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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 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
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value; Preferred Stock Purchase Rights
Indicate by checkmark whether the registrant (1) has filed reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
--- ---
Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
The aggregate market value of the Common Stock of the registrant held by
non-affiliates of the registrant was approximately $176,242,512 as of March 24,
2000. As of March 24, 2000, 26,218,717 shares of Common Stock with a par value
of $.01 per share were outstanding.
Documents Incorporated by Reference - None
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PART I
ITEM 1. BUSINESS.
GENERAL
Duramed Pharmaceuticals, Inc. (the "Company" or "Duramed") currently develops,
manufactures and markets 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
arrangements with other drug manufacturers. The Company sells its products to
drug store chains, drug wholesalers, private label distributors, health
maintenance organizations, hospitals, nursing homes, retiree organizations, mail
order distributors, other drug manufacturers, mass merchandisers and
governmental agencies.
On March 24, 1999, the Company received U.S. Food and Drug Administration
("FDA") marketing approval of its first brand prescription product. Cenestin(R)
(synthetic conjugated estrogens, A) Tablets ("Cenestin") is a new plant-derived
synthetic conjugated estrogens product for the treatment of moderate-to-severe
vasomotor symptoms associated with menopause. Late in 1999, the Company
completed a bone marker study of Cenestin that demonstrated the product caused a
favorable reduction in bone markers, which indicates a bone preservation effect.
In addition, in the cardiovascular evaluation, a positive lipid profile was
found. The Company anticipates initiating formal clinical trials in the future
to evaluate Cenestin for the prevention of osteoporosis.
Additionally, Apri(TM) (desogestrel and ethinyl estradiol) Tablets ("Apri"), the
Company's first oral contraceptive product was approved by the FDA on August 12,
1999 and is the first, and currently the only, oral contraceptive bioequivalent
to and therapeutically interchangeable with Ortho-Cept(R) and Desogen(R)
Tablets. Annual combined brand revenue for these two products in 1999 was
approximately $143 million. Apri is the first product to be approved under the
Company's agreement with Gedeon Richter, Ltd. The Company began marketing Apri
in the fourth quarter of 1999.
The approvals of Cenestin and Apri are expected to assist Duramed in its efforts
to move ahead with its long-term product development program designed to
generate a stream of new product offerings and to make the Company a leader in
women's health and the hormone replacement therapy ("HRT") market, in part by
developing a family of hormone products. Opportunities in this market area
include:
o additional brand products that include Cenestin in combination with
other therapeutic drugs,
o other brand pharmaceuticals developed by Duramed alone or in
conjunction with strategic partners, and
o selected generic pharmaceuticals that have the potential to be
marketed as part of a brand identity program.
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The Company's strategy has been, and will remain, to focus its product
development activities primarily on prescription drugs with attractive market
opportunities and potentially limited competition due to technological barriers
to entry, principally HRT products. In addition to the women's health and HRT
markets, Duramed will continue to seek to obtain products, either through
strategic alliances or internal development, that take advantage of the
Company's core competencies and are logical extensions of the Company's existing
product line due to their marketing or production characteristics. The Company's
product development capabilities include modified release technologies as well
as controlled substances development.
Duramed invested substantial resources in the development of its synthetic
conjugated estrogens product. An Abbreviated New Drug Application ("ANDA") for
the product was filed with the FDA in 1994. In May 1997, the Company was
notified by the FDA that, at that time, it would not approve a generic
conjugated estrogens product, although the product had been developed by Duramed
based on the guidance established by the FDA in 1991 and then current official
USP compositional standards. Following that decision, Duramed management
decided, to pursue a New Drug Application ("NDA") brand product strategy. As
noted above, on March 24, 1999, the FDA granted Duramed approval to market
Cenestin for the treatment of moderate-to-severe vasomotor symptoms associated
with menopause in two dosage strengths -- 0.625mg and 0.9mg. Cenestin became
available by prescription in June 1999. On March 13, 2000, the Company received
approval for the 1.25mg dosage strength which represents a $200 million market,
accounting for approximately 19% of all conjugated estrogens prescriptions
written and 23% of total conjugated estrogens revenues in the U.S. in 1999.
MARKET AND COMPETITION
The approval of Cenestin means that, for the first time, Duramed is competing in
the brand name pharmaceutical market. Cenestin, an estrogen replacement therapy
("ERT"), competes with other ERT/HRT products in a market approaching $2 billion
in the U.S. alone. According to Scrip Reports, 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 years. 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 eligible to take either ERT (estrogen only) or HRT (estrogen
with progestin).
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There are several brand name products that compete in the ERT/HRT therapeutic
category the most widely prescribed of which is Premarin(R), marketed by
Wyeth-Ayerst Pharmaceuticals. These products are supported by the resources of
larger and more experienced firms with substantially greater resources than
Duramed. Duramed believes that it will be able to compete with these companies
by leveraging the distinctive characteristics of its product. Cenestin is a new
plant-derived synthetic conjugated estrogens product. Duramed management
believes that women will respond favorably to having a choice in ERT therapies,
since Cenestin uses potentially preferable raw ingredients - plants - as well as
state-of-the-art production technology. To help communicate Cenestin's
availability and favorable characteristics, Duramed entered into an agreement
with Cardinal MarketFORCE, a wholly owned subsidiary of Dublin, Ohio based
Cardinal Health, Inc., for ongoing sales, marketing and distribution support. To
expand and enhance the promotion of Cenestin, the Company entered into a
co-promotion agreement with Solvay Pharmaceuticals, Inc. on October 6, 1999. The
co-promotion agreement was expanded and extended into a long-term arrangement on
March 1, 2000, when Duramed and Solvay Pharmaceuticals entered into a 10-year
marketing agreement relating to Cenestin. Under the terms of the agreement,
effective January 1, 2000 Solvay Pharmaceuticals assumed the responsibility for
marketing of Cenestin in exchange for a share in the profits generated by the
product. Solvay Pharmaceuticals' responsibility under the terms of the agreement
include assuming all advertising, selling and promotional expenses for Cenestin,
including all expenses associated with Duramed's sales force. See "Cenestin
Marketing and Distribution Agreements" for additional details.
In addition to Cenestin and other brand products that may be developed or
acquired by the Company, for the foreseeable future generic drugs will continue
to contribute to Duramed sales. Generic drugs are the chemical and therapeutic
equivalents of brand name drugs that have gained market acceptance while under
patent protection. In general, prescription generic drug products are required
to meet the same governmental standards as brand name pharmaceutical products
and must receive FDA approval prior to manufacture and sale. Generic drug
products are marketed after expiration of patents held by the innovator company,
generally on the basis of FDA approved ANDAs submitted by the generic
manufacturers. Generic drug products typically sell at prices substantially
below those of the equivalent brand name products. The increasing emphasis on
controlling health care costs, the growth of managed care organizations and the
significant number of drugs for which patents will expire in the next few years
are expected to offer the Company opportunities to selectively grow its generic
product portfolio.
According to Warburg Dillon Read LLC, generic pharmaceutical market
opportunities remain strong. In addition to about $7 billion in major
pharmaceutical products already off patent, but without generic competition,
over the next five years patents will expire for brand products with more than
$25 billion in total sales.
Competition in the generic industry is intense. The Company competes with other
generic drug product manufacturers, brand name pharmaceutical companies that
manufacture generic drug products and the original manufacturers of brand name
drug products that continue to produce those products after patent expirations.
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As other manufacturers introduce generic products in competition with the
Company's existing products, market share and prices with respect to such
existing products typically decline. Similarly, the Company's potential for
profits is reduced if competitors introduce a product prior to the Company`s
introduction of its product. Accordingly, the level of revenue and gross profit
generated by the Company's current and prospective products depends, in part, on
the number and timing of introductions of competing products and the Company's
timely development and introduction of new products.
The Company believes that the primary competitive factors in the generic market
are the ability to develop new products on a timely basis, price, product
quality, customer service, breadth of product line and reputation. Many of the
Company's competitors have greater financial and other resources than the
Company and are able to expend more for product development and marketing.
PRODUCTS
A summary, by therapeutic classification, of the products manufactured or
marketed by the Company at December 31, 1999 is given below. Chemical entities
and dosage forms discontinued by the Company in 1999 are not included.
<TABLE>
<CAPTION>
Marketed
Duramed for
Therapeutic Category Manufactured Others Total
- --------------------------------- ------------------ ------------------ ------------------
Chemical Dosage Chemical Dosage Chemical Dosage
Entities Forms Entities Forms Entities Forms
================== ================== ==================
<S> <C> <C> <C> <C> <C> <C>
Adrenal Cortical Steroids 1 1 -- -- 1 1
Analgesic 3 4 1 3 4 7
Anti-Emetic 1 2 -- -- 1 2
Anti-Tuberculosis 1 1 -- -- 1 1
Anti-Viral -- -- 1 1 1 1
Calcium Channel Blocker 1 2 -- -- 1 2
Cardiovascular Therapy -- -- 2 7 2 7
Cough/Cold/Decongestant 6 6 11 13 17 19
Diabetes 1 2 -- -- 1 2
Diuretic 1 1 -- -- 1 1
Gastrointestinal Stimulants -- -- 4 4 4 4
Hormonal Replacement 4 12 -- -- 4 12
Oncology -- -- 1 1 1 1
Oral Contraceptives 1 1 -- -- 1 1
Rheumatoid Arthritis 1 1 -- -- 1 1
Ulcers 1 1 -- -- 1 1
Vascular Headaches 1 1 1 1 2 2
-------------- -------------- --------------
TOTALS 23 35 21 30 44 65
============== ============== ==============
</TABLE>
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The following list provides the name, approval date and other information
pertaining to Duramed products approved by the FDA in 1999 and the first three
months of 2000.
1) Oxycodone and Acetaminophen Capsules USP, 5mg/500mg, the generic equivalent
to Tylox(R), was approved on March 18, 1999.
2) Cenestin(R) (synthetic conjugated estrogens, A) Tablets, 0.625mg and 0.9mg,
was approved on March 24, 1999. The 1.25mg dosage was approved on March 13,
2000.
3) Verapamil Hydrochloride Extended Release (ER) Tablets USP, 120mg and 240mg,
an extended release calcium channel blocker bioequivalent to, and
therapeutically interchangeable with Calan(R) SR and Isoptin(R) SR, was
approved on May 27, 1999.
4) Methotrexate Sodium, 2.5mg Tablets, USP, for the treatment of rheumatoid
arthritis and various cancers, including breast cancer, bioequivalent to, and
therapeutically interchangeable with the currently marketed Methotrexate
Sodium, 2.5mg Tablets, USP, was approved on June 18, 1999.
5) Triamterene and Hydrochlorothiazide 37.5mg/25mg Capsules, a diuretic used as
an adjunct to other antihypertension drugs, bioequivalent to, and
therapeutically interchangeable with Dyazide(R), was approved on June 21,
1999.
6) Apri(TM) (desogestrel and ethinyl estradiol) Tablets, the first, and
currently the only, oral contraceptive bioequivalent to and therapeutically
interchangeable with Ortho-Cept(R) and Desogen(R) Tablets, was approved on
August 12, 1999.
7) Meperidine Tablets, USP 50mg and 100mg - analgesic therapeutically equivalent
to and interchangeable with Demerol(R) Tablets, was approved October 12,
1999.
8) Estropipate Tablets, USP 0.75mg, 1.5mg and 3mg hormone replacement,
bioequivalent and therapeutically interchangeable with Ogen(R), was approved
on November 2, 1999.
9) Medroxyprogesterone Acetate Tablets, USP 2.5mg, 5mg and 10mg hormone
replacement, bioequivalent and therapeutically interchangeable with
Provera(R) Tablets was approved on December 2, 1999.
Methylprednisolone, which is manufactured by Duramed, accounted for
approximately 19%, 26% and 37%, respectively, of the Company's sales in 1999,
1998 and 1997. Promotion of Apri, the Company's first oral contraceptive,
commenced on October 26, 1999. Apri accounted for 11% of net sales in 1999 (41%
of fourth quarter sales which included the initial pipeline fill.)
The Company's generic products do not have patent protection and trademarks are
of relatively minor importance at this time. Cenestin is a registered trademark
name for the Company's synthetic conjugated estrogens product and Apri is a
trademark name for the Company's first oral contraceptive product. On June 1,
1999 the Company was granted a formulation patent for the composition of
Cenestin(R) (synthetic conjugated estrogens, A) Tablets, and solid oral dose
pharmaceutical products containing synthetic conjugated estrogens, A in
combination with a progestin. The patent, titled "Pharmaceutical Compositions of
Conjugated Estrogens and Methods for Their Use," issued on June 1, 1999 by the
U.S. Patent and Trademark office as U.S. Patent 5,908,638, provides Duramed with
exclusivity through July 26, 2015 for its novel pharmaceutical compositions and
methods for the preparation containing synthetic conjugated estrogens, A for the
treatment of vasomotor symptoms. Additionally, under the provisions of the
Federal Food Drug and Cosmetic Act Duramed is granted three-year non-patent
market exclusivity for Cenestin. See "Product Development - Internal Research
and Development Efforts".
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In 1997, the Company was granted its first U.S. patent for controlled release
technology. This patented technology is used in a controlled release product
approved by the FDA in May 1999. Duramed has two additional patent applications
pertaining to drug delivery systems pending with the U.S. Patent and Trademark
Office. All of the modified release patents relate to technologies that would be
used in the development of proprietary products.
MANUFACTURING
Duramed currently manufactures 23 chemical entities in 35 dosage forms for its
line of prescription generic drug products. Manufacturing occurs primarily in
the Company's Cincinnati, Ohio facility, which has highly specialized
containment facilities for the production of HRT and other products requiring
special handling, including Cenestin. The Company believes that manufacturing
capacity exists to meet demand for Cenestin for the foreseeable future.
Specialized manufacturing capabilities exist at the Company's facility in
Somerset, New Jersey. The Company obtained a Drug Enforcement Administration
("DEA") license for this facility in January 1998 and utilizes the facility to
manufacture products containing controlled substances as well as certain other
pharmaceutical products.
WARNER-LAMBERT COMPANY AGREEMENT
In September 1997 Duramed entered into a ten-year renewable manufacturing
agreement with Warner-Lambert Company ("Warner-Lambert"). Under the terms of the
agreement, Duramed manufactures a brand name pharmaceutical product for
Warner-Lambert, at its Cincinnati manufacturing facility. The product was
approved in 1999 and was introduced into the market in the first quarter of
2000. The provisions of the agreement include a monthly lease payment for the
term of the agreement. Prior to the project entering the commercialization stage
in early 2000, the Company also was reimbursed for the costs of Duramed
personnel involved in the project. Now that the product has been commercialized,
Duramed is compensated on a per batch manufacturing fee basis. The project began
contributing to operating performance in the fourth quarter of 1997, made a
significant contribution in 1998 and 1999 and is expected to continue to do so
over the term of the agreement.
DISTRIBUTION AGREEMENTS
The Company's business strategy includes enhancing its market position by
entering into strategic alliance agreements. The Company has agreements with
several manufacturers whereby the Company markets and distributes 21 generic
prescription drug products in 30 dosage forms. The terms of these agreements
vary, but typically provide for a sharing of profits between the Company and the
manufacturer.
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For the years ended December 31, 1999, 1998 and 1997, respectively, the
percentages of the Company's sales comprised of products purchased from others
and resold were 31%, 46% and 37%. The gross profit generated by these sales was
approximately $2.0 million, $5.4 million and $2.5 million in 1999, 1998 and
1997, respectively. The decline in 1999 reflects the transition of products
previously purchased from Ortho-McNeil Pharmaceutical Corporation
("Ortho-McNeil") to Duramed manufactured products. In 1998, sales volume and
profitability for outsourced products benefited from a price increase for
Acetaminophen with Codeine, instituted in May 1998, the sales of products
outsourced from Ortho-McNeil due to product supply timing, and the launch of
Hydroxyurea, approved in August 1998, which is manufactured by the Company's
business partner, Kiel Laboratories, Inc. These products came under increased
competition in 1999, which reduced their profitability.
ORDER BACKLOG
The dollar amount of the Company's open orders at March 1, 2000 was
approximately $0.3 million as compared with approximately $0.4 million at March
1, 1999. The Company's backlog is not indicative of net sales during the
following reporting period.
SALES AND MARKETING
Duramed sells its products to a broad range of customers located throughout the
United States. These customers include direct buying retail chains, drug
wholesalers, private label distributors, health maintenance organizations,
hospitals, nursing homes, retiree organizations, mail order distributors, other
drug manufacturers, mass merchandisers and government agencies. Despite recent
consolidations among its customers, Duramed continues to effectively penetrate
the market by selling to more than 200 different outlets.
Walgreen Co. accounted for 13% of the Company's net sales in 1999 and 10% in
1998. In 1997, no single customer accounted for more than 10% of the Company's
net sales. The breakdown of sales by major category reflects the growth of
Duramed's direct distribution activities and strengthening relationships with
drug wholesalers.
1999 1998 1997
---- ---- ----
Chains 44.5% 39.2% 48.8%
Wholesalers 33.2 37.0 25.3
Distributors 19.7 21.6 23.5
Other 2.6 2.2 2.4
----- ----- -----
Total 100.0% 100.0% 100.0%
===== ===== =====
The Company markets its products under the Duramed label and under private
labels. On all prescription products that it manufactures, Duramed is named on
the label as the manufacturer. Marketing and sales efforts for the generic
product line are conducted principally by Duramed employees. Duramed promotes
its products through catalogs, trade shows, publications, telemarketing and
direct sales.
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The brand pharmaceutical market, which Duramed entered following FDA approval of
Cenestin, presents challenges that are different from those of the generic
market. Generic pharmaceuticals generally are familiar to health care
professionals, such as physicians, pharmacists and payors. Brand products must
be marketed to health care professionals in order to create interest and demand.
CENESTIN MARKETING AND DISTRIBUTION AGREEMENTS
On March 30, 1999, Duramed entered into an agreement with Cardinal MarketFORCE
for launch-related and ongoing sales, marketing and distribution support for
Cenestin. Under the terms of the three-year agreement, Cardinal has recruited,
trained and deployed a team of dedicated, full-time sales professionals and
experienced sales managers. Additionally, Cardinal assists in the distribution
and stocking of Cenestin. In return, Duramed compensates Cardinal according to a
fixed schedule with performance incentives for achievement of certain market
share targets. At the end of the three-year period, the Company has the option
to retain the sales team as full-time Duramed employees.
Solvay Pharmaceuticals, Inc. Agreements
In order to expand and enhance the promotion of Cenestin, on October 6, 1999
Duramed enter into an agreement with Solvay Pharmaceuticals to jointly promote
three of the companies' hormone products in the United States: Duramed's
Cenestin(R) (synthetic conjugated estrogens, A) Tablets and Solvay
Pharmaceuticals' Estratest(R)/Estratest(R) H.S. Tablets (esterified estrogens
and methyltestosterone) and Prometrium(R) (progesterone) Capsules.
The agreement resulted in a combined national sales force of more than 300
Duramed and Solvay Pharmaceuticals sales representatives promoting the alliance
products to obstetricians and gynecologists across the United States. Solvay
Pharmaceuticals' resources also include teams of regional marketing managers,
field trainers, medical liaison teams and a medical advisory committee comprised
of leading women's health physicians.
Cenestin was designated as the primary product in the Duramed/Solvay
Pharmaceuticals alliance while the Solvay Pharmaceuticals products address
additional important therapeutic requirements in women's health. The Solvay
Pharmaceuticals products Estratest(R)/Estratest(R) H.S. Brand Tablets and
Prometrium(R) Capsules complement Cenestin in the pharmaceutical sales effort.
All three products are expected to benefit from the broadened exposure in the
marketplace.
Solvay Pharmaceuticals, based in Marietta, Ga., is a research-based
pharmaceuticals company, active in the therapeutic areas of cardiology,
gastroenterology, mental health and women's health. It is the second largest
pharmaceutical company in the U.S. hormone replacement therapy market, having
advanced from its previous standing of sixth in the industry in 1996, and is a
member of the worldwide Solvay Group of chemical and pharmaceutical companies,
headquartered in Brussels, Belgium. The Group's members employ some 33,000
people in 46 countries. Its 1999 revenue worldwide was 7.9 billion EUR ($7.9
billion) from four operating sectors: Chemicals, Plastics, Processing, and
Pharmaceuticals.
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On March 1, 2000, the co-promotion agreement was expanded and extended into a
long-term arrangement, when Duramed and Solvay Pharmaceuticals entered into an
expanded 10-year marketing agreement whereby the two companies will share in the
profits of Duramed's Cenestin. Effective January 1, 2000, Solvay Pharmaceuticals
assumed responsibilities for the marketing of Cenestin. This responsibility also
includes assuming all advertising, selling and promotional expenses for
Cenestin, including all expenses associated with Duramed's sales force. See the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" for further information regarding the details of the Company's
agreements with Solvay Pharmaceuticals.
Staff Addition
Additionally, to support the clinical program for Cenestin, the Company has
hired Dr. Raymond Klein as Advisor to the Chairman, Clinical & Medical Affairs.
Dr. Klein who most recently held the position of Senior Director Global Medical
Affairs-clinical development women's healthcare for Wyeth-Ayerst Laboratories,
will oversee Duramed's clinical studies in the area of women's health.
Dr. Klein has extensive experience in the management of Phase IV clinical
trials. In that role, he had management responsibility for research on the
benefits of estrogen for post-menopausal women. Dr. Klein managed estrogen
replacement therapy study benefits for cardiovascular disease, Alzheimer's
disease, cognition, eye disorders, osteoporosis and other age-related disorders.
His extensive experience in this arena greatly expands the Company's
capabilities in the clinical program area, which is a key component of the
promotional effort for Cenestin. From 1980 to 1989, Dr. Klein was in private
practice as an obstetrician/gynecologist. He has published numerous articles on
estrogen replacement therapy in professional journals such as Obstetrics and
Gynecology, Menopause, and Arthritis and Rheumatism.
PRODUCT DEVELOPMENT
During the fiscal years ended December 31, 1999, 1998 and 1997, product
development expenditures were $7.3 million, $5.3 million, and $12.5 million,
respectively, net of $3.5 million for a write-off of conjugated estrogens
inventory in the first quarter of 1997.
The Company's product development strategy consists of separate but related
components:
o an internal research and development staff, and
o joint product development efforts with, or purchasing new product
formulations from, other parties.
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INTERNAL RESEARCH AND DEVELOPMENT EFFORTS -- The Company's internal research
and development activities are headquartered at its facility in Cincinnati. The
knowledge and experience attained through the pursuit of the synthetic
conjugated estrogens product has enabled the Company to pursue the development
of additional hormonal products focused in the estrogen and hormonal replacement
therapy and oral contraceptive product categories. An important aspect of the
program is the development of additional brand products that include Cenestin in
combination with other therapeutic drugs and active development work is
underway. Based on the favorable outcome of bone marker studies conducted in
1999, Duramed anticipates initiating formal clinical trials in the future to
evaluate Cenestin for the prevention of osteoporosis.
The Company also has technical expertise and capabilities with respect to
advanced drug delivery systems. This technology provides the Company with
advantages with respect to the development of drug products with complex drug
delivery systems. Products of this type typically experience limited competition
due to the technical barriers to development, and therefore generate higher
margins. The Company believes that it has assembled a strong product development
team with the demonstrated ability to formulate, file and commercialize a
portfolio of new products.
The Company currently has three ANDAs on file with the FDA, two of which are for
hormonal products. Two additional ANDAs for hormonal products are expected to be
filed in the second quarter of 2000. To the extent resources are available, the
Company plans to submit NDAs and ANDAs for other products in 2000 and beyond, as
appropriate to its business strategy. The Company's business strategy includes
pursuing strategic partnerships on product projects where appropriate in order
to fund projects.
Formulations for all new products are subjected to laboratory testing and
stability studies and, when required to support an ANDA filing, are tested for
bioequivalence to the reference product by qualified laboratories. Bio-studies,
used to demonstrate that the rate and extent of absorption of a generic drug
statistically conform to the corresponding innovator product, currently cost in
the range of $250,000 to $700,000. Bio-studies for certain product classes
exceed that range. If the accumulated data demonstrates bioequivalency,
submission is then made to the FDA for its review and approval to manufacture
and market.
The cost for clinical studies of brand pharmaceutical products typically are
substantially higher than the bioequivalency studies to support an ANDA
submission. The Company anticipates multi-million dollar costs and up to three
years duration for the previously discussed clinical studies for the prevention
of osteoporosis indication for Cenestin and for the combination products.
The development of new generic products, including formulation, stability
testing and obtaining FDA approval, generally takes a minimum of 21-28 months.
Development of sustained release prescription products typically requires at
least two bioequivalence studies for most products and, therefore, total
development time, including FDA approval, may be two or three years. Liquid
product development frequently does not require bioequivalence studies and,
including formulation, stability testing and FDA approval, generally takes a
minimum of 12-18 months.
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New drug applications are reviewed under the provisions of the Prescription Drug
User Fee Act, which require the payment of a user fee and provide for a standard
review period of twelve months or less.
Duramed filed the NDA for its synthetic conjugated estrogens drug product under
Section 505(b)(2) (and related regulations) of the Federal Food, Drug and
Cosmetic Act ("Act"). The NDA for Cenestin was approved under the Act, pertinent
provisions of which grant Duramed three years non-patent market exclusivity.
This delays effective approval of any subsequently approved application
submitted for the same drug substance by another company for three years from
the date of approval of Cenestin's application. Additionally, the three-year,
non-patent market exclusivity also precludes the FDA from approving any ANDA as
a generic equivalent to Cenestin during that time period. On June 1, 1999 the
Company was granted a formulation patent for the composition of Cenestin and
solid oral dose pharmaceutical products containing synthetic conjugated
estrogens, A in combination with a progestin. The patent, titled "Pharmaceutical
Compositions of Conjugated Estrogens and Methods for Their Use," provides
Duramed with exclusivity through July 26, 2015 for its novel pharmaceutical
compositions and methods for the preparation containing synthetic conjugated
estrogens, A for the treatment of vasomotor symptoms.
Tamoxifen Project -- In December 1998, the Company entered into an agreement
with Generic Biologicals Limited, ("GBL") a United Kingdom-based product
development company, relating to the development of an improved Tamoxifen
synthetic process form. Under the terms of the agreement, in 1999 Duramed paid
$1.0 million in milestone payments to GBL. At this time, the Company has decided
to suspend the project based on its evaluation of the requirements and related
costs to develop the product further. Negotiations are underway for recovery of
the Company's investment contingent upon the ultimate development, approval and
commercialization of the product.
JOINT PRODUCT DEVELOPMENT ACTIVITIES -- The Company's business strategy includes
enhancing its product development activities by entering into strategic
partnerships. The Company has agreements with several firms whereby the
companies will jointly develop and seek approval for generic prescription drug
products. The terms of these agreements vary, but typically provide for a
sharing of costs and potential profits between the Company and the partner.
Gedeon Richter, Ltd. -- In 1995, Duramed entered into an agreement with Gedeon
Richter, Ltd. ("Gedeon Richter") under which Gedeon Richter is supplying certain
bulk actives (raw ingredients) and technologies that Duramed is using to develop
specific generic pharmaceuticals, some of which are on an exclusive basis. In
return, Duramed received marketing rights to the products in North America and
Gedeon Richter has marketing rights for certain Duramed products in the former
Soviet Union, now called the Commonwealth of Independent States ("CIS"), and
Eastern Europe countries on an exclusive basis. Gedeon Richter, the largest
Hungarian pharmaceutical company, focuses on the CIS and is the only Hungarian
pharmaceutical company with manufacturing and distribution joint venture local
partners in Russia and the Ukraine. Gedeon Richter is one of the market leaders
in the CIS and Eastern Europe markets, with a diversified product portfolio and
a strong distribution network. The Company's first product marketed under this
agreement, Apri, was approved by the FDA on August 12, 1999 and is the first,
and currently the only, oral contraceptive bioequivalent to and therapeutically
interchangeable with Ortho-Cept and Desogen Tablets.
- 11 -
<PAGE> 13
Kiel Laboratories -- In 1995, Duramed and Kiel Laboratories, Inc. ("Kiel"),
based in Gainesville, Georgia, entered into an agreement under which Kiel would
develop and manufacture a number of oncology products for Duramed's exclusive
marketing and distribution. In return, Duramed would make payments to Kiel based
on achievement of specific performance milestones and share in any profits
generated after products were approved and marketed. As a result of Duramed's
partnership with Kiel, the Company has received FDA approval for two products:
(1) in August 1998, Hydroxyurea capsule, an oncology drug used to reduce tumors,
and (2) in June 1999, Methotrexate Sodium, 2.5mg Tablets, USP, for the treatment
of rheumatoid arthritis and various cancers, including breast cancer.
GOVERNMENT REGULATION
All pharmaceutical manufacturers are subject to extensive regulation by the
federal government, principally by the FDA, the DEA and by state governments.
The Federal Food, Drug and Cosmetic Act, the Controlled Substance Act, the
Generic Drug Enforcement Act of 1992 and other federal statutes and regulations
govern or influence the testing, manufacture, safety, labeling, storage, record
keeping, approval, pricing, advertising and promotion of the Company's products.
Noncompliance with applicable requirements can result in fines, seizure of
products, total or partial suspension of production, refusal of the government
to enter into supply contracts or to approve new drug applications, criminal
prosecution and corporate debarment. The FDA also has the authority to institute
proceedings to revoke previous approvals of drug products.
FDA approval is required before most prescription drug products can be marketed.
Each dosage form of a specific generic drug product, whether a different form of
administration or a different strength, is typically treated as a separate drug
product by the FDA and requires separate submission. There are two types of
applications currently used to obtain FDA approval of a new drug product.
1. New Drug Application -- With respect to drug products with active
ingredients not previously approved by the FDA or new uses or new dosage
forms for previously approved active ingredients, a prospective
manufacturer must conduct and submit to the FDA clinical studies to prove
that product's safety and efficacy. An NDA also may be submitted for a drug
product with previously approved active ingredients if the abbreviated
procedure discussed below is not available.
2. Abbreviated New Drug Application -- This is an abbreviated application
procedure for obtaining FDA approval for generic drug products that are
bioequivalent to brand name drugs. In contrast to most NDAs, this
application procedure does not require completion of animal and clinical
studies for safety and efficacy, and instead requires data demonstrating
that the generic drug product is bioequivalent to the listed FDA reference
product. Bioequivalence means that the rate of absorption and distribution
of a generic drug in the body are equivalent to the previously approved
listed reference drug product and, therefore, that the generic drug will
produce a therapeutically equivalent effect.
- 12 -
<PAGE> 14
Among the requirements for a new drug approval is that the prospective
manufacturer's methods conform to the FDA's Current Good Manufacturing Practices
("cGMP Regulations"). The cGMP Regulations must be followed when the approved
drug is manufactured. To ensure compliance with the standards set forth in these
regulations, the Company must continue to expend time, money and effort in the
areas of production and quality control. Failure to comply with these
regulations risks possible FDA action such as the suspension of manufacturing or
the seizure of drug products.
