 shares of Duramed Common Stock at $25.00 per share (the
"Warrants") as consideration for the Transaction. Pursuant to the Plan of
Liquidation, Hallmark will distribute a portion of the Duramed Common Stock (or
cash obtained upon the sale of such stock) to its creditors as payment in full
of its obligations, other than those to be assumed by Duramed. Hallmark
estimates that approximately 113,834 shares of Duramed Common Stock and 400,000
Warrants will be available for distribution to its shareholders.
Holders of Hallmark Common Stock who do not vote in favor of the
Transaction and who perfect their rights in accordance with the requirements of
New Jersey Law will be entitled to demand
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appraisal rights as a result of the Transaction. See "THE TRANSACTION --
Appraisal Rights."
RECORD DATE; SHARES ENTITLED TO VOTE; VOTE REQUIRED
The close of business on July 15, 1996 (the "Record Date") has been
fixed as the record date for determination of the holders of Hallmark Common
Stock who are entitled to notice of, and to vote at, the Special Meeting. As of
the Record Date, there were 6,156,240 shares of Hallmark Common Stock
outstanding. The holders of record of shares of Hallmark Common Stock on the
Record Date are entitled to one vote per share on each matter submitted to a
vote at the Special Meeting. The presence in person or by proxy of the holders
of a majority of the outstanding shares of Hallmark Common Stock entitled to
vote is necessary to constitute a quorum for the transaction of business at the
Special Meeting. Under the New Jersey Business Corporation Law ("NJBCL"), the
holders of a majority of the outstanding shares of Hallmark Common Stock must be
voted in favor of the Transaction for it to be approved. The Asset Purchase
Agreement also provides that the Transaction must be approved by the affirmative
vote of the holders of a majority of the outstanding shares of Hallmark Common
Stock actually voting on the proposal, other than shares of Hallmark Common
Stock beneficially owned by Duramed or its affiliates (collectively, the
"Required Company Vote"). As of the Record Date, Duramed and its affiliates
owned no shares of Hallmark Common Stock. Certain directors of Hallmark, who
owned 3,870,493 shares of Hallmark Common Stock as of the Record Date,
constituting approximately 63% of the outstanding Hallmark Common Stock, have
agreed to vote in favor of the Transaction.
PROXIES; PROXY SOLICITATION
Shares of Hallmark Common Stock represented by properly executed
proxies received at or prior to the Special Meeting and which have not been
revoked will be voted at the Special Meeting in accordance with the instructions
contained therein. Shares of Hallmark Common Stock represented by properly
executed proxies for which no instruction is given will be voted FOR approval of
the Transaction. Hallmark shareholders are requested to complete, sign, date and
return promptly the enclosed proxy in the postage prepaid envelope provided for
this purpose in order to ensure that their shares are voted. A shareholder may
revoke a proxy by submitting at any time prior to the vote on the Transaction a
later dated proxy with respect to the same shares, by delivering written notice
of revocation to the Secretary of Hallmark at any time prior to such vote or by
attending the Special Meeting and voting in person. Attendance at the Special
Meeting will not in and of itself revoke a proxy.
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21
If fewer shares of Hallmark Common Stock are voted in favor of approval
of the Transaction than the number required for approval, it is expected that
the Special Meeting will be postponed or adjourned for the purpose of allowing
additional time for obtaining additional proxies or votes, and, at any
subsequent reconvening of the Special Meeting, all proxies will be voted in the
same manner as such proxies would have been voted at the original convening of
the meeting (except for any proxies which have theretofore been revoked or
withdrawn), notwithstanding that they may have been voted on the same or any
other matter at a previous meeting.
Hallmark will bear the cost of the solicitation of proxies from its
shareholders. In addition to solicitation by mail, directors, officers and
employees of Hallmark and Duramed may solicit proxies by telephone, facsimile or
otherwise. Such directors, officers and employees of Hallmark and Duramed will
not be additionally compensated for such solicitation but may be reimbursed for
out-of-pocket expenses incurred in connection therewith.
SPECIAL FACTORS
BACKGROUND OF AND REASONS FOR THE PLAN OF LIQUIDATION AND THE
TRANSACTION
Hallmark was organized in 1992 and by May 1995 had developed commercial
readiness for the production and sale of initial products. Hallmark's
manufacturing facility had been constructed, ANDA's for Captopril and Glipizide
had been filed and several other products were under development. Hallmark's
Board of Directors determined that it needed substantial additional expansion
capital to enable Hallmark to commercialize its products. Accordingly, Hallmark
decided to seek a strategic partner.
During the spring of 1995, Duramed and Hallmark engaged in discussions
concerning the marketing of Hallmark's drug, Captopril. During the summer of
1995, these discussions extended beyond the marketing and distribution of
Captopril into discussions concerning a possible merger. Due diligence commenced
during the summer of 1995 culminating in a Letter of Intent in October 1995 as
described below.
Hallmark's initial research and development efforts were directed
primarily toward immediate release solid oral dosage form drugs. Based on
changing market conditions and its experience with immediate release solid oral
dosage form drugs, the Board of Directors of Hallmark determined in early 1994
to expand its research and development efforts into sustained release solid oral
dosage form drugs.
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22
In order to fund Hallmark's expansion of its research and development
efforts into sustained release solid oral dosage form drugs, Hallmark considered
several alternatives including (1) an initial public offering; (2) additional
debt and equity financing from existing stockholders; (3) strategic partners
willing to invest expansion capital; and (4) product joint ventures. In order to
provide immediate capital, Hallmark sought equity financing from its
stockholders during the summer of 1994. Hallmark raised approximately $7,500,000
during that offering. Hallmark also explored during that time strategic partners
and product joint ventures with various pharmaceutical companies although no
such arrangements were consummated.
During the fall of 1994, Hallmark contacted several financial advisory
firms for assistance in raising capital to fund its research and development
expansion efforts. Hallmark engaged three financial advisory firms in late 1994
to assist it in raising capital: Commercial Financial Corporation, Joseph A.
Watters and Windward Partners. In January 1995, the Board of Directors
terminated those engagements after they proved unsuccessful. At that time, the
Board of Directors determined (i) to engage Deloitte & Touche, LLP to identify
potential financing sources and (ii) to seek bridge financing from Hallmark's
existing stockholders until financing sources were identified. Hallmark raised
$3 million from its stockholders in early 1995 through the issuance of notes.
Hallmark terminated its relationship with Deloitte & Touche in August 1995 after
its financing efforts proved to be unsuccessful.
In September 1995, Hallmark received a proposal on behalf of an
European pharmaceutical company expressing an interest in a $15 million equity
investment in Hallmark in exchange for a controlling interest in the Company and
requesting an exclusive negotiating period. The Hallmark Board of Directors
declined to grant an exclusive negotiating period but consented to due
diligence. In October 1995, the Hallmark Board of Directors retained Armata
Partners, an investment banking firm, to assist the Board in evaluating
alternative proposals. After exploring all alternative proposals, the Board of
Directors determined to proceed with the Duramed proposal.
Discussions with Duramed continued and in early October, 1995, Duramed
and Hallmark entered into a Letter of Intent which contemplated that Duramed
would acquire Hallmark in a merger in exchange for approximately $30.5 million
in Duramed Common Stock based on future market value (but not more than
1,250,000 shares of Duramed Common Stock). The purchase price was to be paid in
two installments, 50% at closing and 50% on February 15, 1996. 20% of the
consideration was to be held in escrow for a period of 18 months. The Letter of
Intent also contemplated that Duramed would assume Hallmark's bank debt and
repay the Hallmark Shareholder Debt (then approximately $5,800,700). Duramed
agreed to advance Hallmark $100,000 immediately and up to $400,000 per
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23
month thereafter to finance Hallmark's operations, and Hallmark granted Duramed
exclusive marketing rights in North America to Hallmark's Captopril product. The
transaction was to be subject to customary conditions, including completion of
due diligence, execution of definitive agreements and consummation of the merger
on or before January 31, 1996.
Negotiations and due diligence continued into December 1995. However,
in mid-December, Duramed advised Hallmark that it was unable to proceed with the
transaction at that time because of uncertainties relating to claims asserted by
Deloitte & Touche, LLP for fees in connection with the transaction, which fees
Duramed was unwilling to assume. In addition, unexpectedly intense competition
with generic Captopril products produced by other manufacturers dramatically
eroded margins on sales of Hallmark's Captopril product and, in Duramed's view,
substantially impaired the value of Hallmark.
Negotiations resumed in late February 1996 and in early March 1996,
Hallmark and Duramed entered into a revised Letter of Intent which incorporated
the terms of the current Transaction. The revised terms reflected Duramed's
views as to the decreased value of Hallmark and Duramed's refusal to assume any
liability to Deloitte & Touche. After further negotiations, the parties entered
into the Asset Purchase Agreement and other definitive documentation on April
11, 1996 (as of April 9, 1996).
DESCRIPTION OF REASONS FOR BUSINESS COMBINATION WITH DURAMED
The Hallmark Board of Directors unanimously approved and authorized the
Transaction and recommends approval of the Transaction by Hallmark shareholders
based on the Hallmark Board's determination that the aggregate consideration to
be received by the Hallmark shareholders is fair to them from a financial point
of view and the Transaction is in the best interests of Hallmark, its
shareholders and its nonshareholder constituencies. In making its recommendation
and those determinations, the Hallmark Board of Directors considered the advice
of its management, its financial advisor and legal counsel and the following
factors:
(a) The strategic and synergistic effect of a business
combination with Duramed including the compatibility of management teams;
Duramed's established sales and marketing infrastructure; Duramed's customer
base and Duramed's ability to access global marketing opportunities.
(b) The lack of operating capital for Hallmark's continued
research and development efforts and Hallmark's absence of sales and marketing
personnel and lack of funds to establish a sales force.
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(c) The desire of Hallmark shareholders to realize liquidity
in their investment and the unwillingness of Hallmark shareholders to invest
further in Hallmark or to continue to guarantee Hallmark's indebtedness.
(d) The existence of a public market for Duramed's common
stock, the trading history of Duramed common stock and Duramed's ability to
continue to access the public markets for funding of business expansion.
(e) Information with respect to the management, business
operations, financial condition, financial performance, and business and
financial prospects of Duramed as well as the likelihood of achieving those
prospects compared to the going-concern value of Hallmark as reflected by its
historical operating results.
(f) The likelihood that the Transaction would be
consummated, including the experience, reputation and financial
capability of Duramed.
(g) The risks associated with Hallmark's ability to locate a
strategic partner or joint venture partner or other source for operating funds.
(h) Industry trends toward consolidation of suppliers
and the perceived willingness of customers to deal only with a
limited number of suppliers.
RECOMMENDATION OF HALLMARK BOARD OF DIRECTORS
The Board of Directors of Hallmark unanimously recommends that
shareholders of Hallmark vote in favor of the Transaction (see "SPECIAL FACTORS
- -- Background of and Reasons for the Transaction).
INTERESTS OF CERTAIN PERSONS
Hallmark Leasing Associates, a partnership owned by certain of
Hallmark's shareholders and directors ("HLA"), leases certain equipment to
Hallmark pursuant to agreements dated September 1, 1992, November 16, 1992,
March 20, 1993, May 17, 1994 and December 28, 1994 (the "Lease Agreements"). The
aggregate annual rental payments under the Lease Agreements are $454,564. At
July 15, 1996, $140,000 of such rental obligations that had become due were
unpaid. Pursuant to an agreement dated as of April 9, 1996 between HLA and
Duramed (the "HLA Agreement"), HLA agreed to sell such equipment to Duramed at
the closing of the Transaction for a purchase price of approximately $494,000,
which is equal to its net book value as of the date of execution of the HLA
Agreement. The Lease Agreements will be canceled, and Duramed will not assume
any liability for unpaid rental obligations.
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25
Pursuant to various transactions over the last three years, Hallmark
has borrowed funds from HLA and certain of its shareholders. The outstanding
balance of such indebtedness to HLA at July 15, 1996 was $227,059. Duramed will
not assume any obligation of Hallmark with respect to such indebtedness to HLA
or the shareholders. Pursuant to the Plan, such creditors will be paid in full
by Hallmark from the proceeds of the Transaction, in shares of Duramed Common
Stock or in cash.
Certain shareholders and directors of Hallmark have guaranteed
indebtedness of Hallmark to Mid-State Bank in the aggregate amount of
approximately $1,672,000, of which approximately $1,256,351 was still owed at
July 15, 1996. Duramed has agreed to cause all such indebtedness to be repaid at
the closing of the Transaction (the "Closing").
Two Hallmark directors have also guaranteed certain of Hallmark's
obligations in connection with its lease of computer equipment, which lease will
be assumed by Duramed. Duramed has agreed to use all reasonable efforts to
obtain the release of such guarantees and to indemnify such directors against
any claims pursuant to such guarantees if they are not released.
Pursuant to the Asset Purchase Agreement, Duramed will assume
Hallmark's obligations under employment agreements with Mr. V. G. Budharaju,
President and Chief Executive Officer of Hallmark, Dr. Kamlesh Shah, Hallmark's
Director of Research and Development, and Dr. Guohua Zhang, Hallmark's Director
of Research and Development and Special Projects. Each of these agreements
provides for a five-year term, specified base salary ($150,000 for Mr. Raju and
approximately $105,000 for each of Drs. Shah and Zhang), other benefits and
grants of Hallmark Common Stock all of which Common Stock has been granted.
Prior to the execution of the Asset Purchase Agreement, Duramed
advanced $2,085,012 in product development costs to Hallmark in exchange for
product marketing rights to Captopril and another generic prescription
pharmaceutical product. Pursuant to the Asset Purchase Agreement, since April 1,
1996, Duramed has advanced to Hallmark amounts necessary to meet Hallmark's
operating expenses and interest payments to its bank at a rate not exceeding an
aggregate of $314,000 per month. Accordingly, at July 15, 1996, Hallmark owed
Duramed $3,480,520, represented by promissory notes, certain of which notes are
secured by Hallmark's rights in Captopril and such other product. The Asset
Purchase Agreement provides that such indebtedness will be released at the
Closing. If the Transaction is not consummated, Hallmark will be obligated to
repay such amounts to Duramed.
The Asset Purchase Agreement also provides that under certain
circumstances Duramed will advance to Hallmark additional funds to pay all
reasonable costs of its biostudy with respect to
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26
such other product. By July 15, 1996, Duramed had advanced $245,508 towards the
cost of this biostudy, which amount is included in the $3,480,520 owed by
Hallmark to Duramed at that date.
As of July 12, 1996, Duramed agreed to advance to Hallmark up to
$290,000 to cover the costs of its biostudy with respect to a third generic
prescription pharmaceutical product, in exchange for product marketing rights to
such product. As of July 15, 1996, Duramed had advanced no funds to Hallmark
toward the cost of this biostudy.
As of July 8, 1996, Duramed issued options to purchase an aggregate of
75,000 shares of common stock to certain consultants and employees of Hallmark
including V. G. Budharaju, Guohua Zhang, Kamlesh B. Shah, Mike Adone, Leonid
Freytor and Vijay R. Dandu. The options will be exercisable at $15.50, the
market price of Duramed common stock as of July 8, 1996. The options will vest
over a five year period contingent upon the individuals continuing to provide
services, either as consultants or employees, during the vesting period.
THE TRANSACTION
The descriptions of the Plan and the Asset Purchase Agreement set forth
in this section do not purport to be complete and are qualified in their
entirety by reference to the Plan and the Asset Purchase Agreement, which are
attached as Appendices A and B, respectively, to this Proxy Statement/Prospectus
and are incorporated by reference herein.
SALE OF THE ASSETS
At the Closing, Duramed will purchase all of Hallmark's right, title
and interest in and to the assets used in its business, including without
limitation, all real property leases, leasehold improvements, equipment,
personal property, inventory, furniture, fixed assets, fixtures, raw materials,
supplies and other tangible property, governmental licenses, permits and
authorizations, contracts, agreements, leases, intellectual property, cash, bank
accounts, accounts receivable, insurance policies, all rights in and to the name
"Hallmark Pharmaceuticals, Inc." and all goodwill.
PURCHASE PRICE
At the Closing, Duramed will issue 640,000 shares of Duramed Common
Stock and the 400,000 Warrants, less certain amounts thereof to be placed in
escrow as described below. Hallmark will distribute the shares and Warrants as
provided in the Plan. Duramed will also assume certain obligations of Hallmark,
including those arising under assigned contracts, agreements and leases, certain
specified accounts payable and Hallmark's bank
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27
debt ($1,256,351 at July 15, 1996), and will release all of Hallmark's
indebtedness to Duramed ($3,480,520 at July 15, 1996). Duramed will not assume
any other liabilities of Hallmark, including any potential obligation of
Hallmark to pay a finder's fee to Deloitte & Touche, LLP in connection with the
Transactions, any Hallmark Shareholder Debt, any obligation relating to any
stock options issued by Hallmark, any obligation under any Hallmark employee
benefit plan, any Hallmark obligation for taxes or any liability to any Hallmark
shareholder exercising appraisal rights.
