EXHIBIT 99.2
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Kali Laboratories, Inc.:
We have audited the accompanying combined balance sheet of Kali Laboratories,
Inc. (the "Company") as of December 31, 2003, and the related combined
statements of operations, stockholders' equity (deficit), and cash flows for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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 audit provides a
reasonable basis for our opinion.
In our opinion, such combined financial statements present fairly, in all
material respects, the financial position of the Company as of December 31,
2003, and the results of its operations and its cash flows for the year then
ended December 31, 2003, in conformity with accounting principles generally
accepted in the United States of America.
/s/ Deloitte & Touche LLP
Parsippany, New Jersey
August 13, 2004
KALI LABORATORIES, INC.
COMBINED BALANCE SHEET
DECEMBER 31, 2003
(IN THOUSANDS)
ASSETS
Current Assets:
Cash and cash equivalents $241
Accounts receivable 444
Available-for-sale securities 6,554
Inventories 422
Prepaid expenses and other current assets 327
-----
Total current assets 7,988
-----
Property, plant and equipment--At cost 5,857
Less accumulated depreciation and amortization (1,041)
-----
Property, plant and equipment--Net 4,816
-----
Other Assets:
Deferred financing costs (net of accumulated amortization of $11) 7
-----
Total other assets 7
-----
TOTAL ASSETS $12,811
======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable and accrued liabilities $415
Taxes payable 5
Note payable - stockholder 553
Deferred income - current portion 500
------
Total current liabilities 1,473
Loan payable - Perrigo 10,000
Deferred income 1,800
------
Total liabilities 13,273
======
Commitments and contingencies
Stockholders' deficit:
Common stock 130
Additional paid-in capital 96
Accumulated deficit (681)
Accumulated other comprehensive loss (7)
------
Total stockholders' deficit (462)
------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $12,811
======
See notes to combined financial statements.
2
KALI LABORATORIES, INC.
COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2003
(IN THOUSANDS)
Revenue:
Research and development fees $932
Royalty income 470
-----
Total revenue 1,402
Operating expenses:
Research and development 2,672
General and administrative 447
-----
Total operating expenses 3,119
-----
Operating loss (1,717)
-----
Other income (expenses):
Realized loss on sale of available-for-sale securities (393)
Interest expense (205)
Dividend and interest income 32
Other income 14
-----
Total other expenses (552)
-----
Loss before benefit for state income taxes (2,269)
Benefit for state income taxes 5
-----
Net loss $(2,264)
=====
See notes to combined financial statements.
3
KALI LABORATORIES, INC.
COMBINED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
YEAR ENDED DECEMBER 31, 2003
(IN THOUSANDS)
RETAINED ACCUMULATED
ADDITIONAL EARNINGS OTHER TOTAL
COMMON STOCK PAID-IN (ACCUMULATED COMPREHENSIVE STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT) INCOME (LOSS) EQUITY (DEFICIT)
------ ------ ------- -------- ------------- ----------------
Balance--January 1, 2003 10 $130 $96 $1,844 $(490) $1,580
Net loss - - - (2,264) - (2,264)
Change in unrealized gains on
available-for-sale securities - - - - 483 483
Distributions of "S"
corporation earnings - - - (261) - (261)
----- ----- ----- ----- ----- -----
Balance--December 31, 2003 10 $130 $96 $(681) $(7) $(462)
===== ===== ===== ===== ===== =====
See notes to combined financial statements.
4
KALI LABORATORIES, INC.
COMBINED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2003
(IN THOUSANDS)
Cash flows from operating activities:
Net loss $(2,264)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 371
Amortization of deferred financing costs 87
Deferred income taxes (19)
Realized loss on available-for-sale securities 393
Changes in assets and liabilities:
Accounts receivable (143)
Inventories (422)
Prepaids and other current assets (230)
Accounts payable and accrued liabilities 117
Taxes payable 5
Deferred income 1,680
-----
Net cash used in operating activities (425)
-----
Cash flows from investing activities
Proceeds from sale of available-for-sale securities 309
Purchases of available-for-sale securities (6,561)
Purchases of property, plant and equipment (290)
-----
Net cash used in investing activities (6,542)
-----
Cash flows from financing activities:
Borrowings from Perrigo 10,000
Borrowings from stockholder 553
Repayments to mortgage lender (556)
Repayments of reducing revolver (2,727)
Borrowings under line of credit 591
Repayments under line of credit (594)
Payment of debt issue costs (18)
Distributions of S Corporation earnings (261)
-----
Net cash provided by financing activities 6,988
-----
Net change in cash and cash equivalents 21
Cash and cash equivalents--Beginning of year 220
-----
Cash and cash equivalents--End of year $241
=====
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $166
=====
State income taxes $10
=====
Supplemental disclosure of noncash
investing and financing activities:
Unrealized gain on available-for-sale securities $483
=====
See notes to combined financial statements.
