<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(Amendment No 1.)
[X] ANNUAL REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value; Preferred Stock Purchase Rights
Indicate by checkmark whether the registrant (1) has filed reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
-- --
Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [X]
The aggregate market value of the Common Stock of the registrant held by
non-affiliates of the registrant was approximately $126,017,949 as of April 23,
1997. As of April 23, 1997, 14,768,693 shares of Common Stock with a par value
of $.01 per share were outstanding.
Documents Incorporated by Reference
Not applicable.
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PART I
ITEM 1. BUSINESS.
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GENERAL
Duramed Pharmaceuticals, Inc. (the "Company" or "Duramed") currently
manufactures and sells a line of prescription generic drug products in tablet,
capsule and liquid forms to customers throughout the United States. Products
sold by the Company include those of its own manufacture and those which it
markets under certain arrangements with other drug manufacturers. The Company
sells its products to drug wholesalers, private label distributors, drug store
chains, health maintenance organizations, hospitals, nursing homes, retire
organizations, mail order distributors, other drug manufacturers, mass
merchandisers and governmental agencies.
The Company is committed to executing an aggressive 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 with attractive market opportunities and potentially limited competition
due to technological barriers of entry, including generic hormone replacement
therapy ("HRT") product opportunities. Through the Company's Hallmark division,
the Company's product development pursuits have expanded to include controlled
and sustained release products. The Company typically seeks to develop products
that either (i) are soon to be off patent, (ii) have not yet been developed
generically even though patents have expired (usually because of technological
barriers), or (iii) are logical extensions of the Company's existing product
line due to their marketing or production characteristics.
Generic drugs are the chemical and therapeutic equivalents of brand name drugs
which have gained market acceptance while under patent protection. In general,
prescription generic drug products are required to meet the same governmental
standards as brand name pharmaceutical products and must receive Food and Drug
Administration ("FDA") approval prior to manufacture and sale. Generic drug
products are marketed after expiration of patents held by the innovator company,
generally on the basis of FDA approved Abbreviated New Drug Applications
("ANDAs") submitted by the generic manufacturers. Generic drug products
typically sell at prices substantially below those of the equivalent brand name
products. The increasing emphasis on controlling health care costs, the growth
of managed care organizations and the significant number of drugs for which
patents will expire in the next few years are expected to create an opportunity
for continued growth in the generic drug market.
CONJUGATED ESTROGENS PRODUCT STATUS
The Company has invested a substantial amount of resources pursuing the
development, approval, and launch of a generic conjugated estrogens product. The
Company continues to prepare for the anticipated commercial launch of conjugated
estrogens and,
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accordingly, is maintaining a higher level of operational and corporate
infrastructure than would otherwise be required. The Company's financial
condition and results of operations have been substantially impacted by this
pursuit. Therefore, management believes a review of the chronology of key
events related to this matter provides an important perspective.
FDA approval is required for Duramed to market conjugated estrogens in the
United States. On September 27, 1994, the Company filed with the FDA an ANDA
for the .625 mg strength of conjugated estrogens. Subsequently, the Company
filed amendments covering the other dosage strengths of conjugated estrogens.
These products are formulated and designed to meet the conjugated estrogens
product composition standards and bioequivalency guidance established by the
FDA in 1991 and USP composition standards.
Since 1991, Wyeth-Ayerst, a Division of American Home Products ("Wyeth-Ayerst"),
the manufacturer of the brand name product Premarin(R) has made several
submissions to the FDA requesting changes in the USP conjugated estrogens
product composition standards and bioequivalency guidance. Among other things,
Wyeth-Ayerst requested that the FDA change the product composition standards for
conjugated estrogens by requiring the generic version to include a specific
equine estrogenic substance, delta8,9 dehydroestrone sulfate (delta8,9 DHES). In
response to each submission, the FDA determined that the information submitted
by Wyeth-Ayerst was insufficient to justify changes in the standards or
guidance. In so responding, the FDA let stand the 1991 product composition
standards, which established delta8,9 DHES as an impurity and not a necessary
ingredient in conjugated estrogens.
On November 30, 1994, Wyeth-Ayerst filed a Citizen Petition with the FDA which
reiterates some of its earlier arguments and again requests that the FDA require
the inclusion of delta8,9 DHES in generic conjugated estrogens. On July 27-28,
1995, the FDA's Fertility and Maternal Health Drugs and Generic Drugs Advisory
Committees met to address this issue. The outcome of this meeting was a
unanimous vote by the advisory committees that there is insufficient data to
assess whether any individual component (including delta8,9 DHES) or combination
of components other than estrone sulfate and equilin sulfate need be present to
achieve clinical safety and efficacy in conjugated estrogens.
On October 6, 1995 the Company filed with the FDA an extensive response to the
Citizen Petition filed by Wyeth-Ayerst. Duramed's filing included scientific and
medical data, as well as the opinions of renowned experts, who all conclude,
consistent with the FDA's 1991 guidance, that delta8,9 DHES has no impact on the
safety or efficacy of conjugated estrogens and should not be a required
component in generic pharmaceutical equivalent dosages to Premarin(R).
Throughout 1996 the Company closely monitored the status of its conjugated
estrogens application, and, based on discussions with the FDA, believed that
approval of its application would be granted by the end of the third quarter of
1996. However, in October 1996, management was informed that a decision on the
Company's conjugated estrogens application would be delayed as a result of
FDA's decision to publish a notice for public comment.
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On November 7, 1996 the FDA made available for public comment a report prepared
by the FDA entitled "Preliminary Analysis of Scientific Data on the Composition
of Conjugated Estrogens" ("Preliminary Analysis') as well as documents
submitted by Wyeth-Ayerst which were included in the FDA's analysis. The
deadline for comments on the FDA analysis was December 9, 1996.
Referenced in this Preliminary Analysis is a report by FDA's Office of Clinical
Pharmacology and Biopharmaceutics (OCPB) which summarizes their analysis of
clinical data submitted by Wyeth-Ayerst. OCPB, after analyzing this data in the
most favorable light, stated that "NONE OF THE PHARMACOKINETIC DATA PRESENTED BY
THE FIRM (WYETH-AYERST) CAN BE INTERPRETED AS DEMONSTRATING THAT
DELTA8,9-DEHYDROESTRONE OR ITS METABOLITE 17(BETA)-DELTA8,9-DEHYDROESTRONE IS
ESSENTIAL TO THE ESTROGENIC ACTIVITY OF PREMARIN(R) ."
In the Preliminary Analysis, the FDA spells out the scientific/clinical basis
for estrone sulfate and equilin sulfate as being the active ingredients in
Conjugated Estrogens. The Analysis states that if a drug contains more than one
active drug ingredient, then clinical trials are necessary if it is to be shown
that the combination is superior to each of its components alone.
The FDA Preliminary Analysis covers all the scientific data submitted to the
agency to date, and includes the following extracted conclusions:
- No comparative clinical trials have been performed to ascertain
the contribution of individual components to Premarin(R)'s
overall effect.
- It is difficult to draw firm conclusions about the contribution
of Premarin(R) components to clinical effects based solely on in
vitro data.
- Drawing definitive conclusions about clinical effects of
Premarin(R) based on animal data is currently not possible.
- The clinical studies submitted to evaluate
delta8,9-dehydroestrone were unblinded, small and do not provide
definitive results.
- No studies have evaluated the contributions of individual
Premarin(R) components to the long-term safety profile of
Premarin(R). The available epidemiologic evidence does not
definitively establish safety differences.
As previously noted, Duramed has completed its development of Conjugated
Estrogens in accordance with FDA published guidance established in 1991 and
official USP compositional standards which not only do not require the presence
of delta8,9-dehydroestrone, but classifies it as an impurity subject to maximum
tolerance limits. During FDA's Joint Advisory Committee meeting in July 1995,
the FDA's position was that compelling data would be required to make any
changes in the guidance. The Company believes that Wyeth-Ayerst has not met this
standard, and is in agreement with the conclusions set forth in the FDA
Preliminary Analysis of scientific/clinical data.
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In December 1996, in response to the FDA's request for comment, Duramed
submitted additional scientific data and comments to support the FDA's
conclusion in the 1991 guidance that delta8,9-dehydroestrone is nothing more
than a non-essential impurity and is not required to be present in a generic
conjugated estrogens product.
On March 19, 1997, the Senate Labor and Human Resource Committee held a hearing
on proposals to review and restructure the operations of the FDA. Dr. Michael
Friedman, Lead Deputy Commissioner and Deputy Commissioner for Operations,
presented the FDA testimony; he was joined at the witness table by FDA's Center
Directors. During the testimony, Dr. Janet Woodcock, Director of Drug
Evaluation and Research at the FDA, stated that a scientific conclusion has
been made on generic conjugated estrogens, but provided neither details about
the decision nor a specific time frame for announcing it. Dr. Woodcock further
stated that the conclusion needs to be articulated into a series of regulatory
actions and indicated that this will happen as expeditiously as possible. At
this time the Company is unable to determine when or if it will obtain FDA
approval to market conjugated estrogens. If the Company receives approval from
the FDA for its ANDA filings on all strengths 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
operating plan is significantly impacted by this event. If, however, conjugated
estrogens is ultimately not approved by the FDA or the FDA's decision
substantially delays the product approval, the Company could incur certain
write offs related to investments made to date in inventory and other
pre-launch activities and provisions of certain of the Company's contractual
agreements would become applicable. (See "Notes to Consolidated Financial
Statements Note C").
STRATEGIC ALLIANCES
The Company's business strategy includes enhancing its market position and
research and development efforts by entering into strategic alliance agreements.
The Company has an agreement with Schein Pharmaceutical, Inc. ("Schein") with
respect to the development, manufacture and marketing of its conjugated
estrogens products. Under the terms of the agreement, Schein provides project
funding and technical assistance while Duramed is responsible for product
development and manufacturing; both firms will participate in the marketing and
distribution of the products.
In June 1994 the Company entered into marketing, distribution and related
agreements with Ortho-McNeil Pharmaceutical Corporation ("Ortho-McNeil"). Under
the terms of the 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 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
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extension of these rights with Ortho-McNeil and based on discussions to date
believes that the distribution rights to these products will be extended. Loss
of these distribution rights would likely have a material adverse effect upon
the Company's results of operations. In addition to the distribution rights for
the products, Ortho-McNeil provided $2 million in cash and other financial
assistance. In exchange for the financial assistance provided to the Company
under the agreements, Ortho-McNeil obtained the right to receive a royalty on
the future sales of the Company's conjugated estrogens products. In addition,
Ortho-McNeil was to participate in marketing of the Company's conjugated
estrogens products and share in the profits if the Company is successful in
bringing the products to market. Duramed and Ortho-McNeil are cooperating to
amend the obligations of the original agreements regarding conjugated estrogens.
Both parties believe that it would be in their best interests to not engage the
Ortho-McNeil sales force, and to substitute a fixed payment to Ortho-McNeil in
place of the current payment arrangements. At this time, the Company cannot
predict the outcome of these discussions.
The Company has agreements with several manufacturers 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. For the years ended December 31, 1996, 1995
and 1994, respectively, the percentages of the Company's sales comprised of
products marketed for others were 35%, 31% and 28%. The gross profit generated
by these sales was approximately $2.6, $3.3 and $3.6 million in 1996, 1995 and
1994, respectively. For additional information with respect to the Company's
strategic alliance agreements see "Notes to Consolidated Financial Statements -
Note C."
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PRODUCTS
A summary, by therapeutic classification, of the products currently manufactured
or marketed by the Company is given below:
<TABLE>
<CAPTION>
Therapeutic Category Duramed Manufactured Marketed for Others Total
- ---------------------------------- ------------------------ --------------------------- -----------------------
Chemical Dosage Chemical Dosage Chemical Dosage
Entities Forms Entities Forms Entities Forms
------------------------ --------------------------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
Adrenal Cortical Steroids 1 1 - - 1 1
Analgesic - - 4 9 4 9
Anti-Glaucoma - - 1 2 1 2
Anti-Inflammatory - - 1 3 1 3
Anti-Parkinson Agents - - 1 3 1 3
Anti-Psychotic - - 1 4 1 4
Anti-Tuberculosis 1 1 - - 1 1
Anti-Viral - - 1 1 1 1
Cardiovascular Therapy 1 4 3 7 4 11
Cough/Cold/Decongestant 6 6 12 16 18 22
Gastrointestinal Stimulants - - 3 5 3 5
Hormonal Replacement - - 1 2 1 2
Musculoskeletal Disorders - - 2 3 2 3
Sympathicolytic Mydriatic - - 1 1 1 1
Vascular Headaches 1 1 - - 1 1
Vitamin Supplements - - 3 5 3 5
------------------------ --------------------------- -----------------------
TOTALS 10 13 34 61 44 74
======================== =========================== =======================
</TABLE>
Methylprednisolone, which is manufactured by Duramed, accounted for
approximately 41%, 53% and 55%, respectively, of the Company's sales in 1996,
1995 and 1994.
The Company does not have patent protection for any of its products and
trademarks are of relatively minor importance at this time. The Company's
operating strategy includes developing brand identity for certain of its
products. Certain of the Company's products have a degree of seasonality, the
effect of which the Company is attempting to mitigate by adding complimentary
products to its line.
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PRODUCT DEVELOPMENT
The Company's product development activities have increased significantly during
the past year, and the Company intends to continue aggressively funding product
development activities based upon available resources. In the third quarter of
1996, the Company completed the acquisition of Hallmark Pharmaceuticals, Inc.
("Hallmark"), a privately held pharmaceutical development company headquartered
in Somerset, New Jersey. The acquisition provides the Company with enhanced
development capabilities to pursue controlled and sustained release products.
Generic drug products with complex drug delivery systems typically experience
limited competition due to the technical barriers to developing these products,
and therefore generate higher margins.
The Company's product development strategy consists of three separate but
related components; (i) an internal research and development staff, (ii) joint
product development efforts with, or purchasing new product formulations from,
other parties and (iii) engaging outside experts to develop specified products
on a consulting basis.
Through the knowledge and experience attained through the pursuit of the
conjugated estrogens product, coupled with the development capabilities acquired
at Hallmark, the Company believes that it has assembled a strong product
development team with the abilities to successfully and efficiently formulate,
file and commercialize a portfolio of new products.
In addition to the conjugated estrogens products, the Company currently has
ANDAs for nine other chemical entities on file with the FDA. Assuming adequate
resources are in place, the Company's product development plan anticipates the
filing of up to an additional 17 ANDAs during 1997. The Company is also in the
process of filing to market the conjugated estrogens products in certain
markets outside of the United States.
During the fiscal years ended December 31, 1996, 1995 and 1994, product
development expenditures were $10.2 million, $6.0 million, and $1.9 million,
respectively, of which Hallmark related expenses comprised approximately $2.8
million and $1.5 million in 1996 and 1995, respectively. Additionally, in 1995
product development expenditures included approximately $1.6 million of certain
costs incurred in preparation for manufacturing the conjugated estrogens product
in commercial quantities. Product development expenditures are net of
reimbursements received from Schein under the agreement for the development of a
conjugated estrogens product (see "Notes to Consolidated Financial Statements -
Note C").