ESCROW
At the Closing, the parties will enter into an agreement (the "Escrow
Agreement") providing that 10% of the Duramed Common Stock and the Warrants to
be issued will be placed in escrow (the "Escrow") with The Provident Bank (the
"Escrow Agent") for a period of 12 months, as security for Hallmark's
obligations to Duramed with respect to its representations, warranties and
covenants in the Asset Purchase Agreement. The Escrow Agreement permits Hallmark
to cause the sale of all or part of such securities, in which event the proceeds
of sale will be held in the Escrow.
CLOSING OF THE TRANSACTION
If the Transaction is approved by the requisite vote of Hallmark
shareholders and the other conditions to the Transaction are satisfied or waived
(where permissible), the Closing will be held as soon as practicable after the
Special Meeting. It is presently contemplated that the Closing will occur
promptly after obtaining the necessary approval of Hallmark shareholders. See
"THE TRANSACTION -- Conditions; Waivers."
REPRESENTATIONS AND WARRANTIES
The Asset Purchase Agreement contains various representations and
warranties of each of the parties thereto as to (i) its corporate organization,
standing and power; (ii) its capitalization; (iii) the authorization by Duramed
of its Common Stock and Warrants to be issued in the Transaction, (iv) the
authorization of the Asset Purchase Agreement; (v) the Asset Purchase
Agreement's non-contravention of any agreement, law or charter or by-law
provision and the absence of the need (except as specified) for governmental or
third party consents as to the Transaction; (vi) the conduct of its business in
the ordinary and usual course and the absence of any material adverse change in
its business; (vii) the absence of undisclosed liabilities; (viii) the
composition and condition of the assets to be purchased, and Hallmark's title
thereto; (ix) the absence of certain events relating to Hallmark's business
since December 31, 1995; (x) the absence of certain improper commercial
practices relating to Hallmark's business; (xi) transactions between
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Hallmark and related parties; (xii) Hallmark's insurance policies; (xiii)
Hallmark's contracts and agreements, including the absence of material defaults
thereunder; (xiv) certain tax matters; (xv) pending or threatened litigation;
(xvi) compliance with law; (xvii) certain environmental matters; (xviii)
Hallmark's labor relations; (xix) employee benefit plans maintained by Hallmark;
(xx) the accuracy of financial statements and filings with the Commission; (xxi)
certain matters relating to Hallmark's Food and Drug Administration ("FDA")
filings; (xxii) Hallmark's intellectual property; and (xxiii) the accuracy of
information to be supplied for inclusion in filings with the Commission required
by the transactions contemplated by the Asset Purchase Agreement.
The respective representations and warranties of Duramed and Hallmark
will survive the Closing for 12 months.
BUSINESS OF HALLMARK PENDING THE CLOSING
Hallmark has agreed that, among other things, prior to the Closing or
earlier termination of the Asset Purchase Agreement, except as contemplated by
the Asset Purchase Agreement, it will not (i) intentionally make any material
change in its operations, (ii) purchase any significant property or assets other
than in the ordinary course of business, (iii) sell, transfer or otherwise
intentionally dispose of any significant properties or assets which would result
in Hallmark owning in the aggregate an amount of properties and assets less than
the aggregate amount of properties and assets owned by Hallmark on April 9,
1996, except for decreases in such aggregate amount due solely to market
conditions, (iv) form any subsidiary or (v) intentionally take any action which
would make any of its representations and warranties incorrect in any material
respect as of the Closing.
Hallmark has further agreed not to (i) amend its Certificate of
Incorporation or By-laws, (ii) issue or sell any shares of, or rights of any
kind to acquire any shares of or to receive any payment based on the value of,
its capital stock or any securities convertible into shares of any such capital
stock (including, without limitation, any further stock options or stock
appreciation rights), except upon the exercise of presently outstanding options
or rights to acquire shares of Hallmark Common Stock, in each case in accordance
with their present terms, (iii) increase the amount of Hallmark's outstanding
bank indebtedness, (iv) otherwise incur any material indebtedness other than in
the ordinary course of business or in furtherance of its obligations under the
Asset Purchase Agreement, (v) acquire, directly or indirectly, by redemption or
otherwise, any shares of its capital stock or (vi) modify any existing contract,
agreement, commitment or arrangement with respect to any of the foregoing.
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Hallmark has agreed to use all reasonable efforts to conduct its
business only in the ordinary course and consistent with past practice, to
preserve intact its business organization, to keep available the services of its
current officers and key employees, and to preserve the goodwill of those having
business relationships with it. Hallmark has further agreed not to (i) increase
in any manner the compensation of any of its executive officers except pursuant
to binding obligations, (ii) increase in any manner the compensation of any of
its other officers or employees, except pursuant to binding obligations or in
the ordinary course of business and, in the case of such officers and employees
whose present annual compensation exceeds Fifty Thousand Dollars ($50,000),
after consultation with Duramed, or pursuant to the terms of agreements or plans
as currently in effect, (iii) pay or agree to pay any pension, retirement
allowance or other employee benefit not required by any existing plan, agreement
or arrangement to any director, officer or key employee, whether past or
present, (iv) except as required by the terms of any existing plan, agreement or
arrangement, adopt or commit itself to or enter into any additional pension,
profit-sharing, bonus, incentive, deferred compensation, stock purchase, stock
option, stock appreciation right, group insurance, severance pay, retirement or
other employee benefit plan, agreement or arrangement, or into any employment or
consulting agreement with or for the benefit of any director, officer or
employee, whether past or present, (v) amend any such plan, agreement or
arrangement, (vi) enter into any collective bargaining agreement, (vii) enter
into or modify any employment agreement or agreement with a related party or
(viii) with certain exceptions, make or commit to make any capital expenditures.
CONDITIONS; WAIVERS
The respective obligations of Hallmark and Duramed to effect the
Transaction are subject to the satisfaction of certain conditions at or prior to
the Closing, including: (a) approval of the Transaction by the holders of (i) a
majority of the outstanding shares of Hallmark Common Stock, and (ii) a majority
of the outstanding shares of Hallmark Common Stock actually voted on the
Transaction, other than shares of Hallmark Common Stock beneficially owned by
Duramed or its affiliates; (b) no court or governmental or regulatory authority
of competent jurisdiction having been enacted, issued, promulgated, enforced or
entered any statute, rule, regulation, judgment, decree, injunction or other
order or taken any action prohibiting or seeking to prohibit or adversely affect
the consummation of the transactions contemplated by the Asset Purchase
Agreement; (c) the absence of any stop order suspending the effectiveness of the
Registration Statement on Form S-4 of which this Proxy Statement/Prospectus is a
part; (d) all filings required to be made, and all consents, approvals, permits
and authorizations required to be obtained from governmental and regulatory
authorities in connection with
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30
the Asset Purchase Agreement and the consummation of the transactions
contemplated thereby, having been made or obtained without restrictions; (e) the
closing of the transaction contemplated by the HLA Agreement; and (f) the
execution of the Escrow Agreement.
The obligations of Duramed and Hallmark to effect the Transaction are
also subject to certain conditions which are normal and customary for
transactions such as the Transaction, including, in the case of Duramed's
obligations, compliance by Hallmark with the New Jersey Industrial Site Recovery
Act and the Employment Agreements being in full force and effect.
The Asset Purchase Agreement provides that any or all conditions to any
party's obligations may, at any time prior to the Effective Time, be waived by
such party in whole or in part, to the extent permitted by applicable law.
AMENDMENT; TERMINATION
At any time prior to the Closing, Duramed and Hallmark may amend the
Asset Purchase Agreement by mutual written agreement.
The Asset Purchase Agreement may be terminated at any time prior to the
Closing: (a) by mutual consent of Duramed and Hallmark; (b) by either Duramed or
Hallmark if the Transaction shall not have been consummated by September 30,
1996; (c) by either Duramed or Hallmark if the other is in material breach of
any representation, warranty, covenant and agreement which has not been cured in
a specified time period after notice; (d) by either Duramed or Hallmark if any
permanent injunction or other order of a court or other competent authority
enjoining or otherwise preventing the consummation of the transactions
contemplated by the Asset Purchase Agreement shall have become final and
non-appealable; (e) by either Duramed or Hallmark if the Required Company Vote
shall not have been obtained; (f) by Duramed if the Board of Directors of
Hallmark shall or shall resolve to (i) not recommend, or withdraw its approval
or recommendation of, the Asset Purchase Agreement or any of the transactions
contemplated hereby, (ii) modify such approval or recommendation in a manner
adverse to Duramed or any of its affiliates or (iii) adopt a Third-Party
Resolution (as defined below); or (g) by Hallmark if an entity or group (other
than Duramed or any of its affiliates) (a "Third Party") shall have made a bona
fide proposal (a "Third-Party Proposal") to acquire all or a substantial portion
of the outstanding shares of Hallmark Common Stock or the assets of Hallmark and
the Board of Directors of Hallmark adopts a resolution (a "Third-Party
Resolution") that states that it believes in good faith that such a proposal is
more favorable, from a financial point of view, to the holders of Hallmark
Common Stock than the Transaction. Hallmark is required, prior to such
termination, to provide
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Duramed with notice of the terms and conditions of such Third-Party Proposal and
the identity of such Third Party.
ACCOUNTING TREATMENT
It is expected that the Transaction will be accounted for by Duramed as
a purchase.
INDEMNIFICATION
Hallmark has agreed to indemnify Duramed for any damages resulting from
any misrepresentation or breach of warranty by Hallmark or any Hallmark
liability not assumed by Duramed. Duramed may assert an indemnification claim
within one year after the Closing and only to the extent of the shares of
Duramed Common Stock, Warrants and proceeds therefrom held in the Escrow.
Duramed has agreed to indemnify Hallmark in certain circumstances, including for
any breach of warranty by Duramed or any Hallmark liability specifically assumed
by Duramed.
TREATMENT OF HALLMARK STOCK OPTIONS
Hallmark currently has outstanding options to purchase 1,500,000 shares
of its Common Stock at an exercise price of $1.00 per share, and options to
purchase 620,100 shares of its Common Stock at an exercise price of $5.00 per
share. All of the outstanding options are currently exercisable. In connection
with this proxy solicitation, Hallmark will notify all persons holding options
to purchase common stock of the Transaction, giving them a period of not less
than 30 days from the date of the notice in which to exercise their options and
participate in the Transaction as shareholders. Options that are not exercised
within 30 days of the notice will be canceled.
EXPENSES AND FEES
Except as described below, each party to the Asset Purchase Agreement
will pay its own expenses in connection with the Transaction. If the Transaction
is consummated, Duramed also will assume and pay $50,000 of the fees of Armata
Partners, financial advisor to Hallmark. If the Asset Purchase Agreement is
terminated due to (i) failure by Hallmark to obtain the approval of Hallmark
shareholders, (ii) a determination by the Hallmark Board of Directors to pursue
a transaction with a Third Party, (iii) failure to consummate the transaction
contemplated by the HLA Agreement or (iv) breach by Hallmark of any of its
representations, warranties and agreements under the Asset Purchase Agreement,
Hallmark has agreed to pay all actual out-of-pocket fees and expenses incurred
by Duramed in connection with the Transaction, up to $500,000.
If the Asset Purchase Agreement is terminated for any reason (other
than its material breach by Hallmark), Hallmark may
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repurchase all marketing rights to its products which have been granted to
Duramed by repaying all funds previously advanced by Duramed.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
THE TRANSACTION. The Transaction will constitute a taxable sale. In
accordance with section 1060 of the Internal Revenue Code (the "Code"), to
determine the amount and character of the gain or loss recognized by Hallmark as
the result of the sale, the consideration paid by Duramed must be allocated
among the assets sold. Hallmark will recognize a gain under section 1001(a) of
the Code on the sale of an asset to the extent the consideration allocated to
the asset exceeds Hallmark's basis in the asset. Hallmark will recognize a loss
under section 1001(a) of the Code on the sale of an asset to the extent
Hallmark's basis in the asset exceeds the fair market value of the consideration
allocated to the asset.
Hallmark currently has net operating losses and net operating loss
carryovers that can be applied against, and thereby reduce or eliminate, gains
recognized by Hallmark as a result of the Transaction.
ESCROW FUND. Hallmark will be treated for tax purposes as the owner of
the Escrow Fund. Consequently, income from the securities or cash held in the
Escrow Fund will be included in Hallmark's taxable gross income.
PAYMENT OF LIABILITIES WITH DURAMED COMMON STOCK. Assuming the fair
market value of the shares of Duramed Common Stock does not change from the time
Hallmark receives them until Hallmark transfers a portion of them to its
creditors, such transfer will not result in any tax consequences to Hallmark. If
during such time the fair market value of the Duramed Common Stock transferred
to the creditors does change, Hallmark will recognize taxable gain or loss equal
to such change.
The transfer of Duramed Common Stock to Hallmark's creditors may cause
some of the creditors to recognize gain. A creditor will recognize gain to the
extent that the fair market value of the portion of the Duramed Common Stock
received by the creditor exceeds the creditor's basis in Hallmark's
indebtedness to the creditor. Although a creditor's basis in a debt owed the
creditor is generally equal to the amount of the debt, under certain
circumstances the creditor's basis may be less than the amount of the debt. One
such circumstance may arise where the creditor is a shareholder of the debtor,
and the debtor is an S corporation at any time during which the debt is
outstanding. In such a case, in accordance with section 1367(b)(2) of the Code
the creditor's basis in the indebtedness of the S corporation to the creditor
may be reduced under certain circumstances including
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the recognition of losses and deductions by the S corporation when the
shareholder's basis in his stock is zero.
Hallmark was at one time an S corporation. During such time, some of
the creditors' bases in the debts owed them by Hallmark were reduced.
Consequently, such creditors will recognize gain upon Hallmark's satisfaction of
the debts owed them.
LIQUIDATION OF HALLMARK. Hallmark will not recognize any gain or loss
as a result of its liquidation unless the fair market value of the Duramed
Common Stock and Warrants changes from the time of their transfer to Hallmark to
the time of Hallmark's transfer of them to its shareholders. If the fair market
value of the Duramed Common Stock and Warrants does change during such time,
then under section 336(a) of the Code, Hallmark will recognize gain or loss
(recognition of loss is limited under certain circumstances) equal to the
difference between its basis in the Duramed Common Stock and Warrants (their
fair market value when received by Hallmark) and the fair market value of the
Duramed Common Stock and Warrants on the date they are distributed to the
shareholders.
In accordance with sections 331 and 1001(a) of the Code, each
shareholder's gain or loss resulting from the liquidation of Hallmark will equal
the difference between the adjusted basis the shareholder has in his stock in
Hallmark and the fair market value of the liquidating distribution received by
the shareholder. Because Hallmark was at one time an S corporation, the basis
that a shareholder holds in his stock in Hallmark may be lower than the fair
market value of the property that the shareholder contributed to Hallmark in
exchange for his stock. While Hallmark was an S corporation, the basis that a
shareholder had in his stock in Hallmark was reduced in accordance with section
1367(a)(2) of the Code under certain circumstances including distributions by
the corporation to the shareholder and as a result of corporate losses and
deductions.
Any gain or loss recognized by a shareholder as the result of the
shareholder's receipt of assets in the liquidation of Hallmark will be
characterized as a capital gain or loss if the shareholder held his stock in
Hallmark as a capital asset. This gain or loss will be short-term if the
shareholder held his shares in Hallmark for not more than one year, and
long-term if the shareholder held the shares for more than one year.
Under section 334(a) of the Code, the shareholders will receive a basis
in the assets distributed to them in liquidation of Hallmark equal to the fair
market value of the assets at the time they are distributed.
EXERCISE OR LAPSE OF WARRANTS. The shareholders of Hallmark will not
recognize any income on the receipt of Duramed Common
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34
Stock pursuant to the exercise of the Warrants. Upon a shareholder's exercise of
the Warrants, the shareholder's basis in the Warrants will be added to the
exercise price to determine the shareholder's basis in the stock received
pursuant to the exercise of the Warrants. Rev. Rul. 78-182, 1978-1 C.B. 265. If
a shareholder chooses not to exercise his Warrants and they lapse, in accordance
with section 1234 of the Code, the shareholder will recognize a loss in an
amount equal to his basis in the Warrants.