The Company also is subject to environmental protection laws and regulations of
federal, state and local governmental authorities, including the Clean Air Act
and Occupational Safety and Health Administration ("OSHA") requirements. Under
the Clean Air Act, the Company is required to meet certain air emissions
standards. Under OSHA, the Company is required to meet certain safety standards,
including those relating to equipment and procedures, indoor air quality and
safety data sheets on material used at the Company's facilities. Compliance with
these laws had no material effect on the Company's capital expenditures,
operating results or competitive position during fiscal 1999, and the Company
anticipates no such material effect during fiscal 2000.
ITEM 2. PROPERTIES.
Duramed's manufacturing, laboratory, and product development activities in Ohio
are conducted primarily in a 190,000 square foot plant located on 17 acres in
Cincinnati, which includes a 38,000 square foot expansion designed to meet the
initial projected manufacturing requirements of Cenestin and other hormonal
products on file with the FDA or under development. The facility is collateral
for certain of the Company's borrowings.
The Company also conducts product development, and limited manufacturing
activities, from a leased 38,000 square foot facility in Somerset, New Jersey.
The lease pertaining to this facility expires on May 31, 2000. The Company has
notified the owner of the facility of its intent to purchase the facility for
$2.3 million. The purchase option currently expires on June 1, 2000.
The Company's executive offices and certain corporate support groups occupy a
52,400 square foot facility in Cincinnati, Ohio. The lease for this facility
extends to August 3, 2004.
The Company's distribution and other support activities are conducted from a
leased 120,000 square foot facility in Mason, Ohio. The lease for this facility
extends to September 30, 2004.
The Company believes its facilities and equipment are well maintained, in good
operating condition and suitable for the Company's current level of business.
- 13 -
<PAGE> 15
ITEM 3. LEGAL PROCEEDINGS.
On October 22, 1999 the Company reached a settlement agreement with Schein
Pharmaceutical, Inc. relating to a 1992 agreement regarding the pursuit of an
ANDA conjugated estrogens product. Under the terms of the settlement Schein has
given up any claim to rights in Cenestin in exchange for a payment of $15
million, which was recorded as a charge in the third quarter of 1999. Duramed
made an initial $7.5 million payment to Schein on October 22, 1999. The second
$7.5 million payment was made in the first quarter of 2000. An additional $15
million payment is required under the terms of the settlement if Cenestin
achieves total profits (product sales less product-specific cost of goods sold,
sales and marketing and other relevant expenses) of greater than $100 million
over any five year or less period within the next 15 years.
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is quoted on the Nasdaq National Market under the
symbol "DRMD." The following table sets forth the range of high and low sale
prices for the Common Stock on the Nasdaq National Market for the periods
indicated.
High Low
---- ----
1999:
First Quarter ........................... $17.00 $3.88
Second Quarter ........................... 18.00 8.00
Third Quarter ........................... 15.88 7.50
Fourth Quarter ........................... 10.61 6.53
1998:
First Quarter ........................... $ 7.31 $4.75
Second Quarter ........................... 7.31 5.25
Third Quarter ........................... 6.25 3.31
Fourth Quarter ........................... 5.56 2.63
- 14 -
<PAGE> 16
As of December 31, 1999 the Company had 1,791 holders of record of the Common
Stock. The Company believes that, in addition, there are a significant number of
beneficial owners of its Common Stock whose shares are held in "street name."
The Company has not paid any cash dividends on its Common Stock since its
inception and does not intend to pay cash dividends in the foreseeable future.
Under the terms of the Company's current loan agreements with its bank, no
dividend declaration is permitted.
The Company's net worth at December 31, 1999 did not meet the net worth
requirements of the Nasdaq National Market for continued listing of the
Company's Common Stock. The Company intends to request an exemption to permit
continued listing on the Nasdaq National Market. If this request is not granted,
trading will continue in the over-the-counter market. Loss of Nasdaq National
Market listing could have an adverse effect on the liquidity of outstanding
shares.
During the quarter ended December 31, 1999, the Company sold 3,000,000 shares of
Common Stock to Solvay Pharmaceuticals, Inc. at a price of $9.00 per share.
Details of the transaction are provided in the response to Item 7 of this Report
under "Liquidity and Capital Resources." The sale was exempt from registration
under the Securities Act of 1933 by virtue of the exemption found in
Section 4(2) of that Act, due to the sophistication of the single purchaser of
the shares.
- 15 -
<PAGE> 17
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth selected financial data, derived from the audited
financial statements of the Company, for each of the five years in the period
ended December 31, 1999. This information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's Consolidated Financial Statements and Notes
included elsewhere in this document.
<TABLE>
<CAPTION>
Year ended December 31, 1999 1998 1997 1996 1995
---------------------------------------------------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Net sales $ 50,220 $ 49,759 $ 44,296 $ 43,855 $ 49,624
- -------------------------------------------------------------------------------------------
Pretax loss (51,023) (8,396) (17,441) (20,810) (991)
- -------------------------------------------------------------------------------------------
Income taxes -- -- -- 3,901 --
- -------------------------------------------------------------------------------------------
Net loss (51,023) (8,396) (17,441) (24,711) (991)
- -------------------------------------------------------------------------------------------
Preferred dividends 255 517 170 929 123
- -------------------------------------------------------------------------------------------
Deemed dividend
on convertible preferred stock -- 4,873 4,835 -- --
- -------------------------------------------------------------------------------------------
Net loss applicable to
common stockholders (51,278) (13,787) (22,446) (25,640) (1,114)
- -------------------------------------------------------------------------------------------
Net loss per share of
common stock:
Basic and diluted (2.36) (0.76) (1.45) (2.44) (0.14)
- -------------------------------------------------------------------------------------------
Cash dividends
per common share -- -- -- -- --
- -------------------------------------------------------------------------------------------
Total assets 80,773 61,424 50,126 53,634 45,177
- -------------------------------------------------------------------------------------------
Long-term liabilities 31,556 23,160 12,009 11,878 19,837
- -------------------------------------------------------------------------------------------
</TABLE>
- 16 -
<PAGE> 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
Certain statements in this Form 10-K constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995,
including those concerning management's expectations with respect to future
financial performance and events, particularly relating to sales of current
products as well as the introduction of new manufactured and distributed
products. Forward-looking 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. Factors that might affect the forward-looking statements set
forth in this Form 10-K include, among others, (i) increased competition from
new and existing competitors and pricing practices of those 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 status of strategic alliances, and (vi) the success of 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 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, 1999 reflect the
substantial resources Duramed invested in the development of an ANDA and,
subsequently, an NDA for a conjugated estrogens product. In March 1999, the
Company received marketing approval of the product, its first brand prescription
product. Cenestin is a new plant-derived synthetic conjugated estrogens product
for the treatment of moderate-to-severe vasomotor symptoms associated with
menopause.
Additionally, Apri, the Company's first oral contraceptive product was approved
by the FDA on August 12, 1999 and is the first, and currently the only, oral
contraceptive bioequivalent to and therapeutically interchangeable with
Ortho-Cept(R) and Desogen Tablets(R). The market for these products at brand
prices is estimated to be approximately $143 million. This product is the first
product to be approved under the Company's agreement with Gedeon Richter, Ltd.
The Company began marketing Apri in the fourth quarter of 1999.
- 17 -
<PAGE> 19
The approval of Cenestin and Apri are expected to assist Duramed in its efforts
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.
OUTLOOK
Business Strategy Outlook -- Based on assessments of the market opportunities
for a synthetic conjugated estrogens product, the market for oral contraceptives
and the related potential impact on Duramed's revenues and profitability,
management believes that the approvals of Cenestin and Apri change Duramed's
long-term outlook and enhance the Company's ability to become a leader in the
women's health market.
To achieve the goal of sustainable profitability and becoming a leader in the
women's health care market, the Company's business plan involves primary focus
on three initiatives:
Maximize the Market Penetration of Cenestin -- Cenestin, an estrogen replacement
therapy (ERT), competes with other ERT/HRT products in a market approaching $2
billion in the U.S. alone. According to Scrip Reports, 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 years. 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, to perform the necessary
direct-to-doctor sales efforts.
To expand and enhance the promotion of Cenestin, on October 6, 1999 Duramed
enter into an agreement with Solvay Pharmaceuticals, Inc. to jointly promote
three of the companies' hormone products in the United States: Duramed's
Cenestin and Solvay Pharmaceuticals' Estratest/Estratest H.S. and Prometrium.
The agreement resulted in a combined national sales force of more than 300
Duramed and Solvay Pharmaceuticals sales representatives which promote the
alliance products to obstetricians and gynecologists across the United States.
Solvay Pharmaceuticals' resources also include teams of regional marketing
managers, field trainers, medical liaison teams and a medical advisory committee
comprised of leading women's health physicians.
- 18 -
<PAGE> 20
Cenestin was designated as the primary product in the Duramed/Solvay
Pharmaceuticals alliance while the Solvay Pharmaceuticals products address
additional important therapeutic requirements in women's health and complement
Cenestin in the pharmaceutical sales effort. All three products are expected to
benefit from the broadened exposure in the marketplace.
On March 1, 2000 the co-promotion agreement was expanded and extended into a
long-term arrangement when Duramed and Solvay Pharmaceuticals entered into an
expanded 10-year marketing agreement whereby the two companies will share in the
profits of Cenestin. Effective January 1, 2000, Solvay Pharmaceuticals assumed
responsibilities for the marketing of Cenestin. This responsibility also
includes assuming all advertising, selling and promotional expenses for
Cenestin, including all expenses associated with Duramed's sales force (Cardinal
MarketFORCE). During this initial stage of the marketing agreement, Solvay
Pharmaceuticals will receive 80% of the gross profit from Cenestin and Duramed
will receive 20% of Cenestin's gross profit until Solvay Pharmaceuticals has
recovered all of the ongoing advertising and marketing expenses and Cenestin
becomes an income-producing product.
The agreement then moves into a second stage, where Duramed will receive 80% of
Cenestin net profit dollars and Solvay Pharmaceuticals will receive 20%, until
Duramed recovers the $38 million (inclusive of $15 million litigation
settlement) it invested in Cenestin from when the product was approved in March
1999 through December 31, 1999.
Upon completion of these two stages, when both Duramed and Solvay
Pharmaceuticals have recovered the specified investments, the two companies each
will receive 50% of Cenestin net profit dollars on a moving-forward basis.
Duramed also granted Solvay Pharmaceuticals a worldwide exclusive license to
Cenestin outside the United States. The global rights to Cenestin include all
countries except Eastern European countries that are currently covered by other
established marketing partners and Puerto Rico. Solvay Pharmaceuticals and
Duramed will enter into mutually agreed upon license and supply agreements for
each country based on a country-by-country selection
process. Solvay Pharmaceuticals has also been granted the option to an exclusive
worldwide license to Verapamil SR, a calcium channel blocker for the treatment
of hypertension, which has been previously approved by the FDA. See "Liquidity
and Capital Resources" for information regarding additional financing
transactions with Solvay Pharmaceuticals.
Management's original goal was for Cenestin to reach $100 million in annualized
revenues within 15-18 months of the July 1999 launch date. While management
remains confident this milestone of revenue is achievable, particularly in view
of the expanded relationship with Solvay Pharmaceuticals, because of the
extremely competitive nature of this category and the complexities of the
managed care approval process, it is likely that reaching this milestone may
take longer than originally anticipated.
- 19 -
<PAGE> 21
Successfully Commercialize Recently Approved and Filed Products -- On August 12,
1999 the FDA approved the Company's first oral contraceptive product,
Desogestrel and Ethinyl Estradiol .15mg/0.03mg, which has been brand named Apri.
Apri is the first, and currently the only, product therapeutically
interchangeable with Ortho-Cept and Desogen tablets for all new and refill
prescriptions. This product is the first product marketed under the Company's
agreement with Gedeon Richter, Ltd. The agreement provides for the profits
generated by products under the agreement to be split between Duramed and
Gedeon Richter. The market for these products at brand prices is estimated to be
approximately $143 million.
Since the beginning of 1999, the FDA has approved the Cenestin NDA and eight
ANDAs submitted by the Company. The Company has three ANDAs on file, two of
which are for hormonal products. Two additional ANDAs for hormonal products are
expected to be filed in the second quarter of 2000. To the extent resources are
available, the Company plans to submit NDAs and ANDAs for other products in 2000
and beyond, as appropriate to its business strategy. The Company's strategy
includes pursuing strategic partnerships, where appropriate, to fund product
projects.
Continue to Invest in Product Development Activities -- With the approval of
Cenestin, the Company intends to continue to expand its research and development
in the women's health care area, including hiring incremental personnel and
procurement of the necessary equipment to prepare for the production and launch
of certain products on file based upon availability of funds generated from
recently approved products or strategic partnerships. On March 13, 2000 the
Company received approval of the 1.25mg dosage strength of Cenestin, which
represents a $200 million market accounting for approximately 19% of all
conjugated estrogens prescriptions written and 23% of total conjugated estrogens
revenues in the U.S. last year. In late 1999, the Company completed a bone
marker study that demonstrated that Cenestin caused a favorable reduction in
bone markers, which indicates a bone preservation effect. In addition, in the
cardiovascular evaluation, a positive lipid profile was found. The Company
anticipates beginning a full osteoporosis clinical study of Cenestin in the
future to confirm the beneficial results indicated by the bone marker study.
On June 1, 1999 the Company was granted a formulation patent for the composition
of Cenestin and solid oral dose pharmaceutical products containing synthetic
conjugated estrogens, A in combination with a progestin. The Company intends to
initiate clinical studies of this combination as funds generated from recently
approved products and other resources that may be available to the Company
become available.
- 20 -
<PAGE> 22
During 1999, Duramed invested approximately $21 million on the marketing and
promotion of Cenestin. Additionally the Company reached a $15 million settlement
with Schein Pharmaceutical, Inc, pertaining to a 1992 agreement related to the
pursuit of an ANDA conjugated estrogens product. These transactions accounted
for a substantial portion of the $51 million loss in 1999. See "Liquidity and
Capital Resources" for a discussion of issues resulting from the commitment of
resources to these transactions. As discussed previously, the recent agreement
with Solvay Pharmaceuticals provides for Solvay Pharmaceuticals to be
responsible for marketing and sales expenses, including expenses related to the
Company's agreement with Cardinal MarketFORCE effective January 1, 2000, in
exchange for a share in the profit in the sales of Cenestin. The elimination of
the spending on Cenestin sales, marketing and promotion will result in a
material improvement in the Company's operating performance in the first quarter
of 2000. Management believes that a combination of reduced spending levels
resulting from the Company's agreement with Solvay Pharmaceuticals, and its
projection of revenue levels, could be sufficient to position the Company for
profitability in the second quarter of 2000.
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 successful commercialization of Apri and other products recently approved by
the FDA; (3) development of additional potential sources of revenue; (4) 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);
and (5) the level of spending on clinical and bioequivalency studies.
- 21 -
<PAGE> 23
RESULTS OF OPERATIONS
The table below sets forth the components of the Company's results of operations
as a percentage of net sales.
Percentage of Sales
Year Ended December 31,
--------------------------
1999 1998 1997
---- ---- ----
Net sales 100.0% 100.0% 100.0%
- --------------------------------------------------------------------
Cost of goods sold 79.2 75.0 75.6
Gross margin 20.8 25.0 24.4
Product development 14.4 10.6 36.0
Brand marketing expense 41.6 -- --
Selling 5.0 6.9 7.2
General and administrative 24.4 19.6 17.4
Litigation settlement 29.9 -- --
Operating margin (94.5) (12.1) (36.2)
Interest expense 7.0 4.7 3.2
Preferred dividends 0.5 1.0 0.4
Deemed dividend on
convertible preferred stock -- 9.8 10.9
Income taxes -- -- --
- --------------------------------------------------------------------
Net Loss (102.0)% (27.7)% (50.7)%
====================================================================
NET SALES
Net sales of $50.2 million in 1999 include $2.0 million in Cenestin revenue,
$5.7 million from Apri and $42.5 million for all of the Company's other
("baseline") products. Net sales of the baseline products decreased by $7.2
million (14.5%) in 1999 compared with 1998. The decline was primarily
attributable to price erosion on certain of the Company's existing products. The
1998 increase in net sales was primarily attributable to shipment of products
sourced from other manufacturers that were in a backorder status at December 31,
1997 and the contribution from newly approved products offset by a decline in
1998 revenues from the Company's methylprednisolone product and lower revenue
from several products for which the Company instituted price increases late in
the second quarter of 1998. While the adjustment to the selling price of those
selected low margin products reduced unit sales volume, the action resulted in
improving margins.
Promotion of Apri, the Company's first oral contraceptive, commenced in the
fourth quarter of 1999; Apri accounted for 11% of net sales in 1999 (41% in the
fourth quarter of 1999). Methylprednisolone accounted for 19%, 26% and 37% of
net sales in 1999, 1998 and 1997, respectively. Acetaminophen with Codeine
accounted for 14% of net sales in 1998. No other single product has accounted
for more than 10% of net sales in 1999, 1998 or 1997. In total, products
manufactured by Duramed accounted for 69%, 54% and 63% of net sales in 1999,
1998 and 1997, respectively.
- 22 -
<PAGE> 24
See "Analysis of Cash Flows - Operating Activities" for information relating to
Cenestin shipments to date and deferred revenue. In keeping with the Company's
revenue recognition policy, approximately $2.0 million in sales of Cenestin was
recognized in the fourth quarter of 1999, based on end-user prescription data.
Management believes the Company's approach to revenue recognition for Cenestin
is appropriate due to the limited time Cenestin has been promoted by the joint
Solvay Pharmaceuticals/Duramed sales force, the fact that Cenestin is Duramed's
first introduction of a brand product, the more than 600,000 sample packages
that have been supplied to the sales force and the large pipeline fill of
Cenestin.
Management believes that Cenestin has the potential to become a market leader in
the ERT market and will become a significant component of the Company's total
sales.
Apri also is expected to become a major contributor to the Company's 2000
results. Based on prescription data for the week ending March 17, 2000 Apri has
achieved a 30% new prescription market share for desogestrel products.
GROSS MARGIN
Gross margins, and the corresponding percentages of net sales, for 1999, 1998
and 1997, were $10.5 million (20.8%), $12.4 million (25.0%), and $10.8 million
(24.4%), respectively.
The reduced gross margin in 1999 reflected the decline in selling prices on the
baseline business as well as approximately $3.3 million in start-up production
activities necessary to commercialize Cenestin and Apri. Gross margin in the
fourth quarter of 1999 was favorably impacted by the $2.0 million revenue
recognized for Cenestin and the Apri revenue of $5.7 million. The Company
expects gross margin to increase in 2000 with the anticipated increase in
Cenestin and Apri revenues. As discussed in the "Outlook" above, Solvay
Pharmaceuticals will share the gross profits generated from Cenestin and Gedeon
Richter will share in the profits of Apri.
The increased gross margin in 1998 reflected the favorable impacts of pricing
actions taken toward the end of the second quarter, contract revenues from
Warner-Lambert, and contributions from newly approved products, partially offset
by increased competition for the Company's methylprednisolone product.
The reduced gross margin in 1997 primarily reflected the continued decline in
methylprednisolone profitability, principally due to price erosion. The margin
erosion for methylprednisolone was partially offset by sales of products sourced
from other manufacturers and, in the fourth quarter, the positive contribution
from the manufacturing agreement signed with Warner-Lambert in September 1997.
- 23 -
<PAGE> 25
Various factors are expected to impact the Company's gross margin in 2000 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 as market
conditions change, particularly when additional competitive products are
introduced as a result of FDA approvals as experienced with certain of the
Company's products, particularly methylprednisolone and the Company's oral
contraceptive product, Apri. These impacts can be material depending on the
products affected.
PRODUCT DEVELOPMENT
Product development expenditures for the years ended December 31, 1999, 1998 and
1997 were approximately $7.3 million, $5.3 million and $12.5 million,
respectively, net of $3.5 million for the write-off of conjugated estrogens
inventory in the first quarter of 1997. The increase in 1999 was due to spending
for bioequivalency studies and investment in selected projects. The decrease in
product development expense in 1998 was due principally to a reduction of
spending for bioequivalency studies in an effort to conserve resources.
Additionally, product development expenses during 1998 were impacted by reduced
spending on Duramed Europe operations. For four years, Duramed funded activities
at Duramed Europe. In 1998, the Company restructured the operation to conserve
resources while still providing Duramed with access to certain rights to
products developed by Duramed Europe.
In 1997, in view of the FDA's decision regarding the Company's generic
conjugated estrogens ANDA, the Company determined that it was prudent to
write-off existing conjugated estrogens inventory. Accordingly, a charge in the
amount of $3,465,000 was recorded in the first quarter of 1997 and reflected in
product development expenses for the year. While General Accepted Accounting
Principles do not allow for reversal of the write-off, the product inventory has
been maintained and utilized in the sales efforts for Cenestin.
The Company's product development emphasis is on hormonal therapies, modified
release technologies, and controlled substances development. Product development
expenses for 2000 and beyond are dependent on the timing of biostudies and
clinical studies and the Company's continuing efforts to balance product
development spending and available resources.
- 24 -
<PAGE> 26
SALES AND MARKETING
The Company's sales and marketing expenses for 1999 decreased $924,000 compared
with 1998, excluding brand marketing expenses of $20.9 million. The decrease
principally relates to the reduction of the sales and marketing staff positions
and attendant costs assigned to the baseline business. The brand marketing
expenses relate to the Company's marketing program for Cenestin.
Sales and marketing expenses increased by $546,000 in 1998 compared with 1997,
excluding a charge in the first quarter of 1997 of $300,000 in connection with
contractual commitments associated with the Company's generic conjugated
estrogens product. The increase in selling expenses in 1998 was a result of
increased costs associated with preparing for the launch of its synthetic
conjugated estrogens product as a brand product.
As previously discussed, effective January 1, 2000, Solvay Pharmaceuticals
assumed responsibilities for the marketing of Cenestin. The responsibility
includes assuming all advertising, selling and promotional expenses for
Cenestin, including all expenses associated with Duramed's brand sales force. As
a result, sales and marketing expenses are expected to return to a more
normalized level in 2000 and beyond. A return to that level is an important
element of management's efforts to obtain a sustainable level of profitability
for the Company.
LITIGATION SETTLEMENT
On October 22, 1999 the Company reached a settlement agreement with Schein
Pharmaceutical, Inc. relating to a 1992 agreement regarding the pursuit of an
ANDA conjugated estrogens product. Under the terms of the settlement, Schein has
given up any claim to rights in Cenestin in exchange for payment of $15 million,
which was recorded as a charge in the third quarter of 1999. Duramed made an
initial $7.5 million payment to Schein on October 22, 1999. The second $7.5
million payment was made in the first quarter of 2000. An additional $15 million
payment is required under the terms of the settlement if Cenestin achieves total
profits (product sales less product-specific cost of goods sold, sales and
marketing and other relevant expenses) of greater than $100 million over any
five year or less period within the next 15 years.
- 25 -
<PAGE> 27
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased $2.5 million compared with the
same period in 1998 principally due to consultants assisting with information
technology infrastructure and other corporate projects, compensation charges
relating to options granted to consultants and personnel expenses. The Company's
information technology infrastructure projects included its Year 2000 compliance
program as well as other information technology needs.
General and administrative expenses in 1998 increased $2.0 million compared with
1997 due principally to increased legal fees associated with pending litigation
with Schein Pharmaceutical, Inc. and other matters. Also included were expenses
relating to the Company's Year 2000 Compliance program and other information
technology needs.
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 have encountered operating problems due to their
inability to distinguish years after 1999 from years preceding 1999. As a
result, the Company initiated a program to identify and remedy or replace its
date-sensitive IT systems and non-IT systems.
The approximate cost of hardware and system upgrades to address the IT aspects
of the Y2K issue were approximately $750,000. For non-IT aspects of the Y2K
issue, the cost of compliance was approximately $150,000. Of these costs,
approximately $550,000 represented capital expenditures that will be amortized
over the estimated useful life of the assets. The remaining $350,000 was
expensed as incurred and was included in the Company's operating results on a
ratable basis between June 1998 and December 1999. The amounts do not include
the cost incurred by the Company as a result of the use of its own employees but
do include approximately $200,000 for the use of outside consultants who
assisted the Company in evaluating, implementing and testing aspects of the Y2K
issue and the Company's compliance program. The Company did not encounter any
significant issues or delays relating to Y2K.
NET INTEREST EXPENSE AND INTEREST RATE RISK
The Company's borrowings are primarily variable rate facilities. In 1999, net
interest expense increased by $1,192,000 compared with 1998 due to an increase
in average borrowings under the Company's revolving credit facility.
Net interest expense increased by $960,000 in 1998 compared with 1997 due to an
increase in average borrowings under the Company's revolving credit facility,
the increase in the mortgage on the Company's manufacturing facility and the
amortization of expenses incurred in connection with Series F Preferred Stock
issued by the Company in early 1998.
In 1997, the Company's net interest expense declined by $451,000 compared with
1996 due to reduction of the Company's borrowings under its revolving credit
facility.
- 26 -
<PAGE> 28
The Company has floating rate debt totaling $33.0 million, with interest
fluctuating based on changes in the prime rate and in commercial paper rates. As
a result, annual interest expense in 2000 will fluctuate based upon fluctuations
in those rates.
INCOME TAXES
At December 31, 1999, the Company had cumulative net operating loss
carryforwards of approximately $105.9 million for federal income tax purposes
that expire in the years 2004 to 2019. Additionally, the Company had cumulative
losses from Duramed Europe that amounted to approximately $6.4 million that are
not deductible for U.S. tax purposes. Due to net losses in the last three years,
the Company did not record a provision for income taxes during the three-year
period.
PREFERRED DIVIDENDS
The Company's Series E Mandatory Redeemable Preferred Stock (issued in June
1997) and Series F Mandatory Redeemable Preferred Stock (issued in February
1998) provided for a 5% dividend on unconverted shares. Preferred Stock
dividends of $255,000, $517,000, and $170,000 in 1999, 1998 and 1997,
respectively, represented dividends associated with the unconverted portion of
those series of Preferred Stock. These shares now have all been converted into
Common Stock.
BENEFICIAL CONVERSION DIVIDEND
A beneficial conversion feature is present when convertible preferred stock is
issued with an imbedded discount at the date of issue. EITF Topic D-60
("Accounting for the issuance of Convertible Preferred Stock and Debt Securities
with a Nondetachable Conversion Feature") requires that the beneficial
conversion feature be recognized and measured by allocating a portion of the
proceeds of the convertible preferred stock equal to the intrinsic value of that
feature to additional paid-in capital. Any discount resulting from an allocation
of proceeds to the beneficial conversion feature is analogous to a dividend and
should be recognized as a return to the preferred stockholders over the minimum
period in which the preferred stockholders can realize the return of the
beneficial conversion.
The effect of the application of EITF Topic D-60 was an increase in the net loss
applicable to the common stockholders of $4,873,000 and $4,835,000 in both basic
and diluted net loss per share of $0.27 and $0.27 for the years ended December
31, 1998 and 1997, respectively.
- 27 -
<PAGE> 29
LIQUIDITY AND CAPITAL RESOURCES
The financial commitment to launch Cenestin as a brand product and the $15
million settlement the Company reached with Schein Pharmaceutical pertaining to
a 1992 agreement related to the pursuit of an ANDA conjugated estrogens product
placed a severe strain on the resources of the Company. These transactions
accounted for a substantial portion of the $51 million loss in 1999. As
discussed previously, the Company's recent agreement with Solvay Pharmaceuticals
provides for Solvay Pharmaceuticals to be responsible for Cenestin marketing and
sales expenses in exchange for a share in the profit of Cenestin. The
elimination of the spending on Cenestin sales, marketing and promotional
expenses currently is expected to result in a material improvement in the
Company's operating performance in 2000.
On March 1, 2000, the Company entered into a $20 million financing transaction
collateralized by its Cincinnati facility and secured by a loan guaranty from
Solvay America. The proceeds from this financing were utilized to pay off the
facility's existing $7.7 million mortgage and to pay the second $7.5 million
required under the Schein settlement agreement. The $4.8 million balance was
utilized to pay down trade creditors and reduce amounts owed under the Company's
revolving line of credit.
Subsequent to the financing and as of March 29, 2000 the Company's borrowing
capacity under its revolving credit facility was $17.3 million of which the
Company has utilized $14.4 million, leaving a net availability of $2.9 million.
See "Available Funds" for a discussion of the Company's current financial
condition.
- 28 -
<PAGE> 30
ANALYSIS OF CASH FLOWS (amounts in millions)
1999 1998 1997
---- ---- ----
Net Cash Used In Operating Activities $(34.7) $(16.1) $(14.3)
Net Cash Used For Investing Activities (5.5) (1.5) (1.6)
Net Cash Provided by Financing Activities 40.2 17.6 14.1
------ ------ ------
Net Change in Cash and Cash Equivalents -- -- (1.8)
Cash and Cash Equivalents at Beginning of Period -- -- 1.8
------ ------ ------
Cash and Cash Equivalents at End of Period $ -- $ -- $ --
====== ====== ======
Supplemental Cash Flow Disclosures:
Interest Paid $ 3.0 $ 2.0 $ 1.4
Income Taxes Paid -- -- --
Operating Activities
In 1999 the Company had a net operating loss of $51.0 million and cash used in
operating activities of $34.7 million. Cash used in operating activities
included a $13.1 million increase in inventory resulting from the stocking of
new products, principally Cenestin and Apri. Accounts payable and accrued
expenses increased substantially due to increased spending levels related to the
brand marketing program for Cenestin, to the $15 million settlement with Schein
and to $5.8 million of net deferred Cenestin revenue. As a result of the
Company's continued investment in working capital, the Company had $42.5 million
in receivables and inventory at December 31, 1999.
In 1998 the Company had a net operating loss of $8.4 million and cash used in
operating activities of $16.1 million. Cash used in operating activities
included a $9.4 million increase in inventory resulting from the stocking of new
products, both Duramed produced products as well as products sourced through
other manufacturers. In 1997, net cash used in operating activities primarily
related to funding of operating losses resulting from the Company's continued
commitment to product development. Inventory decreased in 1997 principally due
to the write-off of $3,465,000 in conjugated estrogens inventory. Prepaid
expense increased and accounts payable decreased due to a change in terms under
a distribution agreement, whereby the Company was required to prepay for product
purchases in excess of an established credit limit. Additionally, prepaid
expenses increased in 1997 due to amounts paid on Warner-Lambert's behalf for
which the Company was subsequently reimbursed.
