<PAGE> 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, 1996
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 July 15, 1996 10,687,821
Page 1 of 20 pages
<PAGE> 2
DURAMED PHARMACEUTICALS, INC.
INDEX
<TABLE>
<CAPTION>
Page
PART I. Financial Information
- -------------------------------
<S> <C> <C>
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 6. Exhibits and Reports on Form 8-K . . . . . . . . . 18
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
</TABLE>
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<PAGE> 3
DURAMED PHARMACEUTICALS, INC.
Consolidated Balance Sheets
Assets
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
----------- ------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash $ 2,500 $ 2,600
Trade accounts receivable,
less allowance of $659,000
and $576,000, respectively 10,408,761 8,543,411
Inventories 14,379,211 9,423,326
Prepaid expenses and other assets 1,696,073 1,276,213
Deferred taxes 1,797,000 1,797,000
----------- -----------
Total current assets 28,283,545 21,042,550
----------- -----------
Property, plant and equipment - net 20,057,718 20,342,945
----------- -----------
Other assets:
Deposits and other assets 1,725,116 1,687,816
Deferred taxes 2,104,000 2,104,000
----------- -----------
Total other assets 3,829,116 3,791,816
----------- -----------
Total assets $52,170,379 $45,177,311
=========== ===========
</TABLE>
See accompanying notes.
-3-
<PAGE> 4
DURAMED PHARMACEUTICALS, INC.
Consolidated Balance Sheets
Liabilities and Stockholders' Equity
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
------------ ------------
(Unaudited)
<S> <C> <C>
Current liabilities:
Accounts payable $ 3,985,009 $ 3,625,593
Accrued liabilities 4,458,000 4,505,907
Current portion of long-term debt
and other liabilities 2,813,164 7,169,374
Current portion of capital lease obligations 1,085,806 1,140,658
------------ ------------
Total current liabilities 12,341,979 16,441,532
------------ ------------
Long-term debt, less current portion 21,191,028 17,236,736
Long-term capital leases, less current portion 1,531,828 1,706,836
Other long-term liabilities 756,597 893,885
------------ ------------
Total liabilities 35,821,432 36,278,989
------------ ------------
Stockholders' equity:
Convertible Preferred Stock Series B - authorized 500,000 shares, par
value $.001; issued 74,659 shares; outstanding 6,059 and 74,659
shares in 1996 and 1995 respectively 6 75
Convertible Preferred Stock Series C - authorized 250,000
shares, stated value $100; issued 240,000 shares;
outstanding 7,500 and 120,000 shares in 1996 and
1995 respectively 750,000 12,000,000
Common stock - authorized 50,000,000
shares, par value $.01; issued and outstanding
10,660,184 and 8,074,449 shares in 1996 and 1995
respectively 106,601 80,744
Additional paid-in capital 47,294,888 24,686,871
Accumulated deficit (31,802,548) (27,869,368)
------------ ------------
Total stockholders' equity 16,348,947 8,898,322
------------ ------------
Total liabilities and stockholders' equity $ 52,170,379 $ 45,177,311
============ ============
</TABLE>
See accompanying notes.
-4-
<PAGE> 5
DURAMED PHARMACEUTICALS, INC.
