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, 1998
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 7, 1998 17,941,773
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 - 10
ITEM 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations. . . . . . . . . 11 - 16
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk . . . . 16
PART II. Other Information
- ---------------------------
ITEM 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . 17 - 18
ITEM 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . 18
ITEM 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . . 18
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
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3
DURAMED PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
June 30, December 31,
1998 1997
---- ----
Unaudited
Current assets:
Cash and cash equivalents $ 3,500 $ 3,500
Trade accounts receivable,
less allowance for doubtful accounts:
$1,472,000 and $1,482,000,
in 1998 and 1997 respectively 8,637,475 8,108,462
Inventories 16,883,610 10,435,942
Prepaid expenses and other assets 2,162,696 2,650,274
----------- -----------
Total current assets 27,687,281 21,198,178
Property, plant and equipment:
Land 1,000,000 1,000,000
Buildings and improvements 18,925,821 18,785,948
Equipment, furniture and fixtures 24,694,472 24,441,717
----------- -----------
44,620,293 44,227,665
Less accumulated depreciation
and amortization 17,038,366 15,808,609
----------- -----------
Property, plant and equipment - net 27,581,927 28,419,056
Deposits and other assets 703,687 508,707
----------- -----------
Total assets $55,972,895 $50,125,941
=========== ===========
See accompanying notes.
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4
DURAMED PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30, December 31,
1998 1997
---- ----
Unaudited
Current liabilities:
Accounts payable $ 3,117,176 $ 4,129,712
Accrued liabilities 5,621,568 4,973,354
Current portion of long-term
debt and other liabilities 2,934,290 6,913,909
Current portion of capital lease obligations 808,185 1,064,210
------------ ------------
Total current liabilities 12,481,219 17,081,185
------------ ------------
Long-term debt, less current portion 14,712,013 10,903,498
Long-term capital leases, less current portion 808,519 1,105,571
Mandatory redeemable convertible preferred stock 12,000,000 150,000
------------ ------------
Total liabilities 40,001,751 29,240,254
------------ ------------
Stockholders' equity:
Common stock - authorized 50,000,000 shares,
par value $.01; 17,924,676 and 17,881,287 shares in
1998 and 1997 respectively 179,246 178,812
Additional paid-in capital 90,685,237 90,728,595
Accumulated deficit (74,893,339) (70,021,720)
------------ ------------
Total stockholders' equity 15,971,144 20,885,687
------------ ------------
Total liabilities and stockholders' equity $ 55,972,895 $ 50,125,941
============ ============
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,
1998 1997 1998 1997
---- ---- ---- ----
Net sales $ 11,681,859 $ 11,692,609 $ 24,422,894 $ 22,431,400
Cost of goods sold 9,078,681 8,372,190 19,366,149 16,237,782
------------ ------------ ------------ ------------
Gross profit 2,603,178 3,320,419 5,056,745 6,193,618
------------ ------------ ------------ ------------
Operating expenses:
Product development 908,273 3,710,326 2,847,989 10,082,546
Selling 685,732 810,669 1,298,821 1,789,383
General and administrative 2,611,744 1,894,671 4,704,761 3,892,886
------------ ------------ ------------ ------------
4,205,749 6,415,666 8,851,571 15,764,815
------------ ------------ ------------ ------------
Operating loss (1,602,571) (3,095,247) (3,794,826) (9,571,197)
Net interest expense 587,968 364,222 1,076,793 646,634
------------ ------------ ------------ ------------
Loss before income tax and
preferred stock dividends (2,190,539) (3,459,469) (4,871,619) (10,217,831)
Preferred stock dividends 150,000 35,616 241,662 35,616
------------ ------------ ------------ ------------
Net loss applicable
to common shareholders $ (2,340,539) $ (3,495,085) $ (5,113,281) $(10,253,447)
============ ============ ============ ============
Basic and diluted loss per share $ (0.13) $ (0.24) $ (0.28) $ (0.70)
============ ============ ============ ============
See accompanying notes.