Investing Activities
In 1999 capital expenditures were $5.5 million. Expenditures included
renovations to the Cincinnati, Ohio manufacturing facility to accommodate
packaging equipment acquired for Apri, computer hardware and continued
improvements to the Company's Somerset, New Jersey facility. The $1.5 million in
capital expenditures in 1998 included renovating the manufacturing portion of
the Somerset facility to incorporate updates necessary for manufacturing of
controlled substances. In 1997, capital expenditures of $1.6 million included an
expansion of the laboratory facilities at the Somerset facility.
- 29 -
<PAGE> 31
Financing Activities
Financing activities funded the Company's operations for 1997-1999 including:
1) Issuances of Convertible Preferred Stock raised $11.4 million in 1998 and
$9.6 million in 1997.
2) Long-term borrowings including term notes and capital equipment leases
added $11.2 million, $6.8 million and $9.1 million in 1999, 1998 and 1997,
respectively. 1999 long-term borrowing facilities included a new $7.0
million term note with Bank of America. 1997 borrowings included a term
loan supported by a Warner Lambert loan guarantee agreement. These funds
were offset by payment of long-term debt in each of the three years.
3) Solvay Pharmaceuticals purchased 3,000,000 shares of Common Stock of
Duramed which provided net proceeds of $25.7 million in the fourth quarter
of 1999.
4) Increased borrowings under the Company's revolving credit facility
provided $3.9 million, $6.2 million and $4.5 million in 1999, 1998 and
1997, respectively.
In June 1997, the Company raised $10.0 million ($9.5 million net of issuance
costs) through an offering of 100,000 shares of Series E Mandatory Redeemable 5%
Cumulative Convertible Preferred Stock ("Series E Preferred Stock"). As of
December 31, 1997, $9.85 million of Series E Preferred Stock had been converted
into Common Stock. Subsequent to December 31, 1997 the remaining $150,000 of
Series E Preferred Stock was converted into 2,881 shares of Common Stock and
$176,099 was redeemed in cash. The Company issued 2,956,246 shares of Common
Stock in connection with conversions of Series E Preferred Stock at an average
conversion price of $3.47 per share.
In February 1998, the Company raised $12.0 million ($11.4 million net of
issuance cost) through an offering of 120,000 shares of Series F Mandatory
Redeemable 5% Cumulative Convertible Preferred Stock ("Series F Preferred
Stock"). As of December 31, 1999, $7.1 million of Series F Preferred Stock had
been converted into Common Stock. Subsequent to December 31, 1999 the remaining
$4.9 million of Series F Preferred Stock was converted into Common Stock. The
Company issued 4,088,622 shares of Common Stock in connection with the
conversion of the Series F Preferred Stock, at an average conversion price of
$3.07 per share.
On August 4, 1999, the Company entered into a second four-year term loan with
Bank of America in the amount of $7.0 million. Pursuant to the terms of the
agreement, the new term note is being repaid in monthly installments and bears
an interest rate of prime plus 1.25%. The term note is collateralized by the
intangible assets of the Company.
In September 1997, the Company entered into a long-term manufacturing agreement
with Warner-Lambert. Under the terms of the agreement, Duramed would manufacture
a brand name pharmaceutical product for Warner-Lambert, following the products
development and approval by the FDA. In addition, Warner-Lambert guaranteed
a promissory note mortgage loan in the amount of $8.5 million, which was secured
by the Company's manufacturing facility. This loan guaranty has subsequently
been replaced by a $20.0 million guaranty from Solvay America.
- 30 -
<PAGE> 32
On October 6, 1999 Solvay Pharmaceuticals was granted the option to purchase
3,000,000 shares of Duramed Common Stock at $9.00 per share. Solvay
Pharmaceuticals exercised this option by purchasing 1,666,666 shares on October
22, 1999 and the remaining 1,333,334 shares on December 30, 1999. Pursuant to
the terms of this financing, Duramed will create an additional position on
Duramed's board of directors to be filled as designated by Solvay
Pharmaceuticals at the Company's next Annual Meeting.
The term of the Company's financing agreement with Bank of America 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.
AVAILABLE FUNDS
Additional funds will be required to meet existing obligations resulting from
the 1999 Cenestin launch and, depending on the continued rate of growth of key
products, to satisfy 2000 operating requirements.
The amount of additional financing required by the Company is dependent upon
several factors including: (1) the rate and growth in sales and profits from
products approved by the FDA in recent months, principally Cenestin and Apri;
(2) the ability of the Company to maintain the current business base as well as
the success of other aspects of its business plan; and, (3) any proceeds
received from the exercise of stock options and warrants.
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.
A critical aspect of managing the Company's current financial situation is the
continued support of the Company's unsecured creditors. Management believes 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 existing obligations and execute its business plan.
The Company is exploring various capital raising alternatives which may include
raising additional equity capital.
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. At this time no definitive agreements have been reached and a
failure to obtain necessary funding could have a materially adverse effect on
Duramed and its prospects and business plan.
- 31 -
<PAGE> 33
The Company's net worth at December 31, 1999 did not meet the net worth
requirements of the Nasdaq National Market for continued listing of the
Company's Common Stock. The Company intends to request an exemption to permit
continued listing on the Nasdaq National Market. If this request is not
granted, trading will continue in the over-the-counter market. Loss of Nasdaq
National Market listing could have an adverse effect on the liquidity of
outstanding shares and on the ability of the Company to raise funds through
the issuance of additional shares of Common Stock.
SEASONALITY
Certain of the Company's generic products have a degree of seasonality, the
effect of which the Company attempts to mitigate by adding complementary
products to its line.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS.
The information required by Item 7A is included in Item 7 under "Net Interest
Expense and Interest Rate Risk" of this Form 10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The following financial statements are included in this report on Form 10-K:
Page
----
Report of Independent Auditors .......................................... F-1
Consolidated Balance Sheets as of December 31, 1999 and 1998 ............ F-2
Consolidated Statements of Operations for the Years Ended
December 31, 1999, 1998 and 1997 ...................................... F-4
Consolidated Statements of Stockholders' Equity/(Capital Deficiency)
for the Years Ended December 31, 1999, 1998 and 1997 .................. F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997 ...................................... F-6
Notes to Consolidated Financial Statements .............................. F-7
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
- 32 -
<PAGE> 34
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
DIRECTORS
The Company's corporate powers are exercised, and its business, property and
affairs are managed, by or under the direction of the Board of Directors.
Directors of the Company are elected at the Annual Meeting of Stockholders.
Currently there are six directors. Set forth below is certain information with
respect to each director.
E. THOMAS ARINGTON, age 63. Mr. Arington has been President, Chief Executive
Officer and a director of the Company since 1987 and Chairman of the Board since
1988. Prior to joining the Company, he was President of MarketMaster, Inc., a
health care consulting firm which was acquired by the Company in 1987. Mr.
Arington's career has also included 17 years with Lederle Laboratories, a
division of American Cyanamid, where he held a variety of executive management
positions.
JEFFREY T. ARINGTON, age 39. Mr. Arington has been Senior Vice President,
Marketing, Sales and Science of the Company since 1995 and a director since
1998. He served as the Company's Senior Vice President, Marketing, Science and
Operations from 1994 until 1995, as Vice President, Sales and Marketing from
1989 until 1994 and as Executive Director of Sales and Marketing from 1987 until
1989. From 1984 until 1987, he was employed by MarketMaster. Jeffrey T. Arington
is E. Thomas Arington's son.
GEORGE W. BAUGHMAN, age 62. Mr. Baughman has been a director of the Company
since 1989. Mr. Baughman has been President and Chairman of Advanced Research
Associates, a consulting firm specializing in information systems and technology
and in financial analysis and planning, for more than the past five years. He
was employed by The Ohio State University for twenty-five years, retiring as
Director of Special Projects, Office of President.
RICHARD R. FRANKOVIC, age 57. Mr. Frankovic is a pharmaceutical industry
consultant, having recently retired from Rugby Laboratories where he was
employed since 1980 and served as President from 1984-1998. Earlier in his
career, Mr. Frankovic was employed by Lederle Laboratories, a division of
American Cyanamid, where he held a variety of management positions.
PETER R. SEAVER, age 56. Mr. Seaver has been a director of the Company since
1998. Mr. Seaver has been President of the Health Care Group of Kaleidoscope
Television, Inc., a health care cable company, since 1997. He joined
Kaleidoscope Television following a thirty-year career with The Upjohn Company,
a pharmaceutical manufacturer, where he held a variety of management and
executive positions, including serving as Vice President of Marketing from 1987
until 1989, as Corporate Vice President of Worldwide Pharmaceutical Marketing
from 1989 until 1995 and as Corporate Vice President of Health Care Policy
during 1996.
S. SUNDARARAMAN, age 63. Mr. Sundararaman is the Company's Secretary and has
been a director of the Company since 1982. Mr. Sundararaman is Manager, Sales
Automation and Distribution, USA for Lufthansa German Airlines and has been with
that company since 1961.
- 33 -
<PAGE> 35
EXECUTIVE OFFICERS
The current executive officers of the Company are as follows:
Name Age Title
- ---- --- -----
E. Thomas Arington 63 Chairman of the Board, President and
Chief Executive Officer
S. Sundararaman 63 Secretary and Director
Jeffrey T. Arington 39 Senior Vice President, Marketing,
Sales and Science and Director
Timothy J. Holt 47 Senior Vice President, Finance and Administration,
Treasurer and Chief Financial Officer
Information about Messrs. E. Thomas Arington, Jeffrey T. Arington and
S. Sundararaman is given above. Information about the Company's other executive
officer is as follows:
TIMOTHY J. HOLT. Mr. Holt has been Senior Vice President, Finance and
Administration of the Company since 1994. He served as Vice President, Finance
of the Company from 1985 to 1994. Prior to joining the Company in 1985, Mr. Holt
was Vice President-Finance and Chief Financial Officer of Vortec Corporation, a
then publicly held company operating in the fields of specialty manufacturing
and home health care equipment, and also held financial management positions
with privately held companies including Eagle Software Publishing.
Officers of the Company are elected by, and serve at the discretion of, the
Board of Directors.
- 34 -
<PAGE> 36
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
executive officers and directors, and persons who beneficially own more than ten
percent of the Company's equity securities, to file reports of security
ownership and changes in such ownership with the Securities and Exchange
Commission (the "SEC"). Officers, directors and greater than ten-percent
beneficial owners also are required by SEC regulations to furnish the Company
with copies of all Section 16(a) forms they file. Based upon a review of copies
of such forms, the Company believes that all Section 16(a) filing requirements
were complied with on a timely basis during and for 1999 except that sales made
by Mr. E. Thomas Arington in March 1999 totaling 25,000 shares of Common Stock
were reported in May 1999 instead of in April 1999; options automatically
granted during 1999 to Messrs. Sundararaman, Baughman and Seaver pursuant to the
Company's Stock Option Plan for Nonemployee Directors were reported in March
2000 instead of on their February 2000 Forms 5; and a gift of 1,600 shares of
Common Stock to a trust for the benefit of a child of Mr. Jeffrey T. Arington
was reported in March 2000 instead of on his February 2000 Form 5.
ITEM 11. EXECUTIVE COMPENSATION.
SUMMARY INFORMATION. The following table sets forth, for the fiscal years
indicated, amounts of cash and certain other compensation paid by the Company to
(i) Mr. E. Thomas Arington and
(ii) each of the Company's other executive officers at the end of 1999 whose
salary and bonus exceeded $100,000. Mr. Arington and these other persons
are sometimes referred to as the "named executive officers."
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Compensation
Annual Compensation Awards
-------------------------------------------------- ------------
Securities
Other Underlying
Annual Stock Option All Other
Name and Salary Bonus Compensation Grants Compensation
Principal Position Year ($) ($) ($)(1) (#) ($)(2)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
E. Thomas Arington 1999 $500,000 -- -- 280,714 $29,018
Chairman of the Board, President 1998 500,000 -- -- 175,000 62,669
Chief Executive Officer 1997 519,234 -- -- -- 43,423
Jeffrey T. Arington 1999 $207,500 -- -- 25,000 $ 3,508
Senior Vice President 1998 177,250 -- -- 23,000 3,200
Marketing, Sales and Science 1997 163,365 -- -- 22,000 3,207
Timothy J. Holt 1999 $195,000 -- -- 25,000 $ 3,920
Senior Vice President 1998 172,250 -- -- 20,000 3,920
Finance and Treasurer 1997 163,365 -- -- 20,000 3,802
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
- 35 -
<PAGE> 37
(1) None, other than perquisites which did not exceed the lesser of $50,000
or 10% of salary or bonus for any named executive officer.
(2) Amounts disclosed for 1999 are comprised of the following: (i) term
and/or whole life insurance premium payments for the benefit of Mr. E.
Thomas Arington ($19,366), Mr. Jeffrey T. Arington ($308), and Mr. Holt
($720); (ii) disability insurance premium payments for Mr. E. Thomas
Arington ($6,452); and (iii) matching contributions to the Company's
401(k) Plan on behalf of Mr. E. Thomas Arington ($3,200), Mr. Jeffrey T.
Arington ($3,200) and Mr. Holt ($3,200) in respect of their contributions
to the Plan.
- 36 -
<PAGE> 38
STOCK OPTIONS. The following table presents information on option grants during
1999 to the named executive officers. The Company's plans do not provide for the
grant of stock appreciation rights.
<TABLE>
<CAPTION>
OPTION GRANTS IN LAST FISCAL YEAR
Individual Grants(1)
Potential Realizable
Value at Assumed
Number of Annual Rates of Stock
Securities % of Total Price Appreciation for
Underlying Options Exercise Option Term
Options Granted to or Base ----------------------
Granted Employees in Price Expiration
Name (#) Fiscal Year ($/Sh) Date 5% ($) 10% ($)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
E. Thomas Arington 280,714 45.6% $ 7.000 3/24/09 $1,235,777 $3,131,701
Jeffrey T. Arington 25,000 4.1% $13.125 6/15/09 $ 206,356 $ 522,947
Timothy J. Holt 25,000 4.1% $13.125 6/15/09 $ 206,356 $ 522,947
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) All options become exercisable at the rate of 20% of the shares per
year beginning on the first anniversary of the date of grant. Each
option becomes exercisable in full (i) if any person becomes, or
commences a tender offer which could result in the person becoming, the
beneficial owner of more than 50% of the outstanding shares of the
Company's Common Stock or (ii) in the event of the execution of an
agreement of merger, consolidation or reorganization pursuant to which
the Company is not to be the surviving corporation or the execution of
an agreement of sale or transfer of all or substantially all of the
assets of the Company. Under certain change-of-control circumstances,
an optionee will be entitled to receive a cash payment equal to the
difference between the "fair value" of all unexercised option shares
and the aggregate option price of those shares.
With respect to each named executive officer, the following table sets forth
information concerning option exercises during 1999 and unexercised options held
at December 31, 1999.
- 37 -
<PAGE> 39
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
and FY-End Option Values
<TABLE>
<CAPTION>
Value of Unexercised
Value Realized Number of Securities In-the-Money
($) Underlying Unexercised Options at FY-End
Options at FY-End (#) ($)
(Market Price on
Shares Acquired Exercise Less Exercisable/ Exercisable/
Name on Exercise (#) Exercise Price) Unexercisable Unexercisable
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
E. Thomas Arington 500,000 $2,935,000 803,343/520,714 $2,560,709/$457,589
Jeffrey T. Arington -- -- 134,701/47,300 $641,582/$67,194
Timothy J. Holt -- -- 112,534/42,800 $512,697/$53,805
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
COMPENSATION OF DIRECTORS. During 1999, nonemployee directors of the Company
received an annual fee of $30,000. Of the annual fee, $12,000 was paid in
Duramed Common Stock and the remainder was paid in cash. Non-employee directors
also received fees of $1,500 for each Board meeting attended, plus reimbursement
of expenses, and fees of $600 for each Board meeting held by conference
telephone. Fees of $1,000 are also paid for committee meetings attended and held
on a date other than a Board meeting date. During 1999, there were no committee
meetings held on a separate date from a Board meeting date. No fees are paid to
directors who are also employees of the Company. Each nonemployee director also
is annually awarded nondiscretionary options to purchase 5,000 shares of the
Company's Common Stock and is reimbursed by the Company for up to $7,500 per
year in legal and financial consulting expenses.
The Company has an unfunded pension plan covering nonemployee directors elected
prior to 1998 who have served on the Board for at least five years and
nonemployee directors elected 1998 or after who have served on the Board for at
least ten years. No director who is, or at any time during the five years prior
to the end of service as a director was, an employee of the Company may
participate in the plan. With certain exceptions for current long-serving
directors, the plan provides an annual benefit, payable monthly for a period of
ten years from the time a participating director ceases to be a member of the
Board, equal to 50% of the director's most recent annual Board fee, as adjusted
annually to reflect changes in the Consumer Price Index. The right of a director
to receive benefits under the plan is forfeited if the director engages in any
activity determined by the Board to be contrary to the best interests of the
Company.
- 38 -
<PAGE> 40
CHANGE IN CONTROL CONTINGENT EMPLOYMENT AGREEMENTS. The Company has entered
into Change in Control Contingent Employment Agreements with Mr. Jeffrey T.
Arington and Mr. Holt. In the event of a "change in control" of the Company, as
defined in the agreements, the Company agrees to continue the employment of the
employee for twenty-four months, following the date of the change in control.
EMPLOYMENT AGREEMENT. On March 30, 1994, the Company entered into an Amended and
Restated Employment Agreement (the "Agreement") with Mr. E. Thomas Arington. The
initial term of the Agreement expired on December 31, 1998; however, the
Agreement provides for automatic annual extension if notice of termination is
not given by either party prior to specified dates. No notice has been given.
Therefore, the effect of the Agreement is to continue with subsequent "rolling
three year" minimum terms. The Agreement may be amended by agreement between the
Compensation Committee of the Board of Directors and Mr. Arington.
Under the Agreement, Mr. Arington is to receive a salary in an amount to be set
by the Compensation Committee, but not less than $33,333 per month. Mr.
Arington's salary was set at $500,000 for 1999. Bonuses may be paid in such a
manner and amount as the Compensation Committee determines from time to time.
The Agreement provides for life and disability insurance for certain other
customary benefits. Options to purchase 254,685 shares of Common Stock
previously granted to Mr. Arington are continued by the Agreement. If Mr.
Arington's employment is voluntarily terminated by him, or if he is terminated
by the Company with cause, the Agreement provides that he will not compete with
the Company for a period of one year after termination.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION. Mr. E. Thomas
Arington, the Company's Chief Executive Officer, determined the 1999 salaries of
the Company's other named executive officers, taking into consideration the
target range for total cash compensation established by the Compensation
Committee.
- 39 -
<PAGE> 41
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth, as of March 24, 2000, certain information with
regard to the beneficial ownership of the Company's Common Stock by (i) each of
the Company's stockholders known to hold more than 5% of the outstanding shares
of Common Stock, (ii) each director and each executive officer named on the
Summary Compensation Table, individually, and (iii) all directors and executive
officers of the Company as a group.
Name Beneficial Ownership
---- ------------------------------
Number Of Shares (1) Percent
-------------------- -------
Solvay Pharmaceuticals, Inc. (2) 3,000,000 11.4%
901 Sawyer Road
Marietta, GA 30062
E. Thomas Arington 1,862,513 6.8%
7155 East Kemper Road
Cincinnati, OH 45249
Jeffrey T. Arington 180,772 *
George W. Baughman 89,288 *
Richard R. Frankovic 10,418 *
Timothy J. Holt 135,241 *
Peter R. Seaver 31,288 *
S. Sundararaman 225,004 *
All directors and 2,534,524 9.2%
executive officers
as a group (7 persons)
*Less than one percent.
- --------------
(1) Excludes shares of Common Stock subject to options which cannot be
exercised within 60 days after March 24, 2000. Includes options to
purchase the following numbers of shares: Mr. E. Thomas Arington, Mr.
Jeffrey T. Arington, 137,101 shares; 994,486 shares; Mr. Baughman,
35,000 shares; Mr. Frankovic, 10,000 shares; Mr. Holt, 114,534 shares;
Mr. Seaver, 25,000 shares; Mr. Sundararaman, 30,000 shares; and all
directors and executive officers as a group, 1,346,121 shares.
- 40 -
<PAGE> 42
(2) In connection with its acquisition of shares of the Company, Solvay
Pharmaceuticals agreed, that, until October 1, 2001, it will not (i)
acquire any material assets or equity securities of the Company except
pursuant to a stock split or dividend or other similar transaction,
(ii) make or participate in any solicitation of proxies to vote in
opposition to any matter that has been recommended by the Company's
Board, in favor of a matter that has not been approved by the Board or
participate in an election contest, (iii) form or join any group with
respect to any of the Company's shares or the acquisition of any of its
assets, (iv) deposit any shares into a voting trust, (v) seek the
election or removal of a member of the Company's Board of Directors, or
(vi) solicit, negotiate or otherwise make or cause to be made a
statement or proposal with respect to a merger or acquisition of the
Company, the sale of a substantial portion of the Company's assets or
the recapitalization of the Company. In addition, until October 1,
2001, Solvay Pharmaceuticals has agreed not to sell or otherwise
transfer its shares to a third party if, as a result of the transfer,
the third party would hold more than 5% of the Company's outstanding
shares. Finally, until October 1, 2001, if the Company notifies Solvay
Pharmaceuticals that it is in the process of carrying out a private or
public sale of equity, Solvay Pharmaceuticals has agreed not to sell or
otherwise dispose of any of its shares until 90 days after that sale of
securities by the Company.
Each of the restrictions agreed to by Solvay Pharmaceuticals will be
suspended if (i) any third party seeks to acquire 50% or more of the
Company's outstanding shares and the Company has not publicly
recommended that the offer not be accepted, (ii) the Company has
received an acquisition proposal from a third party and has not
rejected the proposal, (iii) there has been a change in control of the
Company, including the execution of an agreement that would result in a
change of control, (iv) the Company publicly announces that it is for
sale, (v) a person or group attempts to elect or remove a majority of
the Company's directors which is not publicly opposed by the Company
and which would result in a change in composition of a majority of the
Board, or (vi) the Company adopts a plan of liquidation or dissolution.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Mr. Philip B. Arington is employed by the Company as its Senior Director of
Sales and Marketing. His total compensation for 1999 was approximately $103,000.
Mr. Christopher H. Arington is employed by the Company as its Director of Sales
Operations. For 1999, his total compensation was approximately $85,000. Mr.
Philip B. Arington and Mr. Christopher H. Arington are sons of Mr. E. Thomas
Arington, the Company's Chairman of the Board and Chief Executive Officer.
- 41 -
<PAGE> 43
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. All financial statements filed as a part of this report on Form 10-K are
listed under Item 8, above.
2. The following financial statement schedule is filed herewith:
Page
----
Valuation and Qualifying Accounts S-1
All other schedules are omitted because of the absence of conditions under which
they are required or because the information is shown in the financial
statements or notes thereto.
(b) Reports on Form 8-K: None
(c) Exhibits
Exhibit Number Description
- -------------- -----------
3.1 Certificate of Incorporation (a)
3.2 By-Laws (b)
4.1 Certificate of Designation, Preferences and Rights of Series A
Preferred Stock (c)
4.2 Rights Agreement between Duramed Pharmaceuticals, Inc. and The
Provident Bank as Rights Agent dated as of August 17, 1988 (d)
4.3 Amendment dated as of August 12, 1998 to Rights Agreement (e)
10.1 Loan and Security Agreement dated November 6, 1998, between
NationsCredit Commercial Corporation through its NationsCredit
Commercial Funding Division and the Company (f)
10.2 First Amendment to Loan and Security Agreement dated
November 6, 1998 (g)
10.3 Promissory Note dated as of February 28, 2000, by Duramed
Pharmaceuticals, Inc. to The Provident Bank, in the principal
sum of $8,000,000
10.4 Promissory Note dated as of February 28, 2000, by Duramed
Pharmaceuticals, Inc. to The Provident Bank, in the principal
sum of $12,000,000
10.5 Open-End Mortgage dated as of February 28, 2000, by Duramed
Pharmaceuticals, Inc. to The Provident Bank
10.6 Guaranty Agreement dated as of February 25, 2000, between The
Provident Bank and Solvay America, Inc.
10.7 Reimbursement Agreement dated as of February 25, 2000, between
Solvay America, Inc. and Duramed Pharmaceuticals, Inc.
10.8 Form of warrant issued to shareholders of Hallmark
Pharmaceuticals, Inc. (h)
10.9 Lease by and between the Company and Warner Lambert Company
dated as of September 24, 1997 (i)
- 42 -
<PAGE> 44
10.10 Marketing Agreement dated January 27, 2000 between the Company
and Solvay Pharmaceuticals, Inc.
10.11 Executive Compensation Plans and Arrangements
(i) Amended and Restated Employment Agreement dated as
of March 30, 1994 between the Company and E. Thomas
Arington (j)
(ii) Life and disability insurance policies for the
benefit of E. Thomas Arington (k)
(iii) Life insurance policy for the benefit of Timothy J.
Holt (k)
(iv) 1988 Stock Option Plan (l)
(v) 1991 Stock Option Plan for Nonemployee Directors (m)
(vi) 1997 Stock Option Plan (n)
(vii) 1999 Nonemployee Director Stock Plan (b)
(viii) Form of Change in Control Contingent Employment
Agreement
23 Consent of Independent Auditors
24 Powers of Attorney
27 Financial Data Schedule
- 43 -
<PAGE> 45
(a) Filed as an Exhibit to Registration Statement No. 33-8215-C and incorporated
herein by reference.
(b) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the year
ended December 31, 1998 and incorporated herein by reference.
(c) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the year
ended December 31, 1988 and incorporated herein by reference.
(d) Filed as an Exhibit to the Company's Current Report on Form 8-K, Date of
Report August 28, 1988, and incorporated herein by reference.
(e) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q/A for the
quarter ended June 30, 1998 and incorporated herein by reference.
(f) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998 and incorporated herein by reference.
(g) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1999 and incorporated herein by reference.
(h) Filed as an Exhibit to the Company's Registration Statement on Form S-4, No.
333-06901, and incorporated herein by reference.
(i) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997 and incorporated herein by reference.
(j) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the year
ended December 31, 1993 and incorporated herein by reference.
(k) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the year
ended December 31, 1992 and incorporated herein by reference.
(l) Filed as an Exhibit to the Company's Proxy Statement relating to the 1993
Annual Meeting of Stockholders and incorporated herein by reference.
(m) Filed as an Exhibit to the Company's Proxy Statement relating to the 1998
Annual Meeting of Stockholders and incorporated herein by reference.
(n) Filed as an Exhibit to the Company's Proxy Statement relating to the 1997
Annual Meeting of Stockholders and incorporated herein by reference.
The Company will furnish to the Commission, upon request, its long-term debt
instruments not listed in this Item.
- 44 -
<PAGE> 46
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, as of the 30th day of
March 2000.
DURAMED PHARMACEUTICALS, INC.
BY: /s/ E. Thomas Arington
--------------------------------
E. Thomas Arington
President, Chairman of the Board
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated as of the 30th day of March 2000.
Signatures Title
/s/ E. Thomas Arington President, Chairman of the Board
- --------------------------------- Chief Executive Officer
E. Thomas Arington
/s/ Jeffrey T. Arington Director, Senior Vice President
- --------------------------------- Marketing, Sales and Science
Jeffrey T. Arington
/s/ George W. Baughman* Director
- ---------------------------------
George W. Baughman
/s/ Richard R. Frankovic* Director
- ---------------------------------
/s/ Timothy J. Holt Senior Vice President
- --------------------------------- Finance and Administration, Treasurer and
Timothy J. Holt Chief Financial Officer
/s/ Peter R. Seaver* Director
- ---------------------------------
Peter R. Seaver
/s/ S. Sundararaman* Director and Secretary
- ---------------------------------
S. Sundararaman
*Pursuant to Power of Attorney
/s/ Timothy J. Holt
- ---------------------------------
Timothy J. Holt, Attorney-in-Fact
- 45 -
<PAGE> 47
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Duramed Pharmaceuticals, Inc.
We have audited the accompanying consolidated balance sheets of Duramed
Pharmaceuticals, Inc. as of December 31, 1999 and 1998, and the related
consolidated statements of operations, stockholders equity (capital deficiency)
and cash flows for each of the three years in the period ended December 31,
1999. Our audits also included the financial statement schedule listed in
the index at Item 14(a). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Duramed
Pharmaceuticals, Inc. at December 31, 1999 and 1998, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1999, in conformity accounting principles generally
accepted in the United States. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material respects,
the information set forth therein.
/s/ Ernst & Young LLP
Cincinnati, Ohio
March 29, 2000
F-1
<PAGE> 48
DURAMED PHARMACEUTICALS, INC.
Consolidated Balance Sheets
Assets
December 31, 1999 1998
- --------------------------------------------------------------------------------
Current assets:
Cash and cash equivalents $ 4,000 $ 3,500
Trade accounts receivable,
less allowance for doubtful
accounts: 1999 - $951,000
1998 - $903,000 9,610,307 10,330,816
Inventories 32,910,493 19,786,705
Prepaid expenses and other assets 6,681,892 2,803,460
----------- -----------
Total current assets 49,206,692 32,924,481
----------- -----------
Property, plant and equipment - net 29,939,602 27,229,828
----------- -----------
Deposits and other assets 1,627,123 1,270,041
----------- -----------
$80,773,417 $61,424,350
=========== ===========
See accompanying notes.
F-2
<PAGE> 49
DURAMED PHARMACEUTICALS, INC.
Consolidated Balance Sheets
Liabilities, Mandatory Redeemable Convertible Preferred Stock
and Stockholders' Equity/(Capital Deficiency)
<TABLE>
<CAPTION>
December 31, 1999 1998
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current liabilities:
Accounts payable $ 11,391,954 $ 4,370,181
Accrued liabilities 28,459,817 5,524,574
Current portion of long-term debt
and other liabilities 5,783,232 3,384,860
Current portion of capital lease obligations 992,531 708,891
------------- ------------
Total current liabilities 46,627,534 13,988,506
------------- ------------
Long-term debt, less current portion 29,720,761 22,718,408
Long-term capital leases, less current portion 1,835,023 441,632
------------- ------------
Total liabilities 78,183,318 37,148,546
------------- ------------
Mandatory redeemable convertible preferred stock 4,900,000 7,700,000
------------- ------------
Stockholders' equity/(capital deficiency):
Common stock - authorized 50,000,000
shares, par value $.01; issued and outstanding
24,808,591 and 19,811,178 shares in 1999 and 1998,
respectively 248,085 198,111
Additional paid-in capital 126,882,751 94,795,906
Accumulated deficit (129,440,737) (78,418,213)
------------- ------------
Total stockholders' equity/(capital deficiency) (2,309,901) 16,575,804
------------- ------------
$ 80,773,417 $ 61,424,350
============= ============
</TABLE>
See accompanying notes.