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
--------------------------- ---------------------------
<S> <C> <C> <C> <C>
Net sales $ 11,785,920 $13,032,773 $ 22,486,118 $25,614,394
Cost of goods sold 7,238,651 7,393,724 15,063,851 14,717,951
------------ ----------- ------------ -----------
Gross profit 4,547,269 5,639,049 7,422,267 10,896,443
------------ ----------- ------------ -----------
Operating expenses:
Product development 2,757,487 1,183,974 3,856,803 1,983,934
Selling 846,401 939,806 1,857,405 1,828,609
General and administrative 2,148,423 2,151,964 4,522,964 4,183,611
------------ ----------- ------------ -----------
5,752,311 4,275,744 10,237,172 7,996,154
------------ ----------- ------------ -----------
Operating (loss) income (1,205,042) 1,363,305 (2,814,905) 2,900,289
Interest expense 567,043 717,822 1,118,275 1,217,709
------------ ----------- ------------ -----------
(Loss) income before income taxes
and preferred dividends (1,772,085) 645,483 (3,933,180) 1,682,580
Income tax provision -- 13,000 -- 41,750
------------ ----------- ------------ -----------
Net (loss) income (1,772,085) 632,483 (3,933,180) 1,640,830
Preferred stock dividends 103,651 -- 378,569 --
------------ ----------- ------------ -----------
Net (loss) income applicable to
common stockholders ($ 1,875,736) $ 632,483 ($ 4,311,749) $ 1,640,830
============ =========== ============ ===========
Earnings (loss) per share: $ (.19) $ .06 $ (.46) $ .15
============ =========== ============ ===========
Weighted average number of
shares outstanding: 10,122,713 10,699,075 9,344,296 10,705,138
============ =========== ============ ===========
</TABLE>
See accompanying notes.
-5-
<PAGE> 6
DURAMED PHARMACEUTICALS, INC.
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1996 1995
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income ($ 3,933,180) $ 1,640,830
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities:
Depreciation and amortization 1,121,311 836,308
Recognition of deferred revenues (500,000) (500,000)
Provision for doubtful accounts 82,483 --
Common stock issued in connection with
employee compensation plans 97,237 89,649
Changes in assets and liabilities:
Trade accounts receivable (1,947,833) (1,131,125)
Inventories (4,955,885) (2,673,479)
Prepaid expenses and other assets (419,860) 168,705
Accounts payable 359,416 1,771,409
Accrued liabilities (28,818) 250,750
Other (42,521) (99,305)
------------ -----------
Net cash (used in) provided by operating activities (10,167,650) 353,742
------------ -----------
Investing activities:
Capital expenditures (809,738) (3,365,912)
Deposits on capital equipment (21,125) (79,466)
------------ -----------
Net cash (used for) investing activities (830,863) (3,445,378)
------------ -----------
Cash flows from financing activities:
Payments of long-term debt, including current maturities (5,609,741) (5,019,705)
Net increase in revolving credit facility 3,266,452 3,829,034
Long-term borrowings 2,074,223 4,056,930
Issuance of preferred stock - net 10,857,367 --
Issuance of common stock 807,770 225,077
Dividends paid (397,658) --
------------ -----------
Net cash provided by financing activities 10,998,413 3,091,336
------------ -----------
Net change in cash (100) (300)
Cash at beginning of period 2,600 2,900
------------ -----------
Cash at end of period $ 2,500 $ 2,600
============ ===========
Supplemental cash flow disclosures:
Interest paid $ 1,093,823 $ 1,317,068
Income taxes paid -- $ 90,000
</TABLE>
See accompanying notes.
-6-
<PAGE> 7
<TABLE>
<CAPTION>
DURAMED PHARMACEUTICALS, INC.
Consolidated Statement of Stockholders' Equity
(Unaudited)
Preferred Stock Common Stock Additional
--------------------- ------------------------ Paid-In Accumulated
Series B Series C Shares Amount Capital Deficit Total
--------------------- ------------------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE - DECEMBER 31, 1995 $75 $12,000,000 8,074,449 $ 80,744 $ 24,686,871 ($ 27,869,368) $ 8,898,322
Issuance of stock in connection
with benefit plans 4,647 47 97,190 97,237
Issuance of stock in connection
with stock options 284,637 2,846 792,538 795,384
Issuance of stock in settlement
of certain liabilities 723 7 12,379 12,386
Issuance of Series C
Convertible Preferred Stock 12,000,000 (1,142,633) 10,857,367
Conversion of Series B
Preferred Stock (69) 686,000 6,860 (6,791) --
Conversion of Series C
Preferred Stock (23,250,000) 1,609,728 16,097 23,233,903 --
Net loss for 1996 (3,933,180) (3,933,180)
Series C Preferred Stock dividend (378,569) (378,569)
--- ----------- ---------- ----------- ------------ ------------- ------------
BALANCE - JUNE 30, 1996 $ 6 $ 750,000 10,660,184 $ 106,601 $ 47,294,888 ($ 31,802,548) $ 16,348,947
=== =========== ========== =========== ============ ============= ============
</TABLE>
See accompanying notes.
