ITEM 1. BUSINESS. - ---------------------
GENERAL
Duramed Pharmaceuticals, Inc. (the "Company" or "Duramed") currently manufactures and sells a line of prescription generic drug products in tablet, capsule and liquid forms to customers throughout the United States. Products sold by the Company include those of its own manufacture and those which it markets under certain arrangements with other drug manufacturers. The Company sells its products to drug wholesalers, private label distributors, drug store chains, health maintenance organizations, hospitals, nursing homes, retire organizations, mail order distributors, other drug manufacturers, mass merchandisers and governmental agencies.
The Company is committed to executing an aggressive product development program designed to generate a stream of new product offerings. The Company's strategy has been to focus its product development activities primarily on prescription drugs with attractive market opportunities and potentially limited competition due to technological barriers of entry, including generic hormone replacement therapy ("HRT") product opportunities. Through the Company's Hallmark division, the Company's product development pursuits have expanded to include controlled and sustained release products. The Company typically seeks to develop products that either (i) are soon to be off patent, (ii) have not yet been developed generically even though patents have expired (usually because of technological barriers), or (iii) are logical extensions of the Company's existing product line due to their marketing or production characteristics.
Generic drugs are the chemical and therapeutic equivalents of brand name drugs which have gained market acceptance while under patent protection. In general, prescription generic drug products are required to meet the same governmental standards as brand name pharmaceutical products and must receive Food and Drug Administration ("FDA") approval prior to manufacture and sale. Generic drug products are marketed after expiration of patents held by the innovator company, generally on the basis of FDA approved Abbreviated New Drug Applications ("ANDAs") submitted by the generic manufacturers. Generic drug products typically sell at prices substantially below those of the equivalent brand name products. The increasing emphasis on controlling health care costs, the growth of managed care organizations and the significant number of drugs for which patents will expire in the next few years are expected to create an opportunity for continued growth in the generic drug market.
CONJUGATED ESTROGENS PRODUCT STATUS
The Company has invested a substantial amount of resources pursuing the development, approval, and launch of a generic conjugated estrogens product. The Company continues to prepare for the anticipated commercial launch of conjugated estrogens and,
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accordingly, is maintaining a higher level of operational and corporate infrastructure than would otherwise be required. The Company's financial condition and results of operations have been substantially impacted by this pursuit. Therefore, management believes a review of the chronology of key events related to this matter provides an important perspective.
FDA approval is required for Duramed to market conjugated estrogens in the United States. On September 27, 1994, the Company filed with the FDA an ANDA for the .625 mg strength of conjugated estrogens. Subsequently, the Company filed amendments covering the other dosage strengths of conjugated estrogens. These products are formulated and designed to meet the conjugated estrogens product composition standards and bioequivalency guidance established by the FDA in 1991 and USP composition standards.
Since 1991, Wyeth-Ayerst, a Division of American Home Products ("Wyeth-Ayerst"), the manufacturer of the brand name product Premarin(R) has made several submissions to the FDA requesting changes in the USP conjugated estrogens product composition standards and bioequivalency guidance. Among other things, Wyeth-Ayerst requested that the FDA change the product composition standards for conjugated estrogens by requiring the generic version to include a specific equine estrogenic substance, delta8,9 dehydroestrone sulfate (delta8,9 DHES). In response to each submission, the FDA determined that the information submitted by Wyeth-Ayerst was insufficient to justify changes in the standards or guidance. In so responding, the FDA let stand the 1991 product composition standards, which established delta8,9 DHES as an impurity and not a necessary ingredient in conjugated estrogens.
On November 30, 1994, Wyeth-Ayerst filed a Citizen Petition with the FDA which reiterates some of its earlier arguments and again requests that the FDA require the inclusion of delta8,9 DHES in generic conjugated estrogens. On July 27-28, 1995, the FDA's Fertility and Maternal Health Drugs and Generic Drugs Advisory Committees met to address this issue. The outcome of this meeting was a unanimous vote by the advisory committees that there is insufficient data to assess whether any individual component (including delta8,9 DHES) or combination of components other than estrone sulfate and equilin sulfate need be present to achieve clinical safety and efficacy in conjugated estrogens.
On October 6, 1995 the Company filed with the FDA an extensive response to the Citizen Petition filed by Wyeth-Ayerst. Duramed's filing included scientific and medical data, as well as the opinions of renowned experts, who all conclude, consistent with the FDA's 1991 guidance, that delta8,9 DHES has no impact on the safety or efficacy of conjugated estrogens and should not be a required component in generic pharmaceutical equivalent dosages to Premarin(R).
Throughout 1996 the Company closely monitored the status of its conjugated estrogens application, and, based on discussions with the FDA, believed that approval of its application would be granted by the end of the third quarter of 1996. However, in October 1996, management was informed that a decision on the Company's conjugated estrogens application would be delayed as a result of FDA's decision to publish a notice for public comment.
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On November 7, 1996 the FDA made available for public comment a report prepared by the FDA entitled "Preliminary Analysis of Scientific Data on the Composition of Conjugated Estrogens" ("Preliminary Analysis') as well as documents submitted by Wyeth-Ayerst which were included in the FDA's analysis. The deadline for comments on the FDA analysis was December 9, 1996.
Referenced in this Preliminary Analysis is a report by FDA's Office of Clinical Pharmacology and Biopharmaceutics (OCPB) which summarizes their analysis of clinical data submitted by Wyeth-Ayerst. OCPB, after analyzing this data in the most favorable light, stated that "NONE OF THE PHARMACOKINETIC DATA PRESENTED BY THE FIRM (WYETH-AYERST) CAN BE INTERPRETED AS DEMONSTRATING THAT DELTA8,9-DEHYDROESTRONE OR ITS METABOLITE 17(BETA)-DELTA8,9-DEHYDROESTRONE IS ESSENTIAL TO THE ESTROGENIC ACTIVITY OF PREMARIN(R) ."
In the Preliminary Analysis, the FDA spells out the scientific/clinical basis for estrone sulfate and equilin sulfate as being the active ingredients in Conjugated Estrogens. The Analysis states that if a drug contains more than one active drug ingredient, then clinical trials are necessary if it is to be shown that the combination is superior to each of its components alone.
The FDA Preliminary Analysis covers all the scientific data submitted to the agency to date, and includes the following extracted conclusions:
- No comparative clinical trials have been performed to ascertain the contribution of individual components to Premarin(R)'s overall effect.
- It is difficult to draw firm conclusions about the contribution of Premarin(R) components to clinical effects based solely on in vitro data.
- Drawing definitive conclusions about clinical effects of Premarin(R) based on animal data is currently not possible.
- The clinical studies submitted to evaluate delta8,9-dehydroestrone were unblinded, small and do not provide definitive results.
- No studies have evaluated the contributions of individual Premarin(R) components to the long-term safety profile of Premarin(R). The available epidemiologic evidence does not definitively establish safety differences.
As previously noted, Duramed has completed its development of Conjugated Estrogens in accordance with FDA published guidance established in 1991 and official USP compositional standards which not only do not require the presence of delta8,9-dehydroestrone, but classifies it as an impurity subject to maximum tolerance limits. During FDA's Joint Advisory Committee meeting in July 1995, the FDA's position was that compelling data would be required to make any changes in the guidance. The Company believes that Wyeth-Ayerst has not met this standard, and is in agreement with the conclusions set forth in the FDA Preliminary Analysis of scientific/clinical data.
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In December 1996, in response to the FDA's request for comment, Duramed submitted additional scientific data and comments to support the FDA's conclusion in the 1991 guidance that delta8,9-dehydroestrone is nothing more than a non-essential impurity and is not required to be present in a generic conjugated estrogens product.
On March 19, 1997, the Senate Labor and Human Resource Committee held a hearing on proposals to review and restructure the operations of the FDA. Dr. Michael Friedman, Lead Deputy Commissioner and Deputy Commissioner for Operations, presented the FDA testimony; he was joined at the witness table by FDA's Center Directors. During the testimony, Dr. Janet Woodcock, Director of Drug Evaluation and Research at the FDA, stated that a scientific conclusion has been made on generic conjugated estrogens, but provided neither details about the decision nor a specific time frame for announcing it. Dr. Woodcock further stated that the conclusion needs to be articulated into a series of regulatory actions and indicated that this will happen as expeditiously as possible. At this time the Company is unable to determine when or if it will obtain FDA approval to market conjugated estrogens. If the Company receives approval from the FDA for its ANDA filings on all strengths of conjugated estrogens and this product is successfully manufactured and marketed, the resulting favorable financial impact is expected to be significant. Accordingly, the Company's operating plan is significantly impacted by this event. If, however, conjugated estrogens is ultimately not approved by the FDA or the FDA's decision substantially delays the product approval, the Company could incur certain write offs related to investments made to date in inventory and other pre-launch activities and provisions of certain of the Company's contractual agreements would become applicable. (See "Notes to Consolidated Financial Statements Note C").