Formulations for all new products are subjected to laboratory testing and
stability studies and, when required or desirable, are tested for bioequivalence
to the reference product by qualified laboratories. Bio-studies, used to
demonstrate that the rate and extent of absorption of a generic drug are not
significantly different from the corresponding innovator product, currently cost
in the range of $250,000 to $700,000. Bio-studies for certain product classes
exceed that range. If the accumulated data demonstrates bioequivalency,
submission is then made to the FDA for its review and approval to manufacture
and market.
The development of new generic products, including formulation, stability
testing and obtaining FDA approval, generally takes at least 18-24 months.
Development of sustained release
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prescription products typically requires at least two bioequivalence studies for
most products and, therefore, total development time, including FDA approval,
may be at least two or three years. Liquid product development frequently does
not require bioequivalence studies and, including formulation, stability testing
and FDA approval, generally takes at least 12-18 months.
SALES AND MARKETING
Duramed sells its products to a broad range of over 200 customers located
throughout the United States. These customers include drug wholesalers, private
label distributors, direct buying retail chains, health maintenance
organizations, hospitals, nursing homes, retiree organizations, mail order
distributors, other drug manufacturers, mass merchandisers and government
agencies. The Company markets its products under the Duramed label as well as
under private label; on all prescription products which it manufacturers, the
Company is named on the label as the manufacturer. All marketing and sales
efforts are conducted principally by Duramed employees. Duramed promotes its
products through catalogs, trade shows, publications, telemarketing and direct
sales.
In 1996, 1995 and 1994, no single customer accounted for more than 10% of the
Company's net sales.
ORDER BACKLOG
The dollar amount of the Company's open orders at March 1, 1997 was
approximately $1.6 million as compared to approximately $2.3 million at March 1,
1996. The lower backlog in 1997 is partially attributable to the Company's
efforts to improve customer service. Although open orders are subject to
cancellation without penalty, management expects to fill substantially all of
such open orders within the current fiscal year. The Company's backlog may not
be indicative of net sales during the following reporting period.
COMPETITION
Competition in the generic prescription pharmaceutical industry is intense. The
Company competes with other generic drug product manufacturers, brand name
pharmaceutical companies which manufacture generic drug products and the
original manufacturers of brand name drug products which continue to produce
those products after patent expirations.
As other manufacturers introduce generic products in competition with the
Company's existing products, market share and prices with respect to such
existing products typically decline. Similarly, the Company's potential for
profits is reduced if competitors introduce products prior to the Company.
Accordingly, the level of revenue and gross profit generated by the Company's
current and prospective products depends, in part, on the number and timing of
introductions of competing products and the Company's timely development and
introduction of new products.
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The Company believes that the primary competitive factors are the ability to
develop new products on a timely basis, price, product quality, customer
service, breadth of product line and reputation. Many of the Company's
competitors have greater financial and other resources than the Company and are
able to expend more for product development and marketing.
GOVERNMENT REGULATION
All pharmaceutical manufacturers are subject to extensive regulation by the
federal government, principally by the FDA, the Drug Enforcement Administration
and by state governments. The Federal Food, Drug and Cosmetic Act, the
Controlled Substance Act, the Generic Drug Enforcement Act of 1992 and other
federal statutes and regulations govern or influence the testing, manufacture,
safety, labeling, storage, recordkeeping, approval, pricing, advertising and
promotion of the Company's products. Noncompliance with applicable requirements
can result in fines, seizure of products, total or partial suspension of
production, refusal of the government to enter into supply contracts or to
approve new drug applications, criminal prosecution and corporate debarment. The
FDA also has the authority to institute proceedings to revoke previous approvals
of drug products.
FDA approval is required before most prescription drug products can be marketed.
Each dosage form of a specific generic drug product, whether a different form of
administration or a different strength, is typically treated as a separate drug
product by the FDA and requires separate submission. There are two types of
applications currently used to obtain FDA approval of a new drug product.
1. New Drug Application ("NDA"). With respect to drug products with active
ingredients not previously approved by the FDA or new uses for previously
approved active ingredients, a prospective manufacturer must conduct and
submit to the FDA complete clinical studies to prove that product's safety
and efficacy. An NDA may also be submitted for a drug product with
previously approved active ingredients if the abbreviated procedure
discussed below is not available.
2. Abbreviated New Drug Application ("ANDA"). This is an abbreviated procedure
for obtaining FDA approval for generic drug products which are
bioequivalent to brand name drugs. In contrast to the NDA procedure, this
procedure does not require conducting complete animal and clinical studies
for safety and efficacy, and instead requires data illustrating that the
generic drug formulation is bioequivalent to a previously approved drug.
"Bioequivalence" indicates that the rate of absorption and the levels of
concentration of a generic drug in the body are substantially equivalent to
those of the previously approved equivalent brand name drug and, therefore,
that the drug will produce an equivalent therapeutic effect.
The Company's product development pursuits are primarily focused on products
which can obtain regulatory approval through the ANDA submission process.
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Among the requirements for new drug approval is that the prospective
manufacturer's methods conform to the FDA's Current Good Manufacturing Practices
("CGMP Regulations"). The CGMP Regulations must be followed at all times during
which the approved drug is manufactured. To ensure compliance with the standards
set forth in these regulations, the Company must continue to expend time, money
and effort in the areas of production and quality control. Failure to comply
risks possible FDA action such as the suspension of manufacturing or the seizure
of drug products.
The Company also is subject to environmental protection laws and regulations of
federal, state and local governmental authorities, including the Clean Air Act
and Occupational Safety and Health Administration ("OSHA") requirements. Under
the Clean Air Act, the Company is required to meet certain air emissions
standards. Under OSHA, the Company is required to meet certain safety standards,
including those relating to equipment and procedures, indoor air quality and
data sheets on material used at the Company's facilities. Compliance with these
laws had no material effect on the Company's capital expenditures, operating
results or competitive position during fiscal 1996, and the Company anticipates
no such material effect during fiscal 1997.
RAW MATERIALS
The drugs and other raw materials used in the Company's products are purchased
through United States distributors for foreign and domestic manufacturers of
bulk pharmaceutical chemicals and are generally available from numerous sources.
The federal drug application process requires specification and approval of raw
material suppliers. If raw materials from all specified suppliers become
unavailable, FDA approval of a new supplier is required, which can cause a delay
of six months or more in the manufacture of the drug involved. To date, the
Company has not experienced any significant delays and, where economical and
feasible, will generally specify two or more suppliers in its drug applications.
LIABILITY INSURANCE
Duramed's business exposes it to the potential liability which is inherent in
the production of drugs for human use. Although the Company makes every effort
to maintain strict quality control programs and carries product liability
insurance of $5.0 million per incident and $5.0 million in the aggregate per
year (with a deductible amount of $25,000 per claim and $250,000 in the
aggregate per year), it cannot be fully protected from potential liability in
this area by any reasonable amount of insurance. Additionally, there can be no
assurance that the Company's product liability insurance can be renewed or
renewed at a rate comparable to that now being paid by the Company.
EMPLOYEES
As of March 24, 1997, Company had approximately 303 full-time employees. There
are no collective bargaining agreements in effect at the Company.
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ITEM 2. PROPERTIES.
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Duramed's manufacturing, laboratory, and product development activities in Ohio
are conducted primarily in a 190,000 square foot plant located on 17 acres in
Cincinnati, which includes a 38,000 square foot expansion designed to meet the
initial projected manufacturing requirements of conjugated estrogens and other
HRT products under development. The facility is collateral for certain of the
Company's borrowings.
The Company also conducts product development, and limited manufacturing
activities, from a leased 38,000 square foot facility in Somerset, New Jersey.
The lease pertaining to this facility expires on May 31, 2000 and the Company
has options to purchase the facility, initially exercisable on June 1, 1998.
The Company's executive offices, certain corporate support groups and
distribution activities are conducted from a 28,200 square foot facility in
Cincinnati, Ohio. The lease for this facility extends to February 28, 2000, and
contains options to renew for up to an additional three years.
The Company also has two leased warehouses in Cincinnati, Ohio. One is
approximately 28,000 square feet and the other facility is approximately 10,000
square feet. Both warehouses are being leased on a month to month basis.
The Company believes its facilities and equipment are well maintained, in good
operating condition and, in general, suitable for the Company's purposes. The
Company is currently reviewing its facility requirements and will likely need
additional space and equipment to execute its business plan (see "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" for a discussion of anticipated facility and equipment resource
requirements).
ITEM 3. LEGAL PROCEEDINGS.
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The Company is involved in various lawsuits and claims which arise in the
ordinary course of business. Although the outcome of such lawsuits and claims
cannot be predicted with certainty, the disposition thereof will not, in the
opinion of management, result in a material adverse effect on the Company's
financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
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None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
- -----------------------------------------------------------------------------
MATTERS.
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The Company's Common Stock is quoted on the Nasdaq National Market System under
the symbol "DRMD". The following table sets forth the range of high and low sale
prices for the Common Stock as reported by the Nasdaq National Market System for
the periods indicated for the years ended December 31, 1996 and 1995:
<TABLE>
<CAPTION>
High Low
<S> <C> <C>
1996:
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . .$23.50 $ 14.00
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20.00 14.50
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18.75 12.75
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.88 6.50
1995:
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . .$20.50 $ 14.25
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18.75 12.00
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25.50 14.00
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17.25 12.75
</TABLE>
As of December 31, 1996 the Company had 1,331 holders of record of the Common
Stock. The Company believes that, in addition, there are a significant number of
beneficial owners of its Common Stock whose shares are held in "street name."
The Company has not paid any cash dividends on its Common Stock since its
inception and does not intend to pay cash dividends in the foreseeable future.
Under the terms of the Company's current loan agreements with its bank, no
dividend declaration is permitted. In addition, the terms of the Company's loan
agreement with the State of Ohio require that the Company not pay any dividends
to stockholders unless an amount equal to 30% of such dividends is paid to the
State of Ohio as an additional principal reduction.
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ITEM 6. SELECTED FINANCIAL DATA.
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The following table sets forth selected financial data, derived from the audited
financial statements of the Company, for each of the five years in the period
ended December 31, 1996. This information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" elsewhere herein.
<TABLE>
<CAPTION>
Year ended December 31, 1996 1995 1994 1993 1992
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(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Net sales $ 43,855 $ 49,624 $ 45,274 $ 30,293 $ 16,685
- --------------------------------------------------------------------------------------------
Pretax (loss) income (20,810) (991) 5,765 (1,240) (4,964)
- --------------------------------------------------------------------------------------------
Income taxes 3,901 -- (3,786) 25 --
- --------------------------------------------------------------------------------------------
Net (loss) income (24,711) (991) 9,551 1,215 (4,964)
- --------------------------------------------------------------------------------------------
Preferred dividends 929 123 -- -- --
- --------------------------------------------------------------------------------------------
Net (loss) income applicable to
common stockholders (25,640) (1,114) 9,551 1,215 (4,964)
- --------------------------------------------------------------------------------------------
Net (loss) income per share
of common stock:
Primary (2.44) (.14) .93 .14 (.77)
---------------------------------------------------------------------------------------
Fully diluted (2.44) (.14) .91 .13 (.77)
---------------------------------------------------------------------------------------
Cash dividends
per common share -- -- -- -- --
---------------------------------------------------------------------------------------
Total assets 53,634 45,177 37,002 22,959 16,128
- --------------------------------------------------------------------------------------------
Long-term liabilities 11,878 19,837 18,267 23,201 1,703
- --------------------------------------------------------------------------------------------
</TABLE>
- 14 -
<PAGE> 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------------------------------------------------------------------------------
RESULTS OF OPERATIONS.
- ----------------------
RESULTS OF OPERATIONS
- ---------------------
The table below sets forth the components of the Company's results of operations
as a percentage of net sales, as well as the percentage change in each item from
year to year.
<TABLE>
<CAPTION>
Percentage
Percentage of Sales ----------
Year Ended December 31, Increase or (Decrease)
----------------------- ----------------------
1996 1995 1994 1995-96 1994-95
---- ---- ---- ------- -------
<S> <C> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% (11.6)% 9.6%
- -------------------------------------------------------------------------------------------------------------------------
Cost of goods sold 72.2 59.9 55.6 6.6 17.9
Product development 23.3 12.0 4.1 72.0 219.9
Purchase of in process
research and development 19.5 -- -- * *
Selling 10.3 7.3 6.3 24.5 27.5
General and administrative 17.8 17.3 16.3 (9.1) 16.9
Interest expense 4.2 5.5 5.0 (32.1) 21.1
Preferred dividends 2.1 0.2 -- 657.3 *
Income taxes 8.9 * (8.4) * *
- -------------------------------------------------------------------------------------------------------------------------
Net (loss) income (58.5)% (2.2)% 21.1% * *
=========================================================================================================================
<FN>
*Not a meaningful percentage.
</TABLE>
NET SALES
Net sales decreased by $5.8 million (11.6%) in 1996, compared with an increase
of $4.3 million (9.6%) in 1995. The decline in net sales in 1996 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 on some of the products that the Company has sourced from other
manufacturers, as well as general price erosion resulting from actions by
competing distribution channel members. Ortho-McNeil deferred revenues
contributed $500,000 to net sales in 1996, and $1.5 million in 1995 (see "Notes
to Consolidated Financial Statements - Note E."). These sales declines were
offset to a degree by continued growth in sales of the Ortho-McNeil products,
as well as sales of certain recently introduced products which the Company
markets under various arrangements with the manufacturers.
The sales increase in 1995 was primarily attributable to continued growth in
sales of the Ortho-McNeil products, which the Company commenced marketing in the
fourth quarter of 1994, and recognition of $1.5 million of deferred revenue. Net
sales in the fourth quarter of 1996 were $11.0 million, an increase of $900,000
over the $10.1 million (excluding $750,000 in deferred revenue recognized in the
fourth quarter of 1995) recorded in the fourth quarter of 1995.
- 15 -
<PAGE> 16
Methylprednisolone accounted for 41% of sales in 1996, 53% of sales in 1995, and
55% in 1994. No other product has accounted for more than 10% of net sales in
these years.
GROSS MARGIN
Gross margins, and the corresponding percentages of net sales for 1996, 1995 and
1994, were $12.2 million (27.8%), $19.9 million (40.1%), and $20.0 million
(44.4%), respectively. The substantially lower gross margin in 1996 is
attributable to lower unit sales and lower prices on the Company's
methylprednisolone product, and price erosion on many of the products in the
Company's line due to increased competition. The gross margin in 1996 was also
impacted by inventory charges of approximately $900,000 to recognize impairment
of value for finished products with limited remaining shelf life. The lower
gross margin in 1995 compared to 1994 was attributable to the product sales mix
and price erosion on certain of the Company's products. The gross margin in 1995
was favorably impacted by the recognition of $1.5 million in deferred revenues,
compared to the recognition of $500,000 of deferred revenues in 1996. In 1994,
the increases in the Company's gross margin were due primarily to increased
sales of one of the Company's key products, along with the effects of higher
overhead absorption due to volume increases and manufacturing efficiencies.