-7-
<PAGE> 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, 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 consolidated
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the year ended December 31, 1995, as amended (the "1995 10-K").
Note 2: Earnings (Loss) Per Share
- ----------------------------------
The earnings per share calculations are computed using weighted average common
shares outstanding and common equivalent shares, which include dilutive options,
warrants and convertible preferred stock. Loss per share is computed using the
weighted average of common shares outstanding only. Recognition of outstanding
options, warrants and convertible preferred stock in computing loss per share is
not required as their effect would be anti-dilutive.
Note 3: Inventories
- --------------------
<TABLE>
<CAPTION>
Components of inventories include:
June 30, December 31,
1996 1995
----------- ----------
<S> <C> <C>
Raw materials $ 4,059,415 $3,931,836
Work-in-process 423,317 261,671
Finished goods 9,896,479 5,229,819
----------- ----------
Total $14,379,211 $9,423,326
=========== ==========
</TABLE>
As of June 30, 1996, inventories include approximately $2.8 million (net of
inventory funded by a joint venture partner) of inventory costs, consisting of
both raw materials and conversion costs, relating to the conjugated estrogens
product, for which the Company is awaiting regulatory approval.
- 8 -
<PAGE> 9
Note 4: Debt and Other Long-Term Liabilities
- ---------------------------------------------
<TABLE>
<CAPTION>
June 30, December 31,
Debt 1996 1995
- ---- -------- ------------
<S> <C> <C>
Revolving credit facility $11,931,313 $ 8,664,861
Term note -- 4,500,000
Manufacturing facility expansion loan 5,500,000 5,500,000
Equipment loans 2,516,657 1,080,155
Note payable to State of Ohio 964,882 1,060,770
Convertible note 2,234,382 2,121,465
Installment notes payable 169,411 236,039
----------- -----------
23,316,645 23,163,290
Less amounts classified as current 2,125,617 5,926,554
----------- -----------
$21,191,028 $17,236,736
=========== ===========
</TABLE>
In the first half of 1996, the funds used by the Company in its operations were
primarily provided through borrowings against its revolving credit facility, and
net proceeds of approximately $10.9 million received in February 1996, in
connection with the issuance of an additional $12.0 million of the Company's 8%
Cumulative Convertible Preferred Stock, Series C (the "Series C Stock"). (See
Note G of Notes to Consolidated Financial Statements in the 1995 10-K for
additional information related to the Series C Stock).
The amended terms of the revolving credit facility permit the Company to borrow
up to $12.5 million based upon eligible collateral ($12.5 million as of June 30,
1996). The expressed intention of the Company and its bank is to review
quarterly the Company's financial condition and, if appropriate, extend the due
date of its revolving credit facility in order to maintain a fifteen month term.
In accordance with this, the bank has extended the term of the revolving credit
facility from June 30, 1997 to September 30, 1997.
The revolving credit facility bears interest at the rate of prime plus 1%, and
is collateralized by substantially all assets of the Company including
inventory, receivables and a mortgage interest on the manufacturing facility.
At December 31, 1995 the Company had a $4.5 million outstanding principal
balance on the term note, with a $1.5 million payment due on March 1, 1996 and
the remaining $3.0 million due on June 1, 1996. In February 1996 the Company
made the $1.5 million term note principal payment due on March 1, 1996, and in
June 1996 the Company repaid the remaining $3.0 million term note balance.