STRATEGIC ALLIANCES
The Company's business strategy includes enhancing its market position and research and development efforts by entering into strategic alliance agreements. The Company has an agreement with Schein Pharmaceutical, Inc. ("Schein") with respect to the development, manufacture and marketing of its conjugated estrogens products. Under the terms of the agreement, Schein provides project funding and technical assistance while Duramed is responsible for product development and manufacturing; both firms will participate in the marketing and distribution of the products.
In June 1994 the Company entered into marketing, distribution and related agreements with Ortho-McNeil Pharmaceutical Corporation ("Ortho-McNeil"). Under the terms of the agreements with Ortho-McNeil, Duramed has non-exclusive distribution rights to the Ortho-McNeil products acetaminophen with codeine, tolmetin sodium, tolmetin sodium ds, oxycodone with acetaminophen and estropipate. The distribution agreement for each of these products specifies a term of ten years, subject to reduction to three years (if not extended) from the date of first sale if Duramed's conjugated estrogens product is not approved by the FDA by June 30, 1996. Such approval was not received by June 30, 1996. Duramed commenced marketing estropipate during the fourth quarter of 1993 and the other Ortho-McNeil products during the fourth quarter of 1994. Duramed is discussing an
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extension of these rights with Ortho-McNeil and based on discussions to date believes that the distribution rights to these products will be extended. Loss of these distribution rights would likely have a material adverse effect upon the Company's results of operations. In addition to the distribution rights for the products, Ortho-McNeil provided $2 million in cash and other financial assistance. In exchange for the financial assistance provided to the Company under the agreements, Ortho-McNeil obtained the right to receive a royalty on the future sales of the Company's conjugated estrogens products. In addition, Ortho-McNeil was to participate in marketing of the Company's conjugated estrogens products and share in the profits if the Company is successful in bringing the products to market. Duramed and Ortho-McNeil are cooperating to amend the obligations of the original agreements regarding conjugated estrogens. Both parties believe that it would be in their best interests to not engage the Ortho-McNeil sales force, and to substitute a fixed payment to Ortho-McNeil in place of the current payment arrangements. At this time, the Company cannot predict the outcome of these discussions.
The Company has agreements with several manufacturers whereby the Company markets and distributes their generic prescription drug products. The terms of these agreements vary, but typically provide for a sharing of profits between the Company and the manufacturer. For the years ended December 31, 1996, 1995 and 1994, respectively, the percentages of the Company's sales comprised of products marketed for others were 35%, 31% and 28%. The gross profit generated by these sales was approximately $2.6, $3.3 and $3.6 million in 1996, 1995 and 1994, respectively. For additional information with respect to the Company's strategic alliance agreements see "Notes to Consolidated Financial Statements - Note C."
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PRODUCTS
A summary, by therapeutic classification, of the products currently manufactured or marketed by the Company is given below:
Methylprednisolone, which is manufactured by Duramed, accounted for approximately 41%, 53% and 55%, respectively, of the Company's sales in 1996, 1995 and 1994.
The Company does not have patent protection for any of its products and trademarks are of relatively minor importance at this time. The Company's operating strategy includes developing brand identity for certain of its products. Certain of the Company's products have a degree of seasonality, the effect of which the Company is attempting to mitigate by adding complimentary products to its line.
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PRODUCT DEVELOPMENT
The Company's product development activities have increased significantly during the past year, and the Company intends to continue aggressively funding product development activities based upon available resources. In the third quarter of 1996, the Company completed the acquisition of Hallmark Pharmaceuticals, Inc. ("Hallmark"), a privately held pharmaceutical development company headquartered in Somerset, New Jersey. The acquisition provides the Company with enhanced development capabilities to pursue controlled and sustained release products. Generic drug products with complex drug delivery systems typically experience limited competition due to the technical barriers to developing these products, and therefore generate higher margins.
The Company's product development strategy consists of three separate but related components; (i) an internal research and development staff, (ii) joint product development efforts with, or purchasing new product formulations from, other parties and (iii) engaging outside experts to develop specified products on a consulting basis.
Through the knowledge and experience attained through the pursuit of the conjugated estrogens product, coupled with the development capabilities acquired at Hallmark, the Company believes that it has assembled a strong product development team with the abilities to successfully and efficiently formulate, file and commercialize a portfolio of new products.
In addition to the conjugated estrogens products, the Company currently has ANDAs for nine other chemical entities on file with the FDA. Assuming adequate resources are in place, the Company's product development plan anticipates the filing of up to an additional 17 ANDAs during 1997. The Company is also in the process of filing to market the conjugated estrogens products in certain markets outside of the United States.
During the fiscal years ended December 31, 1996, 1995 and 1994, product development expenditures were $10.2 million, $6.0 million, and $1.9 million, respectively, of which Hallmark related expenses comprised approximately $2.8 million and $1.5 million in 1996 and 1995, respectively. Additionally, in 1995 product development expenditures included approximately $1.6 million of certain costs incurred in preparation for manufacturing the conjugated estrogens product in commercial quantities. Product development expenditures are net of reimbursements received from Schein under the agreement for the development of a conjugated estrogens product (see "Notes to Consolidated Financial Statements - Note C").
Formulations for all new products are subjected to laboratory testing and stability studies and, when required or desirable, are tested for bioequivalence to the reference product by qualified laboratories. Bio-studies, used to demonstrate that the rate and extent of absorption of a generic drug are not significantly different from the corresponding innovator product, currently cost in the range of $250,000 to $700,000. Bio-studies for certain product classes exceed that range. If the accumulated data demonstrates bioequivalency, submission is then made to the FDA for its review and approval to manufacture and market.
The development of new generic products, including formulation, stability testing and obtaining FDA approval, generally takes at least 18-24 months. Development of sustained release
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prescription products typically requires at least two bioequivalence studies for most products and, therefore, total development time, including FDA approval, may be at least two or three years. Liquid product development frequently does not require bioequivalence studies and, including formulation, stability testing and FDA approval, generally takes at least 12-18 months.
SALES AND MARKETING
Duramed sells its products to a broad range of over 200 customers located throughout the United States. These customers include drug wholesalers, private label distributors, direct buying retail chains, health maintenance organizations, hospitals, nursing homes, retiree organizations, mail order distributors, other drug manufacturers, mass merchandisers and government agencies. The Company markets its products under the Duramed label as well as under private label; on all prescription products which it manufacturers, the Company is named on the label as the manufacturer. All marketing and sales efforts are conducted principally by Duramed employees. Duramed promotes its products through catalogs, trade shows, publications, telemarketing and direct sales.
In 1996, 1995 and 1994, no single customer accounted for more than 10% of the Company's net sales.
ORDER BACKLOG
The dollar amount of the Company's open orders at March 1, 1997 was approximately $1.6 million as compared to approximately $2.3 million at March 1, 1996. The lower backlog in 1997 is partially attributable to the Company's efforts to improve customer service. Although open orders are subject to cancellation without penalty, management expects to fill substantially all of such open orders within the current fiscal year. The Company's backlog may not be indicative of net sales during the following reporting period.
COMPETITION
Competition in the generic prescription pharmaceutical industry is intense. The Company competes with other generic drug product manufacturers, brand name pharmaceutical companies which manufacture generic drug products and the original manufacturers of brand name drug products which continue to produce those products after patent expirations.
As other manufacturers introduce generic products in competition with the Company's existing products, market share and prices with respect to such existing products typically decline. Similarly, the Company's potential for profits is reduced if competitors introduce products prior to the Company. Accordingly, the level of revenue and gross profit generated by the Company's current and prospective products depends, in part, on the number and timing of introductions of competing products and the Company's timely development and introduction of new products.
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The Company believes that the primary competitive factors are the ability to develop new products on a timely basis, price, product quality, customer service, breadth of product line and reputation. Many of the Company's competitors have greater financial and other resources than the Company and are able to expend more for product development and marketing.
GOVERNMENT REGULATION
All pharmaceutical manufacturers are subject to extensive regulation by the federal government, principally by the FDA, the Drug Enforcement Administration and by state governments. The Federal Food, Drug and Cosmetic Act, the Controlled Substance Act, the Generic Drug Enforcement Act of 1992 and other federal statutes and regulations govern or influence the testing, manufacture, safety, labeling, storage, recordkeeping, approval, pricing, advertising and promotion of the Company's products. Noncompliance with applicable requirements can result in fines, seizure of products, total or partial suspension of production, refusal of the government to enter into supply contracts or to approve new drug applications, criminal prosecution and corporate debarment. The FDA also has the authority to institute proceedings to revoke previous approvals of drug products.
FDA approval is required before most prescription drug products can be marketed. Each dosage form of a specific generic drug product, whether a different form of administration or a different strength, is typically treated as a separate drug product by the FDA and requires separate submission. There are two types of applications currently used to obtain FDA approval of a new drug product.
1. New Drug Application ("NDA"). With respect to drug products with active ingredients not previously approved by the FDA or new uses for previously approved active ingredients, a prospective manufacturer must conduct and submit to the FDA complete clinical studies to prove that product's safety and efficacy. An NDA may also be submitted for a drug product with previously approved active ingredients if the abbreviated procedure discussed below is not available.