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6
DURAMED PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six months ended June 30,
1998 1997
---- ----
Cash flows from operating activities:
Net loss $ (4,871,619) $(10,217,831)
Adjustments to reconcile net loss to net cash
(used in) operating activities:
Depreciation and amortization 1,354,887 1,029,792
Provision for doubtful accounts 96,637 83,258
Common stock issued in connection with
employee compensation plans 104,085 97,179
Changes in assets and liabilities:
Trade accounts receivable (625,650) (1,165,780)
Inventories (6,447,668) 2,476,514
Prepaid expenses
and other assets 787,890 (812,344)
Accounts payable (1,012,536) 430,533
Accrued liabilities 607,924 2,027,310
Other 9,620 (154,527)
------------ ------------
Net cash (used in) operating activities (9,996,430) (6,205,896)
------------ ------------
Investing activities:
Capital expenditures (392,628) (589,463)
Refunds (deposits) on capital equipment (29,418) (55,285)
------------ ------------
Net cash (used for) investing activities (422,046) (644,748)
------------ ------------
Cash flows from financing activities:
Payments of long-term debt, including current maturities (1,711,320) (1,476,162)
Net increase (decrease) in revolving credit facility (76,762) --
Long-term borrowings 1,063,901 475,805
Issuance of preferred stock - net 11,399,376 9,481,190
Cash redemption of preferred stock (149,971) --
Issuance of common stock 94,624 212,213
Preferred stock dividends paid (201,372) (257,202)
------------ ------------
Net cash provided by financing activities 10,418,476 8,435,844
------------ ------------
Net change in cash -- 1,585,200
Cash at beginning of period 3,500 1,811,182
------------ ------------
Cash at end of period $ 3,500 $ 3,396,382
============ ============
Supplemental cash flow disclosures:
Interest paid $ 832,786 $ 661,759
See accompanying notes.
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DURAMED PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Common Stock Additional
---------------------------------- Paid-In Accumulated
Shares Amount Capital Deficit Total
---------------------------------- --------------- ---------------- ---------------
BALANCE - DECEMBER 31, 1997 17,881,287 $ 178,812 $90,728,595 $(70,021,720) $20,885,687
Issuance of stock in connection
with benefit plans 18,588 186 103,899 104,085
Issuance of stock in connection
with stock options 21,920 219 94,405 94,624
Conversion of Series E
Preferred Stock 2,881 29 29
Preferred Stock dividend (241,662) (241,662)
Net loss for 1998 (4,871,619) (4,871,619)
----------- ----------- ----------- ------------ -----------
BALANCE - JUNE 30, 1998 17,924,676 $ 179,246 $90,685,237 $(74,893,339) $15,971,144
=========== =========== =========== ============ ===========
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, 1998
are not necessarily indicative of the results that may be expected for the year
ended December 31, 1998. 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 for the year
ended December 31, 1997, (the "1997 10-K").
Note 2: Loss Per Common Share
The following table presents the calculation of losses applicable to common
stockholders:
Three Months Ended Six Months Ended
June 30 June 30
1998 1997 1998 1997
--------------------------------- ----------------------------------
Net loss $(2,190,539) $(3,459,469) $(4,871,619) $(10,217,831)
Less dividends on
preferred shares 150,000 35,616 241,662 35,616
----------- ----------- ----------- ------------
Net loss applicable to
common stockholders $(2,340,539) $(3,495,085) $(5,113,281) $(10,253,447)
=========== =========== =========== ============
Weighted-average common shares outstanding for the computation of basic and
diluted loss per share were 17,920,937 and 17,911,590 for the three and six
month periods ended June 30, 1998 and 14,786,221 and 14,715,272 for the same
periods in 1997.
For the six month periods ended June 30, 1998 and 1997 the recognition of
outstanding options and warrants in the amount of 4,595,119 and 4,127,324,
respectively, were not recognized in computing net loss per share as their
effect would be anti-dilutive.
- 8 -
9
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,
1998 1997
---- ----
Raw materials $ 5,767,432 $ 3,855,477
Work-in-process 446,806 882,835
Finished goods 12,227,315 7,327,177
Obsolescence reserve (1,557,943) (1,629,547)
------------ ------------
Net inventory $ 16,883,610 $ 10,435,942
============ ============
The Company had manufactured a commercial launch quantity of its generic
conjugated estrogens product. On May 5, 1997, the Company was notified by the
Food and Drug Administration ("FDA") that at that time, it would not approve a
generic conjugated estrogens product, although the product had been developed in
accordance with 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 and is
reflected in product development expenses for the quarter ended March 31, 1997.
