1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File NO. 0-15242
DURAMED PHARMACEUTICALS, INC.
Incorporated Under the IRS Employer I.D.
Laws of the State No. 11-2590026
of Delaware
7155 East Kemper Road
Cincinnati, Ohio 45249
(513) 731-9900
Indicate by checkmark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
------- -------
Common Stock, $.01 par value per share:
Shares Outstanding as of August 11, 1997 15,414,706
Page 1 of 19 pages
2
DURAMED PHARMACEUTICALS, INC.
INDEX
Page
PART I. Financial Information
- -------------------------------
ITEM 1. Financial Statements (Unaudited)
Consolidated Balance Sheets....................................................... 3-4
Consolidated Statements of Operations............................................. 5
Consolidated Statements of Cash Flows............................................. 6
Consolidated Statements of Stockholders'
Equity.......................................................................... 7
Notes to Consolidated Financial
Statements...................................................................... 8-11
ITEM 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations................................ 12-17
PART II. Other Information
ITEM 2. Changes in Securities.............................................................. 18
ITEM 6. Exhibits and Reports on Form 8-K................................................... 18
SIGNATURES..................................................................................... 19
- 2 -
3
DURAMED PHARMACEUTICALS, INC.
Consolidated Balance Sheets
Assets
June 30, December 31,
1997 1996
-------------------- -------------------
Unaudited
Current assets:
Cash and cash equivalents $ 3,396,382 $ 1,811,182
Trade accounts receivable,
less allowance for doubtful accounts:
$1,422,750 and $1,339,000,
in 1997 and 1996 respectively 8,542,974 7,460,452
Inventories 10,712,113 13,188,627
Prepaid expenses and other assets 2,527,000 1,455,251
-------------------- -------------------
Total current assets 25,178,469 23,915,512
Property, plant and equipment:
Land 1,000,000 1,000,000
Buildings and improvements 18,212,730 18,211,740
Equipment, furniture and fixtures 24,131,741 23,589,782
-------------------- -------------------
43,344,471 42,801,522
Less accumulated depreciation
and amortization (14,480,254) (13,499,466)
-------------------- -------------------
Property, plant and equipment - net 28,864,217 29,302,056
Deposits and other assets 883,015 416,288
-------------------- -------------------
Total assets $ 54,925,701 $ 53,633,856
==================== ===================
See accompanying notes.
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4
DURAMED PHARMACEUTICALS, INC.
Consolidated Balance Sheets
Liabilities and Stockholders' Equity
June 30, December 31,
1997 1996
-------------------- --------------------
Unaudited
Current liabilities:
Accounts payable $ 4,891,967 $ 4,461,434
Accrued liabilities 6,983,792 5,178,068
Current portion of long-term
debt and other liabilities 3,634,190 3,363,798
Current portion of capital lease obligations 1,203,139 1,113,114
-------------------- --------------------
Total current liabilities 16,713,088 14,116,414
-------------------- --------------------
Long-term debt, less current portion 8,177,708 9,989,461
Long-term capital leases, less current portion 1,446,043 1,727,587
Other long-term liabilities --- 161,171
Mandatory redeemable convertible preferred stock 10,000,000 ---
-------------------- --------------------
Total liabilities 36,336,839 25,994,633
-------------------- --------------------
Stockholders' equity:
Convertible Preferred Stock Series B, par value $.001;
outstanding shares in 1997 and 1996 --- 6
Common stock - authorized 50,000,000 shares,
par value $.01; 14,839,130 and 14,603,516 shares in
1997 and 1996 respectively 148,391 146,035
Additional paid-in capital 81,238,706 80,073,586
Accumulated deficit (62,798,235) (52,580,404)
-------------------- --------------------
Total stockholders' equity 18,588,862 27,639,223
-------------------- --------------------
Total liabilities and stockholders' equity $ 54,925,701 $ 53,633,856
==================== ====================
See accompanying notes.
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5
DURAMED PHARMACEUTICALS, INC.
