UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2004
Commission File Number: 1-10827
PAR PHARMACEUTICAL COMPANIES, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 22-3122182
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
300 TICE BOULEVARD, WOODCLIFF LAKE, NEW JERSEY 07677
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (201) 802-4000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE
SECURITIES EXCHANGE ACT OF 1934:
TITLE OF CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
Common Stock, $.01 par value The New York Stock Exchange, Inc.
Preferred Share Purchase Rights The New York Stock Exchange, Inc.
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE
SECURITIES EXCHANGE ACT OF 1934:
None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 (the "Exchange Act") during the preceding 12 months (or for such shorter
period that the Registrant was required to file such reports) and (2) has been
subject to such filing requirements for the past 90 days: Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in a definitive proxy or information
statement incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act): Yes X No
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The aggregate market value of the common equity held by non-affiliates of
the Registrant was $1,170,982,543 as of July 3, 2004 (assuming, solely for
purposes of this calculation, that all directors and executive officers of the
Registrant were "affiliates").
Number of shares of the Registrant's common stock outstanding as of March
7, 2005: 33,957,063
Part III of this Form 10-K incorporates by reference certain portions of the
Registrant's proxy statement for its 2005 Annual Meeting of Stockholders to be
filed within 120 days after December 31, 2004.
TABLE OF CONTENTS
PAR PHARMACEUTICAL COMPANIES, INC.
FORM 10-K FOR THE FISCAL
YEAR ENDED DECEMBER 31, 2004
PAGE
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PART I
Item 1 Business...........................................................3
Item 2 Properties........................................................12
Item 3 Legal Proceedings.................................................13
Item 4 Submission of Matters to a Vote of Security Holders...............14
PART II
Item 5 Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities...............15
Item 6 Selected Financial Data...........................................17
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................20
Item 7A Quantitative and Qualitative Disclosures about Market Risk........33
Item 8 Consolidated Financial Statements and Supplementary Data..........34
Item 9 Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure........................................34
Item 9A Controls and Procedures...........................................34
Item 9B Other Information.................................................35
PART III
Item 10 Directors and Executive Officers of the Registrant................36
Item 11 Executive Compensation............................................36
Item 12 Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters.................................36
Item 13 Certain Relationships and Related Transactions....................36
Item 14 Principal Accountant Fees and Services............................36
PART IV
Item 15 Exhibits and Financial Statement Schedules........................37
SIGNATURES...................................................................43
2
PART I
ITEM 1. BUSINESS.
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GENERAL
Par Pharmaceutical Companies, Inc. (the "Company" or "PRX") is a Delaware
holding company that, principally through its wholly owned subsidiary, Par
Pharmaceutical, Inc. ("Par"), is in the business of manufacturing and
distributing generic drugs in the United States. On June 10, 2004, the Company
acquired Kali Laboratories, Inc. ("Kali"), a generic pharmaceutical research and
development company located in Somerset, New Jersey, which has been integrated
with Par's internal research and development program. The Company's principal
executive offices are now located at 300 Tice Boulevard, Woodcliff Lake, NJ
07677, and its telephone number at such address is (201) 802-4000. Additional
information concerning the Company can be found on the Company's website at
www.parpharm.com. The Company makes its electronic filings with the United
States Securities and Exchange Commission (the "SEC"), including the Company's
annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K and any amendments to these reports, available through its website,
free of charge, as soon as practicable after it files or furnishes them with the
SEC. Information on the website is not, and should not be construed to be, part
of this Form 10-K.
Generic drugs are the pharmaceutical and therapeutic equivalents of brand
name drugs and are usually marketed under their generic (chemical) names rather
than by brand names. Typically, a generic drug may not be marketed until the
expiration of applicable patent(s) on the corresponding brand name drug. Generic
drugs must meet the same governmental standards as brand name drugs, but they
are sold generally at prices below those of the corresponding brand name drugs.
Generic drugs provide a cost-effective alternative for consumers, while
maintaining the safety and effectiveness of the brand name pharmaceutical
product.
The Company's product line comprises generic prescription drugs consisting
of 187 products representing various dosage strengths for 80 separate drugs. The
Company's products are manufactured principally in the solid oral dosage form
(tablet, caplet and two-piece hard shell capsule). In addition, the Company
markets one oral suspension product and one product in the semi-solid form of a
cream. The Company develops and manufactures some of its own products and has
strategic alliances and relationships with several pharmaceutical and chemical
companies that provide the Company with products for sale through various
distribution, manufacturing, development and licensing agreements.
As part of the Company's business plan to sustain future growth, the
Company has recently expanded its efforts in developing new dosage strengths and
drug delivery forms through a specialty pharmaceutical product line it believes
will improve existing pharmaceutical products. The Company believes that these
potential brand products will have limited competition, longer product life
cycles and higher profitability than its existing products. Following this
strategy, the Company submitted its first New Drug Application ("NDA") on June
29, 2004, pursuant to Section 505(b)(2) of the Federal Food, Drug, and Cosmetic
Act (the "FFDC Act"), seeking marketing clearance for megestrol acetate oral
suspension NanoCrystal(R) Dispersion ("NCD") and began to assemble a sales force
to detail its branded drug products. In addition to this strategy, the Company
is continuing its efforts in developing generic equivalents of existing drugs,
exploring potential acquisitions of complementary products and businesses and
seeking additional strategic alliances and relationships.
The Company markets its products primarily to wholesalers, retail drug
store chains, managed health care providers and drug distributors, principally
through its internal sales staff. The Company also promotes the sales efforts of
wholesalers and drug distributors that sell the Company's products to clinics,
governmental agencies and other managed health care organizations.
The Company has adopted a code of ethics that applies to all of its
directors, officers, employees and representatives. This code is publicly
available on the Company's website. Amendments to the code of ethics and any
grant of a waiver from a provision of the code requiring disclosure under
applicable SEC rules will be available on the Company's website. The Company's
corporate governance principles and the charters of the Audit, Nominating and
Corporate Governance and Compensation and Stock Option Committees of its Board
of Directors (the "Board") are also available on the Company's website. Any of
these materials may also be requested in print by writing to the Company,
Attention: Thomas Haughey, Vice President, General Counsel and Secretary, at 300
Tice Boulevard, Woodcliff Lake, NJ 07677.
3
As further described in Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations," certain statements made in this
document may 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,
expenditures, trends and future events. Such statements involve various risks,
uncertainties and contingencies, many of which are beyond the control of the
Company and which could cause actual results and performance to differ
materially from those stated herein. Any forward-looking statements included in
this document are made as of the date hereof only, based on information
available to the Company as of the date hereof, and, subject to any applicable
law to the contrary, the Company assumes no obligation to update any
forward-looking statements.
The financial data and share amounts, except per share, employee and
stockholder numbers, contained in Parts I and II are in thousands.
PRODUCT LINE INFORMATION
The Company operates in one industry segment, namely the manufacture and
distribution of generic pharmaceuticals. Products are marketed principally in
solid oral dosage form consisting of tablets, caplets and two-piece hard-shell
capsules. The Company also distributes one product in the semi-solid form of a
cream and one oral suspension product.
Par distributes 80 products, representing various dosage strengths for 30
separate drugs, that are manufactured by the Company and 107 additional
products, representing various dosage strengths for 50 separate drugs that are
manufactured for it by other companies. Par holds the Abbreviated New Drug
Applications ("ANDAs") for the drugs that it manufactures. Set forth below is a
list of the drugs manufactured and/or distributed by Par, including the brand
name products, Capoten(R), Capozide(R), Questran(R) and Questran Light(R), and
Sumycin(R), which the Company sells through an agreement with Bristol-Myers
Squibb Company ("BMS"). The names of all of the drugs under the caption
"Competitive Brand-Name Drug" are trademarked. The holders of the trademarks are
non-affiliated pharmaceutical manufacturers.
Name Competitive Brand Name Drug
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CENTRAL NERVOUS SYSTEM:
Biperiden Hydrochloride Akineton
Benztropine Mesylate Cogentin
Buspirone Hydrochloride BuSpar
Chlordiazepoxide Librium
Doxepin Hydrochloride Sinequan, Adapin
Fluoxetine Prozac
Fluphenazine Hydrochloride Prolixin
Imipramine Hydrochloride Tofranil
Mercaptopurine Purinethol
Mirtazapine Remeron
Nefazodone Serzone
Paroxetine Paxil
Tizanidine Hydrochloride Zanaflex
Triazolam Halcion
CARDIOVASCULAR:
Acebutolol Hydrochloride Sectral
Amiodarone Hydrochloride Cordarone
Captopril Capoten
Captopril & HCTZ Capozide
Doxazosin Mesylate Cardura
Enalapril Maleate Vasotec
Enalapril Maleate & HCTZ Vaseretic
Flecainide Acetate Tambocor
Guanfacine Tenex
Hydralazine Hydrochloride Apresoline
Hydra-Zide Apresazide
4
Indapamide Lozol
Isosorbide Dinitrate Isordil
Lisinopril Zestril
Minoxidil Loniten
Nicardipine Hydrochloride Cardene
Quinapril Accupril
Sotalol Hydrochloride Betapace
Torsemide Demadex
ANALGESIC/ANTI-INFLAMMATORY:
Aspirin (zero order release) Zorprin
Carisoprodol & Aspirin Soma Compound
Dexamethasone Decadron
Etodolac Lodine
Ibuprofen Advil, Nuprin, Motrin
Orphengesic Norgesic
Orphengesic Forte Norgesic Forte
Oxaprozin Daypro
Tramadol Hydrochloride Ultram
ANTI-BACTERIAL:
Ciprofloxacin Tabs Cipro
Doxycycline Monohydrate Monodox
Fluconazole Diflucan
Minocycline Minocin
Nystatin Powder Mycostatin
Ofloxacin Floxin
Silver Sulfadiazine (SSD) Silvadene
Tetracycline Tablets Sumycin
Tetracycline Syrup Sumycin
ANTI-DIABETIC:
Metformin Hydrochloride Glucophage
Metformin ER Glucophage XR
Glyburide & Metformin HCl Glucovance
ANTI-DIARRHEAL:
Diphenoxylate Hydrochloride & Atropine Sulfate Lomotil
ANTIEMETIC:
Meclizine Hydrochloride Antivert
Prochlorperazine Maleate Compazine
ANTI-GOUT:
Allopurinol Zyloprim
ANTI-HISTAMINIC:
Cyproheptadine Hydrochloride Periactin
ANTI-NEOPLASTIC:
Hydroxyurea Hydrea
Megestrol Acetate Megace
Megestrol Acetate Oral Suspension Megace Oral Suspension
ANTI-PARKINSON:
Selegiline Hydrochloride Eldepryl
5
ANTI-THROMBOTIC:
Ticlopidine Hydrochloride Ticlid
ANTI-ULCERATIVE:
Ranitidine Hydrochloride Zantac
Famotidine Pepcid
Nizatidine Axid
ANTI-VIRAL:
Acyclovir Zovirax
Ribavarin Rebetol
ANTI-HYPERTHYROID:
Methimazole Tapazole
BRONCODILATOR:
Metaproterenol Sulfate Alupent
CHOLESTEROL LOWERING:
Lovastatin Mevacor
Cholestyramine Questran
Cholestyramine Light Questran Light
DERMATOLOGY:
Hydroquinone HCL Eldoquin
Hydroquinone w/sunscreen Solaquin
GENTRO-URINARY (DIURETIC):
Amiloride Hydrochloride Midamor
GLUCORTICOID:
Methylprednisolone Medrol
OVULATION STIMULANT:
Clomiphene Citrate Clomid
POTASSIUM SUPPLEMENT:
Potassium Chloride K-Dur
From January 1, 2004 to December 31, 2004, the Food and Drug Administration
(the "FDA") approved ANDAs, filed by either the Company or its strategic
partners, for the following products that the Company is currently marketing or
has the right to market in the future: mercaptopurine tablets 50 mg; benazepril
HCl tablets 5 mg, 10 mg, 20 mg & 40 mg; benazepril HCl & HCTZ tablets 5 mg/6.25
mg, 10 mg/12.5 mg, 20 mg/12.5 mg & 20 mg/25 mg; ribavirin capsules 200 mg;
fluoxetine oral solution 20 mg/5 mL; ciprofloxacin tablets 250 mg, 500 mg & 750
mg; nystatin topical powder 100,000 Units/g; fluconazole tablets 50 mg, 100 mg,
150 mg & 200 mg; potassium chloride extended-release tablets 20 mEq; citalopram
hydrobromide tablets 10 mg, 20 mg & 40 mg; and quinapril HCl tablets 5 mg, 10
mg, 20 mg & 40 mg.
