Exhibit 99.2
Generics International (US), Inc. and Subsidiaries
Condensed Consolidated Financial Statements
(Unaudited)
Contents
| | | | |
Condensed Consolidated Financial Statements (Unaudited) | | | | |
| |
Condensed Consolidated Balance Sheets as of September 30, 2010 and December 31, 2009 | | | 2 | |
Condensed Consolidated Statements of Operations for nine-months ended September 30, 2010 and September 30, 2009 | | | 3 | |
Condensed Consolidated Statements of Changes in Stockholder’s Equity as of September 30, 2010 | | | 4 | |
Condensed Consolidated Statements of Cash Flows for nine-months ended September 30, 2010 and September 30, 2009 | | | 5 | |
Notes to Condensed Consolidated Financial Statements | | | 6 | |
Generics International (US) Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
| | | | | | | | |
| | | September 30,
2010 | | | December 31,
2009 | |
Assets | | | | | | | | |
Current assets: | | | | | | | | |
Cash and cash equivalents | | $ | 10,770,026 | | | $ | 8,047,157 | |
Trade accounts receivables—net | | | 68,217,180 | | | | 48,036,440 | |
Other receivables | | | 1,304,377 | | | | 1,806,107 | |
Inventories—net | | | 83,051,546 | | | | 72,933,454 | |
Prepaid expenses and other current assets | | | 858,263 | | | | 841,138 | |
| | | | | | | | |
Total current assets | | | 164,201,392 | | | | 131,664,296 | |
| | | | | | | | |
Other assets | | | 19,625 | | | | — | |
Property and equipment—net | | | 104,705,187 | | | | 106,857,798 | |
Intangible assets—net | | | 154,396,332 | | | | 160,594,256 | |
Goodwill | | | 237,483,545 | | | | 237,483,545 | |
| | | | | | | | |
Total assets | | $ | 660,806,081 | | | $ | 636,599,895 | |
| | | | | | | | |
| | |
Liabilities and stockholder’s equity | | | | | | | | |
Current liabilities: | | | | | | | | |
Accounts payable | | $ | 24,429,849 | | | $ | 18,751,621 | |
Accrued returns allowance | | | 10,536,724 | | | | 8,605,336 | |
Other accrued expenses | | | 23,907,202 | | | | 20,429,788 | |
Discontinued operations liability | | | 259,207 | | | | 837,743 | |
| | | | | | | | |
Total current liabilities | | | 59,132,982 | | | | 48,624,488 | |
| | | | | | | | |
Long term debt | | | 393,795,000 | | | | 399,795,000 | |
Deferred taxes | | | 17,528,769 | | | | 13,551,931 | |
| | |
Commitments and contingencies | | | | | | | | |
Common stock 1,000 shares at $0.01 par value authorized, issued and outstanding | | | 10 | | | | 10 | |
Additional paid in capital | | | 477,160,540 | | | | 477,160,540 | |
Accumulated deficit | | | (277,254,320 | ) | | | (289,533,176 | ) |
Accumulated other comprehensive loss | | | (9,556,900 | ) | | | (12,998,898 | ) |
| | | | | | | | |
Total stockholder’s equity | | | 190,349,330 | | | | 174,628,476 | |
| | | | | | | | |
Total liabilities and stockholder’s equity | | $ | 660,806,081 | | | $ | 636,599,895 | |
| | | | | | | | |
See notes to accompanying consolidated financial statements
2
Generics International (US) Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
| | | | | | | | |
| | | Nine-Month Ended
September 30, 2010 | | | Nine-Month Ended
September 30, 2009 | |
Net sales | | $ | 264,952,865 | | | $ | 225,756,163 | |
Cost of goods sold | | | 176,776,153 | | | | 149,946,988 | |
Selling, general, and administrative | | | 38,717,613 | | | | 33,932,946 | |
Research and development | | | 9,332,172 | | | | 7,892,175 | |
Other operating (loss) income | | | (612,723 | ) | | | 18,885,116 | |
| | | | | | | | |
Operating income | | | 39,514,204 | | | | 52,869,170 | |
Interest expense, net | | | (23,216,872 | ) | | | (26,102,462 | ) |
| | | | | | | | |
Pretax income from continued operations | | | 16,297,332 | | | | 26,766,708 | |
Provision for taxes | | | 4,107,245 | | | | 4,603,551 | |
| | | | | | | | |
Income from continued operations | | | 12,190,087 | | | | 22,163,157 | |
Discontinued operations | | | 88,769 | | | | — | |
| | | | | | | | |
Net income | | $ | 12,278,856 | | | $ | 22,163,157 | |
| | | | | | | | |
See notes to accompanying consolidated financial statements
3
Generics International (US) Inc. and Subsidiaries
Condensed Consolidated Statement of Changes in Stockholder’s Equity
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Common
stock shares | | | Common
stock | | | Additional
paid-in
capital | | | Accumulated
Deficit | | | Accumulated
other
comprehensive
income (loss) | | | Comprehensive
income | | | Total | |
Balance—December 31, 2009 | | | 1,000 | | | $ | 10 | | | $ | 477,160,540 | | | $ | (289,533,176 | ) | | $ | (12,998,898 | ) | | | | | | $ | 174,628,476 | |
| | | | | | | |
Comprehensive income (loss): | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | | | | | | | | | | | | | | 12,278,856 | | | | | | | | 12,278,856 | | | | 12,278,856 | |
| | | | | | | |