There can be no assurance that, with the Company's current limited product line,
the present gross margin levels can be maintained if the Company's products,
particularly methylprednisolone, should experience further increased
competition.
OPERATING EXPENSES
Product Development
Product development expenditures for the years ended December 31, 1996, 1995 and
1994 were approximately $10.2 million, $6.0 million and $1.9 million,
respectively. In 1996, the Company's product development expenses included
approximately $3.4 million in expenses for bioequivalency studies and milestone
payments to alliance partners. Also, during 1996, the Company expanded its
product development capabilities through the acquisition of Hallmark. Funding of
product development activities at Hallmark in 1996, exclusive of the charge
recorded in conjunction with the acquisition, was $2.8 million compared with
$1.5 million in 1995. During 1995, product development expenditures included
approximately $1.6 million of certain costs incurred in preparation for
manufacturing the conjugated estrogens product in commercial quantities. Product
development expenditures are net of reimbursements received from Schein pursuant
to the terms of the contractual agreement for the development of the conjugated
estrogens product.
The increase in 1996 product development expenditures reflects the Company's
commitment to expanding its product development activities. The Company intends
in 1997 to continue to significantly increase its investment in product
development, as its available resources permit.
Purchased Research and Development
In connection with the acquisition of Hallmark in September 1996, the Company
recorded a one-time, non-cash charge of approximately $8.6 million for the
portion of the consideration allocated
- 16 -
<PAGE> 17
to purchase of in-process research and development. (See Notes to Consolidated
Financial Statements - Note B.)
Selling
Selling expenses increased $889,000 in 1996, as a result of an incremental
$750,000 charge recorded in the third quarter of 1996 to supplement the
allowance for doubtful accounts, primarily as a result of the bankruptcy
petition filed by a large wholesaler customer, and a $300,000 charge recorded
in the fourth quarter of 1996 to establish a reserve for potential shelf stock
adjustments. Exclusive of these charges, selling expenses declined by $161,000
compared to 1995 due to steps implemented to control costs. In 1995 selling
expenses increased by $782,000 as a result of increased sales and marketing
activities and the expansion of the Company's sales force in anticipation of
the commercial launch of conjugated estrogens and in order to develop strategic
alliance opportunities, enhance service to existing customers and provide
additional resources to contact prospective customers.
General and Administrative
In 1996, general and administrative expenses declined by $782,000. The reduction
was due to the recognition in the fourth quarter of 1996 of a $330,000 reduction
of general and administrative expenses resulting from a sublessor's lease
renewal (see "Notes to Consolidated Financial Statements - Note E") and steps
implemented by management to reduce compensation costs and other controllable
expenses. In 1995, general and administration expenses increased by $1,242,000
due in part to staff increases and professional fees associated with an
increased emphasis on business development activities. Additionally, during 1996
and 1995 the Company incurred incremental expenses of approximately $503,000 and
$756,000, respectively, in connection with responding to various regulatory and
legal issues associated with the Company's pending ANDA for conjugated
estrogens.
Net Interest Expense
The Company's borrowings are primarily variable rate facilities. In 1996, the
Company's net interest expense declined by $874,000 compared to 1995, due to
reductions in average borrowings achieved by paying down bank indebtedness with
a portion of the proceeds of the issuances of the Company's Series C and Series
D Preferred Stock (see "Liquidity and Capital Resources" below). Also, in 1996
the Company earned interest income from the short term investment of a portion
of the Series D Preferred Stock proceeds. The increase in interest expense in
1995 compared to 1994 resulted from an increase in average borrowings.
Income Taxes
At December 31, 1996 the Company had cumulative net operating loss carryforwards
of approximately $41.4 million for federal income tax purposes which expire in
the years 2004 to 2011. Additionally, the Company had cumulative losses from
Duramed Europe that amounted to approximately $3.0 million which are not
deductible for U.S. tax purposes. In 1994, based upon a forecast of future
operating results, the Company concluded that it would, more likely than not, be
able to realize a portion of the benefit of its net deferred tax assets.
Accordingly, in the fourth
- 17 -
<PAGE> 18
quarter of 1994 the valuation allowance was reduced and a $3.9 million deferred
tax benefit was recorded. The carrying value of the deferred tax asset and the
related valuation allowance are based on a forecast of future operating
results, which excludes potential revenues associated with products that are
under development or have not yet obtained regulatory approval. Based on this
criteria, in the fourth quarter of 1996 the Company recognized a non-cash
charge of $3.9 million to restore fully the valuation allowance pertaining to
the Company's deferred tax assets, principally net operating loss
carryforwards.
Excluding the adjustments to the valuation allowance, the Company did not record
a provision for income taxes in either 1996 or 1995. In 1994, the Company
recorded a current alternative minimum tax provision of $115,000.
Preferred Dividends
Both the Series C and Series D Preferred Stock provided for an 8% dividend on
unconverted preferred shares. Preferred stock dividends of $929,000 in 1996
represent the dividend provision associated with the $24.0 million of Series C
stock issued in November 1995 and February 1996, and the $20.0 million offering
of Series D Stock which was completed in August 1996. The preferred dividends
of $123,000 in 1995 represent the dividend provision associated with the $12.0
million of Series C Preferred Stock issued in November 1995 (see "Notes to
Consolidated Financial Statements - Note E").
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 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 and based on
discussions to date believes that the distribution rights to these products will
be extended. Loss of these distribution rights would likely have a material
adverse effect upon the Company's financial position and results of operations.
A conscious decision was made in early 1995 to incur certain 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.
Additionally, as previously discussed, the Company has been aggressively
increasing product development spending, including funding the operations at
Hallmark. This planned investment in the future has contributed substantially to
increased expenses, and therefore reduced levels of performance. The Company
remains optimistic regarding the approval of its conjugated estrogens product
and the resulting increase in revenues.
- 18 -
<PAGE> 19
The Company also continues to seek potential business development opportunities
which could provide additional product revenues. However, it is not certain if,
or when, revenues from these sources 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 would expect to report substantial losses throughout 1997. (See
"Liquidity and Capital Resources" below).
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," requires the Company either to adopt the fair value method of
accounting for stock options in its financial statements or to retain its
existing method and disclose the pro forma effects of using the fair value
method beginning in 1996. The Company determined that it will retain its
existing method of accounting for stock options and include pro forma
disclosures in the notes to its consolidated financial statements. Accordingly,
the standard has no effect on the Company's financial condition or results of
operations.
INFLATION
Inflation has not had, and is not expected to have, a material impact upon the
Company's business.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
In August 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 bulk of the proceeds from the issuance of the
Series D Preferred Stock were utilized to pay off the Company's revolving credit
facility, with the balance initially invested in short-term securities. The
Series D Preferred Stock was convertible on October 16, 1996, at the option of
the holders, at 15% below the average of the closing bid prices of the Common
Stock of the Company over the ten day trading period ending the day prior to the
date of conversion. At December 31, 1996, all $20.0 million of the Series D
Stock had been converted to 2,832,966 shares of the Company's Common Stock, at
an average conversion price of $7.06 per common share.
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. Through August 1996,
the full $24.0 million of the Series C Stock had been converted to 1,672,417
shares of Common Stock, at an average price of $14.35 per common share.
- 19 -
<PAGE> 20
The Company's revolving credit facility, as amended, permits the Company to
borrow up to $6.5 million, based upon eligible collateral ($10.4 million as of
December 31, 1996). The bank has indicated to the Company a willingness to
expand the amount of availability on the revolving credit facility if the
Company obtains additional sources of financing or the Company's operating
results substantially improve. As of March 27, 1997, the Company had no
remaining short term cash equivalent investments, and had drawn $1.5 million
against the revolving credit facility.
The Company paid off a $4.5 million term note during 1996 with the proceeds from
the Series C Preferred Stock offering. 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.
Under the terms of the Company's agreement with Ortho-McNeil, if FDA approval
of the conjugated estrogens product had been obtained by June 1996, title to
the equipment would have transferred to the Company over a specified period.
Since this requirement was not met, 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. 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 (see "Notes to Consolidated Financial Statements - Note E)."
Operating activities in 1996 used approximately $11.8 million in cash,
principally attributable to a $3.7 million increase in inventory and funding of
operating losses. 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, stocking of additional new products which the Company
commenced marketing and distributing in 1996 and manufacturing of the conjugated
estrogens product in anticipation of FDA approval. As a result of a reduction in
sales and gross profits, 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 $12.3 million for the year ended December 31, 1996, excluding the
one-time charge for purchase of in-process research and development in
connection with the Hallmark acquisition, and the $3.9 million non-cash charge
to adjust to the valuation allowance associated with deferred tax assets.
On September 13, 1996, Duramed completed the acquisition of the assets and
business of Hallmark, a privately held pharmaceutical development company
headquartered in Somerset, N.J. with technical expertise and capabilities with
respect to advance drug delivery systems technologies. As consideration, Duramed
issued 640,000 shares of the Company's Common Stock, and warrants to purchase
400,000 shares of Common Stock at a purchase price of $25.00, and assumed
certain obligations of Hallmark, a portion of which Duramed paid off at closing.
This acquisition was accounted for by the purchase method of accounting. The
purchase price was allocated to the tangible assets acquired based on their fair
values, and a one-time, non-cash charge of approximately $8.6 million was
recorded for purchased in-process research and development. The Company's future
product development expenses are expected to continue to reflect the costs of
Hallmark operations at the rate of approximately $1.0 million per quarter during
1997. For additional information on the Hallmark acquisition see "Notes to
Consolidated Financial Statements - Note B."
The Company intends to continue aggressively funding product development
activities as its resources permit. Continued expansion of the Company's product
development efforts will necessitate capital investment in equipment and
facility, as well as a need for substantial
- 20 -
<PAGE> 21
incremental personnel, to provide the capabilities to produce the resulting
products in commercial quantities. The resources required to satisfy the
requirements of the Company's expanded business plan are significant.
The Company is awaiting the FDA decision on the Company's pending ANDA filings
on all strengths of conjugated estrogens. If the Company receives approval from
the FDA for its ANDA filings on all strengths of conjugated estrogens and this
product is successfully manufactured and marketed, the resulting favorable
financial impact is expected to be significant. On March 19, 1997, in response
to questions raised at a Senate committee meeting, Dr. Janet Woodcock, Director
of Drug Evaluation and Research at the FDA, stated that a scientific conclusion
has been made on generic conjugated estrogens, but provided no details about
the decision and no specific time frame for announcing it. Dr. Woodcock further
stated that the conclusion needs to be articulated into a series of regulatory
actions and indicated that this will happen as expeditiously as possible. At
this time the Company is unable to determine when or if it will obtain FDA
approval to market conjugated estrogens.
The Company is currently exploring financing alternatives to fund its expanded
product development plan and the Company's capital requirements. At this time,
the Company cannot determine if these capital raising efforts will be successful
or, if successful, whether any capital infusion will result in a substantial
dilution of the ownership interest of the Company's current stockholders. Also,
the Company is currently pursuing certain business development opportunities,
which could result in additional products and profit contributions. On a longer
term basis, if the Company receives FDA approval on pending ANDA applications
(other than its conjugated estrogens application) and is successful with certain
of its other product development pursuits, the availability of these products
could significantly improve the Company's operating results.
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, in the fourth quarter of 1996, after
management was informed that a decision by the FDA on the Company's conjugated
estrogens application would be delayed as a result of FDA's decision to publish
a notice for public comment, management implemented major changes to the
business plan to reduce operating expenses while preserving key long-term
projects, pending the FDA decision on the conjugated estrogens application.
Management is encouraged by the results to date from the product development
program and the feedback from FDA on the Company's pending ANDA applications and
has concluded that it is in the 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, in the absence of approval of the Company's conjugated
estrogens product, such actions will result in continued reported losses for the
Company until the Company begins to receive anticipated revenues from products
now on file 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
- 21 -
<PAGE> 22
operations in the absence of approval of the conjugated estrogens product until
after 1997. Accordingly, in the meantime, the Company's expanded product
development program, which includes the costs of funding product development
pursuits through the Company's Hallmark division, will not be supported from
Company profits but will require financing through obtaining of additional
capital. 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-K 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-K 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 AND (IV) THE ABILITY
OF THE COMPANY TO RETAIN AND ATTRACT PERSONNEL IN KEY OPERATIONAL AREAS.
Item 8. Financial Statements and Supplementary Data.
- ---------------------------------------------------------
The following financial statements are included in this report on Form 10-K:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors ........................................... F-1
Consolidated Balance Sheets as of
December 31, 1996 and 1995 ......................................... F-2
Consolidated Statements of Operations for
the Years Ended December 31, 1996,
1995 and 1994 ...................................................... F-4
Consolidated Statements of Stockholders' Equity
for the Years Ended December 31, 1996,
1995 and 1994 ...................................................... F-5
Consolidated Statements of Cash Flows for
the Years Ended December 31, 1996, 1995 and 1994 ................... F-6
Notes to Consolidated Financial Statements ............................... F-7
</TABLE>
Item 9. Changes in and Disagreements with Accountants on Accounting
- ---------------------------------------------------------------------------
and Financial Disclosure.
- -------------------------
None.
- 22 -
<PAGE> 23
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
DIRECTORS
The Company's corporate powers are exercised, and its business, property and
affairs are managed, by or under the direction of the Board of Directors.
Directors of the Company are elected at the Annual Meeting of Stockholders.
Currently there are five directors. Set forth below is certain information with
respect to each director.
E. THOMAS ARINGTON, age 60. Mr. Arington has been the Company's President
and Chief Executive Officer since October 1987. He became a director of the
Company in December 1987 and its Chairman of the Board in May 1988. Prior to
joining the Company, he was President of MarketMaster, Inc., a health care
consulting firm which had the exclusive rights to market the Company's products.
MarketMaster, Inc. was acquired by the Company in December 1987. Mr. Arington's
career has also included 17 years with Lederle Laboratories, a division of
American Cyanamid, where he held a variety of executive management positions.
GEORGE W. BAUGHMAN, age 59. Mr. Baughman was elected a director of the
Company in April 1989. Mr. Baughman has been President and Chairman of Advanced
Research Associates, a consulting firm specializing in information systems and
technology and in financial analysis and planning, for more than the past five
years. He was employed by The Ohio State University for twenty-five years,
retiring as Director of Special Projects, Office of President.
DEREK G. LAYTON, PH.D., age 56. Dr. Layton has been a director of the
Company since November 1996 and President of Duramed Europe, Ltd., a wholly
owned subsidiary of the Company, since its formation in May 1994. Prior to
joining the Company, he was a partner with the executive search company Ward
Howell, Inc. In 1983 Dr. Layton co-founded Porton International plc, an
Anglo-American conglomerate of companies focused on healthcare and
biotechnology. He served as Group Managing Director from 1983 to 1985 and as
Chief Executive Officer from 1985 to 1989. Dr. Layton has held a number of
senior academic positions in Europe and the U.S. and acted as an advisor to
several governments on the impact of biotechnology on existing industries.