The Company also seeks to introduce new products through its internal
research and development program and through joint venture, distribution and
other agreements, including licensing of authorized generics, with
pharmaceutical companies located in various parts of the world. As such, the
Company has pursued and continues to pursue arrangements and relationships that
share development costs, generate profits from jointly-developed products and
expand distribution channels for new and existing products. The Company's
distribution and supply agreements that it believes are material to its business
are described in the "Notes to Consolidated Financial Statements - Note 10 -
Distribution and Supply Agreements". In fiscal year 2004, the Company entered
into several new agreements, which are summarized below.
6
In December 2004, the Company entered into an agreement with FSC
Laboratories, Inc. ("FSC") and purchased the NDA for Isoptin(R) SR for $15,000.
The Company and FSC have entered into an economic sharing agreement related to
sales of Isoptin(R) SR and other verapamil hydrochloride sustained release
products.
In December 2004, the Company entered into a purchase agreement in which it
agreed to acquire a 5% partnership interest in Abrika Pharmaceuticals, LLLP
("Abrika"), a privately-held specialty generic pharmaceutical company located in
Sunrise, Florida. The companies also agreed to collaborate on the marketing of
five products to be developed by Abrika. The first product is expected to be a
transdermal fentanyl patch for the management of chronic pain. Under the
agreement, Abrika is to market, sell and distribute the patch under the Abrika
label and Par will receive a share of the profits. This patch is a generic
version of Duragesic(R), marketed by Janssen Pharmaceutica Products, L.P., a
division of Johnson & Johnson that according to the Company's marketing
estimates, achieved U.S. sales of more than $1.0 billion in 2004.
RESEARCH AND DEVELOPMENT
The Company's research and development activities consist principally of
(i) identifying and conducting patent and market research on brand name drugs
for which patent protection has expired or is expected to expire in the near
future, (ii) identifying and conducting patent and market research on brand name
drugs for which the Company believes the patents are invalid or the Company can
develop a non-infringing formulation, (iii) researching and developing new
product formulations based upon such drugs, (iv) identifying and conducting
research to improve existing products for FDA approval of Section 505(b)(2)
applications submitted under the FFDC Act (v) obtaining approvals from the FDA
for such new product formulations and (vi) introducing technology to improve
production efficiency and enhance product quality. The scientific process of
developing new products and obtaining FDA approval is complex, costly and
time-consuming; there can be no assurance that any products will be developed
regardless of the amount of time and money spent on research and development.
The development of products may be curtailed in the early or later stages of
development due to the introduction of competing generic products or other
reasons.
The research and development of the Company's pharmaceutical products,
including pre-formulation research, process and formulation development,
required studies and FDA review and approval, have historically taken
approximately two to three years to complete. Accordingly, Par typically selects
for development products that it intends to market several years in the future.
However, the length of time necessary to bring a product to market can vary
significantly and depends on, among other things, the availability of funding,
problems relating to formulation, safety or efficacy and patent issues
associated with the product.
The Company contracts with outside laboratories to conduct biostudies,
which, in the case of oral solids, generally are required in order to obtain FDA
approval. These biostudies are used to demonstrate that the rate and extent of
absorption of a generic drug are not significantly different from the
corresponding brand name drug and can cost between $100 to $1,000 for each
biostudy. During fiscal year 2004, the Company contracted with outside
laboratories, expending $10,642 to conduct biostudies for 33 potential new
products. The Company intends to continue to contract for additional biostudies
in the future. In addition, the Company's share of certain costs for biostudies
totaled approximately $1,000 in fiscal year 2004 for products in development
with one of its strategic partners. Biostudies are required to be conducted and
documented in conformity with FDA standards (see "Government Regulation").
As a result of its product development program, the Company currently has
15 ANDAs pending with the FDA, two of which have received tentative approval,
for potential products that are not subject to any distribution or profit
sharing agreements. In addition, there are 34 ANDAs pending with the FDA, three
of which have received tentative approval, that have been filed by the Company
or its strategic partners for potential products covered under various
distribution agreements. No assurances can be given that the Company or any of
its strategic partners will successfully complete the development of these
products either under development or proposed for development, that they will
obtain regulatory approvals for any such product, that any approved product will
be produced in commercial quantities or that any approved product can be sold
profitably.
In order to further grow its research and development program, the Company
acquired the capital stock of Kali for $145,391 in cash and warrants on June 10,
2004. Kali is a generic pharmaceutical research and development company located
in Somerset, New Jersey. With 59 employees in Kali's research and development
group at the date of acquisition, the addition of Kali more than doubled the
Company's research and development organization. All results and product
information reported in this filing include Kali from the date of acquisition.
7
In addition to its own internal development program, the Company, from time
to time, enters into development and license agreements with various third
parties with respect to the development and marketing of new products and
technologies. The Company's product development agreements that it believes are
material to its business are described in "Notes to Consolidated Financial
Statements - Note 9 - Research and Development Agreements". Pursuant to these
agreements, the Company has advanced funds to several unaffiliated companies for
products in various stages of development.
Although there can be no such assurance, annual research and development
expenses for fiscal year 2005, including payments to be made to unaffiliated
companies, are expected to increase by approximately 20% from fiscal year 2004.
MARKETING AND CUSTOMERS
The Company markets its products under the Par label principally to
wholesalers, retail drug store chains, managed health care providers,
distributors and, to a lesser extent, drug manufacturers and government
agencies, primarily through its internal sales staff. Some of the Company's
wholesalers and distributors purchase products and warehouse those products for
certain retail drug store chains, independent pharmacies and managed health care
organizations. Customers in the managed health care market include health
maintenance organizations, nursing homes, hospitals, clinics, pharmacy benefit
management companies and mail order customers.
The Company has approximately 150 customers, some of which are part of
larger buying groups. In fiscal year 2004, the Company's four largest customers
in terms of net sales dollars, McKesson Drug Co., Cardinal Health, Inc.,
AmerisourceBergen Corporation and Walgreen Co., accounted for approximately 15%,
13%, 13% and 9%, respectively, of its total revenues. In fiscal year 2003, the
Company's four largest customers in terms of net sales dollars, Cardinal Health,
Inc., AmerisourceBergen Corporation, McKesson Drug Co. and Walgreen Co.
accounted for approximately 17%, 13%, 11% and 11%, respectively, of its total
revenues. The Company does not have written agreements with any of these major
customers and the loss of any one or more of these customers or the substantial
reduction in orders from any of such customers could have a material adverse
effect on the Company's operating results, prospects and financial condition
(see "Notes to Consolidated Financial Statements - Note 4 - Accounts
Receivable-Major Customers").
ORDER BACKLOG
The approximate dollar amount of open orders, believed by management to be
firm, at December 31, 2004, was $8,381, as compared to $34,800 at December 31,
2003, and $18,185 at December 31, 2002. Although open orders are subject to
cancellation without penalty, management expects that it will fill substantially
all of such open orders at December 31, 2004 in the near future.
COMPETITION
The pharmaceutical industry is highly competitive. At times, the Company
may not be able to differentiate its products from its competitors, successfully
develop or introduce new products that are less costly than those of its
competitors or offer purchasers of its products payment and other commercial
terms as favorable as those offered by its competitors. The Company believes
that its principal generic competitors are Mylan Laboratories, Inc., Teva
Pharmaceutical Industries Limited, Watson Pharmaceuticals, Inc., Barr
Laboratories, Inc., Apotex Pharmaceutical Healthcare, Inc. ("Apotex"), Eon Labs,
Inc., Sandoz Pharmaceuticals, Inc., Roxane Laboratories, Inc. ("Roxane") and
Ivax Corporation. The Company's principal strategy in addressing its competition
is to offer customers a consistent supply of a broad line of generic drugs at
competitive pricing. There can be no assurance, however, that this strategy will
enable the Company to continue to compete successfully in the industry or that
it will be able to develop and implement any new or additional viable
strategies.
Competition in the generic drug industry has also increased due to the
proliferation of authorized generics, which occurs when manufacturers of brand
name drugs and/or their affiliates introduce generic pharmaceutical products
equivalent to their brand name drugs at relatively lower prices or partner with
generic companies to introduce generic products. This is a significant source of
competition for the Company because brand-name companies do not face any
8
regulatory barriers when attempting to introduce a generic version of their
proprietary brand and authorized generics may be sold during the Company's
exclusivity period significantly affecting the profits the Company could receive
as an exclusive marketer of a product. Such actions have the effect of reducing
the potential market share and profitability of generic products developed by
the Company and may inhibit it from developing and introducing generic
pharmaceutical products corresponding to certain brand name drugs. The Company
has also marketed authorized generics including metformin ER (Glucophage XR(R))
and glyburide & metformin HCl (Glucovance(R)) licensed through BMS, during the
exclusivity period of competitors.
In addition to the introduction of competing products, price competition
has also resulted from consolidation among wholesalers and retailers and the
formation of large buying groups resulting in reductions in sales prices and
gross margin. This competitive environment has led to an increase in customer
demand for downward price adjustments from the manufacturers of generic
pharmaceutical products, including the Company, for certain products that have
already been delivered. There can be no assurance that such price reductions for
these products or others, will not continue, or even increase, with a consequent
material adverse effect on the Company's revenues and gross margin.
In the generic drug industry, when a company first introduces a generic
drug, it may, under certain circumstances, be granted exclusivity by the FDA to
market the product for a period of time before any other generic manufacturer
may enter the market. At the expiration of such exclusivity period, other
generic manufacturers may enter the market and, as a result, the price of the
drug may decline significantly (in some instances, price declines have exceeded
90%). As a result of the expected price decline upon the expiration of a
marketing exclusivity period, it has become common in the industry for generic
pharmaceutical manufacturers, like the Company, that have been granted such
exclusivity periods to offer price protection to their customers. Under such
price protection arrangements, the Company will generally provide a credit to
its customers for the difference between the Company's new price at the
expiration of the exclusivity period and the price at which the Company sold the
customers the product with respect to the customer's remaining inventory at the
expiration of the exclusivity period. As a result, the total price protection
that the Company will credit customers at the expiration of an exclusivity
period will depend on the amount by which the price declines as the result of
the introduction of comparable generic products by additional manufacturers and
the inventory that customers hold at the expiration of the exclusivity period.
The principal competitive factors in the generic pharmaceutical market
include: (i) introduction of other generic drug manufacturers' products in
direct competition with the Company's products, (ii) introduction of authorized
generic products in direct competition with the Company's products, particularly
during exclusivity periods, (iii) consolidation among distribution outlets
through mergers and acquisitions and the formation of buying groups, (iv)
ability of generic competitors to quickly enter the market after the expiration
of patents or exclusivity periods, diminishing the amount and duration of
significant profits, (v) the willingness of generic drug customers, including
wholesale and retail customers, to switch among pharmaceutical manufacturers,
(vi) pricing pressures and product deletions by competitors, (vii) a company's
reputation as a manufacturer and distributor of quality products, (viii) a
company's level of service (including maintaining sufficient inventory levels
for timely deliveries), (ix) product appearance and labeling and (x) a company's
breadth of product offerings.
RAW MATERIALS
The raw materials essential to the Company's manufacturing business are
purchased primarily from United States distributors of bulk pharmaceutical
chemicals manufactured by foreign companies. To date, the Company has
experienced no significant difficulties in obtaining raw materials and expects
that raw materials will generally continue to be available in the future.