Change in unrealized loss on derivatives, net of tax | | | | | | | | | | | | | | | | | | | 3,441,998 | | | | 3,441,998 | | | | 3,441,998 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total comprehensive loss | | | | | | | | | | | | | | | | | | | | | | $ | 15,720,854 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance—September 30, 2010 | | | 1,000 | | | $ | 10 | | | $ | 477,160,540 | | | $ | (277,254,320 | ) | | $ | (9,556,900 | ) | | | | | | $ | 190,349,330 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
See notes to accompanying consolidated financial statements
4
Generics International (US) Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
| | | | | | | | |
| | | Nine-Month Ended
September 30, 2010 | | | Nine-Month Ended
September 30, 2009 | |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | |
Net income | | $ | 12,278,856 | | | $ | 22,163,157 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | |
Depreciation and amortization | | | 12,590,023 | | | | 12,403,557 | |
Loss on disposal of assets | | | 69,219 | | | | — | |
Stock based compensation | | | 2,782,274 | | | | 393,103 | |
Deferred taxes | | | 4,100,245 | | | | 4,603,551 | |
Changes in assets and liabilities which provided (used) cash: | | | | | | | | |
Trade accounts receivable—net | | | (20,180,739 | ) | | | (414,582 | ) |
Other receivables | | | 501,730 | | | | (18,242,019 | ) |
Inventories—net | | | (10,118,093 | ) | | | (22,345,519 | ) |
Prepaid expenses and other current assets | | | (17,127 | ) | | | (70,869 | ) |
Other assets | | | (10,989 | ) | | | — | |
Accounts payable | | | 5,678,228 | | | | (4,740,363 | ) |
Accrued returns allowance | | | 1,931,388 | | | | 1,950,896 | |
Other accrued expenses | | | 3,425,708 | | | | 464,782 | |
| | | | | | | | |
Net cash provided by (used in) operating activities | | | 13,030,723 | | | | (3,834,306 | ) |
| | | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | |
Acquisition of tradename | | | (49,750 | ) | | | — | |
Capital expenditures | | | (4,258,104 | ) | | | (7,370,414 | ) |
| | | | | | | | |
Net cash used in investing activities | | | (4,307,854 | ) | | | (7,370,414 | ) |
| | | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | | |
Proceeds from long-term debt | | | 4,000,000 | | | | 8,500,000 | |
Principal payments of long-term debt | | | (10,000,000 | ) | | | (2,055,000 | ) |
| | | | | | | | |
Net cash (used in) provided by financing activities | | | (6,000,000 | ) | | | 6,445,000 | |
| | | | | | | | |
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | | | 2,722,869 | | | | (4,759,720 | ) |
CASH AND CASH EQUIVALENTS—Beginning of period | | | 8,047,157 | | | | 15,038,059 | |
| | | | | | | | |
CASH AND CASH EQUIVALENTS—End of period | | $ | 10,770,026 | | | $ | 10,278,339 | |
| | | | | | | | |
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION— | | | | | | | | |
Cash paid during the period for interest | | $ | 23,217,417 | | | $ | 26,165,725 | |
| | | | | | | | |
Cash paid during the period for taxes | | $ | 7,000 | | | $ | — | |
| | | | | | | | |
See notes to accompanying consolidated financial statements
5
Generics International (US) Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Nature of Operations and Basis of Presentation
Generics International (US) Inc. (the “Company”), through its wholly owned subsidiaries Generics Bidco I DBA Qualitest Pharmaceuticals, Inc. (“Qualitest”) and Generics Bidco II DBA Vintage Pharmaceuticals, Quartz Specialty Pharmaceuticals, and Generics Bidco III, is a manufacturer and distributor of generic drugs throughout the U.S. The Company sells to wholesalers, as well as, directly to chain pharmacies and individual pharmacies. It has one distribution and two manufacturing facilities located in Huntsville, Alabama and a manufacturing facility in Charlotte, North Carolina.
The condensed consolidated financial statements as of September 30, 2010 and for the nine-month period ended September 30, 2010 and 2009 are unaudited, and in the opinion of management include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the results for the interim periods. The consolidated financial statements as of December 30, 2009 were derived from the Company’s annual audited financial statements for fiscal year 2009. Accordingly, they do not include all of the information and footnotes required by U.S. Generally Accepted Accounting Principles (“U.S GAAP”) for complete financial statements and should be read in conjunction with the financial statements and notes in the Company’s annual audited statements for fiscal year 2009. The results reported in these financial statements should not necessarily be taken as indicative of results that may be expected for the entire fiscal year.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The Company’s unaudited condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the U.S. (GAAP). The consolidated financial statements include Generics International (US) Inc. and its subsidiaries listed in Note 1. All subsidiaries have been consolidated and all significant intercompany items have been eliminated.