STANLEY L. MORGAN, age 79. Mr. Morgan was elected a director of the Company
in April 1989. Mr. Morgan is the retired Executive Vice President of Ben Venue
Laboratories, Inc., a leading pharmaceutical manufacturer of sterile dosage
forms and bulk pharmaceutical products. He served Ben Venue in many capacities
including Chief Administrative Officer, Chief Engineer and Executive Director of
Research and Development. Since retirement he has been a consultant to the
pharmaceutical industry.
S. SUNDARARAMAN, age 60. Mr. Sundararaman is the Company's Secretary and
has been a director of the Company since 1982. Mr. Sundararaman is Manager,
Sales Automation and Distribution, USA for Lufthansa German Airlines and has
been with that company since 1961.
<PAGE> 24
EXECUTIVE OFFICERS
The current executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Title
- ---- --- -----
<S> <C> <C>
E. Thomas Arington 60 Chairman of the Board, President and Chief
Executive Officer
S. Sundararaman 60 Secretary and Director
Jeffrey T. Arington 36 Senior Vice President, Marketing, Sales and
Science
Timothy J. Holt 44 Senior Vice President, Finance and
Administration, Treasurer and Chief Financial
Officer
</TABLE>
Information about Messrs. E. Thomas Arington and Sundararaman is given
above. Information about the Company's other executive officers is as follows:
JEFFREY T. ARINGTON. Mr. Arington has been Senior Vice President,
Marketing, Sales and Science since 1995. He served as the Company's Senior
Vice President, Marketing, Science and Operations from 1994 until 1995, as Vice
President, Sales and Marketing of the Company from 1989 until 1994 and as
Executive Director of Sales and Marketing from 1987 until 1989. From 1984
until 1987, he was employed by MarketMaster in a variety of executive
positions. Jeffrey T. Arington is E. Thomas Arington's son.
TIMOTHY J. HOLT. Mr. Holt has been Senior Vice President, Finance and
Administration since April 1994. He served as Vice President, Finance of the
Company from 1985 through March 1994. Prior to joining the Company in 1985, Mr.
Holt was Vice President-Finance and Chief Financial Officer of Vortec
Corporation, a then publicly held company operating in the fields of specialty
manufacturing and home health care equipment, and also held financial
management positions with privately held companies including Eagle Software
Publishing.
Officers of the Company are elected by, and serve at the discretion of,
the Board of Directors.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's executive officers and directors, and persons who beneficially own
more than ten percent of the Company's equity securities, to file reports of
security ownership and changes in such ownership with the Securities and
Exchange Commission (the "SEC"). Officers, directors and greater than
ten-percent beneficial owners also are required by SEC regulations to furnish
the Company with copies of all Section 16(a) forms they file. Based upon a
review of copies of such forms and written representations from its executive
officers and directors, the Company believes that all Section 16(a) filing
requirements were complied with on a timely basis during and for 1996.
ITEM 11. EXECUTIVE COMPENSATION.
SUMMARY INFORMATION. The following table sets forth, for the fiscal years
indicated, amounts of cash and certain other compensation paid by the Company
to (i) Mr. E. Thomas Arington, (ii) each of the Company's other executive
officers at the end of 1996 whose salary and bonus exceeded $100,000, and (iii)
a former executive officer of the Company. Mr. Arington and these other
persons are sometimes referred to as the "named executive officers."
<PAGE> 25
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Compensation
Annual Compensation Awards
--------------------------------------------
Other Securities
Name and Annual Underlying All
Principal Compen- Stock Option Other
Position Year Salary Bonus sation Grants Compensation
($) ($) ($)(1) # ($)(2)
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
E. Thomas Arington 1996 $369,213 $ --- --- 518,500 $32,522
Chief Executive Officer 1995 422,142 --- --- --- 35,159
1994 400,000 461,000 --- 95,158 27,699
Jeffrey T. Arington 1996 $148,489 $ --- --- 17,000 $ 3,107
Senior Vice President 1995 155,262 --- --- --- 3,308
1994 137,885 50,000 --- --- 3,883
Timothy J. Holt 1996 $145,883 $ --- --- 15,000 $ 3,188
Senior Vice President 1995 155,262 --- --- --- 5,540
and Treasurer 1994 137,885 50,000 --- --- 4,115
Ivan E. Pusecker(3) 1996 $135,123 $ --- --- 38,000 $ 3,040
1995 144,606 --- --- --- 3,830
1994 124,292 40,000 --- --- 4,030
- -------------
</TABLE>
(1) None, other than perquisites which did not exceed the lesser of $50,000 or
10% of salary and bonus for any named executive officer.
(2) Amounts disclosed for 1996 are comprised of the following: (i) term
and/or whole life insurance premium payments for the benefit of Mr. E.
Thomas Arington ($23,629), Mr. Jeffrey T. Arington ($308), Mr. Holt ($540)
and Mr. Pusecker ($830); (ii) disability insurance premium payments for
Mr. E. Thomas Arington ($5,893); (iii) matching contributions to the
Company's 401(k) Plan on behalf of Mr. E. Thomas Arington ($3,000), Mr.
Jeffrey T. Arington ($2,799), Mr. Holt ($2,648) and Mr. Pusecker ($2,210)
in respect of their contributions to the Plan.
(3) Although Mr. Pusecker continues to render service to the Company as a full
time employee, he resigned as an executive officer of the Company on
November 5, 1996.
STOCK OPTIONS. The following table presents information on option grants
during 1996 to the named executive officers. The Company's plans do not
provide for the grant of stock appreciation rights.
<PAGE> 26
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Individual Grants(1)
-----------------------------------------------------------------------------------
Potential Realizable
Number % of Value at Assumed
of Total Annual Rates of Stock
Securities Options Exercise Price Appreciation for
Underlying Granted to or Base Option Term
Options Employees in Price Expiration ---------------------------
Name Granted (#) Fiscal Year ($/Sh) Date 5% ($) 10% ($)
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
E. Thomas Arington 500,000 48.6% $8.625 5/13/06 $1,795,855 $5,414,034
18,500 1.8% $8.625 5/13/06 $ 66,447 $ 200,319
Jeffrey T. Arington 10,000 1.0% $8.625 5/13/06 $ 35,917 $ 108,281
7,000 0.7% $8.625 7/11/06 $ 25,142 $ 75,796
Timothy J. Holt 10,000 1.0% $8.625 5/13/06 $ 35,917 $ 108,281
5,000 0.5% $8.625 7/11/06 $ 17,959 $ 54,140
Ivan E. Pusecker 10,000 1.0% $8.625 5/13/06 $ 35,917 $ 108,281
5,000 0.5% $8.625 7/11/06 $ 17,959 $ 54,140
23,000 2.2% $7.625 11/5/06 $ 110,292 $ 279,503
</TABLE>
(1) All options having an expiration date of May 13, 2006 were granted
originally on May 13, 1996 with an exercise price of $17.50 per share, and
all options having an expiration date of July 11, 2006 were granted
originally on July 11, 1996 with an exercise price of $14.50 per share.
These options were repriced on November 11, 1996.
The grants for 10,000 shares to each of Messrs. Jeffrey T. Arington, Holt
and Pusecker became exercisable as to 50% of the shares on May 13, 1996
and become exercisable as to the remaining 50% on May 13, 1997. The
23,000 share grant to Mr. Pusecker became exercisable on November 5, 1996.
All other options become exercisable at a maximum rate of 25% of the
shares per year beginning on the first anniversary of the date of grant.
Each option becomes exercisable in full (i) if any person becomes, or
commences a tender offer which could result in the person becoming, the
beneficial owner of more than 50% of the outstanding shares of the
Company's Common Stock or (ii) in the event of the execution of an
agreement of merger, consolidation or reorganization pursuant to which the
Company is not to be the surviving corporation or the execution of an
agreement of sale or transfer of all or substantially all of the assets of
the Company. Under certain change-of- control circumstances, an optionee
will be entitled to receive a cash payment equal to the difference between
the "fair value" of all unexercised option shares and the aggregate option
price of those shares.
With respect to each named executive officer, the following table sets
forth information concerning option exercises during 1996 and unexercised
options held at December 31, 1996.
<PAGE> 27
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION VALUES
<TABLE>
<CAPTION>
Number of
Securities
Value Underlying Value of
Realized ($) Unexercised Unexercised In-
Options at the-Money Options
(Market Price FY -End (#) at FY-End ($)
Shares on Exercise
Acquired on Less Exercise Exercisable/ Exercisable/
Name Exercise (#) Price) Unexercisable Unexercisable
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
E. Thomas Arington --- --- 949,843/418,500 $4,426,902/---
Jeffrey T. Arington 8,000 $118,000 100,001/12,000 $543,705/---
Timothy J. Holt --- --- 83,334/10,000 $443,329/---
Ivan E. Pusecker 23,000 $402,010 66,200/10,000 $224,990/---
</TABLE>
COMPENSATION OF DIRECTORS. During 1996, nonemployee directors of the
Company received an annual fee of $10,000, fees of $1,200 for each Board
meeting attended, plus reimbursement of expenses, and fees of $500 for each
Board meeting held by conference telephone. Committee meeting fees are paid at
the same rates as fees for Board meetings; however, no fees are paid for
committee meetings held on the same dates as Board meetings. No fees are paid
to directors who are also employees of the Company. Each nonemployee director
also is annually awarded nondiscretionary options to purchase 5,000 shares of
the Company's Common Stock and is reimbursed by the Company for up to $7,500
per year in legal and financial consulting expenses.
The Company has an unfunded pension plan covering nonemployee directors
who have served on the Board for at least five years. No director who is, or
at any time during the five years prior to the end of service as a director
was, an employee of the Company may participate in the plan. The plan provides
an annual benefit, payable monthly from the time a participating director
ceases to be a member of the Board until death, equal to the director's most
recent annual Board fee, as adjusted annually to reflect changes in the
Consumer Price Index. The right of a director to receive benefits under the
plan is forfeited if the director engages in any activity determined by the
Board to be contrary to the best interests of the Company.
EMPLOYMENT AGREEMENT. On March 30, 1994, the Company entered into an
Amended and Restated Employment Agreement (the "Agreement") with Mr. E. Thomas
Arington. The initial term of the Agreement continues until December 31, 1998,
subject to automatic annual extensions if notice of termination is not given by
either party prior to specified dates. The effect of the Agreement is to
provide for an initial five year employment term, with subsequent "rolling
three year" minimum terms. The Agreement may be amended by agreement between
the Compensation Committee of the Board of Directors and Mr. Arington.
Under the Agreement, Mr. Arington is to receive a salary in an amount to
be set by the Compensation Committee, but not less than $33,333 per month. For
1996, the Compensation Committee had determined to increase Mr. Arington's
salary to $500,000 per year. In view of the Company's operating results,
however, Mr. Arington declined the increase and, in addition, during the
periods February 26 to July 29 and November 9 to December 30, 1996, voluntarily
reduced his salary by 50% below that paid in 1995. The Agreement also entitles
Mr. Arington to receive an annual bonus equal to the following percentages of
the Company's income before taxes: 6% for 1996, and 5% for each of 1997 and
1998. After 1998, a bonus will be paid in such a manner and amount as the
Compensation Committee might at that time determine. This incentive
compensation arrangement was approved by the Company's stockholders at the 1994
Annual Meeting of Stockholders. Mr. Arington received no bonus in respect of
1996.
<PAGE> 28
The Agreement provides for life and disability insurance and for certain
other customary benefits. Options to purchase 254,685 shares of Common Stock
previously granted to Mr. Arington are continued by the Agreement. If Mr.
Arington's employment is voluntarily terminated by him, or if he is terminated
by the Company with cause, the Agreement provides that he will not compete with
the Company for a period of one year after termination.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION. Mr. E.
Thomas Arington, the Company's Chief Executive Officer, determined the 1996
salaries of the Company's other named executive officers, taking into
consideration the target range for total cash compensation established by the
Compensation Committee.
Certain indebtedness of the Company is guaranteed by Mr. Sundararaman, the
Company's Secretary and the Chairman of the Compensation Committee, as well as
by a former director and officer of the Company. As of December 31, 1996, the
amount of outstanding indebtedness subject to these guarantees was $877,342.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth, as of April 23, 1997, certain information
with regard to the beneficial ownership of the Company's common stock by (i)
each of the Company's stockholders known to hold more than 5% of the
outstanding shares of common stock, (ii) each director and current executive
officer named on the Summary Compensation Table, individually, and (iii) all
directors and executive officers of the Company as a group.
<TABLE>
<CAPTION>
Name Beneficial Ownership
---- ------------------------------
Number Of Shares (1) Percent
-------------------- -------
<S> <C> <C>
E. Thomas Arington 1,839,479 11.6%
7155 East Kemper Road
Cincinnati, OH 45249
George W. Baughman 73,000 *
Derek G. Layton 7,400 *
Stanley L. Morgan 77,000 *
S. Sundararaman 218,716 1.5%
Jeffrey T. Arington 141,164 *
Timothy J. Holt 107,575 *
All directors and 2,464,334 15.3%
executive officers
as a group (7 persons)
</TABLE>
*Less than one percent.
_______________
(1) Excludes shares of Common Stock subject to options which cannot be
exercised within 60 days after April 23, 1997. Includes options to
purchase the following numbers of shares: Mr. E. Thomas Arington,
1,054,468 shares; Mr. Baughman, 25,000 shares; Dr. Layton, 7,400
<PAGE> 29
shares; Mr. Morgan, 24,000 shares; Mr. Sundararaman, 15,000 shares; Mr.
Jeffrey T. Arington, 105,001 shares; Mr. Holt, 88,334 shares; and all
current directors and executive officers as a group, 1,319,203 shares.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
In late October 1996, the Company loaned Ivan E. Pusecker, then an
executive officer of the Company, $93,881 to assist him in resolving certain
financial circumstances. Mr. Pusecker remains as a highly-valued employee of
the Company. The loan bears interest at the prime rate, commencing January 1,
1997, and is payable in full on December 31, 1997.
<PAGE> 30
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
- --------------------------------------------------------------------------------
(a) 1. All financial statements filed as a part of this report on Form 10-K are
listed under Item 8, above.
2. The following financial statement schedule is filed herewith:
Page
----
Valuation and Qualifying Accounts S-1
All other schedules are omitted because of the absence of conditions under which
they are required or because the information is shown in the financial
statements or notes thereto.
