<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File No. 0-15242
DURAMED PHARMACEUTICALS, INC.
Incorporated Under the IRS Employer I.D.
Laws of the State No. 11-2590026
of Delaware
7155 East Kemper Road
Cincinnati, Ohio 45249
(513) 731-9900
Indicate by checkmark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
--- ---
Common Stock, $.01 par value per share:
Shares Outstanding as of August 6, 1999 21,744,108
Page 1 of 24 pages
<PAGE> 2
DURAMED PHARMACEUTICALS, INC.
INDEX
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited)
Consolidated Balance Sheets.................................... 3-4
Consolidated Statements of Operations.......................... 5
Consolidated Statements of Cash Flows.......................... 6
Consolidated Statements of Stockholders' Equity................ 7
Notes to Consolidated Financial
Statements................................................... 8-11
ITEM 2. Management's Discussion and Analysis
of Financial Condition and Results of Operation.............. 12-21
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk..... 21
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.............................................. 22-23
ITEM 2. Changes in Securities and Use of Proceeds...................... 23
ITEM 5. Other Information.............................................. 22-23
ITEM 6. Exhibits and Reports on Form 8-K. ............................. 23
SIGNATURES ............................................................. 24
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<PAGE> 3
DURAMED PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
----------- -----------
Unaudited
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,000 $ 3,500
Trade accounts receivable,
less allowance for doubtful accounts:
1999 - $742,000 1998 - $903,000 7,050,903 10,330,816
Inventories 23,431,019 19,786,705
Prepaid expenses and other assets 4,339,306 2,803,460
----------- -----------
Total current assets 34,825,228 32,924,481
Property, plant and equipment - net 27,939,940 27,229,828
Deposits and other assets 1,051,590 1,051,575
----------- -----------
Total assets $63,816,758 $61,205,884
=========== ===========
</TABLE>
See accompanying notes.
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<PAGE> 4
DURAMED PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES, MANDATORY REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------ ------------
Unaudited
<S> <C> <C>
Current liabilities:
Accounts payable $ 5,790,937 $ 4,370,181
Accrued liabilities 6,321,280 5,886,201
Current portion of long-term
debt and other liabilities 3,259,413 3,384,860
Current portion of capital lease obligations 785,764 708,891
------------ ------------
Total current liabilities 16,157,394 14,350,133
------------ ------------
Long-term debt, less current portion 32,656,635 22,138,315
Long-term capital leases, less current portion 563,364 441,632
------------ ------------
Total liabilities 49,377,393 36,930,080
------------ ------------
Mandatory redeemable convertible preferred stock 4,900,000 7,700,000
------------ ------------
Stockholders' equity:
Convertible Preferred Stock Series B
Common stock - authorized 50,000,000 shares,
par value $.01; 21,685,693 and 19,811,178 shares
in 1999 and 1998 respectively 216,856 198,111
Additional paid-in capital 99,648,106 94,795,906
Accumulated deficit (90,325,597) (78,418,213)
------------ ------------
Total stockholders' equity 9,539,365 16,575,804
------------ ------------
Total liabilities and stockholders' equity $ 63,816,758 $ 61,205,884
============ ============
</TABLE>
See accompanying notes.
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<PAGE> 5
DURAMED PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 9,966,776 $ 11,681,859 $ 23,216,283 $ 24,422,894
Cost of goods sold 9,492,185 9,078,681 19,909,722 19,366,149
------------ ------------ ------------ ------------
Gross profit 474,591 2,603,178 3,306,561 5,056,745
------------ ------------ ------------ ------------
Operating expenses:
Product development 2,308,576 908,273 3,611,299 2,847,989
Selling 4,359,060 685,732 5,255,046 1,298,821
General and administrative 2,606,198 2,611,744 4,932,799 4,704,761
------------ ------------ ------------ ------------
9,273,834 4,205,749 13,799,144 8,851,571
------------ ------------ ------------ ------------
Operating loss (8,799,243) (1,602,571) (10,492,583) (3,794,826)
Net interest expense 732,002 587,968 1,414,801 1,076,793
------------ ------------ ------------ ------------
Loss before income tax and
preferred stock dividends (9,531,245) (2,190,539) (11,907,384) (4,871,619)
Preferred stock dividends 61,931 150,000 130,223 241,662
------------ ------------ ------------ ------------
Net loss applicable
to common shareholders $ (9,593,176) $ (2,340,539) $(12,037,607) $ (5,113,281)
============ ============ ============ ============
Basic and diluted loss per share $ (0.45) $ (0.13) $ (0.57) $ (0.28)
============ ============ ============ ============
</TABLE>
See accompanying notes.
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<PAGE> 6
DURAMED PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six months ended June 30,
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(11,907,384) $ (4,871,619)
Adjustments to reconcile net loss to net cash
(used in) operating activities:
Depreciation and amortization 1,424,688 1,354,887
Provision for doubtful accounts 89,058 96,637
Common stock issued in connection with
employee compensation plans 141,277 104,085
Changes in assets and liabilities:
Trade accounts receivable 3,190,855 (625,650)
Inventories (3,644,314) (6,447,668)
Prepaid expenses
and other assets (1,623,284) 787,890
Accounts payable 1,420,756 (1,012,536)
Accrued liabilities 462,626 607,924
Other (26,469) 9,620
------------ ------------
Net cash (used in) operating activities (10,472,191) (9,996,430)
------------ ------------
Investing activities:
Capital expenditures (1,962,500) (392,628)
Deposits on capital equipment (66,221) (29,418)
------------ ------------
Net cash (used for) investing activities (2,028,721) (422,046)
------------ ------------
Cash flows from financing activities:
Payments of long-term debt, including current maturities (1,535,263) (1,711,320)
Net increase (decrease) in revolving credit facility 9,922,616 (76,762)
Long-term borrowings 2,204,125 1,063,901
Issuance of preferred stock - net -- 11,399,376
Cash redemption of preferred stock -- (149,971)
Issuance of common stock 2,057,593 94,624
Preferred stock dividends paid (147,659) (201,372)
------------ ------------
Net cash provided by financing activities 12,501,412 10,418,476
------------ ------------
Net change in cash 500 --
Cash at beginning of period 3,500 3,500
------------ ------------
Cash at end of period $ 4,000 $ 3,500
============ ============
Supplemental cash flow disclosures:
Interest paid $ 1,201,611 $ 832,786
</TABLE>
See accompanying notes.