- 9 -
<PAGE> 10
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. Under the terms of this loan, principal payments do not commence until
the occurrence of certain defined events or January 1, 1997, whichever occurs
first. Interest is payable monthly based upon the prime rate.
The equipment 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, and 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 the State of Ohio is secured by the Company's manufacturing
facility. The loan bears interest at 7.5% and requires minimum monthly payments
of $20,394 and certain other payments as defined by the agreement. The final
balloon payment of approximately $1,021,000, including accrued interest, is due
November 1, 1996. This debt is personally guaranteed by a former officer and by
a director.
The convertible note represents funds advanced in July 1995 from a joint venture
partner. The note bears interest at a variable rate approximating prime rate
+3%, compounded annually, and both principal and interest are due at maturity on
July 10, 1998. As amended, at the option of the lender the principal amount of
the note and accrued interest may be convertible to shares of Duramed common
stock at a conversion price 15% below the closing bid price of the common shares
of the Company over the ten day trading period ending the day prior to the date
of conversion. The conversion price may not be less than $7.00 per share, nor
more than $14.44 per share. If the Company repays this obligation prior to
maturity, the note holder is entitled to receive warrants, in an amount equal to
the principal amount plus accrued interest that is paid, to purchase shares of
the Company's common stock. The exercise price of such warrants would be equal
to the conversion price existing at the time of repayment.
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:
<TABLE>
<CAPTION>
June 30, December 31,
Other Long-Term Liabilities 1996 1995
- --------------------------- ---------- ------------
<S> <C> <C>
Abandoned facility obligation - net $1,444,144 $1,636,705
Deferred revenue -- 500,000
---------- ----------
1,444,144 2,136,705
Less amount classified as current 687,547 1,242,820
---------- ----------
$ 756,597 $ 893,885
========== ==========
</TABLE>
- 10 -
<PAGE> 11
The abandoned facility obligation represents the amounts due, net of sublease
income, under the terms of a lease which extends through September 30, 1998. Due
to the Company's financial condition at the time, the Company was unable to meet
its commitments under the lease and vacated the facility in 1991. The facility
was sublet for a period of five years in 1992. In 1994 the Company commenced
payment of its current net obligations under the lease and also commenced
quarterly payments on the accumulated outstanding balance.
The $500,000 in deferred revenue at December 31, 1995 represented the
unamortized balance from $2.0 million cash received from Ortho-McNeil
Pharmaceuticals, Inc. ("Ortho-McNeil") pursuant to the terms of distribution and
marketing agreements entered into in 1994 (see Note B of Notes to Consolidated
Financial Statements in the 1995 10-K for additional details). As of June 30,
1996, all of the deferred revenue had been recognized as income.
- 11 -
<PAGE> 12
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
- ---------------------
Net sales decreased by $1.2 million (9.6%) and $3.1 million (12.2%) for the
three and six month periods, ended June 30, 1996 as compared to the same periods
in 1995. The decline in net sales was primarily attributable to lower revenues
from the Company's Methylprednisolone product (resulting from both lower unit
sales and lower prices per unit) as well as lower sales of many of the products
that the Company previously sourced from Invamed Inc. These sales declines were
offset to a degree by continued growth in sales of the Ortho-McNeil products, as
well as initial sales of certain recently introduced products which the Company
markets under various arrangements with the manufacturers. Due to the continued
competitive environment, the Company expects that during the second half of 1996
the sales from the current product line will be lower than for the comparable
period of 1995.
The gross margin percentage for the three and six month periods ended June 30,
1996 was 39% and 33% respectively, compared to 43% for the three and six month
periods ended June 30, 1995. The lower gross margin percentages in 1996 were due
primarily to the product sales mix and lower sales prices on certain of the
Company's products. 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.
Product development expenditures increased $1.6 million (133%) and $1.9 million
(94%) for the three and six month periods ended June 30, 1996 as compared to the
same periods of 1995. The increase was due to spending for bioequivalency
studies, funding of the operating expenses of Hallmark Pharmaceuticals, Inc.