Consolidated Statement of Operations
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
------------------ ------------------- -------------------- ------------------
Net sales $ 11,692,609 $ 11,785,920 $ 22,431,400 $ 22,486,118
Cost of goods sold 8,372,190 7,238,651 16,237,782 15,063,851
------------------ ------------------- -------------------- ------------------
Gross profit 3,320,419 4,547,269 6,193,618 7,422,267
------------------ ------------------- -------------------- ------------------
Operating expenses:
Product development 3,710,326 2,757,487 10,082,546 3,856,803
Selling 810,669 846,401 1,789,383 1,857,405
General and administrative 1,894,671 2,148,423 3,892,886 4,522,964
------------------ ------------------- -------------------- ------------------
6,415,666 5,752,311 15,764,815 10,237,172
------------------ ------------------- -------------------- ------------------
Operating loss (3,095,247) (1,205,042) (9,571,197) (2,814,905)
Interest expense 364,222 567,043 646,634 1,118,275
------------------ ------------------- -------------------- ------------------
Loss before
preferred dividends (3,459,469) (1,772,085) (10,217,831) (3,933,180)
Preferred dividends 35,616 103,651 35,616 378,569
------------------ ------------------- -------------------- ------------------
Net loss
to common shareholders $ (3,495,085) $ (1,875,736) $ (10,253,447) $ (4,311,749)
================== =================== ==================== ==================
Loss per share $ (0.24) $ (0.19) $ (0.70) $ (0.46)
================== =================== ==================== ==================
Weighted average number of
shares outstanding 14,786,221 10,122,713 14,715,272 9,344,296
================== =================== ==================== ==================
See accompanying notes.
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6
DURAMED PHARMACEUTICALS, INC.
Consolidated Statements of Cash Flows
(UNAUDITED)
Six months ended June 30,
1997 1996
------------ ------------
Cash flows from operating activities:
Net loss $(10,217,831) $ (3,933,180)
Adjustments to reconcile net loss to net cash
(used in) operating activities:
Depreciation and amortization 1,029,792 1,121,311
Recognition of deferred revenues -- (500,000)
Provision for doubtful accounts 83,258 82,483
Common stock issued in connection with
employee compensation plans 97,179 97,237
Changes in assets and liabilities:
Trade accounts receivable (1,165,780) (1,947,833)
Inventories 2,476,514 (4,955,885)
Prepaid expenses
and other assets (812,344) (419,860)
Accounts payable 430,533 359,416
Accrued liabilities 2,027,310 (28,818)
Other (154,527) (42,521)
------------ ------------
Net cash (used in) operating activities (6,205,896) (10,167,650)
------------ ------------
Investing activities:
Capital expenditures (589,463) (809,738)
Refunds (deposits) on capital equipment (55,285) (21,125)
------------ ------------
Net cash (used for) investing activities (644,748) (830,863)
------------ ------------
Cash flows from financing activities:
Payments of long-term debt, including current maturities (1,476,162) (5,609,741)
Net increase (decrease) in revolving credit facility -- 3,266,452
Long-term borrowings 475,805 2,074,223
Issuance of preferred stock - net 9,481,190 10,857,367
Issuance of common stock 212,213 807,770
Preferred stock dividends paid (257,202) (397,658)
------------ ------------
Net cash provided by financing activities 8,435,844 10,998,413
------------ ------------
Net change in cash 1,585,200 (100)
Cash at beginning of period 1,811,182 2,600
------------ ------------
Cash at end of period $ 3,396,382 $ 2,500
============ ============
Supplemental cash flow disclosures:
Interest paid $ 661,759 $ 1,093,823
See accompanying notes.
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7
DURAMED PHARMACEUTICALS, INC.
Consolidated Statement of Stockholders' Equity
(UNAUDITED)
Preferred Stock Common Stock Additional
--------------- ---------------------- Paid-In Accumulated
Series B Shares Amount Capital Deficit Total
--------------- ---------------------- ---------- ------------ ----------
BALANCE - DECEMBER 31, 1996 $ 6 14,603,516 $146,035 80,073,586 $(52,580,404) 27,639,223
Issuance of stock in connection
with benefit plans 13,859 138 97,041 97,179
Issuance of stock in connection
with stock options 71,796 718 211,495 212,213
Issuance of stock in settlement
of certain liabilities 89,369 894 892,800 893,694
Conversion of Series B
Preferred Stock (6) 60,590 606 (600) --
Series E Preferred Stock dividend (35,616) (35,616)
Net loss for the six month
period ended June 30, 1997 (10,217,831) (10,217,831)
--------------- ---------- --------- ---------- ------------ ----------
BALANCE - JUNE 30, 1997 -- 14,839,130 $148,391 $ 81,238,706 $(62,798,235) $18,588,862
=============== ========== ========= ========== ============ ==========
See accompanying notes.