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DURAMED PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Additional
-------------------------- Paid-In Accumulated
Shares Amount Capital Deficit Total
---------- -------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE - DECEMBER 31, 1998 19,811,178 $198,111 $94,795,906 $(78,418,213) $16,575,804
Issuance of stock in connection
with benefit plans 22,746 227 141,050 141,277
Issuance of stock in connection
with stock options and warrants 858,989 8,590 2,049,003 2,057,593
Conversion of Series F
Preferred Stock 992,780 9,928 2,792,370 2,802,298
Net loss for 1999 (11,907,384) (11,907,384)
Preferred Stock dividend (130,223) (130,223)
---------- -------- ----------- ------------ -----------
BALANCE - JUNE 30, 1999 21,685,693 $216,856 $99,648,106 $(90,325,597) $9,539,365
========== ======== =========== ============ ==========
</TABLE>
See accompanying notes.
-7-
<PAGE> 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: INTERIM FINANCIAL DATA
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the six-month period ended June 30, 1999
are not necessarily indicative of the results that may be expected for the year
ended December 31, 1999. For further information, refer to the consolidated
financial statements and notes thereto included in the Annual Report of Duramed
Pharmaceuticals, Inc. (the "Company" or "Duramed") on Form 10-K/A for the year
ended December 31, 1998, (the "1998 10-K/A").
NOTE 2: LOSS PER COMMON SHARE
The following table presents the calculation of losses applicable to common
stockholders:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
1999 1998 1999 1998
--------------------------------- -----------------------------------
<S> <C> <C> <C> <C>
Net loss $ (9,531,245) $ (2,190,539) $ (11,907,384) $ (4,871,619)
Less dividends on
preferred shares 61,931 150,000 130,223 241,662
------------- ------------ --------------- ---------------
Net loss applicable to
common stockholders $ (9,593,176) $ (2,340,539) $ (12,037,607) $ (5,113,281)
============= ============ =============== ===============
</TABLE>
Weighted-average common shares outstanding for the computation of basic and
diluted loss per share were 21,476,065 and 21,046,006 for the three and six
month periods ended June 30, 1999 and 17,920,937 and 17,911,590 for the same
periods in 1998.
For the six month periods ended June 30, 1999 and 1998 the recognition of
outstanding options and warrants in the amount of 4,159,077 and 4,595,119,
respectively, were not recognized in computing net loss per share as their
effect would be anti-dilutive.
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<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>
June 30, December 31,
1999 1998
------------ -----------
<S> <C> <C>
Raw materials $ 10,385,529 $ 6,841,241
Work-in-process 304,284 476,404
Finished goods 15,260,494 14,914,588
Obsolescence reserve (2,519,288) (2,445,528)
------------ ------------
Net inventory $ 23,431,019 $ 19,786,705
============ ============
</TABLE>
The Company had $3.5 million in inventory of its synthetic conjugated estrogens
product, in raw material and finished dosage form, which had previously been
expensed. The product is being utilized in the sales effort for Cenestin(TM)
(synthetic conjugated estrogens, A) Tablets, ("Cenestin"). The Company shipped
$10.9 million of Cenestin through June 30, 1999. The cost of these shipments has
been retained in inventory as of June 30, 1999 and will be recorded as revenue
as evidence of product movement through the distribution system is obtained.
NOTE 4: DEBT
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------------------------------
<S> <C> <C>
Revolving credit facility $20,624,105 $10,701,489
Merrill Lynch note payable 7,931,904 8,144,404
Equipment term note 5,162,587 5,564,866
Loan payable to contract sales organization 1,650,000 --
Note payable to strategic alliance partner 521,711 1,081,146
Installment notes payable 25,741 31,270
----------- -----------
35,916,048 25,523,175
Less amount classified as current 3,259,413 3,384,860
----------- -----------
$32,656,635 $22,138,315
=========== ===========
Mandatory redeemable
convertible preferred stock $ 4,900,000 $ 7,700,000
=========== ===========
</TABLE>
During the second quarter of 1999, the Company financed its operations with
borrowings on its revolving credit facility, a loan payable to a contract sales
organization and proceeds from the exercise of stock options and warrants.
- 9 -
<PAGE> 10
DEBT
- ----
The Company's principal lender is NationsCredit Commercial Corporation
("NationsCredit"). The initial term of the agreement with NationsCredit is
through November 2002 with provisions for renewals. The financing agreement
provides for a revolving credit facility collateralized by the Company's
receivables and inventories and a $5,631,913 term note secured by the Company's
equipment. The Company's borrowing capacity under the revolving credit facility
adjusts based on the change in receivables and inventory and bears an interest
rate of prime plus 0.50% (8.25% at June 30, 1999). The $5,631,913 term note
bears an interest rate of prime plus 0.75% (8.50% at June 30, 1999) and requires
monthly principal payments of $158,342 plus interest through July 30, 2000 and
$67,047 plus interest for the remaining term of the note, subject to renewal of
the financing agreement.
On August 4, 1999, the Company announced the addition of a second four-year term
loan, in the amount of $7.0 million. Under the terms of the agreement, the new
term note will be repaid in equal monthly installments and bear an interest rate
of prime plus 1.25%.
The Company has an $8.1 million note payable to Merrill Lynch, which is
guaranteed by the Warner-Lambert Company ("Warner-Lambert"). Warner-Lambert
holds a first mortgage on the Company's Cincinnati, Ohio manufacturing facility.
The note payable to Merrill Lynch bears a variable interest rate based upon the
average commercial paper dealer rate plus 2.65% (7.85% on June 30, 1999). The
monthly principal 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 $1,650,000 loan payable to a contract sales organization represents the
initial cost to establish the brand sales force which is representing the
Company's branded products (initially Cenestin) to the physicians community. The
firm contracted to establish and manage the Company's dedicated sales force
agreed to finance its startup costs over the 36-month term of the agreement in
exchange for a monthly principal and interest payment by the Company of $53,240.
The loan is unsecured and carries an interest rate of 10%.
The note payable to a strategic alliance partner is an unsecured note. The note
requires payment in full on April 30, 2000.
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.
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<PAGE> 11
MANDATORY REDEEMABLE CONVERTIBLE PREFERRED STOCK
- ------------------------------------------------
In February 1998, the Company issued $12.0 million in Series F Preferred Stock.