2. Abbreviated New Drug Application ("ANDA"). This is an abbreviated procedure for obtaining FDA approval for generic drug products which are bioequivalent to brand name drugs. In contrast to the NDA procedure, this procedure does not require conducting complete animal and clinical studies for safety and efficacy, and instead requires data illustrating that the generic drug formulation is bioequivalent to a previously approved drug. "Bioequivalence" indicates that the rate of absorption and the levels of concentration of a generic drug in the body are substantially equivalent to those of the previously approved equivalent brand name drug and, therefore, that the drug will produce an equivalent therapeutic effect.
The Company's product development pursuits are primarily focused on products which can obtain regulatory approval through the ANDA submission process.
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Among the requirements for new drug approval is that the prospective manufacturer's methods conform to the FDA's Current Good Manufacturing Practices ("CGMP Regulations"). The CGMP Regulations must be followed at all times during which the approved drug is manufactured. To ensure compliance with the standards set forth in these regulations, the Company must continue to expend time, money and effort in the areas of production and quality control. Failure to comply risks possible FDA action such as the suspension of manufacturing or the seizure of drug products.
The Company also is subject to environmental protection laws and regulations of federal, state and local governmental authorities, including the Clean Air Act and Occupational Safety and Health Administration ("OSHA") requirements. Under the Clean Air Act, the Company is required to meet certain air emissions standards. Under OSHA, the Company is required to meet certain safety standards, including those relating to equipment and procedures, indoor air quality and data sheets on material used at the Company's facilities. Compliance with these laws had no material effect on the Company's capital expenditures, operating results or competitive position during fiscal 1996, and the Company anticipates no such material effect during fiscal 1997.
RAW MATERIALS
The drugs and other raw materials used in the Company's products are purchased through United States distributors for foreign and domestic manufacturers of bulk pharmaceutical chemicals and are generally available from numerous sources. The federal drug application process requires specification and approval of raw material suppliers. If raw materials from all specified suppliers become unavailable, FDA approval of a new supplier is required, which can cause a delay of six months or more in the manufacture of the drug involved. To date, the Company has not experienced any significant delays and, where economical and feasible, will generally specify two or more suppliers in its drug applications.
LIABILITY INSURANCE
Duramed's business exposes it to the potential liability which is inherent in the production of drugs for human use. Although the Company makes every effort to maintain strict quality control programs and carries product liability insurance of $5.0 million per incident and $5.0 million in the aggregate per year (with a deductible amount of $25,000 per claim and $250,000 in the aggregate per year), it cannot be fully protected from potential liability in this area by any reasonable amount of insurance. Additionally, there can be no assurance that the Company's product liability insurance can be renewed or renewed at a rate comparable to that now being paid by the Company.
EMPLOYEES
As of March 24, 1997, Company had approximately 303 full-time employees. There are no collective bargaining agreements in effect at the Company.
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ITEM 2.

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 conjugated estrogens and other HRT products under development. The facility is collateral for certain of the Company's borrowings.
The Company also conducts product development, and limited manufacturing activities, from a leased 38,000 square foot facility in Somerset, New Jersey. The lease pertaining to this facility expires on May 31, 2000 and the Company has options to purchase the facility, initially exercisable on June 1, 1998.
The Company's executive offices, certain corporate support groups and distribution activities are conducted from a 28,200 square foot facility in Cincinnati, Ohio. The lease for this facility extends to February 28, 2000, and contains options to renew for up to an additional three years.
The Company also has two leased warehouses in Cincinnati, Ohio. One is approximately 28,000 square feet and the other facility is approximately 10,000 square feet. Both warehouses are being leased on a month to month basis.
The Company believes its facilities and equipment are well maintained, in good operating condition and, in general, suitable for the Company's purposes. The Company is currently reviewing its facility requirements and will likely need additional space and equipment to execute its business plan (see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" for a discussion of anticipated facility and equipment resource requirements).
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS. - ---------------------------------
The Company is involved in various lawsuits and claims which arise in the ordinary course of business. Although the outcome of such lawsuits and claims cannot be predicted with certainty, the disposition thereof will not, in the opinion of management, result in a material adverse effect on the Company's financial position or results of operations.
ITEM 4.

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER - ----------------------------------------------------------------------------- MATTERS. --------
The Company's Common Stock is quoted on the Nasdaq National Market System under the symbol "DRMD". The following table sets forth the range of high and low sale prices for the Common Stock as reported by the Nasdaq National Market System for the periods indicated for the years ended December 31, 1996 and 1995:
As of December 31, 1996 the Company had 1,331 holders of record of the Common Stock. The Company believes that, in addition, there are a significant number of beneficial owners of its Common Stock whose shares are held in "street name." The Company has not paid any cash dividends on its Common Stock since its inception and does not intend to pay cash dividends in the foreseeable future. Under the terms of the Company's current loan agreements with its bank, no dividend declaration is permitted. In addition, the terms of the Company's loan agreement with the State of Ohio require that the Company not pay any dividends to stockholders unless an amount equal to 30% of such dividends is paid to the State of Ohio as an additional principal reduction.
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ITEM 6.

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, 1996. This information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" elsewhere herein.
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ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND - ------------------------------------------------------------------------------ RESULTS OF OPERATIONS. - ----------------------
RESULTS OF OPERATIONS - ---------------------
The table below sets forth the components of the Company's results of operations as a percentage of net sales, as well as the percentage change in each item from year to year.
NET SALES
Net sales decreased by $5.8 million (11.6%) in 1996, compared with an increase of $4.3 million (9.6%) in 1995. The decline in net sales in 1996 was primarily attributable to lower revenues from the Company's methylprednisolone product (resulting from both lower unit sales and lower prices per unit) as well as lower sales on some of the products that the Company has sourced from other manufacturers, as well as general price erosion resulting from actions by competing distribution channel members. Ortho-McNeil deferred revenues contributed $500,000 to net sales in 1996, and $1.5 million in 1995 (see "Notes to Consolidated Financial Statements - Note E."). These sales declines were offset to a degree by continued growth in sales of the Ortho-McNeil products, as well as sales of certain recently introduced products which the Company markets under various arrangements with the manufacturers.
The sales increase in 1995 was primarily attributable to continued growth in sales of the Ortho-McNeil products, which the Company commenced marketing in the fourth quarter of 1994, and recognition of $1.5 million of deferred revenue. Net sales in the fourth quarter of 1996 were $11.0 million, an increase of $900,000 over the $10.1 million (excluding $750,000 in deferred revenue recognized in the fourth quarter of 1995) recorded in the fourth quarter of 1995.
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Methylprednisolone accounted for 41% of sales in 1996, 53% of sales in 1995, and 55% in 1994. No other product has accounted for more than 10% of net sales in these years.
GROSS MARGIN
Gross margins, and the corresponding percentages of net sales for 1996, 1995 and 1994, were $12.2 million (27.8%), $19.9 million (40.1%), and $20.0 million (44.4%), respectively. The substantially lower gross margin in 1996 is attributable to lower unit sales and lower prices on the Company's methylprednisolone product, and price erosion on many of the products in the Company's line due to increased competition. The gross margin in 1996 was also impacted by inventory charges of approximately $900,000 to recognize impairment of value for finished products with limited remaining shelf life. The lower gross margin in 1995 compared to 1994 was attributable to the product sales mix and price erosion on certain of the Company's products. The gross margin in 1995 was favorably impacted by the recognition of $1.5 million in deferred revenues, compared to the recognition of $500,000 of deferred revenues in 1996. In 1994, the increases in the Company's gross margin were due primarily to increased sales of one of the Company's key products, along with the effects of higher overhead absorption due to volume increases and manufacturing efficiencies. There can be no assurance that, with the Company's current limited product line, the present gross margin levels can be maintained if the Company's products, particularly methylprednisolone, should experience further increased competition.
OPERATING EXPENSES
Product Development
Product development expenditures for the years ended December 31, 1996, 1995 and 1994 were approximately $10.2 million, $6.0 million and $1.9 million, respectively. In 1996, the Company's product development expenses included approximately $3.4 million in expenses for bioequivalency studies and milestone payments to alliance partners. Also, during 1996, the Company expanded its product development capabilities through the acquisition of Hallmark. Funding of product development activities at Hallmark in 1996, exclusive of the charge recorded in conjunction with the acquisition, was $2.8 million compared with $1.5 million in 1995. During 1995, product development expenditures included approximately $1.6 million of certain costs incurred in preparation for manufacturing the conjugated estrogens product in commercial quantities. Product development expenditures are net of reimbursements received from Schein pursuant to the terms of the contractual agreement for the development of the conjugated estrogens product.
The increase in 1996 product development expenditures reflects the Company's commitment to expanding its product development activities. The Company intends in 1997 to continue to significantly increase its investment in product development, as its available resources permit.
Purchased Research and Development
In connection with the acquisition of Hallmark in September 1996, the Company recorded a one-time, non-cash charge of approximately $8.6 million for the portion of the consideration allocated
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to purchase of in-process research and development. (See Notes to Consolidated Financial Statements - Note B.)
