<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File NO. 0-15242
DURAMED PHARMACEUTICALS, INC.
Incorporated Under the IRS Employer I.D.
Laws of the State No. 11-2590026
of Delaware
7155 East Kemper Road
Cincinnati, Ohio 45249
(513) 731-9900
Indicate by checkmark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
--------- -----------
Common Stock, $.01 par value per share:
Shares Outstanding as of May 12, 1998 17,921,401
Page 1 of 19 pages
<PAGE> 2
DURAMED PHARMACEUTICALS, INC.
INDEX
<TABLE>
<CAPTION>
Page
PART I. Financial Information
- -------------------------------
<S> <C>
ITEM 1 Financial Statements (Unaudited)
Consolidated Balance Sheets ............................................................... 3 - 4
Consolidated Statements of Operations ..................................................... 5
Consolidated Statements of Cash Flows ..................................................... 6
Consolidated Statements of Stockholders'
Equity ................................................................................. 7
Notes to Consolidated Financial
Statements.............................................................................. 8 - 10
ITEM 2 Management's Discussion and Analysis
of Financial Condition and Results of Operations ....................................... 11 - 16
ITEM 3 Quantitative and Qualitative Disclosures About Market Risk ................................ 16
PART II. Other Information
- ---------------------------
ITEM 1 Legal Proceedings ......................................................................... 17 - 18
ITEM 2 Changes in Securities ..................................................................... 18
ITEM 6 Exhibits and Reports on Form 8-K .......................................................... 18
SIGNATURES .......................................................................................... 19
</TABLE>
- 2 -
<PAGE> 3
DURAMED PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
----------- -----------
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 340,711 $ 3,500
Trade accounts receivable,
less allowance for doubtful accounts
of $1,519,000 and $1,482,000,
respectively 9,290,423 8,108,462
Inventories 15,019,714 10,435,942
Prepaid expenses and other assets 2,514,380 2,650,274
----------- -----------
Total current assets 27,165,228 21,198,178
Property, plant and equipment:
Land 1,000,000 1,000,000
Buildings and improvements 18,846,327 18,785,948
Equipment, furniture and fixtures 24,522,179 24,441,717
----------- -----------
44,368,506 44,227,665
Less accumulated depreciation
and amortization 16,437,016 15,808,609
----------- -----------
Property, plant and equipment - net 27,931,490 28,419,056
Deposits and other assets 785,625 508,707
----------- -----------
Total assets $55,882,343 $50,125,941
=========== ===========
</TABLE>
See accompanying notes.
- 3 -
<PAGE> 4
DURAMED PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
------------------- --------------------
<S> <C> <C>
Current liabilities:
Accounts payable $ 5,336,090 $ 4,129,712
Accrued liabilities 5,675,755 4,973,354
Current portion of long-term debt
and other liabilities 2,474,685 6,913,909
Current portion of capital lease obligations 958,506 1,064,210
------------------- --------------------
Total current liabilities 14,445,036 17,081,185
------------------- --------------------
Long-term debt, less current portion 10,270,388 10,903,498
Long-term capital leases, less current portion 941,030 1,105,571
Mandatory redeemable convertible preferred stock 12,000,000 150,000
------------------- --------------------
Total liabilities 37,656,454 29,240,254
------------------- --------------------
Stockholders' equity:
Common stock - authorized 50,000,000
shares, par value $.01; issued and outstanding
17,915,367 and 17,881,287 shares in 1998 and 1997,
respectively 179,153 178,812
Additional paid-in capital 90,749,536 90,728,595
Accumulated deficit (72,702,800) (70,021,720)
------------------- --------------------
Total stockholders' equity 18,225,889 20,885,687
------------------- --------------------
Total liabilities and stockholders' equity $ 55,882,343 $ 50,125,941
=================== ====================
</TABLE>
See accompanying notes.