5
KALI LABORATORIES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2003
(IN THOUSANDS)
- --------------------------------------------------------------------------------
1. NATURE OF BUSINESS
Kali Laboratories, Inc. ("Kali" or the "Company"), a New Jersey
corporation, is engaged in custom research, development, formulation and
delivery systems of solid, liquid and semisolid dosage forms of pharmaceutical
products. Kali partners with leading generic and niche branded pharmaceutical
manufacturers in developing new generic and proprietary formulations from
initial product development and selection through the Abbreviated New Drug
Application ("ANDA") or New Drug Application ("NDA") process. Currently, Kali
has also entered into contracts for developing and manufacturing certain
pharmaceutical products.
On June 10, 2004, Kali was acquired by Par Pharmaceutical Companies, Inc.
("Par") (see Note 16).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF COMBINATION-- The accompanying combined financial statements
include the accounts of VGS Holdings, Inc. ("VGS") which are under common
control. All significant intercompany transactions have been eliminated in
combination.
BASIS OF PRESENTATION--The combined financial statements of Kali are
prepared on the accrual basis of accounting, in conformity with accounting
principles generally accepted in the United States of America.
USE OF ESTIMATES--The combined financial statements are prepared in
conformity with accounting principles generally accepted in the United States of
America which requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and the disclosure of
contingencies, if any, at the date of the financial statements, and revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
REVENUE RECOGNITION--The Company recognizes revenue provided persuasive
evidence of an arrangement exists, pricing is fixed or determinable, the amount
is due within one year and collection of the resulting receivable is deemed
reasonably assured.
(a) Research and development fee revenue is recognized when a product has
achieved certain milestone hurdles.
(b) Royalty revenue is recognized when products sales have occurred, the
fee is fixed and determinable and collectibility is reasonably
assured.
Amounts billed to clients for "out-of-pocket" expenses are not classified
as revenue as they pertain to purchases made by Kali in regards to the contract.
The costs are billed by Kali and recovered from the customer. Out-of-pocket
expenses billed related to costs of contract purchases were approximately $491
for the year ended December 31, 2003. Approximately $260 of reimbursable costs
are included in prepaid expenses and other current assets in the accompanying
combined balance sheet. These costs have all been collected subsequent to
December 31, 2003.
RESEARCH AND DEVELOPMENT COSTS--Research and development costs include
materials, equipment and facilities cost, personnel costs, contract services,
and a reasonable allocation of indirect costs excluding general and
administrative costs that are not related to research and development
activities. Costs incurred by the Company's internal product development program
to develop new products and obtain pre-marketing regulatory approval for such
products are expensed as incurred and charged to research and development as
incurred.
FAIR VALUE OF FINANCIAL INSTRUMENTS--For financial instruments including
cash and cash equivalents, accounts receivable, accounts payable, accrued
expenses and loans payable, the carrying amount approximated fair value because
of their short maturity.
CASH AND CASH EQUIVALENTS--Kali considers all highly liquid short-term
investments with an original maturity date of three months or less to be cash
equivalents.
6
Kali maintains its cash balances in several financial institutions, which,
at times, may exceed the federally insured limit of $100. It has not experienced
any losses in such accounts and it is not exposed to any significant credit risk
on cash and cash equivalents.
AVAILABLE-FOR-SALE SECURITIES--The Company determines the appropriate
classification of all marketable securities as held-to-maturity,
available-for-sale or trading at the time of purchase, and re-evaluates such
classification as of each balance sheet date in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 115, ACCOUNTING FOR CERTAIN
INVESTMENTS IN DEBT AND EQUITY SECURITIES. Investments in equity securities that
have readily determinable fair values are classified and accounted for as
available-for-sale. The Company assesses whether temporary or
other-than-temporary gains or losses on its available-for-sale securities have
occurred due to increases or declines in fair value or other market conditions.
Because the Company has determined that all of its marketable securities are
available-for-sale, unrealized gains and losses are reported as a component of
accumulated other comprehensive loss in the accompanying combined statement of
stockholders' equity (deficit).