The product currently meets the required stability criteria and will be retained
until such time as it no longer passes those tests. On March 30, 1998, the
Company filed a New Drug Application ("NDA") for its synthetic conjugated
estrogens product. 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
June 30, December 31,
1998 1997
---- ----
Mandatory redeemable
convertible preferred stock $12,000,000 $ 150,000
Revolving credit facility 4,385,894 4,462,656
Promissory note mortgage loan 8,181,250 8,393,750
Equipment liability 3,122,766 3,601,214
Equipment loan 925,945 1,323,623
Note payable to strategic alliance partner 1,023,059 --
Installment notes payable 7,389 36,164
----------- -----------
29,646,303 17,967,407
Less amount classified as current 2,934,290 6,913,909
----------- -----------
$26,712,013 $11,053,498
=========== ===========
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10
During the second quarter of 1998, the Company funded its operations through
borrowings under its revolving credit facility.
The terms of the revolving credit facility permit the Company to borrow up to
$6.5 million, based upon current financial condition and operating performance,
through September 1999. Borrowings on the revolving credit facility bear
interest at the rate of prime plus 1%, and are collateralized by certain assets
of the Company including inventory and receivables. As of August 7, 1998, the
Company had outstanding borrowings of $4,114,416 drawn against the revolving
credit facility.
Warner-Lambert Company ("Warner-Lambert") has guaranteed a promissory note
mortgage loan from the Company's bank in the amount of $8.5 million, which is
secured by a mortgage on the Company's Cincinnati, Ohio manufacturing facility.
The mortgage loan bears an interest rate which is variable based upon the bank's
prime rate (8.5% at August 7, 1998). The monthly payment required is $35,417
plus interest. Principal payments are based upon a twenty year amortization with
a balloon payment due on October 1, 2007 of $4,250,000.
The equipment liability represents an obligation to Ortho-McNeil Pharmaceutical
Corporation ("Ortho-McNeil") for equipment purchased from Ortho-McNeil. The
equipment note bears interest at 14% and requires a monthly interest and
principal payment of $135,497 for a three year term. The note is secured by the
equipment.
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.
The note payable to strategic alliance partner is an unsecured note payable. The
note requires payments of $600,000 and $550,000 on April 30, 1999 and April 30,
2000, respectively.
Other long-term debt also includes facilities of varying amounts and terms which
are generally collateralized by the assets financed.
The carrying value of the Company's debt approximates fair market value.
- 10 -
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OVERVIEW
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 delays or delays in obtaining regulatory approvals, (iv) the ability of
the Company to retain and attract personnel in key operational areas, (v) the
outcome of pending litigation, and (vi) the status of strategic alliances.
Duramed manufactures and distributes a line of prescription drug products in
tablet, capsule and liquid forms to customers throughout the United States.
Products sold by the Company include those of its own manufacture and those it
markets under certain arrangements with other drug manufacturers. The Company's
results include expenses associated with a product development program designed
to generate a stream of new product offerings. The Company's strategy has been
to focus its product development activities primarily on prescription drugs,
principally hormonal products, with attractive market opportunities and
potentially limited competition due to technological barriers of entry. The
Company's product development pursuits have expanded to include controlled
release technologies as well as controlled substances.
Duramed has invested substantial resources in the development of a synthetic
conjugated estrogens product. An Abbreviated New Drug Application ("ANDA") for
the product was filed in 1994. In May 1997, the Company was notified by the FDA
that, at that time, it would not approve a generic conjugated estrogens product,
although the product had been developed based on the guidance established by the
FDA in 1991 and current official USP compositional standards. Following that
decision, Duramed management decided, in addition to appealing the FDA's
decision, to pursue a New Drug Application ("NDA") branded product strategy for
its synthetic conjugated estrogens product. In February 1998, the Company
announced the successful completion of a multi-center, double-blind,
placebo-controlled trial to evaluate its drug in the treatment of postmenopausal
vasomotor symptoms in women. This trial provided Duramed with the clinical data
that constituted the basis for the filing of an NDA with the FDA on March 30,
1998. On June 15, 1998, the Company announced that it had moved beyond the first
stage in the FDA review of the NDA. The FDA's preliminary review, done in a
sixty-day time frame from the filing of the new drug application, has determined
that the application is sufficiently complete to proceed with the substantive
review for approval.
- 11 -
12
OUTLOOK
Management is pursuing a business strategy designed to return the Company to
profitability. The Company's ability to attain profitability, the time frame
required to do so, and the potential level of such profitability, are dependent
primarily upon several factors including: (1) the ability of the Company to
maintain the contribution from its current business base; (2) the level and
timing of the profit contribution from products approved by the FDA in recent
months; and, (3) the approval of pending, or not yet filed, applications with
the FDA. Additionally, in September 1997, Duramed entered into a ten year
renewable manufacturing agreement with Warner-Lambert.