The Series F Preferred Stock is convertible into shares of common stock and pays
a dividend of 5% annually, payable quarterly in arrears, on all unconverted
shares. Any of the Series F Preferred Stock that remain outstanding will be
redeemed automatically on February 4, 2000. The terms of the Series F Preferred
Stock limit the number of shares of Common Stock that can be issued upon
conversion to 3,580,252, with an option for the Company to satisfy any remaining
unconverted Series F Preferred Stock in cash or stock. In November 1998, the
Company received a waiver of the Nasdaq requirement for shareholders approval
which permits the Company to issue, as required, 1,401,584 shares beyond the
original 3,580,252. The terms of the Series F Preferred Stock provide for a
conversion price based upon a trailing 20 day period and were structured such
that the Series F Preferred Shares were convertible into common shares at
varying discounts to the market price (as defined) depending on the date the
conversion occurred.
At August 12, 1999 $7.1 million of the stated value of the Series F Preferred
Stock had been converted into 2,794,702 shares of Common Stock at an average
price of $2.54 per share. Per the terms of the Series F Stock, assuming that the
stock price remains above $4.88 and the Series F holder converts, the balance of
the Series F preferred shares will convert into common shares at $3.80 per
share. Based upon a $3.80 conversion price, the Company will be required to
issue approximately 1.3 million common shares upon the conversion of the
remaining Series F Preferred Stock. This would result in the Company issuing 4.1
million common shares at an average price of $2.94 upon the complete conversion
of the Series F Stock.
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<PAGE> 12
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, (vi) the status of strategic alliances, and (vii)
the success of its brand marketing efforts.
Duramed develops, manufactures and markets prescription drug products. 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 with
attractive market opportunities and potentially limited competition due to
technological barriers of entry, principally, hormonal products. The Company's
product development capabilities include modified release technologies as well
as controlled substances development.
Results for the three-year period ended December 31, 1998 and the six month
period ended June 30, 1999 reflect the substantial resources Duramed invested in
the development of an ANDA generic conjugated estrogens product, and
subsequently, an NDA brand conjugated estrogens product. In March 1999, the
Company received U.S. Food and Drug Administration ("FDA") marketing approval of
the NDA product, its first branded prescription product. Cenestin (synthetic
conjugated estrogens, A) Tablets is a new plant-derived synthetic conjugated
estrogens product for the treatment of moderate-to-severe vasomotor symptoms
associated with menopause. The approval of Cenestin, which is expected to become
the Company's single largest source of revenue, should permit Duramed to move
ahead with its long-term product development program designed to ultimately make
the Company a leader in women's health care and in the near term, the hormone
replacement market, in part by developing a family of hormone products.
- 12 -
<PAGE> 13
OUTLOOK
Business Strategy Outlook -- Based on an assessment of the market opportunities
for a synthetic conjugated estrogens product, and the related potential impact
on Duramed's revenues and profitability, management believes that the approval
of Cenestin in March 1999 significantly changes Duramed's long-term outlook and
greatly enhances the Company's ability to fund its efforts to become a leader in
the women's health care market.
To achieve that goal, as well as generate sustainable profitability, the
Company's business plan involves primary focus on three initiatives:
Maximize the Market Penetration of Cenestin -- Cenestin, an estrogen replacement
therapy (ERT), will compete with other ERT/HRT products in a market approaching
$2 billion in the U.S. alone. According to NDC(R) Health Information Services, a
leading pharmaceutical market data provider, the combined ERT/HRT market is
growing at a projected annual rate of 15%. ERT/HRT therapies are prescribed for
women entering or in menopause. The average age for women entering menopause is
51. According to the American College of Obstetrics and Gynecology, the first
wave of "baby boomer" women (born between 1945-1960) is now entering menopause
and another 20 million will reach menopause in the next decade. Currently more
than 40 million women in the U.S. are over 50 and therefore, candidates to take
either ERT (estrogen only) or HRT (estrogen with progestin).
Duramed believes that the distinctive characteristics of its product will
contribute to its ability to capture a significant share of the ERT market. To
help communicate Cenestin's availability and favorable characteristics, on March
30, 1999 Duramed entered into a marketing and distribution agreement with
Cardinal MarketFORCE, a subsidiary of Cardinal Health, Inc., to perform the
necessary direct-to-physicians sales effort and national distribution. Under the
terms of the three- year agreement, Cardinal MarketFORCE is to recruit, train
and deploy a team of dedicated, full-time sales professionals and experienced
sales managers. Duramed will compensate Cardinal MarketFORCE according to a
fixed schedule with performance incentives for achievement of certain market
share targets. At the end of the three-year period, Duramed may transition the
sales team to full-time Duramed employees. The Cardinal MarketFORCE management
team for Duramed has substantial experience in contract sales, pharmaceutical
sales and women's health. All regional managers and the sales force had been
hired by mid-June 1999, and the direct-to-physicians sales effort commenced in
early July. Additionally, the Company is finalizing the balance of its
aggressive Cenestin marketing plan which will include health care and consumer
advertising programs. Management's goal is for Cenestin to reach an annualized
rate of at least $100 million in annualized revenues within 15-18 months of the
July 1999 launch date.
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<PAGE> 14
In May 1999 the Company commenced shipping Cenestin to the retail market.
Product was available at retail outlets to fill prescriptions by June 1, 1999.
Invoiced shipments through June 30, 1999 amounted to $10.9 million and none of
this was recorded as revenue during the second quarter. In accordance with the
rules governing revenue recognition, the Company will record these shipments as
revenue when evidence of product movement through the distribution system is
obtained. Since the approval, the Company incurred substantial marketing and
launch related expenses and will maintain and, as appropriate, expand this
effort during the ramp-up of product sales over the coming months, impacting
financial performance throughout 1999.
Product Approval Status -- On August 12, 1999 the FDA approved the Company's
first oral contraceptive product, Desogestrel and Ethinyl Estradiol .15mg/0.03mg
tablets. The FDA granted Duramed's Desogestrel and Ethinyl Estradiol
.15mg/0.03mg tablet bioequivalency, and therefore it is therapeutically
interchangeable with Ortho-Cept and Desogen tablets for all new and refill
prescriptions.
Duramed's Desogestrel and Ethinyl Estradiol .15mg/0.03mg tablet is the first and
only substitutable equivalent oral contraceptive for Ortho-Cept and Desogen
tablets. Annual combined brand revenue for the two products in 1998 was
approximately $155 million. Duramed expects shipments to begin within 60 days.
Since the beginning of 1999, the FDA has approved the Cenestin NDA and five
ANDAs submitted by the Company. The Company has four ANDAs on file. Two of the
ANDAs on file are for hormonal products. IMS data estimates the market for these
four products at $232 million. The Company plans to submit NDAs and ANDAs for
other projects in 1999 and beyond, as appropriate to its business strategy.
