<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, 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 May 12, 1999 21,416,597
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 Operations .................................. 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 ....................................... 23
ITEM 6. Exhibits and Reports on Form 8-K ............................ 23
SIGNATURES ........................................................... 24
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DURAMED PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,000 $ 3,500
Trade accounts receivable,
less allowance for doubtful accounts:
1999 - $884,000 1998 - $903,000 10,225,930 10,330,816
Inventories 20,981,251 19,786,705
Prepaid expenses and other assets 3,065,532 2,803,460
------------ ------------
Total current assets 34,276,713 32,924,481
Property, plant and equipment:
Land 1,000,000 1,000,000
Buildings and improvements 19,333,343 19,285,854
Equipment, furniture and fixtures 25,782,099 25,253,509
------------ ------------
46,115,442 45,539,363
Less accumulated depreciation
and amortization 18,937,178 18,309,535
------------ ------------
Property, plant and equipment - net 27,178,264 27,229,828
Deposits and other assets 1,014,189 1,051,575
------------ ------------
$ 62,469,166 $ 61,205,884
============ ============
</TABLE>
See accompanying notes.
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DURAMED PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---------- ------------
<S> <C> <C>
Current liabilities:
Accounts payable $ 4,283,648 $ 4,370,181
Accrued liabilities 5,752,670 5,886,201
Current portion of long-term debt
and other liabilities 3,204,485 3,384,860
Current portion of capital lease obligations 739,581 708,891
----------- ------------
Total current liabilities 13,980,384 14,350,133
----------- ------------
Long-term debt, less current portion 25,198,526 22,138,315
Long-term capital leases, less current portion 471,687 441,632
----------- ------------
Total liabilities 39,650,597 36,930,080
----------- ------------
Mandatory redeemable convertible preferred stock 4,900,000 7,700,000
----------- ------------
Stockholders' equity:
Common stock - authorized 50,000,000
shares, par value $.01; issued and outstanding
21,369,002 and 19,811,178 shares in 1999 and 1998,
respectively 213,689 198,111
Additional paid-in capital 98,499,232 94,795,906
Accumulated deficit (80,794,352) (78,418,213)
------------ ------------
Total stockholders' equity 17,918,569 16,575,804
------------ ------------
$ 62,469,166 $ 61,205,884
============ ============
</TABLE>
See accompanying notes.
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DURAMED PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended March 31,
1999 1998
------------ ------------
<S> <C> <C>
Net sales $ 13,249,507 $ 12,741,035
Cost of goods sold 10,417,537 10,287,468
------------ ------------
Gross profit 2,831,970 2,453,567
------------
Operating expenses:
Product development 1,302,723 1,939,716
Selling 895,986 613,089
General and administrative 2,326,601 2,093,017
------------ ------------
4,525,310 4,645,822
------------ ------------
Operating loss (1,693,340) (2,192,255)
Net interest expense 682,799 488,825
------------ ------------
Loss before income taxes
and preferred stock dividends (2,376,139) (2,681,080)
Income taxes --- ---
------------ ------------
Net loss (2,376,139) (2,681,080)
Preferred stock dividends 68,292 91,662
------------ ------------
Net loss applicable to
common stockholders $ (2,444,431) $ (2,772,742)
============ ============
Basic and diluted loss per share $ (0.12) $ (0.15)
============ ============
Weighted average number of
common and common equivalent
shares outstanding 20,609,007 17,902,140
============ ============
</TABLE>
See accompanying notes.