However, since the federal drug application process requires specification of
raw material suppliers, if raw materials from a specified supplier were to
become unavailable, FDA approval of a new supplier would be required. A delay of
six months or more in the manufacture and marketing of the drug involved while a
new supplier becomes qualified by the FDA and its manufacturing process is
determined to meet FDA standards could, depending on the particular product,
have a material adverse effect on the Company's results of operations and
financial condition. Generally, the Company attempts to mitigate the potential
effects of any such situation by providing for, where economically and otherwise
feasible, two or more suppliers of raw materials for the drugs it manufactures.
In addition, the Company may attempt to enter into a contract with a raw
material supplier in an effort to ensure adequate supply for its products.
9
EMPLOYEES
At December 31, 2004, the Company had 656 employees compared to 531 and
456, respectively, at December 31, 2003 and 2002. The increased headcount level
in fiscal year 2004 was primarily due to the acquisition of Kali. The increased
headcount level in 2003, was primarily in the research and development and
administrative functions, and reflected the continued growth of the Company from
fiscal year 2002.
GOVERNMENT REGULATION
Pharmaceutical manufacturers are subject to extensive regulation by the
federal government, principally the FDA, and as applicable, the Drug Enforcement
Administration, Federal Trade Commission (the "FTC") and state and local
governments. The FFDC Act, the Controlled Substances Act and other federal
statutes and regulations govern the development, testing, manufacture,
safety/effectiveness, labeling, storage, record keeping, approval, advertising
and promotion of the Company's products. Non-compliance with applicable
regulations can result in judicially and/or administratively imposed sanctions,
including the initiation of product seizures, injunction actions, fines and
criminal prosecutions. Administrative enforcement measures may involve the
recall of products, as well as the refusal of an applicable government authority
to enter into supply contracts or to approve new drug applications. The FDA also
has the authority to withdraw its approval of drugs in accordance with
regulatory due process procedures.
FDA approval is required before any new drug, including a generic
equivalent of a previously approved brand name drug, may be marketed. To obtain
FDA approval for a new drug, a prospective manufacturer must, among other
things, as discussed below, demonstrate that its manufacturing facilities comply
with the FDA's current Good Manufacturing Practices ("cGMP") regulations. The
FDA may inspect the manufacturer's facilities to ensure such compliance prior to
approval or at any other reasonable time. The manufacturer must comply with cGMP
regulations at all times during the manufacture and processing of drugs. To
comply with the standards set forth in these regulations, the Company must
continue to expend significant time, money and effort in the areas of
production, quality control and quality assurance.
In order to obtain FDA approval of a new drug, a manufacturer must
demonstrate the safety and effectiveness of such drug. There currently are two
basic ways to satisfy the FDA's safety and effectiveness requirements:
1. NEW DRUG APPLICATIONS: Unless the procedure discussed in paragraph 2
below is permitted under the FFDC Act, a prospective manufacturer must
submit to the FDA an NDA containing complete pre-clinical and clinical
safety and efficacy data or a right of reference to such data. The
pre-clinical data must provide an adequate basis for evaluating the
safety and scientific rationale for the initiation of clinical trials.
Clinical trials are conducted in three sequential phases and may take
several years to complete. At times, the phases may overlap. Data from
pre-clinical testing and clinical trials is submitted to the FDA as an
NDA for marketing approval.
2. ABBREVIATED NEW DRUG APPLICATIONS: The Hatch-Waxman amendments
established a statutory procedure for submission, FDA review and
approval of ANDAs for generic versions of brand name drugs previously
approved by the FDA (such previously approved drugs are hereinafter
referred to as "listed drugs"). Because the safety and efficacy of
listed drugs have already been established by the innovator company,
the FDA waives the requirement for complete clinical trials. However,
a generic manufacturer is typically required to conduct
bioavailability/bioequivalence studies of its test product against the
listed drug. The bioavailability/bioequivalence studies assess the
rate and extent of absorption and concentration levels of a drug in
the blood stream required to produce a therapeutic effect.
Bioequivalence is established when the rate of absorption and
concentration levels of a generic product are substantially equivalent
to the listed drug. For some drugs (e.g., topical anti-fungals), other
means of demonstrating bioequivalence may be required by the FDA,
especially where rate and/or extent of absorption are difficult or
impossible to measure. In addition to the bioequivalence data, an ANDA
must contain patent certifications, chemistry, manufacturing, labeling
and stability data.
The Hatch-Waxman amendments also established certain statutory protections
for listed drugs. Under the Hatch-Waxman amendments, approval of an ANDA for a
generic drug may not be made effective for interstate marketing until all
relevant patents for the listed drug have expired or been determined to be
invalid or not infringed by the generic drug. Prior to enactment of the
Hatch-Waxman amendments, the FDA did not consider the patent status of a
10
previously approved drug. In addition, under the Hatch-Waxman amendments,
statutory non-patent exclusivity periods are established following approval of
certain listed drugs, where specific criteria are met by the drug. If
exclusivity is applicable to a particular listed drug, the effective date of
approval of ANDAs (and, in at least one case, submission of an ANDA) for the
generic version of the listed drug is usually delayed until the expiration of
the exclusivity period, which, for newly approved drugs, can be either three or
five years. The Hatch-Waxman amendments also provide for extensions of up to
five years for certain patents covering drugs to compensate the patent holder
for the reduction in the effective market life of the patented drug resulting
from the time spent in the federal regulatory review process.
During 1995, patent terms for a number of listed drugs were extended when
the Uruguay Round Agreements Act (the "URAA") went into effect in order to
implement the General Agreement on Tariffs and Trade (the "GATT") to which the
United States became a treaty signatory in 1994. Under GATT, the term of patents
was established as 20 years from the date of patent application. In the United
States, the patent terms historically have been calculated at 17 years from the
date of patent grant. The URAA provided that the term of issued patents be
either the existing 17 years from the date of patent grant or 20 years from the
date of application, whichever was longer. The effect generally was to extend
the patent life of already issued patents, thus delaying FDA approvals of
applications for generic products.
The FDA issued a final rule (the "final rule") on June 18, 2003, which
became effective on August 18, 2003, streamlining the generic drug approval
process by limiting a drug company to only one 30-month stay of a generic drug's
entry into the market for resolution of a patent challenge. This will help
maintain a balance between the innovator companies' intellectual property rights
and the desire to get generic drugs on the market in a timely fashion.
The final rule clarifies the types of patents that innovators must submit
for listing and prohibits the submission of patents claiming packaging,
intermediates or metabolite innovations. Patents claiming a different
polymorphic form of the active ingredient described in a NDA must be submitted
if the NDA holder has test data demonstrating that the drug product containing
the polymorph will perform in the same way as the drug product described in the
NDA. These changes are consistent with concerns raised in 2002 by the FTC in its
report on generic drugs. The final rule also clarifies the type of patent
information required to be submitted and revises the declaration that NDA
applicants must provide regarding their patents to help ensure that NDA
applicants submit only appropriate patents.
The final rule was intended to make the patent submission and listing
process more efficient, as well as to enhance the ANDA and 505(b)(2) application
approval process. The changes were designed to enable consumers to save billions
of dollars each year by making it easier for generic drug manufacturers to get
safe and effective products on the market when the appropriate patent protection
expires.
Section 505(b)(2) was added to the FFDC Act by the Hatch-Waxman amendments.
This provision permits the FDA to rely, for approval of an NDA, on data not
developed by the applicant. A 505(b)(2) application must include identification
of the listed drug for which the FDA has made a finding of safety and
effectiveness and on which finding the applicant relies in seeking approval of
its proposed drug product. A 505(b)(2) application may rely on studies published
in scientific literature or an FDA finding of safety and/or efficacy for an
approved product for support, in addition to clinical studies performed by the
applicant.
The approval of a 505(b)(2) application may result in three years of
exclusivity under the Hatch-Waxman amendments if one or more of the clinical
studies (other than bioavailability/bioequivalency studies) were essential to
the approval of the application and was conducted by the applicant. The approval
of a 505(b)(2) application may result in 5 years of exclusivity if it is for a
new chemical entity. Such approvals have the potential to be delayed due to
patent and exclusivity rights that apply to the listed drug.
In addition to the federal government, various states and localities have
laws regulating the manufacture and distribution of pharmaceuticals, as well as
regulations dealing with the substitution of generic drugs for brand name drugs.
The Company's operations are also subject to regulation, licensing requirements
and inspection by the states and localities in which its operations are located
and/or it conducts business.
11
Certain activities of the Company may also be subject to FTC enforcement.
The FTC enforces a variety of antitrust and consumer protection laws designed to
ensure that the nation's markets function competitively, are vigorous, efficient
and free of undue restrictions.
The Company also is governed by federal and state laws of general
applicability, including laws regulating matters of environmental quality,
working conditions, health and safety, and equal employment opportunity.
As a public company, the Company is subject to the Sarbanes-Oxley Act of
2002 (the "SOX Act"), including the regulations promulgated thereunder. The SOX
Act contains a variety of provisions affecting public companies, including the
relationship with its auditors, prohibiting loans to executive officers and
requiring an evaluation of its internal disclosure controls and procedures.
The U.S. federal government made significant changes to Medicaid drug
reimbursement as part of the Omnibus Budget Reconciliation Act of 1990 ("OBRA").
Generally, OBRA provides that a generic drug manufacturer must offer the states
an 11% rebate on drugs dispensed under the Medicaid program and must enter into
a formal drug rebate agreement, as the Company has, with the Centers for
Medicare and Medicaid Services, formerly the Federal Health Care Financing
Administration. Although not required under OBRA, the Company has also entered
into similar agreements with various states.
ITEM 2. PROPERTIES.
- ------ ----------
The Company owns an approximately 92,000 square foot facility built to
Par's specifications that contains manufacturing and research and development
operations. The building, occupied by Par since 1986, also includes packaging
and warehouse facilities. The facility is located in Spring Valley, New York, on
an approximately 24 acre parcel of land, of which approximately 15 acres are
available for future expansion.
The Company owns a second facility in Spring Valley, New York, across the
street from its manufacturing facility, occupying approximately 36,000 square
feet on two acres. This property was acquired in 1994 and was remodeled in 2003
for use as research and quality control laboratories and additional office
space.
In 2003, the Company moved its primary warehousing operation to a facility
in Montebello, New York. In August 2002, the Company entered into a ten-year
lease expiring in September 2012 to occupy approximately 190,000 square feet of
such facility.
Par occupies approximately 47,000 square feet in a building located in
Spring Valley, New York for warehouse space under a lease that expires in
December 2014.
The Company leases office space in Woodcliff Lake, New Jersey covering
approximately 53,000 square feet. The lease expires in March 2011. This facility
houses the majority of the Company's administrative functions.
FineTech Laboratories, Ltd. ("Finetech") a wholly owned subsidiary based in
Israel, entered into a lease in March 2003 covering approximately 11,000 square
feet of a building in Nesher, Israel, which contains its laboratories and
administrative offices. The term of the lease is for nine years and 11 months,
with two-year and 11-month renewal periods.
Kali leases, with a purchase option, a 45,000 square foot facility used for
research and development and manufacturing located in Somerset, New Jersey. The
building is subject to a triple net lease between VGS Holdings, Inc. and Kali
that terminates on June 9, 2006. In June 2004, the lease was assigned to Par.
In 2004, Kali executed a lease for an additional 27,000 square foot
research and development facility located in Franklin, New Jersey. The facility
is currently being renovated and the Company is not planning on occupying the
space until the second half of 2005. The lease expires in July 2010.
The Company believes that its owned and leased properties are sufficient in
size, scope and nature to meet its anticipated needs for the reasonably
foreseeable future (see "Management's Discussion and Analysis of Financial
Condition and Results of Operations-Financial Condition" and "Notes to
Consolidated Financial Statements - Note 15 - Commitments, Contingencies and
Other Matters-Leases").
12
ITEM 3. LEGAL PROCEEDINGS.