("Hallmark") and expansion of the Company's research and development activities
to pursue additional products. During the first half of 1995 product development
expenditures included certain manufacturing start up costs associated with the
Company's pending Abbreviated New Drug Application ("ANDA") for conjugated
estrogens. Product development expenditures are net of reimbursements received
from Schein Pharmaceutical, Inc. ("Schein") pursuant to the terms of a
contractual agreement in connection with the development of a new formulation of
conjugated estrogens tablets, the generic equivalent of the name brand product
Premarin(R). The increase in product development expenditures reflects the
Company's commitment to expanding its product development activities. The
Company intends to continue to increase its investment in product development
activities as its available resources permit. On April 11, 1996 the Company and
Hallmark entered into a definitive agreement providing for the acquisition by
Duramed of the assets and business of Hallmark. Hallmark is a privately held
pharmaceutical development company headquartered in Somerset, N.J. The Company
believes that Hallmark's technical expertise and capabilities with respect to
advanced drug delivery systems will contribute significantly to the long term
success of the Company's product development program. As part of the agreement,
- 12 -
<PAGE> 13
Duramed has agreed to fund the operating expenses of Hallmark commencing April
1, 1996 until the close of the transaction. These product development expenses
are forecasted to approximate $314,000 per month plus certain bio-study costs,
and will continue to impact future operating results and cash requirements
(further discussion regarding the Hallmark transaction is included in "Liquidity
and Capital Resources" below). In the three month period ended June 30, 1996
product development expenses included Hallmark funding of $900,000, plus funding
of certain bio-study costs. The stockholders of Hallmark are scheduled to vote
on the proposed transaction on September 11, 1996. In the event the acquisition
of Hallmark is not completed, and the funds advanced to Hallmark are not repaid,
the Company has been granted the exclusive marketing rights to the products for
which the Company has funded the bio-study costs.
General and administrative expenses for the three months ended June 30, 1996
were comparable to the same period in 1995. The increase in general and
administrative expenses for the six months ended June 30, 1996 compared to the
same period in 1995 was due primarily to additional staff positions and
attendant costs incurred to support and execute the Company's business plans.
Additionally, the expense levels in both the first half of 1995 and 1996 reflect
incremental levels of legal and consulting costs associated with responding to
various issues in connection with the Company's pending ANDA for conjugated
estrogens.
Interest expense for the three and six month periods ended June 30, 1996 was
lower than in the comparable periods of 1995, resulting from lower average
borrowings during the period. Additionally, during 1996 the Company recognized
interest expense in connection with the $5.5 million manufacturing facility
expansion loan which provided a portion of the financing for the expansion of
the Company's manufacturing facility. In the first quarter of 1995, during the
construction phase, interest of $94,000 was capitalized.
Due to the reported net losses in the first half of 1996, no provision for
income tax was recorded. The tax provision in the first and second quarters of
1995 represents alternative minimum tax; no regular income tax provision was
required due to the offset of taxable income by the carryforward of net
operating losses. As of June 30, 1996, the Company 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. The Company 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 the Company's operating performance with its current
product line and planned expenditures resulting from its commitment to an
expanded product development program, the Company 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.
Preferred stock dividends in 1996 represent the dividend provision associated
with the $24.0 million of Series C Stock issued in November 1995 and February
1996. Through July 15, 1996, $23.25 million of the Series C Stock had been
converted to 1,609,732 shares of the Company's common stock, at an average
conversion price of $14.44 per common share. (See Note G of Notes to
Consolidated Financial Statements in the 1995 10-K for additional information
related to the Series C Stock).
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 term of the distribution agreement for each of these products
is ten years subject to reduction to three years (if not
- 13 -
<PAGE> 14
extended) from date of first sale if the Duramed's conjugated estrogens product
has not been 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.