- 4 -
<PAGE> 5
DURAMED PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended March 31,
1998 1997
-------------------- --------------------
<S> <C> <C>
Net sales $ 12,741,035 $ 10,738,791
Cost of goods sold 10,287,468 7,865,592
-------------------- --------------------
Gross profit 2,453,567 2,873,199
-------------------- --------------------
Operating expenses:
Product development 1,939,716 6,372,220
Selling 613,089 978,714
General and administrative 2,093,017 1,998,215
-------------------- --------------------
4,645,822 9,349,149
-------------------- --------------------
Operating loss (2,192,255) (6,475,950)
Net interest expense 488,825 282,412
-------------------- --------------------
Loss before income taxes
and preferred stock dividends (2,681,080) (6,758,362)
Income taxes --- ---
-------------------- --------------------
Net loss (2,681,080) (6,758,362)
Preferred stock dividends 91,662 ---
-------------------- --------------------
Net loss applicable to
common stockholders $ (2,772,742) $ (6,758,362)
==================== ====================
Basic and diluted loss per share $ (0.15) $ (0.46)
==================== ====================
</TABLE>
See accompanying notes.
- 5 -
<PAGE> 6
DURAMED PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional
Common Stock Paid-In Accumulated
---------------------------------------
Shares Amount Capital Deficit Total
--------------------------------------- ------------------ ------------------ -----------------
<S> <C> <C> <C> <C>
BALANCE - DECEMBER 31, 1997 17,881,287 $ 178,812 $ 90,728,595 $(70,021,720) $ 20,885,687
Issuance of stock in connection
with benefit plans 9,439 94 50,327 50,421
Issuance of stock in connection
with stock options 21,760 218 93,607 93,825
Conversion of Series E
Preferred Stock 2,881 29 (31,331) (31,302)
Net loss for 1998 (2,681,080) (2,681,080)
Preferred Stock dividends (91,662) (91,662)
------------------ --------------- ------------------ ------------------ -----------------
BALANCE - MARCH 31, 1998 17,915,367 $ 179,153 $ 90,749,536 $(72,702,800) $ 18,225,889
================== =============== ================== ================== =================
</TABLE>
See accompanying notes.
- 6 -
<PAGE> 7
DURAMED PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended March 31,
1998 1997
------------------- --------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (2,681,080) $ (6,758,362)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 678,459 465,559
Provision for doubtful accounts 48,628 42,150
Common stock issued in connection with
employee compensation plans 50,421 54,886
Changes in assets and liabilities:
Trade accounts receivable (1,230,589) 105,490
Inventories (4,583,772) 2,050,338
Prepaid expenses and other assets 436,206 (771,421)
Accounts payable 1,206,378 421,470
Accrued liabilities 705,979 1,214,637
Other 5,621 (77,042)
------------------- --------------------
Net cash used in operating activities (5,363,749) (3,252,295)
------------------- --------------------
Investing activities:
Capital expenditures (140,841) (79,611)
Refunds (deposits) on capital expenditures (32,279) 1,880
------------------- --------------------
Net cash used for investing activities (173,120) (77,731)
------------------- --------------------
Cash flows from financing activities:
Payments of long-term debt,
including current maturities (915,758) (712,426)
Net increase (decrease) in revolving credit facility (4,462,656) 2,424,918
Long-term borrowings 35,835 20,772
Issuance of preferred stock - net 11,399,376 ---
Cash redemption of preferred stock (176,098) ---
Issuance of common stock 93,825 46,282
Dividends paid (100,444) (257,202)
------------------- --------------------
Net cash provided by financing activities 5,874,080 1,522,344
------------------- --------------------
Net change in cash 337,211 (1,807,682)
Cash at beginning of period 3,500 1,811,182
------------------- --------------------
Cash and cash equivalents at end of period $ 340,711 $ 3,500
=================== ====================
Supplemental cash flow disclosures:
Interest paid $ 444,687 $ 317,391
Income taxes paid --- ---
</TABLE>
See accompanying notes.
- 7 -
<PAGE> 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Interim Financial Data
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three month period ended March 31, 1998
are not necessarily indicative of the results that may be expected for the year
ended December 31, 1998. For further information, refer to the consolidated
financial statements and notes thereto included in the Annual Report of Duramed
Pharmaceuticals, Inc. (the "Company" or "Duramed") on Form 10-K for the year
ended December 31, 1997, (the "1997 10-K").
Note 2: Loss Per Common Share
The following table presents the calculation of losses applicable to common
stockholders:
<TABLE>
<CAPTION>
March 31
1998 1997
---- ----
<S> <C> <C>
Net loss ($2,681,080) ($6,758,362)
Less dividends on Preferred
shares 91,662 --
----------- -----------
Net loss applicable to
common stockholders ($2,772,742) ($6,758,362)
=========== ===========
</TABLE>
Weighted-average common shares outstanding for the computation of basic and
diluted loss per share were 17,902,140 and 14,674,318 for the periods ended
March 31, 1998 and 1997, respectively.