Management continues to be 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 to continue 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.
Since the beginning of 1997, Duramed has received approval from the FDA for
six ANDAs for products developed by the Company. ANDAs also have been approved
for a product developed by Stason Pharmaceuticals, Inc., ("Stason") an affiliate
of Standard Chemical and Pharmaceutical Company, Ltd. of Taiwan, and for a
product developed by Kiel Laboratories ("Kiel"). In 1995, Duramed and Kiel
entered into an agreement for the development and manufacture of selected
oncology products for Duramed's exclusive marketing. Duramed and Stason entered
into a long-term agreement in July 1997 under which Duramed has exclusive
marketing rights in the United States for products developed by Stason.
The Company presently has seven ANDAs on file in addition to the NDA for its
synthetic conjugated estrogens product. Three of the ANDAs on file are for
hormonal products. The market for one of the hormonal products is estimated by
IMS America, Ltd. ("IMS") to be $150 million with no generic equivalent
available currently. IMS data estimates the market for the other six products on
file at $750 million. The Company plans to submit ANDAs for other projects later
this year, including hormonal products.
Management recognizes that continued investment in product development is likely
to result in operating losses until such time as new products make a meaningful
contribution to results. Based on the Company's anticipated market share for
products approved in recent months and the anticipated timing of approval for
currently pending applications with the FDA, the Company expects to begin
generating more positive results in the second half of 1998 with the most
significant impact in 1999 and beyond.
In the meantime, the Company's product development program will not be supported
from the Company's operations and therefore will be funded principally through
borrowings under its line of credit. The extent of the Company's need for
capital in addition to that provided under the line of credit is dependent
on the factors indicated in the first paragraph above. The Company is
exploring other sources of credit financing.
- 12 -
13
The terms of a private placement of Convertible Preferred Stock completed in
February 1998 require the Company to obtain the investor's concurrence to raise
additional equity capital. If the Company needs to raise additional equity
capital, the extent of dilution to current stockholders will be dependent on the
amount of capital required and the terms under which it is raised. If capital is
needed and is not available, or approval to raise such capital cannot be
obtained from the investor, implementation of the Company's plans will be
restricted or delayed.
RESULTS OF OPERATIONS
NET SALES
Net sales for the three month period ended June 30, 1998 were comparable to the
same period in 1997. Net sales increased $2.0 million (8.9%) for the six month
period ended June 30, 1998 as compared to the same period in 1997. The increase
in net sales was primarily attributable to shipment of products sourced from
other manufacturers that were in a backorder status at December 31, 1997 and the
contribution from recently approved products. The Company has agreements with
several manufacturers, including Ortho-McNeil, whereby the Company markets and
distributes their prescription drug products. The terms of these agreements
vary, but typically provide for a sharing of profits between the Company and the
manufacturer. For both the three and six month periods ended June 30, 1998, the
percentage of the Company's sales comprised of products marketed for others was
45% as compared to 35% for the same periods in 1997. Late in the second quarter
the Company adjusted the selling price of selected low margin products. The
Company expects this action to result in a reduction of units while improving
gross margin.
GROSS MARGIN
The gross margin, and the corresponding percentage of net sales, was $2.6
million (22.3%) and $5.1 million (20.7%) for the three and six months ended June
30, 1998 compared to $3.3 million (28.4%) and $6.2 million (27.6%) for the same
periods in 1997. The reduced gross margin in the second quarter and first half
of 1998 compared to the same periods in 1997 reflects a substantial decline in
methylprednisolone profitability, due to competition partially offset by
contributions from new products and contract revenues from Warner-Lambert. The
Company expects the gross margin to increase in the second half of 1998 as
recently approved products are commercialized and favorable impacts are realized
for the pricing actions taken in the second quarter.
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 -
14
OPERATING EXPENSES
Product Development
Excluding a $3,465,000 conjugated estrogens inventory charge in 1997, product
development expenditures decreased by $2.8 million (75.5%) and $3.8 million
(57.0%) for the three and six month periods ended June 30, 1998 compared to the
same periods in 1997. The decrease was due principally to a reduction of
spending for bioequivalency studies. Spending on bioequivalency studies for a
given period will vary significantly depending on the cost of studies, which
varies based upon the product, as well as the number of studies the Company
initiates. Additionally, product development expenses were impacted by reduced
spending on Duramed Europe operations and efficiencies obtained through the
consolidation of the Company's product development activities to its Somerset,
New Jersey facility. The product development emphasis is on hormonal therapies
and controlled release technology, focusing on products with high margin
potential and limited competition. Product development expenses for the second
half of the year are dependent on the timing of biostudies and the Company's
continuing efforts to balance product development spending and available
resources.