F-3
<PAGE> 50
DURAMED PHARMACEUTICALS, INC.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year ended December 31, 1999 1998 1997
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 50,219,878 $ 49,759,285 $ 44,296,444
Cost of goods sold 39,759,108 37,333,632 33,468,376
------------ ------------ ------------
Gross profit 10,460,770 12,425,653 10,828,068
------------ ------------ ------------
Operating expenses:
Product development 7,258,314 5,282,167 15,961,150
Brand marketing expenses 20,909,227 -- --
Selling 2,504,444 3,428,100 3,182,290
General and administrative 12,259,450 9,752,471 7,726,830
Litigation settlement 15,000,000 -- --
------------ ------------ ------------
57,931,435 18,462,738 26,870,270
------------ ------------ ------------
Operating loss (47,470,665) (6,037,085) (16,042,202)
Net interest expense 3,551,859 2,359,408 1,399,114
------------ ------------ ------------
Net loss (51,022,524) (8,396,493) (17,441,316)
Preferred stock dividends 255,445 517,343 170,023
Deemed dividend on convertible
preferred stock -- 4,873,000 4,835,000
------------ ------------ ------------
Net loss applicable to
common stockholders $(51,277,969) $(13,786,836) $(22,446,339)
============ ============ ============
Basic and diluted loss per share $ (2.36) $ (0.76) $ (1.45)
============ ============ ============
</TABLE>
See accompanying notes.
F-4
<PAGE> 51
DURAMED PHARMACEUTICALS, INC.
Consolidated Statements of Stockholders' Equity/(Capital Deficiency)
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional
----------------------------------------- Paid-In Accumulated
Series B Shares Amount Capital Deficit Total
---------------------------------------- ----------------- ------------------ ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE - DECEMBER 31, 1996 $ 6 14,603,516 $146,035 $ 80,073,586 $ (52,580,404) $ 27,639,223
Issuance of stock in connection
with compensation plans -- 37,196 372 198,891 -- 199,263
Issuance of stock in connection
with stock options -- 137,251 1,372 313,259 -- 314,631
Issuance of stock in settlement
of certain liabilities -- 89,369 894 892,800 -- 893,694
Conversion of Series B
Preferred Stock (6) 60,590 606 (600) -- --
Conversion of Series E
Preferred Stock Net -- 2,953,365 29,533 9,420,682 -- 9,450,215
Net loss for 1997 -- -- -- -- (17,441,316) (17,441,316)
Preferred Stock dividends -- -- -- (170,023) -- (170,023)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE - DECEMBER 31, 1997 -- 17,881,287 178,812 90,728,595 (70,021,720) 20,885,687
Issuance of stock in connection
with compensation plans -- 51,121 511 236,577 -- 237,088
Issuance of stock in connection
with stock options -- 73,967 740 173,249 -- 173,989
Conversion of Series E
Preferred Stock Net -- 2,881 29 -- -- 29
Conversion of Series F
Preferred Stock Net -- 1,801,922 18,019 4,174,828 -- 4,192,847
Net loss for 1998 -- -- -- -- (8,396,493) (8,396,493)
Preferred Stock dividends -- -- -- (517,343) -- (517,343)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE - DECEMBER 31, 1998 -- 19,811,178 198,111 94,795,906 (78,418,213) 16,575,804
Issuance of stock in connection
with compensation plans -- 47,260 472 393,709 -- 394,181
Issuance of stock in connection
with stock options -- 950,762 9,508 3,340,536 -- 3,340,536
Issuance of stock in settlement
of certain liabilities -- 6,611 66 99,925 -- 99,991
Conversion of Series F
Preferred Stock Net -- 992,780 9,928 2,792,370 -- 2,802,298
Issuance of stock in connection
with Solvay Alliance Net -- 3,000,000 30,000 25,715,750 -- 25,745,750
Net loss for 1999 -- -- -- -- (51,022,524) (51,022,524)
Preferred Stock dividends -- -- -- (255,445) -- (255,445)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE - DECEMBER 31, 1999 $-- 24,808,591 $248,085 $ 126,882,751 $(129,440,737) $ (2,309,901)
=== ========== ======== ============= ============= ============
</TABLE>
See accompanying notes.
F-5
<PAGE> 52
DURAMED PHARMACEUTICALS, INC.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31, 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(51,022,524) $ (8,396,493) $(17,441,316)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 3,043,301 2,789,639 2,446,050
Provision for doubtful accounts 184,053 191,694 176,588
Common stock issued in connection with
employee compensation plans 394,181 237,088 199,263
Write off of conjugated estrogens inventory -- -- 3,465,044
Changes in assets and liabilities:
Trade accounts receivable 536,456 (2,414,048) (824,598)
Inventories (13,123,788) (9,350,763) (712,359)
Prepaid expenses and other assets (4,061,420) 45,128 (1,589,809)
Accounts payable 7,021,773 240,469 (113,710)
Accrued liabilities 22,944,378 927,515 126,079
Other (594,454) (418,150) (81,524)
------------ ------------ ------------
Net cash used in operating activities (34,678,044) (16,147,921) (14,350,292)
------------ ------------ ------------
Investing activities:
Capital expenditures (5,385,363) (1,311,698) (1,473,658)
Deposits on capital equipment (133,625) (148,913) (98,665)
------------ ------------ ------------
Net cash used for investing activities (5,518,988) (1,460,611) (1,572,323)
------------ ------------ ------------
Cash flows from financing activities:
Payments of long-term debt,
including current maturities (3,860,800) (6,347,723) (9,036,004)
Net increase in revolving credit facility 3,886,613 6,238,833 4,462,656
Long-term borrowings 11,246,103 6,795,400 9,099,099
Issuance of preferred stock - net -- 11,399,376 9,560,848
Issuance of common stock - Solvay alliance 25,745,750 -- --
Cash redemption of preferred stock -- (149,971) --
Issuance of common stock 3,450,035 173,989 314,631
Dividends paid (270,169) (501,372) (286,297)
------------ ------------ ------------
Net cash provided by financing activities 40,197,532 17,608,532 14,114,933
------------ ------------ ------------
Net change in cash and cash equivalents 500 -- (1,807,682)
Cash and cash equivalents at beginning of period 3,500 3,500 1,811,182
------------ ------------ ------------
Cash and cash equivalents at end of period $ 4,000 $ 3,500 $ 3,500
============ ============ ============
Supplemental cash flow disclosures:
Interest paid $ 2,964,661 $ 1,990,794 $ 1,412,182
</TABLE>
See accompanying notes.
F-6
<PAGE> 53
DURAMED PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A. ACCOUNTING POLICIES
Duramed Pharmaceuticals, Inc. (the "Company" or "Duramed") conducts business in
one segment which develops, manufactures and markets prescription pharmaceutical
products in tablet, capsule and liquid forms to customers throughout the United
States. The Company's product development program is focused on hormonal
therapies and controlled release technology. On March 24, 1999, the FDA granted
Duramed approval to market Cenestin(R) (synthetic conjugated estrogens, A)
Tablets ("Cenestin") for the treatment of moderate to severe vasomotor symptoms
associated with menopause. Cenestin is Duramed's first pharmaceutical product
marketed as a brand product.
A summary of the principal accounting policies followed in preparation of the
consolidated financial statements and related information is set forth below.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its subsidiaries, all of which are wholly owned. Significant intercompany
accounts and transactions have been eliminated in consolidation.
Cash and Cash Equivalents
Duramed considers all investments with a maturity of three months or less as of
the date of purchase to be cash equivalents. As of December 31, 1999, the
Company had no short-term investments classified as cash equivalents. The
Company's 1999 and 1998 cash balances represent only the balances maintained in
internal cash funds.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or
market. Components of inventories include:
December 31,
-----------------------------------
1999 1998
-----------------------------------
Raw materials $17,239,214 $ 8,903,450
Work-in-process 249,211 476,404
Finished goods 23,870,296 19,513,422
Obsolescence reserve (8,448,228) (9,106,571)
----------- -----------
Net inventory $32,910,493 $19,786,705
=========== ===========
F-7
<PAGE> 54
As of December 31, 1999 the Company had recorded $2.0 million shipments of
Cenestin as revenue. Through December 31, 1999 the Company had shipped and
invoiced $10.0 million of Cenestin (net of returns and allowances). $2.0 million
of Cenestin shipments have been recognized as revenue with the balance of $8.0
million carried at cost in inventory.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation and amortization
is provided using principally the straight-line method over the estimated useful
lives of the assets. Major renewals and improvements are capitalized, while
ordinary maintenance and repairs are expensed. Property, plant and equipment
consist of the following:
December 31,
------------------------- Estimated
1999 1998 Useful Life
------------------------- --------------
Land $ 1,000,000 $ 1,000,000
Buildings and improvements 21,204,228 19,285,854 20 to 30 Years
Equipment, furniture and fixtures 28,597,309 25,253,509 3 to 10 Years
----------- -----------
50,801,537 45,539,363
Less accumulated
depreciation and amortization 20,861,935 18,309,535
----------- -----------
$29,939,602 $27,229,828
=========== ===========
Revenue Recognition
The Company generally recognizes revenue for products at the time it ships
products and provides for returns and allowances based upon historical trends.
However, in accordance with the rules governing revenue recognition, the Company
currently is recording shipments of Cenestin as revenue until evidence of
product movement through the distribution system is obtained. Accordingly, $2.0
million in sales of Cenestin was recognized in the fourth quarter of 1999, based
on end-user prescription data. Management believes the Company's approach to
revenue recognition for Cenestin is appropriate due to the limited time Cenestin
has been promoted by the joint Solvay Pharmaceuticals/Duramed sales force (see
Note B), the fact that Cenestin is Duramed's first introduction of a brand
product, the more than 600,000 sample packages that have been supplied to the
sales force and the large pipeline fill of Cenestin.
Product Development Costs
Product development costs are charged to expense when incurred. The reported
costs include specifically identifiable expenses and an allocation of certain
expenses shared with the other departments within the Company.
Advertising Costs
The Company accounts for advertising costs as an expense in the period in which
they are incurred. Advertising expenses relating to Cenestin were $5.0 million
in 1999. Prior to 1999, advertising costs were not incurred.
F-8
<PAGE> 55
Concentration of Risk
The financial instrument that potentially subjects the Company to credit risk is
accounts receivable. The Company sells its products to drug store chains, drug
wholesalers, private label distributors, health maintenance organizations,
hospitals, nursing homes, retiree organizations, mail order distributors, other
drug manufacturers, mass merchandisers and governmental agencies. One customer
accounted for 13% of net sales in 1999 and 9% of receivables as of December 31,
1999. In 1998, two customers accounted for 11% and 10% of net sales and 18% and
11%, respectively, of receivables. The credit risk associated with this
financial instrument is believed by the Company to be limited due to the
relatively large number of customers, their geographic dispersion and the
performance of certain credit evaluation procedures. The Company maintains
credit insurance for its accounts receivable portfolio subject to certain limits
and deductibles.
The drugs and other raw materials used in the Company's products are purchased
through United States distributors from foreign and domestic manufacturers of
bulk pharmaceutical chemicals and are generally available from numerous sources.
The federal drug application process requires specification and approval of raw
material suppliers. If raw materials from all specified suppliers become
unavailable, FDA approval of a new supplier is required, which can cause a delay
of six months or more in the manufacture of the drug involved. To date, the
Company has not experienced any significant delays and generally specifies two
or more suppliers in all drug applications.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
NOTE B. FINANCIAL CONDITION AND BUSINESS PLANS
During the last three years the Company has expended substantial resources
developing and commercializing a conjugated estrogens product. In 1999, Duramed
invested approximately $21 million on the marketing and promotion of Cenestin
and reached a $15 million settlement agreement with Schein Pharmaceutical, Inc.
(see Note K) pertaining to a generic conjugated estrogens product. These
transactions accounted for a substantial portion of the $51 million loss in 1999
which placed a severe strain on the resources of the Company. On March 1, 2000
the Company reached an expanded long-term sales and marketing agreement with
Solvay Pharmaceuticals, Inc. pertaining to Cenestin. Under the terms of the
agreement, Solvay Pharmaceuticals is responsible for all sales, marketing and
promotional expenses associated with Cenestin in exchange for a share of the
product profits. The elimination of the spending on Cenestin sales, marketing
and promotion currently is expected to result in a material improvement in the
Company's operating performance in 2000.
F-9
<PAGE> 56
On March 1, 2000, the Company entered into a $20 million financing transaction
collateralized by its Cincinnati facility and secured by a loan guaranty from
Solvay America, Inc. ("Solvay America"). The proceeds from this financing were
utilized to pay off the facility's existing $7.7 million mortgage (see Note D)
and to pay the second $7.5 million required under the Schein settlement
agreement (see Note K). The $4.8 million balance was utilized to pay down trade
creditors and reduce amounts owed under the Company's revolving line of credit.
Subsequent to the financing and as of March 29, 2000 the Company's borrowing
capacity under this revolving credit facility (see Note D) was $17.3 million of
which the Company has utilized $14.4 million, leaving a net availability of $2.9
million. The Company will need additional funds to meet existing obligations
resulting from the 1999 Cenestin launch and, depending on the continued rate of
growth of key products, to satisfy 2000 operating requirements.
The Company's level of need for additional financing is dependent upon several
factors including: (1) the level and timing of the profit contribution from
products approved by the FDA in recent months, principally Cenestin and Apri, a
generic oral contraceptive product; (2) the ability of the Company to maintain
the current business base as well as the success of other aspects of its
business plan; and, (3) any proceeds received from the exercise of stock options
and warrants.
A critical aspect of managing the Company's current financial situation is the
continued support of the Company's unsecured creditors. Management believes 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 existing obligations and execute its business plan.
The Company is exploring various capital raising alternatives which may include
raising additional equity capital.
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. At this time no definitive agreements have been reached and a
failure to obtain necessary funding could have a materially adverse effect on
Duramed and its prospects and business plan.
F-10
<PAGE> 57
NOTE C. ACCRUED LIABILITIES
The Company's accrued liabilities consist of the following:
December 31,
-------------------------------
1999 1998
----------- ----------
Litigation settlement $ 7,500,000 $ --
Accrued marketing expenses 5,876,198 --
Deferred revenue 5,836,737 --
Accrued profit sharing 2,256,605 545,785
Wages and other compensation 1,991,129 2,087,929
Accrued bio-studies 908,658 136,470
Taxes, other than income taxes 694,860 606,782
Accrued Medicaid rebates 160,000 235,449
Royalty payable -- 462,422
Other 3,235,630 1,449,737
----------- ----------
$28,459,817 $5,524,574
=========== ==========
The $7.5 million represents the balance due for the $15.0 million settlement of
the litigation between the Company and Schein (see Note K).
Deferred revenues reflect amounts collected for shipments of Cenestin net of
returns and allowance less the $2.0 million recognized as revenue in the fourth
quarter of 1999. The Company will record these shipments as revenue as evidence
of product movement through the distribution system is obtained.
The $5.9 million accrued marketing expenses represents the liability for
marketing expenses related to Cenestin.
F-11
<PAGE> 58
NOTE D. DEBT AND MANDATORY REDEEMABLE CONVERTIBLE PREFERRED STOCK
The Company's debt and mandatory redeemable convertible preferred stock consists
of the following:
<TABLE>
<CAPTION>
December 31,
--------------------------------
1999 1998
--------------------------------
<S> <C> <C>
Debt
Revolving credit facility $14,588,102 $10,701,489
Merrill Lynch note payable 7,719,404 8,144,404
Term note 6,416,667 --
Equipment term note 4,303,832 5,564,866
Loan payable to contract sales organization 1,490,051 --
Note payable to strategic alliance partner 544,737 1,081,146
Installment notes payable 55,266 31,270
Other 385,934 580,093
----------- -----------
35,503,993 25,523,175
Less amount classified as current 5,783,232 3,384,860
----------- -----------
$29,720,761 $22,718,408
=========== ===========
Mandatory redeemable
convertible preferred stock $ 4,900,000 $ 7,700,000
</TABLE>
During 1999, the Company financed its operations with borrowings on its
revolving credit facility, the addition of a four-year term loan from Bank of
America Commercial Finance, Commercial Funding Division (formerly NationsCredit
Commercial Corporation) in the amount of $7.0 million and the issuance of Common
Stock.
Debt
The Company's principal lender is Bank of America Commercial Finance ("Bank of
America"). The initial term of the agreement with Bank of America 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% (9.00% at December 31, 1999). The $5,631,913 term note bears an
interest rate of prime plus 0.75% (9.25% at December 31, 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 entered into a second four-year term loan, in the
amount of $7.0 million. Under the terms of the agreement, the new term note
requires monthly principal payments of $229,166 plus interest through November
30, 2000 and $145,833 plus interest for the remaining term of the note. The term
note bears an interest rate of prime plus 1.25% (9.75% at December 31, 1999) and
is collateralized by the intangible assets of the Company.
F-12
<PAGE> 59
The Company had an $8.1 million note payable to Merrill Lynch, which was
guaranteed by the Warner Lambert Company ("Warner Lambert"). Warner Lambert held
a first mortgage on the Company's Cincinnati, Ohio manufacturing facility. The
note subsequently was paid in full by The Provident Bank ("Provident") financing
agreement.
On March 1, 2000 the Company refinanced its existing note payable collateralized
by its Cincinnati, Ohio manufacturing facility with a $12.0 million note and
$8.0 million note payable to Provident, both of which are guaranteed by Solvay
America. Provident holds a first mortgage on the Company's Cincinnati, Ohio
manufacturing facility. The $12.0 million note bears an interest rate of prime
and requires a monthly payment of $100,000 plus interest for a ten-year period
commencing April 1, 2000. The $8.0 million note bears an interest rate of prime
and requires a monthly payment of $33,333 plus interest commencing April 1,
2000. Principal payments are based upon a twenty-year amortization with a
balloon payment due on March 1, 2010 of $4.0 million.
The loan payable to a contract sales organization, initially in the principal
amount of $1,650,000, represents the initial cost to establish the brand sales
force which is representing the Company's brand products (initially Cenestin) to
the physicians community. The firm with which the Company has 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.
At December 31, 1999, maturities of long-term indebtedness for the ensuing five
years were as follows:
Year ending December 31:
Debt
----
2000 $ 5,783,232
2001 3,573,417
2002 17,893,165
2003 1,402,330
2004 871,511
Thereafter 5,980,338
-----------
35,503,993
Less current installments 5,783,232
-----------
$29,720,761
F-13
<PAGE> 60
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. As of February 3, 2000 all of the Series F Preferred Stock had been
converted into 4,088,622 shares of Common Stock at an average price of $3.07 per
share.
NOTE E. LEASES
Aggregate rental expense for the years ended December 31, 1999, 1998, 1997 was
approximately $1,476,000, $1,118,000, and $892,000, respectively. The following
summarizes minimum future lease payments as of December 31, 1999:
Year Ending December 31:
Operating Capital
Leases Leases
---------- ----------
2000 $ 918,957 $1,317,300
2001 793,291 945,790
2002 789,798 794,154
2003 774,059 307,124
2004 563,876 147,208
---------- ----------
Total minimum lease payments $3,839,981 3,511,576
==========
Less amount representing interest 684,022
----------
Present value of net minimum lease 2,827,554
payments
Less current installments 992,531
----------
Obligations under capital leases
less current installments $1,835,023
==========
Assets under capital leases amounted to approximately $9.9 million and $7.3
million in 1999 and 1998, respectively, with related amortization of $4.3
million and $3.6 million.
F-14
<PAGE> 61
NOTE F. EMPLOYEE RETIREMENT PLAN
The Company has a defined contribution plan, the "Duramed Pharmaceuticals, Inc.
401(k)/Profit Sharing Plan," available to eligible employees. The Plan provides
for the Company match to 50% of employee contributions to a maximum of 3% of
each employee's compensation. The Company match of $345,000, $217,000 and
$185,000 in 1999, 1998 and 1997, respectively, was made with the Company's
Common Stock, as permitted by the Plan. The Plan also has a profit sharing
provision at the discretion of the Company's Board of Directors.
The Company has not made a profit sharing contribution to the Plan. All
full-time employees are eligible to participate in the deferred compensation and
Company matching provisions of the Plan. Employees are immediately vested with
respect to the Company matching provisions of the Plan.
The Company has an unfunded pension plan covering nonemployee directors elected
prior to 1998 who have served on the Board for at least five years and
nonemployee directors elected 1998 or after who have served on the Board for at
least ten years. No director who is, or at any time during the five years prior
to the end of service as a director was, an employee of the Company may
participate in the plan. With certain exceptions for current long-serving
directors, the plan provides an annual benefit, payable monthly for a period of
ten years from the time a participating director ceases to be a member of the
Board, equal to 50% of the director's most recent annual Board fee, as adjusted
annually to reflect changes in the Consumer Price Index. As of December 31,
1999, the Company has recorded $386,000 as long-term debt representing the
estimated benefit to the eligible directors. The right of a director to receive
benefits under the plan is forfeited if the director engages in any activity
determined by the Board to be contrary to the best interests of the Company.
NOTE G. COMMON AND PREFERRED STOCK
The Company has authorized the issuance of 100,000 shares of Series A Preferred
Stock, none of which has been issued.
On October 6, 1999 Solvay Pharmaceuticals was granted the option to purchase
3,000,000 shares of Duramed Common Stock at $9.00 per share. Solvay
Pharmaceuticals exercised this option by purchasing 1,666,666 shares on October
22, 1999 and purchased the remaining 1,333,334 shares on December 30, 1999.
Pursuant to the terms of this financing, Duramed will create an additional
position on Duramed's Board of Directors to be filled as designated by Solvay
Pharmaceuticals no later than at the Company's next annual meeting.
On July 8, 1993, as part of an agreement with its bank, the Company issued
74,659 shares of Series B Convertible Preferred Stock ("Series B Preferred
Stock"). The Series B Preferred Stock was non-voting and convertible at any time
into 746,590 shares of the Company's Common Stock. At December 31, 1997, all
shares of Series B Preferred Stock were converted into shares of the Company's
Common Stock.
F-15
<PAGE> 62
NOTE H. LOSS PER COMMON SHARE
The following table presents the calculation of losses applicable to common
stockholders.
1999 1998 1997
------------ ------------ ------------
Net loss $(51,022,524) $ (8,396,493) $(17,441,316)
Dividends on preferred
stock 255,445 517,343 170,023
Deemed dividend on convertible
preferred stock -- 4,873,000 4,835,000
------------ ------------ ------------
Net loss applicable to
common stockholders $(51,277,969) $(13,786,836) $(22,446,339)
============ ============ ============
Basic and diluted loss per share $ (2.36) $ (0.76) $ (1.45)
============ ============ ============
Weighted-average common shares outstanding for the computation of basic and
diluted loss per share were 21,742,123, 18,150,494 and 15,510,890 in 1999, 1998
and 1997, respectively.
For 1999, 1998 and 1997 the recognition of outstanding options and warrants in
the amount of 4,597,516, 5,029,222 and 4,028,319, respectively, were not
recognized in computing net loss per share as their effect would have been
anti-dilutive.
F-16
<PAGE> 63
NOTE I. STOCK OPTIONS AND WARRANTS
STOCK OPTION PLANS
During 1999, the Company had options outstanding under the 1986 Stock Option
Plan (the "1986 Plan"), the 1988 Stock Option Plan (the "1988 Plan"), the 1997
Stock Option Plan (the "1997 Plan"), and the 1991 Stock Option Plan for
Nonemployee Directors (the "Directors Plan"). The 1986 Plan, which expired in
1996 (insofar as the grant of new options was concerned) permitted the granting
of options for up to 160,000 shares of the Company's Common Stock.
The 1988 plan authorizes the granting of options for up to 3,589,725 shares of
the Company's Common Stock and the 1997 plan authorizes the granting of options
for up to 1,500,000 shares of the Company's Common Stock. Options granted under
the 1997 Plan may be either incentive stock options or nonqualified stock
options. Only nonqualified options may now be granted under the 1988 Plan. All
nonqualified options must be granted with an exercise price which is not less
than 50% of the fair market value of the Company's Common Stock on the date of
grant. All incentive stock options must be granted at a price not less than 100%
of the Company's Common Stock's fair market value on the date of grant, and
incentive stock options granted to persons owning more than 10% of the Company's
Common Stock must be granted at a price of at least 110% of fair market value.
After the 1997 Plan was adopted on February 11, 1997, the Company transferred to
that Plan 770,275 shares authorized for issuance under the 1988 Plan, which were
not the subject of then outstanding options. The shares remaining authorized for
issuance under the 1988 Plan have been allocated to options that have already
been exercised or options already granted but not yet exercised. Therefore, the
Company does not expect to make future routine grants from the 1988 Plan,
although it is possible that limited grants will be made, if and as shares
become available due to the termination or expiration of unexercised options.
Options granted under the 1986, 1988, and 1997 Plans become exercisable based
upon the terms and conditions established at the time of the grant and generally
expire 10 years after the date of grant.
The Director's Plan provides for the issuance of non-qualified options for up to
300,000 shares of the Company's Common Stock. The Directors Plan is a "formula
plan" under which each new nonemployee director is granted, at the close of
business on the date he or she first becomes a director, options to purchase
10,000 shares of the Company's Common Stock. Annually, each then serving
nonemployee director, other than a new director, is also automatically granted
options to purchase 5,000 shares of the Company's Common Stock at a price equal
to the closing market price on the date of grant. Options granted under the
Directors Plan generally vest 50% immediately and 50% six months from the date
of grant and expire 10 years after the date of grant.
F-17
<PAGE> 64
DURAMED PHARMACEUTICALS, INC.
The following summarizes the activity in the 1986, 1988, 1997 and Directors
Plans:
<TABLE>
<CAPTION>
1986 Plan 1988 Plan
-----------------------------------------------------------------------
Weighted Weighted
Shares Option Price Avg Shares Option Price Avg
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
December 31, 1996 77,699 $0.50 to $8.63 $2.87 2,410,522 $0.50 to $8.63 $5.44
Granted ............. -- N/A to N/A N/A 475,849 $3.31 to $10.75 $5.54
Forfeited ........... -- N/A to N/A N/A (103,960) $1.13 to $8.63 $8.40
Exercised ........... (1,417) $0.50 to $5.75 $1.55 (22,499) $1.13 to $8.63 $5.26
Outstanding at
December 31, 1997 76,282 $0.50 to $5.00 $2.31 2,759,912 $0.50 to $7.25 $3.68
Granted ............. -- N/A to N/A N/A -- N/A to N/A N/A
Expired ............. (5,000) $3.13 to $3.13 $3.13 (2,000) $3.75 to $3.75 $3.75
Forfeited ........... -- N/A to N/A N/A (77,371) $3.38 to $5.75 $4.89
Exercised ........... (4,250) $0.50 to $5.00 $0.76 (62,977) $0.50 to $5.00 $2.14
Outstanding at
December 31, 1998 67,032 $0.50 to $5.00 $2.35 2,617,564 $0.50 to $7.25 $3.68
Granted ............. -- N/A to N/A N/A -- N/A to N/A N/A
Expired ............. -- N/A to N/A N/A (8,000) $2.75 to $7.25 $5.84
Forfeited ........... (1,400) $5.00 to $5.00 $5.00 (91,920) $3.38 to $5.75 $4.98
Exercised ........... (10,100) $0.50 to $3.69 $1.22 (812,524) $1.13 to $7.25 $2.33
Outstanding at
December 31, 1999 55,532 $0.50 to $5.00 $2.58 1,705,120 $0.50 to $5.75 $4.25
================================================================================================
Exercisable at
December 31, 1997 66,059 $0.50 to $5.00 $1.97 1,750,446 $0.50 to $7.25 $2.99
December 31, 1998 67,032 $0.50 to $5.00 $2.35 2,051,937 $0.50 to $7.25 $3.36
December 31, 1999 55,532 $0.50 to $5.00 $2.57 1,435,426 $0.50 to $5.75 $4.15
================================================================================================
Available for future
grants at
December 31, 1999 -- --
</TABLE>
<TABLE>
<CAPTION>
1997 Plan Directors Plan
-----------------------------------------------------------------------
Weighted Weighted
Shares Option Price Avg Shares Option Price Avg
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
December 31, 1996 -- N/A to N/A N/A 54,000 $4.00 to 16.50 $11.64
Granted ............ 5,900 $3.88 to $5.75 $5.38 15,000 $5.50 to $5.50 $ 5.50
Forfeited .......... -- N/A to N/A N/A -- N/A to N/A N/A
Exercised .......... -- N/A to N/A N/A -- N/A to N/A N/A
Outstanding at
December 31, 1997 5,900 $3.88 to $5.75 $5.38 69,000 $4.00 to $16.50 $10.30
Granted ............ 658,100 $3.44 to $6.63 $4.95 20,000 $3.63 to $3.63 $ 3.63
Expired ............ -- N/A to N/A N/A -- N/A to N/A N/A
Forfeited .......... (500) $3.88 to $6.06 $5.56 -- N/A to N/A N/A
Exercised .......... -- N/A to N/A N/A -- N/A to N/A N/A
Outstanding at
December 31, 1998 663,500 $3.44 to $6.63 $4.96 89,000 $3.63 to $16.50 $ 8.70
Granted ............ 758,664 $3.44 to $15.38 $8.45 30,000 $7.75 to $7.75 $ 7.75
Expired ............ -- N/A to N/A N/A -- N/A to N/A N/A
Forfeited .......... (15,220) $3.63 to $7.19 $5.00 -- N/A to N/A N/A
Exercised .......... (30,440) $3.63 to $6.63 $5.12 -- N/A to N/A N/A
Outstanding at
December 31, 1999 1,376,504 $3.44 to $15.38 $6.88 119,000 $3.63 to $16.50 $ 8.63
================================================================================================
Exercisable at
December 31, 1997 -- N/A to N/A N/A 54,000 $4.00 to $16.50 $11.64
December 31, 1998 25,140 $3.88 to $6.00 $5.92 64,000 $4.00 to $16.50 $10.68
December 31, 1999 315,380 $3.44 to $6.63 $5.12 84,000 $3.63 to $16.50 $ 9.00
================================================================================================
Available for future 1,469,560 130,000
grants at
December 31, 1999
</TABLE>
F-18
<PAGE> 65
Other Options and Warrants
On August 22, 1995, in consideration of modifications to the Company's borrowing
arrangements and additional extensions of credit, the Company granted to its
bank warrants to purchase 200,000 shares of the Company's Common Stock at an
exercise price of $18.125 per share. These warrants vested immediately upon
grant and expire ten years from the date of grant. During 1999, based on an
antidilutive clause in the bank warrant contract, the exercise price was
adjusted to $11.637 and the number of warrants to purchase shares of the
Company's Common Stock was adjusted to 311,471. In 1999, pursuant to the terms
of the contract, the bank exercised its option to surrender 254,386 shares to
satisfy the exercise price of the warrants and was issued 57,085 shares of
Duramed Common Stock.