THE FOREGOING DISCUSSION IS INTENDED ONLY AS A SUMMARY OF CERTAIN FEDERAL INCOME
TAX CONSEQUENCES OF THE PLAN AND THE TRANSACTION AND DOES NOT PURPORT TO BE A
COMPLETE ANALYSIS OR LISTING OF ALL POTENTIAL TAX EFFECTS RELEVANT TO A DECISION
WHETHER TO VOTE IN FAVOR OF APPROVAL OF THE PLAN AND THE TRANSACTION. THE
DISCUSSION DOES NOT ADDRESS THE TAX CONSEQUENCES THAT MAY BE RELEVANT TO A
PARTICULAR SHAREHOLDER SUBJECT TO SPECIAL TREATMENT UNDER CERTAIN FEDERAL INCOME
TAX LAWS, SUCH AS DEALERS IN SECURITIES, BANKS, INSURANCE COMPANIES, TAX-EXEMPT
ORGANIZATIONS, NON-UNITED STATES PERSONS AND SHAREHOLDERS WHO ACQUIRED THEIR
SHARES OF HALLMARK COMMON STOCK PURSUANT TO THE EXERCISE OF HALLMARK OPTIONS OR
OTHERWISE AS COMPENSATION, NOR ANY CONSEQUENCES ARISING UNDER THE LAWS OF ANY
STATE, LOCALITY OR FOREIGN JURISDICTION. MOREOVER, THE TAX CONSEQUENCES TO
HOLDERS OF HALLMARK OPTIONS ARE NOT DISCUSSED. THE DISCUSSION IS BASED UPON THE
PROVISIONS OF THE INTERNAL REVENUE CODE, TREASURY REGULATIONS THEREUNDER AND
ADMINISTRATIVE RULINGS AND COURT DECISIONS AS OF THE DATE HEREOF, ALL OF WHICH
ARE SUBJECT TO CHANGE. HALLMARK SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX
ADVISORS CONCERNING THE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF
THE PLAN AND THE TRANSACTION TO THEM.
RIGHTS OF DISSENTING SHAREHOLDERS
Shareholders of Hallmark who do not vote in favor of the Transaction
and who perfect their rights as described below will have dissenters' rights
under applicable New Jersey law. Section 14A:11-1 of the New Jersey Business
Corporation Act (the "NJBCA") provides that shareholders may generally dissent
from a sale of substantially all of the assets of the corporation not in the
ordinary course of business, except if (i) the shares held by such shareholder
are listed on a national exchange or held of record by not less than 1,000
shareholders, (ii) the transaction is entered into pursuant to a plan of
dissolution of the corporation which provides for distribution of the net assets
of the corporation to its shareholders in accordance with their interests within
one year after the date of such transaction and the transaction is wholly for
cash, securities so listed or held or cash and such securities; or (iii) the
sale is pursuant to an order of a court of competent jurisdiction.
A shareholder of Hallmark who wishes to assert his right to dissent
from the adoption of the Plan and approval of the Asset
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Purchase Agreement and receive the fair value of his shares must file with
Hallmark a written notice stating that he intends to demand payment for his
shares if the Plan is adopted. Such notice must be filed with Hallmark prior to
the vote of the shareholders on the Plan. If one or more shareholders file
notices of dissent, and the Plan is nonetheless adopted, Hallmark must, within
ten days of the effective date of such action, send written notice of the
effective date of such action to the shareholders filing such notices. Such
shareholders must then provide to Hallmark, within 20 days of the mailing of
such notice, a written demand for payment of the fair value of the shares held
by them and, within twenty days of the date of such demand, submit the share
certificates held by them for notation thereon of such demand.
Within ten days after expiration of the period within which a
shareholder may demand payment for his shares, Hallmark must mail to all
shareholders making such a demand the balance sheet and surplus statement of
Hallmark as of the latest available date, and a profit and loss statement for
not less than a 12- month period ended on the date of such balance sheet.
Hallmark may accompany such mailing with a written offer to pay each dissenting
shareholder for his shares at a specified price deemed by Hallmark to be the
fair value thereof. Such offer must be made at the same price to each dissenting
shareholder. If, not later than 30 days after the end of the ten-day period
referred to in this paragraph, Hallmark and any dissenting shareholders agree
upon the fair value of the shares, Hallmark must deliver payment therefor to
such shareholders upon surrender of the certificate or certificates representing
such shares.
If Hallmark and any dissenting shareholder fail to agree upon a fair
value for the shares within the 30-day period described in the previous
paragraph, any remaining dissenting shareholder may serve upon Hallmark, no
later than 30 days after the expiration of such period, a written demand that it
commence an action in the Superior Court of the State of New Jersey for the
determination of the fair value of the shares. Hallmark must commence such
action no later than 30 days after receipt of such demand, or at any earlier
time that it determines. If Hallmark fails to commence such an action within
such time period, any remaining dissenting shareholder may commence such an
action in the name of Hallmark within sixty days of the expiration of such time
period. All remaining dissenting shareholders must be named as parties to such
an action against their shares quasi in rem. The court must render judgment
against Hallmark and in favor of each shareholder who is a party to the action
for the amount of the fair value of his shares, as determined by the court. In
making such determination, the court may appoint an appraiser to receive
evidence and report to the court on the question of fair value. The court must
also award to each shareholder who is a party to the action interest at an
equitable rate from the date of such shareholder's demand for payment, unless
the court finds
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that the refusal of any dissenting shareholder of an offer by Hallmark pursuant
to the preceding paragraph was arbitrary, vexatious or otherwise not in good
faith, in which case no interest shall be awarded. A judgment for the payment of
the fair value of shares must be payable upon surrender to Hallmark of the
certificates representing such shares. The costs and expenses of such an action
must be determined and apportioned by the court. Each party must pay its own
attorney's fees and expert's fees, unless the court finds that the offer made by
Hallmark pursuant to the preceding paragraph was not made in good faith, in
which case the court may in its discretion award to any dissenting shareholder
who is a party to such action his attorney's and expert's fees.
INFORMATION CONCERNING DURAMED
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 Duramed include those of its own
manufacture and those which it markets under certain arrangements with other
drug manufacturers. Duramed 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 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 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.
Other information concerning Duramed is incorporated herein
by reference. See "AVAILABLE INFORMATION" and "DOCUMENTS
INCORPORATED BY REFERENCE."
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INFORMATION CONCERNING HALLMARK
BUSINESS
Hallmark is a development stage company engaged in the research,
development and manufacturing of generic or "off-patent" prescription drugs.
Hallmark also is engaged in the business of developing a proprietary drug
delivery system designed to enable alternate formulation of pharmaceutical
compounds. Hallmark is a New Jersey corporation organized in February, 1992.
Hallmark commenced operations on March 1, 1992.
Hallmark's primary objective has been to enter the generic drug
industry through the establishment of a research and development facility and
the acquisition of equipment and personnel in order to identify and formulate
generic versions of brand name drugs with expired and expiring patents.
In June, 1992, Hallmark leased its present 22,751 square feet facility
in Somerset, New Jersey. Modification of part of the building at a cost of
approximately $128,000 for use as a research and development laboratory was
completed in September, 1992. Support staff, consisting of laboratory personnel
and clerical support personnel, were also added in September, 1992.
The FDA's promulgation of a series of regulatory requirements in the
early 1990's had a material effect on the time and money needed for Hallmark to
achieve its business objective. Chief among these regulatory changes were the
requirements for pre-approval inspections and for submission batch manufacture
in a facility meeting Good Manufacturing Practice ("GMP") regulations. Plans to
modify part of the building as a pilot facility in compliance with GMP
regulations of the FDA were developed and implemented during the latter part of
1992 and early 1993. Implementation costs were approximately $191,000. This GMP
pilot facility was operational in April, 1993.
Between that latter part of 1993 and early 1994, Hallmark utilized the
GMP facility to complete three bio-studies to support applications by Hallmark
to the FDA for approval of two generic drug products: Captopril (application
filed in March, 1993) and Glipizide (application filed in October, 1994).
Also beginning in late 1993 and continuing throughout 1994, plans to
modify the rest of the building as an additional GMP facility were developed and
implemented in two phases at a cost of approximately $1,500,000. This facility,
which was completed in the first quarter of 1995, will enable Hallmark to
produce selected drugs in commercial quantities.
Hallmark is dependent on debt and equity financing to fund its
activities. Hallmark has financed its activities through
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sales of common stock, loans from shareholders and bank loans guaranteed by
shareholders. The aggregate of these financing activities has produced
approximately $14,877,000 through March 31, 1996, all of which has been
dedicated to research and development ("R&D"), acquisition of equipment and
personnel, and operation of Hallmark's facilities.
TIME RELEASE FORMS
During the process of completing the GMP facility, Hallmark had
concentrated its efforts on immediate release solid oral dosage forms as the
scope of the project. However, based on the earlier success of Hallmark's R&D
program, changes in market conditions, and the desirability of enhancing
Hallmark's product potential, the Board of Directors of Hallmark decided in
October of 1993 to expand the R&D program to include time release solid oral
dosage forms. Dr. Guohua Zhang, Ph.D., a specialist in the development of time
release solid oral dosage drugs, became, on April 18, 1994, the Director of
Special Projects to direct the activities of this expanded R&D program.
The decision to enter the time release field while continuing with the
immediate solid dosage form products contributed to the need for substantially
more funding. Further, compliance with FDA requirements for pre-approval
inspection and entry into the time release field caused Hallmark to seek and
obtain additional funding in 1994. The total amounts raised through stock sales,
stockholder loans and bank loans guaranteed by stockholders in 1994 was
approximately $5,446,950.
HALLMARK PHARMACEUTICALS, INC.
SELECTED FINANCIAL DATA
The selected financial data of Hallmark set forth below as of and for the years
ended December 31, 1995, 1994 and 1993 has been derived from, and should be read
in conjunction with, Hallmark's audited financial statements and notes thereto
included elsewhere herein. The selected financial data of Hallmark as of March
31, 1996 and for the three month periods ended March 31, 1996 and 1995 is
unaudited and should be read in conjunction with Hallmark's interim financial
statements also included elsewhere herein. The unaudited balance sheet data as
of March 31, 1995 has been derived from Hallmark's interim balance sheet not
included herein.
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SELECTED FINANCIAL DATA
(In thousands, except per share data)
Three months ended Years ended December 31,
------------------------------- ------------------------
MARCH 31, 1996 MARCH 31, 1995 1995 1994 1993
STATEMENT OF OPERATIONS DATA: (UNAUDITED)
Net sales $837 - - - -
Operating (loss) ($1,388) ($945) ($4,068) ($3,572) ($2,281)
Net (loss) ($1,585) ($1,071) ($4,815) ($3,981) ($2,607)
Net loss per common share ($.26) ($.18) ($0.79) ($0.71) ($0.75)
BALANCE SHEET DATA:
Current assets $989 $227 $837 $501 $142
Total assets $4,332 $3,913 $4,402 $3,508 $1,774
Current liabilities $6,299 $825 $3,972 $705 $352
Long-term liabilities $4,645 $4,709 $5,506 $3,675 $2,204
Accumulated deficit ($13,984) ($8,654) ($12,398) ($7,583) ($3,602)
Stockholders' deficiency ($6,611) ($1,622) ($5,076) ($872) ($782)
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION OF HALLMARK
RESULTS OF OPERATIONS
Comparison of Three Month Periods Ended March 31, 1996 and 1995.
NET SALES AND COST OF GOODS SOLD
Net sales for the three month period ended March 31, 1996 of $836,819
consisted of sales of Hallmark's Captopril product to Duramed in accordance with
the terms of a distribution agreement between the parties. As a result of
intense competition in the market for the Captopril product, Hallmark incurred a
gross loss of $314,140 and its cost of goods sold was $1,150,959. There were no
sales or cost of goods sold in the comparable prior quarter as Hallmark was in
the development stage at that time.
OPERATING EXPENSES
Research and development
Research and development expense increased by $114,795, or 27.7%, in
the first quarter of 1996 to $529,484 from $414,689 in the first quarter of
1995. The increase in research and development expense was primarily a result of
increased bio-studies.
General and administrative
General and administrative expense increased by $10,320, or 3.9%, in
the first quarter of 1996 to $275,564 from $265,244 in the first quarter of
1995. The moderate increase in General and Administrative expense is a result of
first quarter increases in salaries and product liability insurance, offset by a
decrease in legal and professional fees.
Interest Expense
Interest expense increased by $70,391, or 55.6%, in the first quarter
of 1996 to $197,042 from $126,651 in the first quarter of 1995. The increased
interest expense is principally a result of increased stockholder debt.
Comparison of Years Ended December 31, 1995 and 1994
NET SALES
There were no sales in 1995 and 1994 as Hallmark was in the development
stage.
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OPERATING EXPENSES
Research and development
Research and development expense increased by $137,675, or 6.9%, in
1995 to $2,120,982 from $1,983,307 in 1994. The increase in research and
development expense was principally a result of increased salaries as well as
increased outside lab fees for bioequivalency studies.
General and administrative
General and administrative expense decreased by $25,177, or 2.9%, in
1995 to $856,028 from $881,205 in 1994. The decrease in general and
administrative expense was principally a result of a non-recurring charge of
$250,000 recorded in 1994 in connection with the issuance of stock options (see
Note 8 to Hallmark's financial statements) offset by 1995 increases in legal and
professional fees of approximately $103,400, salaries of approximately $18,200,
insurance and workmen's compensation of approximately $17,300, travel expenses
of approximately $22,000, and net increases in other expenses aggregating
approximately $64,000.
Interest Expense
Total interest expense increased by $338,718, or 82.8%, in 1995 to
$747,803 from $409,085 in 1994. This increase results primarily from increased
borrowing from stockholders during 1995 of approximately $4,315,500.
Depreciation and Amortization
Depreciation and amortization expense increased by $382,880, or 54.1%,
to $1,090,594 in 1995 from $707,714 in 1994. The increase in depreciation and
amortization expense is principally a result of Hallmark's additions to property
and equipment which aggregated approximately $1,549,000 in 1995 (including
additions to equipment classified as held under capital leases).
Income Taxes
Since Hallmark's adoption of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" as of January 1, 1994 (such
standard was adopted concurrent with the Company's effective date of revocation
of its S Corporation status), a valuation allowance was provided for the total
amount of deferred tax assets.
Inflation
Inflation has not had and is not expected to have a material impact on
Hallmark's business.
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LIQUIDITY AND CAPITAL RESOURCES
Hallmark is engaged in the research and late-stage development of
generic drugs and drug delivery technologies the funding for which, since
Hallmark's inception, has been obtained from sales of common stock to
shareholders in a series of private placements, loans from shareholders and bank
debt guaranteed by Hallmark's shareholders. During 1995 Hallmark received its
first approval to market Captopril but intense competition in the market for
this product has severely impacted expected profit margins. Accordingly,
Hallmark will continue to require equity and/or debt financing to carry out its
business plan. Currently, Hallmark is being funded substantially by advances
from Duramed as well as occasional shareholder loans. Absent such funding, there
is substantial doubt about whether Hallmark could continue as a going concern.
At March 31, 1996 and December 31, 1995, shareholder loans aggregated
approximately $6,051,000 and $5,946,000, respectively, and obligations under
capital leases aggregated approximately $734,000 and $800,000, respectively.
Bank debt at March 31, 1996 and December 31, 1995 aggregated approximately
$1,256,000 and $1,279,000, respectively. Hallmark was indebted to Duramed at
March 31, 1996 and December 31, 1995 in connection with short term advances of
$2,010,000 and $900,000, respectively.
Also, at March 31, 1996 and December 31, 1995, Hallmark had a working
capital deficiency of approximately $5,309,000 and $3,135,000, respectively.
See "SUMMARY-MARKET INFORMATION" and "INDEX TO FINANCIAL STATEMENTS"
for additional information with respect to Hallmark.
SECURITY OWNERSHIP OF HALLMARK
Hallmark common stock is owned beneficially by 53 stockholders. As of
July 15, 1996, the record date for the Special Meeting, there were 6,156,240
shares of common stock outstanding. Officers and directors of Hallmark own
beneficially approximately 63% of the outstanding shares of common stock. Each
share of common stock is entitled to one vote. Under New Jersey law and
Hallmark's governing instruments, approval by a majority of the outstanding
shares of common stock is necessary in order to effect the sale of assets.
However, the board of directors of each of Hallmark and Duramed voted has
determined, and the Asset Purchase Agreement provides, that the Transaction will
not proceed unless a majority of the shares voted by persons unaffiliated with
Duramed approve the Transaction.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of July 15, 1996, of each person
known by Hallmark to be beneficial owners of more than 5% of the outstanding
Common Stock, each of the directors of the Company, and all Directors and
executive officers of the Company as a group. Under the rules of the Securities
and Exchange Commission (the "Commission"), a person is deemed a "beneficial
owner" of a security if such person has or shares the power to vote or direct
the voting of such security or the power to dispose or direct the disposition of
such security. A person is also deemed to be a beneficial owner of any
securities of which that person has the right to acquire beneficial ownership
within 60 days. More than one person may be deemed to be a beneficial owner of
the same securities.
NAMES AND ADDRESSES OF BENEFICIAL OWNERS SHARES PERCENTAGE
BENEFICIALLY OWNED
OWNED
Mr. V. G. Budharaju.............................................. 900,000 14.6%
c/o Hallmark Pharmaceuticals, Inc.