6
Generics International (US) Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements—(continued)
(Unaudited)
2. Summary of Significant Accounting Policies (continued)
Accounting Estimates
Management is required to make certain estimates and assumptions in order to prepare consolidated financial statements in conformity with generally accepted accounting principles. Such estimates and assumptions affect the reported amounts of assets, liabilities, revenues and expenses and disclosure of contingent assets and liabilities in the consolidated financial statements and accompanying notes. The Company’s most significant estimates relate to the determination of sales returns and allowances for accounts receivable and accrued liabilities, valuation of inventory balances, the determination of useful lives for intangible assets and the assessment of expected cash flows used in evaluating goodwill and other long-lived assets for impairment. The estimation process required to prepare the Company’s consolidated financial statements requires assumptions to be made about future events and conditions, and as such, is inherently subjective and uncertain. Actual results could differ materially from those estimates.
Revenue Recognition
The Company recognizes revenue when persuasive evidence of an arrangement exists, product delivery has occurred, title has passed, the price is fixed or determinable and collection is reasonably assured. Revenues are recorded net of provisions for sales discounts and returns, which are established at the time of sale. Accruals for sales discounts and allowances are reflected as a direct reduction to accounts receivable and accruals for returns are recorded as a liability.
The Company establishes accruals for returns; chargebacks; sales volume rebates; cash discounts; and Medicaid rebate obligations in the same period it recognizes the related sales. These accruals reduce revenues and, with the exception of returns, are treated as a reduction of trade receivables. Returns are usually related to expired product and are recorded as a liability. At the time a rebate or chargeback payment is made or a product return is received, which occurs with a delay after the related sale, the Company records a reduction to the contra accounts receivable or returns reserve at the end of each quarter. Due to estimates and assumptions inherent in determining the amount of returns, chargebacks and rebates, the actual amount of product returns and claims for chargebacks and rebates may differ from the Company’s estimates.
7
Generics International (US) Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements—(continued)
(Unaudited)
2. Summary of Significant Accounting Policies (continued)
The Company’s product returns accrual is primarily based on estimates of future product returns over the period customers have a right of return, which is in turn based in part on estimates of the remaining shelf-life of products when sold to customers. Future product returns are estimated primarily based on historical sales and return rates. The Company estimates its chargeback accrual based on its estimates of the level of inventory of its products in the distribution channel that remain subject to chargebacks and historical chargeback rates. The estimate of the level of products in the distribution channel is based primarily on data provided by three key wholesalers. The Company estimates its Medicaid rebate accruals based on monthly sales, historical rates, and estimated lag time of the rebate request. The Company’s sales volume rebate accrual is based on actual net sales and the rebate rate for each individual customer. The Company’s accruals for returns, chargebacks and rebates are adjusted as appropriate for specific known developments that may result in a change in its product returns or its rebate and chargeback obligations.
Cash and Cash Equivalents
The Company considers cash and cash equivalents to include cash in banks, commercial paper and deposits with financial institutions that can be liquidated without prior notice or penalty. The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.
Trade Accounts Receivable
Trade accounts receivable are recorded at the invoiced amount net of allowance for doubtful accounts and other sales allowances and do not bear interest. The allowance for doubtful accounts is management’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable. Management determines the allowance based on historical experience along with the present knowledge of potentially uncollectible accounts. Management reviews its allowance for doubtful accounts periodically. Account balances are charged off against the allowance when management believes it is probable the receivable will not be recovered.
8
Generics International (US) Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements—(continued)
(Unaudited)
2. Summary of Significant Accounting Policies (continued)
Inventories
Inventories consist of finished goods held for sale, raw materials and work in process. Inventories are stated at the lower of cost or market, with cost determined using a first-in, first-out method. The Company establishes reserves for excess and obsolete inventories based upon historical experience and management’s assessment of current product demand. These assessments include inventory obsolescence, based on its expiration date, damaged or rejected product and slow moving products.
Property and Equipment
Property and equipment are stated at historical cost. Depreciation expense for financial reporting purposes is computed using the straight-line method over the estimated useful lives of the assets. Gains and losses are reflected in the period of disposal. Expenditures which significantly increase value or extend useful lives of property and equipment are capitalized, whereas those for normal maintenance and repairs are expensed.
Goodwill and Other Intangible Assets
Intangible assets, which primarily include acquired product rights, customer relationships, trademarks and patents, are stated at cost, net of accumulated amortization. Amortization is computed over the estimated useful lives, ranging up to forty years, using the straight-line method. The Company estimates the useful lives of the assets by factoring in the characteristics of the products such as: patent protection, competition by products prescribed for similar indications, estimated future introductions of competing products and other factors. The Company evaluates the remaining useful lives of intangible assets each reporting period to determine whether events and circumstances warrant a revision to the remaining period of amortization. The Company reviews its intangible assets other than goodwill for possible impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable.
9
Generics International (US) Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements—(continued)
(Unaudited)
2. Summary of Significant Accounting Policies (continued)
The Company reviews goodwill and indefinite lived intangible assets for possible impairment annually, or whenever events or circumstances indicate that the carrying amount may not be recoverable. Assumptions and estimates used in the evaluation of impairment may affect the carrying value of long-lived assets, which could result in impairment charges in future periods. Such assumptions include projections of future cash flows and, in some cases, the current fair value of the asset. In addition, the Company’s amortization policies reflect judgments on the estimated useful lives of assets.