On September 13, 1996, in connection with the Company's acquisition of Hallmark
Pharmaceuticals, Inc., the Company issued 400,000 warrants for purchase of the
Company's Common Stock at an exercise price of $25.00 per share. These warrants
were repriced on September 12, 1997 to $10.00 per share. The warrants have a
term of five years and became fully vested as of March 25, 1999. As of March 24,
2000, based on an antidilutive clause in the purchase contract, the exercise
price was adjusted to $8.785 and the number of warrants to purchase shares of
the Company's Common Stock was adjusted to 454,759. At March 24, 2000, there
were 430,606 warrants outstanding.
On June 5, 1997, in combination with the Company's issuance of Series E
Preferred Stock, the Company granted to certain employees of Shoreline Pacific,
Institutional Finance Division of Financial West Group, warrants to purchase
20,000 shares of the Company's Common Stock at an exercise price of $4.3125 per
share. The warrants vested immediately and expire three years from the date of
grant. As of March 24, 2000, there were 15,800 warrants outstanding.
On February 4, 1998, along with the Company's issuance of Series F Preferred
Stock, the Company granted 550,000 warrants to purchase shares of the Company's
Common Stock. Of the 550,000 warrants, 500,000 warrants were issued to investors
of the Series F Preferred Stock at an exercise price of $5.74 per share. The
warrants vested on October 2, 1998 and expire four years from the date of grant.
The warrants require for-cash exercise at the Company's option. The remaining
50,000 warrants were granted to certain employees of Shoreline Pacific,
Institutional Finance Division of Financial West Group at an exercise price of
$5.22 per share. The warrants vested immediately and expire three years from the
date of grant. As of March 24, 2000, there were 540,000 warrants outstanding.
In the third quarter of 1999, in conjunction with an amendment to a financing
agreement, the Company granted to its bank warrants to purchase 110,000 shares
of the Company's Common Stock at an exercise price of $12.79. These warrants
vested immediately and expire four years from the date of grant. In December
1999, the financing agreement was amended to reset the exercise price of 50% of
the warrants to $9.00 per share.
F-19
<PAGE> 66
At December 31, 1999, an aggregate of 4,597,516 shares of common stock were
reserved for issuance.
The following table summarizes information regarding stock options and warrants
outstanding:
<TABLE>
<CAPTION>
Options & Warrants Outstanding Options & Warrants Exercisable
- --------------------------------------------------------------- -------------------------------
Weighted Weighted
Number Average Average Number Weighted
Range of Outstanding Remaining Exercise Exercisable Average
Exercise Prices As of 12/31/99 Contractual Life Price As of 12/31/99 Exercise Price
- --------------------------------------------------------------- -------------------------------
<S> <C> <C> <C> <C> <C>
$0.50 - $5.00 2,342,457 5.56 $3.88 1,904,763 $3.77
$5.12 - $8.97 1,497,084 6.22 $6.22 766,060 $5.71
$8.99 - $16.50 757,975 4.25 $10.55 560,875 $9.45
-------------- ------------
$0.50 - $16.50 4,597,516 5.59 $5.62 3,231,698 $5.06
============== ============
</TABLE>
Effective January 1, 1996, the Company adopted the provisions of SFAS No. 123 -
"Accounting for Stock-Based Compensation". As permitted by the Statement the
Company has elected to continue to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its stock based compensation plans. During
1999, certain options were granted at an exercise price less than fair market
value on the date of grant. According to APB 25, $530,210 was recognized in
compensation expense. The remaining options were granted with an exercise price
equal to or greater than the closing market price on the date of grant and,
accordingly, no compensation expense was recognized on these options.
F-20
<PAGE> 67
Pro forma information regarding net loss and net loss per share is required by
Statement 123, which also requires that information be determined as if the
Company has accounted for its stock options granted and/or modified subsequent
to December 31, 1994 using the fair value method of that Statement. For purposes
of pro forma disclosure, the estimated fair value of the options is amortized to
expense over the options vesting periods. In 1996 and 1997 certain options were
repriced. The impact of repriced options for 1996 and 1997 are reflected as
additional compensation expense under the pro forma disclosure requirements of
FASB 123. This incremental difference is measured as the excess of (1) the fair
value of the modified option and (2) the value of the old option immediately
before its terms are modified. According to the pro forma disclosure
requirements of FASB 123, both the incremental value of the repriced option and
the value established at the original grant date are amortized to expense over
the remaining vesting term of the option. The expense in connection with FASB
123 that would have been recorded in 1999, 1998 and 1997 was $2.8 million, $2.7
million and $4.5 million, respectively and would have generated the following
pro forma results:
1999 1998 1997
------------- ------------ -------------
Net loss applicable to
common stockholders $(54,089,755) $(16,532,926) $(26,936,653)
Net loss per
common share (diluted) $ (2.49) $ (0.91) $ (1.74)
The effects of providing pro forma disclosure are not indicative of future
amounts until the new rules are applied to all outstanding non-vested awards.
The fair value for these options was estimated at the date of grant and at the
date of the repricing using the Black-Scholes model with the following weighted
average assumptions:
Fair Value Assumptions 1999 1998 1997
- ----------------------- ----- ----- -----
Dividend Yield 0% 0% 0%
Expected Volatility 61.1% 50.6% 37.7%
Risk Free Interest Rate 6.33% 4.55% 5.50%
Expected life in years 5 5 5
F-21
<PAGE> 68
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee and directors stock options have characteristics
significantly different from those traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, existing models do not necessarily provide a reliable
single measure of the fair value of its options.
During 1999, 1998, and 1997, the weighted average fair value of options granted
was $4.90, $2.19 and $2.97, respectively.
F-22
<PAGE> 69
NOTE J. INCOME TAXES
Deferred income taxes provided under Statement of Financials Accounting
Standards No. 109 "Accounting for Income Taxes" ("FAS 109") are determined based
upon the temporary differences between the financial statements and the tax
basis of assets and liabilities. The tax effects of temporary differences that
give rise to deferred income tax assets and liabilities at December 31, 1999 and
December 31, 1998 are presented below:
December 31, December 31,
1999 1998
------- -------
(000's omitted)
Deferred tax assets (liabilities):
Net operating loss carryforwards $42,678 $23,737
Accrued employee benefits 577 757
Inventory obsolescence allowance 3,218 3,468
Accounts receivable allowance 361 343
Hallmark acquisition 3,459 3,755
Litigation settlement 2,850 --
Property, plant and equipment (383) (412)
Other (815) (777)
------- -------
Total deferred tax assets 51,945 30,871
Less valuation allowance 51,945 30,871
------- -------
Net deferred tax assets $ -- $ --
======= =======
At December 31, 1999 and 1998, the Company had cumulative net operating loss
carryforwards of approximately $105.9 million and $56.7 million, respectively,
for federal income tax purposes which expire in the years 2004 to 2019.
Additionally, the Company had cumulative losses from Duramed Europe that
amounted to approximately $6.4 million and $5.7 million, respectively, in 1999
and 1998, which are not deductible for U.S. tax purposes.
The reconciliation of income tax at the U.S. federal statutory rate to income
tax (benefit) expense is:
<TABLE>
<CAPTION>
Year Ended December 31
(000's omitted)
<S> <C> <C> <C>
Current Federal Tax benefit
at U.S. statutory rate $(16,045) $(2,630) $(5,622)
Current State Tax benefit
net of federal benefit (1,375) (225) (482)
Deferred tax expense (benefit) --- --- ---
Losses for which benefit not provided 17,420 2,855 6,104
Actual tax (benefit) provision -------- ------- -------
$ --- $ --- $ ---
======== ======= =======
</TABLE>
F-23
<PAGE> 70
NOTE K. LITIGATION SETTLEMENT AND LEGAL PROCEEDINGS
On October 22, 1999 the Company reached a settlement agreement with Schein
Pharmaceutical, Inc. relating to a 1992 agreement regarding the pursuit of an
ANDA conjugated estrogens product. Under the terms of the settlement, Schein has
given up any claim to rights in Cenestin in exchange for a payment of $15
million, which was recorded as a charge in the third quarter of 1999. Duramed
made an initial $7.5 million payment to Schein on October 22, 1999. The second
$7.5 million payment was made in the first quarter of 2000. An additional $15
million payment is required under the terms of the settlement if Cenestin
achieves total profits (product sales less product-specific cost of goods sold,
sales and marketing and other relevant expenses) of greater than $100 million
over any five year or less period within the next 15 years.
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.
NOTE L. BENEFICIAL CONVERSION
The Company's consolidated financial statements for the years ended December 31,
1998 and 1997 reflect accounting for a beneficial conversion feature related to
the issuance of mandatory redeemable convertible preferred stock in June 1997
and February 1998 to Emerging Issues Task Force Topic No. D-60 (Topic No. D-60).
Topic No. D-60 requires that the intrinsic value of beneficial conversion
features of convertible preferred stock be treated as a return to the preferred
stockholder over the period from issuance to the first date that conversion can
occur. The Series E and F mandatory redeemable convertible preferred stock
provided for maximum discounts on conversion of 18% and 22%, respectively. The
amounts were amortized over 90 days (Series E) and 300 days (Series F), the
minimum period which the preferred shareholders could have realized the maximum
beneficial conversion.
The application of Topic No. D-60 impacted the net loss applicable to common
stockholders by $4,873,000 and $4,835,000 and basic and diluted loss per share
by $0.27 and $0.31 for the years ended December 31, 1998 and 1997, respectively.
F-24
<PAGE> 71
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
DURAMED PHARMACEUTICALS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Col. A Col. B Col. C Col. D Col. E
- ------------------------------------ ---------- ------------------------ -------------- ----------
Additions
------------------------
Charged
Charged to Other Balance
to Costs Accounts Deductions at End
DESCRIPTION and Expenses (describe) (describe) of Period
----------- ------------ ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1999
Allowance for doubtful trade
accounts receivable $ 902,900 $ 184,053 $ 135,714 (1) $ 951,239
Allowance for inventory obsolescence $9,106,571 $ 595,197 $1,253,540 (2) $8,448,228
YEAR ENDED DECEMBER 31, 1998
Allowance for doubtful trade
accounts receivable $1,481,868 $ 191,694 $ 770,662 (1) $ 902,900
Allowance for inventory obsolescence $7,740,917 $1,397,345 $ 31,691 (2) $9,106,571
YEAR ENDED DECEMBER 31, 1997
Allowance for doubtful trade
accounts receivable $1,339,492 $ 176,588 $ 34,212 (1) $1,481,868
Allowance for inventory obsolescence $4,808,557 $3,757,673 $ 825,313 (2) $7,740,917
</TABLE>
1) Uncollectible accounts written off, net of recoveries.
2) Products reserved as short dated inventory then subsequently sold.
S-1
<PAGE> 1
Exhibit 10.3
PROMISSORY NOTE
ADJUSTABLE RATE MORTGAGE LOAN
Date of Note: February 29, 2000
- ------------
Amount of Note: Eight Million and 00/100 Dollars ($8,000,000.00)
- --------------
Maturity Date: February 28, 2010
- -------------
Interest Rate:
- -------------
The "Interest Rate" shall be the Prime Rate of the Lender, as defined
herein, charged by the Lender, computed daily for the actual number of days
elapsed over a year of 360 days. For purposes hereof, Prime Rate shall mean the
rate charged by Lender as its "Prime Rate", computed daily for the actual number
of days elapsed over a year of 360 days. Prime Rate is that percentage rate of
interest which is announced by Lender from time to time as its Prime Rate, which
is in effect until a new rate is announced and which provides a base to which
loan rates may be referenced; it is not necessarily the Lender's lowest loan
rate. In the event of a change in such Prime Rate, the interest rate hereunder
shall be adjusted accordingly, and such adjustment shall become effective on the
date such Prime Rate changes.
Amortization Period:
- -------------------
The "Amortization Period" shall equal twenty (20) years.
Principal and Interest Monthly Payment:
- --------------------------------------
Commencing on April 1, 2000 and on the first Business Day, as defined
herein, of each calendar month thereafter during the term hereof, principal
payments shall be due and payable in the amount of Thirty-Three Thousand Three
Hundred Thirty-Three and 33/100 Dollars ($33,333.33) each. Commencing on April
1, 2000 and on the first Business Day of each calendar month thereafter during
the term hereof, Borrower shall make interest payments to Lender as accrued and
as determined in accordance with the Interest Rate provided above. Business Day
shall mean any day of the year on which banks are not required or authorized to
close in Cincinnati, Ohio.
FOR VALUE RECEIVED, the undersigned ("Borrower") does hereby covenant
and promise to pay to the order of THE PROVIDENT BANK, an Ohio banking
corporation, or its successors or assigns, at its principal office located at
One East Fourth Street, Cincinnati, Ohio, 45202 ("Lender"), or at such other
place as the Lender may designate to Borrower in writing from time to time, in
legal tender of the United States, the Amount of Note, together with interest at
the Interest Rate on the
<PAGE> 2
- 2 -
Amount of Note until this Note is paid in full. Borrower shall pay a late
payment premium of five percent (5%) of any principal or interest payment made
more than ten (10) days after the due date which shall be due with any such late
payment.
All payments of principal and interest made hereunder by Borrower shall
be applied monthly, first to the payment of sums advanced by the Lender, if any,
as provided in this Note, the Open-End Mortgage dated of even date herewith
granted by Borrower to Lender ("Mortgage") or in any other document executed as
collateral security for the Note ("Loan Documents"); second, to interest which
became due previously; third, to interest which became due for the month for
which payment is being made; fourth, to the payment of late charges provided
herein; and the balance to principal, until the full amount of principal and
interest has been paid, or until the unpaid balance of this Note matures, if
sooner.
Upon each monthly determination of the Interest Rate and in accordance
with Lender's normal billing process, the Lender will mail a statement to the
Borrower at the address then listed for Borrower on the Lender's records. Such
statement will provide notice that the Interest Rate has changed, the effective
date of such change, the revised amount of the Borrower's Principal and Interest
Monthly Payment as determined in accordance with the adjusted Interest Rate
which will continue to include a monthly principal payment of Thirty-Three
Thousand Three Hundred Thirty-Three and 33/100 Dollars ($33,333.33) per month,
and will contain such other information as may be required by law or which the
Lender may elect to provide to Borrower. Borrower promises to pay to Lender such
revised Principal and Interest Monthly Payment as determined in accordance with
the terms hereof.
Unless sooner paid, the outstanding principal balance and all accrued
interest remaining due hereunder shall be payable on the Maturity Date.
This Note is secured by the Mortgage and the other Loan Documents which
Mortgage and other Loan Documents specify various defaults (each, a "Default")
upon the happening of which all sums owing on this Note may, at the Lender's
option, be declared immediately due and payable without demand or notice.
During the continuance of a Default, the Amount of Note outstanding
shall bear interest at four percent (4%) per annum in excess of the Interest
Rate in effect from time to time, each change in such rate to be effective as of
the date of such change ("Default Rate").
Should the indebtedness represented by this Note or any part thereof be
collected at law or in equity, or in bankruptcy, receivership or any other court
proceedings (whether at the trial or appellate level), or should this Note be
placed in the hands of attorneys for collection upon the occurrence of a
Default, Borrower agrees to pay, in addition to the principal, premium and
interest due and payable hereon, all costs of collection, including reasonable
attorneys' fees and expenses.
<PAGE> 3
- 3 -
All parties to this Note, whether Borrower, principal, surety,
guarantor or endorser, hereby jointly and severally waive presentment for
payment, demand, protest, notice of protest, notice of dishonor and any other
notice required to be given by law in connection with the delivery, acceptance,
performance, default or enforcement of this Note or any endorsement or guaranty
of this Note, except as provided in the Mortgage or the Guaranty, and consent to
all forbearance or waiver of any term hereof or release or discharge by the
holder hereof of any of the Borrower, guarantors, endorsers or sureties or the
release, substitution or exchange of any security for the payment hereof or the
failure to act on the part of the holder or any other indulgence shown by the
holder from time to time, in one or more instances (without notice to or further
assent from the Borrower, guarantors, endorsers or sureties) and the Borrower,
guarantors, endorsers or sureties agree that no such action, failure to act or
failure to exercise any right or remedy on the part of the holder shall in any
way affect or impair the obligations of the Borrower hereunder or of any
guarantors, endorsers or sureties or be construed as a waiver by the holder of
or otherwise affect any of the holder's rights under this Note, under any
endorsement or guaranty of this Note or under any document or instrument
evidencing any security for payment of this Note.
This Note may not be changed orally, but only by an agreement in
writing, signed by the party against whom enforcement of any change or
modification is sought.
Anything herein to the contrary notwithstanding, the obligations of
Borrower under this Note, the Mortgage or other Loan Documents shall be subject
to the limitation that payments of interest shall not be required to the extent
that receipt of any such payment by the Lender would be contrary to provisions
of law applicable to the Lender limiting the maximum rate of interest that may
be charged or collected by the Lender.
The Borrower shall have the right to prepay all, or any part, of the
Amount of Note outstanding and all accrued interest thereon without premium or
penalty. Any partial prepayments of principal shall be applied against
installments of principal due hereunder in the inverse order of maturity.
This Note shall be governed by, and shall be construed and enforced in
accordance with, the laws of the State of Ohio.
Remainder of page intentionally left blank. Signature page follows.
<PAGE> 4
AS A SPECIFICALLY BARGAINED INDUCEMENT FOR LENDER TO EXTEND CREDIT TO
BORROWER, THE BORROWER HEREBY EXPRESSLY WAIVES THE RIGHT TO TRIAL BY JURY IN ANY
LAWSUIT OR PROCEEDING RELATED TO THIS NOTE OR ARISING IN ANY WAY FROM THE
INDEBTEDNESS OR TRANSACTIONS INVOLVING THE LENDER AND THE BORROWER.
IN WITNESS WHEREOF, Borrower has executed and delivered this Note on
the day and year first above written.
BORROWER:
DURAMED PHARMACEUTICALS, INC.
a Delaware corporation
By: /s/ Timothy J. Holt
----------------------------------------
Name: Timothy J. Holt
--------------------------------------
Title: Senior Vice President
Finance & Administration
-------------------------------------
<PAGE> 1
Exhibit 10.4
PROMISSORY NOTE
ADJUSTABLE RATE MORTGAGE LOAN
Date of Note: February 29, 2000
- ------------
Amount of Note: Twelve Million and 00/100 Dollars ($12,000,000.00)
- --------------
Maturity Date: February 28, 2010
- -------------
Interest Rate:
- -------------
The "Interest Rate" shall be the Prime Rate of the Lender, as defined
herein, charged by the Lender, computed daily for the actual number of days
elapsed over a year of 360 days. For purposes hereof, Prime Rate shall mean the
rate charged by Lender as its "Prime Rate", computed daily for the actual number
of days elapsed over a year of 360 days. Prime Rate is that percentage rate of
interest which is announced by Lender from time to time as its Prime Rate, which
is in effect until a new rate is announced and which provides a base to which
loan rates may be referenced; it is not necessarily the Lender's lowest loan
rate. In the event of a change in such Prime Rate, the interest rate hereunder
shall be adjusted accordingly, and such adjustment shall become effective on the
date such Prime Rate changes.
Amortization Period:
- -------------------
The "Amortization Period" shall equal ten (10) years.
Principal and Interest Monthly Payment:
- --------------------------------------
Commencing on April 1, 2000 and on the first Business Day, as defined
herein, of each calendar month thereafter during the term hereof, principal
payments shall be due and payable in the amount of One Hundred Thousand and
00/100 Dollars ($100,000.00) each. Commencing on April 1, 2000 and on the first
Business Day of each calendar month thereafter during the term hereof, Borrower
shall make interest payments to Lender as accrued and as determined in
accordance with the Interest Rate provided above. Business Day shall mean any
day of the year on which banks are not required or authorized to close in
Cincinnati, Ohio.
FOR VALUE RECEIVED, the undersigned ("Borrower") does hereby covenant
and promise to pay to the order of THE PROVIDENT BANK, an Ohio banking
corporation, or its successors or assigns, at its principal office located at
One East Fourth Street, Cincinnati, Ohio, 45202 ("Lender"), or at such other
place as the Lender may designate to Borrower in writing from time to time, in
legal tender of the United States, the Amount of Note, together with interest at
the Interest Rate on the
<PAGE> 2
- 2 -
Amount of Note until this Note is paid in full. Borrower shall pay a late
payment premium of five percent (5%) of any principal or interest payment made
more than ten (10) days after the due date which shall be due with any such late
payment.
All payments of principal and interest made hereunder by Borrower shall
be applied monthly, first to the payment of sums advanced by the Lender, if any,
as provided in this Note, the Open-End Mortgage dated of even date herewith
granted by Borrower to Lender ("Mortgage") or in any other document executed as
collateral security for the Note ("Loan Documents"); second, to interest which
became due previously; third, to interest which became due for the month for
which payment is being made; fourth, to the payment of late charges provided
herein; and the balance to principal, until the full amount of principal and
interest has been paid, or until the unpaid balance of this Note matures, if
sooner.
Upon each monthly determination of the Interest Rate and in accordance
with Lender's normal billing process, the Lender will mail a statement to the
Borrower at the address then listed for Borrower on the Lender's records. Such
statement will provide notice that the Interest Rate has changed, the effective
date of such change, the revised amount of the Borrower's Principal and Interest
Monthly Payment as determined in accordance with the adjusted Interest Rate
which will continue to include a monthly principal payment of One Hundred
Thousand and 00/100 Dollars ($100,000.00) per month, and will contain such other
information as may be required by law or which the Lender may elect to provide
to Borrower. Borrower promises to pay to Lender such revised Principal and
Interest Monthly Payment as determined in accordance with the terms hereof.
Unless sooner paid, the outstanding principal balance and all accrued
interest remaining due hereunder shall be payable on the Maturity Date.
This Note is secured by the Mortgage and the other Loan Documents which
Mortgage and other Loan Documents specify various defaults (each, a "Default")
upon the happening of which all sums owing on this Note may, at the Lender's
option, be declared immediately due and payable without demand or notice.
During the continuance of a Default, the Amount of Note outstanding
shall bear interest at four percent (4%) per annum in excess of the Interest
Rate in effect from time to time, each change in such rate to be effective as of
the date of such change ("Default Rate").
Should the indebtedness represented by this Note or any part thereof be
collected at law or in equity, or in bankruptcy, receivership or any other court
proceedings (whether at the trial or appellate level), or should this Note be
placed in the hands of attorneys for collection upon the occurrence of a
Default, Borrower agrees to pay, in addition to the principal, premium and
interest due and payable hereon, all costs of collection, including reasonable
attorneys' fees and expenses.
<PAGE> 3
- 3 -
All parties to this Note, whether Borrower, principal, surety,
guarantor or endorser, hereby jointly and severally waive presentment for
payment, demand, protest, notice of protest, notice of dishonor and any other
notice required to be given by law in connection with the delivery, acceptance,
performance, default or enforcement of this Note or any endorsement or guaranty
of this Note, except as provided in the Mortgage or the Guaranty, and consent to
all forbearance or waiver of any term hereof or release or discharge by the
holder hereof of any of the Borrower, guarantors, endorsers or sureties or the
release, substitution or exchange of any security for the payment hereof or the
failure to act on the part of the holder or any other indulgence shown by the
holder from time to time, in one or more instances (without notice to or further
assent from the Borrower, guarantors, endorsers or sureties) and the Borrower,
guarantors, endorsers or sureties agree that no such action, failure to act or
failure to exercise any right or remedy on the part of the holder shall in any
way affect or impair the obligations of the Borrower hereunder or of any
guarantors, endorsers or sureties or be construed as a waiver by the holder of
or otherwise affect any of the holder's rights under this Note, under any
endorsement or guaranty of this Note or under any document or instrument
evidencing any security for payment of this Note.
This Note may not be changed orally, but only by an agreement in
writing, signed by the party against whom enforcement of any change or
modification is sought.
Anything herein to the contrary notwithstanding, the obligations of
Borrower under this Note, the Mortgage or other Loan Documents shall be subject
to the limitation that payments of interest shall not be required to the extent
that receipt of any such payment by the Lender would be contrary to provisions
of law applicable to the Lender limiting the maximum rate of interest that may
be charged or collected by the Lender.
The Borrower shall have the right to prepay all, or any part, of the
Amount of Note outstanding and all accrued interest thereon without premium or
penalty. Any partial prepayments of principal shall be applied against
installments of principal due hereunder in the inverse order of maturity.
This Note shall be governed by, and shall be construed and enforced in
accordance with, the laws of the State of Ohio.
Remainder of page intentionally left blank. Signature page follows.
<PAGE> 4
AS A SPECIFICALLY BARGAINED INDUCEMENT FOR LENDER TO EXTEND CREDIT TO
BORROWER, THE BORROWER HEREBY EXPRESSLY WAIVES THE RIGHT TO TRIAL BY JURY IN ANY
LAWSUIT OR PROCEEDING RELATED TO THIS NOTE OR ARISING IN ANY WAY FROM THE
INDEBTEDNESS OR TRANSACTIONS INVOLVING THE LENDER AND THE BORROWER.
IN WITNESS WHEREOF, Borrower has executed and delivered this Note on
the day and year first above written.
BORROWER:
DURAMED PHARMACEUTICALS, INC.
a Delaware corporation
By: /s/ Timothy J. Holt
----------------------------------------
Name: Timothy J. Holt
--------------------------------------
Title: Senior Vice President
Finance & Administration
-------------------------------------
<PAGE> 1
Exhibit 10.5
OPEN-END MORTGAGE
Maximum Principal Amount: $20,000,000.00
THIS OPEN-END MORTGAGE ("Mortgage") made as of the 29th day of
February, 2000, by DURAMED PHARMACEUTICALS, INC., a Delaware corporation, with a
mailing address of 5040 Duramed Drive, Cincinnati, Ohio 45213 (hereinafter
referred to as "Mortgagor," whether one or more), to THE PROVIDENT BANK, an Ohio
banking corporation, with a mailing address of One East Fourth Street,
Cincinnati, Ohio 45202 (hereinafter, together with its successors and assigns,
called "Mortgagee").
WHEREAS, Mortgagor has executed and delivered to Mortgagee (i) a
certain promissory note in the principal amount of Eight Million and 00/100
Dollars ($8,000,000.00) dated of even date herewith and a certain Promissory
Note in the principal amount of Twelve Million and 00/100 Dollars
($12,000,000.00) dated of even date herewith (such promissory notes together
with any renewals, extensions or modifications thereof which remain outstanding
while the Mortgage is in effect shall hereinafter be referred to, collectively,
as the "Note"), which Note evidences loans (collectively, the "Loan") from
Mortgagee to Mortgagor wherein Mortgagor promises to pay to Mortgagee so much
thereof as may now or hereafter be disbursed to or for the account of Mortgagor,
together with interest thereon as set forth in the Notes, with the final
installment being due on February 28, 2010.
WHEREAS, the Loan is made pursuant to the terms and in accordance with
or reliance upon certain other agreements and documents, which may include,
without limitation, an Assignment of Leases, Rents and Proceeds from Mortgagor
to Mortgagee dated of even date herewith, an Environmental Indemnity Agreement
and a Guaranty Agreement from Solvay America, Inc., a Delaware corporation
("Guarantor"), to Mortgagee dated of even date herewith, certificates, and
affidavits (hereinafter collectively referred to herein as "Loan Documents").
ARTICLE 1
The Grant
NOW THEREFORE, in consideration of the making of the Loan, Mortgagor
does hereby agree that the Mortgage shall secure the following: (a) the prompt
payment of the indebtedness evidenced by the Note, with interest thereon, and
any late or other charges imposed in accordance with the terms thereof; and (b)
the payment, performance and observance by Mortgagor of all of the covenants and
conditions contained in the Note, this Mortgage and the Loan Documents; (items
(a) and (b) shall hereinafter collectively be referred to as the "Indebtedness
Hereby Secured"), and in order to charge the properties, interests and rights
hereinafter described with such payment,
<PAGE> 2
- 2 -
performance and observance, and for other valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, Mortgagor does hereby
mortgage, warrant, grant, bargain, sell, assign, encumber, convey and grant a
security interest to Mortgagee forever in all of the estate, title, and interest
of Mortgagor in the fee simple, leasehold and easement estates in that certain
real property situated in the County of Hamilton and State of Ohio and more
particularly described on Exhibit A attached hereto and by reference made a part
hereof ("Real Property");
TOGETHER WITH all and singular the tenements, hereditaments, and
appurtenances thereto belonging, all present and future buildings, structures,
annexations, access rights, rights-of-way or use, servitudes, licenses, and
improvements thereon, all of the rights, privileges, licenses, easements and
appurtenances belonging to such Real Property, together with all of the estates
and rights in and to lands lying in streets, alleys and roads adjoining the said
Real Property (collectively, the "Improvements") and all Mortgagor's right,
title, interest, estate, claim and demand, either at law or in equity, in and to
all fixtures including, without limiting the generality of the foregoing, all
lighting, heating, cooling, ventilating, air conditioning, incinerating,
sprinkling, gas, plumbing, waste removal and refrigeration systems, engines,
furnaces, boilers, pumps, tanks, heaters, generators, motors, fire prevention
apparatus and all pipes, wires, fixtures, and apparatus forming a part of or
used in connection therewith; elevators and motors, refrigeration plants or
units, storm windows and doors, window and door screens, awnings and window and
door shades, all drapes and curtains and related hardware and mounting devices,
wall-to-wall carpeting; fixtures situated on the Real Property and used or
usable in operation thereof as well as all additions, improvements and
replacements thereto, and proceeds thereof; all water, sanitary and storm sewer
systems including all water mains, service laterals and mineral rights,
hydrants, valves and appurtenances, all sanitary sewer lines, including mains,
laterals, manholes and appurtenances, all paving for streets, roads, walkways or
entrance ways, all minerals, soil, flowers, shrubs, crops, trees, timber and
other emblements now or hereafter on the Real Property or under or above the
same or any part or parcel thereof, all proceeds, or sums payable in lieu of or
as compensation for the loss or damage to Improvements or to the Real Property
upon which the said property covered hereby is or may be located including
without limitation the buildings or improvements now or hereafter located
thereon, and all rights in and to all pertinent present and future fire, hazard,
business interruption, rental interruption and other insurance policies
maintained by Mortgagor on the Improvements and Real Property, all payment and
performance bonds received in connection with any construction or other matter
and all rights thereunder, all plans, specifications, drawings, studies,
surveys, appraisals and other similar work product, all contracts for design,
architectural, engineering or construction services and all rights and claims
thereunder; all other contract rights and agreements for the protection of
property or services to or in connection with, or otherwise benefiting the Real
Property including, without limitation, all management agreements and cable
television agreements; all permits, licenses, variances, approvals and/or
consents issued by any governmental entity, utility or other entity; all awards
made by any public body or created by any competent jurisdiction for the taking
or the degradation of value in any eminent domain proceedings, or purchase in
lieu thereof; all of Mortgagor's interest and rights as lessor or lessee in and
to all leases now or hereafter affecting the said Real Property or part thereof;
<PAGE> 3
- 3 -
all contracts for the sale of all or any portion of said Real Property,
excluding, however, those certain items of tangible personal property or trade
fixtures now or hereafter used or acquired by Mortgagor pursuant to its
Manufacturing Agreement with Warner-Lambert Company, a Delaware corporation
("Warner-Lambert"), to manufacture pharmaceutical products at the Real Property
or any personal property now or hereafter owned in whole or in part by
Warner-Lambert for use pursuant to such Manufacturing Agreement or any personal
property now or hereafter acquired in which Mortgagor has previously granted to
Bank of America Commercial Finance Corporation a security interest including,
without limitation, that certain property more particularly described in
Exhibits B, C and D attached hereto and incorporated herein (the "Excluded
Property") (the Real Property, Improvements and fixtures (other than the
Excluded Property) are hereinafter referred to as the "Premises").