- 7 -
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Interim Financial Data
- ----------------------------------
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q 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, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the six month period ended June 30, 1997
are not necessarily indicative of the results that may be expected for the year
ended December 31, 1997. For further information, refer to the consolidated
financial statements and notes thereto included in the Annual Report of Duramed
Pharmaceuticals, Inc. (the "Company" or "Duramed") on Form 10-K/A Amendment No.
1 for the year ended December 31, 1996, as amended (the "1996 10-K").
Note 2: Loss Per Share
- ----------------------------
Loss per share is computed using the weighted average of common shares
outstanding only. Recognition of outstanding options, warrants and convertible
preferred stock in computing loss per share is not required as their effect
would be antidilutive.
Note 3: Inventories
- -------------------------
Inventories are stated at the lower of cost (first-in, first-out) or market.
Components of inventories include:
June 30, December 31,
1997 1996
--------------- ---------------
Raw materials $ 6,955,164 $ 6,767,105
Work-in-process 407,405 452,905
Finished goods 4,403,414 7,520,247
Reserves (1,053,870) (1,551,630)
--------------- ---------------
Net inventory $ 10,712,113 $ 13,188,627
=============== ================
The Company had manufactured a commercial launch quantity of its conjugated
estrogens product which was developed in accordance with the Food and Drug
Administration's (FDA) guidance established in 1991 and current official U. S.
Pharmacopeia (USP) compositional standards. On May 5, 1997, the Company was
notified by the FDA that at this time, it would not approve a generic conjugated
estrogens product developed in accordance with the guidance
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9
established by the FDA in 1991 and current official USP compositional standards.
The Company is pursuing various options with respect to its conjugated estrogens
product and related inventory. In view of the FDA's decision the Company
determined that it was prudent to write off the generic conjugated estrogens
inventory, accordingly, a charge in the amount of $3,465,000 was recorded in the
first quarter results and was reflected in product development expenses.
The product currently meets the required stability criteria and will be retained
until such time as it no longer passes those tests. In the event the Company is
ultimately successful in obtaining approval for the product, some, or all of the
inventory write-off may be recovered.
Note 4: Debt and Other Long-Term Liabilities
- ---------------------------------------------------
Debt
- ----
June 30, December 31,
1997 1996
--------------- --------------
Mandatory redeemable
convertible preferred stock $ 10,000,000 $ --
Revolving credit facility -- --
Manufacturing facility expansion loan 5,225,000 5,500,000
Equipment liability 4,000,000 4,000,000
Equipment loan 1,721,301 2,118,979
Note payable to State of Ohio 786,563 877,342
Installment notes payable 79,034 124,415
--------------- --------------
21,811,898 12,620,736
Less amount classified as current 3,634,190 2,631,275
--------------- --------------
$ 18,177,708 $ 9,989,461
=============== ==============
During June 1997, the Company raised $10.0 million ($9.5 million net of issuance
costs) through an offering of 100,000 shares of 5% Cumulative Convertible
Preferred Stock, Series E ("Series E Stock"). The Series E Stock has a stated
value of $100 and is convertible at the option of the holder into shares of the
Company's common stock at a discount to the average of the closing bid prices of
the common stock over the ten day trading period ending the day prior to the
date of conversion. Half of the shares of Series E Stock became convertible on
August 3, 1997, the remaining half become convertible on September 2, 1997. The
number of common shares to be issued is limited to 2,956,246. Any Series E Stock
which remains outstanding thereafter would be subject to cash redemption. The
cash redemption requirement is computed by multiplying the number of common
shares which the Series E holder would be entitled upon conversion by the
average of the closing bid prices of the Company's common
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10
shares for the ten day trading period ending the day prior to the date of
redemption. Any shares of Series E Preferred Stock remaining outstanding on June
4, 1999 are required to be redeemed for cash at the stated amount plus all
accrued and unpaid dividends. As of June 30, 1997 the $10 million Preferred
Stock has been classified as debt since it is convertible at the option of the
holder and is required to be redeemed if not converted. Subsequent to June 30,
1997 and through August 11, 1997, $1,608,000 of Series E Stock had been
converted to 570,040 shares of the Company's common stock at an average
conversion price of $2.82 per common share.