Selling
Selling expenses increased $889,000 in 1996, as a result of an incremental $750,000 charge recorded in the third quarter of 1996 to supplement the allowance for doubtful accounts, primarily as a result of the bankruptcy petition filed by a large wholesaler customer, and a $300,000 charge recorded in the fourth quarter of 1996 to establish a reserve for potential shelf stock adjustments. Exclusive of these charges, selling expenses declined by $161,000 compared to 1995 due to steps implemented to control costs. In 1995 selling expenses increased by $782,000 as a result of increased sales and marketing activities and the expansion of the Company's sales force in anticipation of the commercial launch of conjugated estrogens and in order to develop strategic alliance opportunities, enhance service to existing customers and provide additional resources to contact prospective customers.
General and Administrative
In 1996, general and administrative expenses declined by $782,000. The reduction was due to the recognition in the fourth quarter of 1996 of a $330,000 reduction of general and administrative expenses resulting from a sublessor's lease renewal (see "Notes to Consolidated Financial Statements - Note E") and steps implemented by management to reduce compensation costs and other controllable expenses. In 1995, general and administration expenses increased by $1,242,000 due in part to staff increases and professional fees associated with an increased emphasis on business development activities. Additionally, during 1996 and 1995 the Company incurred incremental expenses of approximately $503,000 and $756,000, respectively, in connection with responding to various regulatory and legal issues associated with the Company's pending ANDA for conjugated estrogens.
Net Interest Expense
The Company's borrowings are primarily variable rate facilities. In 1996, the Company's net interest expense declined by $874,000 compared to 1995, due to reductions in average borrowings achieved by paying down bank indebtedness with a portion of the proceeds of the issuances of the Company's Series C and Series D Preferred Stock (see "Liquidity and Capital Resources" below). Also, in 1996 the Company earned interest income from the short term investment of a portion of the Series D Preferred Stock proceeds. The increase in interest expense in 1995 compared to 1994 resulted from an increase in average borrowings.
Income Taxes
At December 31, 1996 the Company had cumulative net operating loss carryforwards of approximately $41.4 million for federal income tax purposes which expire in the years 2004 to 2011. Additionally, the Company had cumulative losses from Duramed Europe that amounted to approximately $3.0 million which are not deductible for U.S. tax purposes. In 1994, based upon a forecast of future operating results, the Company concluded that it would, more likely than not, be able to realize a portion of the benefit of its net deferred tax assets. Accordingly, in the fourth
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quarter of 1994 the valuation allowance was reduced and a $3.9 million deferred tax benefit was recorded. The carrying value of the deferred tax asset and the related valuation allowance are based on a forecast of future operating results, which excludes potential revenues associated with products that are under development or have not yet obtained regulatory approval. Based on this criteria, in the fourth quarter of 1996 the Company recognized a non-cash charge of $3.9 million to restore fully the valuation allowance pertaining to the Company's deferred tax assets, principally net operating loss carryforwards.
Excluding the adjustments to the valuation allowance, the Company did not record a provision for income taxes in either 1996 or 1995. In 1994, the Company recorded a current alternative minimum tax provision of $115,000.
Preferred Dividends
Both the Series C and Series D Preferred Stock provided for an 8% dividend on unconverted preferred shares. Preferred stock dividends of $929,000 in 1996 represent the dividend provision associated with the $24.0 million of Series C stock issued in November 1995 and February 1996, and the $20.0 million offering of Series D Stock which was completed in August 1996. The preferred dividends of $123,000 in 1995 represent the dividend provision associated with the $12.0 million of Series C Preferred Stock issued in November 1995 (see "Notes to Consolidated Financial Statements - Note E").
Other Matters
Under the terms of agreements with Ortho-McNeil, Duramed has non-exclusive distribution rights to the Ortho-McNeil products Acetaminophen with Codeine, Tolmetin Sodium, Tolmetin Sodium DS, Oxycodone with Acetaminophen and Estropipate. The distribution agreement for each of these products specifies a term of ten years subject to reduction to three years (if not extended) from the date of first sale if Duramed's conjugated estrogens product is not approved by the FDA by June 30, 1996. Such approval was not received by June 30, 1996. Duramed commenced marketing Estropipate during the fourth quarter of 1993 and the other Ortho-McNeil products during the fourth quarter of 1994. Duramed is discussing an extension of these rights with Ortho-McNeil and based on discussions to date believes that the distribution rights to these products will be extended. Loss of these distribution rights would likely have a material adverse effect upon the Company's financial position and results of operations.
A conscious decision was made in early 1995 to incur certain expenditures for manufacturing and other launch activities in anticipation of the approval of the Company's conjugated estrogens product, and to provide the additional personnel and capital resources needed to implement the Company's business plan. Additionally, as previously discussed, the Company has been aggressively increasing product development spending, including funding the operations at Hallmark. This planned investment in the future has contributed substantially to increased expenses, and therefore reduced levels of performance. The Company remains optimistic regarding the approval of its conjugated estrogens product and the resulting increase in revenues.
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The Company also continues to seek potential business development opportunities which could provide additional product revenues. However, it is not certain if, or when, revenues from these sources would be available. Accordingly, if the Company's revenue stream is not supplemented by the approval and launch of the conjugated estrogens product, or success in other business development pursuits, the Company would expect to report substantial losses throughout 1997. (See "Liquidity and Capital Resources" below).
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," requires the Company either to adopt the fair value method of accounting for stock options in its financial statements or to retain its existing method and disclose the pro forma effects of using the fair value method beginning in 1996. The Company determined that it will retain its existing method of accounting for stock options and include pro forma disclosures in the notes to its consolidated financial statements. Accordingly, the standard has no effect on the Company's financial condition or results of operations.
INFLATION
Inflation has not had, and is not expected to have, a material impact upon the Company's business.
LIQUIDITY AND CAPITAL RESOURCES - -------------------------------
In August 1996 the Company raised $20.0 million ($19.0 million net of issuance costs) through an offering of 200,000 shares of 8% Cumulative Convertible Preferred Stock, Series D. The bulk of the proceeds from the issuance of the Series D Preferred Stock were utilized to pay off the Company's revolving credit facility, with the balance initially invested in short-term securities. The Series D Preferred Stock was convertible on October 16, 1996, at the option of the holders, at 15% below the average of the closing bid prices of the Common Stock of the Company over the ten day trading period ending the day prior to the date of conversion. At December 31, 1996, all $20.0 million of the Series D Stock had been converted to 2,832,966 shares of the Company's Common Stock, at an average conversion price of $7.06 per common share.
Previously, the Company had raised $24.0 million through an offering of 8% Cumulative Convertible Preferred Stock, Series C of which the first $12.0 million ($10.8 million net of issuance costs) was received in November 1995, and the remaining $12.0 million ($10.9 million net of issuance costs) was received in February 1996. The proceeds from the issuance of the Series C Stock were utilized to fund operating activities including the expanded product development program, as well as costs associated with preparing to launch the conjugated estrogens product and repayment of certain indebtedness. Through August 1996, the full $24.0 million of the Series C Stock had been converted to 1,672,417 shares of Common Stock, at an average price of $14.35 per common share.
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The Company's revolving credit facility, as amended, permits the Company to borrow up to $6.5 million, based upon eligible collateral ($10.4 million as of December 31, 1996). The bank has indicated to the Company a willingness to expand the amount of availability on the revolving credit facility if the Company obtains additional sources of financing or the Company's operating results substantially improve. As of March 27, 1997, the Company had no remaining short term cash equivalent investments, and had drawn $1.5 million against the revolving credit facility.
The Company paid off a $4.5 million term note during 1996 with the proceeds from the Series C Preferred Stock offering. Under a separate agreement, in March 1996 the bank made available to the Company an additional $1.5 million of term financing collateralized by existing equipment.
Under the terms of the Company's agreement with Ortho-McNeil, if FDA approval of the conjugated estrogens product had been obtained by June 1996, title to the equipment would have transferred to the Company over a specified period. Since this requirement was not met, the Company may be required, at Ortho-McNeil's option, either to return the equipment or to purchase it at its fair market value at that time. If the company is required to purchase the equipment, the purchase price plus interest at the current prime rate will be payable on a quarterly basis over three years. In the fourth quarter of 1996, the Company recorded a $4.0 million liability for the equipment provided by Ortho-McNeil (see "Notes to Consolidated Financial Statements - Note E)."
Operating activities in 1996 used approximately $11.8 million in cash, principally attributable to a $3.7 million increase in inventory and funding of operating losses. The majority of the inventory increase was in the category of finished goods, reflecting planned growth in inventory levels in order to improve customer service, stocking of additional new products which the Company commenced marketing and distributing in 1996 and manufacturing of the conjugated estrogens product in anticipation of FDA approval. As a result of a reduction in sales and gross profits, continued expenditures associated with the anticipated commercial launch of conjugated estrogens and an increase in product development expenditures other than for conjugated estrogens, the Company recorded a net loss of $12.3 million for the year ended December 31, 1996, excluding the one-time charge for purchase of in-process research and development in connection with the Hallmark acquisition, and the $3.9 million non-cash charge to adjust to the valuation allowance associated with deferred tax assets.