Mortgagee is hereby subrogated to the rights of all mortgagees, lien
holders and owners paid off by the proceeds of the Loan secured hereby.
TO HAVE AND TO HOLD, the Premises unto the Mortgagee, its successors
and assigns forever for the use and purposes hereinafter set forth.
ARTICLE 2
Representations and Warranties
2.1 Organization and Existence. Mortgagor is a corporation, duly
organized and validly existing in good standing under the laws of the State of
Delaware and is qualified to do business and in good standing in each other
state where the nature of its business or the property owned by it make such
qualification necessary.
2.2 Execution, Delivery and Performance. The execution, delivery and
performance by Mortgagor of this Mortgage and each of the other Loan Documents
to which it is a party: (i) have been duly authorized by all requisite action,
(ii) do not and will not violate or conflict with any law or other governmental
requirement, or any of the agreements, instruments or documents which formed or
govern Mortgagor, and (iii) do not and will not breach or violate any of the
provisions of, and will not result in a default by Mortgagor under any other
agreement, instrument or document to which it is a party or by which it or its
properties are bound.
2.3 Notices and Approvals. Except as may have been given or obtained,
no notice to or consent or approval of any governmental body or authority or
other third party whatsoever (including, without limitation, any other creditor)
is required in connection with the execution, delivery or performance by
Mortgagor of this Mortgage.
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2.4 Enforceability. This Mortgage and such of the other Loan Documents
to which Mortgagor is a party are the respective legal, valid and binding
obligations of Mortgagor, enforceable against it in accordance with their
respective terms, except as enforceability may be limited by bankruptcy and
other similar laws affecting the rights of creditors generally or by general
principles of equity.
2.5 Financial Statements. Except as disclosed therein, all financial
statements of Mortgagor furnished to Mortgagee have been prepared in conformity
with generally accepted accounting principles, consistently applied, are true
and correct in all material respects, and fairly present the financial condition
of Mortgagor as at such dates and the results of its operations for the periods
then ended (subject, in the case of interim unaudited financial statements, to
normal year-end adjustments); and since the most recent date covered by such
financial statements, there has been no material adverse change in any such
financial condition or operations.
2.6 Litigation. No litigation, arbitration, administrative or
governmental proceedings are pending or, to the knowledge of Mortgagor,
threatened against Mortgagor, which would, if adversely determined, materially
and adversely affect the liens and security interests of Mortgagee hereunder or
under any of the other Loan Documents, the financial condition of Mortgagor or
the continued operations of Mortgagor.
2.7 Tax Returns. All federal, state and local tax returns, reports and
statements required to be filed by Mortgagor have been filed with the
appropriate governmental agencies and all taxes due and payable by Mortgagor
have been timely paid (except to the extent that any such failure to file or pay
will not materially and adversely affect either the liens and security interests
of Mortgagee hereunder or under any of the other Loan Documents, the financial
condition of Mortgagor, or the continued operations of Mortgagor.
2.8 Compliance with Laws. Mortgagor has complied with and is not in any
default under any federal, state or local law, regulation, rule order, the
failure to comply which would have a material adverse effect on the business of
Mortgagor.
2.9 Title. Mortgagor does hereby represent and warrant to Mortgagee
that it is lawfully seized of the Premises in fee simple and has full power to
convey the same and to execute this Mortgage; that the Premises are free, clear
and unencumbered of all easements, restrictions, and liens whatsoever, except
those easements, restrictions and liens set forth in the title evidence issued
to Mortgagee in connection herewith, if any ("Permitted Encumbrances"); that
Mortgagor does warrant and will defend the title to the Premises against the
claims and demands of all persons whomsoever except for the Permitted
Encumbrances; that Mortgagor will keep and observe all of the terms of this
Mortgage on Mortgagor's part to be performed; and that Mortgagor will make any
further assurances of title that Mortgagee may reasonably require.
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2.10 Mechanics Lien Matters. Mortgagor represents and warrants that,
except for Permitted Encumbrances, no Notice of Commencement (as identified in
Ohio Revised Code Section 1311.04) as to the Premises has been filed or will be
filed prior to the filing for record of this Mortgage and that Mortgagor shall
promptly provide Mortgagee with a copy of all Notices of Furnishing (as
identified in Ohio Revised Code Section 1311.05) received by Mortgagor.
Each of the foregoing representations and warranties: (i) has been and
will be relied upon as an inducement to Mortgagee to provide the Loan, and (ii)
shall survive the execution and delivery of this Mortgage.
ARTICLE 3
Covenants
Mortgagor further covenants and agrees with Mortgagee as follows:
3.1 Payments. To pay to Mortgagee, when due, the principal balance of
the Note with interest thereon and all other late charges and/or penalties, all
in accordance with the terms of the Note and to pay all other Indebtedness
Hereby Secured at the times and in the manner herein and therein provided.
3.2 Taxes and other Impositions. To pay, when due according to law, all
taxes, assessments and other charges which are now due or may hereafter be
imposed or assessed upon the Premises, or any part thereof, or that may be
imposed or assessed against the holder of this Mortgage (except when contested
in good faith and when appropriate reserves are established) and the Note by
reason of ownership thereof, by any authority, be it federal, state, county or
city including, but not limited to, charges imposed upon the Premises under any
applicable declaration of condominium. Upon the failure of Mortgagor promptly to
pay such taxes, assessments and other charges, Mortgagee shall have the option
to pay and discharge the same after written notice to Mortgagor, and any sum so
expended by Mortgagee shall at once become indebtedness owing from Mortgagor to
Mortgagee, shall be immediately due and payable by Mortgagor with interest
thereon to the extent legally enforceable at the rate of interest provided in
the Note in the event of default and shall together be added to the Indebtedness
Hereby Secured. Upon the request of Mortgagee, Mortgagor will promptly provide
Mortgagee with evidence of payment of the above taxes, assessments and other
charges imposed or assessed upon the Premises.
3.3 Insurance. For the term of this Mortgage, to obtain and keep in
full force and effect at the sole cost and expense of Mortgagor or cause to be
obtained and kept policies of insurance to: (a) maintain comprehensive general
public liability insurance covering the legal liability of Mortgagor against
claims for bodily injury, and/or property damage arising out of the use,
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maintenance and/or operation of the Premises and all areas appurtenant thereto
and/or the conduct of Mortgagor's business in such amounts as Mortgagee may
reasonably require but in no event less than One Million and 00/100 Dollars
($1,000,000.00) for personal injury or death to one person, One Million and
00/100 Dollars ($1,000,000.00) for personal injury or deaths in one accident and
One Million and 00/100 Dollars ($1,000,000.00) for property damage; (b) maintain
"broad form/special perils" insurance on any and all Improvements and Personal
Property located on the Premises against loss by fire or other hazards in an
amount not less than the greater of (i) actual cash, and (ii) full insurable
value of the Improvements located on the Premises as Mortgagee may reasonably
require, but in no event less than the principal balance of the Note; (c) in the
event any of the Premises is located within a hundred year flood plain or area
designated as subject to flood by the Federal Emergency Management Agency or
other government agency, or when required by any federal, state or local law,
statute, regulation or ordinance, maintain flood insurance in an amount
Mortgagee reasonably deems appropriate; (d) satisfy all applicable workers'
compensation insurance requirements; (e) maintain business interruption
insurance and/or loss of "rental value" insurance in such amounts, and with such
coverages, as may be reasonably satisfactory to Mortgagee, such insurance to be
provided at such time as Mortgagee may specify but in no event later than the
commencement of occupancy by any tenant; (f) during the course of any
construction or repair of the Improvements on the Premises, maintain builder's
completed value risk insurance against "all risks of physical loss," including
collapse and transit coverage, in nonreporting form, covering the total value of
work performed and equipment, supplies and materials furnished; and (g) obtain
and maintain any other insurance concerning the Premises or operation of
business thereon as Mortgagee may reasonably require including, but not limited
to, any applicable condominium insurance or PUD insurance.
All such policies of insurance shall be written by a company or
companies reasonably acceptable to Mortgagee; shall have attached thereto the
standard form of mortgagee clause; shall name Mortgagee and assigns as a named
insured, loss payee and as Mortgagee, without contribution; shall be delivered
to and held by Mortgagee or assigns; shall provide for thirty (30) days prior
written notice of cancellation or non-renewal to Mortgagee; shall have attached
thereto an agreed amount endorsement; shall include a provision stating that the
waiver of subrogation rights of the insured does not void the coverage; shall
contain endorsements that no act or negligence of the insured or any occupant
and no occupancy or use of the Premises for purposes more hazardous than
permitted by the terms of the policy, nor any breach of any warranty,
declaration or condition by the insured, will affect the validity or
enforceability of such insurance as against Mortgagee; shall contain the
agreement of the insurer waiving all rights of set off, counterclaim or
deductions against Mortgagor.
Mortgagor shall furnish or shall cause to be furnished to Mortgagee an
original policy or certificate of all required policies of insurance along with
proof of premiums paid for the current policy year and each subsequent year for
the term of this Mortgage. This Mortgage shall operate as an assignment to
Mortgagee of said policies of insurance, whether delivered or not. At
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the option of the Mortgagee, if insurance proceeds are not paid within ninety
(90) days of the casualty or if Mortgagor cannot reinstate its business
operations within a reasonable period of time after the occurrence of a
casualty, or if there is a default, the proceeds of loss under any policy of
insurance, whether endorsed payable to the Mortgagee or not, may be applied in
payment of the Note or any other sum secured by this Mortgage, whether or not
such sums are then due, or to the restoration or replacement of any buildings on
the Premises without in any way affecting the lien of this Mortgage or the
obligation of the Mortgagor or any other person for payment of the Indebtedness
Hereby Secured.
If the Premises are sold following foreclosure or if Mortgagee acquires
title to the Premises, Mortgagee shall have all the right, title and interest of
the Mortgagor in and to any insurance policies and unearned premiums thereon and
in and to the proceeds resulting from any damage to the Premises prior to such
sale or acquisition.
Upon the failure of Mortgagor to provide or cause to be provided the
aforesaid insurance, Mortgagee shall have the option to procure and maintain
such insurance without notice to Mortgagor. Any sum so expended by Mortgagee
shall at once become indebtedness owing from Mortgagor to Mortgagee and shall
immediately become due and payable by Mortgagor with interest thereon to the
extent legally enforceable, at the rate of interest provided in the Note in the
event of a default, and shall together be added to the Indebtedness Hereby
Secured.
3.4 Condition of Property; Compliance with Law; Waste. To keep the
Premises in good condition and repair and to make all structural and
nonstructural repairs and maintenance necessary and to cause all repairs and
maintenance to be done in a good and workmanlike manner; to comply in all
material respects with all statutes, laws, ordinances and governmental rules,
regulations and orders which are applicable to the Premises; (except for items
having a value of less than Ten Thousand and 00/100 Dollars ($10,000.00)) not to
commit or permit waste on the Premises or remove or permit the removal of any
building, improvement, or fixture from the Premises without prior written
consent of the Mortgagee or unless replaced with an item of greater or equal
value; and not to perform or permit any act which may in any way materially
impair the value of the Premises.
3.5 No Further Encumbrances; No Disposition. Except for the Permitted
Encumbrances or a merger or consolidation or sale of substantially all the
assets of Mortgagor permitted under Section 3.15 hereof, not to make, create, or
suffer to be made or created any sale, transfer, conveyance, assignment of the
Premises, or any part thereof, or any interest therein or any contract or
agreement to do any of the same without Mortgagee's prior written consent, which
consent may be withheld in Mortgagee's sole and absolute discretion. A sale,
transfer, conveyance or assignment means the conveyance by the Mortgagor of any
legal or equitable right, title or interest in the Premises, or any part
thereof, whether such conveyance is voluntary or involuntary, by outright sale,
deed, installment sale contract, land contract, lease option contract, or any
other method of transferring any interest in real property, except for the lease
from Mortgagor to Warner-Lambert and
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a license back from Warner-Lambert to Mortgagor. Any encumbrance means a lien,
mortgage or any other encumbrance subordinate to Mortgagee's Mortgage. Further,
in the event of default under any of the provisions of this Section 3.5,
Mortgagee may, without notice to Mortgagor, deal with such successor or
successors in interest with reference to this Mortgage and the Note and in the
same manner as with the Mortgagor and may forbear to sue or may extend time for
payment of the Note without discharging or in anyway affecting the liability of
the Mortgagor hereunder or under the Note.
3.6 Condemnation. To promptly notify Mortgagee of any action or
proceeding relating to any condemnation or other taking, whether direct or
indirect of the Premises, or part thereof, and Mortgagor shall appear in and
prosecute any such action or proceedings unless otherwise directed by Mortgagee
in writing. Mortgagor authorizes Mortgagee at Mortgagee's option, as attorney in
fact for Mortgagor, (which authorization shall be irrevocable) to commence,
appear in and prosecute, in Mortgagee's or Mortgagor's name, any action or
proceeding relating to any condemnation or other taking of the Premises, whether
direct or indirect and to settle or compromise any claim in connection with such
condemnation or other taking. The proceeds of any award, payment or claim for
damages, direct or consequential, in connection with any condemnation or other
taking, whether direct or indirect, of the Premises or any part thereof, or for
conveyance in lieu of condemnation, are hereby assigned to and shall be paid to
Mortgagee; and all condemnation money so received shall be forthwith applied by
Mortgagee, at its option in payment of the Note, or any other sum secured by
this Mortgage whether or not such sums are then due, or to the restoration or
replacement of any part of the Premises without in any way affecting the lien of
this Mortgage or the obligation of the Mortgagor or any other person for payment
of Indebtedness Hereby Secured; provided however that any excess over the
balance due under the Note and any other indebtedness secured by this Mortgage
shall be delivered to Mortgagor.
3.7 Books and Records; Financial Information. With respect to the
Premises and the operation thereof, Mortgagor will keep or cause to be kept
proper books of record in accordance with generally accepted accounting
principals consistently applied. Mortgagee shall have the right to inspect the
books and records of the operation of the Premises and make copies thereof at
all reasonable times and upon reasonable notice to Mortgagor. Mortgagor shall
furnish to Mortgagee during the term of this Mortgage all of the following: (i)
within ninety (90) days after the end of each fiscal year of Mortgagor, a copy
of the annual audited financial statements of Mortgagor including, in reasonable
detail, a balance sheet as of the close of such fiscal year, and a statement of
profit and loss for such fiscal year; (ii) within forty-five (45) days after the
close of each fiscal quarter of Mortgagor, a copy of the interim financial
statements of Mortgagor for such fiscal quarter (including, in reasonable
detail, both a balance sheet as of the close of such fiscal period, and a
statement of profit and loss for such fiscal period); and (iii) such other
information as Mortgagee may from time to time request. All such financial
statements shall be certified as correct by the party who has prepared such
information, and, in the case of internally prepared statements, certified as
correct by the chief financial officer of Mortgagor. In addition, Mortgagor will
furnish to Mortgagee copies
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of federal income tax returns as Mortgagee may reasonably request, certified by
Mortgagor in such form as may be reasonably acceptable to Mortgagee.
3.8 Liability For All Loan Administration and Enforcement Expenses.
Mortgagor shall pay all sums, including costs and reasonable attorney fees for
Mortgagee's outside counsel at such counsel's standard hourly rates for time
actually incurred in the making of the Loan and the administration thereof
including title examination and title insurance premiums and expenses, appraisal
fees, survey fees, inspection fees incurred by Mortgagee to establish or
preserve the lien of this Mortgage or its priority, or in connection with any
suit to enforce this Mortgage to recover the Indebtedness Hereby Secured, or to
protect the security of this Mortgage. All such sums shall be immediately due
and payable, shall bear interest at the highest rate of interest provided in the
Note in the event of default, and shall, together with such interest, be added
to the Indebtedness Hereby Secured.
3.9 Application of Funds. Unless applicable law provides otherwise, all
payments received by Mortgagee from Mortgagor under the Note or this Mortgage
shall be applied by Mortgagee in the following order of priority:
(a) Amounts advanced by Mortgagee in accordance with the terms of
this Mortgage, the Note or the Loan Documents, together with interest thereon;
(b) All late charges, penalties and/or prepayment penalties due
Mortgagee from Mortgagor pursuant to the provisions of the Note, Mortgage and
Loan Documents;
(c) Interest payable on the Note;
(d) Principal balance of the Note; and
(e) All other Indebtedness Hereby Secured.
3.10 Environmental Conditions. Mortgagor represents and warrants to
Mortgagee (a) that, except as disclosed in environmental reports now or
previously provided to Mortgagee, Mortgagor has no knowledge or information
which would put a reasonable person on notice or cause such person to make
inquiry concerning the likelihood or presence of any hazardous waste condition
or any factor contributing to a risk to the environment located on or emanating
from the Premises; (b) that no environmental enforcement action(s) against or
concerning the Premises are pending or threatened and Mortgagor will notify
Mortgagee if any such action is commenced; (c) that Mortgagor will maintain and
operate the Premises during the term of the Mortgage in material compliance with
all applicable environmental laws of the state where the Premises are located
and of the United States of America; (d) that Mortgagor will remedy any
contamination that may be discovered on the Premises and which is required by
law to be remedied; and (e) the Mortgagor will indemnify and
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hold Mortgagee harmless from and against all losses or damages arising from
hazardous waste conditions or risks to the environment which will result in
claims against or liability of Mortgagee as holder of this Mortgage or
subsequent owner of the Premises that are not covered by Mortgagee or its agents
or employees or independent contractors retained by or on behalf of Mortgagee.
3.11 Indemnification of Mortgagee. To indemnify Mortgagee for and hold
Mortgagee harmless from and against any loss suffered or any liability, cost or
expense including, without limitation, reasonable attorneys' fees, incurred by
Mortgagee on account of any damage to the person or property of the parties
hereto or of any third parties by reason of or in connection with the use,
operation, maintenance, repair or management of the Premises, whether or not
such damage is partly due to the negligence of Mortgagee, or its employees or
agents, unless such damage was caused solely by the act or acts of Mortgagee or
its employees or agents while on the Premises. Mortgagor shall undertake, at
their sole expense and through counsel satisfactory to Mortgagee, the defense of
Mortgagee in any lawsuit commenced as the result, or alleged to be the result,
of injury or damage occurring by reason of or in connection with the use,
operation, maintenance, repair or management of the Premises.
3.12 Taxes. Mortgagor will pay when due all taxes, assessments and
other governmental charges, howsoever designated, and all other liabilities and
obligations, except to the extent that any such failure to pay will not
materially and adversely affect either the liens and security interests of
Mortgagee hereunder or under any of the other Loan Documents, the financial
condition of Mortgagor or the continued operations of Mortgagor.
3.13 Compliance With Laws and Agreements. Mortgagor will not violate
any law, regulation or other governmental requirement, any judgment or order of
any court or governmental agency or authority, or any agreement, instrument or
document to which it is a party or by which it is bound, if any such violation
will materially and adversely affect either the liens and security interests of
Mortgagee hereunder or under any of the other Loan Documents, the financial
condition of Mortgagor, or the continued operations of Mortgagor.
3.14 Notification of Default. Mortgagor shall provide Mortgagee with
prompt written notification of: (i) any Event of Default or any event which,
with the giving of notice, passage of time, or both, would constitute such an
Event of Default; (ii) any materially adverse change in the business, financial
condition or operations of Mortgagor; (iii) any information which indicates that
any financial statements of Mortgagor fail, in any material respect, to present
fairly the financial condition and results of operations purported to be
presented in such statements; and (iv) any change in Mortgagor's outside
accountants. Each notification by Mortgagor pursuant hereto shall specify the
event or information causing such notification, and, to the extent applicable,
shall specify the steps being taken to rectify or remedy such event or
information.
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3.15 Continuity. Except upon the prior written consent of Mortgagee,
which consent will not be unreasonably withheld: (a) Mortgagor shall be a party
to any merger or consolidation with, or purchase or otherwise acquire all or
substantially all of the assets of, or any material stock, partnership, joint
venture or other equity interest in, any person or entity, or sell, transfer or
lease all or any substantial part of its assets, if any such action would result
in either: (i) a material change in the principal business of Mortgagor, or (ii)
a material adverse change in the financial condition or operations of Mortgagor;
and (b) Mortgagor shall preserve its existence and good standing in the
jurisdiction(s) of establishment and operation. In any event, regardless of the
consent of Mortgagee, Mortgagor may be a party to any merger or consolidation,
or purchase or otherwise acquire all or substantially all of the assets of, or
any material stock, partnership, joint venture or other equity interest in, any
person or entity, or sell, transfer or lease all or any substantial part of its
assets if (A) the net worth of Mortgagor immediately following any such
transaction shall equal or exceed the net worth of Mortgagor immediately prior
to such transaction, and (B) the debt to equity ratio of Mortgagor immediately
following any such transaction shall be the same or better than that immediately
prior to such transaction.
ARTICLE 4
Events of Default
Each of the following shall be deemed to be an "Event of Default":
4.1 Default in the payment of principal, interest or any other amounts
due under the Note within ten (10) days after notice from Mortgagee that such
payment is past due;
4.2 Default in the payment of any other Indebtedness Hereby Secured
within five (5) days after notice from Mortgagee that such payment is past due;
4.3 The failure to obtain and keep in force at all times all insurance
on the Premises and contents thereof and other insurance coverages in accordance
with the terms of this Mortgage and such failure is not fully cured within ten
(10) days after Mortgagee has given written notice thereof to Mortgagor;
4.4 An encumbrance on or sale of the Premises, or any part thereof, in
violation of Section 3.5 herein;
4.5 The filing of any lien unless contested in good faith and with
appropriate reserves established or charge against the Premises or any part
thereof which is not removed or bonded to the satisfaction of Mortgagee within a
period of thirty (30) days thereafter;
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4.6 The failure to observe or perform any one or more of the other
terms, covenants or other obligations on the part of Mortgagor set forth in the
Note, this Mortgage, or the Loan Documents and such default is not fully cured
within thirty (30) days after Mortgagee has given written notice thereof to
Mortgagor; provided, however, that if such default is curable, and if and so
long as Mortgagor is proceeding with due diligence to cure the default, such
period will be extended to whatever reasonable period is required to permit the
Mortgagor to cure the default; provided that such additional curing period does
not, in Mortgagee's sole opinion, jeopardize its vital interest in the Premises;
4.7 The abandonment by Mortgagor of all or a part of the Premises;
4.8 In the case where Mortgagor is a corporation, partnership or trust
entity, the dissolution or cessation of existence as a legal entity of
Mortgagor;
4.9 Any certification, representation or warranty of Mortgagor under
this Mortgage or any of the Loan Documents or any other information provided to
Mortgagee by Mortgagor or its representatives in connection with the Premises is
determined to have been untrue and/or misleading in any material effect when
made;
4.10 Upon the filing of any bankruptcy proceeding by Mortgagor or upon
the filing of any bankruptcy proceeding against Mortgagor which is not dismissed
within sixty (60) days; any assignment by the Mortgagor of any of its property
for the benefit of creditors, or the placing of any of Mortgagor's property in
receivership, trusteeship or conservatorship with or without action or suit in
any court;
4.11 The death of any individual, or dissolution of any corporate
partnership or limited liability company, borrower, co-maker or guarantor;
4.12 The insolvency or bankruptcy of a guarantor; and
4.13 The occurrence of any Event of Default under any of the other Loan
Documents.
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ARTICLE 5
Remedies
5.1 Mortgagee's Remedies. Upon the occurrence of an Event of Default,
Mortgagee shall have the right to exercise all rights and remedies provided by
law or in equity to which Mortgagee is entitled including, without limitation,
(a) the right to proceed to protect and enforce its rights by any action at law,
in equity or other appropriate proceeding, whether for the specific performance
of any agreement contained herein or for an injunction against a violation of
any of the terms, conditions, or provisions hereof or in the aid of the exercise
of any power granted hereby or by law; (b) the right to declare the entire
amount of the Note and all interest thereon, or, at its option, any part of the
foregoing, to be immediately due and payable without further demand or notice;
(c) the right to, at any time or from time to time, proceed at law or in equity
or otherwise to foreclose the lien of this Mortgage as against all or any part
of the Premises; (d) upon the filing of a suit or other commencement of judicial
proceeding to enforce the rights of the Mortgagee under this Mortgage, Mortgagee
shall be entitled, as a matter of right, to the appointment of a receiver or
receivers of the Premises and to receive all receipts therefrom pending such
proceedings, with such power as the court making such appointment shall confer;
and (e) the right to demand that Mortgagor surrenders the possession of the
Premises subject to the rights of any lessee, to take possession of all or any
part of the Premises together with all books, papers and accounts of Mortgagor
pertaining thereto and to operate and manage the same and from time to time to
make all needful repairs and improvements as Mortgagee may deem reasonable; and
to lease the Premises or any part thereof in the name of and for the account of
the Mortgagor and to collect and receive and sequester the rents, revenues and
other income after deducting all proper costs and expenses of so taking, holding
and managing the same, including reasonable compensation to Mortgagee.
5.2 Rights and Remedies Cumulative; No Waiver or Release of Obligation.
The rights and remedies of the Mortgagee as provided in this Mortgage and in the
Note, and in the warranties contained herein and therein shall be cumulative and
concurrent, may be pursued separately, successively or together against
Mortgagor or against the Premises, or both, in the sole discretion of Mortgagee,
and may be exercised as often as occasion therefor shall arise.
Any failure by Mortgagee to insist upon strict performance by Mortgagor
of any of the terms and provisions of this Mortgage or of the Note shall not be
deemed a waiver of any of the terms or provisions of this Mortgage or the Note.
No delay or omission to exercise any right or power accruing upon any Event of
Default shall impair any right or power or shall be construed to be a waiver of
any such Event of Default or acquiescence therein; every such right and power
may be exercised from time to time and as often as may be deemed expedient. No
waiver of any default or Event of Default hereunder by the Mortgagee shall
extend to or shall affect any subsequent Event of Default or shall impair any
rights or remedies consequent thereon.
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Mortgagee may release, regardless of consideration, any part of the
security held for the indebtedness secured by this Mortgage without, as to the
remainder of the security, in any way impairing or affecting the lien of this
Mortgage or its priority over any subordinate lien.
5.3 Expenses. Upon an Event of Default hereunder, Mortgagor shall pay
to Mortgagee such further amount as shall be sufficient to reimburse it fully
for all costs and expenses of collection of the Note and the enforcement of any
security for the Note including without limitation, Mortgagee's fees and
expenses for enforcing this Mortgage or any rights hereunder, reasonable
attorneys', accountants' and appraisers' fees and expenses, court costs and any
taxes and fees or governmental charges incident to such enforcement of rights
and collection.
ARTICLE 6
Miscellaneous
6.1 Binding Effect. All of the terms, covenants and conditions of this
Mortgage shall bind Mortgagor and its respective heirs, devisees,
administrators, executors, successors and assigns and shall inure to the benefit
of and be available to Mortgagee, and its successors and assigns.
6.2 Interpretation; Time of the Essence. All references to Mortgagor
and Mortgagee shall be read in the singular or plural and in the masculine,
feminine, or neuter gender, as the sentence may require. Time is of the essence
with respect to each and every obligation of Mortgagor under the Note, the
Mortgage and the other Loan Documents.
6.3 Governing Law. This Mortgage shall be governed by the laws of the
State of Ohio. In the event that any provision of this Mortgage conflicts with
applicable law, such conflict shall not affect other provisions of this Mortgage
or the Note which can be given affect without the conflicting provisions, and to
this end the provisions of this Mortgage are declared to be severable.
6.4 Covenants Run With Land. All of the covenants of this Mortgage
shall run with the land constituting the Premises.
6.5 Headings. The headings to the articles and sections hereof are for
reference only and do not limit in any way the content thereof.
6.6 Additional Assurances. Mortgagor hereby agrees to promptly execute
and deliver such further instruments and assurances and will do such further
acts as Mortgagee may reasonably request to perfect the security interest of
Mortgagee in all or any portion of the Premises and/or to more effectively carry
out the purposes of the Note, Mortgage and/or other Loan Documents.
<PAGE> 15
- 15 -
6.7 Open-End Mortgage. In accordance with the provisions of Ohio
Revised Code Sections 5301.232 and 5301.233, this Mortgage is given to, and the
parties intend that it shall secure indebtedness in a maximum amount of Twenty
Million and 00/100 Dollars ($20,000,000.00) evidenced by the Note, which
indebtedness may include advances made by Mortgagee, after this Mortgage is
filed of record. The making of such advances is obligatory on the part of
Mortgagee subject to the terms and conditions provided for in the Note, Mortgage
and Loan Documents. The maximum amount of the unpaid balance of such
indebtedness, in the aggregate and exclusive of interest thereon, which is or
will be outstanding at any time, is that set forth above, provided that this
Mortgage shall also secure unpaid balances of advances made for the payment of
taxes, assessments, insurance premiums, or costs incurred for the protection of
the Premises.
6.8 Ohio Revised Code Section 1311.14. Mortgagor covenants and agrees
with Mortgagee that Mortgagee may, at its option, do all things provided to be
done by a Mortgagee under Section 1311.14 of the Ohio Revised Code, and any
amendments or supplements thereto, for the protection of Mortgagee's interest in
the Premises.
6.9 Obligations Unconditional. The obligations of the Mortgagor to make
payments of any and all amounts due hereunder shall be absolute and
unconditional without defense or set-off by reason of any default whatsoever
including, without limitation, a default by any tenant of the Premises under any
lease with the Mortgagor or under any other agreement or instrument between the
Mortgagee and the Mortgagor, and such payments to Mortgagee shall not be
decreased, abated, postponed or delayed for any reason whatsoever including,
without limitation, any acts or circumstances that may constitute failure of
consideration, destruction of or damage to the Premises, the taking of any part
of the Premises, commercial frustration of purpose, failure of any person to
perform or observe any agreement, whether expressed or implied, or any duty,
liability or obligation arising out of or connected with this Mortgage, the
Note, or any other Loan Document, or failure of any resident or occupant of the
Premises to pay the fees, rentals or other charges owed to Mortgagor, and
irrespective of whether or not any such resident or occupant of the Premises
receives either partial or total reimbursement as a credit against such payment,
it being the intention of the parties that the payments required of the
Mortgagor hereunder will be paid in full when due without any delay or
diminution whatsoever.