The amended terms of the revolving credit facility permit the Company to borrow
up to $6.5 million based upon eligible collateral ($10.7 million as of August
11, 1997) and the Company's current financial condition and operating
performance. Borrowings on the revolving credit facility bear interest at the
rate of prime plus 1%, and are collateralized by substantially all assets of the
Company including inventory, receivables and the manufacturing facility. As of
August 11, 1997, the Company had no borrowings outstanding under its revolving
credit facility.
The manufacturing facility expansion loan is a ten year $5.5 million facility
which provided a portion of the financing for the expansion of the Company's
manufacturing facility and is supported by a loan guaranty from Johnson &
Johnson. Principal payments on this loan commenced on January 1, 1997. Interest
is payable monthly based upon the prime rate.
The equipment liability of $4.0 million at June 30, 1997 represents an
obligation to Ortho-McNeil Pharmaceutical Corporation ("Ortho-McNeil") for
equipment that was provided in connection with the Company's facility expansion
that was completed in 1995. Since the Company did not receive regulatory
approval to market its conjugated estrogens product, the Company will be
required, at Ortho-McNeil's option, either to return the equipment or to
purchase it at fair market value. The Company and Ortho-McNeil are currently in
negotiations, which could revise the terms of the agreement and the repayment
schedule for this equipment. However, based on the current agreement terms, if
Ortho-McNeil requires Duramed to purchase the equipment, the purchase price plus
interest at the current prime rate will be payable on a quarterly basis over a
three year period. The equipment loans represent financing by the Company's bank
for equipment purchases, bear interest at the rate of prime plus 1%, and require
monthly installments of principal and interest. One of the loans is payable over
a three year term and requires a monthly principal payment of $42,355 plus
interest through April 1, 1999; the other loan is payable over a five year term
and requires a monthly principal payment of $23,925 plus interest through March
1, 2000. These loans are collateralized by the assets financed.
- 10 -
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The note payable to the State of Ohio is secured by the Company's manufacturing
facility. The loan bears interest at 7.5%. Minimum monthly payments of $20,394
are required through November 1, 2000, along with certain other payments as
defined by the agreement. This debt is personally guaranteed by a former officer
and by a director.
Other long-term debt also includes facilities of varying amounts and terms which
are generally collateralized by the assets financed.
The Company's other long-term liabilities consist of the following:
Other Long-Term Liabilities June 30, December 31,
- --------------------------- 1997 1996
--------------- ----------------
Abandoned facility obligation - net -- $ 893,694
Less amount classified as current -- 732,523
--------------- ----------------
$ -- $ 161,171
=============== ================
The abandoned facility obligation represented the amounts due, net of sublease
income, under terms of a lease which extended through September 30, 1998. Due to
the Company's financial condition at the time, the Company was unable to meet
its commitments under the lease and vacated the facility in 1991. During the
first quarter of 1997, the Company settled the remaining obligation through the
issuance of 89,369 shares of Duramed common stock.
- 11 -
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
- ---------------------
CONJUGATED ESTROGENS UPDATE
The Company has had an application for an Abbreviated New Drug Approval ("ANDA")
on file with the FDA for a generic conjugated estrogens product since September
1994. The product was developed based upon the bioequivalency guidance
established by the FDA in 1991, which had been reaffirmed repeatedly over the
past six years, and current official USP compositional standards.
On May 5, 1997, the Company was notified by the FDA that at this time it would
not approve a generic conjugated estrogens product based upon the guidance
established by the FDA in 1991 and current official USP compositional standards.
In view of the FDA's decision the Company determined that it was prudent to
write off the generic conjugated estrogens inventory, accordingly, a charge in
the amount of $3,465,000 was recorded in the first quarter results and was
reflected in product development expenses. The product currently meets the
required stability criteria and will be retained until such time as it no longer
passes those tests. In the event the Company is ultimately successful in
obtaining approval for the product, some or all of the inventory write-off may
be recovered.
The Company filed a Citizen Petition with the U.S. Food and Drug Administration
on July 30, 1997, asking that Premarin(R) brand of conjugated estrogens tablets
be declared deficient in its labeling in that it fails to identify its active
ingredients. The petition requests that the FDA require the manufacturer of
Premarin(R), Wyeth Ayerst Laboratories, to amend the labeling to comply with the
federal requirements and to withhold approval of any new drug applications for
new dosage strengths, new indications for Premarin(R), and any drug combinations
that include Premarin(R), until the drug is adequately characterized and its
active ingredients definitively identified.