For the three month periods ended March 31, 1998 and 1997 the recognition of
outstanding options and warrants in the amount of 4,079,569 and 3,956,995,
respectively were not recognized in computing net loss per share as their effect
would be anti-dilutive.
- 8 -
<PAGE> 9
Note 3: Inventories
- -------------------------
Inventories are stated at the lower of cost (first-in, first-out) or market.
Components of inventories include:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Raw materials $ 6,896,030 $ 3,855,477
Work-in-process 438,386 882,835
Finished goods 9,236,359 7,327,177
Obsolescence reserve (1,551,061) (1,629,547)
------------ ------------
Net inventory $ 15,019,714 $ 10,435,942
============ ============
</TABLE>
The Company had manufactured a commercial launch quantity of its generic
conjugated estrogens product. On May 5, 1997, the Company was notified by the
Food and Drug Administration ("FDA") that at that time, it would not approve a
generic conjugated estrogens product, although the product had been developed in
accordance with the guidance established by the FDA in 1991 and current official
USP compositional standards. In view of the FDA's decision, the Company
determined that it was prudent to write-off the generic conjugated estrogens
inventory; accordingly, a charge in the amount of $3,465,000 was recorded and is
reflected in product development expenses for the quarter ended March 31, 1997.
The product currently meets the required stability criteria and will be retained
until such time as it no longer passes those tests. On March 30, 1998, the
Company filed a New Drug Application for its synthetic conjugated estrogens
product. In the event the Company is ultimately successful in obtaining approval
for the product, some, or all of the inventory write-off may be recovered.
Note 4: Debt
- -------------------
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
--------------------------
<S> <C> <C>
Mandatory redeemable
convertible preferred stock $12,000,000 $ 150,000
Revolving credit facility -- 4,462,656
Promissory note mortgage loan 8,287,500 8,393,750
Equipment liability 3,317,481 3,601,214
Equipment loan 1,124,784 1,323,623
Installment notes payable 15,308 36,164
----------- -----------
24,745,073 17,967,407
Less amount classified as current 2,474,685 6,913,909
----------- -----------
$22,270,388 $11,053,498
=========== ===========
</TABLE>
- 9 -
<PAGE> 10
During the first quarter of 1998, the Company funded its operations with net
proceeds ($11.4 million net of issuance cost) received from the private
placement of its Series F Mandatory Redeemable Convertible Preferred Stock. The
Company used a portion of the proceeds from the Series F Preferred Stock to pay
off borrowings under its revolving credit facility.
The terms of the revolving credit facility permit the Company to borrow up to
$6.5 million, based upon current financial condition and operating performance,
through April 1999. Borrowings on the revolving credit facility bear interest at
the rate of prime plus 1%, and are collateralized by certain assets of the
Company including inventory and receivables. As of May 12, 1998, the Company had
outstanding borrowings of $3,343,628 drawn against the revolving credit
facility.
Warner-Lambert Company ("Warner-Lambert") has guaranteed a promissory note
mortgage loan from the Company's bank in the amount of $8.5 million, which is
secured by a mortgage on the Company's Cincinnati, Ohio manufacturing facility.
The mortgage loan bears an interest rate which is variable based upon the bank's
prime rate (8.5% at May 12, 1998). The monthly payment required is $35,417 plus
interest. Principal payments are based upon a twenty year amortization with a
balloon payment due on October 1, 2007 of $4,250,000.
The equipment liability represents an obligation to Ortho-McNeil Pharmaceutical
Corporation ("Ortho-McNeil") for equipment purchased from Ortho-McNeil. The
equipment note bears interest at 14% and requires a monthly interest and
principal payment of $135,497 for a three year term. The note is secured by the
equipment.
The equipment loans represent financing by the Company's bank for equipment
purchases, bear interest at the rate of prime plus 1%, and require monthly
installments of principal and interest. One of the loans is payable over a three
year term and requires a monthly principal payment of $42,355 plus interest
through April 1, 1999; the other loan is payable over a five year term and
requires a monthly principal payment of $23,925 plus interest through March 1,
2000. These loans are collateralized by the assets financed.
Other long-term debt also includes facilities of varying amounts and terms which
are generally collateralized by the assets financed.