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DURAMED PHARMACEUTICALS, INC.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Three Months Ended March 31,
1999 1998
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(2,376,139) $(2,681,080)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 714,929 678,459
Provision for doubtful accounts 51,080 48,628
Common stock issued in connection with
employee compensation plans 86,423 50,421
Changes in assets and liabilities:
Trade accounts receivable 53,806 (1,230,589)
Inventories (1,194,546) (4,583,772)
Prepaid expenses and other assets (301,735) 436,206
Accounts payable (86,533) 1,206,378
Accrued liabilities (109,899) 705,979
Other (29,624) 5,621
------------- -------------
Net cash used in operating activities (3,192,238) (5,363,749)
------------- -------------
Investing activities:
Capital expenditures (576,079) (140,841)
Refunds (deposits) on capital expenditures 11,574 (32,279)
------------- -------------
Net cash used for investing activities (564,505) (173,120)
------------- -------------
Cash flows from financing activities:
Payments of long-term debt,
including current maturities (468,770) (915,758)
Net increase (decrease) in revolving credit facility 3,168,398 (4,462,656)
Long-term borrowings 240,953 35,835
Issuance of preferred stock - net -- 11,399,376
Cash redemption of preferred stock -- (176,098)
Issuance of common stock 898,475 93,825
Preferred dividends paid (81,813) (100,444)
------------- -------------
Net cash provided by financing activities 3,757,243 5,874,080
------------- -------------
Net change in cash 500 337,211
Cash at beginning of period 3,500 3,500
------------- -------------
Cash and cash equivalents at end of period $ 4,000 $ 340,711
============= =============
Supplemental cash flow disclosures:
Interest paid $ 554,932 $ 444,687
Income taxes paid -- --
</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>
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 16,154 161 86,262 86,423
Issuance of stock in connection
with stock options 548,890 5,489 892,986 898,475
Conversion of Series F
Preferred Stock 992,780 9,928 2,792,370 2,802,298
Net loss for 1999 (2,376,139) (2,376,139)
Preferred Stock dividends (68,292) (68,292)
----------- ---------- ------------ ------------ ------------
BALANCE - MARCH 31, 1999 21,369,002 $213,689 $ 98,499,232 $ (80,794,352) $ 17,918,569
=========== ========== ============ ============ ============
</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, 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:
March 31
1998 1997
---- ----
Net loss ($2,376,139) ($2,681,080)
Less dividends on Preferred
shares 68,292 91,662
----------- -----------
Net loss applicable to
common stockholders ($2,444,431) ($2,772,742)
=========== ===========
Weighted-average common shares outstanding for the computation of basic and
diluted loss per share were 20,609,007 and 17,902,140 for the periods ended
March 31, 1999 and 1998, respectively.
For the three month periods ended March 31, 1999 and 1998 the recognition of
outstanding options and warrants in the amount of 4,564,317 and 4,079,569,
respectively were not recognized in computing net loss per share as their effect
would be anti-dilutive.
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NOTE 3: INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market.
Components of inventories include: March 31, December 31,
1999 1998
------------ ------------
Raw materials $ 6,810,198 $ 6,841,241
Work-in-process 352,990 476,404
Finished goods 16,600,165 14,914,588
Obsolescence reserve (2,782,102) (2,445,528)
------------ ------------
Net inventory $ 20,981,251 $ 19,786,705
============ ============
The Company has $3.5 million in inventory of its synthetic conjugated estrogens
product, in raw material and finished dosage form, which has previously been
expensed. The product has been maintained and will be utilized in the sales
effort for Cenestin(TM) (synthetic conjugated estrogens, A) Tablets,
("Cenestin").
NOTE 4: DEBT AND MANDATORY REDEEMABLE CONVERTIBLE PREFERRED STOCK
March 31, December 31,
1999 1998
------------------------------------
Debt
Revolving credit facility $ 13,869,887 $ 10,701,489
Merrill Lynch note payable 8,038,154 8,144,404
Equipment term note 5,363,727 5,564,866
Note payable to strategic
alliance partner 1,103,678 1,081,146
Installment notes payable 27,565 31,270
------------ ------------
28,403,011 25,523,175
Less amount classified as current 3,204,485 3,384,860
------------ ------------
$ 25,198,526 $ 22,138,315
============ ============
Mandatory redeemable
convertible preferred stock $ 4,900,000 $ 7,700,000
============ ============
During the first quarter of 1999, the Company financed its operations and a $1.2
million increase in inventory with borrowings on its revolving credit facility
and proceeds from the exercise of stock options.