INVENTORIES--Inventories are started at the lower of cost (first-in,
first-out basis) or market value. The Company examines inventory levels,
including expiration dates by product, on a regular basis. The Company makes
provisions for obsolete and slow moving inventories as necessary to properly
reflect inventory value.
DEPRECIATION AND AMORTIZATION--Property, plant and equipment are
depreciated on a straight-line basis over their estimated useful lives that
range from 4 to 40 years. Leasehold improvements are amortized over the shorter
of the estimated useful life or the term of the lease.
DEFERRED FINANCING COSTS--Costs incurred in connection with obtaining
financing are capitalized and included in other assets in the accompanying
combined balance sheet. Such costs are amortized over the life of the respective
debt obligation on the straight-line basis. Amortization expense was
approximately $87 for the year ended December 31, 2003.
IMPAIRMENT OF LONG-LIVED ASSETS--The Company evaluates long-lived assets,
with finite lives, for impairment whenever events or changes in circumstances
indicate that the carrying value of an asset may no longer be recoverable. If
the estimated future cash flows (undiscounted and without interest charges) from
the use of an asset were less than the carrying value, a write-down would be
recorded to reduce the related asset to its estimated fair value.
OTHER COMPREHENSIVE LOSS--Kali's other comprehensive loss consists of
unrealized gains and losses on available-for-sale securities classified for SFAS
No. 115 purposes as held available-for-sale.
INCOME TAXES-- The stockholders of Kali have elected "S" corporation status
under applicable provisions of the Internal Revenue Code and the New Jersey
State tax law. It is treated for federal and state income tax purposes as if it
were a partnership while a valid election is in effect, and the stockholders'
respective share of net income or loss is reported on their individual returns.
Accordingly, the financial statements reflect no provision or liability for
federal income taxes. Kali remains liable for "S" corporation tax in the State
of New Jersey.
UNDISTRIBUTED "S" CORPORATION EARNINGS--It is Kali's intention to
distribute to its stockholders' undistributed earnings as dividends in an amount
sufficient for the stockholders to meet their current tax obligations and
additional amounts at its discretion.
CONCENTRATION OF CREDIT RISK--The Company grants credit to all customers on
an unsecured basis. During 2003, three customers accounted for 39%, 28% and 14%
of total revenues. Three customers represented 65%, 18% and 16% of accounts
receivable at December 31, 2003.
RECENT ACCOUNTING PRONOUNCEMENTS-- In April 2003, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 149, AMENDMENT OF STATEMENT 133 ON
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. This statement amends Statement
133 for decisions made (1) as part of the Derivatives Implementation Group
process that effectively required amendments to Statement 133, (2) in connection
with other FASB projects dealing with financial instruments and (3) in
connection with implementation issues raised in relation to the application of
the definition of a derivative, in particular, the meaning of an initial net
investment that is smaller than would be required for other types of contracts
that would be expected to have a similar response to changes in market factors,
7
the meaning of underlying, and the characteristics of a derivative that contains
financing components. This statement is effective for contracts entered into or
modified after June 30, 2003, except as stated below and for hedging
relationships designated after June 30, 2003. In addition, except as stated
below, all provisions of this statement should be applied prospectively. The
provisions of this statement that related to Statement 133 Implementation Issues
that have been effective for fiscal quarters that began prior to June 15, 2003,
should continue to be applied in accordance with their respective effective
dates. In addition, certain provisions, which relate to forward purchases or
sales of when-issued securities or other securities that do not exist yet,
should be applied to both existing contracts and new contracts entered into
after June 30, 2003. The Company determined that the adoption of this statement
did not have a material impact on the Company's combined statement of
operations.
In January 2003, the FASB issued Financial Interpretation Number ("FIN")
No. 46, CONSOLIDATION OF VARIABLE INTEREST ENTITIES ("FIN 46"). This
interpretation defines when a business must consolidate a variable interest
entity. This interpretation applies immediately to variable interest entities
created after January 31, 2003 and became effective for all other transactions
as of July 1, 2003. However, in October 2003 the FASB permitted companies to
defer the July 1, 2003 effective date to December 31, 2003. In December 2003,
the FASB replaced FIN 46 with FIN 46R, which permitted companies to defer the
December 31, 2003 effective date of FIN 46, in certain circumstances, to the
first annual period beginning after December 15, 2004. The Company has
determined that it is not reasonably probable that it will be required to
consolidate or disclose information about a variable interest entity.