A conscious decision has been made to increase expenditures for manufacturing
and other launch activities in anticipation of the approval of the Company's
conjugated estrogens product and to provide the additional personnel and capital
resources needed to implement the Company's business plan. This planned
investment in the future has contributed substantially to increased expenses,
and therefore reduced levels of performance. Additionally, as previously
discussed, on April 1, 1996 the Company commenced funding Hallmark's operations
at an amount not to exceed $314,000 per month, plus certain bio-study costs. The
Company remains optimistic regarding the approval of its conjugated estrogens
product. However, management also recognizes the importance of balancing a
strong product development commitment against the need to conserve resources. In
keeping with this combined commitment, steps were implemented in the second
quarter of 1996 to reduce certain operating expenses consistent with these two
corporate goals. Additionally, the Company is discussing several potential
business development opportunities which could provide additional product
revenues. However, it is not certain if and when these revenues would be
available. Accordingly, if the Company's revenue stream is not supplemented by
the approval and launch of the conjugated estrogens product, or success in other
business development pursuits, the Company's reported income for the remainder
of 1996 will be less than for the comparable quarters of 1995, and the Company
would expect to report a loss for each of the remaining quarters of 1996.
- 14 -
<PAGE> 15
Liquidity and Capital Resources
- -------------------------------
Subsequent to June 30, 1996 the Company raised $20.0 million ($19.0 million net
of issuance costs) through an offering of 200,000 shares of 8% Cumulative
Convertible Preferred Stock, Series D (the "Series D Stock"). The Series D Stock
will be convertible on or after October 16, 1996 at the option of the holder at
15% below the closing bid price of the common shares of the Company over the ten
day trading period ending the day prior to the date of conversion. The
conversion price for the preferred shares may not be less than $7.00 per share,
nor more than $20.00 per share. No more than 2,130,895 common shares will be
issued upon conversion, and any Series D Stock which remains outstanding
thereafter 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 Series D Stock will pay a dividend of 8% annually,
payable quarterly in arrears, on all unconverted preferred shares. Any shares of
the Series D Stock that remain outstanding will be converted (or redeemed)
automatically on July 18, 1998. The proceeds from the issuance of the Series D
Stock were initially utilized to pay off the Company's revolving credit
facility, and the balance of approximately $6.5 million was initially invested
in short-term securities.
Previously, the Company had raised $24.0 million through an offering of 8%
Cumulative Convertible Preferred Stock, Series C of which the first $12.0
million ($10.8 million net of issuance costs) was received in November 1995, and
the remaining $12.0 million ($10.9 million net of issuance costs) was received
in February 1996. The proceeds from the issuance of the Series C Stock were
utilized to fund operating activities including the expanded product development
program, as well as, costs associated with preparing to launch the conjugated
estrogens product and repayment of certain indebtedness.
The Company has a revolving credit facility which permits the Company to borrow
up to $12.5 million, based upon eligible collateral, through September 30, 1997
when the principal balance is due. The expressed intention of the Company and
its bank is to review quarterly the Company's financial condition and, if
appropriate, extend the due date of the revolving credit facility in order to
maintain a fifteen month term. As of August 8, 1996, the full $12.5 million
revolving credit facility is available to the Company.
The Company's term note, with a principal balance of $4.5 million at December
31, 1995, required a principal payment of $1.5 million on March 1, 1996, with
the remaining $3.0 million due on June 1, 1996. In February 1996 the Company
made the $1.5 million term note principal payment due on March 1, 1996, and in
June 1996 the Company repaid the remaining $3.0 million term note balance. Under
a separate agreement, in March 1996 the bank made available to the Company an
additional $1.5 million of term financing collateralized by existing equipment.
The current terms of the note payable to the State of Ohio require a balloon
payment of $1,021,000, including accrued interest, in November 1996.