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DEBT
On November 9, 1998 the Company executed a new debt financing agreement with
NationsCredit Commercial Corporation, through its NationsCredit Commercial
Funding Division ("NationsCredit"). The term of the financing agreement is four
years 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% (8.75% at March 31, 1999). As of March 31, 1999 the Company's
available borrowing capacity under this revolving credit facility was $5.0
million based upon eligible collateral ($17.9 million as of March 31, 1999). The
$5,631,913 term note bears an interest rate of prime plus 0.75% (9.00% at
March 31, 1999) and requires monthly principal payments of $67,047 plus interest
for a seven year period, subject to renewal of the financing agreement.
The Company used the proceeds from the NationsCredit financing to pay off the
Company's existing revolving credit facility, as well as an equipment note held
by Ortho-McNeil Pharmaceutical Corporation and various equipment notes held by
its previous bank.
Additionally, the Company refinanced its existing mortgage loan on its
Cincinnati, Ohio manufacturing facility with a $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% (7.52% on March 31, 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 note payable to a strategic alliance partner is an unsecured note. The note
requires payments of $600,000 and $550,000 on April 30, 1999 and April 30, 2000,
respectively.
Other long-term debt also includes facilities of varying amounts and terms which
are generally collateralized by the assets financed.
The carrying value of the Company's debt approximates fair market value.
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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
to raise funds necessary to continue to execute the Company's business plan. 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 May 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 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 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 three month
period ended March 31, 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 make the
Company a leader in women's health and the hormone replacement market, in part
by developing a family of hormone products.
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<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 market.
To achieve that goal, as well as generate sustainable profitability, Duramed
will focus efforts on two 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. To date all regional managers already have been hired and
hiring for the sales force should be completed by mid-June 1999, with the
direct-to-physicians sales effort to commence 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 at least $100 million in annualized revenues
within 15-18 months of the product's expected launch in July 1999. Since the
approval of Cenestin, Duramed has received numerous inquiries and requests for
information regarding the availability of the product. These requests have come
from a variety of health-care professionals including physicians, large retail
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<PAGE> 14
providers, managed care organizations, wholesalers/distributors and consumers.
Management is encouraged by the response to date and is focused on the
successful implementation of all aspects of the marketing plan which is designed
to maximize the market penetration of Cenestin.
On May 12, 1999 the Company announced that it commenced shipping Cenestin to the
retail market and that its manufacturing facility is in full production.
Management expects that the product will be available at most retail outlets to
fill prescriptions by June 1, 1999. Initially the Company intends to recognize
revenue on product shipped as it obtains indications of written prescriptions.
Expenses associated with marketing programs and the product launch will likely
be recognized before recognition of the anticipated revenue stream from sales of
the product. As a result, Duramed management believes that material improvement
in the Company's operating performance due to Cenestin will not occur until the
fourth quarter of 1999 and beyond.
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 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 as early as the fall of
1999. The Company has initiated clinical programs to evaluate Cenestin in
additional dosage strengths. The Company currently expects to introduce a 1.25mg
strength for Cenestin in the fourth quarter of 1999 and a .03mg 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 other
products on file, if approved, and other resources that may be available to the
Company.
Since the beginning of 1998, the FDA has approved the Cenestin NDA and four
ANDAs submitted by the Company. The Company has eight ANDAs on file. Three of
the ANDAs on file are for hormonal products. One of the hormonal products is an
oral contraceptive with no generic competition and a brand market estimated by
IMS to be $155 million in 1998. IMS data estimates the market for the other
seven products on file at $638 million. The Company plans to submit NDAs and
ANDAs for other projects in 1999 and beyond, as appropriate to its business
strategy.
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<PAGE> 15
Management recognizes that continued investment in product development slows the
rate at which the Company moves toward profitability. However, the contribution
of products approved during 1997 and 1998 helped the Company begin to generate
performance improvements during the course of 1998 and management believes this
trend will continue in 1999 and beyond.
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 and successful
commercialization of pending applications with the FDA; and (5) the level of
spending on clinical and bioequivalencies studies.