(b) Reports on Form 8-K: None
(c) Exhibits
Exhibit Number Description
- -------------- -----------
3.1 Certificate of Incorporation (a)
3.2 By-Laws (b)
4.1 Certificate of Designation, Preferences and Rights
of Series A Preferred Stock (b)
4.2 Rights Agreement between Duramed Pharmaceuticals,
Inc. and The Provident Bank as Rights Agent
dated as of August 17, 1988 (d)
10.1 Loan Agreement between the State of Ohio Department
of Development and the Company dated April 25,
1985 (a)
10.2 Development and Construction Loan Agreement dated
as of September 16, 1994 between the Company
and The Provident Bank (e)
10.3 Promissory Note - Variable Rate Mortgage Loan dated
September 16, 1994 from the Company to The
Provident Bank (e)
- 23 -
<PAGE> 31
10.4 Amended and Restated Loan and Security Agreement
dated as of December 31, 1994 between the Company
and The Provident Bank (c)
10.5 Amended and Restated Promissory Note
(Revolving Credit) dated December 31, 1994 from
the Company to The Provident Bank (c)
10.6 First Amendment to Amended and Restated Loan and
Security Agreement dated August 22, 1995 between
the Company and The Provident Bank (f)
10.7 Second Amendment to Amended and Restated Loan and
Security Agreement dated September 30, 1995
between the Company and The Provident Bank (f)
10.8 Third Amendment to Amended and Restated Loan and
Security Agreement dated December 22, 1995 between
the Company and The Provident Bank (g)
10.9 Fourth Amendment to Amended and Restated Loan and
Security Agreement dated March 31, 1997 between
the Company and The Provident Bank
10.10 Warrant for the purchase of 200,000 shares of common
stock between the Company and The Provident Bank
(f)
10.11 Executive Compensation Plans and Arrangements
(i) Amended and Restated Employment
Agreement dated as of March 30,
1994 between the Company and
E. Thomas Arington (h)
(ii) Life and disability insurance
policies for the benefit of E.
Thomas Arington (i)
(iii) Life insurance policy for the
benefit of Timothy J. Holt (i)
(iv) 1988 Stock Option Plan (j)
(v) 1991 Stock Option Plan for
Nonemployee Directors (j)
11 Statement regarding computation of earnings
per share
23 Consent of Independent Auditors
24 Powers of Attorney
27 Financial Data Schedule*
- -----------------
*Contained only in electronic filing with Securities and Exchange Commission.
- 24 -
<PAGE> 32
(a) Filed as an Exhibit to Registration Statement No. 33-8215-C and
incorporated herein by reference.
(b) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1988 and incorporated herein by reference.
(c) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1994 and incorporated herein by reference.
(d) Filed as an Exhibit to the Company's Current Report on Form 8-K, Date of
Report August 28, 1988, and incorporated herein by reference.
(e) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1994 and incorporated herein by reference.
(f) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1995 and incorporated herein by reference.
(g) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1995 and incorporated herein by reference.
(h) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1993 and incorporated herein by reference.
(i) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1992 and incorporated herein by reference.
(j) Filed as an Exhibit to the Company's Proxy Statement relating to the 1993
Annual Meeting of Stockholders and incorporated herein by reference.
The Company will furnish to the Commission, upon request, its long-term debt
instruments not listed in this Item.
- 25 -
<PAGE> 33
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this amended report to be signed
on its behalf by the undersigned, thereunto duly authorized, as of the 29th
day of April 1997.
DURAMED PHARMACEUTICALS, INC.
BY: /s/ Timothy J. Holt
---------------------------
Timothy J. Holt, Senior
Vice President Finance and
Administration
<PAGE> 34
[ERNST & YOUNG LLP LETTERHEAD]
Report of Independent Auditors
The Board of Directors
Duramed Pharmaceuticals, Inc.
We have audited the accompanying consolidated balance sheets of Duramed
Pharmaceuticals, Inc. as of December 31, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1996, Our audits also
included the financial statement schedule listed in the index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation,
We believe that our audits provide a reasonable basis for our opinion,
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Duramed
Pharmaceuticals, Inc. at December 31, 1996 and 1995, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
/s/ ERNST & YOUNG LLP
Cincinnati, Ohio
March 27, 1997
<PAGE> 35
DURAMED PHARMACEUTICALS, INC.
Consolidated Balance Sheets
Assets
<TABLE>
<CAPTION>
December 31, 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,811,182 $ 2,600
Trade accounts receivable,
less allowance for doubtful
accounts: 1996 - $1,339,000
1995 - $576,000 7,460,452 8,543,411
Inventories 13,188,627 9,423,326
Prepaid expenses and other assets 1,455,251 1,276,213
Deferred taxes --- 1,797,000
----------- -----------
Total current assets 23,915,512 21,042,550
----------- -----------
Property, plant and equipment - net 29,302,056 20,342,945
----------- -----------
Other assets:
Deposits and other assets 416,288 1,687,816
Deferred taxes --- 2,104,000
----------- -----------
Total other assets 416,288 3,791,816
----------- -----------
Total assets $53,633,856 $45,177,311
=========== ===========
</TABLE>
See accompanying notes.
F-2
<PAGE> 36
DURAMED PHARMACEUTICALS, INC.
Consolidated Balance Sheets
Liabilities and Stockholders' Equity
<TABLE>
<CAPTION>
December 31, 1996 1995
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Current liabilities:
Accounts payable $ 4,461,434 $ 3,625,593
Accrued liabilities 5,178,068 4,505,907
Current portion of long-term debt
and other liabilities 3,363,798 7,169,374
Current portion of capital lease obligations 1,113,114 1,140,658
------------ ------------
Total current liabilities 14,116,414 16,441,532
------------ ------------
Long-term debt, less current portion 9,989,461 17,236,736
Long-term capital leases, less current portion 1,727,587 1,706,836
Other long-term liabilities 161,171 893,885
------------ ------------
Total liabilities 25,994,633 36,278,989
------------ ------------
Stockholders' equity:
Common stock - authorized 50,000,000
shares, par value $.01; issued and outstanding
14,603,516 and 8,074,449 shares in 1996 and 1995,
respectively 146,035 80,744
Convertible Preferred Stock Series B,
par value $.001; issued and outstanding
6,059 and 74,659 shares in 1996 and 1995,
respectively 6 75
Convertible Preferred Stock Series C,
stated value $100; issued and outstanding
-0- and 120,000 shares in 1996 and 1995,
respectively --- 12,000,000
Convertible Preferred Stock Series D,
stated value $100; -0- shares issued and outstanding
in 1996 and 1995 --- ---
Additional paid-in capital 80,073,586 24,686,871
Accumulated deficit (52,580,404) (27,869,368)
------------ ------------
Total stockholders' equity 27,639,223 8,898,322
------------ ------------
Total liabilities and stockholders' equity $ 53,633,856 $ 45,177,311
============ ============
</TABLE>
F-3
<PAGE> 37
DURAMED PHARMACEUTICALS, INC.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year ended December 31, 1996 1995 1994
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 43,855,014 $ 49,623,526 $ 45,274,362
Cost of goods sold 31,679,577 29,705,677 25,190,330
------------ ------------ ------------
Gross profit 12,175,437 19,917,849 20,084,032
------------ ------------ ------------
Operating expenses:
Product development 10,238,395 5,952,694 1,860,824
Purchase of in-process
research and development 8,557,275 --- ---
Selling 4,518,600 3,629,105 2,847,473
General and administrative 7,820,757 8,602,405 7,360,716
------------ ------------ ------------
31,135,027 18,184,204 12,069,013
------------ ------------ ------------
Operating (loss) income (18,959,590) 1,733,645 8,015,019
Net interest expense 1,850,446 2,724,593 2,249,902
------------ ------------ ------------
(Loss) income before income taxes
and preferred stock dividends (20,810,036) (990,948) 5,765,117
Income taxes 3,901,000 --- (3,785,750)
------------ ------------ ------------
Net (loss) income (24,711,036) (990,948) 9,550,867
Preferred stock dividends 929,471 122,739 ---
------------ ------------ ------------
Net (loss) income available to
common shareholders ($25,640,507) ($ 1,113,687) $ 9,550,867
============ ============ ============
Net (loss) income per average common
and common equivalent shares outstanding:
Primary $ (2.44) $ (0.14) $ 0.93
============ ============ ============
Fully diluted $ (2.44) $ (0.14) $ 0.91
============ ============ ============
Weighted average number of common
and common equivalent shares outstanding:
Primary 10,522,213 8,026,359 10,248,315
============ ============ ============
Fully diluted 10,522,213 8,026,359 10,509,695
============ ============ ============
</TABLE>
See accompanying notes.
F-4
<PAGE> 38
DURAMED PHARMACEUTICALS, INC.
Consolidated Statement of Stockholders' Equity
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional
------------------------------------------- --------------------- Paid-In
Series B Series C Series D Shares Amount Capital
------------------------------------------- --------------------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE - DECEMBER 31, 1993 $ 75 --- --- 7,302,388 $ 73,023 $ 24,976,649
Issuance of stock in connection
with the Company's 401(k) plan --- --- --- 16,882 169 149,675
Amortization of deferred
financing charge --- --- --- --- --- ---
Issuance of stock in connection
with stock options --- --- --- 598,838 5,988 291,941
Issuance of stock in connection
with exercised warrants --- --- --- 50,000 500 149,500
Net income for 1994 --- --- --- --- --- ---
- ----------------------------------------------------------------------------------------------------------------------------
BALANCE - DECEMBER 31, 1994 75 --- --- 7,968,108 79,680 25,567,765
Issuance of stock in connection
with benefit plans --- --- --- 14,250 143 228,174
Issuance of stock in connection
with stock options --- --- --- 92,091 921 256,142
Issuance of Series C
Convertible Preferred Stock --- 12,000,000 --- --- --- (1,242,471)
Net loss for 1995 --- --- --- --- --- ---
Preferred Series C Stock dividends --- --- --- --- --- (122,739)
- ----------------------------------------------------------------------------------------------------------------------------
BALANCE - DECEMBER 31, 1995 75 12,000,000 --- 8,074,449 80,744 24,686,871
Issuance of stock in connection
with benefit plans --- --- --- 12,486 125 187,099
Issuance of stock in connection
with stock options --- --- --- 349,838 3,499 929,640
Issuance of stock in settlement
of certain liabilities --- --- --- 723 7 12,379
Issuance of stock in connection
with Hallmark acquisition --- --- --- 640,000 6,400 11,093,600
Issuance of Series C
Preferred Stock --- 12,000,000 --- --- --- (1,142,633)
Issuance of Series D
Preferred Stock --- --- 20,000,000 --- --- (1,051,165)
Conversion of Series B
Preferred Stock (69) --- --- 686,000 6,860 (6,791)
Conversion of Series C
Preferred Stock --- (24,000,000) --- 1,672,417 16,724 23,983,276
Conversion of Series D
Preferred Stock --- --- (20,000,000) 2,832,966 28,330 19,971,670
Conversion of Convertible Note --- --- --- 334,637 3,346 2,339,111
Net loss for 1996 --- --- --- --- --- ---
Series C Preferred Stock dividends --- --- --- --- --- (929,471)
BALANCE - DECEMBER 31, 1996 $ 6 --- --- 14,603,516 $146,035 $ 80,073,586
<CAPTION>
Deferred
Financing Accumulated
Capital Deficit Total
------------ ------------ -------------
<S> <C> <C> <C>
BALANCE - DECEMBER 31, 1993 ($ 605,200) ($36,429,287) ($11,984,740)
Issuance of stock in connection
with the Company's 401(k) plan --- --- 149,844
Amortization of deferred
financing charge 605,200 --- 605,200
Issuance of stock in connection
with stock options --- --- 297,929
Issuance of stock in connection
with exercised warrants --- --- 150,000
Net income for 1994 --- 9,550,867 9,550,867
- -------------------------------------------------------------------------------------
BALANCE - DECEMBER 31, 1994 --- (26,878,420) (1,230,900)
Issuance of stock in connection
with benefit plans --- --- 228,317
Issuance of stock in connection
with stock options --- --- 257,063
Issuance of Series C
Convertible Preferred Stock --- --- 10,757,529
Net loss for 1995 --- (990,948) (990,948)
Preferred Series C stock dividends --- --- (122,739)
- -------------------------------------------------------------------------------------
BALANCE - DECEMBER 31, 1995 --- (27,869,368) 8,898,322
Issuance of stock in connection
with benefit plans --- --- 187,224
Issuance of stock in connection
with stock options --- --- 933,139
Issuance of stock in settlement
of certain liabilities --- --- 12,386
Issuance of stock in connection
with Hallmark acquisition --- --- 11,100,000
Issuance of Series C
Convertible Preferred Stock --- --- 10,857,367
Issuance of Series D
Convertible Preferred Stock --- --- 18,948,835
Conversion of Series B
Preferred Stock --- --- ---
Conversion of Series C
Preferred Stock --- --- ---
Conversion of Series D
Preferred Stock --- --- ---
Conversion of Convertible Note --- --- 2,342,457
Net loss for 1996 (24,711,036) (24,711,036)
Series C Preferred Stock dividends --- --- (929,471)
BALANCE - DECEMBER 31, 1996 $ --- ($52,580,404) $ 27,639,223
</TABLE>
See accompanying notes.
F-5
<PAGE> 39
DURAMED PHARMACEUTICALS, INC.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31, 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income ($24,711,036) ($ 990,948) $ 9,550,867
Adjustments to reconcile net (loss) income to net
cash (used in) provided by operating activities:
Deferred taxes 3,901,000 --- (3,901,000)
Depreciation and amortization 2,065,240 1,837,382 2,064,429
Recognition of deferred revenues (500,000) (1,500,000) ---
Provision for doubtful accounts 1,213,808 84,773 119,140
Purchase of in-process research and development 8,557,275 --- ---
Common stock issued in connection with
employee compensation plans 187,224 228,317 149,844
Changes in assets and liabilities:
Trade accounts receivable (130,849) (3,365,757) (222,428)
Inventories (3,703,937) (999,639) (2,703,265)
Prepaid expenses and other assets 106,720 42,360 (299,443)
Accounts payable 818,003 (214,476) (1,174,933)
Accrued liabilities 502,589 (1,063,073) (202,496)
Other (118,248) (82,395) (124,069)
------------ ------------ ------------
Net cash (used in) provided by operating activities (11,812,211) (6,023,456) 3,256,646
------------ ------------ ------------
Investing activities:
Capital expenditures (5,244,306) (5,248,610) (6,165,584)
Payments in connection with acquisition (1,577,649) --- ---
------------ ------------ ------------
Net cash (used for) investing activities (6,821,955) (5,248,610) (6,165,584)
------------ ------------ ------------
Cash flows from financing activities:
Payments of long-term debt,
including current maturities (7,688,898) (9,025,422) (810,721)
Net (decrease) increase in revolving credit facility (8,664,861) 1,199,692 (2,723,330)
Long-term borrowings 6,839,789 8,082,904 5,996,160
Issuance of preferred stock - net 29,806,202 10,757,529 ---
Issuance of common stock 945,525 257,063 447,929
Dividends paid (795,009) --- ---
------------ ------------ ------------
Net cash provided by financing activities 20,442,748 11,271,766 2,910,038
------------ ------------ ------------
Net change in cash 1,808,582 (300) 1,100
Cash at beginning of period 2,600 2,900 1,800
------------ ------------ ------------
Cash and cash equivalents at end of period $ 1,811,182 $ 2,600 $ 2,900
============ ============ ============
Supplemental cash flow disclosures:
Interest paid $ 1,901,092 $ 2,724,376 $ 1,776,457
Income taxes paid --- 105,000 88,000
</TABLE>
See accompanying notes.