On September 13, 1996, Duramed completed the acquisition of the assets and business of Hallmark, a privately held pharmaceutical development company headquartered in Somerset, N.J. with technical expertise and capabilities with respect to advance drug delivery systems technologies. As consideration, Duramed issued 640,000 shares of the Company's Common Stock, and warrants to purchase 400,000 shares of Common Stock at a purchase price of $25.00, and assumed certain obligations of Hallmark, a portion of which Duramed paid off at closing. This acquisition was accounted for by the purchase method of accounting. The purchase price was allocated to the tangible assets acquired based on their fair values, and a one-time, non-cash charge of approximately $8.6 million was recorded for purchased in-process research and development. The Company's future product development expenses are expected to continue to reflect the costs of Hallmark operations at the rate of approximately $1.0 million per quarter during 1997. For additional information on the Hallmark acquisition see "Notes to Consolidated Financial Statements - Note B."
The Company intends to continue aggressively funding product development activities as its resources permit. Continued expansion of the Company's product development efforts will necessitate capital investment in equipment and facility, as well as a need for substantial
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incremental personnel, to provide the capabilities to produce the resulting products in commercial quantities. The resources required to satisfy the requirements of the Company's expanded business plan are significant.
The Company is awaiting the FDA decision on the Company's pending ANDA filings on all strengths of conjugated estrogens. If the Company receives approval from the FDA for its ANDA filings on all strengths of conjugated estrogens and this product is successfully manufactured and marketed, the resulting favorable financial impact is expected to be significant. On March 19, 1997, in response to questions raised at a Senate committee meeting, Dr. Janet Woodcock, Director of Drug Evaluation and Research at the FDA, stated that a scientific conclusion has been made on generic conjugated estrogens, but provided no details about the decision and no specific time frame for announcing it. Dr. Woodcock further stated that the conclusion needs to be articulated into a series of regulatory actions and indicated that this will happen as expeditiously as possible. At this time the Company is unable to determine when or if it will obtain FDA approval to market conjugated estrogens.
The Company is currently exploring financing alternatives to fund its expanded product development plan and the Company's capital requirements. At this time, the Company cannot determine if these capital raising efforts will be successful or, if successful, whether any capital infusion will result in a substantial dilution of the ownership interest of the Company's current stockholders. Also, the Company is currently pursuing certain business development opportunities, which could result in additional products and profit contributions. On a longer term basis, if the Company receives FDA approval on pending ANDA applications (other than its conjugated estrogens application) and is successful with certain of its other product development pursuits, the availability of these products could significantly improve the Company's operating results.
Management recognizes the importance of both the future benefits from continuing these increased expenditures and the current necessity of conserving the Company's resources. Accordingly, in the fourth quarter of 1996, after management was informed that a decision by the FDA on the Company's conjugated estrogens application would be delayed as a result of FDA's decision to publish a notice for public comment, management implemented major changes to the business plan to reduce operating expenses while preserving key long-term projects, pending the FDA decision on the conjugated estrogens application. Management is encouraged by the results to date from the product development program and the feedback from FDA on the Company's pending ANDA applications and has concluded that it is in the interests of the Company and its stockholders for the Company to continue substantial spending for research and development and for hiring incremental personnel and procuring necessary equipment to prepare for the production and launch of certain products on file. Management recognizes that, in the absence of approval of the Company's conjugated estrogens product, such actions will result in continued reported losses for the Company until the Company begins to receive anticipated revenues from products now on file with the FDA. The Company does not anticipate substantial revenues from such products before late 1997 and, accordingly, does not anticipate a return to profitable
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operations in the absence of approval of the conjugated estrogens product until after 1997. Accordingly, in the meantime, the Company's expanded product development program, which includes the costs of funding product development pursuits through the Company's Hallmark division, will not be supported from Company profits but will require financing through obtaining of additional capital. If necessary capital is not available, implementation of the Company's plans will be restricted or delayed with a negative effect upon the Company's prospects.
CERTAIN STATEMENTS IN THIS FORM 10-K CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995, INCLUDING THOSE CONCERNING MANAGEMENT'S EXPECTATIONS WITH RESPECT TO FUTURE FINANCIAL PERFORMANCE AND FUTURE EVENTS, PARTICULARLY RELATING TO SALES OF CURRENT PRODUCTS AS WELL AS THE INTRODUCTION OF NEW MANUFACTURED AND DISTRIBUTED PRODUCTS. SUCH STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND CONTINGENCIES, MANY OF WHICH ARE BEYOND THE CONTROL OF THE COMPANY, WHICH COULD CAUSE ACTUAL RESULTS AND OUTCOMES TO DIFFER MATERIALLY FROM THOSE EXPRESSED HEREIN. FACTORS THAT MIGHT AFFECT SUCH FORWARD-LOOKING STATEMENTS SET FORTH IN THIS FORM 10-K INCLUDE, AMONG OTHERS, (I) INCREASED COMPETITION FROM NEW AND EXISTING COMPETITORS AND PRICING PRACTICES FROM SUCH COMPETITORS, (II) THE AMOUNT OF FUNDS CONTINUING TO BE AVAILABLE FOR INTERNAL RESEARCH AND DEVELOPMENT AND FOR RESEARCH AND DEVELOPMENT JOINT VENTURES, (III) RESEARCH AND DEVELOPMENT PROJECT DELAYS OR DELAYS IN OBTAINING REGULATORY APPROVALS AND (IV) THE ABILITY OF THE COMPANY TO RETAIN AND ATTRACT PERSONNEL IN KEY OPERATIONAL AREAS.
Item 8.

Item 8. Financial Statements and Supplementary Data. - ---------------------------------------------------------
The following financial statements are included in this report on Form 10-K:
Item 9.

Item 9. Changes in and Disagreements with Accountants on Accounting - --------------------------------------------------------------------------- and Financial Disclosure. - -------------------------
None.
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PART III
This information required by Items 10, 11, 12 and 13 of Part III is incorporated by reference from the Company's definitive Proxy Statement for its 1997 Annual Meeting of Stockholders filed or to be filed with the Securities and Exchange Commission pursuant to Regulation 14A.
PART IV
Item 14.

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. - --------------------------------------------------------------------------------
(a) 1. All financial statements filed as a part of this report on Form 10-K are listed under Item 8, above.
2. The following financial statement schedule is filed herewith:
Page ---- Valuation and Qualifying Accounts S-1
All other schedules are omitted because of the absence of conditions under which they are required or because the information is shown in the financial statements or notes thereto.
(b) Reports on Form 8-K: None
(c) Exhibits
Exhibit Number Description - -------------- ----------- 3.1 Certificate of Incorporation (a)
3.2 By-Laws (b)
4.1 Certificate of Designation, Preferences and Rights of Series A Preferred Stock (b)
4.2 Certificate of Designation, Preferences and Rights of Series B Preferred Stock (c)
4.3 Rights Agreement between Duramed Pharmaceuticals, Inc. and The Provident Bank as Rights Agent dated as of August 17, 1988 (d)
10.1 Loan Agreement between the State of Ohio Department of Development and the Company dated April 25, 1985 (a)
10.2 Development and Construction Loan Agreement dated as of September 16, 1994 between the Company and The Provident Bank (e)
10.3 Promissory Note - Variable Rate Mortgage Loan dated September 16, 1994 from the Company to The Provident Bank (e)
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10.4 Amended and Restated Loan and Security Agreement dated as of December 31, 1994 between the Company and The Provident Bank (c)
10.5 Amended and Restated Promissory Note (Revolving Credit) dated December 31, 1994 from the Company to The Provident Bank (c)
10.6 First Amendment to Amended and Restated Loan and Security Agreement dated August 22, 1995 between the Company and The Provident Bank (f)
10.7 Second Amendment to Amended and Restated Loan and Security Agreement dated September 30, 1995 between the Company and The Provident Bank (f)
10.8 Third Amendment to Amended and Restated Loan and Security Agreement dated December 22, 1995 between the Company and The Provident Bank (g)
10.9 Fourth Amendment to Amended and Restated Loan and Security Agreement dated March 31, 1997 between the Company and The Provident Bank
10.10 Warrant for the purchase of 200,000 shares of common stock between the Company and The Provident Bank (f)
10.11 Executive Compensation Plans and Arrangements
(i) Amended and Restated Employment Agreement dated as of March 30, 1994 between the Company and E. Thomas Arington (h)
(ii) Life and disability insurance policies for the benefit of E. Thomas Arington (i)
(iii) Life insurance policy for the benefit of Timothy J. Holt (i)
(iv) 1988 Stock Option Plan (j)
(v) 1991 Stock Option Plan for Nonemployee Directors (j)
11 Statement regarding computation of earnings per share 23 Consent of Independent Auditors 24 Powers of Attorney 27 Financial Data Schedule*
- -----------------
*Contained only in electronic filing with Securities and Exchange Commission.
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(a) Filed as an Exhibit to Registration Statement No. 33-8215-C and incorporated herein by reference.
(b) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1988 and incorporated herein by reference.