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 achieve its performance objectives. 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
Net sales increased $508,472 (4.0%) for the three month period ended March 31,
1999 as compared to the same period in 1998. The increase in net sales was
primarily attributable to the contribution from recently approved 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 periods ended March 31, 1999 and 1998, the percentages of
the Company's sales comprised of products marketed for others were 45.8% and
45.2%, respectively.
GROSS MARGIN
The gross margin, and the corresponding percentage of net sales, was $2.8
million (21.4%) for the first quarter of 1999 compared to $2.5 million (19.3%)
for the first quarter of 1998. The increased gross margin in the first quarter
of 1999 reflects the contributions from new products and contract revenues from
Warner-Lambert offset by increased competition on the Company's
methylprednisolone product.
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<PAGE> 16
Various factors are expected to impact the Company's gross margin in 1999 and
beyond, the most significant of which will be the rate at which Cenestin
penetrates the ERT market. Additionally, the Company's gross margin could be
favorably impacted by successful introduction and marketing of other recently
approved products, additional approvals of pending applications and
contributions from the Company's agreement with Warner-Lambert. FDA approval of
the Company's pending applications is outside the Company's control, and
management cannot predict whether or when these approvals will be obtained.
The Company's generic products are subject to price deterioration if market
conditions change, particularly if additional competitive products are
introduced as a result of FDA approvals. These impacts can be material depending
on the products affected.
OPERATING EXPENSES
Product Development
Product development expenditures decreased by $637,000 (32.8 %) in the period
ended March 31, 1999 compared to the same period in 1998. The decrease was due
principally to a reduction of spending for bioequivalency studies in an effort
to conserve resources. 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 1999
increased by $283,000 (46.1%) over the same period in 1998 principally due to
costs associated with preparing for the launch of its synthetic conjugated
estrogens product as a branded product. The Company has initiated the Cenestin
marketing program and expects substantial spending to commence in the second
quarter of 1999. The Company has entered into a three-year agreement with
Cardinal MarketFORCE to perform the necessary direct-to-physicians sales effort
and national distribution.
General and Administrative
The $234,000 (11.2%) increase in general and administrative expenses in the
first quarter of 1999 compared to the same period in 1998 was due primarily to
legal and consulting services in connection with the Company's Cenestin product.
Additionally, the Company has expanded its information technology infrastructure
to address the implementation of its Year 2000 compliance program as well as
other information technology needs.
Net Interest Expense and Interest Rate Risk
Net interest expense increased $194,000 (39.7%) in the first quarter of 1999
compared to the same period in 1998, due to an increase in average borrowings
under the Company's revolving credit facility and the amortization of expense
incurred in connection with the Series F Preferred Stock and with the
NationsCredit financing agreement.
-16-
<PAGE> 17
Income Taxes
Due to the reported net loss in the first quarters of 1999 and 1998, no
provision for income tax was recorded.
Preferred Dividends
Preferred stock dividends of $68,292 and $91,662 in the first quarters 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, 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 mid-1999. A Year
2000 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 in the third quarter of 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 Year 2000 compliance is expected by
mid-1999. EDI compliance evaluation and testing is complete. The Company is
working with its trading partners to insure 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 Year 2000 issue have been
concluded to be compliant by mid-1999. All others are being addressed in order
to be compliant before the end of the second quarter of 1999.
-17-
<PAGE> 18
The Company estimates the cost of hardware and system upgrades in order to
address the IT aspects of the Year 2000 issue, to be approximately $500,000. For
non-IT aspects of the Year 2000 issue, the cost of compliance is estimated to be
approximately $250,000. Of these cost estimates, approximately $450,000
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 $40,000 for the use of outside consultants who are assisting the
Company in evaluating, implementing and testing aspects of the Year 2000 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 Year 2000 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 Year
2000 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 Year 2000 issue contain
forward-looking statements and are based on management's estimates of future
events.
LIQUIDITY AND CAPITAL RESOURCES
During the first quarter of 1999 the Company financed its operations and a $1.2
million increase in inventory through borrowings under its revolving credit
facility and the proceeds from the exercise of stock options.