6.10 Waiver of Jury Trial. In consideration for the extension of the
Loan to Mortgagor by Mortgagee, Mortgagor hereby expressly waives the right to
trial by jury in any lawsuit or proceeding related to this Mortgage or arising
in any way from the Indebtedness Hereby Secured or the transactions between
Mortgagor and Mortgagee.
NOW, THEREFORE, if Mortgagor shall well and truly pay and discharge the
Indebtedness Hereby Secured as the same shall become due and payable and shall
perform and observe all of the terms, covenants and conditions to be performed
and observed by Mortgagor hereunder then this
<PAGE> 16
- 16 -
conveyance shall be null and void and shall be released by Mortgagee at the
expense of Mortgagor; otherwise this Mortgage is to remain in full force and
effect.
Remainder of page intentionally left blank. Signature page follows.
<PAGE> 17
- 17 -
IN WITNESS WHEREOF, Mortgagor has executed this Open-End Mortgage as of
the year and date first above written.
WITNESSES: MORTGAGOR:
/s/ Christina E. Hassan DURAMED PHARMACEUTICALS, INC.,
- ---------------------------------------- a Delaware corporation
Printed: Christina E. Hassan
--------------------------------
/s/ Joy E. Herald
- ----------------------------------------
Printed: Joy E. Herald By: /s/ Timothy J. Holt
-------------------------------- ------------------------------
Name: Timothy J. Holt
----------------------------
Its: Senior Vice President
& Chief Financial Officer
-----------------------------
STATE OF OHIO )
) SS:
COUNTY OF HAMILTON )
The foregoing instrument was acknowledged before me this _____ day of
February, 2000, by Timothy J. Holt as Senior Vice President & Chief Financial
Officer of DURAMED PHARMACEUTICALS, INC., a Delaware corporation, on behalf
of the corporation.
/s/ Joy E. Herald
---------------------------------
Notary Public
This instrument was prepared by:
Laura L. Warren, Esq.
Keating, Muething & Klekamp, P.L.L.
1400 Provident Tower
One East Fourth Street
Cincinnati, Ohio 45202
(513) 579-6400
<PAGE> 18
EXHIBIT A
PARCEL I: LEGAL DESCRIPTION FOR CONSOLIDATION 14.790 ACRE PARCEL
------------------------------------------------------
Being a parcel of land situated in Columbia Township, City of
Cincinnati, Hamilton County, Ohio, Section 28 and Section 29, Town 4, Fractional
Range 2, and being part of the property as conveyed in Official Record Book
6330, Page 419 of the deed records of the Recorders Office of Hamilton County,
Ohio, and being located within the following described points and the boundary
thereof:
Commencing at the northwest corner of the northeast quarter of Section
28; thence along the north-south half section line of said Section 28, South
05(degree)30'46" West, 115.50 feet to the east line of Lester Road, said point
being the Real Point of Beginning of the parcel herein described; thence with
the east line of said Lester Road on the following courses: (1) North
12(degree)35'24" West, 64.85 feet; (2) on a curve deflecting to the left and
having a radius of 392.00 feet, an arc length of 68.20 feet, and a chord bearing
North 14(degree)38'48" West, 68.11 feet to the south right-of-way line of the N
& W Railroad; thence with said south line on the following courses: (1) North
35(degree)34'43" East, 48.18 feet; (2) on a curve deflecting to the right and
having a radius of 1,833.46 feet; an arc length of 1366.45 feet, and a chord
bearing North 88(degree)40'07" East, 1,335.04 feet; (3) South 69(degree)41'23"
East, 188.00 feet; (4) South 20(degree)18'37" West, 15.00 feet; (5) South
69(degree)38'07" East, 40.14 feet to the northwesterly Limited Access line of
Interstate 71; thence with said northwesterly line on the following courses: (1)
South 47(degree)22'53" West, 101.58 feet; (2) South 17(degree)30'03" West, 68.97
feet; (3) on a curve deflecting to the right and having a radius of 1,839.86
feet, an arc length of 315.10 feet, and a chord bearing South 69(degree)37'01"
West, 314.72 feet; (4) South 82(degree)22'48" West, 83.23 feet; (5) North
5(degree)44'46" East, 42.43 feet; (6) South 76(degree)47'12" West, 251.19 feet;
(7) South 72(degree)35'28" West, 56.36 feet; (8) North 71(degree)06'11" West,
53.62 feet; (9) South 51(degree)46'24" West, 89.33 feet; (10) South
80(degree)56'32" West, 159.04 feet; (11) South 85(degree)44'06" West, 200.81
feet; (12) North 11(degree)43'07" West, 10.38 feet; (13) South 78(degree)17'53"
West, 57.31 feet; (14) North 88(degree)30'50" West, 62.00 feet; (15) North
65(degree)43'31: West, 129.08 feet; (16) North 83(degree)05'13" West, 47.44 feet
to the east line of Lester Road; thence with said east line on the following
courses: (1) North 01(degree)10'46" East, 142.95 feet; (2) North
12(degree)35'24" West, 58.62 feet to the Real Point of Beginning containing
14.790 acres more or less.
The above description is the result of a survey prepared by Carl D.
Walker of Savage, Walker & Associates, Inc., Ohio Registered Surveyor No. 6260
dated June 7, 1994.
PARCEL II: DESCRIPTION FOR CONSOLIDATION 2.302 ACRE PARCEL
------------------------------------------------
Being a parcel of land situated in Columbia Township, City of
Cincinnati, Hamilton County, Ohio, Section 28, Town 4, Fractional Range 2 and
being part of the property as conveyed in Official Record Book 6330, Page 419
and all of the property as conveyed in Registered Land Certificate No. 159327 of
the deed records of the Recorders Office and Registered Land Office of Hamilton
County, Ohio, and being located within the following described points and the
boundary thereof:
<PAGE> 19
- 2 -
Commencing at the northwest corner of the northeast quarter of Section
28; thence on the north-south half section line of said Section 28; South
05(degree)30'46" West, 313.05 feet to the northwesterly limited access line of
Interstate 71; thence with said northwesterly line North 84(degree)24'32"
West,21.18 feet to the Real Point of Beginning of the parcel herein described;
thence continuing with the said northwesterly line on the following courses: (1)
North 84(degree)24'32" West, 61.17 feet; (2) South 78(degree)08'00" West, 343.29
feet; (3) South 86(degree)56'55" West, 127.85 feet; (4) South 48(degree)47'12"
West, 18.99 feet; (5) North 41(degree)14'07" West, 20.54 feet to the south
right-of-way line of the N & W Railroad; thence with said south line on a curve
deflecting to the right and having a radius of 1,833.46 feet, an arc length of
629.03 feet, and a chord bearing North 53(degree)46'30" East, 625.95 feet to the
west right-of-way line of Lester Road; thence with said west line on the
following courses: (1) on a curve deflecting to the right and having a radius of
332.00 feet, an arch length of 32.36 feet, and a chord bearing South
41(degree)17'58" East, 32.35 feet, (2) on a curve deflecting to the right and
having a radius of 675.00 feet, an arc length of 89.71 feet, and a chord bearing
South 14(degree)12'08" East, 89.64 feet; (3) South 38(degree)47'14" East, 12.36
feet; (4) South 01(degree)10'46" West, 72.10 feet; (5) on a curve deflecting to
the right and having a radius of 30.00 feet, an arc length of 8.88 feet, and a
chord bearing South 60(degree)39'41" West, 8.85 feet; (6) on a curve deflecting
to the left and having a radius of 50.00 feet, an arc length of 125.97 feet and
a chord bearing South 03(degree)24'52" East, 95.20 feet; (7) South
01(degree)10'46" West, 9.11 feet to the Real Point of Beginning containing 2.302
acres more or less.
Included in the above described parcel is Registered Land Certificate
of Title No. 87180, described as follows:
Commencing at the northwest corner of the northeast quarter of Section
28; thence along the north-south half section line of said Section 28; South
05(degree)30'46" West, 168.63 feet; thence leaving said north-south line North
38(degree)47'14" West, 62.23 feet to the west line of Lester Road, said point
being the Real Point of Beginning of the parcel herein described; thence leaving
said west line North 38(degree)47'14" West, 90.04 feet; thence on a curve
deflecting to the right and having a radius of 1830.08 feet, an arc length of
38.26 feet, and a chord bearing North 64(degree)05'11" East, 38.26 feet to the
west line of Lester Road; thence with said west line on a curve deflecting to
the right having a radius of 675.00 feet, an arc length of 89.71 feet, and a
chord bearing South 14(degree)12'08" East, 89.64 feet to the Real Point of
Beginning containing .0407 acres more or less.
The above description is the result of a survey prepared by Carl D.
Walker of Savage, Walker & Associates, Inc., Ohio Registered Surveyor No. 6260
dated August 29, 1997.
<PAGE> 20
EXHIBITS B, C, D
EXCLUDED PROPERTY
<PAGE> 1
Exhibit 10.6
GUARANTY AGREEMENT
THIS GUARANTY AGREEMENT (the "Guaranty") is dated as of the 29th day of
February, 2000, between THE PROVIDENT BANK, an Ohio banking corporation
("Provident"), and SOLVAY AMERICA, INC., a Delaware corporation (the
"Guarantor").
Preliminary Statement
Duramed Pharmaceuticals, Inc., a Delaware corporation (the "Borrower"),
has requested from Provident a loan in the sum of Twenty Million and 00/100
Dollars ($20,000,000.00) (the "Loan") for the purpose of financing working
capital and other general corporate purposes related to Borrower's
pharmaceutical business located at 5040 Duramed Drive, Cincinnati, Ohio 45213
(the "Premises"). The Loan will be evidenced by two (2) Promissory Notes in the
aggregate amount of the Loan (collectively, the "Notes") dated the date hereof,
and will be secured by an Open-End Mortgage (the "Mortgage"), an Assignment of
Leases, Rents and Proceeds (the "Assignment of Leases") and the UCC Financing
Statements. All obligations of Borrower to Provident under the Notes, the
Mortgage, the Assignment of Leases and the UCC Financing Statements are
hereinafter collectively referred to as the "Indebtedness."
NOW, THEREFORE, the parties hereto agree as follows:
1. To induce Provident to make the Loan, the Guarantor hereby
absolutely and unconditionally guarantees the Indebtedness subject to the other
terms and conditions of this Guaranty. The Guarantor undertakes this guarantee
of the aforementioned payment and performance by Borrower notwithstanding that
any portion of the Indebtedness shall be void or voidable as between the
Borrower and any of its creditors including, without limitation, any bankruptcy
trustee of the Borrower. The liability of the Guarantor shall be limited to a
principal amount of Twenty Million and 00/100 Dollars ($20,000,000.00), plus
interest thereon as provided in the Notes (including Default Interest), and all
costs of collection (including reasonable attorneys' fees) and all expenses
reimbursable pursuant to Section 2 hereof.
2. This Guaranty is a guarantee of payment and not a guarantee of
collection. Notwithstanding the foregoing, upon Borrower's failure to pay any
portion of the Indebtedness promptly when due, Provident shall first, by written
notice, make demand upon the Borrower, with a copy of such notice to Guarantor,
to pay such portion of the Indebtedness as is then due, unless provision of such
a notice shall be prohibited under Title 11 U.S. Code or successor statute, in
which case such notice shall be deemed to have been given as of the date of
effectiveness of the prohibition of such notice. Within thirty (30) days after
such notice shall have been given or deemed given to Borrower, Provident, at its
sole option, may demand payment from the Guarantor of all or any part of the
Indebtedness then due and owing. In addition, Provident may proceed against the
Guarantor
<PAGE> 2
- 2 -
(or an additional guarantor, if there be any, or against any one or more of the
foregoing) to collect the Indebtedness, with or without proceeding against the
Borrower, any co-maker or co-surety or co- guarantor, any endorser or any
collateral held as security for the Indebtedness. The Guarantor agrees to
reimburse Provident for all reasonable expenses of any nature whatsoever
including, without limitation, reasonable attorneys' fees, incurred or paid by
Provident in exercising any right, power or remedy against Guarantor conferred
by this Guaranty. Any and all payments upon the Indebtedness made by the
Borrower, Guarantor or any other person, or from the proceeds of any collateral
held as security for the Indebtedness, may be applied by Provident against the
Indebtedness in whatever manner it may determine in its sole discretion. Until
the Indebtedness is paid in full, Guarantor shall not exercise any right of
subrogation with respect to payments made by Guarantor pursuant to this
Guaranty.
Provident shall forbear from exercising any remedy that it might have
under the Mortgage, the Assignment of Leases, the Environmental Indemnity
Agreement or the UCC Financing Statements on account of any default in payment
by Borrower until it shall have demanded payment from Guarantor of such past due
amount as provided above in this Section 2 and Guarantor's failure to pay in
full such past due amount within two (2) business days of Provident's demand
hereof to Guarantor. The failure of Provident to demand payment of any past due
amount from Guarantor as provided herein on any given occasion shall not impair
or be considered a waiver of any such right or power or a waiver of any such
default by Borrower.
3. The liability of Guarantor and the rights of Provident under this
Guaranty shall not be impaired or affected in any manner by, and Guarantor
hereby consents in advance to and waives any requirement of notice for, any (a)
disposition, impairment, release, surrender, substitution, or modification of
any collateral securing the Indebtedness or the obligations created by this
Guaranty or any failure to perfect a security interest in any such collateral;
(b) release (including adjudication or discharge in bankruptcy) or settlement
with any person primarily or secondarily liable for the Indebtedness (including,
without limitation, any maker, endorser, guarantor or surety); (c) delay in
enforcement of payment of the Indebtedness or delay in enforcement of this
Guaranty; (d) delay, omission, waiver, or forbearance in exercising any right or
power with respect to the Indebtedness or this Guaranty; (e) defense arising
from the enforceability or validity of the Indebtedness or any part thereof or
the genuineness, enforceability or validity of any agreement relating thereto;
(f) any defenses or counterclaims that the Borrower may assert on the
Indebtedness, including, but not limited to, failure of consideration, breach of
warranty, fraud, payment, statute of frauds, bankruptcy, infancy, statute of
limitations, lender liability, accord and satisfaction and usury; or (g) other
act or omission which might constitute a legal or equitable discharge of
Guarantor. Except such notices as are expressly required hereby, Guarantor
waives presentment, protest, demand for payment, any right of set-off, notice of
dishonor or default, notice of acceptance of this Guaranty, notice of the
incurring of any of the Indebtedness and notice of any other kind in connection
with the Indebtedness or this Guaranty. Notwithstanding the foregoing, during
the time the Indebtedness remains outstanding, Provident will not, without the
prior written consent of Guarantor, which consent shall
<PAGE> 3
- 3 -
not be unreasonably delayed or withheld, agree to any modification to any
material term or condition of the documents which evidence the Indebtedness.
4. The Guarantor agrees that in the event of (a) the dissolution or
insolvency of Borrower, (b) the inability of Borrower generally to pay its debts
as they become due, (c) an assignment by Borrower for the benefit of its
creditors, (d) the institution by Borrower of any action or proceeding with
respect to itself under Title 11 U.S. Code or successor statute, or (e) the
institution by another entity of any action or proceeding with respect to
Borrower under Title 11 U.S. Code or successor statute, and continuance of such
proceeding for sixty (60) days without dismissal, and whether or not such event
shall occur at a time when the Indebtedness is not then due and payable, the
Guarantor shall upon demand by Provident pay the Indebtedness to Provident as if
the Indebtedness was then due and payable.
5. In the event of any demand by Provident for payment by Guarantor of
any amount less than payment in full of the Indebtedness pursuant to Section 2
hereof, Guarantor shall have the option to promptly tender to Provident the full
amount owing under this Guaranty.
Upon the payment in full to Provident by Guarantor of all the
Indebtedness, Provident shall (a) endorse and deliver to Guarantor the Notes,
without recourse and without any warranties whatsoever, except that Provident
has good title to such Notes, and (b) execute non-recourse assignments of the
Mortgage, the Assignment of Leases, the Environmental Indemnity Agreement and
the UCC Financing Statements, and Guarantor shall be subrogated to the rights of
Provident in respect of such Indebtedness.
6. The Guarantor agrees that this Guaranty shall continue to be
effective or be reinstated, as the case may be, if at any time payment, or any
part thereof, of principal, interest or any other amount with respect to the
Indebtedness is rescinded or must otherwise be restored by Provident upon the
bankruptcy or reorganization of Borrower, any other person or otherwise.
7. The Guarantor shall provide Provident with audited financial
statements of Guarantor for Guarantor's fiscal year within one hundred twenty
(120) days after the end of each such fiscal year. Guarantor shall submit to
Provident within ninety (90) days after each quarter financial statements of
Guarantor that are not audited.
8. Provident shall not be compelled to resort first to any collateral
for payment of any of the Indebtedness or the obligations created by this
Guaranty but may, at its election, require the obligation to be paid by the
Guarantor, with or without suit.
9. Guarantor agrees that with respect to any uncured Event of Default
under the Notes, the Mortgage, the Assignment of Leases or the Environmental
Indemnity Agreement, Provident shall have the sole option to declare or not to
declare a default thereunder, or to waive any such default
<PAGE> 4
- 4 -
from time to time, or to waive the right from time to time to accelerate the
Indebtedness after declaring a default, without in any way affecting its right,
after it does declare a default under the Notes, the Mortgage, the Assignment of
Leases or the Environmental Indemnity Agreement, to require payment from the
Guarantor under this Guaranty. After the declaration of any default by Provident
under the Notes, the Mortgage, the Assignment of Leases or the Environmental
Indemnity Agreement, Provident shall have the sole right to determine whether to
apply payments received from the Borrower toward obligations under the
Indebtedness or any other obligations owing by Borrower to Provident.
10. This Guaranty shall inure to the benefit of and bind the parties
hereto, their successors and assigns, and their legal representatives or heirs.
Provident may, at its option, assign this Guaranty to any lending institution,
bank holding company, insurance company or the like, which becomes the endorsee
or assignee of any part of the Indebtedness, or who is in possession of or the
bearer of any part of the Indebtedness that is payable to the bearer, and the
Guarantor shall continue to be liable under this Guaranty to such other party to
the extent of such indorsed, assigned, or possessed Indebtedness.
11. This Guaranty and all the rights and obligations of the parties
thereto shall be governed by the laws of the State of Ohio.
12. As a specifically bargained inducement for Provident to extend
credit to Borrower (a) THE GUARANTOR HEREBY EXPRESSLY WAIVES THE RIGHT TO TRIAL
BY JURY IN ANY LAWSUIT OR PROCEEDING RELATED TO THIS GUARANTY OR ARISING IN ANY
WAY FROM THE INDEBTEDNESS OR TRANSACTIONS INVOLVING PROVIDENT AND THE BORROWER,
AND (b) THE GUARANTOR HEREBY DESIGNATES ALL COURTS OF RECORD SITTING IN
CINCINNATI, OHIO AND HAVING JURISDICTION OVER THE SUBJECT MATTER, STATE AND
FEDERAL, AS FORUMS WHERE ANY ACTION, SUIT OR PROCEEDING IN RESPECT OF OR ARISING
FROM OR OUT OF THIS GUARANTY, ITS MAKING, VALIDITY OR PERFORMANCE, SHALL BE
PROSECUTED AS TO ALL PARTIES, THEIR PERMITTED SUCCESSORS AND ASSIGNS, AND BY THE
FOREGOING DESIGNATION, THE GUARANTOR CONSENTS TO THE JURISDICTION AND VENUE OF
SUCH COURTS.
13. The Guarantor warrants that it has the corporate power to execute
this Guaranty, that all the necessary corporate actions have been taken to
permit the Guarantor to give this Guaranty, and that the person executing this
Guaranty is duly empowered to do so on behalf of the Guarantor.
14. Provident warrants that it has the corporate power to execute this
Guaranty, that all the necessary corporate actions have been taken to permit
Provident to enter into this Guaranty, and that the person executing this
Guaranty is duly empowered to do so on behalf of Provident.
<PAGE> 5
- 5 -
15. This Guaranty sets forth the complete agreement of the parties with
respect to the subject matter hereof and expressly supersedes the prior or
contemporaneous representation or agreement.
16. No modification or amendment of this Guaranty shall be effective
unless in writing, signed by the party against whom enforcement is sought. No
waiver of any term or provision of this Guaranty shall be effective unless in
writing and only for the instance then given.
17. Any notice or consent required or permitted to be given under this
Guaranty shall be sufficient if made in writing and sent via courier, fax or
certified mail, postage prepaid, and shall be effective when received by the
party to whom sent.
If to Provident, to: The Provident Bank
Three East Fourth Street
Second Floor
Cincinnati, Ohio 45202
Attention: Richard M. Sterling
Vice President
Fax: (513) 579-2398
with a copy (which copy
shall not constitute
notice) to: Keating, Muething & Klekamp, P.L.L.
1400 Provident Tower
One East Fourth Street
Cincinnati, Ohio 45202
Attention: Mark J. Weber, Esq.
Fax: (513) 579-6457
If to Guarantor, to: Solvay America, Inc.
33 Richmond Avenue
Houston, Texas 77098
Attention: Vice President/General Counsel
Fax: (713) 525-7818
<PAGE> 6
- 6 -
with a copy (which copy
shall not constitute
notice) to: Solvay Pharmaceuticals, Inc.
901 Sawyer Road
Marietta, Georgia 30062
Attention: Vice President-Law,
Government and Public Affairs
Fax: (770) 578-5749
18. Guarantor agrees that it shall not amend or modify any of the
material terms or provisions of that certain Reimbursement Agreement of even
date herewith between Guarantor and Borrower without the prior written consent
of Provident.
Remainder of page intentionally left blank. Signature page follows.
<PAGE> 7
IN WITNESS WHEREOF, the parties hereto have caused their duly
authorized representatives to execute and deliver this Guaranty Agreement on and
as of the date first above set forth.
THE PROVIDENT BANK
By:
----------------------------------------
Name: Richard M. Sterling
Its: Vice President
Date:
--------------------------------------
SOLVAY AMERICA, INC.
By: /s/ Philip Uhrhan
----------------------------------------
Name: Philip Uhrhan
--------------------------------------
Its: Vice President, Finance
---------------------------------------
Date: February 25, 2000
--------------------------------------
<PAGE> 1
Exhibit 10.7
REIMBURSEMENT AGREEMENT
This Reimbursement Agreement (the "Agreement") is made and entered into
as of February ___, 2000 by and between SOLVAY AMERICA, INC., a Delaware
corporation ("Solvay"), and DURAMED PHARMACEUTICALS, INC., a Delaware
corporation ("Duramed").
A. Duramed has requested that The Provident Bank ("Lender"), an Ohio
banking corporation, make a loan to Duramed in the original principal amount of
$20,000,000 (the "Loan");
B. The Lender has agreed to make the Loan provided that Solvay
guarantees the repayment of the Loan;
C. As a condition to Solvay guaranteeing to Lender the repayment of the
Loan by Duramed, Solvay is requiring that Duramed reimburse Solvay the full
amount of any payment made by Solvay to Lender pursuant to its guaranty of the
obligation of Duramed to repay the Loan to Lender;
D. In consideration of Duramed's agreement to reimburse Solvay for any
payment made by Solvay to Lender pursuant to its guaranty of the obligation of
Duramed to repay the Loan to Lender, Solvay and Duramed desire to enter into
this Agreement.
NOW, THEREFORE, in consideration of the premises, of the agreements of
Solvay and Duramed contained herein, and of the making of the Loan by Lender to
Duramed, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
Section 1.01. Definitions. The following terms, as used herein, have
the following meaning:
"Agreement" means this Reimbursement Agreement, as the same may from
time to time be amended, supplemented, or extended, including all exhibits
hereto and any other documents executed and delivered as a part hereof.
"Business Day" means a day of the year, other than (i) a Saturday,
Sunday or legal holiday on which banking institutions in the State of Ohio are
authorized or required by law to close or (ii) a day on which The New York Stock
Exchange is closed.
"Default Rate of Interest" means a rate per annum equal to the sum of
the Prime Rate plus four (4) percentage points (computed on the basis of a year
of 360 days and the actual number of days elapsed).
"Dollars" and the sign "$" mean freely transferable money of the United
States of America.
"Event of Default" shall mean any of the events specified in Article VI
of this Agreement, provided that any requirement for the giving of notice or for
the lapse of time has been satisfied in connection with such event.
"GAAP" shall mean generally accepted accounting principles consistently
applied.
"Guaranty" shall mean a certain Guaranty Agreement executed by Solvay
in favor of Lender of even date herewith.
"Guaranteed Documents" is defined in Section 2.01 of this Agreement.
"Loan" is defined in paragraph A of the preamble hereof.
"Obligations" is defined in Section 2.01 of this Agreement.
"Person" means an individual, a corporation, a partnership, an
association, a trust or trustee thereof or any other entity, fiduciary or
organization, including a government or political subdivision thereof.
<PAGE> 2
"Prime Rate" means such rate of interest as publicly announced from
time to time by Provident as its prime rate, which may not be Provident's lowest
rate of interest charged to borrowers, such rate changing automatically and
immediately from time to time effective as of the effective date of each such
announced change.
ARTICLE II
GUARANTY
Section 2.01. Guaranty.
Solvay has executed in favor of Lender the Guaranty of even date
herewith pursuant to which Solvay guarantees the prompt and punctual payment and
performance, as the case may be, of the Obligations (as defined in the Guaranty)
of Duramed to Lender under the Guaranteed Documents (as defined in the Guaranty)
as more particularly provided in the Guaranty.
Section 2.02. Reimbursement and Other Payments.
(a) Demand for Payment. If (i) Solvay makes any payment to Lender
pursuant to the Guaranty in order to satisfy an Obligation of Duramed to Lender
then due and unpaid or (ii) Solvay pays any third party in order to cause the
performance of any Obligation of Duramed to Lender then due and unperformed,
Solvay shall, unless prohibited by any law, regulation or judicial or
administrative order, notify Duramed, and in the case of payments to third
parties, shall provide to Duramed reasonable evidence of the payment of such
expense and the purpose of the expenditure. Within five (5) days following the
receipt of such notice, Duramed shall pay, and unconditionally promises to pay,
without offset, statement, withholding or other reduction whatsoever, Solvay the
amount of such payment, together with interest on such amount at the Default
Rate of Interest accruing from and after the date of receipt of such notice.
Section 2.03. Payment on Non-Business Days. Whenever any payment to be
made hereunder by Duramed shall be stated to be due on a day which is not a
Business Day, such payment shall be made on or before the preceding Business
Day.
ARTICLE III
CONDITIONS OF ISSUANCE
Section 3.01. Conditions Precedent to this Agreement. The obligation of
Solvay to enter into this Agreement is subject to the condition precedent that
Solvay shall have received on or before the date hereof the following addressed
to Solvay, in form and substance reasonably satisfactory to Solvay:
(a) A certificate of the Secretary or Assistant Secretary of Duramed,
certifying the accuracy and completeness of copies of the resolutions or actions
by unanimous written consent of the board of directors of Duramed authorizing or
ratifying the execution, delivery and performance of this Agreement and the
Other Loan Documents.
(b) A certificate of the Secretary or Assistant Secretary of Duramed
certifying the names and true signatures of the officers or other
representatives of Duramed authorized to sign this Agreement and the Other Loan
Documents.
(c) Opinion of counsel for Duramed, addressed to Solvay, in
substantially the form of Exhibit A hereto.
(d) Executed copies of this Agreement.
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<PAGE> 3
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
Section 4.01. Representations and Warranties of Duramed. Duramed hereby
represents and warrants to Solvay as follows:
(a) Except as previously disclosed to Solvay in writing, Duramed has
filed all Federal, state and local tax returns required to be filed and has paid
all taxes shown to be due on such returns, and has made provision for all
liabilities not so paid or accrued under returns not yet due. Except as
previously disclosed to Solvay in writing, Duramed has no knowledge of any
pending assessments or adjustments to its taxes payable with respect to any
year.
(b) Duramed's obligations under this Agreement are not subordinate in
any manner to any other obligation of Duramed.
(c) There is no claim, action, temporary restraining order, injunction,
suit, proceeding, inquiry or investigation, at law or in equity, before or by
any judicial or administrative court, governmental agency, public board or body,
pending or, to the best of Duramed's knowledge, threatened against or affecting,
or involving the properties or businesses, or any securities of, Duramed nor, to
the best of Duramed's knowledge, is there any basis therefor, (i) contesting the
existence or powers of Duramed or the authority of its directors, officers, or
partners, as the case may be, or (ii) wherein an unfavorable decision, ruling or
finding would in any way adversely affect Duramed's ability to carry out its
obligations under this Agreement.
(d) The transactions contemplated by this Agreement have not been
entered into by Duramed in contemplation of Duramed's insolvency and neither
have such transactions been entered into with the intent of Duramed to hinder,
delay or defraud the equityholders or the creditors of Duramed.
(e) Duramed is not regularly engaged in the business of extending
credit for the purpose of purchasing or carrying margin stock (within the
meaning of Regulation U of the Board of Governors of the Federal Reserve
System).
ARTICLE V
COVENANTS OF DURAMED
Section 5.01. Financial Statements. (a) Duramed shall furnish to Solvay
as soon as practical after the end of each calendar quarter, and in any event
within 30 days thereafter, (i) a balance sheet of Duramed as at the end of such
calendar quarter, (ii) an income statement and a reconciliation of retained
earnings for Duramed for such calendar quarter, and (iii) a statement of cash
flows for Duramed for such calendar quarter. All financial statements required
to be furnished to Solvay pursuant to this Section 5.01(a) shall be in
consolidated form, if applicable, and shall be in reasonable detail and
certified by the chief financial officer of Duramed as having been prepared in
accordance with GAAP, as being true, complete and correct in all material
respects, and as presenting fairly the financial position, of Duramed as of the
respective dates of such balance sheet and the results of its operations for the
respective periods covered. On each occasion on which Duramed is required to
furnish a financial statement to Solvay pursuant to this Section 5.01(a),
Duramed shall also furnish to Solvay a certificate of Duramed's chief executive
officer or chief financial officer that such officer has caused the provisions
of this Agreement to be reviewed and, after reasonable investigation, has no
knowledge of the occurrence of any event or condition which either constitutes
or with the lapse of time or giving of notice or both would constitute an Event
of Default, or if such officer has such knowledge, specifying such event or
condition and what action Duramed has taken, is taking or proposes to take with
respect thereto.