(c) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1994 and incorporated herein by reference.
(d) Filed as an Exhibit to the Company's Current Report on Form 8-K, Date of Report August 28, 1988, and incorporated herein by reference.
(e) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994 and incorporated herein by reference.
(f) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995 and incorporated herein by reference.
(g) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 and incorporated herein by reference.
(h) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1993 and incorporated herein by reference.
(i) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1992 and incorporated herein by reference.
(j) Filed as an Exhibit to the Company's Proxy Statement relating to the 1993 Annual Meeting of Stockholders and incorporated herein by reference.
The Company will furnish to the Commission, upon request, its long-term debt instruments not listed in this Item.
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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 27th day of March 1997.
DURAMED PHARMACEUTICALS, INC.
BY: /s/ E. Thomas Arington --------------------------- E. Thomas Arington, President
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 27th day of March 1997.
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[ERNST & YOUNG LLP LETTERHEAD]
Report of Independent Auditors
The Board of Directors Duramed Pharmaceuticals, Inc.
We have audited the accompanying consolidated balance sheets of Duramed Pharmaceuticals, Inc. as of December 31, 1996 and 1995, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1996, Our audits also included the financial statement schedule listed in the index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation, We believe that our audits provide a reasonable basis for our opinion,
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Duramed Pharmaceuticals, Inc. at December 31, 1996 and 1995, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
Cincinnati, Ohio March 27, 1997
DURAMED PHARMACEUTICALS, INC. Consolidated Balance Sheets Assets
See accompanying notes.
DURAMED PHARMACEUTICALS, INC. Consolidated Balance Sheets Liabilities and Stockholders' Equity
DURAMED PHARMACEUTICALS, INC. Consolidated Statements of Operations
See accompanying notes.
DURAMED PHARMACEUTICALS, INC. Consolidated Statement of Stockholders' Equity
See accompanying notes.
DURAMED PHARMACEUTICALS, INC. Consolidated Statements of Cash Flows
See accompanying notes.
DURAMED PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A. ACCOUNTING POLICIES
The Company's Business - ----------------------
Duramed Pharmaceuticals, Inc. (the "Company" or "Duramed") develops, manufactures and markets generic prescription pharmaceutical products in tablet, capsule and liquid forms to customers throughout the United States.
A summary of the principal accounting policies followed in preparation of the consolidated financial statements is set forth below.
Principles of Consolidation - ---------------------------
The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly owned. Significant intercompany accounts and transactions have been eliminated in consolidation.
Goodwill related to acquisitions is being amortized over ten years.
Cash - ----
Duramed considers all investments with a maturity of three months or less as of the date of purchase to be cash equivalents. As of December 31, 1996, the Company had short term investments classified as cash equivalents of approximately $1.8 million. The Company's 1995 cash balance represented only the balance maintained in internal cash funds. During the first half of 1996 and throughout 1995, the Company's day-to-day operations were funded and financed through its revolving credit facility.
Inventories - -----------
Inventories are stated at the lower of cost (first-in, first-out) or market. Components of inventories include: December 31,
Inventories include approximately $3.0 and $1.3 million (net of inventory funded by a joint venture partner) of inventory costs at December 31, 1996 and December 31, 1995, respectively, consisting both of raw materials and conversion costs, relating to the conjugated estrogens product, for which the Company is awaiting regulatory approval. The drugs and other raw
materials used in the Company's products are purchased through United States distributors for foreign and domestic manufacturers of bulk pharmaceutical chemicals and are generally available from numerous sources. The federal drug application process requires specification and approval of raw material suppliers. If raw materials from all specified suppliers become unavailable, Food and Drug Administration ("FDA") approval of a new supplier is required, which can cause a delay of six months or more in the manufacture of the drug involved. To date, the Company has not experienced any significant delays and generally specifies two or more suppliers in all drug applications.
Property, Plant and Equipment - -----------------------------
Property, plant and equipment are stated at cost. Depreciation and amortization is provided using principally the straight-line method over the estimated useful lives of the assets. Major renewals and improvements are capitalized, while ordinary maintenance and repairs are expensed. Property, plant and equipment consist of the following:
Product Development Costs - -------------------------
Product development costs are charged to expense when incurred, net of reimbursements received from Schein Pharmaceutical, Inc. ("Schein") which amounted to $1.1 million, $2.8 million, and $2.5 million in 1996, 1995 and 1994, respectively, per the contractual agreement (See Note C). The reported costs include specifically identifiable expenses and an allocation of certain expenses shared with the other departments within the Company.
Revenue Recognition - -------------------
The Company recognizes revenue at the time it ships product and provides for returns and allowances based upon historical trends.
Concentration of Risk - ---------------------
The financial instrument that potentially subjects the Company to credit risk is accounts receivable. The Company sells its products to drug wholesalers, private label distributors, drug store chains, health maintenance organizations, hospitals, nursing homes, retiree organizations, mail order distributors, other drug manufacturers, mass merchandisers and governmental agencies. The credit risk associated with this financial instrument is believed by the Company to be limited due to the large number of customers (no single customer accounts for more than 10%
of the Company's sales), their geographic dispersion and the performance of certain credit evaluation procedures.
The Company's current product line is limited and the Company's current operating results are heavily dependent on the performance of its methylprednisolone product. FDA approval is required before most prescription drug products can be marketed. The Company has Abbreviated New Drug Applications ("ANDAs") for several products, including the conjugated estrogens products, on file with the FDA. The Company is unable to determine when or if it will obtain approval on these ANDA submissions.
In the absence of resources provided by new product sales, the additional capital which will be required in order to execute the Company's expanded business plan, which includes significantly expanded product development and business development activities to broaden the Company's current product lines, will have to be acquired from other sources or the business plan will have to be scaled back.
Net (Loss) Income Per Share - ---------------------------
The fully diluted and primary per share calculations are computed using weighted average common shares outstanding and common equivalent shares, which include dilutive options, warrants and convertible preferred stock. Net loss per share is computed using the weighted average of common shares outstanding only. Recognition of outstanding options and warrants in computing net loss per share is not required as their effect would be antidilutive.
Use of Estimates - ----------------
The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
NOTE B. ACQUISITIONS
On September 13, 1996, Duramed completed the acquisition of the assets and business of Hallmark Pharmaceuticals, Inc. ("Hallmark"), a privately held pharmaceutical development company headquartered in Somerset, N.J. with technical expertise and capabilities with respect to advanced drug delivery systems technologies. As consideration, Duramed issued 640,000 shares of the Company's common stock, and warrants to purchase 400,000 shares of common stock at a purchase price of $25.00, and assumed certain obligations of Hallmark, a portion of which Duramed paid off at closing. Also, as part of the accounting for the acquisition of Hallmark, the Company incurred a charge of $847,200, net of related obligations, for the impairment of value on the Company's marketing rights to a product which had been scheduled for development by another entity, which Hallmark had made significant progress in developing.
This acquisition was accounted for by the purchase method of accounting, and is summarized below:
The amount of the purchase of in-process research and development was determined by using a discounted cash flow analysis applied to the anticipated profits from products in development at Hallmark, and considered the costs to commercialize these products and the expected probability of success in their development. The technologies acquired will be applied towards the development of specific products which require FDA approval to commercialize, and accordingly, are deemed to have no alternative future use.
For the year ended December 31, 1996 the Company's results of operations, on a pro forma basis as if Hallmark had been acquired at the beginning of the year, would not be materially different from the results reported. Results of operations on a pro forma basis for the year ended December 31, 1995 would reflect no change in sales or revenues, with incremental product development expenses and net losses of $3.4 million, resulting in a pro forma net loss of $4.5 million, or $.56 net loss per share.
Duramed's financial statements reflect the full consolidation of Hallmark's accounts since the date of acquisition.
NOTE C. STRATEGIC ALLIANCES
On June 26, 1992, the Company signed an agreement with Schein Pharmaceutical, Inc. ("Schein") for the development, manufacture and marketing of a new formulation of conjugated estrogens tablets, the generic equivalent of the brand name product Premarin(R). Under the agreement, Schein provides project funding and technical assistance while Duramed is responsible for product development and manufacturing; both firms will participate in the marketing and distribution of the products. The conjugated estrogens products have been formulated and are designed to meet the bioequivalence guidance established by the FDA in late 1991. On September 27, 1994 the Company filed an ANDA for the .625 mg strength of conjugated estrogens. Subsequently, the Company has filed ANDAs covering the other dosage
strengths of this product. In order to market the .625 mg strength, as well as other dosage strengths, FDA approval is required. On March 19, 1997, in response to questions raised at a Senate committee meeting Dr. Janet Woodcock, Director of Drug Evaluation and Research at the FDA, stated that a scientific conclusion has been made on generic conjugated estrogens, but provided no details about the decision and no specific time frame for announcing it. Dr. Woodcock further stated that the conclusion needs to be articulated into a series of regulatory actions and indicated that this will happen as expeditiously as possible. At this time, the Company is unable to determine when or if it will obtain FDA approval to market conjugated estrogens. Product development expenditures in 1996, 1995 and 1994 are net of reimbursements received from Schein pursuant to this agreement.