- ------ -----------------
On November 1, 2004, Morton Grove Pharmaceuticals, Inc. ("Morton Grove")
filed a lawsuit against the Company in the United States District Court for the
Northern District of Illinois, seeking a declaratory judgment that four Par
patents relating to megestrol acetate oral suspension are invalid, unenforceable
and not infringed by a Morton Grove product that was launched in the fourth
quarter of 2004. The Company intends to defend vigorously this action and has
asserted counterclaims against Morton Grove.
On May 3, 2004, Pentech Pharmaceuticals, Inc. ("Pentech") filed an action
against the Company in the United States District Court for the Northern
District of Illinois. This action alleges that the Company breached its contract
with Pentech relating to the supply and marketing of paroxetine. The Company and
Pentech are in dispute over the amount of gross profit share. The Company
intends to defend vigorously this action. This case is currently in discovery.
At this time the Company is not able to predict with certainty the outcome of
this litigation.
On March 9, 2004, the Congress of California Seniors brought an action
against GlaxoSmithKline, plc ("GSK") and the Company concerning the sale of
paroxetine in the State of California. This action alleges that the sale of
paroxetine by GSK and the Company in California constitutes, among other things,
unfair business practices. The Company intends to defend vigorously this action.
On September 10, 2003, Par and a number of other generic and brand
pharmaceutical companies were sued by a New York State county (the suit has
since been joined by three additional New York counties), which has alleged
violations of laws (including the Racketeer Influenced and Corrupt Organizations
Act, common law fraud and obtaining funds by false statements) related to
participation in the Medicaid program. The complaint seeks declaratory relief;
actual, statutory and treble damages, with interest; punitive damages; an
accounting and disgorgement of any illegal profits; a constructive trust and
restitution; and attorneys' and experts' fees and costs. This case was
transferred to the United States District Court for the District of
Massachusetts for coordinated and consolidated pre-trial proceedings. In
addition, on September 25, 2003, the Office of the Attorney General of the
Commonwealth of Massachusetts filed a complaint in the District of Massachusetts
against Par and 12 other leading generic pharmaceutical companies, alleging
principally that Par and such other companies violated, through their marketing
and sales practices, state and federal laws, including allegations of common law
fraud and violations of Massachusetts false statements statutes, by inflating
generic pharmaceutical product prices paid for by the Massachusetts Medicaid
program. Par waived service of process with respect to the complaint. The
complaint seeks injunctive relief, treble damages, disgorgement of excessive
profits, civil penalties, reimbursement of investigative and litigation costs
(including experts' fees) and attorneys' fees. On January 29, 2004, Par and the
other defendants involved in the litigation brought by the Office of the
Attorney General of the Commonwealth of Massachusetts filed a motion to dismiss,
which has not yet been ruled on. On August 4, 2004, Par and a number of other
generic and brand pharmaceutical companies were also sued by the City of New
York, which has alleged violations of laws (including common law fraud and
obtaining funds by false statements) related to participation in its Medicaid
program. The complaint seeks declaratory relief; actual, statutory and treble
damages, with interest; punitive damages; an accounting and disgorgement of any
illegal profits; a constructive trust and restitution; and attorneys' and
experts' fees and costs. This case was transferred to the U.S. District Court
for the District of Massachusetts for coordinated and consolidated pre-trial
proceedings. In addition to Massachusetts, the Commonwealth of Kentucky, the
State of Illinois and the State of Alabama have filed similar suits in their
respective jurisdictions. Par intends to defend vigorously these actions.
On July 15, 2003, the Company and Par filed a lawsuit against Roxane in the
United States District Court for the District of New Jersey. The Company and Par
alleged that Roxane had infringed Par's U.S. Patents numbered 6,593,318 and
6,593,320 relating to megestrol acetate oral suspension. Roxane has denied these
allegations and has counterclaimed for declaratory judgments of non-infringement
and invalidity of both patents. In addition, Roxane has recently filed an
amended complaint asserting that Par's patents in the litigation are
unenforceable due to inequitable conduct before the U.S. Patent Office. Par
intends to defend vigorously this action.
In February 2003, Abbott, Fournier Industrie et Sante and Laboratoires
Fournier S.A. filed a lawsuit in the United States District Court for the
District of New Jersey against Par, alleging that Par's generic version of
TriCor(R) (fenofibrate) infringes one or more claims of their patents. The
Company had filed an ANDA for the product in October 2002. Par intends to defend
vigorously this action and has filed an answer and a counterclaim, alleging
non-infringement and patent invalidity.
13
On November 25, 2002, Ortho-McNeil Pharmaceutical, Inc. ("Ortho-McNeil")
filed a lawsuit against Kali, a wholly-owned subsidiary of the Company, 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 through an agreement entered into before the
Company's acquisition of Kali. 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. The referenced summary judgment motion was
fully briefed and submitted to the Court as of August 23, 2004. The Court has
stated that it will hold oral argument, which has not as of yet been scheduled.
The Company intends to defend vigorously against this action.
As a result of Par's filing of the ANDA for latanoprost (Xalatan(R)),
Pharmacia Corporation and the Trustees of Columbia University (collectively, the
"Plaintiffs") filed a lawsuit against Par on December 21, 2001 in the United
States District Court for the District of New Jersey, alleging patent
infringement. The Plaintiffs sought an injunction enjoining approval of the
Company's ANDA and the marketing of its generic product prior to the expiration
of their patents. On February 8, 2002, Par answered the complaint and filed a
counterclaim, which sought a declaration that the patents-in-suit are invalid,
unenforceable and/or not infringed by Par's products and that the extension of
the term of one of the patents was invalid. The trial concluded in March 2004
and on July 6, 2004 the Court issued an opinion and order ordering that judgment
be entered in favor of the Plaintiffs on their claims of infringement of U.S.
Patent Nos. 4,599,353 (expires July 28, 2006) and 5,296,504 (expires March 22,
2011); that the effective date of approval of Par's ANDA shall be a date which
is not earlier than the dates of expiration of those patents; and that Par is
enjoined from engaging in the commercial manufacture, use, offer to sell, or
sale within the United States, or importation into the United States, of any
drug product covered by, or the use of which is covered by, those two patents.
As to the third patent asserted by the Plaintiffs, U.S. Patent No. 5,422,368,
the Court dismissed the Plaintiffs' infringement claims and declared that the
patent is unenforceable due to inequitable conduct. The Court further dismissed
all of the parties' claims for attorneys' fees. Both Par and the Plaintiffs have
filed notices of appeal which are pending in the United States Court of Appeals
for the Federal Circuit. Par is appealing the Court's decision only insofar as
it relates to U.S. Patent No. 5,296,504.
Par entered into a licensing agreement with developer Paddock Laboratories,
Inc. ("Paddock") to market testosterone 1% gel, a generic version of Unimed
Pharmaceuticals, Inc.'s ("Unimed") product Androgel(R). The product, if
successfully brought to market, would be manufactured by Paddock and marketed by
Par. Paddock has filed an ANDA (that is pending with the FDA) for the
testosterone 1% gel product. As a result of the filing of the ANDA, Unimed and
Laboratories Besins Iscovesco ("Besins"), co-assignees of the patent-in-suit,
filed a lawsuit against Paddock in the United States District Court for the
Northern District of Georgia, alleging patent infringement on August 22, 2003.
Par has an economic interest in the outcome of this litigation by virtue of its
licensing agreement with Paddock. Unimed and Besins are seeking an injunction to
prevent Paddock from manufacturing the generic product. On November 18, 2003,
Paddock answered the complaint and filed a counterclaim, which seeks a
declaration that the patent-in-suit is invalid and/or not infringed by Paddock's
product. This case is currently in discovery. The Company intends to defend
vigorously against this action.
The Company cannot predict with certainty at this time the outcome or the
effects on the Company of the above listed actions. Accordingly, no assurances
can be given that such actions will not have a material adverse effect on the
Company's financial condition, results of operations, prospects or business.
The Company and/or Par are, from time to time, parties to certain other
litigations, including product liability and patent actions. The Company
believes that these actions are part of the ordinary course of its business and
that their ultimate resolution will not have a material adverse effect on its
financial condition, results of operations or liquidity. The Company intends to
vigorously defend or, in cases where the Company is plaintiff, to prosecute
these actions.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
- ------ ---------------------------------------------------
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of the year ended December 31, 2004.
14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
- ------ ----------------------------------------------------------------------
ISSUER PURCHASES OF EQUITY SECURITIES.
-------------------------------------
(a) MARKET INFORMATION. The Company's Common Stock is traded on the New
York Stock Exchange (the "NYSE") (ticker symbol: PRX). The following
table shows the range of the closing prices for the Common Stock, as
reported by the NYSE, for each fiscal quarter during the Company's two
most recent fiscal years.
2004 2003
--------------- --------------
QUARTER ENDED (APPROXIMATELY) HIGH LOW HIGH LOW
----------------------------- ----- --- ---- ---
March 31 $66.30 $54.57 $42.80 $29.35
June 30 61.20 34.03 52.03 37.57
September 30 42.37 32.22 72.30 48.20
December 31 43.04 34.36 74.71 64.30
(b) HOLDERS. As of March 7, 2005, there were approximately 1,749 holders
of record of the Company's 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".
(c) DIVIDENDS. During fiscal years 2004, 2003 and 2002, the Company did
not pay any cash dividends on its Common Stock. The payment of future
dividends on its Common Stock is subject to the discretion of the
Board and is dependent upon many factors, including the Company's
earnings, its capital needs, the terms of any financing agreements and
its financial condition.
(d) SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS.
NUMBER OF SECURITIES WEIGHTED AVERAGE
TO BE ISSUED UPON EXERCISE PRICE OF
EXERCISE OF OUTSTANDING NUMBER OF SECURITIES
OUTSTANDING OPTIONS, OPTIONS, WARRANTS REMAINING AVAILABLE FOR
PLAN CATEGORY WARRANTS AND RIGHTS AND RIGHTS FUTURE ISSUANCE
------------- ------------------- ---------- ---------------
EQUITY COMPENSATION PLANS
APPROVED BY STOCKHOLDERS:
2004 Performance Equity Plan 219 $36.47 1,519
2001 Performance Equity Plan 3,460 40.95 102
1997 Directors Stock Option Plan 200 36.52 120
1990 Stock Incentive Plan 1 4.13 -
EQUITY COMPENSATION PLANS NOT
APPROVED BY STOCKHOLDERS:
2000 Performance Equity Plan 337 6.90 97
----- -----
Total 4,217 37.78 1,838
===== =====
Included in the total number of securities remaining available for future
issuance are 1,485 shares available for the issuance of stock options and 353
shares available for the issuance of restricted stock and restricted stock
units.
In 2000, the Board of Directors adopted the Company's 2000 Performance
Equity Plan (the "2000 Plan"), which Plan was subsequently amended, making it a
non-qualified, broad-based plan not subject to stockholder approval. The 2000
Plan provides for the granting of incentive and non-qualified stock options to
employees of the Company and others. The 2000 Plan became effective on March 23,
2000 and will continue until March 22, 2010 unless earlier terminated. The
Company reserved 1,025 shares of Common Stock for issuance under the 2000 Plan.
The maximum term of an option under the 2000 Plan is ten years. Vesting and
option terms are determined in each case by the Compensation and Stock Option
Committee of the Board. The maximum term of the option is reduced to five years
if an incentive stock option is granted to a holder of more than 10% of the
total combined voting power of all classes of the capital stock of the Company.
15
(e) PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
PURCHASERS.
TOTAL TOTAL NUMBER OF APPROXIMATE DOLLAR
NUMBER OF AVERAGE SHARES REPURCHASED VALUE THAT MAY
SHARES PRICE PAID AS PART OF A PUBLICLY YET BE REPURCHASED
REPURCHASED(a) PER SHARE(b) ANNOUNCED PLAN(c) UNDER THE PLAN(d)
-------------- ------------ ----------------- -----------------
October 3, 2004 through October 30, 2004 - - - $17,974
October 31, 2004 through November 27, 2004 - - - $17,974
November 28, 2004 through December 31, 2004 - - $17,974
----- ----- -----
Total - - -
===== ===== =====
(f) RECENT STOCK PRICE. On March 7, 2005, the closing price of the Common
Stock on the NYSE was $38.31.