Impairment of Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. The Company evaluates assets for potential impairment by comparing estimated future undiscounted net cash flows to the carrying amount of the asset. If the carrying amount of the assets exceeds the estimated future undiscounted cash flows, impairment is measured based on the difference between the carrying amount of the assets and fair value.
Income Taxes
The Company provides for income taxes using the asset and liability method as required by FASB Accounting Standards Codification 740, “Income Taxes” (ASC 740). This approach recognizes the amount of federal, state and local taxes payable or refundable for the current year, as well as deferred tax assets and liabilities for the future tax consequence of events recognized in the consolidated financial statements and income tax returns. Deferred income tax assets and liabilities are adjusted to recognize the effects of changes in tax laws or enacted tax rates.
Under ASC 740, a valuation allowance is required when it is more likely than not that some portion of the deferred tax assets will not be realized. Realization is dependent on generating sufficient future taxable income.
On January 1, 2009, the Company adopted the authoritative guidance on accounting for and disclosure of uncertainty in tax positions (FASB—Accounting Standards Codification 740), which prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. The Company has no uncertain tax positions as of September 30, 2010 that qualify for either recognition or disclosure in the financial statements under this new guidance.
10
Generics International (US) Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements—(continued)
(Unaudited)
2. Summary of Significant Accounting Policies (continued)
Accumulated Other Comprehensive Income (Loss)
Accumulated Other Comprehensive Income (Loss) consists of the net loss and unrealized losses from derivatives, net of tax.
Share Based Payments
Apax Quartz (Cayman) L.P. (the Company’s ultimate parent) has granted stock awards to certain employees which are recorded in the Company’s consolidated financial statements as a liability award as more fully described in Note 9. The Company recognizes stock-based compensation under the provisions of FASB Accounting Standards Codification 718,Compensation-Stock Compensation,(ASC718), pursuant to which the fair value of awards expected to vest is expensed on a straight-line basis over the vesting period of the related awards. The fair value method is used and stock awards are marked to market each reporting period.
Derivative Instruments
The Company uses derivative instruments as part of its overall strategy to manage its exposure to fluctuations in interest rates. As a matter of policy, the Company does not use derivatives for trading or speculative purposes.
The Company accounts for derivative instruments under the guidance in FASB Accounting Standards Codification ASC 815,Derivatives and Hedging (“ASC 815”). ASC 815 requires that all derivative instruments be recorded on the balance sheet at their fair value.
Changes in the fair value of derivatives are recorded each period in current earnings or in other comprehensive income, depending on whether a derivative is designated as part of a hedging relationship and, if it is, depending on the type of hedging relationship. For a derivative instrument that is designated and qualifies as a hedge, the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income and reclassified into earnings in the same line item associated with the forecasted transaction in the same period or periods during which the hedged transaction affects earnings.
For all hedging activities, the ineffective portion of a derivative’s change in fair value is immediately recognized in other income (expense). For derivative instruments not designated as hedging instruments, the gain or loss is recognized in other income (expense) during the period of change. The Company believes that any such non-designated instruments would offset the economic risks of the hedged items.
11
Generics International (US) Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements—(continued)
(Unaudited)
2. Summary of Significant Accounting Policies (continued)
As of September 30, 2010 and December 31, 2009, the Company holds one derivative instrument, an interest rate swap, that is designated as a cash flow hedge. Therefore, in accordance with ASC 815, the effective portion of the change in the fair value of the interest rate swap is reported in other comprehensive income in the consolidated statement of changes in stockholder’s equity. Net cash settlements on the interest rate swap are included in investing activities in the consolidated statements of cash flows.
Fair Value Measurements
On January 1, 2008, the Company adopted the provisions of FASB Accounting Standards Codification ASC 820,Fair Value Measurements and Disclosures (ASC 820) for financial assets and liabilities. As permitted by ASC 820, the Company elected to defer until January 1, 2009 the adoption of ASC 820 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis. ASC 820 provides a framework for measuring fair value under GAAP and requires expanded disclosures regarding fair value measurements. ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs, where available, and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
Level 1—Quoted prices in active markets for identical assets or liabilities. At September 30, 2010 or December 31, 2009, the Company did not have any Level 1 assets or liabilities.
Level 2—Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. At September 30, 2010 or December 31, 2009, the Company did not have any Level 3 assets or liabilities.
12
Generics International (US) Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements—(continued)
(Unaudited)
2. Summary of Significant Accounting Policies (continued)
The valuation of the Company’s derivative financial instruments is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash payments (or receipts) and the discounted expected variable cash receipts (or payments). The variable cash receipts (or payments) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves.