Continue to Invest in Product Development Activities -- While product
development expenditures were curtailed in 1998 as part of an effort to conserve
resources while awaiting the FDA's decision regarding Cenestin, management is
encouraged by the results to date from its product development program. With the
approval of Cenestin, the Company intends to accelerate spending for research
and development in the women's health care area and for hiring incremental
personnel and procuring necessary equipment to prepare for the production and
launch of certain products on file. The Company has initiated a bone marker
study that will assess the rate at which the estrogens in Cenestin are absorbed
into bone tissue, and some results are anticipated to be published early next
year early. On August 4, 1999, the Company filed for approval of the 1.25mg
strength of Cenestin after successfully completing the clinical study evaluating
the dosage strength. The clinical study was a bioequivalence trial which
compared the 1.25mg formulation to two (2) of the approved .625mg strength of
Cenestin tablets. The study found these strengths to be dose proportional,
essentially identical in rate and extent of absorption of the
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<PAGE> 15
active ingredients in the blood stream. The Company currently expects to
introduce a 1.25mg strength for Cenestin in late 1999 and a .3mg strength in
early 2001. Additionally, the Company also intends to initiate two multi-million
dollar clinical studies, one to demonstrate the effectiveness of Cenestin in the
prevention of osteoporosis, the other to determine the effect of
medroxyprogesterone acetate ("MPA") administered cyclically in combination with
Cenestin (referred to as the combination product) for which the Company recently
filed an Investigational New Drug ("IND") application with the FDA. The Company
intends to initiate these studies based upon the availability of funds generated
from operations through the sale of Cenestin, profits generated from recently
approved products, and other resources that may be available to the Company.
The Company's ability to attain profitability, the time frame required to do so,
and the potential level of such profitability, are dependent upon a number of
factors including: (1) the rate at which Cenestin penetrates the ERT market; (2)
the level of spending required to launch and promote Cenestin to health care
professionals and consumers; (3) the profit level generated from the Company's
current business base (including the level of revenue received under the
Company's agreement with Warner-Lambert); (4) the approval of products pending
before the FDA and the successful commercialization of products recently
approved by the FDA; (5) the level of spending on clinical and bioequivalency
studies; and (6) the success of its branded marketing efforts.
Duramed is investing in the product launch, and expenses will occur before the
anticipated revenue stream is initiated by sales of Cenestin. Until the revenue
stream from Cenestin is realized, the Company will require additional external
capital to continue the investment in its business plan. The extent of the
Company's need for additional capital is dependent on the factors noted above.
Management believes that approval of Cenestin expands its potential sources of
capital and anticipates it should be able to access sufficient funds to meet its
overall business plan. Delays in obtaining the necessary financing, however,
would negatively impact the Company's ability to meet its overall business
plans.
RESULTS OF OPERATIONS
- ----------------------
NET SALES
On March 24, 1999, the FDA granted Duramed approval to market Cenestin, and the
company commenced shipping the initial stocking in the second quarter. Invoiced
shipments through June 30, 1999 amounted to $10.9 million and none of this was
recorded as revenue during the second quarter. In accordance with the rules
governing revenue recognition, the company will record these shipments as
revenue when evidence of product movement through the distribution system is
obtained.
Net sales decreased $1.7 million (14.7%) for the three month period ended June
30, 1999 as compared to the same period in 1998. Net sales decreased $1.2
million (4.9%) for the six month period ended June 30, 1999 as compared to the
same period in 1998. The decrease in net sales, which do not include revenue for
Cenestin, was primarily attributable to price erosion on certain of the
Company's existing products. The Company has agreements with several
manufacturers, 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 three and
six month periods ended June 30, 1999, the percentage of the Company's sales
comprised of products marketed for others was 39% and 45% as compared to 45% for
both of the periods in 1998.
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<PAGE> 16
GROSS MARGIN
The gross margin, and the corresponding percentage of net sales, was $.5 million
(4.8%) and $3.3 million (14.2%) for the three and six months ended June 30, 1999
compared to $2.6 million (22.3%) and $5.1 million (20.7%) for the same periods
in 1998. The reduced gross margin in the second quarter and first half of 1999
compared to the same periods in 1998 reflects the decline in selling prices as
well as approximately $900,000 in start-up production activities necessary to
commercialize Cenestin and other recently approved products. The Company expects
the gross margin to increase in the second half of 1999 as a result of revenue
for Cenestin being recorded as evidence of product movement through the
distribution system is obtained, and contributions commencing from products
recently approved, most notably the Company's first oral contraceptive product
Desogestrel and Ethinyl Estradiol approved by the FDA on August 12, 1999.
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, should
experience increased competition.
OPERATING EXPENSES
Product Development
Product development expenditures increased $1,400,000 (154.2%) and $763,000
(26.8%) for the three and six month periods ended June 30, 1999 compared to the
same periods in 1998. The increase was due to spending for bioequivalency
studies and the continued investment in the Tamoxifen project. The product
development emphasis is on hormonal therapies, modified release technologies and
controlled substances development.
Selling
The Company's sales and marketing expenses increased by $3,673,000 (535.7%) and
$173,310 (26.8%) for the three and six month periods ended June 30, 1999
compared to the same periods in 1998. The increase in selling expenses is a
result of the Company's brand marketing campaign for Cenestin. Sales and
marketing expenses will increase in the second half of 1999 and beyond as the
Company continues to execute its brand sales and marketing program designed to
maximize the market penetration of Cenestin and the Company's new oral
contraceptive product Desogestrel and Ethinyl Estradiol.
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<PAGE> 17
General and Administrative
General and administrative expenses were essentially unchanged for the three
months period ended June 30, 1999, as compared to the 1998 period and increased
$228,000 (4.8%) for the six month period ended June 30, 1999 compared to the
same period in 1998. The increase was due principally to additional staff
positions and attendant costs to expand the Company's information technology
infrastructure to address the implementation of its Year 2000 Compliance program
as well as the information technology needs.
Net Interest Expense
Interest expense for the three and six month periods ended June 30, 1999
increased $144,000 (24.5%) and $338,000 (31.4%) compared to the same period in
1998 due to an increase in average borrowings under the Company's revolving
credit facility.
Income Taxes
Due to the net losses in the first two quarters of each of 1998 and 1999, no
provisions for income tax were recorded.
Preferred Dividends
Preferred dividends of $61,931 and $150,000 in the second quarters and $130,223
and $241,662 in the first half of 1999 and 1998, respectively, represent
dividends associated with the unconverted portion of the Series F Convertible
Preferred Stock.