F-6
<PAGE> 40
DURAMED PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A. ACCOUNTING POLICIES
The Company's Business
- ----------------------
Duramed Pharmaceuticals, Inc. (the "Company" or "Duramed") develops,
manufactures and markets generic prescription pharmaceutical products in tablet,
capsule and liquid forms to customers throughout the United States.
A summary of the principal accounting policies followed in preparation of the
consolidated financial statements is set forth below.
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the accounts of the Company and
its subsidiaries, all of which are wholly owned. Significant intercompany
accounts and transactions have been eliminated in consolidation.
Goodwill related to acquisitions is being amortized over ten years.
Cash
- ----
Duramed considers all investments with a maturity of three months or less as of
the date of purchase to be cash equivalents. As of December 31, 1996, the
Company had short term investments classified as cash equivalents of
approximately $1.8 million. The Company's 1995 cash balance represented only the
balance maintained in internal cash funds. During the first half of 1996 and
throughout 1995, the Company's day-to-day operations were funded and financed
through its revolving credit facility.
Inventories
- -----------
Inventories are stated at the lower of cost (first-in, first-out) or market.
Components of inventories include: December 31,
<TABLE>
<CAPTION>
------------------------------------
1996 1995
------------------------------------
<S> <C> <C>
Raw materials $ 6,767,105 $ 5,730,160
Work-in-process 452,905 261,671
Finished goods 7,520,247 3,982,950
Obsolescence reserve (1,551,630) (551,455)
------------ ------------
Net inventory $ 13,188,627 $ 9,423,326
============ ============
</TABLE>
Inventories include approximately $3.0 and $1.3 million (net of inventory funded
by a joint venture partner) of inventory costs at December 31, 1996 and December
31, 1995, respectively, consisting both of raw materials and conversion costs,
relating to the conjugated estrogens product, for which the Company is awaiting
regulatory approval. The drugs and other raw
F-7
<PAGE> 41
materials used in the Company's products are purchased through United States
distributors for foreign and domestic manufacturers of bulk pharmaceutical
chemicals and are generally available from numerous sources. The federal drug
application process requires specification and approval of raw material
suppliers. If raw materials from all specified suppliers become unavailable,
Food and Drug Administration ("FDA") approval of a new supplier is required,
which can cause a delay of six months or more in the manufacture of the drug
involved. To date, the Company has not experienced any significant delays and
generally specifies two or more suppliers in all drug applications.
Property, Plant and Equipment
- -----------------------------
Property, plant and equipment are stated at cost. Depreciation and amortization
is provided using principally the straight-line method over the estimated useful
lives of the assets. Major renewals and improvements are capitalized, while
ordinary maintenance and repairs are expensed. Property, plant and equipment
consist of the following:
<TABLE>
<CAPTION>
December 31,
----------------------------- Estimated
1996 1995 Useful Life
----------------------------- -------------
<S> <C> <C> <C>
Land $ 1,000,000 $ 1,000,000
Buildings and improvements 18,211,740 15,897,964 20 to 30 Years
Equipment, furniture and fixtures 23,589,782 15,182,693 3 to 10 Years
------------ ----------
42,801,522 32,080,657
Less accumulated
depreciation and amortization 13,499,466 11,737,712
------------ ----------
$ 29,302,056 $ 20,342,945
============ ============
</TABLE>
Product Development Costs
- -------------------------
Product development costs are charged to expense when incurred, net of
reimbursements received from Schein Pharmaceutical, Inc. ("Schein") which
amounted to $1.1 million, $2.8 million, and $2.5 million in 1996, 1995 and 1994,
respectively, per the contractual agreement (See Note C). The reported costs
include specifically identifiable expenses and an allocation of certain expenses
shared with the other departments within the Company.
Revenue Recognition
- -------------------
The Company recognizes revenue at the time it ships product and provides for
returns and allowances based upon historical trends.
Concentration of Risk
- ---------------------
The financial instrument that potentially subjects the Company to credit risk is
accounts receivable. The Company sells its products to drug wholesalers, private
label distributors, drug store chains, health maintenance organizations,
hospitals, nursing homes, retiree organizations, mail order distributors, other
drug manufacturers, mass merchandisers and governmental agencies. The credit
risk associated with this financial instrument is believed by the Company to be
limited due to the large number of customers (no single customer accounts for
more than 10%
F-8
<PAGE> 42
of the Company's sales), their geographic dispersion and the performance of
certain credit evaluation procedures.
The Company's current product line is limited and the Company's current
operating results are heavily dependent on the performance of its
methylprednisolone product. FDA approval is required before most prescription
drug products can be marketed. The Company has Abbreviated New Drug Applications
("ANDAs") for several products, including the conjugated estrogens products, on
file with the FDA. The Company is unable to determine when or if it will obtain
approval on these ANDA submissions.
In the absence of resources provided by new product sales, the additional
capital which will be required in order to execute the Company's expanded
business plan, which includes significantly expanded product development and
business development activities to broaden the Company's current product lines,
will have to be acquired from other sources or the business plan will have to be
scaled back.
Net (Loss) Income Per Share
- ---------------------------
The fully diluted and primary per share calculations are computed using weighted
average common shares outstanding and common equivalent shares, which include
dilutive options, warrants and convertible preferred stock. Net loss per share
is computed using the weighted average of common shares outstanding only.
Recognition of outstanding options and warrants in computing net loss per share
is not required as their effect would be antidilutive.
Use of Estimates
- ----------------
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
NOTE B. ACQUISITIONS
On September 13, 1996, Duramed completed the acquisition of the assets and
business of Hallmark Pharmaceuticals, Inc. ("Hallmark"), a privately held
pharmaceutical development company headquartered in Somerset, N.J. with
technical expertise and capabilities with respect to advanced drug delivery
systems technologies. As consideration, Duramed issued 640,000 shares of the
Company's common stock, and warrants to purchase 400,000 shares of common stock
at a purchase price of $25.00, and assumed certain obligations of Hallmark, a
portion of which Duramed paid off at closing. Also, as part of the accounting
for the acquisition of Hallmark, the Company incurred a charge of $847,200, net
of related obligations, for the impairment of value on the Company's marketing
rights to a product which had been scheduled for development by another entity,
which Hallmark had made significant progress in developing.
F-9
<PAGE> 43
This acquisition was accounted for by the purchase method of accounting, and is
summarized below:
<TABLE>
<CAPTION>
<S> <C>
Fair value of assets acquired $ 5,806,441
Liabilities assumed (1,921,795)
------------
3,884,646
Impairment of value - product marketing rights (847,200)
------------
3,037,446
Purchase price:
Fair market value of common stock and warrants 11,100,000
Cash (including related acquisition costs) 494,721
------------
11,594,721
Purchase of in-process research and development $ 8,557,275
============
</TABLE>
The amount of the purchase of in-process research and development was determined
by using a discounted cash flow analysis applied to the anticipated profits from
products in development at Hallmark, and considered the costs to commercialize
these products and the expected probability of success in their development.
The technologies acquired will be applied towards the development of specific
products which require FDA approval to commercialize, and accordingly, are
deemed to have no alternative future use.
For the year ended December 31, 1996 the Company's results of operations, on a
pro forma basis as if Hallmark had been acquired at the beginning of the year,
would not be materially different from the results reported. Results of
operations on a pro forma basis for the year ended December 31, 1995 would
reflect no change in sales or revenues, with incremental product development
expenses and net losses of $3.4 million, resulting in a pro forma net loss of
$4.5 million, or $.56 net loss per share.
Duramed's financial statements reflect the full consolidation of Hallmark's
accounts since the date of acquisition.
NOTE C. STRATEGIC ALLIANCES
On June 26, 1992, the Company signed an agreement with Schein Pharmaceutical,
Inc. ("Schein") for the development, manufacture and marketing of a new
formulation of conjugated estrogens tablets, the generic equivalent of the brand
name product Premarin(R). Under the agreement, Schein provides project funding
and technical assistance while Duramed is responsible for product development
and manufacturing; both firms will participate in the marketing and distribution
of the products. The conjugated estrogens products have been formulated and are
designed to meet the bioequivalence guidance established by the FDA in late
1991. On September 27, 1994 the Company filed an ANDA for the .625 mg strength
of conjugated estrogens. Subsequently, the Company has filed ANDAs covering the
other dosage
F-10
<PAGE> 44
strengths of this product. In order to market the .625 mg strength, as well as
other dosage strengths, FDA approval is required. On March 19, 1997, in
response to questions raised at a Senate committee meeting Dr. Janet Woodcock,
Director of Drug Evaluation and Research at the FDA, stated that a scientific
conclusion has been made on generic conjugated estrogens, but provided no
details about the decision and no specific time frame for announcing it.
Dr. Woodcock further stated that the conclusion needs to be articulated into a
series of regulatory actions and indicated that this will happen as
expeditiously as possible. At this time, the Company is unable to determine
when or if it will obtain FDA approval to market conjugated estrogens. Product
development expenditures in 1996, 1995 and 1994 are net of reimbursements
received from Schein pursuant to this agreement.
On June 2, 1994 the Company executed distribution, marketing and related
agreements with Ortho-McNeil Pharmaceutical Corporation ("Ortho-McNeil"). Under
the terms of the agreements Duramed received the non-exclusive distribution
rights to the Ortho-McNeil products Acetaminophen with Codeine, Tolmetin sodium,
Tolmetin sodium DS and Oxycodone with Acetaminophen as well as an extension of
the distribution term for the Ortho-McNeil product Estropipate. The 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 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 and based on discussions to date
believes that the distribution rights to these products will be extended. Loss
of these distribution rights would likely have a material adverse effect upon
the Company's results of operations. In addition to the distribution rights for
the 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 the conjugated estrogens product had been obtained
by June 1996, title to the equipment would have transferred to the Company over
a specified period. Since this requirement was not met, 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. 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 (see Note E). In exchange for the financial assistance
provided to the Company under the agreements, Ortho-McNeil obtained the right to
receive a royalty on the future sales of the conjugated estrogens products. In
addition, Ortho-McNeil was to participate in marketing of the Company's
conjugated estrogens products and share in the profits if the Company is
successful in bringing the products to market. Duramed and Ortho-McNeil are
cooperating to amend the obligations of the original agreements regarding
conjugated estrogens. Both parties believe that it would be in their best
interests to not engage the Ortho-McNeil sales force, and to substitute a
F-11
<PAGE> 45
fixed payment to Ortho-McNeil in place of the current payment arrangements. At
this time, the Company cannot predict the outcome of these discussions.
The Company has agreements with several manufacturers 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. For the years ended December 31, 1996, 1995
and 1994, respectively, the percentages of the Company's sales comprised of
products marketed for others were 35%, 31%, and 28%. The gross profit generated
by these sales was approximately $2.6 million in 1996, $3.3 million in 1995, and
$3.6 million in 1994.
NOTE D. ACCRUED LIABILITIES
The Company's accrued liabilities consist of the following:
<TABLE>
<CAPTION>
December 31,
--------------------------
1996 1995
--------------------------
<S> <C> <C>
Wages and other compensation $2,136,180 $1,414,212
Taxes, other than income taxes 477,826 582,272
Accrued bio-studies 606,728 150,000
Accrued Medicaid rebates 267,867 157,609
Accrued interest 177,636 228,282
Other 1,511,831 1,973,532
---------- ----------
$5,178,068 $4,505,907
========== ==========
</TABLE>
NOTE E. DEBT AND OTHER LONG-TERM LIABILITIES
The Company's debt consists of the following:
<TABLE>
<CAPTION>
December 31
-----------------------------
1996 1995
-----------------------------
<S> <C> <C>
Revolving credit facility $ -- $ 8,664,861
Term note -- 4,500,000
Manufacturing facility expansion loan 5,500,000 5,500,000
Equipment liability 4,000,000 --
Equipment loan 2,118,979 1,080,155
Note payable to State of Ohio 877,342 1,060,770
Convertible note -- 2,121,465
Installment notes payable 124,415 236,039
----------- -----------
12,620,736 23,163,290
Less amount classified as current 2,631,275 5,926,554
----------- -----------
$ 9,989,461 $17,236,736
=========== ===========
</TABLE>
F-12
<PAGE> 46
During 1996, the Company funded its operations with net proceeds received from
the private placements of its Series C and Series D Convertible Preferred Stock
(the second stage of Series C Stock issuance provided net proceeds of
approximately $10.9 million in February 1996, and the Series D Stock issuance
generated net proceeds of approximately $19.0 million in August 1996).
The Company utilized a portion of the proceeds from its Preferred Stock
issuances to pay off its revolving credit facility. The amended terms of the
revolving credit facility permit the Company to borrow up to $6.5 million based
upon eligible collateral ($10.4 million as of December 31, 1996). The bank has
indicated to the Company a willingness to expand the amount of availability on
the revolving credit facility if the Company obtains additional sources of
financing or the Company's operating results substantially improve. 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 December 31, 1996,
the Company had no outstanding borrowings drawn against the revolving credit
facility. As of March 27, 1997, the Company had no remaining short term cash
equivalent investments, and had drawn $1.5 million against the revolving credit
facility.
During 1996 the Company paid off its term note. At December 31, 1995, this term
note had a $4.5 million outstanding principal balance.
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 December 31, 1996 represents an
obligation to Ortho-McNeil for equipment that was provided in connection with
the Company's facility expansion that was completed in 1995. 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, repayments would be established on the basis of equal quarterly
payments over a three year period based upon the fair market value of the
equipment at the time, and the obligation would be subject to interest at the
prime rate in effect.
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.
F-13
<PAGE> 47
The note payable to the State of Ohio is secured by the Company's manufacturing
facility. The loan bears interest at 7.5%. In the third quarter of 1996, the
State waived the balloon payment that was due on November 1, 1996 and revised
the terms to require minimum monthly payments of $20,394 through November 1,
2000, and certain other payments as defined by the agreement. 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 interest was a variable rate approximating prime rate plus 3%,
compounded annually, and both principal and interest were due at maturity on
July 10, 1998. As amended, at the option of the lender the principal amount of
the note and accrued interest were convertible to shares of Duramed common stock
at a conversion price 15% below the average of the closing bid prices of the
common stock of the Company over the ten day trading period ending the day prior
to the date of conversion, at a conversion price which could not be less than
$7.00 per share, nor more than $14.44 per share. In December 1996, the lender
exercised the conversion option and received in place of the repayment of
$2,342,457 of principal and accrued interest, 334,637 shares of Duramed common
stock, based on a conversion price of $7.00 per share.
Other long-term debt also includes facilities of varying amounts and terms which
are generally collateralized by the assets financed.
The carrying value of the Company's debt approximates fair market value.