On June 2, 1994 the Company executed distribution, marketing and related agreements with Ortho-McNeil Pharmaceutical Corporation ("Ortho-McNeil"). Under the terms of the agreements Duramed received the non-exclusive distribution rights to the Ortho-McNeil products Acetaminophen with Codeine, Tolmetin sodium, Tolmetin sodium DS and Oxycodone with Acetaminophen as well as an extension of the distribution term for the Ortho-McNeil product Estropipate. The distribution agreement for each of these products specifies a term of ten years, subject to reduction to three years (if not extended) from the date of first sale if Duramed's conjugated estrogens product is not approved by the FDA by June 30, 1996. Such approval was not received by June 30, 1996. Duramed commenced marketing estropipate during the fourth quarter of 1993 and the other Ortho-McNeil products during the fourth quarter of 1994. Duramed is discussing an extension of these rights with Ortho-McNeil and based on discussions to date believes that the distribution rights to these products will be extended. Loss of these distribution rights would likely have a material adverse effect upon the Company's results of operations. In addition to the distribution rights for the products, Ortho-McNeil provided $2 million in cash and the use of $4 million in equipment for the Company's hormone replacement therapy ("HRT") facility expansion and Ortho-McNeil's parent, Johnson & Johnson, guaranteed a $5.5 million construction loan for the HRT facility expansion. Under the terms of the agreement, if FDA approval of the conjugated estrogens product had been obtained by June 1996, title to the equipment would have transferred to the Company over a specified period. Since this requirement was not met, the Company may be required, at Ortho-McNeil's option, either to return the equipment or to purchase it at its fair market value at that time. If the Company is required to purchase the equipment, the purchase price plus interest at the current prime rate will be payable on a quarterly basis over three years. In the fourth quarter of 1996, the Company recorded a $4.0 million liability for the equipment provided by Ortho-McNeil (see Note E). In exchange for the financial assistance provided to the Company under the agreements, Ortho-McNeil obtained the right to receive a royalty on the future sales of the conjugated estrogens products. In addition, Ortho-McNeil was to participate in marketing of the Company's conjugated estrogens products and share in the profits if the Company is successful in bringing the products to market. Duramed and Ortho-McNeil are cooperating to amend the obligations of the original agreements regarding conjugated estrogens. Both parties believe that it would be in their best interests to not engage the Ortho-McNeil sales force, and to substitute a
fixed payment to Ortho-McNeil in place of the current payment arrangements. At this time, the Company cannot predict the outcome of these discussions.
The Company has agreements with several manufacturers whereby the Company markets and distributes their generic prescription drug products. The terms of these agreements vary, but typically provide for a sharing of profits between the Company and the manufacturer. For the years ended December 31, 1996, 1995 and 1994, respectively, the percentages of the Company's sales comprised of products marketed for others were 35%, 31%, and 28%. The gross profit generated by these sales was approximately $2.6 million in 1996, $3.3 million in 1995, and $3.6 million in 1994.
NOTE D. ACCRUED LIABILITIES
The Company's accrued liabilities consist of the following:
NOTE E. DEBT AND OTHER LONG-TERM LIABILITIES
The Company's debt consists of the following:
During 1996, the Company funded its operations with net proceeds received from the private placements of its Series C and Series D Convertible Preferred Stock (the second stage of Series C Stock issuance provided net proceeds of approximately $10.9 million in February 1996, and the Series D Stock issuance generated net proceeds of approximately $19.0 million in August 1996).
The Company utilized a portion of the proceeds from its Preferred Stock issuances to pay off its revolving credit facility. The amended terms of the revolving credit facility permit the Company to borrow up to $6.5 million based upon eligible collateral ($10.4 million as of December 31, 1996). The bank has indicated to the Company a willingness to expand the amount of availability on the revolving credit facility if the Company obtains additional sources of financing or the Company's operating results substantially improve. Borrowings on the revolving credit facility bear interest at the rate of prime plus 1%, and are collateralized by substantially all assets of the Company including inventory, receivables and the manufacturing facility. As of December 31, 1996, the Company had no outstanding borrowings drawn against the revolving credit facility. As of March 27, 1997, the Company had no remaining short term cash equivalent investments, and had drawn $1.5 million against the revolving credit facility.
During 1996 the Company paid off its term note. At December 31, 1995, this term note had a $4.5 million outstanding principal balance.
The manufacturing facility expansion loan is a ten year $5.5 million facility which provided a portion of the financing for the expansion of the Company's manufacturing facility and is supported by a loan guaranty from Johnson & Johnson. Principal payments on this loan commenced on January 1, 1997. Interest is payable monthly based upon the prime rate.
The equipment liability of $4.0 million at December 31, 1996 represents an obligation to Ortho-McNeil for equipment that was provided in connection with the Company's facility expansion that was completed in 1995. The Company and Ortho-McNeil are currently in negotiations, which could revise the terms of the agreement and the repayment schedule for this equipment. However, based on the current agreement terms, if Ortho-McNeil requires Duramed to purchase the equipment, repayments would be established on the basis of equal quarterly payments over a three year period based upon the fair market value of the equipment at the time, and the obligation would be subject to interest at the prime rate in effect.
The equipment loans represent financing by the Company's bank for equipment purchases, bear interest at the rate of prime plus 1%, and require monthly installments of principal and interest. One of the loans is payable over a three year term and requires a monthly principal payment of $42,355 plus interest through April 1, 1999; the other loan is payable over a five year term and requires a monthly principal payment of $23,925 plus interest through March 1, 2000. These loans are collateralized by the assets financed.
The note payable to the State of Ohio is secured by the Company's manufacturing facility. The loan bears interest at 7.5%. In the third quarter of 1996, the State waived the balloon payment that was due on November 1, 1996 and revised the terms to require minimum monthly payments of $20,394 through November 1, 2000, and certain other payments as defined by the agreement. This debt is personally guaranteed by a former officer and by a director.
The convertible note represents funds advanced in July 1995 from a joint venture partner. The interest was a variable rate approximating prime rate plus 3%, compounded annually, and both principal and interest were due at maturity on July 10, 1998. As amended, at the option of the lender the principal amount of the note and accrued interest were convertible to shares of Duramed common stock at a conversion price 15% below the average of the closing bid prices of the common stock of the Company over the ten day trading period ending the day prior to the date of conversion, at a conversion price which could not be less than $7.00 per share, nor more than $14.44 per share. In December 1996, the lender exercised the conversion option and received in place of the repayment of $2,342,457 of principal and accrued interest, 334,637 shares of Duramed common stock, based on a conversion price of $7.00 per share.
Other long-term debt also includes facilities of varying amounts and terms which are generally collateralized by the assets financed.
The carrying value of the Company's debt approximates fair market value.
The Company's other long-term liabilities consist of the following:
The abandoned facility obligation represents the amounts due, net of sublease income, under terms of a lease which extends through September 30, 1998. Due to the Company's financial condition at the time, the Company was unable to meet its commitments under the lease and vacated the facility in 1991. The facility was sublet for a period of five years in 1992. In 1994 the Company commenced payment of its current net obligations under the lease and also commenced quarterly payments on the accumulated outstanding balance.
In December 1996, the Company was advised that the current tenant had renewed, for a five year term, its sublease on the building. As a result of the renewal, the Company's obligation was reduced by approximately $330,000, which was recorded as a reduction of general and
administrative expenses. Additionally, in the first quarter of 1997, the Company reached agreement with the lessor and settled the remaining obligation through the issuance of 89,369 shares of Duramed common stock.
The $500,000 in deferred revenue at December 31, 1995 represents the unamortized balance from the $2.0 million cash received from Ortho-McNeil pursuant to the terms of distribution and marketing agreements entered into in 1994 (see Note C). The Company amortized this remaining balance $250,000 a quarter during the first and second quarters of 1996.
At December 31, 1996, maturities of long-term indebtedness and obligations for the abandoned facility obligation for the ensuing five years were as follows:
Year ending December 31:
NOTE F. LEASES
The Company conducts product development, and limited manufacturing activities, from a leased 38,000 square foot facility in Somerset, New Jersey. The lease pertaining to this facility expires on May 31, 2000 and the Company has options to purchase the facility, initially exercisable on June 1, 1998. Annual rent through the lease term is $171,000.
In December 1994, the Company entered into a lease for approximately 28,200 square feet of a facility in Cincinnati, Ohio which is used for executive offices, certain corporate support groups and distribution. The lease term for this facility extends to February 28, 2000, with a provision for three one-year renewals. Annual rent is $256,000 through 1997, and increase to $265,000 during the final year of the lease.
The Company also has two leased warehouses in Cincinnati, Ohio. One is approximately 28,000 square feet and the other facility is approximately 10,000 square feet. Both warehouses are being leased on a month to month basis.
In addition to the leased offices, warehouses and distribution facility, the Company leases various machinery and equipment.