The following table sets forth the Company’s financial assets and liabilities that were measured at fair value on a recurring basis at September 30, 2010 and December 31, 2009 by level within the fair value hierarchy. As required by ASC 820, assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability:
| | | | | | | | | | | | | | | | |
| | | Quoted Prices in
Active Markets
for
Identical Assets
(Level 1) | | | Significant
Other
Observable
Inputs
(Level 2) | | | Significant
Unobservable
Inputs
(Level 3) | | | Balance at
December 31,
2009 | |
Liabilities | | | | | | | | | | | | | | | | |
Interest rate swap (a) | | $ | — | | | $ | 12,998,898 | | | $ | — | | | $ | 12,998,898 | |
| | | | |
| | | Quoted Prices in
Active Markets
for
Identical Assets
(Level 1) | | | Significant
Other
Observable
Inputs
(Level 2) | | | Significant
Unobservable
Inputs
(Level 3) | | | Balance at
September 30,
2010 | |
Liabilities | | | | | | | | | | | | | | | | |
Interest rate swap (a) | | $ | — | | | $ | 9,556,900 | | | $ | — | | | $ | 9,556,900 | |
| (a) | Reflected in the consolidated balance sheet at September 30, 2010 and December 31, 2009 as a component of Other accrued expenses |
13
Generics International (US) Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements—(continued)
(Unaudited)
2. Summary of Significant Accounting Policies (continued)
Research and Development Activities
Research and development activities are expensed as incurred and consist of direct and allocated expenses incurred with formulation, regulation, and analytical work associated with new products.
14
Generics International (US) Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements—(continued)
(Unaudited)
3. Trade Accounts Receivable
Trade accounts receivable consists of the following:
| | | | | | | | |
| | | September 30,
2010 | | | December 31,
2009 | |
Gross trade receivables | | $ | 94,568,795 | | | $ | 83,674,462 | |
Allowance for doubtful accounts | | | (88,116 | ) | | | (87,528 | ) |
Sales volume allowances | | | (10,292,227 | ) | | | (18,301,778 | ) |
Price protection credits | | | (195,217 | ) | | | (499,387 | ) |
Contract chargebacks | | | (14,093,454 | ) | | | (15,917,516 | ) |
Medicaid commissions | | | (1,682,601 | ) | | | (831,813 | ) |
| | | | | | | | |
Total accounts receivables | | $ | 68,217,180 | | | $ | 48,036,440 | |
| | | | | | | | |
4. Inventories—Net
Inventories—net consist of the following:
| | | | | | | | |
| | | September 30
2010 | | | December 31
2009 | |
Raw Materials | | $ | 34,294,904 | | | $ | 31,064,219 | |
Work-in-Progress | | | 10,990,195 | | | | 8,390,705 | |
Finished Goods | | | 37,766,447 | | | | 33,478,530 | |
| | | | | | | | |
Total | | $ | 83,051,546 | | | $ | 72,933,454 | |
| | | | | | | | |
15
Generics International (US) Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements—(continued)
(Unaudited)
5. Property and Equipment
Property and equipment consists of the following:
| | | | | | | | | | | | |
| | | September 30,
2010 | | | December 31,
2009 | | | Lives | |
Buildings | | $ | 70,496,010 | | | $ | 62,774,041 | | | | 10 - 47 years | |
Equipment and fixtures | | | 45,579,549 | | | | 44,421,696 | | | | 3 - 12 years | |
Land | | | 7,128,000 | | | | 7,128,000 | | | | | |
Land improvements | | | 2,083,908 | | | | 2,083,908 | | | | 19 - 22 years | |
Construction in progress | | | 4,540,435 | | | | 9,244,073 | | | | | |
| | | | | | | | | | | | |
Total property and equipment | | | 129,827,902 | | | | 125,651,718 | | | | | |
Less accumulated depreciation | | | (25,122,715 | ) | | | (18,793,920 | ) | | | | |
| | | | | | | | | | | | |
Property and equipment—net | | $ | 104,705,187 | | | $ | 106,857,798 | | | | | |
| | | | | | | | | | | | |
Depreciation for the nine-months ended September 30, 2010 is $6,342,349 and for nine-months ended September 30, 2009 was $6,305,886.
6. Intangible Assets
Intangible assets consist of the following:
| | | | | | | | | | | | | | | | |
| | | Balance
December 31,
2009 | | | Acquisition | | | Amortization | | | Balance
September 30,
2010 | |
Intangible Assets | | | | | | | | | | | | | | | | |
Corporate Trade Name | | $ | 15,500,000 | | | | 49,750 | | | | — | | | $ | 15,549,750 | |
Customer Relationships | | $ | 92,383,500 | | | | — | | | | (4,817,250 | ) | | $ | 87,566,250 | |
Product Rights | | $ | 52,710,756 | | | | — | | | | (1,430,424 | ) | | $ | 51,280,332 | |
| | | | | | | | | | | | | | | | |
Total Intangible Assets | | $ | 160,594,256 | | | | 49,750 | | | | (6,247,674 | ) | | | 154,396,332 | |
Goodwill | | | 237,483,545 | | | | — | | | | — | | | | 237,483,545 | |
| | | | | | | | | | | | | | | | |
Total Intangibles Including Goodwill | | $ | 398,077,801 | | | | 49,750 | | | $ | (6,247,674 | ) | | $ | 391,879,877 | |
| | | | | | | | | | | | | | | | |
16
Generics International (US) Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements—(continued)
(Unaudited)
6. Intangible Assets (continued)
The weighted average useful lives at September 30, 2010 are as follows:
| | | | |
| | | Weighted Average Useful Lives | |
Intangible Assets : | | | | |
Corporate Trade Name | | | Indefinite | |
Customer Relationships | | | 17 years | |
Product Rights | | | 30 years | |
| |
Goodwill | | | Indefinite | |
The Company recorded $6,247,674 of amortization expense for the nine-months ended September 30, 2010 and $6,097,671 for the nine-months ended September 30, 2009. Amortization expense is included within selling, general, and administrative expenses in the accompanying Consolidated Statements of Operations. In 2009, during the annual impairment testing of the Company’s intangible assets, no impairments were noted. The annual goodwill impairment testing for 2010 has not been performed as of September 30, 2010. Goodwill is amortized for tax purposes over fifteen years.