- 15 -
<PAGE> 16
Operating activities in the first half of 1996 used approximately $10.2 million
in cash, principally attributable to an increase in inventories of $5.0 million,
and growth in the accounts receivable balance attributable to extended dating
offered to certain customers in connection with a promotion. The majority of the
inventory increase was in the category of finished goods, reflecting planned
growth in inventory levels in order to improve customer service, additional new
products which the Company commenced marketing and distributing in the first
half of 1996 and continued manufacturing of the conjugated estrogens product in
anticipation of FDA approval. As a result of a reduction in sales, continued
expenditures associated with the anticipated commercial launch of conjugated
estrogens and an increase in product development expenditures other than for
conjugated estrogens, the Company recorded a net loss of $3.9 million in the
first half of 1996.
On April 11, 1996 the Company and Hallmark entered into a definitive agreement
providing for the acquisition by Duramed of the assets and business of Hallmark.
Hallmark is a privately held pharmaceutical development company headquartered in
Somerset, N.J. As consideration, the Company will issue to Hallmark 640,000
shares of common stock and warrants to purchase 400,000 shares of Duramed Common
Stock at a purchase price of $25 per share and will satisfy certain obligations
of Hallmark. The Company will also acquire at book value certain assets leased
to Hallmark by a related partnership. Consummation of the transaction is subject
to certain customary conditions, including approval of Hallmark's shareholders
(which is scheduled for September 11, 1996) and certain regulatory agencies and
other third parties. The consummation of this transaction would result in the
Company recording, for financial reporting purposes, a substantial non-cash
charge, amounting to approximately $10.5 million, for the recognition of
purchased research and development. Additionally, the Company has agreed to fund
the operating expenses of Hallmark commencing April 1, 1996 until the close of
the transaction, expected to occur in September, 1996. These expenses are
forecasted to approximate $314,000 per month, plus certain bio-study costs and
will continue to impact operating results and cash requirements. In the three
month period ended June 30, 1996 product development expenses included Hallmark
funding of $900,000, plus funding of certain bio-study costs. In the event the
acquisition of Hallmark is not completed and the funds advanced to Hallmark are
not repaid, the Company has been granted the exclusive marketing rights to the
products for which the Company has funded the bio-study costs.
The Company continues to prepare for the anticipated commercial launch of
conjugated estrogens and, accordingly, is maintaining a higher level of
operational and corporate infrastructure than would otherwise be required. The
Company is monitoring the status of its conjugated estrogens application closely
and continues to remain optimistic on ultimate approval of the product; however,
approval is not assured. If the Company receives approval from the FDA for its
ANDA filing for the .625 mg. strength of conjugated estrogens and this product
is successfully manufactured and marketed, the resulting favorable financial
impact is expected to be significant. Accordingly, the Company's longer term
operating plan is significantly impacted
- 16 -
<PAGE> 17
by this event. If, however, conjugated estrogens is ultimately not approved by
the FDA, the Company will incur certain write offs related to investments made
to date in inventory and other pre-launch activities and provisions of certain
of the Company's contractual agreements would become applicable. (See Note B of
Notes to Consolidated Financial Statements in the 1995 10-K for additional
details.)
The Company is currently pursuing several business development opportunities,
which could result in additional products and profit contributions. On a longer
term basis, if Invamed is ultimately successful with its Verapamil S.R. product
development efforts, or the Company is successful with certain of its other
product development pursuits, the availability of these products could
significantly improve the Company's operating results. Again, success is not
assured. The Company intends to increase its funding of product development
activities as its resources permit. Continued expansion of the Company's product
development efforts will likely necessitate capital investment in equipment and
facility to provide the capabilities to produce the resulting products in
commercial quantities. While the Company has not finalized the capital
requirements related to its business plan, the resources required are
significant. To the extent the necessary capital is not available, either from
operations or other sources, implementation of the Company's plans will be
restricted or delayed. In addition, the Company's general and administrative
expenses have increased as needed to support and execute the Company's business
plan and to address the requirements of the Company's current and anticipated
increased operating levels. Management recognizes the importance of both the
future benefits from continuing these increased expenditures and the current
necessity of conserving the Company's resources. Accordingly, management has
taken certain actions designed to balance these dual concerns.