Year 2000 Compliance
Many computer systems ("IT systems") and equipment and instruments with embedded
microprocessors ("non-IT systems") were designed to recognize only the last two
digits of a calendar year. With the arrival of the Year 2000 ("Y2K"), these
systems and microprocessors may encounter operating problems due to their
inability to distinguish years after 1999 from years preceding 1999. As a
result, the Company has initiated a program to identify and remedy or replace
its date-sensitive IT systems and non-IT systems.
The Company's IT systems consist of the primary business and science information
systems, electronic data interchange ("EDI") with customers, personal
computer/terminal hardware and related network software. Non-IT systems include
primarily manufacturing, facility and telecommunication equipment that is
computer controlled.
To date, the Company has identified date-sensitive areas and is in the process
of remedying or replacing the internally identified systems. Regarding IT
systems within the Company, compliant software upgrades to its primary business
systems have been completed, testing has been in process for the past few months
and the systems are expected to be confirmed as compliant by the end of the
third quarter of 1999. A Y2K compliant science information system has been
installed and is operational at the Company's Somerset, New Jersey facility and
a similar system upgrade is scheduled at the Company's Cincinnati facility early
in the fourth quarter of
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<PAGE> 18
1999. Upgrade of the Company's network of PCs and terminals was commenced in
mid-1998, is continuing with the evaluation of all installed personal computer
hardware and the full upgrade of all units for Y2K compliance is expected
by the end of the third quarter of 1999. EDI compliance evaluation and testing
is complete. The Company is working with its trading partners to ensure their
readiness. The analysis of the Company's non-IT systems has been substantially
completed and for the most part the items identified as possibly being affected
by the Y2K issue have been concluded to be compliant. All others are being
addressed in order to be compliant by early fourth quarter.
The Company estimates the cost of hardware and system upgrades in order to
address the IT aspects of the Y2K issue, to be approximately $700,000. For
non-IT aspects of the Y2K issue, the cost of compliance is estimated to be
approximately $150,000. Of these cost estimates, approximately $550,000
represents capital expenditures which will be amortized over the estimated
useful life of the asset. The remaining $300,000 is expensed as incurred and has
been or will be included in the Company's operating results on a ratable basis
between June 1998 and October 1999. The amounts do not include the cost incurred
by the Company as a result of the use of its own employees but does include
approximately $150,000 for the use of outside consultants who are assisting the
Company in evaluating, implementing and testing aspects of the Y2K issue and the
Company's compliance program. To the extent that the implementation of the
Company's program identifies additional areas of noncompliance it is possible
that the estimated cost of compliance could increase.
The Company is dependent upon its customers and suppliers in meeting its ongoing
business needs. The Company's Y2K program includes identifying these third
parties and determining, based on both written and verbal communication, that
they are either in compliance or expect to be in compliance. Lack of compliance
by a third party on whom the Company depends for critical goods or services
could have a material adverse effect on the Company's operations in the absence
of the third party's ability to meet the Company's needs through a contingency
plan or the Company's ability to obtain the goods or services elsewhere.
Currently, the Company believes the largest area of exposure concerning the Y2K
lies with third party suppliers of raw materials especially those located in
foreign countries. The contingency plan to mitigate the disruption among these
suppliers includes the buildup of critical raw material inventories. However,
the extent to which this may be required has not yet been determined and
therefore the cost and ability to accumulate such inventories cannot be
estimated at this time.
The estimates and conclusions in this description of the Y2K issue contain
forward-looking statements and are based on management's estimates of future
events.
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<PAGE> 19
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
During the second quarter of 1999 the Company financed its operations through
borrowings under its revolving credit facility, a loan payable to a contract
sales organization and the proceeds from the exercise of stock options and
warrants.
The increase in inventory resulted from stocking of new products, both Duramed
produced products as well as products sourced through other manufacturers.
Receivables decreased due to a lower sales performance level in the second
quarter on the Company's existing products. Prepaid and other assets increased
due to deposits to raw material suppliers to secure active raw material for
recently approved products. Accounts payable and accrued expenses have increased
due to increased spending levels, associated with the commercialization of
recently approved products. As a result of the Company's continued investment in
working capital, the Company had $30.5 million in receivables and inventory at
June 30, 1999.
The Company's principal lender is NationsCredit Commercial Corporation
("NationsCredit"). The term of the financing agreement is four years commencing
November 1998 with provisions for renewals. The financing agreement provides for
a revolving credit facility collateralized by the Company's receivables and
inventory and a term note secured by the Company's equipment. The Company's
borrowing capacity under the revolving credit facility adjusts based on the
change in receivables and inventory. As of August 12, 1999 the Company's
borrowing capacity under this revolving credit facility was $17.9 million of
which the Company has utilized $13.9 million (net of the proceeds from the
recent term loan described below), leaving a net availability of $4.0 million.
Additionally, the terms of the NationsCredit financing also provide for a
financing commitment of up to $3.0 million, subject to the results of an
appraisal, to allow the Company to purchase its Somerset, New Jersey facility,
and a $5.0 million credit line for the purchase of new eligible equipment based
upon an appraisal value.
On August 4, 1999, the Company announced the amendment of the NationsCredit loan
agreement providing for the addition of a second four-year term loan, subject to
renewal of the overall financing agreement with NationsCredit, in the amount of
$7.0 million. Under the terms of the agreement, the new term note will be repaid
in equal monthly installments and bear an interest rate of prime plus 1.25%.
In February 1998, the Company issued $12.0 million in Series F Preferred. The
Series F Preferred Stock is convertible into shares of common stock and pays a
dividend of 5% annually, payable quarterly in arrears, on all unconverted
shares. Any of the Series F Preferred Stock that remain outstanding will be
redeemed automatically on February 4, 2000. The terms of the Series F Preferred
Stock limit the number of shares of Common Stock that can be issued upon
conversion to 3,580,252, with an option for the Company to satisfy any remaining
unconverted
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<PAGE> 20
Series F Preferred Stock in cash or stock. In November 1998, the Company
received a waiver of the Nasdaq requirement for shareholder approval which
permits the Company to issue, as required, 1,401,584 shares beyond the original
3,580,252. The terms of the Series F Preferred Stock provide for a conversion
price based upon a trailing 20 day period and were structured such that the
Series F Preferred Shares were convertible into common shares at varying
discounts to the market price (as defined) depending on the date the conversion
occurred.