In November 2002, the FASB issued FIN No. 45, GUARANTOR'S ACCOUNTING AND
DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT GUARANTEES OF
INDEBTEDNESS TO OTHERS ("FIN 45"), an interpretation of FASB Statements No. 5,
57 and 107 and rescission of FASB Interpretation No. 34. FIN 45 elaborates on
the disclosures to be made by the guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued.
The initial recognition and measurement provisions of FIN 45 are applicable on a
prospective basis to guarantees issued or modified after December 31, 2002. The
adoption of this interpretation did not have a material impact on the Company's
combined statement of operations.
3. AVAILABLE-FOR-SALE SECURITIES
The following is a summary of Kali's available-for-sale securities at
December 31, 2003:
UNREALIZED FAIR
COST GAIN LOSS VALUE
---- ---- ---- -----
U.S. Government obligations $5,008 - $(7) $5,001
Municipal bonds 1,007 - - 1,007
Certificates of deposit 546 - - 546
------ ------ ------ ------
$6,561 $- $(7) $6,554
====== ====== ====== ======
Short-term investments are considered available-for-sale and carried at
fair value with unrealized gains or losses included in accumulated other
comprehensive loss in the combined statement of stockholders' equity (deficit)
as of December 31, 2003.
On January 1, 2003, Kali had a portfolio of available-for-sale securities
reported at fair market value of $212 with net unrealized losses of $490
reported in other comprehensive loss. In September 2003, the entire portfolio
was disposed of and approximately $393 of net losses were realized. Gains and
losses on sale of available-for-sale securities were determined using the
specific identification method.
The following table summarizes the contractual maturities of
available-for-sale securities at December 31, 2003:
FAIR
COST VALUE
---- -----
Less than one year $2,061 $2,054
Due in 1-2 years - -
Due in 2-5 years - -
Due after 5 years 4,500 4,500
----- -----
$6,561 $6,554
===== =====
The available-for-sale securities due after 5 years were sold in the first half
of 2004.
8
4. INVENTORIES
Inventories include the following major categories at December 31, 2003:
Finished goods $357
Raw materials and supplies 65
----
$422
====
The inventory has been capitalized in anticipation of commercialization of
related products.
5. PROPERTY, PLANT AND EQUPMENT
Property, plant and equipment include the following at December 31, 2003:
Land and buildings $2,934
Production and laboratory equipment 2,508
Leasehold improvements 202
Furniture and fixtures 163
Automobile 50
-----
5,857
Less accumulated depreciation and amortization (1,041)
-----
Property, plant and equipment--net $4,816
=====
Depreciation and amortization expense related to property, plant and
equipment was approximately $371 for the year ended December 31, 2003. All
property, plant and equipment have been pledged as collateral for the loan
payable to Perrigo Generics Company ("Perrigo") (see Note 7).
6. LOANS PAYABLE--MERRILL LYNCH
REDUCING REVOLVER--On December 18, 2002, Kali received a reducing revolver
loan of $3,000 for a term of 60 months. Repayment of the reducing revolver loan
is based on a term of 240 months, with a balloon payment due at maturity.
Interest is calculated at a floating rate equal to the sum of 1.75% plus one
month LIBOR, based upon actual days elapsed over a 360-day year. On August 20,
2003, the reducing revolver was cancelled and the outstanding balance of
approximately $2,727 was paid in full. The amount was paid off by the $10,000
received from Perrigo (see Note 7). Interest expense on the revolver loan
amounted to $51 for the year ended December 31, 2003.
LINE OF CREDIT--On October 31, 2002, Kali received a line of credit of $600
for an initial period of one year, expiring on November 30, 2003, and subject to
renewal annually thereafter with a payment of a fee. Interest is payable at a
floating rate equal to the sum of 2% plus one month LIBOR, based upon actual
days elapsed over a 360-day year. On August 20, 2003, the line of credit was
cancelled and Kali paid off the then outstanding balance of approximately $594.
Interest expense on the line of credit amounted to $5 for the year ended
December 31, 2003.
7. LOAN PAYABLE--PERRIGO
On August 15, 2003, Kali received a $10,000 term loan from Perrigo.
Principal amount outstanding under this loan is repayable in seven quarterly
installments commencing on December 31, 2006 and continuing on the last day of
each of the six succeeding calendar quarters with the entire principal balance
due and payable on September 30, 2008. The seven quarterly principal payments
will be in the amount of the lesser of $450 or 50% of the total aggregate amount
payable to Kali during such quarter pursuant to a product development agreement.