The approximate future annual amortization for intangible assets is as follows:
| | | | |
2011 | | $ | 8,321,305 | |
2012 | | | 8,321,305 | |
2013 | | | 8,321,305 | |
2014 | | | 8,321,305 | |
2015 | | | 8,321,305 | |
Therafter | | | 97,240,057 | |
| | | | |
Total | | $ | 138,846,582 | |
| | | | |
17
Generics International (US) Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements—(continued)
(Unaudited)
7. Long and Short Term Debt
At September 30, 2010 and December 31, 2009 long-term debt consisted of the following:
| | | | | | | | |
| | | September 30,
2010 | | | December 31,
2009 | |
First Lien Credit Facility | | $ | 253,795,000 | | | $ | 259,795,000 | |
Second Lien Credit Facility | | | 140,000,000 | | | | 140,000,000 | |
Revolving credit facility | | | — | | | | — | |
| | | | | | | | |
Total long term debt | | $ | 393,795,000 | | | $ | 399,795,000 | |
| | | | | | | | |
In October 2007, the Company entered into the 2007 Credit Facility (“2007 Credit Facility”) with Royal Bank of Canada. The 2007 Credit Facility provides an aggregate of $507.0 million of senior financing, consisting of a $75.0 million Revolving Credit Facility (“Revolving Credit Facility”), a $27.0 million Delayed Draw Loan (“Delayed Draw Loan”), a $265.0 million senior term loan facility (“First Lien Credit Agreement”), and a $140.0 million senior term loan facility (“Second Lien Credit Agreement”). The 2007 Credit Facility was entered into in connection with the Apax Partners’ purchase of the Company.
The First Lien Credit Agreement and Revolving Credit Facility have a 7 year term while the Second Lien Credit Agreement has a 7 1/2 year term. The Delayed Draw Loan is available for 18 months from October 31, 2007. The Credit Facility bears interest equal to LIBOR plus 3.5% for the First Lien Credit Agreement and 7.5% for the Second Lien Credit Agreement (subject to certain adjustments). The indebtedness under the 2007 Credit Facility is guaranteed by substantially all of the Company’s assets. The remainder under the Revolving Credit Facility and the Delayed Draw Loan is available for working capital and other general corporate requirements. The First Lien Credit Agreement may be prepayable and commitments reduced at the election of the Company without premium (subject to certain conditions), while the Second Lien Credit Agreement has a prepayment penalty of 2% through the first twelve months of the agreement, 1% in the second twelve months, and no prepayment penalty after the first twenty-four months. For the period January 1, 2010 through September 30, 2010, the Company borrowed $4 million available from the Delayed Draw Loan that was subsequently repaid in that period. In 2009, the Company borrowed $27 million available from the Delayed Draw Loan that was subsequently rolled into the First Lien.
18
Generics International (US) Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements—(continued)
(Unaudited)
7. Long and Short Term Debt (continued)
For the period January 1, 2010 through September 30, 2010, the Company made total debt payments of $10 million. For the period November 1, 2007 through September 30, 2009, the Company made no prepayments of debt. For the period October 1, 2009 through December 31, 2009, the Company made of $27.5 million prepayment of all future mandatory payments on the First Lien. In 2009, the Company made total debt payments of $36.1 million.
Under the terms of the 2007 Credit Facility, the Company is subject to financial and operational covenants. The Company is in compliance with all covenants as of September 30, 2010.
The Company does not believe that it is practicable to estimate the fair value of the debt instruments described above as the debt is not publicly traded, and thus, a fair value is not readily obtainable. Information pertinent to estimating the fair value of the debt includes the following:
| | | | | | | | | | | | |
| | | Carrying Value | | | Effective
Interest Rate | | | Maturity | |
First lien credit facility | | $ | 253,795,000 | | | | 3.75 | % | | | 7 year term | |
Second lien credit facility | | | 140,000,000 | | | | 7.75 | % | | | 7.5 year term | |
| | | | | | | | | | | | |
Total | | $ | 393,795,000 | | | | | | | | | |
| | | | | | | | | | | | |
The 2007 Credit Facility specifies quarterly payments equaling 0.25% of the First Lien Credit Facility, however due to the prepayments noted above the quarterly payments are not necessary, making the balance due at the end of the loan terms:
| | | | |
2011 | | $ | — | |
2012 | | | — | |
2013 | | | — | |
2014 | | | 253,795,000 | |
2015 | | | 140,000,000 | |
Thereafter | | | — | |
| | | | |
Total | | $ | 393,795,000 | |
| | | | |
Prepayments equaling a certain percentage of excess cash flow as defined by the Credit agreement may be required.