400 Campus Drive
Somerset, New Jersey
Dr. Marvin H. Meisner(2)......................................... 486,841 7.9%
c/o Hallmark Pharmaceuticals, Inc.
400 Campus Drive
Somerset, New Jersey
Dr. John H. Meloy (3)............................................ 414,598 6.7%
c/o Hallmark Pharmaceuticals, Inc.
400 Campus Drive
Somerset, New Jersey
Dr. Carroll P. Osgood (4)........................................ 517,339 8.4%
c/o Hallmark Pharmaceuticals, Inc.
400 Campus Drive
Somerset, New Jersey
Dr. Rudraraju P. Raju (5)........................................ 725,667 11.8%
c/o Hallmark Pharmaceuticals, Inc.
400 Campus Drive
Somerset, New Jersey
Dr. Robert E. Wertz (6).......................................... 826,048 13.4%
c/o Hallmark Pharmaceuticals, Inc.
400 Campus Drive
Somerset, New Jersey
All directors and executive officers
as a group...................................................... 3,870,493 62.8%
- 37 -
44
(1) Represents shares held of record by various individual investors for
which Mr. Budharaju exercises voting power.
(2) Represents shares held of record by Dr. Meisner and Judith Sue Meisner
jointly.
(3) Represents shares held of record by Dr. Meloy and Eujeania Meloy
jointly.
(4) Represents shares held of record by Dr. Osgood and Altru Company for
which Dr. Osgood exercises voting power.
(5) Represents shares held of record by various individual investors for
which Dr. Raju exercises voting power.
(6) Represents shares held of record by Dr. Wertz individually and with
Patricia Wertz jointly for which Dr. Wertz exercises voting power.
PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial statements give effect to
the proposed Transaction based on the assumptions described in the accompanying
notes. These pro forma financial statements have been prepared from the
historical consolidated financial statements of Duramed and Hallmark and should
be read in conjunction therewith. The historical financial statements of Duramed
and Hallmark are incorporated by reference or appear elsewhere in this Proxy
Statement/Prospectus. See "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE" and
"INDEX TO HALLMARK FINANCIAL STATEMENTS."
In exchange for substantially all the assets of Hallmark, Duramed has
agreed to issue 640,000 shares of common stock and warrants to purchase 400,000
shares of common stock at $25 per share ("securities"), and agreed to assume
certain liabilities valued at $2.8 million as of March 31, 1996. In anticipation
of completing the acquisition and in exchange for the exclusive North American
marketing rights to Hallmark's Captopril product, Duramed advanced Hallmark $2.0
million through March 31, 1996, and has agreed to continue funding the operating
expenses of Hallmark commencing April 1, 1996 until the close of the
Transaction. These expenses are forecasted to approximate $314,000 per month
plus certain bio-study costs. If the Transaction is consummated, Duramed will
release Hallmark from the obligation to repay these advances.
The excess of the value of Duramed's consideration ($16.3 million) over
the fair value of Hallmark's tangible assets acquired ($5.8 million) of $10.5
million represents a non-recurring charge for purchased research and
development. Given that this charge is non-recurring, pursuant to the
presentation requirements for pro forma financial information it has not been
included in the pro forma condensed consolidated financial statements.
The pro forma condensed consolidated balance sheet at March 31, 1996
reflects the acquisition of Hallmark as if it had been completed on March 31,
1996. The pro forma condensed consolidated statement of operations for the three
months ended
- 38 -
45
March 31, 1996 and the year ended December 31, 1995 reflects the acquisition as
if it had been completed as of January 1, 1995.
The pro forma financial information does not purport to be indicative
of the results that would actually have been reported if the Transaction had
occurred on such dates or which may be reported in the future. The pro forma
financial information should be read in conjunction with the historical
financial statements of Duramed and Hallmark and the related notes to such
financial statements.
- 39 -
46
DURAMED PHARMACEUTICALS, INC.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 1996
Purchase
Accounting Pro Forma
Duramed Hallmark Adjustments Consolidated
------- -------- ----------- ------------
Assets
Current Assets:
Cash $2,600 $2,825 $ - $5,425
Accounts receivable 8,944,945 836,819 (1,387,831)a 8,393,933
Inventories 13,300,678 131,977 - 13,432,655
Other Assets 3,469,950 17,623 - 3,487,573
--------- ------ ---------- -----------
Total current assets 25,718,173 989,244 (1,387,831) 25,319,586
---------- ------- ----------- -----------
Property, plant & equipment 20,200,099 2,893,964 2,659,350 b 25,753,413
---------- --------- ----------- -----------
Other Assets 3,796,537 449,157 (375,635)c 3,870,059
--------- ------- ----------- -----------
Total Assets $49,714,809 $4,332,365 $895,884 $54,943,058
========== ========= =========== ===========
Liabilities and Stockholder's Equity
Current Liabilities:
Accounts payable $4,513,344 $ 394,243 $ (194,966)d $4,712,621
Accrued liabilities 4,465,623 282,473 333,808 d 5,081,904
Note Payable to Duramed - 2,010,012 (2,010,012)e -
Current portion of long-term
debt and other liabilities 6,997,995 3,611,933 (1,621,168)d 8,988,760
--------- --------- ----------- -----------
Total current liabilities 15,976,962 6,298,661 (3,492,338) 18,783,285
---------- --------- ----------- -----------
Other Long-term debt and 16,193,916 4,645,168 (4,645,168)d 16,193,916
liabilities ---------- --------- ----------- -----------
Total Liabilities 32,170,878 10,943,829 (8,137,506) 34,977,201
---------- ---------- ----------- -----------
Stockholders' Equity:
Convertible Preferred Stock 6,500,033 - - 6,500,033
Common Stock 97,888 7,122,100 (7,115,700)f 104,288
Additional paid-in-capital 40,976,473 250,000 12,683,600 f 53,910,073
Accumulated deficit (30,030,463) (13,983,564) 3,465,490 f (40,548,537)
---------- ---------- ----------- -----------
Total stockholders' equity 17,543,931 (6,611,464) 9,033,390 19,965,857
---------- ---------- ----------- -----------
Total liabilities and stockholders' equity $49,714,809 $4,332,365 $895,884 $54,943,058
<FN> =========== ========== =========== ===========
PRO FORMA BALANCE SHEET ADJUSTMENTS:
- ------------------------------------
The following adjustments were made to arrive at the pro forma consolidated
balance sheet:
a - Reflects the elimination of receivables related to Hallmark's Captopril
sales to Duramed, as well as the release of Hallmark's obligation to repay
Duramed for advances.
b - Adjustment to fair value property, plant and equipment.
c - Reflects Hallmark's reclassification of deferred financing costs and adjusts
to fair value other assets of Hallmark.
d - Reflects the addition of liabilities that are created as a result of the
transaction, as well as the elimination of certain liabilities not assumed
by Duramed.
e - Reflects the release of Hallmark's obligation to repay Duramed for advances
through March 31, 1996.
f - Reflects the elimination of common stock, additional paid-in-capital, and
accumulated deficit of Hallmark and the issuance of Duramed securities. In
addition, the accumulated deficit reflects the non-recurring charge for
purchased research and development of $10.5 million valued at March 31,
1996.
- 40 -
47
DURAMED PHARMACEUTICALS, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996
Pro Forma Pro Forma
Duramed Hallmark Adjustments Consolidated
------- -------- ----------- ------------
Net Sales $10,700,198 $836,819 ($836,819)a $10,700,198
Cost of Goods Sold 7,825,200 1,150,959 (1,150,959)a 7,825,200
----------- ---------- ---------- -----------
Gross Profit (Loss) 2,874,998 (314,140) 314,140 2,874,998
Selling, General & Administrative Expenses 3,385,545 289,078 (8,424)b 3,666,199
Product Development Expenses 1,099,316 784,827 62,044 b 1,946,187
----------- ---------- --------- -----------
Operating (Loss) Profit (1,609,863) (1,388,045) 260,520 (2,737,388)
Interest Expense 551,232 197,042 (166,231)c 582,043
----------- ---------- --------- -----------
(Loss) Income before Income Taxes (2,161,095) (1,585,087) 426,751 (3,319,431)
Income Taxes - - - -
----------- ---------- --------- -----------
Net (Loss) Income (2,161,095) (1,585,087) 426,751 (3,319,431)
Preferred Dividends 274,918 - - 274,918
----------- ---------- --------- -----------
Net (Loss) Income available to
Common Shareholders ($2,436,013) ($1,585,087) $426,751 ($3,594,349)
=========== ========== ======= ===========
Loss per Share ($0.28) ($0.26) ($0.39)
====== ===== =====
Weighted Average Shares Outstanding 8,565,621 6,122,907 9,205,621
=========== ========== ===========
<FN>
ADJUSTMENTS TO PRO FORMA STATEMENT OF OPERATIONS:
- -------------------------------------------------
The following adjustments were made to arrive at the pro forma consolidated
statement of operations:
a - Reflects the elimination of sales and cost of sales of Captopril to Duramed.
b - Represents change in depreciation resulting from differences in the values
and depreciable lives of equipment, furniture, fixtures and leasehold
improvements.
c - Reflects the elimination of interest expense related to liabilities not
assumed by Duramed.
ADJUSTMENT TO WEIGHTED AVERAGE SHARES OUTSTANDING:
- --------------------------------------------------
Weighted shares outstanding used to compute pro forma loss per share at March
31, 1996 include the issuance of 640,000 shares of Duramed common stock pursuant
to the terms of the transaction.
- 41 -
48
DURAMED PHARMACEUTICALS, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
Adjusted Pro Forma Pro Forma
Duramed Hallmark Adjustments Consolidated
------- -------- ----------- ------------
Net Sales $49,623,526 $ - $ - $49,623,526
Cost of Goods Sold 29,705,677 - - 29,705,677
----------- ------------ ---------- ------------
Gross Profit 19,917,849 - - 19,917,849
Selling, General & Administrative Expenses 12,231,510 908,949 (32,565)a 13,107,894
Product Development Expenses 5,952,694 3,158,655 (187,267)a 8,924,082
----------- ------------ ---------- ------------
Operating Profit (Loss) 1,733,645 (4,067,604) 219,832 (2,114,127)
Interest Expense 2,724,593 747,803 (623,122)b 2,849,274
----------- ------------ ---------- ------------
(Loss) Income before Income Taxes (990,948) (4,815,407) 842,954 (4,963,401)
Income Taxes - - - -
----------- ------------ ---------- ------------
Net (Loss) Income (990,948) (4,815,407) 842,954 (4,963,401)
Preferred Dividends 122,739 - - 122,739
----------- ------------ ---------- ------------
Net (Loss) Income available to
Common Shareholders ($1,113,687) ($4,815,407) $842,954 ($5,086,140)
========== ============ ========== ============
Loss per Share ($0.14) ($0.79) ($0.59)
===== ===== =====
Weighted Average Shares Outstanding 8,026,359 6,060,873 8,666,359
=========== ============ ============
<FN>
ADJUSTMENTS TO PRO FORMA STATEMENT OF OPERATIONS:
- -------------------------------------------------
The following adjustments were made to arrive at the pro forma consolidated
statement of operations:
a - Represents change in depreciation resulting from differences in the values
and depreciable lives of equipment, furniture, fixtures and leasehold
improvements.
b - Reflects the elimination of interest expense related to liabilities not
assumed by Duramed.
ADJUSTMENT TO WEIGHTED AVERAGE SHARES OUTSTANDING:
- --------------------------------------------------
Weighted shares outstanding used to compute pro forma loss per share at December
31, 1995 include the issuance of 640,000 shares of Duramed common stock pursuant
to the terms of the transaction.
- 42 -
49
DESCRIPTION OF DURAMED STOCK AND WARRANTS
The terms and conditions of Duramed's capital stock are governed by the laws
of the State of Delaware as well as by Duramed's Restated Certificate of
Incorporation, as amended ("Duramed's Articles") and By-Laws, as amended
("Duramed's By-Laws").
COMMON STOCK
Duramed has 50,000,000 authorized shares of Common Stock, par value $.01 per
share, of which 10,687,821 shares were issued and outstanding as of July 15,
1996. An additional 7,062,878 shares have been reserved for future issuance.
Holders of Duramed Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of shareholders. Shareholders do not
have cumulative voting rights.
Subject to preferences which may be granted to holders of Preferred Stock,
holders of Duramed Common Stock are entitled to share in such dividends as the
Board of Directors, in its discretion, may validly declare from funds legally
available. In the event of liquidation, each outstanding share of Duramed Common
Stock entitles its holder to participate ratably in the assets remaining after
payment of liabilities and liquidation preferences of any Preferred Stock which
may be outstanding.
Except as described below, shareholders have no preemptive or other rights
to subscribe for or purchase additional shares of any class of stock or of any
other securities of Duramed, and there are no redemption or sinking fund
provisions with regard to the Duramed Common Stock. All outstanding shares of
Duramed Common Stock are fully paid and validly issued and non-assessable.
The consent of the holders of 66 2/3% of all outstanding shares of Duramed
Common Stock is required to amend the Certificate of Incorporation. A vote of
50% of all outstanding shares is required to approve mergers, sales of assets
and similar transactions, except that this percentage increases to 66 2/3% if
the acquiring party has purchased a 15% or greater ownership of Duramed prior to
approval of the transaction by the Board of Directors.
Each share of Duramed Common Stock outstanding (and each share issued prior
to the occurrence of certain events) carries with it one Preferred Stock
Purchase Right to purchase, at a price of $80.00, one one-hundredth of a share
of Series A Preferred Stock. The Preferred Stock Purchase Rights are exercisable
only if a person or group acquires or obtains the right to acquire ownership of
20% or more of the Duramed Common Stock, commences a tender or exchange offer
for 30% or more of the Duramed Common Stock, or is declared an "Adverse Person"
by Duramed's Board of
- 43 -
50
Directors. Duramed is entitled to redeem the Preferred Stock Purchase Rights at
a price of one-tenth of one cent per Preferred Stock Purchase Right at any time
before the twentieth day following the date a 20% position has been acquired.
If Duramed is acquired in a merger or other business combination
transaction, each Preferred Stock Purchase Right entitles its holder to
purchase, at the Preferred Stock Purchase Right's then-current exercise price, a
number of the acquiring company's common shares having a market value at that
time of twice the Preferred Stock Purchase Rights' exercise price. The Preferred
Stock Purchase Rights also provide a similar right for holders (other than an
Acquiring Person or Adverse Person as defined in the Preferred Stock Purchase
Rights Agreement) to purchase Duramed Common Stock having a market value at that
time of twice the Preferred Stock Purchase Right's exercise price under certain
circumstances where a person or group has acquired a 30% block of the Duramed
Common Stock or been declared an "Adverse Person" by a majority of Duramed's
outside directors.
The Provident Bank, Cincinnati, Ohio acts as Registrar and Transfer Agent of
Duramed's Common Stock.
PREFERRED STOCK
Duramed has 500,000 authorized shares of Preferred Stock, $.001 par value
per share. In connection with the Preferred Stock Purchase Rights described
above, the Board of Directors of Duramed has provided for the issuance of
100,000 shares of a series of Preferred Stock designated as Series A Preferred
Stock
On July 8, 1993, as part of an agreement with its bank, Duramed issued
74,659 shares of Series B Convertible Preferred Stock. The Series B Convertible
Preferred Stock is non-voting and is convertible at any time into 746,590 shares
of Duramed Common Stock. As of July 15, 1996, the bank had converted 68,600
shares of Series B Convertible Preferred Stock into 686,000 shares of Duramed
Common Stock.
On November 6, 1995, Duramed's Board of Directors 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, Duramed issued $12.0 million (120,000 shares) of Series C
Preferred Stock. An additional $12.0 million (120,000 shares) of Series C
Preferred Stock was issued 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 Duramed Common Stock at a price which is 15% below
the average closing price of the Duramed 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. Any shares
of Series C Preferred
- 44-
51
Stock remaining outstanding on November 14, 1997 will automatically be converted
into shares of Duramed 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 July 15, 1996, 232,500 shares of the Series C Preferred Stock
had been converted into 1,609,732 shares of the Duramed Common Stock at an
average conversion price of $14.44 per share of Duramed Common Stock.
On August 7, 1996, Duramed completed the issuance of 200,000 shares of
Series D Convertible Preferred Stock. See "RECENT EVENTS."
The remaining shares of authorized preferred stock may be issued in one or
more series having such designated preferences, rights, qualifications and
limitations as the Board of Directors may from time to time determine without
requiring any vote of Duramed shareholders. A series of preferred stock could be
given voting, conversion, redemption, liquidation and dividend rights which, if
issued, could adversely affect the voting power and dilute the equity of the
holders of Duramed Common Stock and could have preference to Duramed Common
Stock with respect to dividend and liquidation rights. In addition, the issuance
of preferred stock by the Board of Directors could be utilized, under certain
circumstances, as a method of preventing a takeover of Duramed.