16
ITEM 6. SELECTED FINANCIAL DATA.
- ------ -----------------------
AS OF AND FOR THE FISCAL YEARS ENDED
------------------------------------
12/31/04 12/31/03 12/31/02 12/31/01 12/31/00
-------- -------- -------- -------- --------
INCOME STATEMENT DATA: (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Revenues:
Net product sales $687,570 $646,023 $380,848 $271,035 $85,022
Other product related revenues 2,446 15,665 755 - -
----- ------ --- ------- ------
Total revenues 690,016 661,688 381,603 271,035 85,022
Cost of goods sold 443,958 378,513 198,313 161,306 62,332
------- ------- ------- ------- ------
Gross margin 246,058 283,175 183,290 109,729 22,690
Operating expenses (income):
Research and development 50,517 24,581 17,910 11,113 7,634
Acquired in-process research and development 84,000 - - - -
Selling, general and administrative 69,735 57,575 40,215 21,878 16,297
Settlements, net (2,846) - (9,051) - -
Gain on sale of facility (2,812) - - - -
Acquisition termination charges - - 4,262 - -
------ ------ ------- ------- -------
Total operating expenses 198,594 82,156 53,336 32,991 23,931
------- ------- ------- ------ ------
Operating income (loss) 47,464 201,019 129,954 76,738 (1,241)
Other (expense) income, net (313) (95) (305) (364) 506
Interest (expense) income, net (1,048) (281) 604 (442) (916)
----- --- --- --- ---
Income (loss) before provision for income taxes 46,103 200,643 130,253 75,932 (1,651)
Provision for income taxes 16,857 78,110 50,799 22,010 -
------ -------- ------ ------ -----
Net income (loss) $29,246 $122,533 $79,454 $53,922 $(1,651)
====== ======= ====== ====== =====
Net income (loss) per share of common stock:
Basic $0.86 $3.66 $2.46 $1.76 $(.06)
==== ==== ==== ==== ===
Diluted $0.84 $3.54 $2.40 $1.68 $(.06)
==== ==== ==== ==== ===
Weighted average number of common shares outstanding:
Basic 34,142 33,483 32,337 30,595 29,604
====== ====== ====== ====== ======
Diluted 34,873 34,638 33,051 32,190 29,604
====== ====== ====== ====== ======
BALANCE SHEET DATA:
Working capital $339,238 $459,802 $136,305 $102,867 $18,512
Property, plant and equipment (net) 66,642 46,813 27,055 24,345 23,560
Total assets 769,004 762,812 301,457 216,926 93,844
Long-term debt, less current portion 200,275 200,211 2,426 1,060 163
Total stockholders' equity 413,590 395,081 220,790 138,423 64,779
17
Management Report on Internal Control Over Financial Reporting
The management of the Company is responsible for establishing and
maintaining adequate internal control over financial reporting. Internal control
over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated
under the Securities Exchange Act of 1934 as a process designed by, or under the
supervision of, the Company's principal executive and financial officers and
effected by the Company's board of directors, management and other personnel, to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles and includes those policies and
procedures that:
o Pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the
assets of the Company;
o Provide reasonable assurance that transactions are recorded as necessary
to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and
expenditures of the Company are being made only in accordance with due
authorizations of management and directors of the Company; and
o Provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Company's assets
that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect certain misstatements. Projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
The Company's management assessed the effectiveness of the Company's
internal control over financial reporting as of December 31, 2004. In making
this assessment, the Company's management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) in
Internal Control-Integrated Framework.
Based on our assessment, management believes that, as of December 31, 2004,
the Company's internal control over financial reporting is effective based on
those criteria.
The Company's independent auditors have issued an audit report on our
assessment of the Company's internal control over financial reporting. This
report appears on page 19.
18
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Par Pharmaceutical Companies, Inc.:
We have audited management's assessment, included in the accompanying
Management Report on Internal Control Over Financial Reporting, that Par
Pharmaceutical Companies, Inc. and subsidiaries (the "Company") maintained
effective internal control over financial reporting as of December 31, 2004
based on criteria established in Internal Control--Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission. The
Company's management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on
management's assessment and an opinion on the effectiveness of the Company's
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinions.
A company's internal control over financial reporting is a process designed
by, or under the supervision of, the company's principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company's board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial
reporting, including the possibility of collusion or improper management
override of controls, material misstatements due to error or fraud may not be
prevented or detected on a timely basis. Also, projections of any evaluation of
the effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our opinion, management's assessment that the Company maintained
effective internal control over financial reporting as of December 31, 2004, is
fairly stated, in all material respects, based on the criteria established in
Internal Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Also in our opinion, the Company
maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2004, based on the criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated financial
statements and financial statement schedule as of and for the year ended
December 31, 2004 of the Company and our report dated March 15, 2005 expressed
an unqualified opinion on those financial statements and financial statement
schedule.
/s/ DELOITTE & TOUCHE LLP
Parsippany, New Jersey
March 15, 2005
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------ ---------------------------------------------------------------
RESULTS OF OPERATIONS.
---------------------
CERTAIN STATEMENTS IN THIS DOCUMENT MAY 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, TRENDS AND FUTURE EVENTS, PARTICULARLY RELATING TO
SALES OF CURRENT PRODUCTS AND 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. THESE STATEMENTS ARE OFTEN, BUT NOT ALWAYS, MADE
TYPICALLY BY USE OF WORDS OR PHRASES SUCH AS "ESTIMATE," "PLANS," "PROJECTS,"
"ANTICIPATES," "CONTINUING," "ONGOING," "EXPECTS," "INTENDS," "BELIEVES," OR
SIMILAR WORDS AND PHRASES. FACTORS THAT MIGHT AFFECT SUCH FORWARD-LOOKING
STATEMENTS SET FORTH IN THIS DOCUMENT INCLUDE (i) INCREASED COMPETITION FROM NEW
AND EXISTING COMPETITORS, AND PRICING PRACTICES FROM SUCH COMPETITORS
(PARTICULARLY UPON COMPLETION OF EXCLUSIVITY PERIODS), (ii) PRICING PRESSURES
RESULTING FROM THE CONTINUED CONSOLIDATION BY THE COMPANY'S DISTRIBUTION
CHANNELS, (iii) THE AMOUNT OF FUNDS AVAILABLE FOR INTERNAL RESEARCH AND
DEVELOPMENT, AND RESEARCH AND DEVELOPMENT JOINT VENTURES, (iv) RESEARCH AND
DEVELOPMENT PROJECT DELAYS OR DELAYS AND UNANTICIPATED COSTS IN OBTAINING
REGULATORY APPROVALS, (v) CONTINUATION OF DISTRIBUTION RIGHTS UNDER SIGNIFICANT
AGREEMENTS, (vi) THE CONTINUED ABILITY OF DISTRIBUTED PRODUCT SUPPLIERS TO MEET
FUTURE DEMAND, (vii) THE COSTS, DELAYS INVOLVED IN AND OUTCOME OF ANY THREATENED
OR PENDING LITIGATIONS, INCLUDING PATENT AND INFRINGEMENT CLAIMS, (viii)
UNANTICIPATED COSTS, DELAYS AND LIABILITIES IN INTEGRATING ACQUISITIONS, (ix)
OBTAINING OR LOSING 180-DAY MARKETING EXCLUSIVITY ON PRODUCTS AND (x) GENERAL
INDUSTRY AND ECONOMIC CONDITIONS. ANY FORWARD-LOOKING STATEMENTS INCLUDED IN
THIS DOCUMENT ARE MADE AS OF THE DATE HEREOF ONLY, BASED ON INFORMATION
AVAILABLE TO THE COMPANY AS OF THE DATE HEREOF, AND, SUBJECT TO APPLICABLE LAW
TO THE CONTRARY, THE COMPANY ASSUMES NO OBLIGATION TO UPDATE ANY FORWARD-LOOKING
STATEMENTS.
THE FINANCIAL DATA CONTAINED IN THIS SECTION IS IN THOUSANDS.
OVERVIEW
Revenues for fiscal year 2004 increased 4.3% from the corresponding period
of 2003; however, continued increased competition has lowered pricing and sales
of the Company's key products leading to lower gross margins. Also, the
Company's increased spending on research and development, legal fees related to
the potential launch of new products and sales and marketing, along with the
write-off of acquired in-process research and development related to the
acquisition of Kali, contributed to decreased earnings when comparing fiscal
years 2004 and 2003. The Company will continue its efforts to introduce new
products during fiscal year 2005 and beyond in order to offset sales and gross
margin declines resulting from competition involving certain of its significant
products and it plans to continue to invest in research and development. The
Company is seeking to reduce its dependence on its present top selling products
by adding additional products through its internal development program, through
new and existing distribution agreements and/or acquisitions of complementary
products or businesses.
As part of the Company's business plan, its strategy is to enter the
branded drug market in an effort to market products with longer life cycles and
higher profitability. On June 29, 2004, the Company submitted its first NDA,
pursuant to Section 505(b)(2) of the FFDC Act, seeking marketing clearance for
megestrol acetate oral suspension NanoCrystal(R) Dispersion ("NCD"). The new NCD
formulation is a line extension of Par's currently marketed megestrol acetate
oral suspension. This advanced formulation utilizes NCD technology to improve
the bioavailability of the drug as compared to currently available formulations
of the product. NCD is a trademark of Elan Corporation, plc, Dublin Ireland. If
cleared for marketing, megestrol acetate oral suspension NCD is expected to be
indicated for the treatment of anorexia, cachexia, or any unexplained
significant weight loss in patients with a diagnosis of acquired
immunodeficiency syndrome ("AIDS") and will utilize the Megace(R) brand name,
which Par has licensed from BMS.
The Company's brand market business strategy also includes a potential
505(b)(2) NDA submission planned for late 2005 through Advancis Pharmaceutical
Corporation ("Advancis"). The Company has an agreement with Advancis to develop
and market a low dose pulsatile form of the antibiotic amoxicillin, utilizing
Advancis' proprietary PULSYS(TM) technology. If successfully developed,
amoxicillin PULSYS(TM) would be a once-daily version of the antibiotic
amoxicillin that is administered for fewer days with improved therapeutic
effect. In addition, the parties signed an amendment to this agreement in
December of 2004. The amendment adds a new formulation of amoxicillin to treat
otitis media in pediatrics to the original agreement.
20
Net sales and gross margins derived from generic pharmaceutical products
often follow a pattern based on regulatory and competitive factors that are
believed by management to be unique to the generic pharmaceutical industry. As
the patent(s) for a brand name product and the related exclusivity period
expire, the first generic manufacturer to receive regulatory approval from the
FDA for a generic equivalent of the product is often able to capture a
substantial share of the market. At that time, however, the branded company may
license an authorized generic product to a competing generic company. As
additional generic manufacturers receive regulatory approvals for competing
products, the market share and the price of that product have typically
declined, often significantly, depending on several factors including the number
of competitors, the price of the brand product and the pricing strategy of the
new competitors. Recently, a large portion of the Company's revenue growth has
been derived from sales of generic drugs during the 180-day marketing
exclusivity period and from the sale of generic products where there is limited
competition. These drugs include paroxetine tablets (Paxil(R)), megestrol
acetate oral suspension (Megace Oral Suspension(R)), and fluoxetine (Prozac(R)).
In fiscal year 2003, Par obtained the marketing rights to paroxetine, the
generic version of GSK's Paxil(R), in connection with an agreement with GSK.
Pursuant to this agreement, Par began marketing paroxetine supplied and licensed
from GSK. The GSK agreement provides that the Company's right to distribute
paroxetine will be suspended if, at any time, there is not another generic
version fully substitutable for Paxil available for purchase in the United
States. On September 8, 2003, another generic drug manufacturer, Apotex,
launched a generic version of Paxil(R). Additionally, in April 2002, GSK
launched a longer-lasting, newly patented version of the drug, Paxil CR(R).