Selling
The Company's sales and marketing expenses decreased by $124,937 (15.4%) and
$190,562 (12.8%) for the three and six month periods ended June 30, 1998
compared to the same periods in 1997 excluding a charge in the first quarter of
1997 of $300,000 in connection with certain contractual commitments associated
with its generic conjugated estrogens product. The reduction in selling expenses
is a reflection of the Company's continuing efforts to reduce controllable
expenses.
General and Administrative
General and administrative expenses increased $717,073 (37.8%) and $811,875
(20.9%) for the three and six month periods ended June 30 1998 compared to the
same periods in 1997 due to additional staff positions and attendant costs to
execute the Company's business plan and increased legal fees associated with
pending litigation with Schein Pharmaceuticals, Inc. and other legal matters.
Net Interest Expense
Interest expense for the three and six month periods ended June 30, 1998
increased $223,746 (61.4%) and $430,159 (66.5%) compared to the same period in
1997 due to an increase in average borrowings under the Company's revolving
credit facility, the restructuring of the mortgage on the Company's
manufacturing facility and the amortization of expenses incurred in connection
with the Series F Preferred Stock.
Income Taxes
Due to the net losses in the first two quarters of each of 1997 and 1998, no
provisions for income tax were recorded.
- 14 -
15
Preferred Dividends
Preferred dividends in the first half of 1998 were $241,662, of which $150,000
were in the quarter ended June 30, 1998. All dividends in 1998 are attributable
to the Company's Series F Convertible Preferred Stock. In 1997, preferred stock
dividends were paid on the Company's Series D and E Preferred Stock, all of
which subsequently was converted to common stock or redeemed.
LIQUIDITY AND CAPITAL RESOURCES
In February 1998, the Company completed the private placement of $12 million
($11.4 million net of issuance cost) of Series F Mandatory Redeemable
Convertible Preferred Stock ("Series F Preferred Stock"). Initially one half of
the preferred shares were convertible immediately, with the remaining half
convertible after August 4, 1998. In July 1998, the Company exercised an option
to extend the August 4, 1998 conversion date until October 2, 1998. The
conversion price for the first half of the Series F Preferred Stock is $7.30 per
share through October 2, 1998. Thereafter, with respect to the second half of
the Series F Preferred Stock and any unconverted portion of the first half, the
conversion price will vary depending on the timing of conversions and the market
price of the Common Stock. Under the terms of the Series F Preferred Stock, the
ultimate conversion price, which can range from a premium to the market price to
a discount from the market price of the Common Stock, will be discounted by an
additional 2% as a result of the Company exercising its option to extend the
release date for conversion.
The Series F Preferred Stock pays a dividend of 5% annually, payable quarterly
in arrears, on all unconverted shares. Any of the Series F Preferred Stock that
remains outstanding will be redeemed automatically on February 4, 2000. At the
closing of this transaction, Duramed had approximately 17.9 million shares of
Common Stock outstanding. Depending on the ultimate conversion price, the number
of shares of Common Stock issued in satisfaction of conversion could range from
a low of 1,397,000 to a high of 3,582,000, with provision for cash redemption of
any remaining unconverted Series F Preferred Stock.
The $6.4 million increase in inventory results from the stocking of new
products, both Duramed produced products as well as products sourced through
other manufacturers. Additionally, inventory levels for certain of the Company's
products were adjusted to improve customer service. The decrease in payables
relates to payments issued for products sourced from other manufacturers.
The terms of the revolving credit facility permit the Company to borrow up to
$6.5 million based upon current financial condition and operating performance
through September 1999. Borrowings on the revolving credit facility bear
interest at the rate of prime plus 1% and are collateralized by certain assets
of the Company including inventory and receivables. As of August 7, 1998 the
Company had outstanding borrowings of $4,114,416 drawn against the revolving
credit facility.
- 15 -
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The Company substantially reduced Duramed Europe's operating level in the second
quarter of 1998 in order to conserve resources. Certain consultants have been
retained in order to maintain contractual relationships on certain key projects.
The Company intends to re-evaluate the funding of Duramed Europe projects as
resources permit.