WARRANTS
The Warrants will be issued in registered form to or at the direction of
Hallmark as provided in the Asset Purchase Agreement. The following general
summary is qualified in its entirety by reference to the form of Warrant.
Each Warrant will entitle the registered holder to purchase one share of
Duramed Common Stock, subject to adjustment as described below. The Warrants
will be exercisable from the first anniversary of the Closing until the fifth
anniversary of the Closing (the "Termination Date") at an exercise price of
$25.00 per share. The Warrants may not be exercised for more than one-third of
the Duramed Common Stock subject thereto prior to the second anniversary of the
Closing or more than two-thirds of the Duramed Common Stock subject thereto
prior to the third anniversary of the Closing.
Warrant certificates may be exchanged for new certificates of different
denominations, and may be exercised, by presenting them at the offices of
Duramed, 7155 East Kemper Road, Cincinnati, Ohio 45249. The purchase price for
shares of Duramed Common Stock purchased pursuant to the Warrants will be
payable in full by check to Duramed or the holder may direct that a portion of
such Common Stock to be issued upon exercise of the Warrant be withheld by
Duramed as payment, to the extent permitted by law.
- 45 -
52
The exercise price of the Warrants and the number of shares issuable upon
exercise are subject to adjustments in certain events.
No fractional shares will be issued upon the exercise of the Warrants, but
Duramed will pay the cash value of any fractional shares otherwise issuable. No
adjustments for cash dividends will be made upon any exercise of Warrants.
Holders of Warrants, as such, do not have any voting or pre-emptive rights or
any other rights as shareholders of Duramed.
COMPARATIVE RIGHTS OF DURAMED STOCKHOLDERS
AND HALLMARK SHAREHOLDERS
If the Transaction is consummated, holders of Hallmark Common Stock will
become holders of Duramed Common Stock, which will result in their rights as
shareholders being governed by the laws of the State of Delaware, Duramed's
Articles and Duramed's By-Laws. The rights of holders of Hallmark Common Stock
currently are governed by the laws of the State of New Jersey and the
Certificate of Incorporation, as amended, of Hallmark ("Hallmark's Articles")
and the By-Laws, as amended, of Hallmark ("Hallmark's By-Laws").
It is not practical to describe all of the differences between the laws of
the State of Delaware and the laws of the State of New Jersey, between Duramed's
Articles and Hallmark's Articles and between Duramed's By-Laws and Hallmark's
By-Laws. The following is a summary of certain differences between the rights of
a holder of Duramed Common Stock and the rights of a holder of Hallmark Common
Stock. The summary is qualified in its entirety by reference to Duramed's
Articles and Duramed's By-Laws, copies of which are filed as exhibits to the
Registration Statement of which this Proxy Statement/Prospectus is a part,
Hallmark's Articles and Hallmark's By-Laws, attached as Appendix D hereto, and
the laws of the State of Delaware and the State of New Jersey.
APPRAISAL RIGHTS
Delaware law provides appraisal rights in the case of a stockholder
objecting to certain mergers or consolidations, but such appraisal rights do not
apply (i) to stockholders of the surviving corporation in a merger if
stockholder approval of the merger is not required or (ii) to any class of stock
which is either listed on a national securities exchange or held of record by
more than 2,000 holders unless stockholders are required to accept for their
shares in the merger or consolidation anything other than common stock of the
surviving or resulting corporation or common stock of another corporation that
is so listed or held (and cash in lieu of fractional shares).
- 46 -
53
New Jersey law provides appraisal rights in the case of a shareholder
objecting to certain mergers or consolidations, but such appraisal rights do not
apply (i) to shareholders of a surviving corporation in a merger if shareholder
approval of the merger is not required; (ii) to any class of stock which is
listed on a national securities exchange or held of record by not less than
1,000 holders unless shareholders are required to accept for their shares
anything other than cash, securities which will be so listed or traded, or such
securities and cash.
New Jersey law further provides appraisal rights in the case of a
shareholder objecting to certain sales or other dispositions of all or
substantially all of the assets of a corporation not in the ordinary course of
business, other than transfers of assets by a corporate parent to a corporate
subsidiary, but such appraisal rights do not apply (i) to a series of stock
listed on a national securities exchange or held of record by no less than 1,000
holders; (ii) a transaction pursuant to a plan of dissolution of the corporation
which provides for distribution of substantially all of its net assets to
shareholders within one year of the transaction, and such transaction is wholly
for cash, securities which will be so listed or traded, or cash and such
securities; or (iii) a sale pursuant to an order of a court having jurisdiction.
TRANSACTIONS WITH AFFILIATES
The Delaware Business Combinations Statute mandates a delay in certain
fundamental corporate transactions with a person owning more than 15% of the
outstanding voting shares of a corporation (an "interested stockholder") for
three years after the date such person became an interested stockholder unless:
(i) prior to such date, the Board of Directors approved either the business
combination or the transaction which resulted in the stockholder becoming an
interested stockholder; (ii) upon consummation of the transaction which resulted
in the stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the outstanding voting stock; (iii) the
business combination is approved by the Board of Directors and by the
stockholders by a vote of two-thirds of the outstanding voting stock (excluding
shares held or controlled by the interested stockholder); or (iv) the
corporation's original certificate of incorporation provided that this Statute
would not be applicable to the corporation.
The New Jersey Shareholders Protection Act mandates a delay in certain
fundamental corporate transactions with a person owning, directly or indirectly,
more than 10% of the voting power of the outstanding voting stock of a
corporation (an "interested shareholder") for five years after the date such
person became an interested shareholder (the "stock acquisition date"), unless
(i) the Board of Directors approved the transaction prior to the stock
acquisition date; (ii) the transaction is approved by the
- 47 -
54
vote of the holders of two-thirds of the voting stock not beneficially owned by
the interested shareholder; (iii) the transaction meets certain conditions
specified by the Act; (iv) the corporation did not have a class of voting stock
registered or traded on a national securities exchange or registered with the
Commission pursuant to Section 12(g) of the Securities Act of 1934 on the stock
acquisition date; (v) the interested shareholder was an interested shareholder
prior to August 5, 1986 and has not since such date increased his proportion of
the voting power of the corporation; (vi) the interested shareholder became an
interested shareholder inadvertently, as soon as practicable divests himself of
a sufficient amount of stock so that he is no longer an interested shareholder,
and would not, during the five-year period preceding the transaction, have been
an interested shareholder but for such inadvertent acquisition; (vii) the
interested shareholder became the beneficial owner of more than 50% of the
voting power of the outstanding voting stock of the corporation prior to August
5, 1986 through a purchase of stock directly from the corporation in a
transaction approved by the directors of the corporation, none of whom were then
affiliated with the interested shareholder; or (viii) the interested shareholder
became an interested shareholder on or after August 5, 1986 and before January
1, 1987.
DIVIDENDS
Under Delaware law, a corporation may generally pay dividends out of
surplus. In addition, a corporation, under certain circumstances, may pay
dividends, if there is no surplus, out of its net profits for the fiscal year in
which the dividend is declared and/or the preceding fiscal year.
Under New Jersey law, a corporation may not make a distribution, including
the payment of dividends, if, after such distribution, the corporation would be
unable to pay its debts as they become due in the ordinary course of business,
or the corporation's total assets would be less than its total liabilities.
LIABILITY OF DIRECTORS
Under Delaware law and Duramed's Articles, no director may be personally
liable to the corporation or its stockholders for monetary damages for any
breach of fiduciary duty by a director, except that a director may be liable to
the extent provided by applicable law (i) for any breach of the director's duty
of loyalty to the corporation or its stockholders, (ii) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law, (iii) for unlawful dividends or other distributions or (iv) for any
transaction from which such director derived an improper personal benefit.
- 48 -
55
New Jersey law provides that a corporation may, in its certificate of
incorporation, limit the directors' liability to the corporation or its
shareholders, but Hallmark has no such limitation in its certificate of
incorporation. Under New Jersey law, a corporation may not relieve its directors
from liability for any breach of duty based upon an act or omission (a) in
breach of such person's duty of loyalty to the corporation or its shareholders,
(b) not in good faith or involving a knowing violation of law or (c) resulting
in receipt by such person of an improper personal benefit. Further, directors
who vote for or concur in any of the following corporate actions are jointly and
severally liable to the corporation for damages: (i) declaration of any dividend
or distribution contrary to law; (ii) purchase of shares of the corporation
contrary to law; (iii) distribution of assets of the corporation during or after
dissolution without adequately providing for all known debts of the corporation;
(iv) liquidation of the corporation without providing for the dissolution of the
corporation and payment of all expenses incident thereto; or (v) the making of
any loan to an officer, director or employee of the corporation contrary to law.
New Jersey law specifically provides that, in discharging their duties,
directors may rely on opinions of counsel to the corporation and upon written
reports of accountants, representations of officers of the corporation or
written reports of committees of the board.
INDEMNIFICATION
Under both New Jersey and Delaware law, a corporation's directors and
officers as well as other employees and individuals may be indemnified against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement in connection with specified actions, suits or proceedings, whether
civil, criminal, administrative or investigative (other than a derivative
action), if they acted in good faith and in a manner they reasonably believed to
be in or not opposed to the best interests of the corporation and, with respect
to any criminal action or proceeding, had no reasonable cause to believe their
conduct was unlawful. A similar standard of care is applicable in the case of
derivative actions, except that indemnification only extends to expenses
(including attorneys' fees) incurred in connection with the defense or
settlement of such an action and approval of a court must be obtained before
there can be any indemnification of expenses where the person seeking
indemnification has been found liable to the corporation.
- 49 -
56
RESALES - SELLING SHAREHOLDERS
The securities offered for resale hereby consist of an aggregate of (i) up
to 390,242 shares of Common Stock that may be offered for resale by the Selling
Shareholders named below, (ii) up to 251,482 Warrants to purchase shares of
Common Stock that may be offered for resale by the Selling Shareholders named
herein, and (iii) up to 251,482 Warrant Shares issuable by the Company upon
exercise of the Warrants. The number of shares to be sold by Hallmark reflected
below are based on certain assumptions regarding the allocation of Duramed
shares pursuant to the Transaction.
The following sets forth certain information regarding the Selling
Shareholders:
Name of Selling Shareholder Number of Shares of Number of
- --------------------------- Common Stock Offered Warrants
Hereby (1) Offered Hereby
-------------------- --------------
Hallmark 40,734(2) -
Dr. Marvin H. Meisner 66,030 31,632
Mr. V. G. Budharaju 16,643 58,477
Dr. John H. Meloy 42,241 26,938
Dr. Carroll P. Osgood 53,624 33,614
Dr. Rudraraju P. Raju 84,608 47,150
Dr. Robert E. Wertz 86,362 53,671
<FN>
(1) Consists of shares of Common Stock being offered and sold to the Selling
Shareholders hereby as well as the resale of shares of Common stock issuable to
such Selling Shareholders upon exercise of Warrants being offered and sold
hereby. Following completion of the resale offering, the Selling Shareholders
will not beneficially own any shares of Common Stock or Warrants.
(2) Consists of shares of Common Stock which may be sold by Hallmark to
satisfy certain liabilities of Hallmark not assumed by Duramed.
Except as set forth in this Prospectus/Proxy Statement, none of the
Selling Shareholders has, or in the past has had, any position, office or
relationship with Duramed (other than as a security holder) or any of its
affiliates.
RESALES - PLAN OF DISTRIBUTION
The Duramed Securities acquired in the Transaction or upon exercise of the
Warrants may be sold from time to time by the
- 50 -
57
Selling Shareholders or their pledgees or donees. Such sales may be made in the
over-the-counter market or in negotiated transactions, at prices and on terms
then prevailing or at prices related to the then current market price or at
negotiated prices. The Duramed Securities may be sold by means of (a) purchases
by a broker or dealer as principal and resale by such broker or dealer for its
account pursuant to this Prospectus/Proxy Statement and/or (b) ordinary
brokerage transactions and transactions in which the broker solicits purchasers.
In effecting sales, brokers or dealers engaged by Selling Shareholders may
arrange for other brokers or dealers to participate. Brokers or dealers will
receive commissions or discounts from Selling Shareholders in amounts to be
negotiated immediately prior to the sale which amounts will not be greater than
that normally paid in connection with ordinary trading transactions.
LEGAL OPINION
The legality of the Duramed Common Stock and the Warrants to be issued in
connection with the Transaction is being passed upon for Duramed by Taft,
Stettinius & Hollister, Cincinnati, Ohio. Timothy E. Hoberg, a partner of that
firm, is Assistant Secretary of Duramed. Partners and associates of Taft,
Stettinius & Hollister beneficially own approximately 50,000 shares of Duramed
Common Stock.
EXPERTS
The consolidated financial statements and schedule of Duramed
Pharmaceuticals, Inc. appearing in Duramed's Annual Report, as amended (Form
10-K/A), for the year ended December 31, 1995 have been audited by Ernst & Young
LLP, independent auditors, as set forth in their report thereon included therein
and incorporated herein by reference. The financial statements of Hallmark
Pharmaceuticals, Inc., at December 31, 1995 and 1994 and for each of the three
years in the period ended December 31, 1995 appearing in this Proxy
Statement/Prospectus have been audited by Eichen & DiMeglio, independent
auditors, as set forth in their reports thereon appearing elsewhere herein. Such
financial statements and schedule, which have been incorporated herein by
reference or appear elsewhere herein, are included in reliance upon such reports
given upon the authority of such firms as experts in accounting and auditing.
- 51 -
58
INDEX TO HALLMARK FINANCIAL STATEMENTS
Financial Statements of Hallmark Pharmaceuticals, Inc.
for the Years ended December 31, 1995 and 1994
Independent Auditors Report F-2
Balance Sheets F-3
Statements of Operations F-4
Statements of Stockholders' Deficiency F-5
Statements of Cash Flows F-6
Notes to Financial Statements F-7
Financial Statements of Hallmark Pharmaceuticals, Inc.
for the Years ended December 31, 1994 and 1993
Independent Auditors Report F-17
Balance Sheets F-18
Statements of Operations F-19
Statements of Stockholders' Deficiency F-20
Statements of Cash Flows F-21
Notes to Financial Statements F-22
Financial Statements of Hallmark Pharmaceuticals, Inc.
for the Three-Month Periods ended March 31, 1996
and March 31, 1995
Balance Sheets as of March 31, 1996 and December 31,
1995 F-29
Statements of Operations for the three months ended
March 31, 1996 and 1995 F-30
Statement of Stockholder's Deficiency for the three
months ended March 31, 1996 F-31
Statements of Cash Flows for the three months ended
March 31, 1996 and 1995 F-32
Notes to Unaudited Interim Financial Statements F-33
- 52 -
59
HALLMARK PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
--------------------------------
Financial Statements for the Years Ended
December 31, 1995 and 1994 and
Independent Auditors' Report
F-1
60
EICHEN & DIMEGLIO 1 Dupont Street
CERTIFIED PUBLIC ACCOUNTANTS Plainview, New York 11803
Tel. (516) 576-3333
Fax. (516) 576-3342
INDEPENDENT AUDITORS' REPORT
- ----------------------------
To the Board of Directors of Hallmark Pharmaceuticals, Inc.:
We have audited the accompanying balance sheets of Hallmark Pharmaceuticals,
Inc. (the "Company"), a development stage enterprise, as of December 31, 1995
and 1994 and the related statements of operations, stockholders' deficiency and
of cash flows for the years then ended and for the cumulative period from
inception (February 5, 1992) to December 31, 1995. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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, such financial statements present fairly, in all material
respects, the financial position of the Company at December 31, 1995 and 1994
and the results of its operations and its cash flows for the years then ended
and for the cumulative period from inception (February 5, 1992 ) through
December 31, 1995 in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, under existing circumstances, there is substantial doubt
as to the Company's ability to continue as a going concern at December 31, 1995.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty. The Company is in the development stage and,
accordingly, the ability to continue its research and development activities and
to potentially achieve profitable operations is dependent upon obtaining
adequate financing. Management's plans in regard to these matters are also
described in Note 2.
EICHEN & DIMEGLIO
February 19, 1996, except for the last paragraph of Note 11, as to which the
date is April 11, 1996.