The carrying value of the Company's debt approximates fair market value.
- 10 -
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS.
- --------------
OVERVIEW
- --------
Certain statements in this Form 10-Q constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995,
including those concerning management's expectations with respect to future
financial performance and future events, particularly relating to sales of
current products as well as the introduction of new manufactured and distributed
products. Such statements involve known and unknown risks, uncertainties and
contingencies, many of which are beyond the control of the Company, which could
cause actual results and outcomes to differ materially from those expressed
herein. Factors that might affect such forward-looking statements set forth in
this Form 10-Q include, among others, (i) increased competition from new and
existing competitors and pricing practices from such competitors, (ii) the
amount of funds continuing to be available for internal research and development
and for research and development joint ventures, (iii) research and development
project delays or delays in obtaining regulatory approvals, (iv) the ability of
the Company to retain and attract personnel in key operational areas, (v) the
outcome of pending litigation, and (vi) the status of strategic alliances.
Duramed manufactures and distributes a line of prescription drug products in
tablet, capsule and liquid forms to customers throughout the United States.
Products sold by the Company include those of its own manufacture and those it
markets under certain arrangements with other drug manufacturers. The Company's
results include expenses associated with a product development program designed
to generate a stream of new product offerings. The Company's strategy has been
to focus its product development activities primarily on prescription drugs,
principally hormonal products, with attractive market opportunities and
potentially limited competition due to technological barriers of entry. In the
past year, the Company's product development pursuits have expanded to include
controlled release technologies as well as controlled substances.
Duramed has invested substantial resources in the development of a synthetic
conjugated estrogens product. An Abbreviated New Drug Application ("ANDA") for
the product was filed in 1994. In May 1997, the Company was notified by the FDA
that, at that time, it would not approve a generic conjugated estrogens product,
although the product had been developed based on the guidance established by the
FDA in 1991 and current official USP compositional standards. Following that
decision, Duramed management decided, in addition to appealing the FDA's
decision, to pursue a New Drug Application ("NDA") branded product strategy for
its synthetic conjugated estrogens product. In February 1998, the Company
announced the successful completion of a multi-center, double-blind,
placebo-controlled trial to evaluate its drug in the treatment of postmenopausal
vasomotor symptoms in women. This trial provided Duramed with the clinical data
that constituted the basis for the filing of an NDA with the FDA on March 30,
1998.
- 11 -
<PAGE> 12
OUTLOOK
Business Strategy Outlook -- Management is pursuing a business strategy designed
to return the Company to profitability. The Company's ability to attain
profitability, the time frame required to do so, and the potential level of such
profitability, are dependent primarily upon several factors including: (1) the
ability of the Company to maintain the contribution from its current business
base; (2) the level and timing of the profit contribution from products
approved by the FDA in recent months; and, (3) the approval of pending, or not
yet filed, applications with the FDA. Additionally, in September 1997, Duramed
entered into a ten year renewable manufacturing agreement with Warner-Lambert.
Management is encouraged by the results to date from the Company's product
development program and has concluded that it is in the best interests of the
Company and its stockholders to continue spending for research and development
and for hiring incremental personnel and procuring necessary equipment to
prepare for the production and launch of certain products on file. Since the
beginning of 1997, Duramed has received approval from the FDA for five ANDAs
for products developed by the Company as well as one approval for an ANDA
developed by Stason Pharmaceuticals, Inc., ("Stason") an affiliate of Standard
Chemical and Pharmaceutical Company, Ltd. of Taiwan. Duramed and Stason entered
into a long-term agreement in July 1997 under which Duramed has exclusive
marketing rights in the United States for products developed by Stason.
The Company presently has nine ANDAs on file along with the NDA for its
synthetic conjugated estrogens product. Three of the ANDAs are for hormonal
products, the market for one is estimated by IMS America, Ltd. ("IMS")
to be $190 million with no generic equivalent available currently. IMS data
estimates the market for the other eight products on file at $760 million. The
Company plans to submit ANDAs for several other projects later this year,
including three additional hormonal products.
Management recognizes that continued investment in product development is likely
to result in operating losses until such time as new products make a meaningful
contribution to results. Based on the Company's anticipated market share for
products approved in recent months and the anticipated timing of approval for
currently pending applications with the FDA, the Company does not anticipate
substantial contributions to revenues from such products before the second half
of 1998 and, accordingly, does not anticipate a return to profitable operations
until late in the fiscal year.