On August 4, 1997, the Company filed an Investigational New Drug ("IND")
application for the initiation of a clinical program to evaluate synthetic
conjugated estrogens in the treatment of postmenopausal symptoms. The
satisfactory completion of this clinical research effort will provide the
efficacy information which will constitute the basis for filing of a New
Drug Application ("NDA") for the Company's product scheduled for the first
quarter of 1998.
As previously disclosed, the Company has agreements related to its generic
conjugated estrogens product with Ortho-McNeil and with Schein Pharmaceutical,
Inc. ("Schein"). As a result of approval of the generic conjugated estrogens
product not having been obtained by June 30, 1996, under the
- 12 -
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Company's agreements with Ortho-McNeil the Company may be required to purchase
certain equipment from Ortho-McNeil or to return such equipment to Ortho-McNeil
and may lose distribution rights to certain Ortho-McNeil products. These matters
are described under "Operating Expenses -- Other Matters," and under "Liquidity
and Capital Resources." The Company's agreement with Schein remains in place as
the Company continues to seek approval of an Abbreviated New Drug Application
for its generic conjugated estrogens product. The Company and Schein are in
disagreement with respect to the applicability of this agreement to the NDA
which will be sought for the Company's conjugated estrogens product. On August
7, 1997, the Company filed a Complaint for Declaratory Judgment with the Court
of Common Pleas, Hamilton County, Ohio, seeking a declaration that the agreement
only applies to a product approved and marketed on the basis of an ANDA.
NET SALES
Net sales for the three and six month periods ended June 30, 1997 were
comparable to the same periods in 1996. The Company has agreements with several
manufacturers including Ortho-McNeil, whereby the Company markets and
distributes their generic prescription drug products. The terms of these
agreements vary, but typically provide for a sharing of profits between the
Company and the manufacturer. The percentage of the Company's sales comprised of
products marketed for others were 35%, for both the three and six month periods
ended June 30, 1997, as compared to 34% for the same periods in 1996.
Recognition of deferred revenues from Ortho-McNeil contributed $250,000 and
$500,000 to net sales for the three and six month periods of 1996.
GROSS MARGIN
The gross margin, and the corresponding percentage of net sales, was $3.3
million (28.4%) and $6.2 million (27.6%) for the three and six month periods
ending June 30, 1997 as compared to $4.5 million (38.6%) and $7.4 million
(33.0%) for the same periods in 1996. Lower gross margins in 1997 were due
primarily to the product sales mix and lower sales prices on certain of the
Company's products. The gross margins were favorably impacted by recognition of
deferred revenues from Ortho-McNeil of $250,000 and $500,000 for the three and
six month periods of 1996. The deferred revenue recognized in 1996 relates to
the $2.0 million received by the Company in 1994 from Ortho-McNeil. The revenue
was amortized into income over a period (1995 - $1.5 million; 1996 - $.5
million) to properly match costs incurred by the Company in pursuit of approval
and commercial launch of its generic conjugated estrogens product.
There can be no assurance that, with the Company's current product line, the
present gross margin levels can be maintained if the Company's products,
particularly Methylprednisolone, should experience increased competition.
- 13 -
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OPERATING EXPENSES
Product Development
Excluding the $3,465,000 conjugated estrogens inventory charge during the first
quarter of 1997, product development expenditures increased $.9 million (35%)
and $2.8 million (72%) for the three and six month periods ended June 30, 1997,
as compared to the same periods for 1996. The increase was due to spending for
bioequivalency studies, milestone payments to product development partners and
the expansion of the Company's product development capabilities through the
acquisition of Hallmark Pharmaceuticals, Inc. ("Hallmark"). The increase in
product development expenditures reflects the Company's commitment to expanding
its product line.