F-2
61
HALLMARK PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
- -------------------------------
BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
- ---------------------------
ASSETS NOTES 1995 1994
- ------ ----- ---- ----
CURRENT ASSETS:
Cash $ 18,503 $ 444,946
Inventories 2,3 769,412
Prepaid expenses 49,232 55,680
------------ -----------
Total current assets 837,147 500,626
PROPERTY AND EQUIPMENT - NET 2,4,7 3,118,927 2,647,239
DEPOSITS ON EQUIPMENT 32,676 308,631
DEFERRED FINANCING COSTS 2 347,000
OTHER ASSETS - NET 2 66,225 51,342
------------ -----------
TOTAL $ 4,401,975 $ 3,507,838
============ ==========
LIABILITIES AND STOCKHOLDERS'
DEFICIENCY
- ------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 290,121 $ 126,427
Due to Duramed Pharmaceuticals, Inc. 2 900,000
Due to affiliate 7 100,000
Interest payable to related parties 6,7 163,340 106,148
Note payable to bank 5 171,727
Current portion of long-term debt 5 289,631 264,037
Current portion of capital lease obligations 7 303,472 208,194
Current portion of due to stockholders 6 1,754,124
------------ -----------
Total current liabilities 3,972,415 704,806
------------ -----------
LONG-TERM DEBT 5 817,859 1,101,326
------------ -----------
CAPITAL LEASE OBLIGATIONS 7 496,371 617,829
------------ -----------
DUE TO STOCKHOLDERS 6 4,191,707 1,956,247
------------ -----------
COMMITMENTS AND CONTINGENCIES 10
STOCKHOLDERS' DEFICIENCY: 8,9
Common stock - no par value;
authorized 10,000,000 shares;
issued and outstanding 6,106,240 shares at
December 31, 1995 and 5,970,640 shares at
December 31, 1994 7,322,100 6,710,700
Deficit accumulated during the development
stage (12,398,477) (7,583,070)
------------ ------------
Stockholders' deficiency (5,076,377) (872,370)
------------- ------------
TOTAL $ 4,401,975 $ 3,507,838
============ ===========
SEE NOTES TO FINANCIAL STATEMENTS.
F-3
62
HALLMARK PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
- -------------------------------
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND
1994 AND CUMULATIVE SINCE INCEPTION
- -----------------------------------
CUMULATIVE
SINCE
NOTES 1995 1994 INCEPTION
----- ---- ---- ----------
OPERATING EXPENSES:
Research and development 2 $ 2,120,982 $1,983,307 $ 5,899,662
Depreciation and amortization 2 1,090,594 707,714 2,327,050
General and administrative 8 856,028 881,205 2,601,775
Interest to related parties 6,7 609,105 351,078 1,373,285
Interest on long-term debt and other 5 138,698 58,007 196,705
----------- ---------- -----------
NET LOSS 4,815,407 3,981,311 $12,398,477
===========
DEFICIT ACCUMULATED DURING
THE DEVELOPMENT STAGE,
BEGINNING OF PERIOD 7,583,070 3,601,759
----------- ----------
DEFICIT ACCUMULATED DURING
THE DEVELOPMENT STAGE,
END OF PERIOD $12,398,477 $7,583,070 $12,398,477
=========== ========== ===========
NET LOSS PER SHARE 2 $ 0.79 $0.71
----------- ----------
WEIGHTED AVERAGE SHARES
OUTSTANDING 2 6,060,873 5,608,409
=========== ==========
SEE NOTES TO FINANCIAL STATEMENTS.
F-4
63
HALLMARK PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
- -------------------------------
STATEMENTS OF STOCKHOLDERS' DEFICIENCY
FOR THE YEARS ENDED DECEMBER 31, 1995 AND
1994 (SEE NOTE 8)
- -----------------------------------------
DEFICIT
ACCUMULATED
DURING THE
COMMON STOCK DEVELOPMENT
SHARES AMOUNT STAGE
--------- --------- ------------
BALANCES, DECEMBER 31, 1993 5,000,000 $2,820,000 ($3,601,759)
Sale of common stock at $1.00 per share 50,000 50,000
Sale of common stock at $3.00 per share 456,250 1,368,750
Sale of common stock at $5.00 per share 414,390 2,071,950
Issuance of common stock for
services rendered 50,000 150,000
Loan guarantee fee in connection with
issuance of stock options 250,000
Net loss for the year (3,981,311)
--------- ---------- ------------
BALANCES, DECEMBER 31, 1994 5,970,640 6,710,700 (7,583,070)
Sale of common stock at $5.00 per share 105,600 528,000
Issuance of common stock for
services rendered 30,000 83,400
Net loss for the year (4,815,407)
--------- ---------- ------------
BALANCES, DECEMBER 31, 1995 6,106,240 $7,322,100 ($12,398,477)
========= ========== ============
SEE NOTES TO FINANCIAL STATEMENTS.
F-5
64
HALLMARK PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
- -------------------------------
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND
1994 AND CUMULATIVE SINCE INCEPTION
- -----------------------------------------
CUMULATIVE
SINCE
1995 1994 INCEPTION
----------- ----------- ------------
CASH FLOWS USED IN OPERATING
ACTIVITIES:
Net loss ($4,815,407) ($3,981,311) ($12,398,477)
----------- ----------- ------------
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 1,090,594 707,714 2,327,050
Non-cash compensation 83,400 150,000 553,400
Non-cash loan guarantee fee 250,000 250,000
Changes in operating assets and liabilities:
Inventories (769,412) (769,412)
Prepaid expenses 6,448 (31,489) (49,232)
Other assets (27,857) (22,434) (118,615)
Accounts payable and accrued expenses 163,694 1,407 290,121
Interest payable to related parties 57,192 25,628 163,340
----------- ----------- ------------
Net adjustments 604,059 1,080,826 2,646,652
----------- ----------- ------------
Net cash used in operating activities (4,211,348) (2,900,485) (9,751,825)
----------- ----------- ------------
CASH FLOWS USED IN INVESTING
ACTIVITY - PURCHASE OF (AND DEPOSITS
ON) PROPERTY AND EQUIPMENT (1,065,325) (1,927,893) (4,083,513)
----------- ----------- ------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Deferred financing costs (347,000) (347,000)
Due to Duramed Pharmaceuticals, Inc. 900,000 900,000
Due to affiliate 100,000 100,000
Note payable to bank 171,727 171,727
Long-term debt:
Proceeds 1,500,000 1,500,000
Payments (257,873) (134,637) (392,510)
Reduction of capital lease obligations (234,208) (157,127) (542,907)
Due to stockholders:
Proceeds 4,315,500 456,250 6,271,747
Payments (325,916) (325,916)
Issuance of common stock 528,000 3,490,700 6,518,700
----------- ----------- ------------
Net cash provided by financing activities 4,850,230 5,155,186 13,853,841
----------- ----------- ------------
INCREASE (DECREASE) IN CASH (426,443) 326,808 18,503
CASH, BEGINNING OF PERIOD 444,946 118,138 0
----------- ----------- ------------
CASH, END OF PERIOD $ 18,503 $ 444,946 $ 18,503
=========== =========== ============
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid during the period for interest $ 690,611 $ 383,457 $1,406,650
=========== =========== ============
NON-CASH FINANCING AND
INVESTING ACTIVITY:
Acquisition of assets held under capital
leases $ 208,028 $ 133,130 $1,342,750
=========== =========== ============
SEE NOTES TO FINANCIAL STATEMENTS.
F-6
65
HALLMARK PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
- --------------------------------
NOTES TO FINANCIAL STATEMENTS
- -----------------------------
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
Hallmark Pharmaceuticals, Inc. ("Hallmark" or the "Company") was incorporated in
New Jersey on February 5, 1992. Presently, the Company is in the process of
research and late-stage development of certain generic drugs and drug delivery
technologies.
During 1995, the Company received its first approval to market Captopril, the
generic equivalent of the brand name product Capoten, for which the brand
company's patent exclusivity expires during February 1996 (see Note 2).
The accompanying financial statements are those of a development stage
enterprise. As a development stage enterprise, the Company is currently
dependent upon debt and equity financing to continue its operations (see Note
2).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GOING CONCERN- The accompanying financial statements have been prepared on a
going concern basis which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. As of December 31,
1995, the Company has a working capital deficit of approximately $3,135,000 and
an accumulated deficit since organization of approximately $12,398,000. The
Company's ability to continue its research and development activities and to
potentially achieve profitable operations is dependent upon obtaining adequate
financing. These factors, among others, raise substantial doubt as to the
Company's ability to continue as a going concern at December 31, 1995. These
financial statements do not include any adjustments which might result from the
outcome of this uncertainty.
Management of the Company has been actively seeking a strategic corporate
partner and is currently engaged in negotiations with Duramed Pharmaceuticals,
Inc. ("Duramed") to acquire the Company (see Note 11); however, there can be no
assurance that such transaction will be consummated. During 1995, Duramed
advanced the Company an aggregate of $900,000 for working capital purposes
(see Note 11). Such advances bear interest at one percent above the prime rate
per annum and are due on demand. In connection with such advances, the Company
entered into an agreement in October 1995 with Duramed granting them exclusive
marketing and distribution rights in North America to Captopril for a period of
ten years. Under such agreement, the Company will supply Captopril to Duramed at
a price equal to 110 percent of cost, as defined in the agreement. Duramed will
have sole discretion over establishing the price at which it sells the product
to customers
F-7
66
and shall receive a marketing and distribution allowance equal to 8.5 percent of
net sales. Net profits, as defined, shall first be paid to Duramed for repayment
of outstanding advances. Thereafter, net profits shall be divided equally
between the Company and Duramed.
RECLASSIFICATIONS - Certain amounts in the 1994 financial statements have been
reclassified to conform to the 1995 presentation. Such reclassification
consisted primarily of $308,631 reclassified from "Other assets - net" to
"Deposits on equipment".
RESEARCH AND DEVELOPMENT - Research and development costs, including related raw
materials and supplies, are expensed as incurred.
DEPRECIATION AND AMORTIZATION - Depreciation of property and equipment and
amortization of assets held under capital leases is computed on the
straight-line method over an estimated useful life of the related assets of 5
years.
INVENTORIES - Inventories are stated at the lower of cost, determined on the
first-in, first-out basis, or market.
DEFERRED FINANCING COSTS - Deferred financing costs at December 31, 1995 consist
of professional fees incurred in connection with the Company's efforts to raise
additional funds.
ORGANIZATION COSTS - Organization costs are being amortized over a period of 5
years. The net book value of such costs was approximately $6,200 and $12,300 at
December 31, 1995 and 1994, respectively, and is included in the balance sheet
caption "Other assets -net".
DEFERRED LOAN COSTS - Deferred loan costs are being amortized over a period of 5
years. The net book value of such costs was approximately $25,700 and $13,500 at
December 31, 1995 and 1994, respectively, and is included in the balance sheet
caption "Other assets - net".
INCOME TAXES - As of January 1, 1994, the Company elected to be taxed as a C
Corporation for Federal income tax purposes and computes its tax provisions
under Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting
for Income Taxes". Under SFAS No. 109, income taxes are recognized using a
liability approach and deferred tax assets and liabilities are computed for
temporary differences using current income tax rates. The adoption of SFAS No.
109 had no effect on the accompanying financial statements.
Prior to January 1, 1994 the Company had elected to be treated as an S
Corporation for Federal income tax purposes and accordingly, income or loss
passed through to the stockholders' individual
F-8
67
income tax return and no Federal income tax was imposed on the Company. For New
Jersey income tax purposes, the Company was taxed as a regular C Corporation
since inception since New Jersey did not recognize S Corporation status prior to
1994.
STOCK OPTIONS - 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 the financial statements. Accordingly, the standard will have no
effect on the Company's financial condition or results of operations.
USE OF ESTIMATES - The preparation of the financial statements in conformity
with generally accepted accounting principles require 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.
NET LOSS PER SHARE - Net loss per share was computed based on the weighted
average number of common shares outstanding during the respective periods and
does not include the assumed exercise of stock options, since such effect would
be anti-dilutive.
3. INVENTORIES
Inventories consist of the following as of December 31, 1995:
Finished goods $ 701,949
Raw materials 34,514
Packaging materials 32,949
---------
Total $ 769,412
=========
Inventories are pledged as collateral to demand loans from Duramed (see Note 2).
4. PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and consists of the following at
December 31, 1995 and 1994:
1995 1994
---- ----
Office furniture and equipment $ 106,226 $ 92,673
Research and development equipment 1,762,322 931,105
Machinery & equipment 93,087 47,927
Equipment held under capital leases 1,354,359 1,134,722
Leasehold improvements 2,096,993 1,657,252
----------- ---------
Total 5,412,987 3,863,679
F-9
68
Less accumulated depreciation and
amortization (2,294,060) (1,216,440)
----------- ----------
Property and equipment - net $ 3,118,927 $2,647,239
=========== =========
5. BANK INDEBTEDNESS
Bank indebtedness consists of the following:
Demand note payable to bank of $ 171,727 at December 31, 1995 with interest at 2
percent above the bank's prime rate per annum (the prime rate being 8.5 percent
at December 31, 1995) Such note is also personally guaranteed by the Company's
Board of Directors.
Long-term note payable to bank with interest at 1 percent above the bank's prime
rate per annum, due in monthly installments of $31,871 (including interest)
through June 1999. Substantially all of the Company's assets not otherwise
pledged are pledged as collateral to this note payable. Also, such note is
personally guaranteed by certain of the Company's stockholders. Long-term debt
maturing in each of the years subsequent to December 31, 1995 is as follows:
Year Ending December 31,
- ------------------------
1996 $ 289,631
1997 318,375
1998 349,974
1999 149,510
----------
Total 1,107,490
Less current portion (289,631)
----------
Long-term debt $ 817,859
==========
In connection with the personal guarantee of bank indebtedness, as described
above, the guaranteeing stockholders were issued stock options (see Note 8).
6. DUE TO STOCKHOLDERS
Due to stockholders at December 31, 1995 and 1994 consists of the following:
1995 1994
---- ----
Notes payable to stockholders with interest
at 6.35 percent per annum, maturing during
1997 through 1999.
$1,956,247 $1,956,247
Notes payable to stockholders with interest
at 10 percent per annum, maturing during
1996.
1,215,000
F-10
69
Notes payable to stockholders (original
principal amount of $3,100,500) bearing
interest at 1 percent above the prime rate,
due in monthly installments aggregating
$67,400 (including interest), maturing
during 2000
2,774,584
---------- ----------
Total $5,945,831 $1,956,247
========== ==========
Due to stockholders maturing in each of the years subsequent to December 31,
1995 are as follows:
Year Ending December 31.
- ------------------------
1996 $ 1,754,124
1997 1,424,124
1998 1,154,121
1999 995,374
2000 618,088
----------
Total 5,945,831
Less current portion (1,754,124)
----------
Due to stockholders - long-term $ 4,191,707
==========
Accrued interest related to such notes aggregated $144,608 and $85,974 at
December 31, 1995 and 1994, respectively, and is included in the balance sheet
caption "Interest payable to related parties."
7. CAPITAL LEASE OBLIGATIONS AND DUE TO AFFILIATE
The Company leases equipment from Hallmark Leasing Associates ("Hallmark
Leasing"), a partnership in which the partners are also stockholders of the
Company. These leases, which represent the majority of Hallmark's capital lease
obligations, expire during 1997, 1998 and 1999 and are accounted for as capital
leases as a result of certain provisions in the lease agreements. In addition,
the Company borrowed $100,000 in October 1995 from Hallmark Leasing. Such amount
bears interest at 10 percent per annum, is due in 1996, and is classified as
"Due to affiliate" on the balance sheet.
The Company also leases computer equipment under a capital lease agreement with
an unrelated entity.
Future minimum lease payments, by year and in the aggregate, and the present
value of the future minimum lease payments at December 31, 1995 are as follows:
F-11
70
Year Ending December 31.
- ------------------------
1996 $ 474,790
1997 400,274
1998 123,985
1999 86,260
2000 8,428
---------
Total future minimum lease payments 1,093,737
Less amount representing interest (293,894)
---------
Present value of future minimum lease
payments (including $303,472 classified
as current) $ 799,843
=========
At December 31, 1995 and 1994, the net book value of equipment held under
capital leases aggregated $566,920 and $618,154, respectively. Also, accrued
interest related to such capital lease obligations at December 31, 1995 and 1994
aggregated $17,054 and $18,753, respectively, and is included in the balance
sheet caption "Interest payable to related parties".
8. COMMON STOCK
During 1995, the Company sold an aggregate of 105,600 shares of its common stock
to new and existing stockholders for $528,000.
During 1994, the Company sold an aggregate of 50,000, 456,250 and 414,390 shares
of its common stock to new and existing stockholders for $50,000, $1,368,750 and
$2,071,950, respectively.
The shareholders' agreement contains provisions which limit the transfer of the
Company's common stock and grant the stockholders certain "first refusal",
"piggyback" and "demand" registration rights.
In connection with the above transactions, the Company issued an additional
30,000 and 50,000 shares during 1995 and 1994, respectively, to certain
management members in consideration for services rendered. Accordingly, the
Company recorded a charge to operations and a credit to common stock for the
fair market value of the shares at the time of issuance. Such amounts aggregated
$83,400 and $150,000 during 1995 and 1994, respectively.