The Company's other long-term liabilities consist of the following:
<TABLE>
<CAPTION>
December 31,
---------------------------
1996 1995
---------------------------
<S> <C> <C>
Abandoned facility obligation - net $ 893,694 $1,636,705
Deferred revenue --- 500,000
---------- ----------
893,694 2,136,705
Less amount classified as current 732,523 1,242,820
---------- ----------
$ 161,171 $ 893,885
========== ==========
</TABLE>
The abandoned facility obligation represents the amounts due, net of sublease
income, under terms of a lease which extends through September 30, 1998. Due to
the Company's financial condition at the time, the Company was unable to meet
its commitments under the lease and vacated the facility in 1991. The facility
was sublet for a period of five years in 1992. In 1994 the Company commenced
payment of its current net obligations under the lease and also commenced
quarterly payments on the accumulated outstanding balance.
In December 1996, the Company was advised that the current tenant had renewed,
for a five year term, its sublease on the building. As a result of the renewal,
the Company's obligation was reduced by approximately $330,000, which was
recorded as a reduction of general and
F-14
<PAGE> 48
administrative expenses. Additionally, in the first quarter of 1997, the Company
reached agreement with the lessor and settled the remaining obligation through
the issuance of 89,369 shares of Duramed common stock.
The $500,000 in deferred revenue at December 31, 1995 represents the unamortized
balance from the $2.0 million cash received from Ortho-McNeil pursuant to the
terms of distribution and marketing agreements entered into in 1994 (see Note
C). The Company amortized this remaining balance $250,000 a quarter during the
first and second quarters of 1996.
At December 31, 1996, maturities of long-term indebtedness and obligations for
the abandoned facility obligation for the ensuing five years were as follows:
Year ending December 31:
<TABLE>
<CAPTION>
Abandoned Facility
Debt Obligation - Net Total
<S> <C> <C> <C>
1997 $ 2,631,275 $ 732,523 $ 3,363,798
1998 2,925,961 161,171 3,087,132
1999 2,571,205 --- 2,571,205
2000 1,192,295 --- 1,192,295
2001 550,000 --- 550,000
Thereafter 2,750,000 --- 2,750,000
----------- ----------- -----------
12,620,736 893,694 13,514,430
Less current installments 2,631,275 732,523 3,363,798
----------- ----------- -----------
$ 9,989,461 $ 161,171 $10,150,632
=========== =========== ===========
</TABLE>
NOTE F. LEASES
The Company conducts product development, and limited manufacturing activities,
from a leased 38,000 square foot facility in Somerset, New Jersey. The lease
pertaining to this facility expires on May 31, 2000 and the Company has options
to purchase the facility, initially exercisable on June 1, 1998. Annual rent
through the lease term is $171,000.
In December 1994, the Company entered into a lease for approximately 28,200
square feet of a facility in Cincinnati, Ohio which is used for executive
offices, certain corporate support groups and distribution. The lease term for
this facility extends to February 28, 2000, with a provision for three one-year
renewals. Annual rent is $256,000 through 1997, and increase to $265,000 during
the final year of the lease.
The Company also has two leased warehouses in Cincinnati, Ohio. One is
approximately 28,000 square feet and the other facility is approximately 10,000
square feet. Both warehouses are being leased on a month to month basis.
F-15
<PAGE> 49
In addition to the leased offices, warehouses and distribution facility, the
Company leases various machinery and equipment.
Aggregate rental expense for the years ended December 31, 1996, 1995, 1994 was
approximately $642,000, $694,000, and $286,000, respectively. The following
summarizes minimum future lease payments as of December 31, 1996:
Year Ending December 31:
<TABLE>
<CAPTION>
Operating Capital
Leases Leases
<S> <C> <C>
1997 $ 461,685 $1,530,290
1998 451,685 1,128,439
1999 445,517 663,865
2000 115,498 266,161
2001 --- 74,857
Thereafter --- 12,422
---------- ----------
Total minimum lease payments $1,474,385 3,676,034
==========
Less amount representing interest 835,333
----------
Present value of net minimum lease payments 2,840,701
Less current installments 1,113,114
----------
Obligations under capital leases
less current installments $1,727,587
==========
</TABLE>
Assets under capital leases amounted to approximately $7.3 million and $5.4
million in 1996 and 1995, respectively, with related amortization of $2.8
million and $2.6 million.
NOTE G. EMPLOYEE RETIREMENT PLAN
The Company has a defined contribution plan, the "Duramed Pharmaceuticals, Inc.
401(k)/Profit Sharing Plan," available to eligible employees. Under the Plan the
Company matches 50% of employee contributions to a maximum of 2% of each
employee's compensation. The Company match of $182,000, $206,000 and $150,000 in
1996, 1995 and 1994, respectively, was made with the Company's common stock, as
permitted by the Plan. The Plan also has a profit sharing provision at the
discretion of the Company's Board of Directors. The Company has not made a
profit sharing contribution to the Plan. All full-time employees are eligible to
participate in the deferred compensation and Company matching provisions of the
Plan. Employees are immediately vested with respect to the Company matching
provisions of the Plan.
NOTE H. COMMON AND PREFERRED STOCK
The Company has authorized the issuance of 100,000 shares of Series A Preferred
Stock, none of which has been issued.
F-16
<PAGE> 50
On July, 8, 1993, as part of an agreement with its bank, the Company issued
74,659 shares of Series B Convertible Preferred Stock. The Series B Preferred
Stock is non-voting and is convertible at any time into 746,590 shares of the
Company's common stock. During 1996, the bank converted 68,600 shares of Series
B Convertible Preferred Stock into 686,000 shares of the Company's common stock.
In 1995 and 1996, the Company raised $44.0 million ($40.6 million net of
issuance costs) through the issuances of the Series C and Series D Preferred
Stock. During 1996 all of the Preferred Stock was converted into shares of the
Company's common stock.
NOTE I. STOCK OPTIONS AND WARRANTS
Stock Option Plans
- ------------------
For financial statement purposes, the Company has elected to follow Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB
25) and related Interpretations in accounting for its stock based compensation
plans rather than the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation." Under APB 25,
because the exercise price of the Company's stock options equals or is greater
than the close of the market price on the date of grant, no compensation expense
is recognized. At the time the options are exercised, the proceeds increase
stockholders' equity.
During 1996, the Company had three stock option plans which had been approved
by the Company's stockholders. The 1986 Stock Option Plan (the "1986 Plan"),
which expired in 1996 (insofar as the grant of new options was concerned),
permitted the granting of options for up to 160,000 shares of the Company's
common stock. The 1988 Stock Option Plan (the "1988 Plan") permits the granting
of options for up to 4,360,000 shares of common stock to employees on the
regular payroll of the Company. Options granted under the 1986 and 1988 Plans
become exercisable based upon the terms and conditions established at the time
of the grant. The 1991 Stock Option Plan for Nonemployee Directors (the
"Directors Plan") provides for the issuance of non-qualified options for up to
150,000 shares of common stock. The Directors Plan is a "formula plan" under
which each new nonemployee director is granted, at the close of business on the
date he or she first becomes a director, options to purchase 10,000 shares of
common stock. Annually, each then serving nonemployee director, other than a
new director, is also automatically granted options to purchase 5,000 shares of
common stock at a price equal to the closing market price on the date of grant.
Options granted under the plans generally expire 10 years after the date of
grant.
As of December 31, 1996, options for 70,899 shares of common stock were
outstanding under the 1986 Plan and options for 84,101 shares had been
exercised; options for 2,312,400 shares of common stock were outstanding under
the 1988 Plan and options for 840,614 shares had been exercised; and options for
54,000 shares of common stock were outstanding under the Directors Plan and
options for 51,000 shares had been exercised.
F-17
<PAGE> 51
The following summarizes the activity in the 1986, 1988 and Directors Plans:
<TABLE>
<CAPTION>
1986 Plan 1988 Plan
---------------------------------------------------------------------------------------------------
Weighted Weighted
Shares Option Price Average Shares Option Price Average
---------------------------------------------------------------------------------------------------
Outstanding at
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
December 31, 1993 ....... 154,669 $0.50 to $13.75 --- 1,849,488 $0.50 to $7.25 ---
Granted ....... --- 233,008 $5.88 to $16.50 ---
Forfeited ....... (6,400) $0.50 to $5.75 --- (33,100) $1.13 to $9.00 ---
Exercised ....... (43,063) $0.50 to $6.00 --- (628,933) $0.75 to $7.25 ---
Outstanding at
December 31, 1994 ....... 105,206 $0.50 to $13.75 --- 1,420,463 $0.50 to $16.50 ---
Granted ....... --- $0.50 241,950 $14.25 to $19.25 ---
Forfeited ....... --- $0.50 (27,800) $1.13 to $19.25 ---
Exercised ....... (19,328) $0.50 to $13.75 --- (62,408) $1.13 to $9.00 ---
Outstanding at
December 31, 1995 ....... 85,878 $0.50 to $6.00 $1.96 1,572,205 $0.50 to $19.25 $4.60
Granted ....... 11,231 $17.50 to $17.50 $17.50 1,002,408 $6.88 to $19.75 $15.72
Forfeited ....... (5,000) $3.13 to $3.13 $3.13 (113,540) $1.13 to $19.75 $9.66
Exercised ....... (21,210) $0.50 to $6.00 $2.15 (148,673) $0.50 to $16.50 $2.20
Outstanding at
December 31, 1996 ....... 70,899 $0.50 to $8.63 $2.87 2,312,400 $0.50 to $8.63 $5.51
====================================================================================================================================
Exercisable at
December 31, 1994 ....... 76,250 $0.50 to $13.75 --- 1,135,646 $0.50 to $7.25 ---
December 31, 1995 ....... 72,078 $0.50 to $6.00 --- 1,162,405 $0.50 to $19.25 ---
December 31, 1996 ....... 57,168 $0.50 to $5.75 $1.74 1,369,726 $0.50 to $8.63 $3.60
====================================================================================================================================
Available for future
grants at
December 31, 1996 ....... --- 1,206,986
====================================================================================================================================
<CAPTION>
Directors Plan
---------------------------------------------------------------
Weighted
Shares Option Price Average
---------------------------------------------------------------
Outstanding at
December 31, 1993 ....... 58,000 $0.50 to $4.00 ---
Granted ....... 15,000 $7.50 ---
Forfeited ....... --- ---
Exercised ....... (22,000) $0.50 to $1.94 ---
Outstanding at
December 31, 1994 ....... 51,000 $0.50 to $7.50 ---
Granted ....... 15,000 $16.50 ---
Forfeited ....... ---
Exercised ....... (1,000) $1.94 ---
Outstanding at
December 31, 1995 ....... 65,000 $0.50 to $16.50 $6.84
Granted ....... 15,000 $15.00 to $15.00 $15.00
Forfeited ....... 0 --- to --- ---
Exercised ....... (26,000) $0.50 to $4.00 $1.86
Outstanding at
December 31, 1996 ....... 54,000 $4.00 to $8.63 $7.54
========================================================================================
Exercisable at
December 31, 1994 ....... 51,000 $0.50 to $7.50 ---
December 31, 1995 ....... 65,000 $0.50 to $16.50 ---
December 31, 1996 ....... 39,000 $4.00 to $8.63 $7.13
========================================================================================
Available for future
grants at
December 31, 1996 ....... 45,000
========================================================================================
</TABLE>
<PAGE> 52
The exercise prices of options outstanding at December 31, 1996 ranged from $.50
to $8.63. The weighted average remaining contractual life of those options was
7.4 years. Pro forma information regarding net loss and net loss per share is
required by Statement 123, which also requires that information be determined as
if the Company has accounted for its stock options granted and /or modified
subsequent to December 31, 1994 using the fair value method of that Statement.
During 1995 and 1996, options were granted which had a weighted average fair
value on the date of grant of $6.85 and $8.00, respectively. The fair value for
these options was estimated at the date of grant and at the date of the
repricing using the Black-Scholes model using the following assumptions:
<TABLE>
<CAPTION>
Fair Value Assumptions 1996 1995
- ---------------------- ---- ----
<S> <C> <C>
Dividend yield 0% 0%
Expected volatility 46.0% to 57.5% 46.0%
Risk free interest rate 6.75% 6.75%
Expected life in years 2 to 5 2 to 5
</TABLE>
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee and directors stock options have characteristics
significantly different from those traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, existing models do not necessarily provide a reliable
single measure of the fair value of its options. For purposes of pro forma
disclosure, the estimated fair value of the options is amortized to expense over
the options vesting periods. Beginning in 1996, additional compensation expense
is recognized on all outstanding options that were repriced. At the time of the
repricing, the fair value of the option changes and, according to FASB 123,
this incremental difference is measured as the excess of (1) the fair value of
the modified option and (2) the value of the old option immediately before its
terms are modified. The incremental expense that would have been recorded in
1996 and 1995 was $1.9 million and $1.3 million, respectively, and would have
generated the following pro forma results.
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Net loss ($27,547,664) ($2,446,261)
Loss per share ($2.62) ($0.30)
</TABLE>
The effects of providing pro forma disclosure are not indicative of future
amounts until the new rules are applied to all outstanding non-vested awards.
F-19
<PAGE> 53
Other Options and Warrants
- --------------------------
In 1988, in connection with an agreement terminating the employment of a former
officer and director, the Company exchanged stock options for 15,000 shares of
common stock previously granted under the 1986 and 1988 Plans for non-qualified
stock options. At December 31, 1996 options for 5,000 shares (at $5.75), which
expire January 2, 1998, remain outstanding.
Pursuant to various provisions of an agreement with a consultant, the Company
granted options to purchase 10,000 shares (at $1.00), 50,000 shares (at $1.50),
and 60,000 shares (at $1.50) on August 1, 1991, June 1, 1992, and December 31,
1993, respectively. During 1996, options for 10,000 shares (at $1.00) were
exercised. The remaining options are fully vested at December 31, 1996 and
expire five years from the date of grant.
On December 18, 1992, in consideration for certain defined business
arrangements, the Company granted options to Invamed, Inc. to purchase 135,000
shares of the Company's common stock at an exercise price of $3.25 per share;
these options were exercised by Invamed during 1996. On December 20, 1993, the
Company granted additional options to purchase 300,000 shares of the Company's
common stock at an exercise price of $6.5625 per share as compensation for
certain defined business arrangements. These options are fully vested and
expire five years from the date of grant.
On August 22, 1995, in consideration of modifications to the Company's borrowing
arrangements and additional extensions of credit, the Company granted to its
bank warrants to purchase 200,000 shares of the Company's common stock at an
exercise price of $18.125 per share. These warrants vested immediately upon
grant and expire ten years from the date of grant.
On September 13, 1996, in connection with the Company's acquisition of Hallmark,
the Company issued 400,000 warrants for purchase of the Company's common stock
at $25.00 per share. The warrants have a term of five years and become
exercisable at the rate of 33.3% per year beginning September 13, 1997.
At December 31, 1996, an aggregate of 4,349,875 shares of common stock were
reserved for issuance.