Interest is calculated at the annual rate of the LIBOR plus 1.5% on the
principal amount outstanding during each calendar quarter. At December 31, 2003,
the principal amount outstanding under this term loan was $10,000 and interest
expense for the year amounted to approximately $107. As of December 31, 2003,
the interest due on the loan was paid. Kali and VGS have pledged their
insurance, plant and equipment, and real property as collateral for the above
loan. The above loan is further guaranteed by VGS. The costs associated with
obtaining the loan are included in other assets in the accompanying combined
balance sheet. These costs are being amortized over the life of the respective
debt obligation on the straight-line basis. Amortization relating to the costs
associated with Perrigo amounted to $11 for the year ended December 31, 2003.
The principal amount outstanding plus interest was fully repaid to Perrigo in
March 2004. Kali repaid the loan principal of $10,000 with funding received from
Par (see Note 16). At December 31, 2003 the amount due to Perrigo is included in
non-current liabilities in the accompanying combined balance sheet.
9
8. DEFERRED INCOME
Deferred income in the aggregate amount of $2,300, as stated in the
accompanying combined balance sheet, resulted from the following two contracts:
(a) On August 15, 2003, Kali signed a product development and distribution
agreement with Perrigo for a period of 10 years to obtain rights to
manufacture certain pharmaceutical products, get necessary regulatory
approvals from the United States Food and Drug Administration ("FDA"),
and later to manufacture those products. In consideration, Kali has
received a non-refundable up-front payment of $1,800 (to help fund the
development expenses) and will share the net profits at various rates
as specified in the agreement. The entire balance of $1,800 is
included in non-current liabilities in the accompanying combined
balance sheet.
(b) On March 28, 2003, Kali and Par signed a manufacturing and supply
agreement to obtain the required governmental approvals to allow the
manufacturing and supply of certain pharmaceutical products by Kali
and for marketing of those products by Par. Kali has agreed to supply
these products at a specified cost, stated in the agreement, for which
it has received an initial consideration of $500. The amount is
refundable to Par if the first commercial sale of the product does not
occur on or before September 13, 2004. As of December 31, 2003, this
project is still in the development stage and thus Kali has not
recognized any amount of the product development fee, which represents
the cost of manufacturing these products over its agreed-upon price.
The entire $500 is treated as a current liability in the accompanying
combined balance sheet. In addition to the initial payment, Kali is
also entitled to a share of profit on sales of these products as
specified in the agreement. As of December 31, 2003, Kali has
manufactured the product according to the specifications given by Par
and is awaiting FDA approval before shipments can begin.
9. DEFERRED INCOME TAXES
Deferred income taxes reflect the tax effect of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. A valuation allowance is
established, when necessary, to reduce deferred income tax assets to the amount
that is more likely than not to be realized. The significant components of the
Company's deferred tax assets and liabilities as of December 31, 2003 are as
follows:
Deferred tax assets:
Timing difference on income recognition
from product development $30
NJ net operating losses 5
---
35
Deferred tax liabilities:
Accumulated depreciation (16)
Other (1)
---
(17)
Net deferred tax asset $18
Valuation allowance (18)
---
Net deferred taxes $ -
===
10. ROYALTY INCOME
On November 21, 2000, Kali entered into a research and development
agreement with Par to perform formulation and research development work with
respect to certain products as defined in the agreement. In consideration of the
10
research and development, Kali will receive a royalty of 12.5% of the gross
profit on sales made by Par. At December 31, 2003, royalty income related to
this agreement amounted to approximately $395 and is included in revenue in the
accompanying combined statement of operations.
11. RELATED PARTY TRANSACTIONS
LOAN RECEIVABLE--In December 2002, Kali advanced $2,135 to VGS to purchase
the building located in Somerset, New Jersey, in which Kali operates. The amount
advanced to VGS was borrowed by Kali under their reducing revolver loan with
Merrill Lynch (see Note 6). The loan of $2,135 plus interest at the annual rate
of 2.3% is due on June 9, 2006. The outstanding balance of the loan of $2,135,
along with interest due thereon of approximately $63 at December 31, 2003, was
eliminated in the accompanying combined balance sheet.
LOAN PAYABLE TO STOCKHOLDER- In March 1998, VGS obtained a mortgage note
with Fleet Bank in the amount of $625 in order to purchase a building located in
Piscataway, New Jersey. A part of the building is utilized by Kali for warehouse
space of which Kali makes rental payments to VGS. The mortgage note was fully
repaid by a stockholder of Kali in 2003 in the amount of approximately $553. The
loan payable did not bear interest and the amount was repaid in full to the
stockholder in April 2004.