19
Generics International (US) Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements—(continued)
(Unaudited)
7. Long and Short Term Debt (continued)
Letters of credit are obtained for raw material vendors in order to purchase materials from these vendors on a recurring basis and for utilities in order to secure utility service. At September 30, 2010, the Company had $1.4 million in open letters of credit issued under the 2007 Credit Facility. At September 30, 2009, the Company had $3 million in open letters of credit issued under the 2007 Credit Facility. At December 31, 2009, the Company had $1.4 million in open letters of credit issued under the 2007 Credit Facility.
An annual commitment fee of 0.5% for the unused portion of the Delayed Draw facility and 1.0% for the revolving Credit Facility is assessed, calculated and paid quarterly.
8. Interest Rate Swap
On November 16, 2007, The Company entered into an interest rate swap agreement. Under the terms of the agreement, the Company receives amounts from the counterparty based on a floating interest rate and pays amounts based on a fixed interest rate, at specified intervals, calculated on the agreed-upon notional amount. The differentials paid or received under the interest rate swap agreement are recognized as adjustments to interest expense in the period incurred. The floating interest rate is reset on a quarterly basis until the end of the agreement in 2011. The Company performs an ineffectiveness calculation on a recurring basis to validate that the interest rate swap is highly effective. As of September 30, 2010 and December 31, 2009, a loss of $9.6 million and $13 million, respectively, has been recorded in accumulated other comprehensive income (loss). The Company estimates that approximately $8.4 million of the accumulated other comprehensive income (loss) will be realized into earnings over the next twelve months for the transactions that are expected to occur over that period.
20
Generics International (US) Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements—(continued)
(Unaudited)
9. Employee Stock Compensation
Class B Common Units and Class C Common Units of APAX Quartz (Cayman) L.P. were granted to certain management employees. Fifty percent of the Class B Common Units and Class C Common Units vest on service, ratably on the anniversary date over 4 years, or immediately upon a sale or public offering. The remaining fifty percent vest on performance at such time as Apax investors receive two and one half times their original investment in Apax Quartz (Cayman) L.P. The Class B Common Units and Class C Common Units share ratably in any distributions from the Partnership, upon a liquidity event, after all preferred capital, preferred yield and capital amounts have been returned to investors. In 2009, Management Preferred Units were granted to certain management employees. The Management Preferred Units vest on service ratable on the anniversary data over 4 years or immediately upon a sale or public offering. In the event of an employee’s termination subject to a General Release (as defined in the agreement), the Parent will repurchase the shares based on the fair value at that time; if a terminated employee is not subject to a General Release then all vested and unvested shares will be forfeited. As the employees do not bear any of the risks and rewards of ownership, these awards are classified as liability awards. As the Company is not publicly traded, the expense related to the awards subject to performance vesting will not be recognized until a liquidation event occurs. The expense associated with employees stock compensation is recognized by the Company since the employee participants are rendering services to the Company. The Company recorded compensation cost, determined in accordance with ASC 718, totaling $2,782,274 for nine-month period ended September 30, 2010 and $393,103 for nine-month period ended September 30, 2009.
The fair value of each common unit is estimated on the date of grant using a Monte-Carlo simulation re-measured at each reporting date based on the instruments’ fair value. Expected volatilities are based on historical volatility levels of similarly situated publicly traded pharmaceutical companies. The risk-free rate for a period consistent with the expected time until a liquidity event is based on the U.S. Treasury yield curve in effect at the time of grant. An estimated liquidity event date of December 31, 2011, four years from the Acquisition date, was used for the period of time that the common units are expected to be outstanding in determining the value as of December 31, 2009. The pending purchase of the Company by Endo Pharmaceuticals established a fair value of the Company as of September 30, 2010. The contract price was used to determine the value of the common units issued as of September 30, 2010.
21
Generics International (US) Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements—(continued)
(Unaudited)
9. Employee Stock Compensation (continued)
A summary of activity is presented below:
| | | | | | | | | | | | |
| | | Class B
Common
Units | | | Class C
Common
Units | | | Management
Preferred
Units | |
Outstanding at December 31, 2009 | | | 3,835 | | | | 3,056 | | | | 6,306 | |
Granted | | | — | | | | 972 | | | | 972 | |
Forfeited | | | (989 | ) | | | (7 | ) | | | (855 | ) |
| | | | | | | | | | | | |
Outstanding at September 30, 1010 | | | 2,846 | | | | 4,021 | | | | 6,423 | |
| | | | | | | | | | | | |
At September 30, 2010 1,281 shares of Class B and 1,181 shares of Class C units were vested. At December 31, 2009 479 shares of Class B and 112 shares of Class C units were vested.
As of September 30, 2010, there is $4,325,311 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted which is expected to be recognized at the liquidity event. No common units were redeemed during the year. The Class B Common Units and Class C Common Units do not expire.
10. Employee Benefit Plans
The Company sponsors a defined contribution retirement plan. Substantially all of the Company’s employees are eligible to be enrolled in an employer-sponsored contributory retirement savings plan, which includes features under Section 401(k) of the Internal Revenue Code of 1986, as amended, and provides for company matching contributions. The Company’s contributions to the plan are determined by its Board of Directors subject to certain minimum requirements as specified in the plans. The Company’s retirement plan expense for the nine-month period ended September 30, 2010 and 2009 was $923,506 and $932,900, respectively.