The increase in inventory resulted from stocking of new products, both Duramed
produced products as well as products sourced through other manufacturers. As a
result of the Company's continued investment in working capital the Company had
$31.2 million in receivables and inventory at March 31, 1999.
-18-
<PAGE> 19
During 1998 the Company obtained a financing package discussed below through
NationsCredit Commercial Corporation, through its NationsCredit Commercial
Funding Division ("NationsCredit") that addressed a number of financing needs
including: (1) expanding its borrowing capacity under its revolving line of
credit, in view of its working capital base, (2) refinancing certain equipment
loans over a longer term, (3) obtaining financing to be in a position to
exercise an option to purchase its leased Somerset, New Jersey facility, and
(4) financing anticipated capital equipment needs that would result from
executing its business plan.
The term of the financing agreement is four years with provisions for renewals.
The financing agreement provides for a revolving credit facility collateralized
by the Company's receivables and inventory and a $5.6 million 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
May 12, 1999 the Company's borrowing capacity under this revolving credit
facility was $17.6 million of which the Company has utilized $14.9 million,
leaving a net availability of $2.7 million.
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.
In February 1998, the Company issued $12.0 million in Series F Preferred Stock
to raise funds necessary to continue to execute the Company's business plan. 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 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.
-19-
<PAGE> 20
At May 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.
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 are vested immediately and expire in October 2002.
AVAILABLE FUNDS
The Company's 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 vested stock options and warrants would provide approximately $20.0 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 approval of Cenestin expands the Company's potential
sources of capital and anticipates that it should be able to access sufficient
funds to meet its overall business plans. Such sources have not been defined
specifically, but may include expanded borrowings under the NationsCredit
agreement or from other lenders and agreements with product development
partners. At present, the Company has no plans to issue additional equity
securities.
-20-
<PAGE> 21
If the Company's intentions change and it decides to raise equity capital, the
extent of dilution to current shareholders will be dependent on the amount of
capital required and the terms under which it is raised. The terms of the
Series F Preferred Stock require the Company to obtain the investor's
concurrence to raise additional capital under certain defined terms. 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 overall 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.
-21-
<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.
-22-
<PAGE> 23
On September 11, 1998, both the Company and Schein filed cross motions for
summary judgment. The court subsequently denied both motions. No trial date has
been established at this time.
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
At the end of the quarter, the Company issued a total of 855 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
(27) Financial Data Schedule
(b) Reports on Form 8-K for the quarter ended March 31, 1999:
The Company filed a Form 8-K (Item 5) on March 26, 1999 relating to the
date of its Annual Meeting of Stockholders. The information in that
Form 8-K subsequently was superceded by a Form 8-K filed on April 13, 1999.
- ------------------
-23-
<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: May 17, 1999 by: /s/ E. Thomas Arington
------------------------- ---------------------------------------
E. Thomas Arington
President, Chairman of the Board
Chief Executive Officer
May 17, 1999 by: /s/ Timothy J. Holt
Dated: ------------------------- ---------------------------------------
Timothy J. Holt
Senior Vice President - Finance,
Treasurer, Chief Financial Officer
-24-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999 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>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 4,000
<SECURITIES> 0
<RECEIVABLES> 11,109,930
<ALLOWANCES> 884,000
<INVENTORY> 20,981,251
<CURRENT-ASSETS> 34,276,713
<PP&E> 46,115,442
<DEPRECIATION> 18,937,178
<TOTAL-ASSETS> 62,469,166
<CURRENT-LIABILITIES> 13,980,384
<BONDS> 25,198,526
4,900,000
0
<COMMON> 213,689
<OTHER-SE> 17,704,880
<TOTAL-LIABILITY-AND-EQUITY> 62,469,166
<SALES> 13,249,507
<TOTAL-REVENUES> 13,249,507
<CGS> 10,417,537
<TOTAL-COSTS> 11,313,523
<OTHER-EXPENSES> 3,629,324
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 682,799
<INCOME-PRETAX> (2,376,139)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,376,139)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,444,431)
<EPS-PRIMARY> (.12)
<EPS-DILUTED> (.12)
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