Aggregate rental expense for the years ended December 31, 1996, 1995, 1994 was approximately $642,000, $694,000, and $286,000, respectively. The following summarizes minimum future lease payments as of December 31, 1996:
Year Ending December 31:
Assets under capital leases amounted to approximately $7.3 million and $5.4 million in 1996 and 1995, respectively, with related amortization of $2.8 million and $2.6 million.
NOTE G. EMPLOYEE RETIREMENT PLAN
The Company has a defined contribution plan, the "Duramed Pharmaceuticals, Inc. 401(k)/Profit Sharing Plan," available to eligible employees. Under the Plan the Company matches 50% of employee contributions to a maximum of 2% of each employee's compensation. The Company match of $182,000, $206,000 and $150,000 in 1996, 1995 and 1994, respectively, was made with the Company's common stock, as permitted by the Plan. The Plan also has a profit sharing provision at the discretion of the Company's Board of Directors. The Company has not made a profit sharing contribution to the Plan. All full-time employees are eligible to participate in the deferred compensation and Company matching provisions of the Plan. Employees are immediately vested with respect to the Company matching provisions of the Plan.
NOTE H. COMMON AND PREFERRED STOCK
The Company has authorized the issuance of 100,000 shares of Series A Preferred Stock, none of which has been issued.
On July, 8, 1993, as part of an agreement with its bank, the Company issued 74,659 shares of Series B Convertible Preferred Stock. The Series B Preferred Stock is non-voting and is convertible at any time into 746,590 shares of the Company's common stock. During 1996, the bank converted 68,600 shares of Series B Convertible Preferred Stock into 686,000 shares of the Company's common stock.
In 1995 and 1996, the Company raised $44.0 million ($40.6 million net of issuance costs) through the issuances of the Series C and Series D Preferred Stock. During 1996 all of the Preferred Stock was converted into shares of the Company's common stock.
NOTE I. STOCK OPTIONS AND WARRANTS
Stock Option Plans - ------------------
For financial statement purposes, the Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related Interpretations in accounting for its stock based compensation plans rather than the alternative fair value accounting provided for under FASB Statement No. 123, "Accounting for Stock-Based Compensation." Under APB 25, because the exercise price of the Company's stock options equals or is greater than the close of the market price on the date of grant, no compensation expense is recognized. At the time the options are exercised, the proceeds increase stockholders' equity.
During 1996, the Company had three stock option plans which had been approved by the Company's stockholders. The 1986 Stock Option Plan (the "1986 Plan"), which expired in 1996 (insofar as the grant of new options was concerned), permitted the granting of options for up to 160,000 shares of the Company's common stock. The 1988 Stock Option Plan (the "1988 Plan") permits the granting of options for up to 4,360,000 shares of common stock to employees on the regular payroll of the Company. Options granted under the 1986 and 1988 Plans become exercisable based upon the terms and conditions established at the time of the grant. The 1991 Stock Option Plan for Nonemployee Directors (the "Directors Plan") provides for the issuance of non-qualified options for up to 150,000 shares of common stock. The Directors Plan is a "formula plan" under which each new nonemployee director is granted, at the close of business on the date he or she first becomes a director, options to purchase 10,000 shares of common stock. Annually, each then serving nonemployee director, other than a new director, is also automatically granted options to purchase 5,000 shares of common stock at a price equal to the closing market price on the date of grant. Options granted under the plans generally expire 10 years after the date of grant.
As of December 31, 1996, options for 70,899 shares of common stock were outstanding under the 1986 Plan and options for 84,101 shares had been exercised; options for 2,312,400 shares of common stock were outstanding under the 1988 Plan and options for 840,614 shares had been exercised; and options for 54,000 shares of common stock were outstanding under the Directors Plan and options for 51,000 shares had been exercised.
The following summarizes the activity in the 1986, 1988 and Directors Plans:
The exercise prices of options outstanding at December 31, 1996 ranged from $.50 to $8.63. The weighted average remaining contractual life of those options was 7.4 years. Pro forma information regarding net loss and net loss per share is required by Statement 123, which also requires that information be determined as if the Company has accounted for its stock options granted and /or modified subsequent to December 31, 1994 using the fair value method of that Statement. During 1995 and 1996, options were granted which had a weighted average fair value on the date of grant of $6.85 and $8.00, respectively. The fair value for these options was estimated at the date of grant and at the date of the repricing using the Black-Scholes model using the following assumptions:
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee and directors stock options have characteristics significantly different from those traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, existing models do not necessarily provide a reliable single measure of the fair value of its options. For purposes of pro forma disclosure, the estimated fair value of the options is amortized to expense over the options vesting periods. Beginning in 1996, additional compensation expense is recognized on all outstanding options that were repriced. At the time of the repricing, the fair value of the option changes and, according to FASB 123, this incremental difference is measured as the excess of (1) the fair value of the modified option and (2) the value of the old option immediately before its terms are modified. The incremental expense that would have been recorded in 1996 and 1995 was $1.9 million and $1.3 million, respectively, and would have generated the following pro forma results.
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.
Other Options and Warrants - --------------------------
In 1988, in connection with an agreement terminating the employment of a former officer and director, the Company exchanged stock options for 15,000 shares of common stock previously granted under the 1986 and 1988 Plans for non-qualified stock options. At December 31, 1996 options for 5,000 shares (at $5.75), which expire January 2, 1998, remain outstanding.
Pursuant to various provisions of an agreement with a consultant, the Company granted options to purchase 10,000 shares (at $1.00), 50,000 shares (at $1.50), and 60,000 shares (at $1.50) on August 1, 1991, June 1, 1992, and December 31, 1993, respectively. During 1996, options for 10,000 shares (at $1.00) were exercised. The remaining options are fully vested at December 31, 1996 and expire five years from the date of grant.
On December 18, 1992, in consideration for certain defined business arrangements, the Company granted options to Invamed, Inc. to purchase 135,000 shares of the Company's common stock at an exercise price of $3.25 per share; these options were exercised by Invamed during 1996. On December 20, 1993, the Company granted additional options to purchase 300,000 shares of the Company's common stock at an exercise price of $6.5625 per share as compensation for certain defined business arrangements. These options are fully vested and expire five years from the date of grant.
On August 22, 1995, in consideration of modifications to the Company's borrowing arrangements and additional extensions of credit, the Company granted to its bank warrants to purchase 200,000 shares of the Company's common stock at an exercise price of $18.125 per share. These warrants vested immediately upon grant and expire ten years from the date of grant.
On September 13, 1996, in connection with the Company's acquisition of Hallmark, the Company issued 400,000 warrants for purchase of the Company's common stock at $25.00 per share. The warrants have a term of five years and become exercisable at the rate of 33.3% per year beginning September 13, 1997.
At December 31, 1996, an aggregate of 4,349,875 shares of common stock were reserved for issuance.
NOTE J. INCOME TAXES
Effective January 1, 1993 the Company adopted Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes" ("FAS 109"). The standard requires the use of the liability method to recognize deferred income tax assets and liabilities, using expected future tax rates. In 1993, a valuation allowance was provided for the total amount of deferred tax assets, due to the Company's limited historical profitability and other uncertainties. In 1994, based upon a forecast of future operating results, the Company concluded that it would, more likely than not, be able to realize a portion of the benefit of its net deferred tax assets. Accordingly, in the fourth quarter of 1994 the valuation reserve was reduced, and a $3.9 million deferred tax benefit was
recorded. At December 31, 1995 the Company continued to maintain the net deferred tax asset at $3.9 million. The carrying value of the deferred tax asset and related valuation allowance are based on a forecast of future operating results, which excludes revenues associated with products that are under development or that have not yet obtained regulatory approval. Based on this criteria, in the fourth quarter of 1996 the Company recognized a charge of $3.9 million to restore fully the valuation allowance on the Company's deferred tax assets, principally net operating loss carryforwards.
Excluding the adjustments to the valuation allowance, the Company did not record a provision for income taxes in either 1996 or 1995. In 1994, the Company recorded a current alternative minimum tax provision of $115,000.
Deferred income taxes provided under FAS 109 are determined based upon the temporary differences between the financial statements and the tax basis of assets and liabilities. The tax effects of temporary differences that give rise to deferred income tax assets and liabilities at December 31, 1996 and December 31, 1995 are presented below:
The components of the provision (benefit) for income taxes follow:
At December 31, 1996 and 1995, the Company had cumulative net operating loss carryforwards of approximately $41.4 million and $28.2 million, respectively, for federal income tax purposes which expire in the years 2004 to 2011. Additionally, the Company had cumulative losses from Duramed Europe that amounted to approximately $3.0 million and $1.8 million, respectively, in 1996 and 1995, which are not deductible for U.S. tax purposes.
The reconciliation of income tax at the U.S. federal statutory rate to income tax (benefit) expense is:
NOTE K. COMMITMENTS AND CONTINGENCIES
The Company is involved in various lawsuits and claims which arise in the ordinary course of business. Although the outcome of such lawsuits and claims cannot be predicted with certainty, the disposition thereof will not, in the opinion of management, result in a material adverse effect on the Company's financial position or results of operations.
The Company has entered into commitments of approximately $490,000 to fund certain strategic product development pursuits.
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