At August 12, 1999 $7.1 million of the stated value of the Series F Preferred
Stock had been converted into 2,794,702 shares of Common Stock at an average
price of $2.54 per share. Per the terms of the Series F Stock, assuming that the
stock price remains above $4.88 and the Series F holder converts, the balance of
the Series F preferred shares will convert into common shares at $3.80 per
share. Based upon a $3.80 conversion price the Company will be required to issue
approximately another 1.3 million common shares upon the conversion of the
remaining Series F Preferred Stock. This would result in the Company issuing 4.1
million common shares at an average price of $2.94 upon the complete conversion
of the Series F Stock.
The terms of the Series F Preferred Stock provide for the issuance of warrants
under defined circumstances which have been met. Accordingly, on October 2, 1998
the Series F preferred stockholders were granted 500,000 warrants at an exercise
price of $5.74. The warrants vested immediately and expire in October 2002.
AVAILABLE FUNDS
The Company's level of need for additional financing is dependent upon several
factors including: (1) the level of spending necessary to commercialize
Cenestin; (2) the level and timing of the profit contribution from products
approved by the FDA in recent months; (3) the timing of approval of currently
pending applications with the FDA; (4) the ability of the Company to maintain
the current business base as well as the success of other aspects of its
business plan; and, (5) the proceeds received from the exercise of stock options
and warrants. Additionally, capital will be required for facility and equipment
to execute the Company's business plan.
Exercise prices for outstanding stock options and warrants vary. The exercise of
all in-the-money vested stock options and warrants would provide approximately
$15.0 million in proceeds to the Company. The decision to exercise options and
warrants is at the discretion of the holder and, therefore, is beyond the
control of the Company.
Management believes that capital in excess of that available to the Company from
its existing credit agreements will be needed if it is to execute its business
plan. However, management believes also that approval of Cenestin and other
recently approved products expands the Company's potential sources of capital
and anticipates that it should be able to access sufficient funds to meet its
business plan. The Company is exploring various capital raising alternatives,
but no definitive arrangements have been reached at this time. These
alternatives may include raising additional equity capital.
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<PAGE> 21
If equity capital is raised, the extent of dilution to current shareholders
will be dependent on the amount of equity capital obtained and the terms under
which it is raised. If capital is not available, implementation of the Company's
business plans will be restricted or delayed.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by Item 3 is included in Liquidity and Capital
Resources.
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<PAGE> 22
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 "Schein Agreement") with Schein Pharmaceutical, Inc. ("Schein")
relating to the development of a generic version of the conjugated estrogens
product Premarin(R). Under the Schein Agreement, Schein was to provide project
funding while Duramed was responsible for product development and manufacturing.
Both firms were to participate in the marketing and distribution of the generic
product. In May 1997, the Company was notified by the FDA that at that time, it
would not approve a generic conjugated estrogens product. 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 Schein 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 Schein 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 Schein 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.
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<PAGE> 23
On September 11, 1998, both the Company and Schein filed cross motions for
summary judgment. On December 16, 1998, the court denied both motions.
The court has set a trial date of September 20, 1999. On August 5, 1999, the
Company filed a motion for an order bifurcating the trial so that the Company's
claim for a declaratory judgment on the Schein Agreement would be tried
separately to the court in September 1999 before any trial on Schein's
counterclaim. The motion is pending.
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 the litigation cannot be predicted.
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 AND USE OF PROCEEDS
During the second quarter, the Company issued a total of 606 shares of its
common stock to its three non-employee directors as partial payment of their
directors' fees. These shares were issued pursuant to the Company's 1998 Stock
Plan for Non-Employee Directors. The issuance of these shares was exempt from
registration under the Securities Act of 1933 on the basis that no sale was
involved in their issuance as defined under such Act or, in the alternative, on
the basis of the exemption from registration provided in Section 4 (2) of the
Act.
ITEM 6. EXHIBIT AND REPORTS ON FORM 8-K
(a) Exhibits
(10.10) First Amendment to the Loan and Security Agreement dated
November 6, 1998, between NationsCredit Commercial
Corporation through its NationsCredit Commercial Funding
Division and the Company.
(27) Financial Data Schedule
(b) Reports on Form 8-K for the quarter ended March 31, 1999:
The Company filed a Form 8-K on April 13, 1999 announcing a change of the
Annual Meeting of Stockholders meeting date to September 30, 1999.
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<PAGE> 24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DURAMED PHARMACEUTICALS, INC.
Dated: August 16, 1999 by: /s/ E. Thomas Arington
--------------------- ------------------------------------
E. Thomas Arington
President, Chairman of the Board
Chief Executive Officer
Dated: August 16, 1999 by: /s/ Timothy J. Holt
--------------------- ----------------------------------
Timothy J. Holt
Senior Vice President - Finance,
Treasurer, Chief Financial Officer
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<PAGE> 1
EXHIBIT 10.10
FIRST AMENDMENT TO
LOAN AND SECURITY AGREEMENT
This First Amendment (this "AMENDMENT") is entered into as of
August 3, 1999, between DURAMED PHARMACEUTICALS, INC. ("BORROWER"), and
NATIONSCREDIT COMMERCIAL CORPORATION, THROUGH ITS NATIONSCREDIT COMMERCIAL
FUNDING DIVISION ("LENDER").
WHEREAS, Borrower has requested that Lender agree to increase
the principal amount of the Maximum Facility Amount and modify certain covenants
of that certain Loan and Security Agreement dated November 6, 1998 (the "LOAN
AGREEMENT"); and
WHEREAS, Lender has agreed to do so subject to the terms
contained herein;
NOW THEREFORE, in consideration of the premises and mutual
agreements herein contained, the parties hereto agree as follows:
1. DEFINED TERMS. Unless otherwise defined herein, capitalized
terms used herein shall have the meanings ascribed to such terms in the Loan
Agreement.
2. AMENDMENTS TO LOAN AGREEMENT.
(a) Subsection 2.2(d) of the Loan Agreement is hereby amended
to replace the reference to "$10,000,000" with "$17,000,000".
(b) Subsection 9.8 of the Loan Agreement is hereby amended to
replace the referenced to "$33,000,000" with "$40,000,000".
(c) Subsection 1(a) of Schedule A is amended to increase the
Maximum Facility Amount from $33,000,000 to $40,000,000.
(d) Subsection 1(b)(i) of Schedule A is amended to read as
follows:
(i) Accounts Advance Rate:
85% (75% on accounts arising from the sale
of Cenestin(C), which advance rate on
accounts arising from the sale of
Cenestin(C) Lender may, in its sole
discretion, consider increasing upon a
showing of the successful sales performance
of Cenestin(C), but which Lender shall not
be required to increase); PROVIDED, that if
the Dilution Percentage exceeds 5%, Lender
may, at its option, (A) reduce such advance
rate by the
<PAGE> 2
number of full or partial percentage points
of such excess or (B) establish a Reserve on
account of such excess
(e) Subsection 1(d)(i) of Schedule A is hereby amended to
replace the reference to "$12,000,000" with "$13,000,000".