Since that time, Paxil CR(R)'s market share has grown causing, among other
factors, the total market for paroxetine tablets to decrease. The marketing
exclusivity period in respect of paroxetine ended on March 8, 2004 and two
additional competitors launched competing paroxetine products in the second
quarter of 2004. The additional competition had an adverse effect on the
Company's revenues and gross margins derived from paroxetine in the third and
fourth quarters of 2004, which will continue in subsequent periods. Due to both
pricing and volume declines, Paroxetine sales in the fourth quarter of 2004 have
decreased to $13,300 from $104,600, $77,300, and $26,800 respectively, in the
first, second and third quarters of 2004.
The Company's exclusivity period for megestrol acetate oral suspension
expired in mid-January 2002. Through October 3, 2004, two generic competitors
had been granted FDA approval to market generic versions of megestrol acetate
oral suspension and launched products that compete with the Company's product.
In July 2004, Par entered into a settlement with one of the competitors, Teva
USA pursuant to which Par granted a license to Teva USA for a limited number of
units and Par is to receive a royalty on Teva USA's net sales of megestrol
acetate oral suspension in the United States. In the fourth quarter 2004, an
additional competitor received approval from the FDA and launched a generic
version of megestrol acetate oral suspension that also competed with the
Company's product. Sales and gross margins for megestrol acetate oral suspension
declined in fiscal year 2004 due principally to the effects of competition on
pricing and volume. Megestrol acetate oral suspension net sales were
approximately $67,800 for fiscal year 2004 compared to approximately $88,200 for
fiscal year 2003.
As a result of generic competition beginning in the first quarter of 2002
following the expiration of the Company's 180-day marketing exclusivity period,
the sales prices for fluoxetine 10 mg and 20 mg tablets and 40 mg capsules
substantially declined from the prices that the Company had charged during the
exclusivity period. Despite pricing declines, fluoxetine 40 mg capsules was a
significant sales and gross margin contributor in fiscal years 2002 and 2003.
Beginning in the first quarter of 2004, however, additional competitors led to
further pricing pressure on fluoxetine 40 mg capsules, resulting in
significantly lower net sales and gross margins. Currently, there are three
competitors in the market with products that compete with the Company's
fluoxetine 40 mg product and a fourth potential competitor received FDA approval
for a competing product in the fourth quarter of 2004. Net sales of fluoxetine
10 mg and 20 mg tablets and 40 mg capsules were approximately $46,600 for fiscal
year 2004 compared to approximately $91,100 for fiscal year 2003.
In April 2004, a marketing partner of the Company, Three Rivers
Pharmaceutical LLC ("Three Rivers"), received final approval from the FDA for
its ribavirin 200 mg capsules, the generic version of Schering-Plough
Corporation's ("Schering") Rebetol(R), which is indicated for the treatment of
chronic hepatitis. Three Rivers was granted 180 days of shared marketing
exclusivity, commencing at launch, for being the first to file an ANDA
containing a Paragraph IV certification. Under the terms of its agreement with
Three Rivers, Par has the exclusive marketing right to sell Three Rivers'
ribavirin product, which Par launched in early April 2004. The launch of this
ribavirin product has not been successful. Several factors contributed to the
unsuccessful launch of ribavirin, which the Company had anticipated would
21
replace a portion of the revenues that it lost from competition on other
products in fiscal year 2004. In addition to the competitor with shared
exclusivity, Warrick Pharmaceuticals Corp., a subsidiary of Schering, launched
an authorized generic ribavirin product in the United States in April 2004. As a
result of launching the product, Schering is not receiving a royalty from Three
Rivers on sales of Three Rivers' and Par's generic ribavirin. Due to the
additional competition, the pricing pressure on ribavirin at launch was more
substantial than the Company had previously anticipated. Additionally, the
market size for Rebetol(R) has declined due to the success of Copegus(R), a new
product introduced by Hoffman La-Roche Inc. in 2003, which has taken significant
market share away from Rebetol(R). The Company's marketing exclusivity period
ended in October 2004 and one additional competitor has since launched a
competing product. These principal factors have contributed to the lower than
expected ribavirin sales of $6,100 by the Company for fiscal year 2004.
Generic drug pricing at the wholesale level can create significant
differences between invoice price and the Company's net selling price. Wholesale
customers purchase product from the Company at invoice price, then resell the
product to specific healthcare providers on the basis of prices negotiated
between the Company and the providers, and the wholesaler submits a chargeback
credit to the Company for that difference. The Company records estimates for
these chargebacks, along with estimates for sales returns, rebates or other
sales allowances for all its customers at the time of sale, as reductions to
invoice price, with corresponding adjustments to its accounts receivable
allowances.
The Company generally will offer price protection for sales of generic
drugs for which the market exclusivity period has expired because the prices of
such drugs will typically decline, sometimes substantially, when additional
generic manufacturers introduce and market comparable generic products. In
addition, the Company may offer price protection with respect to products for
which it anticipates significant price erosion through increased competition.
Such price protection plans, which are common in the Company's industry,
generally provide for shelf-stock adjustments or lower contract pricing to the
wholesalers, which could result in an increased chargeback per unit on existing
inventory levels. In the fourth quarter of 2004, the Company provided for and
issued price protection credits of approximately $10,300 primarily due to
competition with respect to paroxetine, megestrol acetate oral suspension and
glyburide & metformin HCl.
The Company has the historical experience and access to information,
including rebate agreements with each customer, resales by its customers to
end-users having contracts with the Company, the total demand for each drug that
the Company manufactures or distributes, the Company's market share, recent or
pending new drug introductions and inventory practices of the Company's
customers, it believes is necessary to reasonably estimate the amounts of such
reductions to invoice price. Some of the assumptions used by the Company for
certain of its estimates are based on information received from third parties,
such as customers' inventories at a particular point in time and market data, or
other market factors beyond the Company's control. The Company regularly reviews
the information related to these estimates and adjusts its reserves accordingly,
if and when actual experience differs from previous estimates. There were no
material changes to the underlying assumptions used by the Company to estimate
such sales returns, rebates, chargebacks, price adjustments or other sales
allowances for fiscal years 2004, 2003 and 2002. The Company's aggregate
reserves related to the items described above as of December 31, 2004, 2003 and
2002 totaled $144,923, $139,748 and $113,008, respectively.
Critical to the growth of the Company is its introduction of new
manufactured and distributed products at selling prices that generate adequate
gross margins. The Company, through its internal development program and various
strategic alliances and relationships, is seeking to introduce new products that
have limited competition and longer product life cycles. In addition to expected
new product introductions as part of its various strategic alliances and
relationships, the Company plans to continue to invest in its internal research
and development efforts and brand marketing strategy in fiscal year 2005 and
beyond. Also, the Company will continue seeking additional products for sale
through new and existing distribution agreements or acquisitions of
complementary products and businesses, additional first-to-file opportunities
and unique dosage forms to differentiate its products in the marketplace.
22
In June 2004, the Company acquired all of the capital stock of Kali for a
purchase price of $142,861 in cash and warrants to purchase 150,000 shares of
the Company's common stock valued at $2,530. The allocation of the purchase
price includes $84,000 valued as acquired in-process research and development
that was written off in the three-month period ended October 3, 2004 in
accordance with purchase accounting for acquisitions. The Kali acquisition has
expanded the Company's research and development capabilities and increased its
product portfolio. The acquisition also diversifies the Company's development
pipeline and provided what the Company believes to be three additional
first-to-file product opportunities, enhancing its prospects for sustained
long-term growth. Included as part of the Company's purchase of Kali is a lease,
with a purchase option, of a 45,000 square foot manufacturing facility in
Somerset, New Jersey. The former Kali stockholders are entitled to up to an
additional $10,000 if certain product-related performance criteria are met over
the next four years. As of December 31, 2004, the former Kali stockholders had
earned $2,500 of these contingent payments and the Company recorded this amount
as additional goodwill on the accompanying balance sheet. The Company paid the
$2,500 in January 2005.
In addition to its own product development program, the Company has several
strategic alliances through which it co-develops and distributes products. These
strategic alliances afford the Company many advantages, including additional
resources for increased activity, expertise on dissimilar products or
technologies, and a sharing of both the costs and risks of new product
development. As a result of its internal program, including the integration of
Kali, and these strategic alliances, the Company's pipeline of potential
products includes 49 ANDAs (five of which have been tentatively approved),
pending with, and awaiting approval from, the FDA. The ANDAs include seven for
potential products that would be marketed by other companies through licensing
agreements entered into with Kali before the Company's acquisition, pursuant to
which the Company would be due royalty income if successfully launched by third
parties. The Company pays a percentage of the gross profits or of sales to its
strategic partners on sales of products covered by its distribution agreements.
Generally, products that the Company develops internally, and to which it is not
required to split any profits with its strategic partners, contribute higher
gross margins than products covered under distribution agreements. The Company
is engaged in various efforts, subject to FDA approval and other factors, to
introduce new products through its research and development efforts and through
distribution and development agreements with third parties.
In addition to the substantial costs of product development, the Company
may incur significant legal costs in bringing certain products to market.
Litigation concerning patents and proprietary rights is often protracted and
expensive. Pharmaceutical companies with patented brand products are
increasingly suing companies that produce generic forms of their patented brand
name products for alleged patent infringement or other violations of
intellectual property rights, which may delay or prevent the entry of such
generic products into the market. Generally, a generic drug may not be marketed
until the applicable patent(s) on the brand name drug expires. When an ANDA is
filed with the FDA for approval of a generic drug, the filing person may either
certify that the patent listed by the FDA as covering the branded product is
about to expire, in which case the ANDA will not become effective until the
expiration of such patent, or that the patent listed as covering the branded
drug is invalid or will not be infringed by the manufacture, sale or use of the
new drug for which the ANDA is filed. In either circumstance, there is a risk
that a branded pharmaceutical company may sue the filing person for alleged
patent infringement or other violations of intellectual property rights. Because
substantially all of the Company's current business involves the marketing and
development of generic versions of brand products, the threat of litigation, the
outcome of which is inherently uncertain, is always present. Such litigation is
often costly and time-consuming, and could result in a substantial delay in, or
prevent, the introduction and/or marketing of products, which could have a
material adverse effect on the Company's business, financial condition,
prospects and results of operations.
RESULTS OF OPERATIONS
GENERAL
The Company's net income of $29,246 for the fiscal year ended December 31,
2004 decreased $93,287, from $122,533 for the fiscal year ended December 31,
2003. Although total revenues of $690,016 in 2004 increased from $661,688 in
2003, gross margin dollars decreased as higher sales from lower margin new
products were not enough to offset lower sales of the Company's key products due
to continued pricing pressures from competition. Research and development
spending in 2004 of $50,517 increased $25,936, or 105.5%, from $24,581 in the
prior year. In fiscal year 2005, the Company expects to continue to spend at a
higher rate on research and development than it did in 2004. The allocation of
the purchase price for Kali resulted in $84,000 valued as acquired in-process
research and development, which was written off in the third quarter of 2004.
Selling, general and administrative costs in fiscal year 2004 were $69,735
compared to $57,575 in fiscal year 2003. The Company increased spending for
sales and marketing in the latter part of 2004 as it prepared for the potential
launch of a new branded product in fiscal year 2005. Fiscal year 2004 net income
includes net settlement income of $2,846, recorded in the second quarter of
23
2004, resulting primarily from the settlement of claims against Akzo Nobel NV
and Organon USA Inc. relating to anti-competitive practices that delayed the
availability of mirtazapine, a generic version of Remeron(R) and a $2,812 gain
on the sale of the Company's facility in Congers, New York (the "Congers
Facility").