(b) Within ninety (90) days after the last day of each fiscal year,
Duramed shall furnish to Solvay a copy of its financial statements, audited by
independent certified public accountants, including statements of financial
condition as of the end of such fiscal year, and related statements of income
and cash flows, a reconciliation of retained earnings and changes in financial
condition for the fiscal year then ended, setting forth in comparative form the
corresponding figures as of the end of or for the previous fiscal year, all in
reasonable detail and all in conformity with GAAP. Duramed shall also furnish
promptly to Solvay such other information respecting the business, properties,
condition or operations, financial or otherwise, of Duramed as Solvay may
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<PAGE> 4
reasonably request. If an Event of Default shall have occurred and be
continuing, Solvay may require any financial statements required by this
subsection to be audited and certified by independent certified public
accountants.
Section 5.02. Deliver Notice. Forthwith upon learning of any of the
following, Duramed shall deliver written notice thereof to Solvay, describing
the same and the steps being taken by Duramed with respect thereto:
(a) the occurrence of an Event of Default or an event or circumstance
which would constitute an Event of Default, but for the requirement that notice
be given or time elapse or both;
(b) any action, suit or proceeding, by it or against it at law or in
equity, or before any governmental instrumentality or agency, or any of the same
which may be threatened, and which, if adversely determined, would materially
impair the right or ability of Duramed to carry on its business or would
materially impair the right or ability of Duramed to perform its obligations
under this Agreement, or would materially and adversely affect its business,
operations, properties, assets or condition;
(c) any change in the name, address, identity or structure of Duramed;
or
(d) any uninsured or partially uninsured loss through fire, theft,
liability or property damage which may have an adverse material effect on
Duramed's financial condition or operations.
Section 5.03. Keep Books. Duramed shall keep true and proper books of
records and accounts in which full and correct entries are made of all business
transactions, and reflect in its financial statements adequate accruals and
appropriations to reserves, all in accordance with GAAP.
Section 5.04. Continued Existence. Duramed will remain in good standing
and qualified to do business under all applicable state and Federal laws.
Without the prior written consent of Solvay, Duramed will not dissolve or
otherwise dispose of all or substantially all of its assets and will not
voluntarily consolidate with or merge into any other entity or permit one or
more entities to consolidate with or merge into it if the effect of such
consolidation or merger is that Duramed's net worth will be lower immediately
following such merger or consolidation than it was immediately prior to such
merger or consolidation.
Section 5.05. Amendment of Other Documents. Without the prior written
consent of Solvay, Duramed shall not enter into or consent to any amendment or
modification of the Guaranteed Documents. Duramed shall not enter into any
agreement containing any provision which would be violated or breached by the
performance of its obligations hereunder or under any instrument or document
delivered or to be delivered by it hereunder or in connection herewith.
Section 5.06. Affirmative Covenants. Unless the prior written consent
of Solvay is first received, Duramed shall comply with all of the affirmative
covenants contained on Exhibit B hereto, which are hereby incorporated herein by
reference.
ARTICLE VI
EVENTS OF DEFAULT
Section 6.01. Events of Default. The occurrence of any of the following
events shall be an "Event of Default" hereunder:
(a) Duramed shall fail to pay when due any amount payable pursuant to
Section 2.02 hereof; or
(b) Duramed shall fail to furnish any financial statements required by
Section 5.01 when required by Section 5.01 and such failure shall continue for
fifteen (15) days after notice thereof given as provided herein; or
(c) Duramed shall fail to perform or observe any of the terms,
covenants or agreements to be performed or observed by Duramed as set forth in
this Agreement (other than the failures described in
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<PAGE> 5
subsections (a) and (b) of this Section 6.01), and any such failure shall
continue for thirty days after notice given as provided herein; or
(d) Any representation or warranty made by Duramed herein or in any
other document delivered in connection with this Agreement or any representation
or warranty of any guarantor of the obligations of Duramed under this Agreement
shall prove to have been incorrect in any material respect when made.
Section 6.02. Remedies Upon an Event of Default. If (i) any Event of
Default shall have occurred and be continuing and shall not have been
specifically waived pursuant to Section 7.03 hereof, (ii) Lender shall have
accelerated the maturity of the entire principal amount of the Obligations
together with all interest accrued and unpaid thereon and demanded that Solvay
pay the same and (iii) Solvay shall have paid the same, Solvay may declare the
principal of all amounts owing under the Guaranteed Documents, together with
interest thereon, to be forthwith due and payable to Solvay, regardless of any
other specified maturity or due date, without notice of default, presentment or
demand for payment, protest or notice of nonpayment or dishonor, or other
notices or demands of any kind or character, and without the necessity of prior
recourse to any security.
The rights and remedies of Solvay under the terms and provisions of
this Agreement and at law or in equity, shall be separate, distinct and
cumulative, none of them shall be exclusive of the others, and Solvay may
exercise all or any one of them successively or concurrently. No act of Solvay
shall be deemed to be an election to proceed under any one provision herein to
the exclusion of any other provision, anything herein or otherwise to the
contrary notwithstanding.
ARTICLE VII
MISCELLANEOUS
Section 7.01. Amendments; Waivers. No amendment or waiver of any
provision of this Agreement, and no consent to any departure by Duramed
therefrom, shall in any event be effective unless the same shall be in writing
and signed by Solvay, and then such waiver or consent shall be effective only in
the specific instance and for the specific purpose for which given.
Section 7.02. Notices. Except as otherwise provided herein, whenever
notice is required to be given pursuant to the provisions hereof, such notice
shall be in writing (including facsimile transmission) and shall be given as
follows:
(a) if to Duramed: 7155 Kemper Road
Cincinnati, Ohio 45249
Attention: Chief Financial Officer
(b) if to Solvay: 33 Richmond Avenue
Houston, Texas 77098
(713) 525-7818
with copies to: Attention: Vice President and General Counsel
or to such other address as any Person listed in this Section may hereafter
specify for the purpose by written notice to each other Person listed in this
Section. Each such notice shall be effective and conclusively deemed received
(i) if given by certified or registered U.S. mail, when confirmation of delivery
is received or when notice of refusal to accept delivery is received, (ii) if
given by recognized overnight delivery service that in the ordinary course of
its business maintains a record of receipts of each of its deliveries, when
delivery is received or refused, or (iii) if hand delivered, when delivered at
the address specified in this Section.
Section 7.03. No Waiver; Remedies. No failure on the part of Solvay to
exercise, and no delay in exercising, any right hereunder shall operate as a
waiver thereof, unless as permitted under Section 7.03 hereof; neither shall any
single or partial exercise of any right hereunder preclude any other or further
exercise thereof or the exercise of any other right. The remedies herein
provided are cumulative and not exclusive of any remedies provided by law.
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<PAGE> 6
Section 7.04. Accounting Terms. All accounting terms not specifically
defined herein shall be construed in accordance with GAAP.
Section 7.05. Computations. Where the character or amount of any asset,
liability or item of income or expense is required to be determined, or any
consolidation or other accounting computation is required to be made, for the
purpose of this Agreement, such determination or calculation shall, to the
extent applicable and except as otherwise specified in this Agreement, be made
in accordance with GAAP.
Section 7.06. Further Assurances. Duramed shall do such further acts
and things and execute and deliver to Solvay such additional assignments,
agreements, powers and instruments, as Solvay may reasonably require or deem
advisable to carry into effect the purposes of this Agreement or to better
assure and confirm unto Solvay its rights, powers and remedies hereunder.
Section 7.07. Execution in Counterparts. This Agreement may be executed
in any number of counterparts, each of which counterparts, when so executed and
delivered, shall be deemed to be an original and all of which counterparts,
taken together, shall constitute but one and the same Agreement.
Section 7.08. Binding Effect. This Agreement shall become effective
when it shall have been executed by Duramed and Solvay and thereafter shall be
binding upon and inure to the benefit of Duramed and Solvay and their respective
successors and assigns. Solvay may assign to any financial institution all or
any part of, or any interest (undivided or divided) in, its rights and benefits
under this Agreement, and to the extent of that assignment such assignee shall
have the same rights and benefits against Duramed hereunder as it would have had
if such assignee were Solvay.
Section 7.09. Severability. The parties hereto intend and believe that
each provision in this Agreement comports with all applicable local, state and
Federal laws and judicial decisions. However, if any provision or provisions, or
if any portion of any provision or provisions, in this Agreement are found by a
court of law to be in violation of any applicable local, state or Federal
ordinance, statute, law, administrative or judicial decision, or public policy,
and if such court should declare such portion, provision or provisions of this
Agreement to be illegal, invalid, unlawful, void or unenforceable as written,
then it is the intent of the parties hereto that such portion, provision or
provisions shall be given force and effect to the fullest possible extent, that
the remainder of this Agreement shall be construed as if such provision or
provisions were not contained herein and that the rights, obligations and
interests of the parties under the remainder of this Agreement shall continue in
full force and effect.
Section 7.10. Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Ohio, except to the
extent that such laws would direct the application of the laws of a different
state.
Section 7.11. Heading. Section headings and captions in this Agreement
are included herein for convenience of reference only and shall not constitute a
part of this Agreement for any other purpose and are not to be considered as
defining or limiting in any way the scope or intent of the provisions of this
Agreement.
Section 17.12. Solvay's Attorney Fees. As of the date of this
Agreement, Duramed shall pay the reasonable fees of counsel hired by Solvay to
negotiate this Agreement in connection with such negotiation by wire transfer to
such counsel in accordance with wiring instructions furnished by such counsel.
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<PAGE> 7
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered by their respective representatives thereunto duly
authorized as of the date first above written.
Solvay: Duramed:
SOLVAY AMERICA, INC. DURAMED PHARMACEUTICALS, INC.
By /s/ Philip Uhrhan By /s/ Timothy J. Holt
-------------------------------- ----------------------------------
Name Philip Uhrhan Name Timothy J. Holt
------------------------------ --------------------------------
Title Vice President Finance Title
----------------------------- -------------------------------
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<PAGE> 8
EXHIBIT A
FORM OF DURAMED COUNSEL OPINION
A-1
<PAGE> 9
EXHIBIT B
AFFIRMATIVE COVENANTS
Affirmative Covenants
The following affirmative covenants are incorporated in the
Reimbursement Agreement as if fully set forth therein:
INSURANCE. Duramed shall maintain insurance upon all of its assets and
business properties subject to the Security Documents (the "Property")
and product liability insurance with responsible and reputable insurers
of such character and amounts as are usually maintained by companies
engaged in like business. All insurance policies shall be written for
the benefit of Duramed and Solvay as their interests may appear and
shall contain a provision requiring the insurance company to provide
Solvay not less than thirty days' written notice prior to cancellation
of any such policy. All insurance policies or certificates evidencing
the same shall be furnished to Solvay.
PAYMENT OF TAXES AND CLAIMS. Duramed shall pay all taxes, assessments
and other governmental charges imposed upon its properties or assets or
in respect of any of its franchises, business, income or profits before
any penalty or interest accrues thereon, and all claims (including,
without limitation, claims for labor, services, materials and supplies)
for sums which have become due and payable and which by law have or
might become a lien or charge upon any of its properties or assets,
provided that (unless any material item of property would be lost,
forfeited or materially damaged as a result thereof) no such charge or
claim need be paid if the amount, applicability or validity thereof is
currently being contested in good faith and if such reserve or other
appropriate provision, if any, as shall be required by GAAP shall have
been made therefor.
COMPLIANCE WITH LAWS. Duramed shall comply in all substantial respects
with all applicable statutes, laws, ordinances and governmental rules,
regulations and orders to which they are subject or which are
applicable to its business, properties and assets if noncompliance
therewith would materially adversely affect such businesses; provided
that (unless such contest or noncompliance would materially adversely
affect such businesses) Duramed need not so comply if any such statute,
law, ordinance, or governmental rule, regulation or order is currently
being contested in good faith.
B-1
<PAGE> 1
Exhibit 10.10
January 27, 2000
Mr. E. Thomas Arington
Chairman and CEO
Duramed Pharmaceuticals, Inc.
5040 Duramed Drive
Cincinnati, Ohio 45213
Dear Tom:
This letter will confirm our agreement, further details of which may be
elaborated in a subsequent agreement or agreements, regarding (i) the loan
guarantee to be provided by Solvay Pharmaceuticals, Inc. to Merrill Lynch
Business Financial Services, Inc. and (ii) the extended and enhanced alliance
with respect to the co-promotion of Cenestin(R). Such agreement(s) shall contain
the following provisions:
1. The Cenestin co-promotion agreement shall have a term of 10
years.
2. Effective January 1, 2000, Solvay Pharmaceuticals will be
responsible for and pay the advertising and sales promotion
("ASP") and agreed-upon expenses related to Cenestin,
including direct selling expenses of Cardinal Market Force.
3. Upon completion of the "Investment Recovery Phase" (as defined
below), the parties shall share equally in the gross profits
from the sales of Cenestin, less ASP expenses incurred by
Solvay Pharmaceuticals, as illustrated in the financial models
[previously presented]. Investment Recovery Phase shall mean
the period of time from 1/1/2000 until the cumulative gross
profit from Cenestin sales exceeds the total of the Solvay
Pharmaceuticals Investment (defined as the cumulative ASP
incurred by Solvay Pharmaceuticals from 1/1/2000 forward) and
the Duramed 1999 Cenestin Investment (defined as $38,000,000).
During the Investment Recovery Phase, the split of gross
profits shall be calculated as follows:
Step 1 Investment Recovery Phase:
- --------------------------------
THE BASIC FORMULA
- --------------------------------------------------------------------------------
DRMD 100% Sales
DRMD 15% Cost of product @ standard
Gross profit 85% Gross profit (GP)
Solvay Pharmaceuticals gets 80% of GP to cover ASP from 1-1-2000 and
forward
DRMD gets 20% of GP
Step 2 Investment Recovery Phase:
- --------------------------------
When Solvay Pharmaceuticals has recovered all of the on-going ASP costs CENESTIN
will be generating a profit. DRMD will receive 80% of the remaining gross profit
until they have recovered the specified "investments" (38 MUSD).
<PAGE> 2
THE BASIC FORMULA
- --------------------------------------------------------------------------------
Step 1
DRMD 100% Sales
DRMD 15% Cost of Product @ standard
Gross profit 85% Gross profit (GP)
Solvay Pharmaceuticals gets 80% of GP to cover ASP until Cumulative
Breakeven
DRMD gets 20% of GP
Step 2
Remaining Gross Profit 80% Of GP to cover 1999 investment of $38
MUSD
20% Of GP goes to Solvay Pharmaceuticals
4. Solvay Pharmaceuticals will guarantee the loan to Duramed by
Merrill Lynch Business Financial Services, Inc. in the
principal amount of $20,000,000 subject to approval by Solvay
Pharmaceuticals of the required documentation from Merrill
Lynch Business Financial Services, Inc. and the granting of an
exclusive, first position mortgage, to Solvay Pharmaceuticals,
Inc. in the approximately 17 acre tract of land and
improvements comprising Duramed's Cincinnati manufacturing
facility.
5. Duramed shall grant Solvay Pharmaceuticals, or its designee, a
worldwide exclusive license to Cenestin(R)outside the U.S.
These rights will apply to all countries except for Puerto
Rico and the Eastern European countries currently covered by
Duramed's existing commitments to Gedeon Richter until such
time as those arrangements expire or are terminated. This
license will apply on a country-by-country basis and may be
exercised with respect to any country at any time within ten
months after the date of this letter. During this period,
Solvay Pharmaceuticals will advise Duramed of the countries in
which it wishes to market Cenestin, and the parties will
negotiate in good faith to enter into a mutually agreed
license and supply agreement for each country on commercially
viable terms to Solvay Pharmaceuticals which, amongst other
terms, shall include consideration of the pricing constraints
imposed by foreign countries.
Unless otherwise agreed between Duramed and Solvay
Pharmaceuticals, the term of any such agreement will continue
for the term of the Cenestin co-promotion agreement between
Solvay Pharmaceuticals and Duramed, as the term of that
agreement may be modified by the parties in the future. During
the initial ten months period and for a period of two years
thereafter, if Duramed receives a bona fide written offer from
a third party for Cenestin in a country, Duramed will promptly
notify Solvay Pharmaceuticals of the terms of the offer, and
Solvay Pharmaceuticals will have the right to negotiate an
agreement with Duramed for that country on terms no more
favorable to Duramed than the terms offered by the third
party. If Duramed and Solvay Pharmaceuticals are unable to
agree on the terms of the agreement for a country within two
months of the date Duramed notifies Solvay Pharmaceuticals of
the third party offer, Duramed may proceed with the third
party on the terms previously offered by the third party.
6. Duramed shall grant Solvay Pharmaceuticals, or its designee,
the option to an exclusive worldwide license to Verapamil SR
under a Solvay Pharmaceuticals brand name. This option may be
exercised at any time within one year after the date of this
letter. During this period, at Solvay Pharmaceuticals'
request, Duramed will negotiate, with Solvay Pharmaceuticals a
royalty-free licensing and supply agreement for Verapamil SR
on industry-standard terms and conditions. Under any
agreement, Duramed will agree to manufacture Verapamil SR for
Solvay Pharmaceuticals and sell it to Solvay
<PAGE> 3
Pharmaceuticals at a price equal to Duramed's standard cost,
plus 15%. If Solvay Pharmaceuticals exercises its right of
first refusal and introduces a brand product, Duramed will
cease marketing Verapamil SR as a generic drug under Duramed's
ANDA.
Both parties agree to diligently pursue the drafting and negotiation of further
documentation incorporating the agreements as set forth above.
If you agree with the foregoing, please sign and return a copy of this letter,
which will then represent the binding agreement of our companies.
Very truly yours,
SOLVAY PHARMACEUTICALS, INC.
By: /s/ Robert A. Solheim
--------------------------------------
Robert A. Solheim, Vice President
Accepted and agreed to this day
-----
of January, 2000
DURAMED PHARMACEUTICALS, INC.
By: /s/ E. Thomas Arington
--------------------------------------
E. Thomas Arington, Chairman and CEO
<PAGE> 1
Exhibit 10.11
CHANGE IN CONTROL CONTINGENT EMPLOYMENT AGREEMENT
THIS AGREEMENT, made as of the ____ day of _______, ____, by and
between Duramed Pharmaceuticals, Inc., a Delaware corporation (the "Company"),
and _________________________, ___________________ of the Company (the
"Employee"),
W I T N E S S E T H :
---------------------
WHEREAS, sudden takeovers, acquisitions or changes of control of
domestic corporations have occurred frequently in recent years, and current
conditions may contribute to the continuation or acceleration of this trend; and
WHEREAS, the possibility of a sudden takeover, acquisition or change of
control can create uncertainty of employment and may cause the loss of valuable
Company officers, to the detriment of the Company and its shareholders; and
WHEREAS, it is believed that the detriment described can be
substantially reduced by an agreement on the terms hereinafter set forth;
NOW THEREFORE, in consideration of the foregoing premises and the
mutual covenants hereinafter set forth, IT IS AGREED:
(1) Continued Employment. If a change of control of the Company occurs
when the Employee is employed by the Company, the Company will continue
thereafter to employ the Employee, and the Employee will remain in the employ of
the Company, in accordance with the terms and provisions of this Agreement, for
a period of _______ months following the date of such change (the "Employment
Period"). As used herein, the phrase "change of control of the Company" means
the first to occur of the following:
(a) The acquisition of more than thirty percent (30%) of the
outstanding shares of voting stock of the Company by any person or entity or
group thereof acting in concert, excluding affiliates of the Company, by means
of an offer made publicly to the holders of all or substantially all of the
outstanding shares of the voting stock of the Company to acquire such shares for
cash, securities, other property or any combination thereof; or
(b) Any person or entity acquires, subsequent to the date of
this Agreement, beneficial ownership of thirty percent (30%) or more of the then
issued and outstanding voting common stock of the Company in any manner other
than a purchase of such stock directly from the Company for cash; or
(c) The sale, assignment or transfer by the Company of all or
substantially all of its business or assets, in a transaction or related series
of transactions, except any such sales to affiliates of the Company; or
(d) The Company merges or consolidates or reorganizes with or
into any other corporation or corporations other than its affiliates or engages
in any other similar business combination or reorganization; or
(e) A majority of the Board of Directors of the Company does
not consist of persons who were serving in the capacity on the date of this
Agreement, or who were appointed or nominated to serve as a Director by such
persons or by persons who were themselves so appointed or nominated.
<PAGE> 2
(2) Duties. Unless otherwise agreed by the Company and Employee, during
the Employment Period the Employee shall be employed by the Company in the same
position as that which the Employee held on the date of the change of control of
the Company. In such employment, his duties and authority shall consist of and
include all duties and authority customarily performed and held by a person
holding an equivalent position with a corporation of similar nature and size, as
such duties and authority related to such position are reasonably defined and
delegated from time to time by the Board of Directors of the Company. However,
no change of the Employee's location of employment to outside the Cincinnati,
Ohio area, or in the Employee's title, shall be made without the prior written
consent of the Employee. The Employee shall have the powers necessary to perform
the duties assigned and shall be provided such supporting services, staff,
secretarial and other assistance, office space and accouterments as shall be
reasonably necessary and appropriate in light of the duties assigned (but in no
event, in any case, smaller in size or lesser in quality than that being
furnished to the Employee on the date of the change of control of the Company).
The Employee shall devote his entire business time, energy and skills
to such employment while so employed, but the Employee shall not be required to
devote more than an average of approximately 45 hours per calendar week to such
employment. The Employee shall be entitled to a minimum of three (3) weeks
(fifteen [15] working days) of paid vacation annually. The Employee shall have
the sole discretion to determine the time and intervals of such vacation.
(3) Compensation. During the Employment Period, the Employee shall be
compensated as follows:
(a) He shall receive a salary equal to his salary as in effect
as of the date of the change of control of the Company, subject to adjustment as
hereinafter provided.
(b) He shall be reimbursed for any and all monies advanced in
connection with his employment for reasonable and necessary expenses incurred by
him on behalf of the Company.
(c) He shall be included to the extent eligible thereunder in
any and all plans providing benefits for the Company's employees, including, but
no limited to, life, accidental death and dismemberment, long term disability,
hospitalization, medical and retirement, and be provided any and all other
benefits and perquisites (including use of an automobile) made available to
other employees of comparable status, at the expense of the Company on a
comparable basis; and
(d) He shall be included in all profit sharing, bonus,
deferred compensation, split dollar life insurance, and similar or comparable
plans customarily extended by the Company to corporate officers and key
employees of the Company.
(4) Annual Compensation Adjustments. The Board of Directors of the
Company or an appropriate committee thereof will consider and appraise the
contributions of the Employee to the Company's operating efficiency, growth,
production and profits, at least annually during the Employment Period, and in
accordance with past practice, the Employee's compensation rate shall be
annually adjusted upward to be commensurate with increases given to other
corporate officers and key employees generally and as the scope and success of
the Company's operations or the Employee's duties expand.
(5) Retirement. If, during the Employment Period, or during the
applicable period, if any, described in paragraph (7), the Employee shall
deliver to the Company a statement signed by
- 2 -
<PAGE> 3
him, stating that the Employee voluntarily chooses to retire early from the
Company, or if the Employee shall reach the age of 65, or shall with the mutual
agreement of the Company agree in writing on early retirement, then this
Agreement shall terminate on the effective date of such event and the terms of
the Company's retirement policies or such mutual agreement shall immediately
become effective.
(6) Termination Other Than for Cause.
(a) If, during the Employment Period, the Company shall
terminate the employment of the Employee for any reason other than the reasons
set forth in paragraph (5) above or paragraph (7) below, thereafter he or his
personal representatives shall continue to be paid monthly an amount equal to
his then current monthly base salary plus one-twelfth (1/12th) of the annual
average of the executive incentive program payments and all bonuses paid to the
Employee in the preceding five (5) years, and he shall be entitled to continue
live, accidental death and dismemberment, long term disability and
hospitalization and medical insurances and shall receive the other employee
benefits and perquisites described in subparagraphs (3)(c) and (3)(d) hereof,
for the remainder of the Employment Period or as specified by Federal law,
whichever time period is longer.
(b) If during the Employment Period the Employee's duties
shall be changed substantially without his written consent from those specified
in paragraph (2) or he shall fail to be reelected or he shall be removed as a
corporate officer of the Company, or if the Company violates this Agreement, the
Employee shall have the right to elect to terminate his employment under this
Agreement; and if he so elects, he or his personal representatives shall
continue to be paid monthly an amount equal to his then current monthly base
salary plus one-twelfth (1/12th) of the average of the executive incentive
program payments and all bonuses paid to the Employee in the preceding five (5)
years, and he shall be entitled to participate in group life, hospitalization
and medical insurance and shall receive the other employee benefits and
perquisites described in subparagraphs (3)(c) and (3)(d) hereof, for the
remainder of the Employment Period.
(7) Termination for Cause. Employee agrees that this Agreement may be
terminated by the Company at any time for cause, which shall mean only death,
conviction for criminal fraud, the commission of a felony, or becoming the
subject of a final nonappealable judgment of a court of competent jurisdiction
holding that the Employee is liable to the Company for damages for obtaining a
personal benefit in a transaction adverse to the interest of the Company. In the
event this Agreement is terminated for cause, the Employee shall forfeit his
right to any and all benefits he would otherwise have been entitled thereafter
to receive under the Agreement.
(8) Enforceability. The parties agrees that nothing in this Agreement
shall in any way abrogate the right of the Company and the Employee to enforce
by injunction or otherwise the due and proper performance and observance of the
several covenants herein contained to be performed by the Employee or the
Company or to recover damages for breach thereof.
(9) Successors and Assigns. If the Company sells, assigns or transfers
all or substantially all of its business and assets to any person, excluding
affiliates of the Company, or if the Company merges into or consolidates or
otherwise combines with any person which is a continuing or successor entity,
then the Company shall assign all of its right, title and interest in this
Agreement as of the date of such event to the person which is either the
acquiring or successor corporation, and such person(s) shall assume and perform
from and after the date of such assignment all of the terms, conditions and
provisions imposed by this Agreement upon the Company. In case of such
assignment by the Company and of assumption and agreement by such person(s), all
further rights as well as all other obligations of the Company under this
- 3 -
<PAGE> 4
Agreement thenceforth shall cease and terminate and thereafter the expression
"the Company" wherever used herein shall be deemed to mean such person(s).
(10) Affiliate. The term "affiliate" as used in this Agreement means
any corporation more than fifty (50%) percent of the outstanding voting common
stock of which is owned at the time by the Company or an affiliate of the
Company.
(11) Supplemental Compensation. This Agreement supplements, and is not
an amendment to or in derogation of, any other agreement between the Company and
the Employee relating to the employment or the terms and conditions thereof. No
person, other than such person as may be designated by the Board of Directors of
the Company, shall have any authority on behalf of the Company to agree to
modify or change this Agreement.
(12) Severability. This Agreement is to be governed by and construed
under the laws of the State of Ohio. If any provision of this Agreement shall be
held invalid and unenforceable for any reason, such provision shall be deemed
deleted and the remainder of the Agreement shall be valid and enforceable
without such provision.
(13) Termination of Agreement. The Company has the right to terminate
the employment of the Employee except in contemplation of a change in control of
the Company, and the Employee may elect at his discretion to terminate his
employment, at any time prior to a change in control of the Company, in either
of which events this Agreement shall terminate.
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed and its corporate seal affixed and attested by its duly authorized
officers, and the Employee has hereunto set his hand and seal as of the date
first above written.
DURAMED PHARMACEUTICALS, INC.
By
-----------------------------------------
(Corporate Seal) Attest:
------------------------------------
-------------------------------------------
, Employee
- 4 -
<PAGE> 1
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 33-17030) pertaining to the 1986 Stock Option Plan; in the Registration
Statements (Forms S-8 No. 33-68474, No. 33-24122, No. 33-30716 and No.
333-17259) pertaining to the 1988 Stock Option Plan; in the Registration
Statement (Form S-8 No. 333-59861) pertaining to the 1997 Stock Option Plan; in
the Registration Statements (Forms S-8 No. 33-68476 and No. 333-71971)
pertaining to the Stock Option Plan for Nonemployee Directors; and in the
Registration Statements (Forms S-3 No. 33-87948, No. 333-45803, No. 333-69317
and No. 333-91441, and Form S-4 No. 33-06901) and in the related Prospectuses of
Duramed Pharmaceuticals, Inc. of our report dated March 29, 2000 with respect to
the consolidated financial statements and schedule of Duramed Pharmaceuticals,
Inc. included in this Annual Report (Form 10-K) for the year ended December 31,
1999.
Ernst & Young LLP
Cincinnati, Ohio
March 29, 2000
<PAGE> 1
POWER OF ATTORNEY
We, the undersigned directors of Duramed Pharmaceuticals, Inc. hereby
appoint E. Thomas Arington and Timothy J. Holt or either of them, our true and
lawful attorneys and agents, to do any and all acts and things in our names and
on our behalf in our capacities indicated below, which said attorneys and
agents, or each of them, may deem necessary or advisable to enable said
corporation to comply with the Securities Exchange Act of 1934, as amended, and
any rules, regulations and requirements of the Securities and Exchange
Commission, in connection with the corporation's Annual Report on Form 10-K for
the fiscal year ended December 31, 1999, including, without limitation, power
and authority to sign for us, or any of us, in our names in the capacities
indicated below, the Report and any and all amendments to the Report, and we
hereby ratify and confirm all that said attorneys and agents, or each of them,
shall do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Power of Attorney has been signed below by the following persons
as of the 23rd day of March 2000 in the capacities indicated.
Signature Title
--------- -----
/s/ E. Thomas Arington Chairman of the Board
- ------------------------------
E. Thomas Arington
/s/ Jeffrey T. Arington Director
- ------------------------------
Jeffrey T. Arington
/s/ George W. Baughman Director
- ------------------------------
George W. Baughman
/s/ Richard R. Frankovic Director
- ------------------------------
Richard R. Frankovic
/s/ Peter R. Seaver Director
- ------------------------------
Peter R. Seaver
/s/ S. Sundararaman Director
- ------------------------------
S. Sundararaman
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Financial
Statements for the quarterly period ended December 31, 1999 and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 4,000
<SECURITIES> 0
<RECEIVABLES> 10,561,307
<ALLOWANCES> 951,000
<INVENTORY> 32,910,493
<CURRENT-ASSETS> 49,206,692
<PP&E> 50,801,537
<DEPRECIATION> 20,861,935
<TOTAL-ASSETS> 80,773,417
<CURRENT-LIABILITIES> 46,627,534
<BONDS> 29,720,761
4,900,000
0
<COMMON> 248,085
<OTHER-SE> (2,557,986)
<TOTAL-LIABILITY-AND-EQUITY> 80,773,417
<SALES> 50,219,878
<TOTAL-REVENUES> 50,219,878
<CGS> 39,759,108
<TOTAL-COSTS> 42,263,552
<OTHER-EXPENSES> 55,426,991
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,551,859
<INCOME-PRETAX> (51,022,524)
<INCOME-TAX> 0
<INCOME-CONTINUING> (51,022,524)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (51,277,969)
<EPS-BASIC> (2.36)
<EPS-DILUTED> (2.36)
</TABLE>