(f) Subsection 1(c) of Schedule A is hereby amended to
add the following subpart (i) in appropriate order:
(i) Sublimit on advances $3,750,000, until further
against accounts notice from Lender, which
arising from the Lender may give or
sale of Cenestin(C) withhold in its sole
discretion upon a showing
of the successful sales
performance of Cenestin(C)
(g) Subsection 2(a) of Schedule A is hereby amended to
read "Principal Amount for Term Loan A".
(h) Subsection 2(b) of Schedule A is hereby amended to
read "Repayment Schedule for Term Loan A".
(i) Subsection 2(b)(i) of Schedule A is hereby amended to
read as follows:
(i) Equipment Advance: The Equipment Advance shall be repaid in
consecutive monthly installments payable
on the first day of each calendar month
in installments as follows:
August 1, 1999 to July 30, 2000 -
$158,341.61
August 1, 2000 to Maturity Date -
$67,046.58
with the entire unpaid balance due and
payable on the Maturity Date; PROVIDED,
that if at any time Lender determines
that the unpaid principal balance of the
Equipment Advance exceeds 85% of the
value of Eligible Equipment owned by
Borrower on the date of the Agreement as
set forth on the most recent of the
Updated Equipment Appraisals (as defined
in Section 12 of this Schedule A), then,
Borrower shall repay
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<PAGE> 3
such excess in 6 equal consecutive
monthly installments payable on the
first day of each calendar month
commencing with the month immediately
following the date of such determination
by Lender (which payments shall be in
addition to the regular amortization
payments set forth above), AND PROVIDED
FURTHER, that if Borrower's cumulative
pre-tax loss (net of any Included
Subordinated Debt and any Additional
Equity) from October 1, 1998 through the
end of the Term is less than $4,000,000,
the monthly amortization with respect to
the Equipment Advance shall immediately
upon telephonic or other notice from
Lender to Borrower be reduced to
$67,046.58; PROVIDED, that if Borrower
fails to pay immediately when due any
such amounts to Lender, such failure
shall constitute an Event of Default
under Section 8.1(ii) of the Agreement,
BUT PROVIDED FURTHER, that if Borrower
has Cash Flow greater than $0 for each
of six consecutive months, and if no
Default or Event of Default then exists,
Lender will consider entering into a
written amendment of the Agreement
increasing the Loan Limit with respect
to the Equipment Advance back to the
lesser of $6,000,000 and 85% of the
appraised auction sale value of
Borrower's Eligible Equipment, but
Lender shall have no obligation to agree
to any such increase
(j) Section 2 of Schedule A is hereby amended to insert the following
subsections (c) and (d) in appropriate order:
(c) Principal Amount for Term Loan B: $7,000,000
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<PAGE> 4
(d) Repayment Schedule Term Loan B shall be repaid in equal
for Term Loan B: consecutive monthly installments
amortized over 48 months payable on the
first day of each calendar month
commencing September 1, 1999, with the
entire unpaid balance due and payable on
the Maturity Date; PROVIDED, that if
Borrower's cumulative pre-tax loss (net
of any Included Subordinated Debt and
any Additional Equity) from August 1,
1999 through the end of the Term exceeds
$4,000,000, the principal amount with
respect to Term Loan B shall be
automatically reduced by $2,000,000 and
Borrower shall immediately repay to
Lender such amounts as shall cause
Borrower to be in full compliance with
such reduced principal amount (which
payment shall be in addition to the
regular amortization payments set forth
above), PROVIDED FURTHER, that if
Borrower's cumulative pre-tax loss (net
of any Included Subordinated Debt and
any Additional Equity) from August 1,
1999 through the end of the Term should
thereafter be reduced to less than
$4,000,000, Lender will, in its sole
discretion, consider increasing the
principal amount with respect to Term
Loan B by $2,000,000; PROVIDED FURTHER,
that if Borrower fails to pay
immediately when due any such amounts to
Lender, such failure shall constitute an
Event of Default under Section 8.1(ii)
of the Agreement; PROVIDED FURTHER, that
if Borrower completes an additional
public offering of common or preferred
stock, Lender will have the option, in
Lender's sole discretion, to require
Borrower to prepay Term Loan B in full
or in part with the net proceeds (after
payments, charges and expenses) of such
offering (without obligation to pay more
than the aggregate amount of the net
proceeds of such public offering);
PROVIDED FURTHER, that Borrower shall
prepay an aggregate principal amount of
Term Loan B, on the last day of each
fiscal quarter beginning with the fiscal
quarter ending December 31, 1999, equal
to 50% of the amount by which the Cash
Flow after actual cash taxes paid for
such fiscal quarter exceeds $0, with
each such prepayment being applied to
the installments
<PAGE> 5
of principal owing on Term Loan B in the
inverse order of their maturity.
(k) Subsection 3(b) of Schedule A is hereby amended to read as
follows:
(b) Term Loan A: 0.75% per annum in excess of the Prime Rate
Term Loan B: 1.25% per annum in excess of the Prime Rate
(l) Section 5 of Schedule A is hereby amended to insert
the following subsections (c) and (d) in appropriate order:
(c) Maximum days after
original INVOICE DATE for 150
accounts arising from the
sale of Cenestin(C) between
May 1, 1999 and July 15, 1999
(d) Maximum days after
original INVOICE DUE DATE 30
for accounts arising from the
sale of Cenestin(C)
between May 1, 1999
and July 15, 1999
(m) Subsection 6(g) of Schedule A is hereby amended to read as
follows:
(g) Warrants: 110,000 warrants at 110% of market value.
(n) Subsection 13(a) of Schedule A is hereby amended to
increase the maximum amount Borrower may invest or loan to Europe in the
aggregate during any fiscal quarter of Borrower from $100,000 to $200,000.
(o) Schedule B is amended to replace the definition of
"CAPITAL EXPENDITURES" with the following:
"CAPITAL EXPENDITURES" means the amount capitalized for
capital expenditures (including, without limitation, with respect to capitalized
leases) for the period, as determined in accordance with GAAP.