The Company's product development program is broad-based with product
development activities in Cincinnati, the Hallmark division in New Jersey, Kiel
Labs in Georgia and Duramed Europe in Oxford, England. The product development
emphasis is on products and therapeutic categories such as hormones, oncology,
cardiovascular and pain. These products are being developed through
sophisticated technology including patented control release delivery systems. In
addition to nine product applications awaiting approval at the FDA, the Company
has approximately 30 active product development projects which the Company
believes will result in filed applications by the end of 1998. The Company
received approval of its Prochlorperazine product which is the generic
equivalent of Compazine(R) on May 2, 1997. The Company filed the application for
this product on July 28, 1996 and began shipments in the third quarter of 1997,
following completion of process validation. Product development expenditures in
the 1996 period are net of reimbursements received from Schein pursuant to the
terms of a contractual agreement in connection with the scientific support of
the ANDA conjugated estrogens product.
Selling
Excluding a charge of $300,000 in the first quarter of 1997, in connection with
certain contractual commitments associated with its conjugated estrogens
product, the Company's sales and marketing expenses in the first six months of
1997 decreased by $368,000 (20%) over the same period in 1996. The reduction in
selling expenses is a reflection of the Company's steps taken to reduce
operating expenses.
General and Administrative
The decrease in general and administrative expenses for the three and six month
periods of 1997 compared to the same periods in 1996 was due primarily to a
reduction of staff positions and attendant costs. The expense levels in both the
three and six month periods reflect comparable levels of legal and consulting
costs associated with responding to various issues in connection with its
Abbreviated New Drug Application ("ANDA") for conjugated estrogens.
- 14 -
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Net Interest Expense
Interest expense for the three and six month periods ended June 30, 1997 was
lower compared to the same periods in 1996, due primarily to a reduction in
borrowings under the Company's revolving credit facility.
Income Taxes
Due to the reported net loss in the first half of 1997 and 1996, no provision
for income tax was recorded.
Preferred Dividends
Preferred dividends for the three and six months ended June 30, 1997 were
$35,616, which represented the dividend provision associated with outstanding
Cumulative Convertible Preferred Stock, Series E. Preferred dividends in 1996
represent the dividend provision associated with convertible preferred stock of
other series which converted to common stock in 1996.
Other Matters
Under the terms of agreements with Ortho-McNeil, 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 distribution agreement for each of these products specifies a
term of ten years subject to reduction to three years (if not extended) from the
date of first sale if Duramed's conjugated estrogens product is not approved.
Duramed commenced marketing Estropipate during the fourth quarter of 1993 and
the other Ortho-McNeil products during the fourth quarter of 1994. The Company
is continuing to distribute the products and is discussing an extension of these
rights with Ortho-McNeil. Loss of these distribution rights would likely have a
material adverse effect upon the Company's financial position and results of
operations.
Management believes that it is in the best interest of the Company and its
shareholders to continue its product development program and accordingly plans
to continue its spending on its product development program which will likely
result in operating losses in the range of $3.0 to $5.0 million per quarter
until the Company receives approval on pending product applications and
commences marketing the products. Based on current estimates, the Company does
not anticipate a return to profitable operations until the second half of 1998.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
In June 1997, the Company successfully raised $10.0 million ($9.5 million net of
issuance costs) through an offering of 100,000 shares of 5% Cumulative
Convertible Preferred Stock, Series E. The proceeds from the issuance of Series
E Stock are being used to fund operating activities, including the expanded
product development program.
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The amended terms of the Company's revolving credit facility permits the Company
to borrow up to $6.5 million, based upon eligible collateral ($10.7 million as
of August 11, 1997) unless the Company's operating results substantially improve
or the Company obtains additional sources of financing. As of August 11, 1997
the Company had no borrowings outstanding under the revolving credit facility.
The increase in accounts receivable at June 30, 1997 results from the timing of
purchases by certain customers.
In connection with various agreements related to the Company's conjugated
estrogens product along with the distribution rights for certain products,
Ortho-McNeil provided $2 million in cash and the use of $4 million in equipment
for the Company's hormone replacement therapy ("HRT")facility expansion and
Ortho-McNeil's parent, Johnson & Johnson, guaranteed a $5.5 million construction
loan for the HRT facility expansion. Under the terms of the agreement, if FDA
approval of an ANDA for the conjugated estrogens product is not obtained, the
Company may be required, at Ortho-McNeil's option, either to return the
equipment or to purchase it at its fair market value at that time. Under the
existing agreement, if the Company is required to purchase the equipment, the
purchase price plus interest at the current prime rate will be payable on a
quarterly basis over three years. In the fourth quarter of 1996, the Company
recorded a $4.0 million liability for the equipment provided by Ortho-McNeil. In
view of the FDA's decision in May 1997 not to approve the Company's ANDA, the
Company is discussing all aspects of its current contractual arrangements with
Ortho-McNeil. At this time, the Company cannot predict the outcome of these
discussions.