In the meantime, the Company's product development program will not be supported
from the Company's operations and therefore will be funded principally through
borrowings under its line of credit. In view of recent business developments,
the Company is pursuing an expansion of its revolving line of credit. The
extent of the Company's need for capital in addition to that provided under the
line of credit is dependent on the factors indicated in the first paragraph
above, on the ability of the Company to maintain the current business base and
on the success of other aspects of its business plan.
- 12 -
<PAGE> 13
The terms of a recently completed private placement of Convertible Preferred
Stock require the Company to obtain the investor's concurrence to raise
additional capital under certain defined terms. If the Company needs to raise
additional capital, the extent of dilution to current stockholders is dependent
on the amount of capital required and the terms under which it is raised. If
capital is needed and is not available, or approval to raise such capital cannot
be obtained from the investor, implementation of the Company's plans will be
restricted or delayed with potentially a negative effect upon the Company's
prospects.
RESULTS OF OPERATIONS
- ---------------------
NET SALES
Net sales increased $2,002,244 (19%) for the three month period ended March 31,
1998 as compared to the same period in 1997. The increase in net sales was
primarily attributable to shipment of products sourced from other manufacturers
that were in a backorder status at December 31, 1997 and the contribution from
recently approved products. The Company has agreements with several
manufacturers, including Ortho-McNeil, whereby the Company markets and
distributes their prescription drug products. The terms of these agreements
vary, but typically provide for a sharing of profits between the Company and
the manufacturer. For the periods ended March 31, 1998 and 1997, the
percentages of the Company's sales comprised of products marketed for others
were 45.2% and 34.3%, respectively.
GROSS MARGIN
The gross margin, and the corresponding percentage of net sales, was $2.5
million (19.3%) for the first quarter of 1998 compared to $2.9 million (26.9%)
for the first quarter of 1997. The reduced gross margin in the first quarter of
1998 reflects the decline in methylprednisolone profitability due to
competition offset by contributions from new products and contract revenues from
Warner-Lambert.
There can be no assurance that, with the Company's current product line, the
present gross margin levels can be maintained if the Company's products,
particularly methylprednisolone, should experience increased competition.
- 13 -
<PAGE> 14
OPERATING EXPENSES
Product Development
Excluding the $3,465,000 conjugated estrogens inventory charge in the period
ended March 31, 1997, product development expenditures decreased by $968,000
(33.3 %) in the period ended March 31, 1998 compared to 1997. The decrease was
due principally to a reduction of spending for bioequivalency studies, in
addition to efficiencies obtained through the consolidation of the Company's
product development activities to its Somerset, New Jersey facility. The product
development emphasis is on hormonal therapies and controlled release technology,
focusing on products with high margin potential and limited competition.
Selling
The Company's sales and marketing expenses in the first quarter of 1998
decreased by $66,000 (9.7%) over the same period in 1997 excluding a charge in
the first quarter of 1997 of $300,000 in connection with certain contractual
commitments associated with its generic conjugated estrogens product. The
reduction in selling expenses is a reflection of the Company's continuing
efforts to reduce certain controllable expenses.
General and Administrative
The increase in general and administrative expenses in the first quarter of 1998
compared to the same period in 1997 was due primarily to additional staff
positions and attendant costs to execute the Company's business plan.
Net Interest Expense
Interest expense increased in the first quarter of 1998 compared to the same
period in 1997, due primarily to an increase in average borrowings under the
Company's revolving credit facility.
Income Taxes
Due to the reported net loss in the first quarters of 1997 and 1998, no
provision for income tax was recorded.
Preferred Dividends
Preferred dividends in the first quarter of 1998 were $91,662, which represented
the dividend provision associated with outstanding Series F Convertible
Preferred Stock.
- 14 -
<PAGE> 15
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
In February 1998, the Company completed the private placement of $12 million
($11.4 million net of issuance cost) of Series F Mandatory Redeemable
Convertible Preferred Stock ("Series F Preferred Stock"). One half of the
preferred shares are convertible immediately with the remaining half convertible
after August 4, 1998. The conversion price for the first half of the Series F
Preferred Stock is $7.30 per share for at least the first six months.