(p) Schedule B is amended to replace the definition of
"CASH FLOW" with the following:
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<PAGE> 6
"CASH FLOW" means at any time of calculation, on a cumulative
basis from the date of the Agreement through the date of calculation (unless a
different time period is expressly specified elsewhere in the Agreement),
Borrower's net income (or net loss) before taxes for such period, PLUS
depreciation and amortization deducted in determining net income for such
period, LESS Capital Expenditures for such period not financed, LESS all current
principal maturities (including, without limitation, the principal portion of
scheduled payments of capital lease obligations) paid or scheduled to be paid
during such period, all as determined by Lender, on a consistent basis, based
upon the most recent financial statements received by Lender from Borrower.
3.CENESTIN(C). Nothing contained in this Amendment
shall impair Lender's rights under the Loan Agreement to declare an Event of
Default if the outcome of any litigation by Schein concerning Cenestin(C) either
violates subsection 8.1 of the Loan Agreement or is materially adverse to
Borrower (as determined by Lender in its sole discretion), nor shall anything
contained in this Amendment impair the Lender's rights under the Loan Agreement
to deem any Inventory relating to Cenestin(C), any Accounts arising from the
sale of Cenestin(C) or any other Collateral to be ineligible.
4. EQUIPMENT. Borrower may utilize Revolving Loans to purchase
items of Equipment with an original cost not to exceed $1,000,000 in the
aggregate that have been or will be hereafter affixed to any real property in
such a manner, or with such intent, as to become a fixture and such $1,000,000
in purchases shall not be applied against the $100,000 limit specified in
subsection 5.3(ii) of the Loan Agreement; PROVIDED THAT, Lender shall not limit
or waive any of its other rights and remedies under the Loan Agreement or any
other Loan Document.
5. CONDITIONS PRECEDENT. This Amendment shall become
effective when the Lender shall have received a $140,000 amendment fee and each
of the following, duly executed and in form and substance satisfactory to
Lender:
(a) a fully executed copy hereof;
(b) the Term Note B;
(c) a fully executed copy of the Warrant for the Purchase of
Shares of Common Stock dated as of even date herewith, as described in
Subsection 2(j) herein;
(d) a fully executed copy of the First Amendment to
Patent Mortgage; and
(e) a fully executed copy of the First Amendment to
Trademark Mortgage;
6. CONDITION SUBSEQUENT. Borrower hereby agrees to use its
best efforts to grant to Lender a security interest in the Exclusive License for
generic Biologicals Limited on the use of Z-Tamoxifen in Oncology in the United
States, and to use its best efforts to obtain together the consent of licensor
thereto, within sixty (60) days of the date hereof.
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<PAGE> 7
7. MISCELLANEOUS.
(a) WARRANTIES AND ABSENCE OF DEFAULTS. In order to induce
Lender to enter into this Amendment, Borrower hereby warrants to Lender, as of
the date hereof, that:
(i) The representations and warranties of Borrower contained
in the Loan Agreement are true and correct as of the date hereof as if
made on the date hereof.
(ii) All information, reports and other papers and data
heretofore furnished to Lender by Borrower in connection with this
Amendment, the Loan Agreement and the other Loan Documents are accurate
and correct in all material respects and complete insofar as may be
necessary to give Lender true and accurate knowledge of the subject
matter thereof. None of the information furnished to Lender by or on
behalf of Borrower contained any material misstatement of fact or
omitted to state a material fact or any fact necessary to make the
statements contained herein or therein not materially misleading.
(iii) No Event of Default or Default exists as of the date
hereof.
(b) EXPENSES. Borrower agrees to pay on demand all costs and expenses
of Lender (including the reasonable fees and expenses of outside counsel for
Lender) in connection with the preparation, negotiation, execution, delivery and
administration of this Amendment and all other instruments or documents provided
for herein or delivered in connection herewith. In addition, Borrower agrees to
pay, and save Lender harmless from all liability for, any stamp or other taxes
which may be payable in connection with the execution or delivery of this
Amendment or the Loan Agreement, as amended hereby, and the execution and
delivery of any instruments or documents provided for herein or delivered or to
be delivered hereunder or in connection herewith. All obligations provided in
this SECTION 4(B) shall survive any termination of this Amendment and the Loan
Agreement as amended hereby.
(c) GOVERNING LAW. This Amendment shall be a contract made under and
governed by the internal laws of the State of New York.
(d) COUNTERPARTS. This Amendment may be executed in any number of
counterparts, and by the parties hereto on the same or separate counterparts,
and each such counterpart, when executed and delivered, shall be deemed to be an
original, but all such counterparts shall together constitute but one and the
same Amendment.
(e) REFERENCE TO LOAN AGREEMENT. On and after the effectiveness of the
amendment to the Loan Agreement accomplished hereby, each reference in the Loan
Agreement to "this Agreement," "hereunder," "hereof," "herein" or words of like
import, and each reference to the Loan Agreement in any other Loan Documents, or
other agreements,
-7-
<PAGE> 8
documents or other instruments executed and delivered pursuant
to the Loan Agreement, shall mean and be a reference to the Loan Agreement, as
amended by this Amendment.
(f) SUCCESSORS. This Amendment shall be binding upon Borrower, Lender
and their respective successors and assigns, and shall inure to the benefit of
Borrower, Lender and the successors and assigns of Lenders.
-8-
<PAGE> 9
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be executed by their respective officers thereunto duly authorized
and delivered at New York, New York as of the date first above written.
DURAMED PHARMACEUTICALS, INC.
By /s/ Timothy J. Holt
-----------------------------------
Its: Senior Vice President Finance
NATIONSCREDIT COMMERCIAL CORPORATION,
THROUGH ITS NATIONSCREDIT
COMMERCIAL FUNDING DIVISION
By: Lynne Ciaccia
-----------------------------------
Its: Authorized Signatory
-9-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 4,000
<SECURITIES> 0
<RECEIVABLES> 7,792,903
<ALLOWANCES> 742,000
<INVENTORY> 23,431,019
<CURRENT-ASSETS> 34,825,228
<PP&E> 47,378,674
<DEPRECIATION> 19,438,734
<TOTAL-ASSETS> 63,816,758
<CURRENT-LIABILITIES> 16,516,875
<BONDS> 32,297,154
4,900,000
0
<COMMON> 216,856
<OTHER-SE> 9,322,509
<TOTAL-LIABILITY-AND-EQUITY> 63,816,758
<SALES> 9,966,776
<TOTAL-REVENUES> 9,966,776
<CGS> 9,492,185
<TOTAL-COSTS> 13,851,245
<OTHER-EXPENSES> 4,914,774
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 732,002
<INCOME-PRETAX> (9,531,245)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,531,245)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,593,176)
<EPS-BASIC> (.45)
<EPS-DILUTED> (.45)
</TABLE>