The Company's need for additional financing is dependent upon several factors
including: (1) the level and timing of the profit contribution from products
approved by the FDA in recent months; (2) the timing of approvals and
commercialization of products pertaining to currently pending applications with
the FDA; and, (3) the ability of the Company to maintain the current business
base as well as the success of other aspects of its business plan. Additionally,
capital will be required for facility and equipment to execute the Company's
business plan and to commercialize the Company's synthetic conjugated estrogens
product, if and when, FDA approval is received.
Year 2000 Compliance
The Company has instituted a plan in order to become Year 2000 compliant.
Successful executions of the plan will result in the Company becoming Year 2000
compliant early in 1999 at a cost of approximately $500,000. The plan also
includes an evaluation of the Year 2000 compliance of its major suppliers and
customers. At this time, the Company does not anticipate any material disruption
in its operations as a result of any failure by the Company, it's suppliers or
customers to be in compliance.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a party to an Agreement dated June 26, 1992 and amended on April
7, 1994 (the "Agreement") with Schein Pharmaceutical, Inc. ("Schein") relating
to the development of a generic version of the conjugated estrogens product
Premarin(R). On August 7, 1997, the Company filed a complaint for a declaratory
judgment against Schein in the Court of Common Pleas, Hamilton County, Ohio,
Case No. A9705498 ("Ohio action"). The Company seeks a declaration that the
Agreement applies only to a product approved on the basis of an ANDA and which
would be fully substitutable for Premarin(R) and that the Agreement does not
apply to the Company's efforts to develop or market any conjugated estrogens
product which would be approved and marketed on the basis of an NDA.
In apparent response to the Company's action, on September 29, 1997, Schein
filed a complaint against the Company and other unnamed defendants in the
Superior Court of New Jersey, Chancery Division, Morris County, Docket No.
MRS-C-187-97 ("New Jersey action"). Schein alleges that the Company breached its
obligations to Schein under an alleged joint venture arising between the parties
and that the unnamed defendants tortuously interfered with Schein's prospective
business advantage and are liable to Schein. Schein seeks various forms of
relief against the Company, including injunctions barring the Company from the
development of a conjugated estrogens product with any person or company other
than Schein and requiring specific performance from the Company according to the
terms of the Agreement and alleged joint venture and accounting and money
damages and a constructive trust.
On October 9, 1997, Schein filed a motion to dismiss the Ohio action based upon
the pending New Jersey action. The court denied this motion on November 13,
1997. On October 17, 1997, the Company filed a motion to dismiss or, in the
alternative, to stay the New Jersey action because of the previously-filed Ohio
action. On November 14, 1997, the New Jersey court granted the Company's motion
in part and stayed the New Jersey action.
On January 30, 1998, Schein amended its answer in the Ohio action and asserted a
counterclaim against the Company and other unnamed defendants similar to the New
Jersey complaint. As a result, on March 4, 1998, the Company renewed its motion
to dismiss the New Jersey action because Schein had brought the same basic
claims as a counterclaim in the Ohio action. On April 17, 1998, the Court
dismissed without prejudice the New Jersey action.
The Company intends vigorously to prosecute its claim for declaratory relief in
the Ohio action and vigorously to defend against Schein's counterclaim in the
Ohio action, however, the outcome of these claims cannot be predicted with
certainty.
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The Company is involved in various additional lawsuits and claims which arise in
the ordinary course of business. Although the outcome of such lawsuits and
claims cannot be predicted with certainty, the disposition thereof will not, in
the opinion of management, result in a material adverse effect on the Company's
financial position or results of operations.
ITEM 5. OTHER INFORMATION
On August 12, 1998, the Board of Directors of Duramed Pharmaceuticals, Inc. (The
"Company") amended the Rights Agreement dated as of August 16, 1998, between the
Company and The Provident Bank, as Rights Agent (the "Rights Agreement") to
extend the expiration date for the Preferred Stock Purchase Rights provided for
under the Agreement from August 31, 1998 to August 31, 2008. Otherwise, the
Rights Agreement remains unchanged.
Item 6. Exhibits
(4) Amendment dated as of August 12, 1998 to Rights Agreement
(27) Financial Data Schedule*
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*Previously filed.
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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 14, 1998 by: /s/ E. THOMAS ARINGTON
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E. Thomas Arington
President, Chairman of the Board
Chief Executive Officer
Dated: August 14, 1998 by: /s/ TIMOTHY J. HOLT
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Timothy J. Holt
Senior Vice President - Finance,
Treasurer, Chief Financial Officer
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