LEASING OF OPERATING FACILITIES--Kali leases the two operating facilities
from VGS on a month-to-month basis. Kali was charged rent of $200 by VGS for the
year ended December 31, 2003 and, as of December 31, 2003, $149 of such expense
was due to be paid to VGS. Both amounts were eliminated in the accompanying
combined balance sheet.
12. OFFICER'S LIFE INSURANCE
Kali is the owner and beneficiary of a $10,000 term life insurance policy
on the life of its President.
13. BENEFIT PLAN
Kali has a 401(k) benefit plan, which covers substantially all of its
employees. The employees may contribute up to 15% of their salary subject to
statutory limitations. Kali may make discretionary contributions to the plan.
Kali's contribution is limited to 50% of an employee's contribution and is
further limited to a maximum of 3% of annual salary. Contributions under this
plan, including Kali's contributions, were approximately $25 in 2003.
14. COMMITMENTS AND CONTINGENCIES
On November 25, 2002, Ortho-McNeil Pharmaceutical, Inc. ("Ortho-McNeil")
filed a lawsuit against Kali in the United States District Court for the
District of New Jersey. Ortho-McNeil alleged that Kali infringed U.S. Patent No.
5,336,691 (the "`691 patent") by submitting a Paragraph IV certification to the
FDA for approval of tablets containing tramadol hydrochloride and acetaminophen.
Par is Kali's exclusive marketing partner for these tablets. Kali has denied
Ortho-McNeil's allegation, asserting that the `691 patent was not infringed and
is invalid and/or unenforceable, and that the lawsuit is barred by unclean
hands. Kali also has counterclaimed for declaratory judgments of
non-infringement, invalidity and unenforceability of the `691 patent. Summary
judgment papers were served on opposing counsel on May 28, 2004; however under
New Jersey practice the summary judgment papers will not be filed with the Court
until the briefing is complete.
15. COMMON STOCK
In March 1998, VGS and its stockholders adopted a plan to which the
following classes of common stock were authorized: (i) 2,500 shares of voting
common stock, no par value. In March 2002, Kali and its stockholders adopted an
amendment to which the following classes of common stock were authorized: (i)
100 shares of voting common stock, no par value; and (ii) 9,900 shares of
nonvoting common stock, no par value. Two stockholders of Kali also own all of
the shares of common stock issued by VGS.
11
Common stock of both companies at December 31, 2003 is summarized as
follows (in thousands except share data):
SHARES
------
ISSUED AND AMOUNT
AUTHORIZED OUTSTANDING 2003
---------- ----------- ----
VGS Holdings, Inc:
Voting 2,500 200 $100
Kali Laboratories, Inc:
Voting 100 100 $10
Nonvoting 9,900 9,900 20
----- ---
10,200 $130
====== ===
16. SUBSEQUENT EVENTS
On June 2, 2004, the Company entered into a product transfer agreement with
Barr Laboratories ("Barr") for $450. The contract is for Barr to perform
formulation and research development work with respect to three products as
defined in the agreement. Upon filing the ANDA for each product, Kali will
obtain all rights to the product. Upon FDA approval, the products will be
manufactured on behalf of Perrigo. Further an amount of $225 was recovered from
Perrigo.
On June 10, 2004, Kali was acquired by Par for $140,430 in cash and $2,530
in warrants. The purchase price included adjustments for debt repayment of a
$10,000 loan made to the Company by Par in March 2004. Under the terms of the
agreement, Par purchased all of the capital stock of Kali. Kali may be entitled
to up to an additional $10,000 if certain product related performance criteria
are met over the next four years.
On July 7, 2004, Xcel Pharmaceuticals, Inc. ("Xcel") filed a complaint in
the U.S. District Court for the District of New Jersey against Kali alleging
that Kali's proposed generic version of Diastat(R) (diazepam) infringes one or
more claims of U.S. Patent No. 5,462,740 (the "740 patent"). Xcel alleges that
Kali infringed the `740 patent by filing an ANDA with the FDA containing a
Paragraph IV certification and by seeking approval to manufacture and market its
proposed generic version of Diastat(R) before the expiration of the `740 patent.
In the Complaint, Xcel seeks an order of the court enjoining Kali from marketing
its proposed generic version of Diastat(R) until the expiration date of the `740
patent, together with its attorneys' fees. This action is in its earliest stage.
Kali has not yet responded to the complaint but intends to vigorously defend
this action.
12