The Company's net income of $122,533 in fiscal year 2003 increased $43,079
from $79,454 in fiscal year 2002. Total revenues of $661,688 in 2003 increased
$280,085 from $381,603 in fiscal year 2002, driven primarily by additional net
sales of new products introduced in 2003. The revenue growth produced higher
gross margin dollars in 2003, which increased $99,885 to $283,175, from $183,290
in fiscal year 2002. Spending of $24,581 on research and development for fiscal
year 2003 increased 37.2% from $17,910 for fiscal year 2002, while selling,
general and administrative costs of $57,575 for fiscal year 2003 increased
$17,360 from the prior year. Included in selling, general and administrative
expenses in 2003 was a charge of $3,712 related to a retirement package for the
Company's former chairman, president and chief executive officer. Fiscal year
2002 results include income from settlements of $9,051 related to the Company's
termination of its litigation with BMS and acquisition termination charges of
$4,262 in connection with its termination of negotiations with International
Specialty Products ("ISP") related to the Company's then proposed purchase of
the combined ISP FineTech fine chemical business based in Haifa, Israel and
Columbus, Ohio.
Sales and gross margins of the Company's products are principally dependent
upon the (i) introduction of other generic drug manufacturers' products in
direct competition with the Company's significant products, (ii) ability of
generic competitors to quickly enter the market after patent or exclusivity
period expirations, diminishing the amount and duration of significant profits
to the Company from any one product, (iii) pricing practices of competitors and
any removal of competing products from the market, (iv) continuation of existing
distribution agreements, (v) introduction of new distributed products, (vi)
consolidation among distribution outlets through mergers, acquisitions and the
formation of buying groups, (vii) willingness of generic drug customers,
including wholesale and retail customers, to switch among generic pharmaceutical
manufacturers, (viii) approval of ANDAs and introduction of new manufactured
products, (ix) granting of potential marketing exclusivity periods, (x) extent
of market penetration for the existing product line and (xi) level, quality and
amount of customer service.
REVENUES
Total revenues for year ended December 31, 2004 were $690,016, increasing
$28,328, or 4.3%, from total revenues of $661,688 for the year ended December
31, 2003, primarily due to additional sales of new products sold under various
distribution agreements, including $38,100 of glyburide and metformin HCl,
introduced in May 2004 and $25,000 of mercaptopurine (Purinethol(R)), introduced
in February 2004. Also contributing to the increase in revenues were net sales
of paroxetine, which the Company launched in September 2003 in the United States
and is sold through a supply agreement with GSK, which totaled approximately
$222,000 in 2004, increasing $29,500 from $192,500 in 2003 and sales of
lovastatin (Mevacor(R)), distributed pursuant to an agreement with Genpharm,
Inc. ("Genpharm"), which increased $17,100 to $30,000 primarily due to a new
customer. These sales were partially offset by lower sales of certain existing
distributed products, particularly fluoxetine, which decreased $44,500 and
tizanidine (Zanaflex(R)) which decreased $20,900. The Company's top selling
manufactured product, megestrol acetate oral suspension also decreased $20,400.
Net sales of distributed products, which consist of products manufactured
under contract and licensed products, were approximately $504,400, or 73.1% of
the Company's total revenues in 2004, and $456,200, or 68.9% of the Company's
total revenues in 2003. Presently, the Company is substantially dependent upon
distributed products for its overall sales and, because the Company continues to
introduce new products under its distribution agreements, it expects that this
dependence will continue. Any inability by its suppliers to meet demand could
adversely affect the Company's future sales.
The Company's gross revenues before deductions for chargebacks, rebates
(including rebates paid under Federal and State government Medicaid drug
reimbursement programs), price adjustments, sales returns or other sales
allowances were $1,558,220 in 2004 compared to $1,157,332 in 2003. Deductions
from gross revenues were $868,204 in 2004 and $495,644 in 2003. These deductions
are discussed in "Notes to Consolidated Financial Statements - Note 4 - Accounts
Receivable." The gross-to-net revenue percentage spread increased to 55.7% in
fiscal year 2004 compared to 42.8% in fiscal year 2003, primarily due to the
ribavirin launch in April 2004 and competition on paroxetine. The Company had
committed to spend promotional dollars on ribavirin in an effort to obtain
market share and, due to a rapid drop in price after launch, the net selling
price was much lower than expected for a new product. The effect of price
24
declines for both ribavirin and paroxetine increased the chargeback amounts
issued to wholesalers during 2004.
The Company's other product related revenues of $2,446 in 2004 decreased
significantly from $15,665 in 2003. The Company records other product related
revenues pursuant to an agreement with Genpharm, where the Company receives a
portion of the profits, as defined in the agreement, generated from Kremers
Urban Development Co.'s, a subsidiary of Schwarz Pharma AG of Germany, sales of
omeprazole, the generic version of Astra Zeneca's Prilosec(R). In the third
quarter of 2003, two generic competitors began selling forms of omeprazole
significantly reducing the Company's share of profits related to omeprazole. The
revenues related to this agreement are expected to continue to decrease in
future periods.
As discussed above, net sales of megestrol acetate oral suspension and of
fluoxetine 40 mg capsules have decreased as a result of increased generic
competition and its effect on pricing and market share. When competition enters
the market, there are circumstances under which the Company may determine to not
afford price protection to certain customers and consequently, as a matter of
business strategy, lose volume to competitors rather than reduce its pricing.
When there is general market pressure for lower pricing due to many competitors
entering the market at the same time, the Company decides which customers will
be afforded price protection and a price protection reserve is established based
on estimated or actual existing customer inventories. Competitors on these two
products have been entering the market over an extended period of time, thereby
reducing the need for broad price protection and material price protection
reserves at the end of any one reporting period. Although the Company has
lowered the pricing on these products over time and price protection credits
were granted and processed within the reporting periods, including the fourth
quarter of 2004, the Company did not have material reserves for additional price
protection as of December 31, 2004 because it did not believe that there would
be any additional significant price protection credits to be issued with respect
to sales of these products through that date. The Company will continue to
evaluate the effects of competition and will record a price protection reserve
when, if and to the extent that it deems necessary.
As a result of competition, the Company has also issued significant price
protection credits for paroxetine, metformin ER and glyburide and metformin HCl
during the latter part of 2004. The Company will continue to evaluate the
effects of competition and will record a price protection reserve when, if and
to the extent that it deems it necessary.
Total revenues of $661,688 for fiscal year 2003 increased $280,085, or
73.4%, from $381,603 for fiscal year 2002. The revenue growth in 2003 was driven
largely by the September 2003 introduction of paroxetine. Additionally, net
sales of other new products in 2003, including metformin ER, introduced in
December 2003 and sold under a distribution agreement with BMS, tizanidine,
introduced in July 2002 and sold under a distribution agreement with Dr. Reddy's
Laboratories Limited ("Dr. Reddy"), torsemide (Demadex(R)) and minocycline
(Minocin(R)), introduced in the second quarter of 2003 and manufactured by the
Company, contributed to the revenue growth in 2003. Net sales of fluoxetine and
megestrol acetate oral suspension were approximately $91,100 and $88,200,
respectively, for fiscal year 2003, reflecting a small increase over the prior
fiscal year. Net sales of distributed products, which consist of products
manufactured under contract and licensed products, were approximately 68.9% and
59.0%, respectively, of the Company's total revenues in fiscal years 2003 and
2002.
The Company's gross revenues before deductions for chargebacks, rebates
(including rebates paid under Federal and state government Medicaid drug
reimbursement programs), price adjustments, sales returns or other sales
allowances were $1,157,332 in 2003 compared to $826,554 in 2002. Deductions from
gross revenues were $495,644 in 2003 and $444,951 in 2002. The gross-to-net
revenue percentage spread decreased to 42.8% for year ended 2003 compared to
53.8% for the year ended 2002, primarily due to the paroxetine launch in
September 2003, which had a lower gross-to-net spread than the average of the
Company's other products.
GROSS MARGIN
The Company's gross margin of $246,058 (35.7% of total revenues) in fiscal
year 2004 decreased $37,117 from $283,175 (42.8% of total revenues) in the
corresponding period of 2003. Increased revenues had a negligible effect on
gross margin dollars as the increases were generated primarily from lower margin
new products and were not enough to offset lower sales of the Company's key
higher margin products. A significant portion of the sales increase was
generated from products sold under the distribution agreements with GSK, Pentech
and BMS, where the Company splits profits with its contract partners. As a
result of these agreements, the Company's gross margin as a percentage of its
25
total revenues in 2004 declined principally because net sales of these products,
after the allocation of profit splits, yielded a significantly lower gross
margin percentage than the Company's average gross margin as a percentage of
total revenues for its other products in 2003. In addition, Par's gross margin
was also negatively impacted by the decline in other product related revenues.
The gross margin for the year ended December 31, 2004 included an income
adjustment to cost of goods sold of $6,200, which was recorded in the second
quarter of 2004 and related to sales of paroxetine during the period from
September 2003 to June 2004, that reflects a change in accounting estimate used
in the calculation of the profit split due to Pentech. The change in accounting
estimate has effectively reduced payables due under Par's agreement with Pentech
relating to the supply and marketing of paroxetine. The change in accounting
estimate followed Pentech's filing of an action against Par during the second
quarter of 2004.
The Company's gross margin of $283,175 (42.8% of total revenues) for fiscal
year 2003 increased $99,885 from $183,290 (48.0% of total revenues) for fiscal
year 2002. The gross margin dollar increase was achieved primarily as a result
of contributions from sales of new products and, to a lesser extent, higher
sales of certain existing products and additional revenues from omeprazole
pursuant to an agreement with Genpharm.
In fiscal year 2003, a higher gross margin contribution from fluoxetine 40
mg due to increases in its net sales and in the Company's profit sharing
percentage under its agreement with Dr. Reddy following the end of the Company's
exclusivity period more than offset lower gross margin contributions from
fluoxetine 10 mg and 20 mg tablets, which are subject to profit sharing
agreements with Genpharm. Also, additional generic manufacturers introduced and
began marketing comparable fluoxetine products following the expiration of the
Company's exclusivity period in January 2002, adversely affecting the Company's
sales volumes, selling prices and gross margins for the products, particularly
the 10 mg and 20 mg strengths.
Inventory write-offs were $8,643, $3,059 and $3,096, respectively, for
fiscal years 2004, 2003 and 2002. The inventory write-offs, taken in the normal
course of business, were related primarily to the disposal of finished products
due to short shelf lives and work-in-process inventory that did not meet the
Company's quality control standards. The increased write-offs in fiscal year
2004 included the write-off of inventory for a product whose launch was delayed.
The Company maintains inventory levels that it believes are appropriate to
optimize its customer service.
OPERATING EXPENSES
RESEARCH AND DEVELOPMENT
The Company's research and development expenses of $50,517 for the year
ended December 31, 2004 increased $25,936, or 105.5%, from fiscal year 2003. The
increase was primarily attributable to payments of $14,000 to Advancis in order
to fund the development of a novel formulation of the antibiotic amoxicillin,
increased biostudies costs of $4,400 and increased personnel costs of $3,600,
including such costs related to the acquisition of Kali. As previously
discussed, the Company acquired Kali in June 2004. The Company expects to
utilize Kali to develop additional products for its own product pipeline.
The allocated purchase price for Kali includes $84,000 classified as
acquired in-process technology, which was written off in the third quarter of
2004. In valuing Kali, the Company classified the technology assets purchased as
either core/developed or in-process based on the stage of development the
product was in at the time of acquisition. All core/developed and in-process
technology was valued using the income approach, which focuses on the
income-producing capabilities of the subject assets. The underlying premise of
the income approach is that the value of an asset can be measured by the present
worth of the net economic benefit (cash receipts less cash outlays) to be
received over the life of the subject asset.
The acquired in-process research and development included the valuation of
29 products where there was a material investment made in the research and
development activities relating to them and a set amount of development work had
been completed in respect of them. The development work on 16 of these products
was considered complete and ANDAs for 14 of the products were filed with the
FDA, however, the value of all the products was expensed because such products
had not yet been approved.