Thereafter, with respect to the second half of the Series F Preferred Stock and
any unconverted portion of the first half, the conversion price will vary
depending on the timing of conversions and the market price of the Common Stock.
The conversion price will range from a premium to the market price to a discount
from the market price of the Common Stock.
The Series F Preferred Stock pays a dividend of 5% annually, payable quarterly
in arrears, on all unconverted Series F Preferred Stock. Any of the Series F
Preferred Stock that remains outstanding will be redeemed automatically on
February 4, 2000. At the closing of this transaction, Duramed had approximately
17.9 million shares of Common Stock outstanding. Depending on the ultimate
conversion price, the number of shares of Common Stock issued in satisfaction of
conversion could range from a low of 1,397,000 to a high of 3,582,000, with
provision for cash redemption of any remaining unconverted Series F Preferred
Stock.
Receivables increased $1.2 million during the first quarter primarily as a
result of the shipment of product that was on backorder as of December 31, 1997.
The $4.6 million increase in inventory results from the stocking of new
products, both Duramed produced products as well as products sourced through
other manufacturers. Additionally, inventory levels for certain of the Company's
products were adjusted to improve customer service. The increase in payables
relates to the increased purchases of inventory.
The terms of the revolving credit facility permit the Company to borrow up to
$6.5 million based upon current financial condition and operating performance
through April, 1999. Borrowings on the revolving credit facility bear interest
at the rate of prime plus 1%, and are collateralized by certain assets of the
Company including inventory and receivables. As of May 12, 1998, the Company had
outstanding borrowings of $3,343,628 drawn against the revolving credit
facility.
The Company is in the process of restructuring Duramed Europe which, if
successful, will result in the Company retaining a minority ownership in Duramed
Europe as well as certain rights to products developed by Duramed Europe. If the
Duramed Europe restructuring is completed, the Duramed Europe operations will be
funded by an investment partner. The Company believes that the restructuring of
Duramed Europe is in the Company's best interest in order to ensure that these
high value long-term projects continue while retaining marketing and royalty
rights for the Company.
- 15 -
<PAGE> 16
Management is encouraged by the results to date from the Company's product
development program and has concluded that it is in the best interests of the
Company and its stockholders for the Company to continue 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.
The Company's need for additional financing for such purposes is dependent upon
several factors including: (1) the level and timing of the profit contribution
from products approved by the FDA in recent months; (2) the timing of approval
of currently pending applications with the FDA; and, (3) the ability of the
Company to maintain the current business base as well as the success of other
aspects of its business plan. Additionally, capital will be required for
facility and equipment to execute the Company's business plan and to
commercialize the Company's synthetic conjugated estrogens product.
The terms of the recently completed private placement of Convertible Preferred
Stock require the Company to obtain the investors concurrence to raise
additional capital under certain defined terms. If the Company needs to raise
additional capital, the extent of dilution to current shareholders is dependent
on the amount of capital required and the terms under which it is raised. If
capital is needed and is not available, or approval to raise such capital cannot
be obtained from the investor, implementation of the Company's plans will be
restricted or delayed with potentially a negative effect upon the Company's
prospects.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------------------------------------------------------------------------
Not applicable.
- 16 -
<PAGE> 17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
The Company is a party to an Agreement dated June 26, 1992 and amended on April
7, 1994 (the "Agreement") with Schein Pharmaceutical, Inc. ("Schein") relating
to the development of a generic version of the conjugated estrogens product
Premarin(R). On August 7, 1997, the Company filed a complaint for a declaratory
judgment against Schein in the Court of Common Pleas, Hamilton County, Ohio,
Case No. A9705498 ("Ohio action"). The Company seeks a declaration that the
Agreement applies only to a product approved on the basis of an ANDA and which
would be fully substitutable for Premarin(R) and that the Agreement does not
apply to the Company's efforts to develop or market any conjugated estrogens
product which would be approved and marketed on the basis of an NDA.
In apparent response to the Company's action, on September 29, 1997, Schein
filed a complaint against the Company and other unnamed defendants in the
Superior Court of New Jersey, Chancery Division, Morris County, Docket No.
MRS-C-187-97 ("New Jersey action"). Schein alleges that the Company breached its
obligations to Schein under an alleged joint venture arising between the parties
and that the unnamed defendants tortuously interfered with Schein's prospective
business advantage and are liable to Schein. Schein seeks various forms of
relief against the Company, including injunctions barring the Company from the
development of a conjugated estrogens product with any person or company other
than Schein and requiring specific performance from the Company according to the
terms of the Agreement and alleged joint venture and accounting and money
damages and a constructive trust.