During 1995, the Company issued options to certain of its stockholders to
purchase a total of 620,100 shares of the Company's common stock in connection
with their loans aggregating $3,100,500 (see Note 6). The options entitle the
holder to purchase shares at $5 per share and are exercisable for a two year
period from the date of grant.
In June 1994, the Company issued options to all stockholders of record as of May
6, 1994 to purchase a total of 1,500,000 shares of the Company's common stock in
connection with their personal guarantee of bank indebtedness as described in
Note 4. The
F-12
71
options entitle the holder to purchase shares at $1 per share and are
exercisable for a two year period commencing 18 months from the date of grant.
Each optionee received options to purchase shares of the Company's common stock
in proportion to their ownership interest immediately prior to the grant of such
options. Accordingly, upon exercise of all of the options, each stockholders'
ownership interest would remain unchanged relative to each other. In connection
with this transaction, the Company has recorded a charge to operations for
$250,000, which, in management's opinion, represents the estimated value of the
consideration received in exchange for their personal guarantees. Such amount is
included in the expense caption "General and administrative" in the statement of
operations.
During January 1994, the Company increased the number of shares authorized for
issuance from 5,000,000 to 10,000,000.
9. INCOME TAXES
At December 31,1995, the Company has a Federal tax loss carryforward of
approximately $8,000,000 expiring during 2009 and 2010. Also, at such date, the
Company has a New Jersey tax loss carryforward of approximately $11,100,000,
expiring between 1999 and 2002. The difference between the accumulated deficit
of $12,398,477 and the state tax loss carryforward of $11,100,000 at December
31,1995 relates principally to the capitalization of start-up expenses for
income tax purposes, the loan guarantee fee described in Note 8, premiums on
officers' life insurance, employee benefits, and depreciation and amortization.
The New Jersey and Federal income tax loss carryforwards differ since the
Company was taxed as an S Corporation for Federal income tax purposes prior to
January 1, 1994.
In accordance with SFAS No. 109, the Company has computed the components of
deferred income taxes at December 31, 1995 and 1994 as follows:
Deferred tax benefits: 1995 1994
---- ----
Federal $ 2,991,000 $ 1,081,000
New Jersey 738,000 619,000
---------- ----------
Total 3,729,000 1,700,000
Less valuation allowance (3,729,000) (1,700,000)
---------- ----------
Net effect $ 0 $ 0
========== ==========
At December 31, 1995 and 1994 a valuation allowance of $3,729,000 and
$1,700,000, respectively, has been provided since the realization of the
deferred tax benefits are not more likely than not. The Company's deferred tax
benefits were generated principally as a result of such losses.
F-13
72
10. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES - The Company is obligated under a non-cancelable operating
lease agreement for the rental of its facility which expires in May 2000. The
lease agreement provides that the Company pay its proportionate share of
building maintenance, real estate taxes and similar items. At December 31, 1995
minimum annual rentals are as follows:
Year Ending December 31.
- ------------------------
1996 $ 197,786
1997 197,786
1998 197,786
1999 197,786
2000 82,411
---------
Total $ 873,555
=========
Rent expense for the years ended December 31, 1995 and 1994 aggregated
approximately $124,200 and $102,600, respectively.
During 1995, the Company was granted an option, exercisable on June 1, 1998, to
purchase its facility for a minimum of $2,088,955, subject to increases for the
percentage change in the Consumer Price Index ("CPI") from June 1, 1995 (the
"Base CPI") through the month of closing, up to a maximum of $2,340,000. Also,
the Company was granted a second option (the "Second Option"), exercisable on
June 1, 2000 to purchase such facility for $2,088,955 subject to increases for
the percentage change in the Base CPI through the month of closing. The Second
Option contains no maximum purchase price.
EMPLOYMENT AGREEMENTS - The Company is obligated under several employment
agreements, expiring in March 1997 through November 1999. Minimum annual
compensation under such agreements at December 31,1995 is approximately as
follows:
Year Ending December 31.
- ------------------------
1996 $ 486,500
1997 316,200
1998 306,300
1999 173,400
-----------
Total $ 1,282,400
===========
In addition, certain of such employment agreements provided that the individuals
receive shares of the Company's common stock as consideration for services
rendered (see Note 8).
CONTINGENT FINANCING FEES - In February 1995, the Company entered into an
agreement with an entity to assist the Company in raising additional expansion
capital for professional fees ranging from a minimum of $75,000 (increased to
$350,000 under certain circumstances), to a maximum of $1,000,000, depending
upon the
F-14
73
amount of the financing. Such agreement was terminated by the Company during
August 1995 and all invoiced professional fees from this entity (aggregating
approximately $112,000) were paid by the Company. Subsequent to the termination
of this agreement, the Company received notice from this entity claiming
additional professional fees would be due if a transaction with Duramed were
consummated. Legal counsel is currently investigating the nature of this
potential claim and at present, cannot assess the likelihood of the Company's
liability should a claim be filed. The financial statements do not include any
liability relating to this matter.
In October 1995, the Company entered into an agreement with an entity to assist
the Company in evaluating and negotiating potential financing offers. A final
fee of $50,000 would be due to this entity upon the closing of such a
transaction. No provision has been made for such fee as of December 31, 1995.
11. SUBSEQUENT EVENTS
From January 1, 1996 through February 19, 1996, Duramed loaned the Company an
additional $800,000 on the same terms as the earlier demand loans (see Note 2).
Also, during January 1996, the Company entered into a marketing and distribution
agreement with Duramed on substantially the same terms as the Captopril
agreement (see Note 2) for an additional drug product currently under
development by the Company.
During January and February 1996, the Company adopted certain measures to
conserve cash flow, including the suspension of interest and principal payments
on certain amounts due to stockholders and on capital lease obligations to
Hallmark Leasing.
On April 11, 1996, the Company entered into a definitive agreement with Duramed
providing for the acquisition of assets and assumption of certain liabilities of
the Company. Under the terms of such agreement, the Company would receive
640,000 shares of Duramed common stock and warrants to purchase 400,000 shares
of Duramed common stock at a purchase price of $25 per share. Consummation of
the transaction is subject to certain customary conditions, including approval
of the Company's shareholders and certain regulatory agencies and other third
parties.
- --------------------------------------------------------------------------------
F-15
74
HALLMARK PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
----------------------------------------
Financial Statements for the Years Ended
December 31, 1994 and 1993 and
Independent Auditors' Report
F-16
75
EICHEN & DIMEGLIO 1 Dupont Street
CERTIFIED PUBLIC ACCOUNTANTS Plainview, New York 11803
Tel. (516) 576-3333
Fax. (516) 576-3342
INDEPENDENT AUDITORS' REPORT
- ----------------------------
To the Board of Directors of Hallmark Pharmaceuticals, Inc.:
We have audited the accompanying balance sheets of Hallmark Pharmaceuticals,
Inc. (the "Company"), a development stage enterprise, as of December 31, 1994
and 1993 and the related statements of operations, stockholders' deficiency and
of cash flows for the years then ended and for the cumulative period from
inception (February 5, 1992) to December 31, 1994. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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, such financial statements present fairly, in all material
respects, the financial position of the Company at December 31, 1994 and 1993
and the results of its operations and its cash flows for the years then ended
and for the cumulative period from inception (February 5, 1992 ) through
December 31, 1994 in conformity with generally accepted accounting principles.
Eichen & DiMeglio
April 3, 1995
F-17
76
HALLMARK PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
- --------------------------------
BALANCE SHEETS
DECEMBER 31, 1994 AND 1993
- ---------------------------
ASSETS NOTES 1994 1993
- ------ ----- ---- ----
CURRENT ASSETS:
Cash $ 444,946 $ 118,138
Prepaid expenses 55,680 24,191
---------- ----------
Total current assets 500,626 142,329
PROPERTY AND EQUIPMENT - NET 2,3,6 2,647,239 1,575,489
OTHER ASSETS - NET 2,3 359,973 55,980
---------- ----------
TOTAL $3,507,838 $1,773,798
========== ==========
LIABILITIES AND STOCKHOLDERS'
DEFICIENCY
- -----------------------------
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 126,427 $ 125,020
Interest payable to stockholders 5,6 106,148 80,520
Current portion of long-term debt 4 264,037
Current portion of capital lease obligations 6 208,194 146,388
---------- ----------
Total current liabilities 704,806 351,928
---------- ----------
LONG-TERM DEBT 4 1,101,326
----------
CAPITAL LEASE OBLIGATIONS 6 617,829 703,632
---------- ----------
DUE TO STOCKHOLDERS 5 1,956,247 1,499,997
---------- ----------
COMMITMENTS 9
STOCKHOLDERS' DEFICIENCY: 7,8,10
Common stock - no par value;
authorized 10,000,000 shares;
issued and outstanding 5,970,640 shares at
December 31, 1994 and 5,000,000 shares at
December 31, 1993 6,710,700 2,820,000
Deficit accumulated during the development
stage (7,583,070) (3,601,759)
---------- ----------
Stockholders' deficiency (872,370) (781,759)
---------- ----------
TOTAL $3,507,838 $1,773,798
========== ==========
SEE NOTES TO FINANCIAL STATEMENTS.
F-18
77
HALLMARK PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1994 AND
1993 AND CUMULATIVE SINCE INCEPTION
- -----------------------------------------
CUMULATIVE
SINCE
NOTES 1994 1993 INCEPTION
----- ---- ---- ---------
OPERATING EXPENSES:
Research and development 2 $1,983,307 $1,336,301 $3,778,680
Depreciation and amortization 2 707,714 394,807 1,236,456
General and administrative 7 881,205 549,710 1,745,747
Interest to stockholders 5,6 351,078 326,040 764,180
Interest on long-term debt 4 58,007 58,007
---------- ---------- ----------
NET LOSS 3,981,311 2,606,858 $7,583,070
==========
DEFICIT ACCUMULATED DURING
THE DEVELOPMENT STAGE,
BEGINNING OF PERIOD 3,601,759 994,901
---------- ----------
DEFICIT ACCUMULATED DURING
THE DEVELOPMENT STAGE,
END OF PERIOD $7,583,070 $3,601,759 $7,583,070
========== ========== ==========
NET LOSS PER SHARE 2 $ 0.71 $ 0.75
========== ==========
WEIGHTED AVERAGE SHARES
OUTSTANDING 2 5,608,409 3,476,924
========== ==========
SEE NOTES TO FINANCIAL STATEMENTS.
F-19
78
HALLMARK PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
- --------------------------------
STATEMENTS OF STOCKHOLDERS' DEFICIENCY
FOR THE YEARS ENDED DECEMBER 31, 1994 AND
1993 (SEE NOTE 7)
- ------------------------------------------
DEFICIT
ACCUMULATED
DURING THE
COMMON STOCK DEVELOPMENT
SHARES AMOUNT STAGE
------ ------ -----
Balances, December 31, 1992 1,843,750 $ 708,000 ($994,901)
Sale of common stock at $.40 per share 1,025,000 410,000
Sale of common stock at $1.00 per share 1,500,000 1,500,000
Issuance of common stock for
services rendered 631,250 202,000
Net loss for the year (2,606,858)
----------- ----------- ----------
Balances, December 31, 1993 5,000,000 2,820,000 (3,601,759)
Sale of common stock at $1.00 per share 50,000 50,000
Sale of common stock at $3.00 per share 456,250 1,368,750
Sale of common stock at $5.00 per share 414,390 2,071,950
Issuance of common stock for
services rendered 50,000 150,000
Loan guarantee fee in connection with
issuance of stock options 250,000
Net loss for the year (3,981,311)
----------- ----------- -----------
Ending balances, December 31, 1994 5,970,640 $ 6,710,700 ($7,583,070)
=========== =========== ===========
SEE NOTES TO FINANCIAL STATEMENTS.
F-20
79
HALLMARK PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
- --------------------------------
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994 AND
1993 AND CUMULATIVE SINCE INCEPTION
- -----------------------------------------
CUMULATIVE
SINCE
1994 1993 INCEPTION
---- ---- ---------
CASH FLOWS USED IN OPERATING
ACTIVITIES:
Net loss ($3,981,311) ($2,606,858) ($7,583,070)
Adjustments to reconcile net loss to ----------- ----------- -----------
net cash used in operating activities:
Depreciation and amortization 707,714 394,807 1,236,456
Non-cash compensation 150,000 202,000 470,000
Non-cash loan guarantee fee 250,000 250,000
Changes in operating assets and liabilities:
Prepaid expenses (31,489) (11,027) (55,680)
Other assets (311,665) (15,900) (379,989)
Accounts payable and accrued expenses 1,407 60,359 126,427
Interest payable to stockholders 25,628 28,374 106,148
----------- ----------- -----------
Net adjustments 791,595 658,613 1,753,362
----------- ----------- -----------
Net cash used in operating activities (3,189,716) (1,948,245) (5,829,708)
----------- ----------- -----------
CASH FLOWS USED IN INVESTING
ACTIVITY - PURCHASE OF
PROPERTY AND EQUIPMENT (1,638,662) (734,975) (2,728,957)
----------- ----------- -----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Reduction of capital lease obligations (157,127) (111,798) (308,699)
Due to stockholders 456,250 614,997 1,956,247
Long-term debt
Proceeds 1,500,000 1,500,000
Payments (134,637) (134,637)
Issuance of common stock 3,490,700 1,910,000 5,990,700
------------ ----------- -----------
Net cash provided by financing activities 5,155,186 2,413,199 9,003,611
------------ ----------- -----------
INCREASE (DECREASE) IN CASH 326,808 (270,021) 444,946
CASH, BEGINNING OF PERIOD 118,138 388,159 0
----------- ----------- -----------
CASH, END OF PERIOD $ 444,946 $ 118,138 $ 444,946
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid during the period for interest $ 383,457 $ 297,666 $ 716,039
=========== =========== ===========
NON-CASH FINANCING AND
INVESTING ACTIVITY:
Acquisition of assets held under capital
leases $ 133,130 $ 108,530 $ 1,134,722
=========== =========== ===========
SEE NOTES TO FINANCIAL STATEMENTS.
F-21
80
HALLMARK PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
- --------------------------------
NOTES TO FINANCIAL STATEMENTS
- -----------------------------
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
Hallmark Pharmaceuticals, Inc. ("Hallmark" or the "Company") was incorporated in
New Jersey on February 5, 1992. Presently, the Company is in the process of
research and late-stage development of generic drugs.
The accompanying financial statements are those of a development stage
enterprise. As a development stage enterprise, the Company is currently
dependent upon debt and equity financing to continue its operations. It is the
intention of the Company's stockholders to continue to provide this financial
support.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
RESEARCH AND DEVELOPMENT - Research and development costs, including related raw
materials and supplies, are expensed as incurred.
DEPRECIATION AND AMORTIZATION - Depreciation and amortization is computed on the
straight-line method over an estimated useful life of the related assets of 5
years.
ORGANIZATION COSTS - Organization costs are being amortized over a period of 5
years. The net book value of such costs was approximately $12,300 and $18,500 at
December 31, 1994 and 1993, respectively, and is included in the balance sheet
caption "Other assets - net".
DEFERRED LOAN COSTS - Deferred loan costs are being amortized over a period of 5
years. The net book value of such costs was approximately $13,500 at December
31, 1994 and is included in the balance sheet caption "Other assets - net".
INCOME TAXES - As of January 1, 1994, the Company has elected to be taxed as a C
Corporation for Federal income tax purposes and computes its tax provisions
under Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting
for Income Taxes". Under SFAS No. 109, income taxes are recognized using a
liability approach and deferred tax assets and liabilities are computed for
temporary differences using current income tax rates. The adoption of SFAS No.
109 had no effect on the accompanying financial statements.
Prior to January 1, 1994 the Company had elected to be treated as an S
Corporation for Federal income tax purposes and accordingly, income or loss
passed through to the stockholders' individual income tax return and no Federal
income tax was imposed on the
F-22
81
Company. For New Jersey income tax purposes, the Company was taxed as a regular
C Corporation since inception since New Jersey did not recognize S Corporation
status prior to 1994.
NET LOSS PER SHARE - Net loss per share was computed based on the weighted
average number of common shares outstanding during the respective periods and
does not include the assumed exercise of stock options, since such effect would
be anti-dilutive.
3. PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and consisted of the following at
December 31, 1994 and 1993:
1994 1993
---- ----
Office furniture and equipment $ 92,673 $ 63,873
Research and development equipment 931,105 440,101
Machinery & equipment 47,927 36,023
Equipment held under capital leases 1,134,722 1,001,592
Leasehold improvements 1,657,252 550,298
---------- ----------
Total 3,863,679 2,091,887
Less accumulated depreciation and (1,216,440) (516,398)
amortization ---------- ----------
Property and equipment - net $2,647,239 $1,575,489
========== ==========
As of December 31, 1994, the Company had deposits on property and equipment
aggregating approximately $308,600. Such amount is included in the balance sheet
caption "Other assets - net".