NOTE J. INCOME TAXES
Effective January 1, 1993 the Company adopted Statement of Financial Accounting
Standards No. 109 "Accounting for Income Taxes" ("FAS 109"). The standard
requires the use of the liability method to recognize deferred income tax assets
and liabilities, using expected future tax rates. In 1993, a valuation allowance
was provided for the total amount of deferred tax assets, due to the Company's
limited historical profitability and other uncertainties. In 1994, based upon a
forecast of future operating results, the Company concluded that it would, more
likely than not, be able to realize a portion of the benefit of its net deferred
tax assets. Accordingly, in the fourth quarter of 1994 the valuation reserve was
reduced, and a $3.9 million deferred tax benefit was
F-20
<PAGE> 54
recorded. At December 31, 1995 the Company continued to maintain the net
deferred tax asset at $3.9 million. The carrying value of the deferred tax asset
and related valuation allowance are based on a forecast of future operating
results, which excludes revenues associated with products that are under
development or that have not yet obtained regulatory approval. Based on this
criteria, in the fourth quarter of 1996 the Company recognized a charge of $3.9
million to restore fully the valuation allowance on the Company's deferred tax
assets, principally net operating loss carryforwards.
Excluding the adjustments to the valuation allowance, the Company did not record
a provision for income taxes in either 1996 or 1995. In 1994, the Company
recorded a current alternative minimum tax provision of $115,000.
Deferred income taxes provided under FAS 109 are determined based upon the
temporary differences between the financial statements and the tax basis of
assets and liabilities. The tax effects of temporary differences that give rise
to deferred income tax assets and liabilities at December 31, 1996 and December
31, 1995 are presented below:
<TABLE>
<CAPTION>
December 31, December 31,
1996 1995
--------- --------
(000's omitted)
<S> <C> <C>
Deferred tax assets (liabilities):
Net operating loss carryforwards $ 16,855 $ 11,369
Abandoned facility obligations 340 546
Deferred revenue 0 190
Accrued employee benefits 544 293
Inventory obsolescence allowance 718 210
Accounts receivable allowance 395 219
Hallmark acquisition 3,198 562
Property, plant and equipment (392) (1,228)
Other 767 21
-------- --------
Total deferred tax assets 22,425 12,182
Less valuation allowance 22,425 8,281
-------- --------
Net deferred tax assets $ 0 $ 3,901
======== ========
</TABLE>
F-21
<PAGE> 55
The components of the provision (benefit) for income taxes follow:
<TABLE>
<CAPTION>
Year Ended December 31
(000's omitted)
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Current $ --- $ --- $ 115
Deferred --- --- 1,235
Adjustment to net valuation allowance* 3,901 --- (5,136)
------- -------- -------
Net (benefit) provision $ 3,901 $ --- $(3,786)
======= ======== =======
<FN>
*These adjustments represents the impact of adjustments to the net deferred tax
assets as required by FAS 109.
</TABLE>
At December 31, 1996 and 1995, the Company had cumulative net operating loss
carryforwards of approximately $41.4 million and $28.2 million, respectively,
for federal income tax purposes which expire in the years 2004 to 2011.
Additionally, the Company had cumulative losses from Duramed Europe that
amounted to approximately $3.0 million and $1.8 million, respectively, in 1996
and 1995, which are not deductible for U.S. tax purposes.
The reconciliation of income tax at the U.S. federal statutory rate to income
tax (benefit) expense is:
<TABLE>
<CAPTION>
Year Ended December 31
(000's omitted)
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Tax at U.S. statutory rate $(7,284) $ (347) $ 2,018
Benefit of net operating loss
carryforward --- --- (2,018)
Alternative minimum tax --- --- 115
Deferred tax expense (benefit) 3,901 --- (3,901)
Losses for which benefit not provided 7,284 347 ---
------- ------- -------
Actual tax (benefit) provision $ 3,901 $ --- $(3,786)
======= ======= =======
</TABLE>
F-22
<PAGE> 56
NOTE K. COMMITMENTS AND CONTINGENCIES
The Company is involved in various lawsuits and claims which arise in the
ordinary course of business. Although the outcome of such lawsuits and claims
cannot be predicted with certainty, the disposition thereof will not, in the
opinion of management, result in a material adverse effect on the Company's
financial position or results of operations.
The Company has entered into commitments of approximately $490,000 to fund
certain strategic product development pursuits.
F-23
<PAGE> 57
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Col. A Col. B Col. C Col. D Col. E
- ---------------------------------------------------------------------------------------------------------------------------------
Additions
------------------------------------
Balance at Beginning Deductions- Balance at End
DESCRIPTION of Period Describe of Period
Charged to Costs Charged to Other
and Expenses Accounts-Describe
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996
Allowance for funds advanced to
Hallmark Pharmaceuticals, Inc. $ 1,458,952 $ 1,675,000 $ 3,133,952 (1) ---
Allowance for doubtful trade
accounts receivable $ 576,297 $ 1,213,808 $ 450,613 (2) $ 1,339,492
Allowance for inventory obsolescence $ 551,455 $ 1,505,902 $ 505,727 (3) $ 1,551,630
YEAR ENDED DECEMBER 31, 1995
Allowance for funds advanced to
Hallmark Pharmaceuticals, Inc. --- $ 1,458,952 --- $ 1,458,952
Allowance for doubtful trade
accounts receivable $ 504,850 $ 84,773 $ 13,326 (2) $ 576,297
Allowance for inventory obsolescence $ 741,864 $ 209,520 $ 399,929 (4) $ 551,455
YEAR ENDED DECEMBER 31, 1994
Allowance for doubtful trade
accounts receivable $ 385,710 $ 119,140 --- $ 504,850
Allowance for inventory obsolescence $ 257,764 $ 484,100 --- $ 741,864
<FN>
(1) Incorporated with closing of acquisition in 9/96.
(2) Uncollectible accounts written off, net of recoveries.
(3) Products reserved as short dated inventory then subsequently sold.
(4) Reversal due to change in status of product.
</TABLE>
S-1
<PAGE> 1
Exh 10.9
FOURTH AMENDMENT TO AMENDED AND
RESTATED LOAN AND SECURITY AGREEMENT
------------------------------------
This Fourth Amendment to Amended and Restated Loan and Security
Agreement, dated as of March 31, 1997, between DURAMED PHARMACEUTICALS, INC., a
Delaware corporation (referred to herein as "Borrower") and THE PROVIDENT BANK
("Bank"), an Ohio banking corporation.
WITNESSETH
WHEREAS, Borrower and Bank have previously entered into an Amended and
Restated Loan and Security Agreement dated December 31, 1994 as previously
amended by a First Amendment to Amended and Restated Loan and Security Agreement
dated August 22, 1995, a Second Amendment to Amended and Restated Loan and
Security Agreement dated as of September 30, 1995 and a Third Amendment to
Amended and Restated Loan and Security Agreement dated December 22, 1995 (the
"Loan and Security Agreement");
WHEREAS, Borrower wishes to extend the maturity of certain of the Loans
and delete clause (b) of the first sentence of Section 5.15 of the Loan and
Security Agreement which requires that Borrower maintain a minimum ratio of
Consolidated Liabilities to income before interest, income taxes and
depreciation;
WHEREAS, Bank is willing to delete clause (b) of the first sentence of
Section 5.15 on the condition that the Revolving Credit Facility pursuant to
Section 2.1 of the Loan and Security Agreement be reduced from $12,500,000 to
$6,500,000 and clause (a) of the first sentence of Section 5.15 of the Loan and
Security Agreement be amended as set forth herein; and
WHEREAS, the terms used in this Agreement shall have the meanings as
defined in the Loan and Security Agreement.
NOW, THEREFORE, in consideration of the mutual undertakings herein
contained, the parties hereto desiring legally to be bound, hereby agree as
follows:
1. Section 2.1 of the Loan and Security Agreement is hereby amended to
delete "Twelve Million Five Hundred Thousand Dollars ($12,500,000)" and to
substitute "Six Million Five Hundred Thousand Dollars
($6,500,000)" in the place thereof.
2. Section 5.15 of the Loan and Security Agreement is hereby amended by
the deletion of clauses (a) and (b) of the first sentence thereof and the
substitution of the following in the place thereof:
"(a) Stockholder's Equity shall be not less than $21,000,000
on and after March 31, 1997, $24,000,000 on and after June 30,
1997 and $14,000,000 on and after December 31, 1997".
<PAGE> 2
3. The terms of the Ten Million Five Hundred Thousand Dollar
($10,500,000) Promissory Note date December 31, 1994 are hereby amended to
provide that the maturity date of the Note is extended to April 1, 1998 and the
non-default interest rate shall be the prime rate plus two percentage points (P
+ 1%) per annum. From and after the date hereof, Borrower shall have no further
right to borrow in excess of Six Million Five Hundred Thousand Dollars
($6,500,000) under the Ten Million Five Hundred Thousand Dollar ($10,500,000.00)
Promissory Note dated December 31, 1994.
4. From and after the date hereof, Borrower shall have no further right
to borrow under that certain Two Million Dollar ($2,000,000) Promissory Note
dated September 30, 1995.
5. Borrower hereby represents and warrants that no Event of Default, or
event which with the passage of time or the giving of notice, or both, should
become an Event of Default, has occurred and is continuing as of the date
hereof, except with respect to the breach of Section 5.15 of the Loan and
Security Agreement.
6. All of the terms and conditions of the Loan and Security Agreement
not amended hereby shall continue in full force and effect.
IN WITNESS WHEREOF, the parties have caused this Fourth Amendment to
Amended and Restated Loan and Security Agreement to be executed and delivered as
of the date first above written.
DURAMED PHARMACEUTICALS, INC.
By:
---------------------------------------
THE PROVIDENT BANK
By:
---------------------------------------
<PAGE> 1
EXHIBIT 11
Statement Regarding Computation of Earnings Per Share
DURAMED PHARMACEUTICALS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Year Ended December 31
1996 1995 1994
<S> <C> <C> <C>
Primary:
Weighted average common shares
outstanding 10,522,213 8,026,359 7,815,808
Assumed conversion of preferred
shares to common shares * * 746,590
Net effect of dilutive stock options
and warrants - based on the
treasury stock method using the
average market price * * 1,685,917
------------ ------------ ------------
Totals 10,522,213 8,026,359 10,248,315
============ ============ ============
Net (loss) income $(25,640,507) $ (1,113,687) $ 9,550,867
============ ============ ============
Per share amount $ (2.44) $ (0.14) $ 0.93
============ ============ ============
Fully diluted:
Weighted average common shares
outstanding 10,522,213 8,026,359 7,815,808
Assumed conversion of preferred
shares to common shares * * 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 * * 1,947,297
------------ ------------ ------------
Totals 10,522,213 8,026,359 10,509,695
============ ============ ============
Net (loss) income $(25,640,507) $ (1,113,687) $ 9,550,867
============ ============ ============
Per share amount $ (2.44) $ (0.14) $ 0.91
============ ============ ============
<FN>
* Conversion of stock options and preferred shares not assumed in the
computations because their effect is antidilutive.
</TABLE>
<PAGE> 1
Exh.23
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 33-17030) pertaining to the 1986 Stock Option Plan of Duramed
Pharmaceuticals, Inc.; and in the Registration Statements (Forms S-8 No.
33-68676, No. 33-24122 , No. 33-30716 and No. 333-17259) pertaining to the 1988
Stock Option Plan of Duramed Pharmaceuticals, Inc. and in the Registration
Statement (Form S-8 No. 33-684746) pertaining to the Stock Option Plan for
non-employee directors and in the Registration Statement (Forms S-3 No. 87948,
No. 33-64561, No. 333-09765 and 333-17261) and in the related Prospectus of our
report dated March 27, 1997 with respect to the consolidated financial
statements and schedule of Duramed Pharmaceuticals, Inc, included in this Annual
Report (Form 10-K) for the year ended December 31, 1996.
/s/ ERNST & YOUNG
Cincinnati, Ohio
March 28, 1997
<PAGE> 1
Exhibit 24
POWER OF ATTORNEY
We, the undersigned directors of Duramed Pharmaceuticals, Inc. (the
"Company") hereby appoint E. Thomas Arington and Timothy J. Holt or either of
them, with full power of substitution, our true and lawful attorneys and
agents, to do any and all acts and things in our names and on our behalf as
directors of the Company which is said attorneys and agents, or either of them,
may deem necessary or advisable to enable the Company to comply with the
securities Exchange Act of 1934, as amended, and any rules, regulations or
requirements of the Securities and Exchange Commission, in connection with the
filing of the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996 including, without limitation, signing for us, or any of us,
in our names as directors of the Company, such Form 10-K and any and all
amendments thereto, and we hereby ratify and confirm all that said attorney and
agents, or either of them, shall do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, and the rules and regulations thereunder, this Power of Attorney has
been signed below by the following persons in the capacities indicated as of
the 27th day of March, 1997.
/s/ E. Thomas Arington Chairman of the Board
- ------------------------------
E. Thomas Arington
/s/ George W. Baughman Director
- ------------------------------
George W. Baughman
/s/ Derek G. Layton Director
- ------------------------------
Derek G. Layton
/s/ Stanley L. Morgan Director
- ------------------------------
Stanley L. Morgan
/s/ S. Sundararaman Director
- ------------------------------
S. Sundararaman
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,811,182
<SECURITIES> 0
<RECEIVABLES> 8,799,452
<ALLOWANCES> 1,339,000
<INVENTORY> 13,188,627
<CURRENT-ASSETS> 23,915,512
<PP&E> 42,801,522
<DEPRECIATION> 13,499,466
<TOTAL-ASSETS> 53,633,856
<CURRENT-LIABILITIES> 14,116,414
<BONDS> 9,989,461
<COMMON> 146,035
0
6
<OTHER-SE> 27,639,223
<TOTAL-LIABILITY-AND-EQUITY> 53,633,856
<SALES> 43,855,014
<TOTAL-REVENUES> 43,855,014
<CGS> 31,679,577
<TOTAL-COSTS> 34,984,369
<OTHER-EXPENSES> 26,616,427<F1>
<LOSS-PROVISION> 1,213,808
<INTEREST-EXPENSE> 1,850,446
<INCOME-PRETAX> (20,810,036)
<INCOME-TAX> 3,901,000<F2>
<INCOME-CONTINUING> (24,711,036)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (25,640,507)
<EPS-PRIMARY> (2.44)
<EPS-DILUTED> (2.44)
<FN>
<F1>INCLUDES A ONE-TIME, NON-CASH CHARGE OF $8.6 MILLION FOR THE RECORDING OF
PURCHASE OF IN-PROCESS RESEARCH AND DEVELOPMENT IN CONNECTION WITH THE
COMPANY'S ACQUISITION OF HALLMARK PHARMACEUTICALS, INC.
<F2>THE $3.9 MILLION OF INCOME TAX EXPENSE WAS RECORDED TO RESTORE FULLY THE
VALUATION ALLOWANCE ON THE COMPANY'S DEFERRED TAX ASSETS, IN ACCORDANCE WITH
SFAS 109.
</FN>
</TABLE>