On October 9, 1997, Schein filed a motion to dismiss the Ohio action based upon
the pending New Jersey action. The court denied this motion on November 13,
1997. On October 17, 1997, the Company filed a motion to dismiss or, in the
alternative, to stay the New Jersey action because of the previously-filed Ohio
action. On November 14, 1997, the New Jersey court granted the Company's motion
in part and stayed the New Jersey action.
On January 30, 1998, Schein amended its answer in the Ohio action and asserted a
counterclaim against the Company and other unnamed defendants similar to the New
Jersey complaint. As a result, on March 4, 1998, the Company renewed its motion
to dismiss the New Jersey action because Schein had brought the same basic
claims as a counterclaim in the Ohio action. On April 17, 1998, the Court
dismissed without prejudice the New Jersey action.
The Company intends vigorously to prosecute its claim for declaratory relief in
the Ohio action and vigorously to defend against Schein's counterclaim in the
Ohio action, however, the outcome of these claims cannot be predicted with
certainty.
- 17 -
<PAGE> 18
The Company is involved in various additional lawsuits and claims which arise in
the ordinary course of business. Although the outcome of such lawsuits and
claims cannot be predicted with certainty, the disposition thereof will not, in
the opinion of management, result in a material adverse effect on the Company's
financial position or results of operations.
Item 2. Changes in Securities
---------------------
In February 1998, the Company completed the private placement of 12,000 shares
of Series F Mandatory Redeemable Convertible Preferred Stock ("Series F
Preferred Stock") in exchange for proceeds of $12 million ($11.4 million net of
issuance cost). One-half of the shares of Series F Preferred Stock are
convertible immediately, with the remaining half convertible after August 4,
1998. The conversion price for the first half is $7.30 per share for at least
the first six months. Thereafter, with respect to the second half of the shares
of Series F Preferred Stock and any unconverted portion of the first half, the
conversion price will vary depending on the timing of conversions and the market
price of the Company's Common Stock. The conversion price will range from a
premium to the market price to a discount from the market price of the Common
Stock. Depending on the ultimate conversion price, the number of shares of
Common Stock issued could range from a low of 1,397,000 to a high of
3,582,000, with provision for cash redemption of any remaining unconverted
shares of Series F Preferred Stock. The issuance of the shares of Series F
Preferred Stock was exempt from registration under the Securities Act of 1933 on
the basis of the exemption provided in section 4 (2) of that Act.
Item 6. Exhibit and Reports on Form 8-K
-------------------------------
(a) Exhibits
(27) Financial Data Schedule*
(b) Reports on Form 8-K for the quarter ended March 31, 1998: None
- ------------------
*Previously filed.
- 18 -
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DURAMED PHARMACEUTICALS, INC.
Date: May 15, 1998 by: /s/ E. Thomas Arington
------------------------ ----------------------------------------
E. Thomas Arington
President, Chairman of the Board
Chief Executive Officer
Date: May 15, 1998 by: /s/ Timothy J. Holt
------------------------ ----------------------------------------
Timothy J. Holt
Senior Vice President - Finance,
Treasurer, Chief Financial Officer
-19-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 340,711
<SECURITIES> 0
<RECEIVABLES> 10,809,423
<ALLOWANCES> 1,519,000
<INVENTORY> 15,019,714
<CURRENT-ASSETS> 27,165,228
<PP&E> 44,368,506
<DEPRECIATION> 16,437,016
<TOTAL-ASSETS> 55,882,343
<CURRENT-LIABILITIES> 14,445,036
<BONDS> 10,270,388
12,000,000
0
<COMMON> 179,153
<OTHER-SE> 18,046,736
<TOTAL-LIABILITY-AND-EQUITY> 55,882,343
<SALES> 12,741,035
<TOTAL-REVENUES> 12,741,035
<CGS> 10,287,468
<TOTAL-COSTS> 10,900,557
<OTHER-EXPENSES> 4,032,733
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 488,825
<INCOME-PRETAX> (2,681,080)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,681,080)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,772,742)
<EPS-PRIMARY> (0.15)
<EPS-DILUTED> (0.15)
</TABLE>