4. LONG-TERM DEBT
Long-term debt at December 31, 1994 consisted of a note payable to a bank, with
interest at 1 percent above the bank's prime rate per annum (the prime rate
being 8.5 percent at December 31, 1994), due in monthly installments of
approximately $31,871 (including interest) through June 1999. Substantially all
of the Company's assets are pledged as collateral to the note payable. Also,
such note is personally guaranteed by certain of the Company's stockholders.
Long-term debt maturing in each of the years ended December 31, 1994 is as
follows:
F-23
82
Year Ending December 31,
- ------------------------
1995 $ 264,037
1996 290,242
1997 319,048
1998 350,713
1999 141,323
---------
Total 1,365,363
Less current portion (264,037)
Long-term debt $1,101,326
=========
In connection with the personal guarantee of bank indebtedness, as described
above, the guaranteeing stockholders were issued stock options (see Note 7).
5. DUE TO STOCKHOLDERS
Due to stockholders at December 31, 1994 and 1993 consisted of notes payable to
the stockholders of the Company. These notes mature during 1997 ($885,000), 1998
($614,997) and 1999 ($456,250) and bear interest at the rate of 6.35 percent per
annum payable annually on the anniversary date of the notes. Accrued interest
related to such notes aggregated $85,974 and $61,222 at December 31, 1994 and
1993, respectively, and is included in the balance sheet caption "Interest
payable to stockholders".
6. CAPITAL LEASE OBLIGATIONS
The Company leases equipment from a partnership in which the partners are also
stockholders of the Company. These leases expire during 1997, 1998 and 1999 and
are accounted for as capital leases as a result of certain provisions in the
lease agreements. Future minimum lease payments, by year and in the aggregate,
and the present value of the future minimum lease payments at December 31, 1994
are as follows:
F-24
83
Year Ending December 31,
- ------------------------
1995 $ 408,500
1996 408,500
1997 333,984
1998 57,695
1999 19,970
---------
Total future minimum lease payments 1,228,649
Less amount representing interest (402,626)
---------
Present value of future minimum lease
payments (including $208,194 classified as
current) $ 826,023
=========
At December 31, 1994 and 1993, the net book value of equipment held under
capital leases aggregated $618,154 and $711,968, respectively. Also, accrued
interest related to such capital lease obligations at December 31, 1994 and 1993
aggregated $18,753 and $19,298, respectively, and is included in the balance
sheet caption "Interest payable to stockholders".
7. COMMON STOCK
During January 1994, the Company increased the number of shares authorized for
issuance from 5,000,000 to 10,000,000.
During 1994, the Company sold an aggregate of 50,000, 456,250 and 414,390 shares
of its common stock to new and existing stockholders for $50,000, $1,368,750 and
$2,071,950, respectively. In connection with these private placements, the
stockholders loaned the Company a total of $486,250 (see Note 5).
During 1993, the Company sold an aggregate of 1,025,000 and 1,500,000 shares of
its common stock to existing stockholders for $410,000 and $1,500,000,
respectively. In connection with these private placements, the stockholders
loaned the Company a total of $614,997 (see Note 5).
The shareholders' agreement contains provisions which limit the transfer of the
Company's common stock and grant the stockholders certain "first refusal",
"piggyback" and "demand" registration rights.
In connection with the above transactions, the Company issued an additional
50,000 and 631,250 shares during 1994 and 1993, respectively, to certain
management members in consideration for services rendered. Accordingly, the
Company recorded a charge to operations and a credit to common stock for the
fair market value of the shares at the time of issuance. Such amounts aggregated
$150,000 and $202,000 during 1994 and 1993, respectively.
F-25
84
On June 25, 1994, the Company issued options to all stockholders of record as of
May 6, 1994 to purchase a total of 1,500,000 shares of the Company's common
stock in connection with their personal guarantee of bank indebtedness as
described in Note 4. The options entitle the holder to purchase shares at $1 per
share and are exercisable for a two year period commencing 18 months from the
date of grant. Each optionee received options to purchase shares of the
Company's common stock in proportion to their ownership interest immediately
prior to the grant of such options. Accordingly, upon exercise of all of the
options, each stockholders' ownership interest would remain unchanged relative
to each other. In connection with this transaction, the Company has recorded a
charge to operations for $250,000, which, in management's opinion, represents
the estimated value of the consideration received in exchange for their personal
guarantees. Such amount is included in the expense caption "General and
administrative" in the statement of operations.
8. INCOME TAXES
At December 31, 1994, the Company has a Federal tax loss carryforward of
approximately $3,800,000 expiring during 2009. Also, at such date, the Company
has a New Jersey tax loss carryforward of approximately $6,877,000, expiring
between 1999 and 2001. The difference between the accumulated deficit of
$7,583,070 and the state tax loss carryforward of $6,877,000 at December 31,
1994 relates principally to the capitalization of start-up expenses for income
tax purposes, the loan guarantee fee described in Note 7, premiums on officers'
life insurance and depreciation and amortization. The New Jersey and Federal
income tax loss carryforwards differ since the Company was taxed as an S
Corporation for Federal income tax purposes prior to January 1, 1994.
In accordance with SFAS No. 109, the Company has computed the components of
deferred income taxes as follows:
Deferred tax benefits:
Federal $1,081,000
New Jersey 619,000
---------
Total 1,700,000
Less valuation allowance (1,700,000)
---------
Net effect $ 0
==========
At December 31, 1994, a valuation allowance of $1,700,000 has been provided
since the realization of the deferred tax benefits are not more likely than not.
The Company's deferred tax benefits were generated principally as a result of
such losses.
F-26
85
9. COMMITMENTS
OPERATING LEASES - The Company is obligated under two non-cancelable operating
lease agreements for the rental of its facilities which expire in July 1999 and
May 2000. The lease agreements provide that the Company pay its proportionate
share of building maintenance, real estate taxes and similar items. At December
31, 1994 minimum annual rentals are as follows:
Year Ending December 31,
- ------------------------
1995 $ 199,349
1996 231,984
1997 231,984
1998 231,984
1999 216,719
Thereafter 81,395
-----------
Total $ 1,193,415
===========
Rent expense for the years ended December 31, 1994 and 1993 aggregated
approximately $102,600 and $100,800, respectively.
EMPLOYMENT AGREEMENTS - The Company is obligated under several employment
agreements, expiring in March 1997 through November 1999. Minimum annual
compensation under such agreements at December 31, 1994 is approximately as
follows:
Year Ending December 31,
- ------------------------
1995 $ 456,927
1996 486,494
1997 316,169
1998 306,336
1999 173,440
-----------
Total $ 1,739,366
===========
In addition, certain of such employment agreements provided that the individuals
receive shares of the Company's common stock as consideration for services
rendered (see Note 7).
LEASEHOLD IMPROVEMENTS - In connection with certain modifications to its
manufacturing facility, the Company is contractually obligated for approximately
$140,000 in additional leasehold improvements at December 31, 1994.
10. SUBSEQUENT EVENTS
During February and March 1995, the Company sold an additional 64,400 shares of
its common stock at $5 per share to private
F-27
86
investors for an aggregate of $322,000. Also, during such period, certain
stockholders loaned the Company an additional $1,200,000. In connection with
these loans, such stockholders were granted options to purchase, within a 2 year
period from the grant date, a total of 240,000 shares of the Company's common
stock at $5 per share.
During February 1995, the Company amended its lease agreement relating to its
manufacturing facility at 400 Campus Drive to include an additional 15,230
square feet of adjoining space. In connection with such amendment, the Company
was granted an option, exercisable on June 1, 1998, to purchase this facility
for a minimum of $2,088,955, subject to increases for the percentage change in
the Consumer Price Index ("CPI") from June 1, 1995 (the "Base CPI") through the
month of closing, up to a maximum of $2,340,000. Also, the Company was granted a
second option (the "Second Option"), exercisable on June 1, 2000 to purchase
such facility for $2,088,955 subject to increases for the percentage change in
the Base CPI through the month of closing. The Second Option contains no maximum
purchase price.
During February 1995, the Company entered into an agreement with an entity to
assist the Company in raising additional expansion capital of approximately $ 15
million dollars. In connection with such agreement, the Company is obligated to
pay this entity a minimum of $75,000 (increased to $350,000 under certain
circumstances) and a maximum of approximately $1,000,000, depending upon the
amount of financing.
- --------------------------------------------------------------------------------
F-28
87
HALLMARK PHARMACEUTICALS, INC.
- ------------------------------
BALANCE SHEETS
MARCH 31, 1996 (UNAUDITED) AND DECEMBER 31, 1995
- ------------------------------------------------
MARCH 31, DECEMBER 31,
1996 1995
--------- ------------
(UNAUDITED)
ASSETS
- ------
CURRENT ASSETS
Cash $ 2,825 $ 18,503
Accounts receivable 836,819
Inventories 131,977 769,412
Prepaid expenses 17,623 49,232
------------ ------------
Total current assets 989,244 837,147
PROPERTY AND EQUIPMENT - NET 2,893,964 3,118,927
DEPOSITS ON EQUIPMENT 31,676 32,676
DEFERRED FINANCING COSTS 347,000 347,000
OTHER ASSETS - NET 70,481 66,225
------------ ------------
TOTAL $ 4,332,365 $ 4,401,975
============ ============
LIABILITIES AND STOCKHOLDERS'
DEFICIENCY
----------
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 420,644 $ 290,121
Due to Duramed Pharmaceuticals, Inc. 2,010,012 900,000
Due to affiliate 215,000 100,000
Interest payable 256,072 163,340
Note payable to bank 171,727 171,727
Current portion of long-term debt 343,320 289,631
Current portion of capital lease obligations 323,942 303,472
Current portion of due to stockholders 2,557,944 1,754,124
------------ ------------
Total current liabilities 6,298,661 3,972,415
------------ ------------
LONG-TERM DEBT 741,304 817,859
------------ ------------
CAPITAL LEASE OBLIGATIONS 410,473 496,371
------------ ------------
DUE TO STOCKHOLDERS 3,493,391 4,191,707
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIENCY:
Common stock-no par value;
authorized 10,000,000 shares;
issued and outstanding 6,156,240 shares at
March 31, 1996 and 6,106,240 shares at
December 31, 1995 7,372,100 7,322,100
Accumulated deficit (13,983,564) (12,398,477)
------------ ------------
Stockholders' deficiency (6,611,464) (5,076,377)
------------ ------------
TOTAL $ 4,332,365 $ 4,401,975
============ ============
SEE NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS.
F-29
88
HALLMARK PHARMACEUTICALS, INC.
- ------------------------------
STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
- --------------------------------------------------
THREE MONTHS ENDED MARCH 31,
1996 1995
----------- -----------
NET SALES $ 836,819 $ --
COST OF GOODS SOLD 1,150,959 --
----------- -----------
GROSS LOSS (314,140) --
----------- -----------
OPERATING EXPENSES:
Research and development 529,484 414,689
Depreciation and amortization 268,857 264,730
General and administrative 275,564 265,244
Interest expense 197,042 126,651
----------- -----------
1,270,947 1,071,314
----------- -----------
NET LOSS ($1,585,087) ($1,071,314)
=========== ===========
NET LOSS PER SHARE ($ 0.26) ($ 0.18)
=========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING 6,122,907 6,021,307
=========== ===========
SEE NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS.
F-30
89
HALLMARK PHARMACEUTICALS, INC.
- ------------------------------
STATEMENT OF STOCKHOLDERS' DEFICIENCY (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1996
- ------------------------------------------------
COMMON STOCK ACCUMULATED
SHARES AMOUNT DEFICIT
------------ ------------ ------------
BALANCES, DECEMBER 31, 1995 $ 6,106,240 $ 7,322,100 ($12,398,477)
Sale of common stock at $1.00 per share 50,000 50,000
Net loss for the period (1,585,087)
------------ ------------ ------------
BALANCES, MARCH 31, 1996 $ 6,156,240 $ 7,372,100 ($13,983,564)
============ ============ ============
SEE NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS.
F-31
90
HALLMARK PHARMACEUTICALS, INC.
- ------------------------------
STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
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THREE MONTHS ENDED MARCH 31,
1996 1995
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CASH FLOWS USED IN OPERATING
ACTIVITIES:
Net loss $(1,585,087) $(1,071,314)
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Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 268,857 264,730
Changes in operating assets and liabilities:
Accounts receivable (836,819)
Inventories 637,435
Prepaid expenses 31,609 55,628
Other assets (7,500) (18,923)
Accounts payable and accrued expenses 130,523 (8,098)
Interest payable 92,732 (50,177)
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Net adjustments 316,837 243,160
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Net cash used in operating activities (1,268,250) (828,154)
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CASH FLOWS USED IN INVESTING
ACTIVITY-PURCHASE OF (AND DEPOSITS
ON) PROPERTY AND EQUIPMENT (39,650) (796,137)
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CASH FLOWS FROM FINANCING
ACTIVITIES:
Due to Duramed Pharmaceuticals, Inc. 1,110,012
Due to affiliate 115,000
Payment of long-term debt (22,866) (62,657)
Reduction of capital lease obligations (65,428) (52,818)
Due to stockholders:
Proceeds 150,000 1,200,000
Payments (44,496)
Issuance of common stock 50,000 322,000
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Net cash provided by financing activities 1,292,222 1,406,525
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INCREASE (DECREASE) IN CASH (15,678) (217,766)
CASH, BEGINNING OF PERIOD 18,503 444,946
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CASH, END OF PERIOD $ 2,825 $ 227,180
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SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid during the period for interest $ 104,310 $ 176,828
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NON-CASH FINANCING AND
INVESTING ACTIVITY:
Acquisition of assets held under capital
leases $ 0 $ 127,955
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SEE NOTES UNAUDITED INTERIM FINANCIAL STATEMENTS.
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HALLMARK PHARMACEUTICALS, INC.
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NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS
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1 INTERIM FINANCIAL DATA
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, such financial
statements contain all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation. Operating results for the three
month period ended March 31, 1996 are not necessarily indicative of the results
that may be expected for the year ended December 31, 1996. For further
information, refer to the financial statements for the year ended December 31,
1995 and notes thereto included herein.
During the three month period ended March 31, 1996, net sales consisted of
sales of the Company's first product, Captopril, to Duramed Pharmaceuticals,
Inc. ("Duramed") in accordance with the terms of a distribution agreement
between the parties. As the result of such sales, the Company is no longer
considered to be in the development stage.
2. GOING CONCERN
The accompanying financial statements have been prepared on a going concern
basis which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As of March 31, 1996, the Company
has a working captial deficit of approximately $5,309,000 and an accumulated
deficit since organization of approximately $13,984,000. The Company's ability
to continue its research and development activities and to potentially achieve
profitable operations is dependent upon obtaining adequate financing. These
factors, among others, raise substantial doubt as to the Company's ability to
continue as a going concern at March 31, 1996. These financial statements do
not include any adjustments which might result from the outcome of this
uncertainty.
During the quarter ended March 31, 1996, the Company received additional loans
from Duramed of approximately $1,110,000 to continue to finance its operations,
as well as $150,000 in additional stockholder loans and $50,000 from sale of
its common stock.
On April 11, 1996, the Company entered into a definitive agreement with Duramed
providing for the acquisition of assets and assumption of certain liabilities
of the Company. Under the
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terms of such agreement, the Company would receive 640,000 shares of Duramed
common stock and warrants to purchase 400,000 shares of Duramed common stock
at a purchase price of $25 per share. Consummation of the transaction is
subject to certain customary conditions, including approval of the Company's
shareholders and certain regulatory agencies and other third parties.
3. NET LOSS PER SHARE
Net loss per share was computed based on the weighted average number of common
shares outstanding during the respective periods and does not include the
assumed exercise of stock options, since such effect would be anti-dilutive.
4. INVENTORIES
Inventories consist of the following:
March 31, December 31,
1996 1995
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Finished goods $ - $ 701,949
Raw material 131,977 34,514
Packaging materials - 32,949
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Total $ 131,977 $ 769,412
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5. CONTINGENCIES
In February 1995, the Company entered into an agreement with an entity to
assist the Company in raising additional expansion capital for professional
fees ranging from a minimum of $75,000 (increased to $350,000 under certain
circumstances), to a maximum of $1,000,000, depending upon the amount of the
financing. Such agreement was terminated by the Company during August 1995 and
all invoiced professional fees from this entity (aggregating approximately
$112,000) were paid by the Company. Subsequent to the termination of this
agreement, the Company received notice from this entity claiming additional
professional fees would be due if a transaction with Duramed were consummated.
Legal counsel is currently investigating the nature of this potential claim and
at present, cannot assess the likelihood of the Company's liability should a
claim be filed. The financial statements do not include any liability relating
to this matter.
In October 1995, the Company entered into an agreement with an entity to assist
the Company in evaluating the negotiating potential financing offers. A final
fee of $50,000 would be due to this entity upon the closing of such a
transaction. No provision has been made for such fee as of March 31, 1996.
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