The Company anticipates that the HRT manufacturing facility expansion and
related equipment will be utilized to commercialize products on file with the
FDA (exclusive of the Company's conjugated estrogens product) as well as other
products under development. Accordingly, the facility and its equipment are an
integral part of the Company's business plan.
Management is encouraged by the results to date from the Company's product
development program and has concluded that it is in the best interests of the
Company and its stockholders for the Company to continue substantial spending
for research and development and for hiring incremental personnel and procuring
necessary equipment to prepare for the production and launch of certain products
on file. Management recognizes that such actions will result in continued
reported losses for the Company until the Company begins to receive anticipated
revenues from products now on file, or to be filed, with the FDA. The Company
does not anticipate substantial revenues from such products before late 1997
and, accordingly, does not anticipate a return to profitable operations until
the second half of 1998. In the meantime, the
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17
Company's product development program will not be supported from the Company's
operations and therefore will require additional capital which may result in
dilution to current shareholders depending on the amount of capital required and
the terms under which it is raised. The extent of the Company's need for
additional capital is dependent on whether the Company receives FDA approval for
products on file with the agency in the timeframes included in its business plan
and the success of other aspects of its business plan. If necessary capital is
not available, implementation of the Company's plans will be restricted or
delayed with a negative effect upon the Company's prospects.
Certain statements in this Form 10-Q constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995,
including those concerning management's expectations with respect to future
financial performance and future events, particularly relating to sales of
current products as well as the introduction of new manufactured and distributed
products. Such statements involve known and unknown risks, uncertainties and
contingencies, many of which are beyond the control of the Company, which could
cause actual results and outcomes to differ materially from those expressed
herein. Factors that might affect such forward-looking statements set forth in
this Form 10-Q include, among others, (i) increased competition from new and
existing competitors and pricing practices from such competitors, (ii) the
amount of funds continuing to be available for internal research and development
and for research and development joint ventures, (iii) research and development
project failures or delays, or delays in, or the lack of obtaining regulatory
approvals and (iv) the ability of the Company to retain and attract personnel in
key operational areas.
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18
PART II - OTHER INFORMATION
Item 2. Changes in Securities
--------------------
On June 4, 1997 the Company issued 100,000 shares of 5% Cumulative Convertible
Preferred Stock, Series E for $10 million ($9.5 million net of issuance costs).
The securities qualify for exemption from registration under section 4(2) of the
Securities Act of 1933. The Series E Stock with a stated value of $100 is
convertible at the option of the holder into shares of the Company's common
stock at a discount to the average of the closing bid prices of the common stock
over the ten day trading period ending the day prior to the date of conversion.
Half of the shares of Series E Stock became convertible on August 3, 1997, the
remaining half become convertible on September 2, 1997. The number of common
shares to be issued is limited to 2,956,246. Any Series E Stock which remains
outstanding thereafter would be subject to cash redemption. The cash redemption
requirement is computed by multiplying the number of common shares which the
Series E holder would be entitled upon conversion by the average of the closing
bid prices of the Company's common shares for the ten day trading period ending
the day prior to the date of redemption. Any shares of Series E Preferred Stock
remaining outstanding on June 4, 1999 are required to be redeemed for cash at
the stated amount plus all accrued and unpaid dividends.
Item 6. Exhibit and Reports on Form 8-K
-------------------------------
(a) Exhibit:
(11) Statement re: Computation of Earnings Per Share
(27) Financial Data Schedule*
(b) Reports on Form 8-K for the quarter ended June 30, 1997: None
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*Contained only in electronic filing with Securities and Exchange Commission.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DURAMED PHARMACEUTICALS, INC.
Dated: August 13, 1997 by: /s/ E. Thomas Arington
-------------------------- ----------------------
E. Thomas Arington
President, Chairman of the Board
Chief Executive Officer
Dated: August 13, 1997 by: /s/ Timothy J. Holt
-------------------------- -------------------
Timothy J. Holt
Senior Vice President - Finance,
Treasurer, Chief Financial Officer
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