11. Related Party Transactions
As part of the Acquisition, the Company entered into an agreement with Apax Partners for management services for $1.0 million per year with an automatic renewal. Fees of $750,000 have been expensed for the period January 1, 2010 through September 30, 2010 and for the period January 1, 2009 through September 30, 2009. As of September 30, 2010, the Company has $730,392 recorded in other accrued expenses for the payment of management services.
22
Generics International (US) Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements—(continued)
(Unaudited)
12. Self-Insurance
The Company is self-insured for employee medical claims up to a $75,000 stop-loss limit per participant with an overall company aggregate of $220,000. A reinsurance plan has been established for claims greater than $75,000 and up to an annual aggregate maximum of $2,000,000 for the plan. Medical claims expense for the nine-month period ended September 30, 2010 is $6,096,937 and for the nine-month period ended September 30, 2009 was $4,481,795. The Company has recorded a liability for incurred but not reported claims in the amount of $744,573 as of September 30, 2010 as a component of other accrued expenses in the accompanying consolidated balance sheets.
13. Commitments and Contingencies
There are sundry claims and suits pending against the Company in the ordinary course of business. In the opinion of the Company’s management, any ultimate liability in these matters will have no material adverse effect on the consolidated results of operations or financial position of the Company. The Company, along with several pharmaceutical companies, is named as a defendant in civil lawsuits filed by individuals allegedly injured by their use of the prescription Metoclopramide. While it is not possible to determine any degree of certainty the ultimate outcome of these legal proceedings, including making a determination of liability, the Company believes that it has meritorious defenses with respect to claims asserted against it and intends to vigorously defend its position.
14. Concentration of Credit Risk
The Company does not believe that it is dependent upon any single customer. As of and for the nine-months ended September 30, 2010, accounts receivable from the Company’s three largest customers amounted to 31%, 17% and 15% of gross accounts receivable and sales to the Company’s three largest customers amounted to 24%, 13% and 13% of gross sales. As of the December 31, 2009, trade accounts receivable from the Company’s three largest customers amounted to 27%, 16% and 14% of gross trade accounts receivable. As of and for the nine-months ended September 30, 2009, sales to the Company’s three largest customers amounted to 21%, 14% and 14% of gross sales.
15. Other Operating Income
In September 2009, an indemnification settlement was agreed to with the former owner in which the Company received $20,000,000 that was previously held in escrow as part of the purchase agreement that took place in 2007. This income is included in the other operating income line of the Combined Statements of Operation.
23
Generics International (US) Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements—(continued)
(Unaudited)
16. Discontinued Operations
In October 2009, the Company elected to discontinue its medical device business, consisting of insulin syringes. Inventory on hand at the date of discontinuance was fully expensed, and these costs were included as a component of discontinued operations. The Company has a recorded liability of $259,207 as of September 30, 2010 and $837,743 as of December 31, 2009 to cover the expected costs of recalls, recall fees, and expected liabilities associated with disposal.
17. Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting and the amount used for income tax purposes and the impact of the available net operating loss carryforwards. The Company assesses the likelihood that its deferred tax assets will be recovered from future taxable income and, to the extent that the Company believes recovery is not likely, the Company has established a full valuation.
Income tax expense is $4.1 million for the nine-months ended September 30, 2010 and $4.6 million for the nine months ended September 30, 2009. The effective tax rate for the nine-months ended September 30, 2010 is 25.2% as compared to 17.12% for the nine-months ended September 30, 2009. The increase in the effective tax rate for the nine-months ended September 30, 2010 compared to September 30, 2009 is directly related to the decrease in pretax book income from 2009 to 2010.
24
Generics International (US) Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements—(continued)
(Unaudited)
18. Subsequent Events
On September 28, 2010, Endo Pharmaceuticals announced that it has entered into a definitive agreement to acquire the Company, a leading, privately-held generics company in the U.S., for approximately $1.2 billion in cash, of which approximately $400 million will be utilized to extinguish existing indebtedness. Consummation of the acquisition is subject to certain conditions, including, among others (i) absence of certain legal impediments to the consummation of the acquisition, (ii) the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, (iii) the accuracy of the representations and warranties made by each party, respectively, in each case subject to certain material adverse effect qualifications, and (iv) compliance by each party with the respective obligations under the stock purchase agreement, in each cash, subject to certain materiality qualifications.
On December 1, 2010, Endo Pharmaceuticals Holdings Inc. (“Endo”) reported it had completed its acquisition of Generics International (US Parent), Inc (d/b/a Qualitest Pharmaceuticals) from an affiliate of Apax Partners, L.P on November 30, 2010. On November 30, 2010, Apax accepted for payment approximately $769.4 million for all of the issued and outstanding stock of Qualitest.
In preparation of its consolidated financial statements, the Company completed an evaluation of the impact of any other subsequent events through the date these financial statements were able to be issued. No other subsequent event requiring disclosure in or adjustment to these financial statements was noted, other than those disclosed above.
25