As the Company advances with the expanded product development program, which
includes the acquisition of Hallmark, if the Company's revenue base is not
enhanced by the approval and marketing of the Company's conjugated estrogens
product or through other products, the Company expects that it will need to
execute certain restructurings and other additional cost-cutting efforts to
curtail operating expenses in order to support the Company's and Hallmark's
product development activities.
- 17 -
<PAGE> 18
DURAMED PHARMACEUTICALS, INC.
PART II - OTHER INFORMATION
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:
On April 11, 1996 the Company filed a Current Report on Form
8-K to announce the signing of a definitive agreement for
the acquisition of Hallmark Pharmaceuticals, Inc.
- ------------------
*Contained only in electronic filing with Securities and Exchange Commission.
- 18 -
<PAGE> 19
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, 1996 by: /s/ E. Thomas Arington
---------------- -------------------------------------
E. Thomas Arington
President, Chairman of the Board
Chief Executive Officer
Dated: August 13, 1996 by: /s/ Timothy J. Holt
---------------- -------------------------------------
Timothy J. Holt
Senior Vice President - Finance,
Treasurer, Chief Financial Officer
- 19 -
<PAGE> 1
EXHIBIT 11
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
DURAMED PHARMACEUTICALS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Three months ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
-------------------------------------------------------
<S> <C> <C> <C> <C>
Primary:
Weighted average common shares
outstanding 10,122,713 8,012,287 9,344,296 7,998,260
Assumed conversion of preferred
shares to common shares * 746,590 * 746,590
Net effect of dilutive stock options
and warrants - based on the
treasury stock method using the
average market price * 1,940,198 * 1,960,288
----------- ----------- ----------- -----------
Totals 10,122,713 10,699,075 9,344,296 10,705,138
=========== =========== =========== ===========
Net (loss) income ($ 1,875,736) $ 632,483 ($4,311,749) $ 1,640,830
=========== =========== =========== ===========
Per share amount $ (.19) $ .06 $ (.46) $ .15
=========== =========== =========== ===========
Fully diluted:
Weighted average common shares
outstanding 10,122,713 8,012,287 9,344,296 7,998,260
Assumed conversion of preferred
shares to common shares * 746,590 * 746,590
Net effect of dilutive stock options
based on the treasury stock method
using the year-end market price, if
higher than average market price * 1,940,198 * 1,961,575
----------- ----------- ----------- -----------
Totals 10,122,713 10,699,075 9,344,296 10,706,425
=========== =========== =========== ===========
Net (loss) income ($ 1,875,736) $ 632,483 ($4,311,749) $ 1,640,830
=========== =========== =========== ===========
Per share amount $ (.19) $ .06 $ (.46) $ .15
=========== =========== =========== ===========
</TABLE>
*Conversion of stock options and preferred shares not assumed in the
computations because their effect is antidilutive.
-20-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 2,500
<SECURITIES> 0
<RECEIVABLES> 11,067,761
<ALLOWANCES> 659,000
<INVENTORY> 14,379,211
<CURRENT-ASSETS> 28,283,545
<PP&E> 20,057,718
<DEPRECIATION> 0
<TOTAL-ASSETS> 52,170,379
<CURRENT-LIABILITIES> 12,341,979
<BONDS> 21,191,028
<COMMON> 106,601
0
750,006
<OTHER-SE> 15,492,340
<TOTAL-LIABILITY-AND-EQUITY> 52,170,379
<SALES> 22,486,118
<TOTAL-REVENUES> 22,486,118
<CGS> 15,063,851
<TOTAL-COSTS> 16,921,256
<OTHER-EXPENSES> 8,379,767
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,118,275
<INCOME-PRETAX> (3,933,180)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,933,180)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,311,749)
<EPS-PRIMARY> (.46)
<EPS-DILUTED> (.46)
</TABLE>