In June 2004, Par entered into an agreement with Advancis to develop and
market a novel formulation of the antibiotic amoxicillin. Pursuant to this
agreement, Par paid Advancis $14,000 which was charged to research and
development expense in fiscal year 2004, and Par will fund future development of
$19,000 through fiscal year 2005. Advancis agreed to grant Par the exclusive
26
right to sell and distribute the product and the co-exclusive right to market
the product. Advancis will be responsible for the development and manufacture of
the product and the two parties have agreed to share equally in marketing
expenses and profits if the product is successfully developed and brought to
market.
As a result of its product development program, the Company currently has
15 ANDAs pending with the FDA, two of which have received tentative approval,
for potential products that are not subject to any distribution or profit
sharing agreements. In addition, there are 34 ANDAs pending with the FDA, three
of which have received tentative approval, that have been filed by the Company
or its strategic partners for potential products covered under various
distribution agreements. No assurances can be given that the Company or any of
its strategic partners will successfully complete the development of these
products either under development or proposed for development, that they will
obtain regulatory approvals for any such product, that any approved product will
be produced in commercial quantities or that any approved product can be sold
profitably.
Research and development expenses of $24,581 for fiscal year 2003 increased
$6,671, or 37.2%, from $17,910 for fiscal year 2002. The higher expenses in 2003
were primarily attributable to biostudies, including the Company's share of
Genpharm's biostudy costs for products covered under their distribution
agreements. In addition, higher costs were incurred for raw material and
additional personnel to support increased research and development activity in
subsequent periods.
SELLING, GENERAL AND ADMINISTRATIVE
Total selling, general and administrative expenses were $69,735 (10.1% of
total revenues) in 2004 as compared to $57,575 (8.7% of total revenues) in 2003.
The increase in 2004 was primarily attributable to higher sales and marketing
costs of $5,700 in anticipation of the Company's potential brand product launch
in fiscal year 2005, increased legal fees of $5,200 and higher personnel costs
of $3,300, including those for information system assessments. The 2003 costs
included a charge of $3,712 related to a retirement package for the Company's
former chairman, president and chief executive officer, recorded in the second
quarter of 2003. Distribution costs included those related to shipping product
to the Company's customers, primarily through the use of a common carrier or an
external distribution service. Shipping costs were approximately $2,700 in both
fiscal years 2004 and 2003. The Company anticipates that it will continue to
incur a high level of legal expenses for litigation costs relating to potential
new product introductions (see "Notes to Consolidated Financial Statements-Note
15-Commitments, Contingencies and Other Matters-Legal Proceedings"). Although
there can be no such assurance, selling, general and administrative expenses in
fiscal year 2005 are expected to increase by up to 25% to 30% from fiscal year
2004, primarily due to planned brand marketing activities.
Selling, general and administrative costs of $57,575 (8.7% of total
revenues) for fiscal year 2003 increased $17,360 from $40,215 (10.5% of total
revenues) for fiscal year 2002. The increase in 2003 was primarily attributable
to higher costs for product liability and directors and officers insurance of
approximately $3,700, a charge of $3,712 related to a retirement package and
marketing expenses of approximately $1,100. In addition, the Company incurred
increased expenses it believes were necessary to support the Company's growth,
including costs for additional personnel of approximately $5,000, additional
warehouse and administrative office facilities of $1,800, corporate strategic
planning of $1,700 and information systems assessments. Shipping costs of
approximately $2,745 in fiscal year 2003 were comparable to costs of $2,800 in
fiscal year 2002.
SETTLEMENTS, NET
Net settlement income of $2,846 was recorded in 2004 pursuant to the
settlement of claims against Akzo Nobel NV and Organon USA Inc. relating to
anti-competitive practices that delayed the availability of mirtazapine,
partially offset by legal expenses associated with the settlement of litigation
with Asahi Glass Company related to paroxetine.
On March 5, 2002, the Company entered into an agreement with BMS acquiring
the United States rights to five brand products from BMS. The products were the
antihypertensives Capoten(R) and Capozide(R), the cholesterol-lowering
medications Questran(R) and Questran Light(R), and Sumycin(R), an antibiotic. To
obtain the rights to these five products, the Company agreed to terminate its
outstanding litigation against BMS involving megestrol acetate oral suspension
and buspirone, and paid $1,024 in March 2002 and $1,025 in April 2003. The
Company determined the fair value of the product rights received to be $11,700,
which exceeded the cash consideration of $2,049 and associated costs of $600 by
$9,051. The $9,051 value was assigned to the litigation settlements and recorded
as settlement income in the first quarter of 2002. The fair value of the product
rights received is being amortized on a straight-line basis over the seven-year
period which began in March 2002, with the net amount included in intangible
assets on the Company's consolidated balance sheets.
27
GAIN ON SALE OF FACILITY
Par owned a facility of approximately 33,000 square feet located on six
acres in Congers, New York. In March 2004, the Company sold the Congers Facility
to Ivax Pharmaceuticals New York, LLC for $4,980 and recorded a gain on the sale
of $2,812.
ACQUISITION TERMINATION CHARGES
On March 15, 2002, the Company terminated its negotiations with ISP related
to the Company's purchase of the combined ISP FineTech fine chemical business,
based in Haifa, Israel and Columbus, Ohio. At that time, the Company
discontinued negotiations with ISP as a result of various events and
circumstances that occurred following the announcement of the proposed
transaction. Pursuant to the termination of negotiations, the Company paid ISP a
$3,000 break-up fee in March 2002, which was subject to certain credits and
offsets, and incurred $1,262 in related acquisition costs, both of which were
included in acquisition termination charges on the consolidated statements of
operations in fiscal year 2002.
INTEREST EXPENSE/INCOME
Net interest expense was $1,048 in fiscal year 2004 compared to net
interest expense of $281 for the corresponding period of 2003. Net interest
expense in current year includes interest payable on the Company's convertible
notes, partially offset by interest income primarily derived from short-term
investments. Net interest expense in 2003 includes interest payable on the
Company's convertible notes from their issuance in the third quarter of 2003,
partially offset by interest income derived from money market and other
short-term investments. Net interest income of $604 in 2002 was primarily
derived from money market and other short-term investments.
INCOME TAXES
The Company recorded provisions for income taxes of $16,857, $78,110 and
$50,799, respectively, for the fiscal years ended 2004, 2003 and 2002. The
provisions were based on the applicable federal and state tax rates for those
periods (see "Notes to Consolidated Financial Statements-Note 14-Income Taxes").
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents of $36,534 at December 31, 2004 decreased
$126,015 from $162,549 at December 31, 2003, primarily due to the acquisition of
Kali for $144,104 in cash. The Company had $52,934 of cash provided by
operations, net proceeds of $43,009 from available for sale securities, gross
proceeds of $5,036 from the sale of fixed assets, primarily the Congers
Facility, and $9,359 from the issuance of shares of Common Stock upon the
exercise of stock options. In the year ended December 31, 2004, the Company
invested $25,818 in capital improvements, primarily for Phase II of the
expansion of its laboratories in Spring Valley, New York, information system
improvements and new production machinery. The Company has also invested $15,700
in intangible assets, primarily for the purchase of the NDA for the drug Isoptin
from FSC and paid $15,362 for investments in Abrika and New Rivers
Pharmaceuticals, Inc. ("New River"). The Company's cash balances are deposited
primarily with financial institutions in money market funds and overnight
investments.
There were no significant changes in credit terms, collection efforts,
credit utilization, or delinquency related to the Company's accounts receivable.
There are many timing issues that cause fluctuations when measuring accounts
receivable days based on the previous quarter's average days' sales in accounts
receivable. The Company measures its days' sales in accounts receivable on a
rolling twelve month average. Days' sales in accounts receivable based on this
calculation increased to 85 days at December 31, 2004 from 63 days at December
31, 2003. Generally, the Company has a customer base that pays in 60 to 90 days
and the Company's management expects days' sales in accounts receivables to
fluctuate within that range.
The Company's working capital, current assets minus current liabilities, of
$339,238 decreased $120,564, from $459,802 at December 31, 2003, primarily due
to the purchase of Kali, funded by using cash on hand. The working capital
ratio, which is calculated by dividing current assets by current liabilities,
was 3.19x at December 31, 2004 compared to 3.75x at December 31, 2003. The
Company believes that its strong working capital ratio indicates its ability to
meet ongoing and foreseeable obligations.
28
In April 2004, the Company's board of directors authorized the repurchase
of up to $50,000 of the Company's Common Stock. The repurchases are made,
subject to compliance with applicable securities laws, from time to time in the
open market or in privately negotiated transactions. Common Stock acquired
through the repurchase program is available for general corporate purposes.
Pursuant to the program, the Company had repurchased approximately 844 shares of
its common stock for approximately $32,026 through December 31, 2004.
In September 2003, the Company sold an aggregate principal amount of
$200,000 of senior subordinated convertible notes pursuant to Rule 144A under
the Securities Act of 1933. Net proceeds of $177,945 from the notes, which were
net of underwriting costs of $5,250 and the net payment of $16,805 from the
purchase of call options and sale of warrants, were used to purchase
available-for-sale securities in October 2003. Available-for-sale securities of
$151,854 at December 31, 2004 are all available for immediate sale. The Company
intends to use its current liquidity to support the expansion of its business,
which included the acquisition of Kali, increasing its research and development
activities, entering into product license arrangements, potentially acquiring
other complementary businesses and products and for general corporate purposes.
As of December 31, 2004, the Company had payables owed to distribution
agreement partners of $40,149 related primarily to amounts due pursuant to
profit sharing agreements, particularly amounts owed to GSK and Pentech on
paroxetine and BMS on glyburide and metformin HCl and metformin ER. The Company
expects to pay these amounts, with the exception of payables due to Pentech
related to current litigation, out of its working capital during the beginning
of 2005. In the second quarter of 2004, Pentech filed a legal action against the
Company alleging that the Company breached its contract with Pentech. The
Company and Pentech are in dispute over the amount of gross profit share.
The dollar values of the Company's material contractual obligations and
commercial commitments as of December 31, 2004 were as follows:
AMOUNTS DUE BY PERIOD
--------------------
TOTAL MONETARY 2006 TO 2009 TO 2011 AND
OBLIGATION OBLIGATION 2005 2008 2010 THEREAFTER
---------- ---------- ---- ---- ---- ----------
Operating leases $22,076 $3,357 $9,417 $4,983 $4,319
Convertible notes* 200,000 - - 200,000 -
Advancis development expenses 19,000 19,000 - - -
Nortec 500 500 - - -
Insurance obligations 4,142 4,142 - - -
Kali acquisition earn-out 2,500 2,500 - - -
Pension obligation 22 22 - - -
Other 481 206 275 - -
--- --- --- ------- -----
Total obligations $248,721 $29,727 $9,692 $204,983 $4,319
======= ====== ===== ======= =====
*The convertible notes mature on September 30, 2010, unless earlier converted or repurchased.
In addition to its internal research and development costs, the Company,
from time to time, enters into agreements with third parties for the development
of new products and technologies. To date, the Company has entered into
agreements and advanced funds, has commitments or contingent liabilities with
several non-affiliated companies for products in various stages of development.
These contingent payments or commitments are generally dependent on the third
party achieving certain milestones or the timing of third-party research and
development or legal expenses. Due to the uncertainty of the timing and/or
realization of such contingent commitments, these obligations are not included
in the above table. Payments made pursuant to these agreements are either
capitalized or expensed according to the Company's accounting policies. The
total amount that could be due under agreements with contingencies is
approximately $47,300. The agreements that contain such commitments that the
Company believes are material are described in "Notes to Consolidated Financial
Statements - Note 3 - Investments" and "Notes to Consolidated Financial
Statements - Note 9 - Research and Development Agreements".
As part of the consideration for the acquisition of Kali, the former Kali
stockholders are entitled to up to $10,000 from the Company if certain
product-related performance criteria are met over the next four years. As of
December 31, 2004, the former Kali stockholders had earned $2,500 of this
contingent payout and were paid in January 2005.
29
The Company expects to continue to fund its operations, including its
research and development activities, capital projects and obligations under its
existing distribution and development arrangements discussed herein, out of its
working capital, including proceeds from the issuance of its 2003 convertible
notes. The Company anticipates that its capital spending in fiscal year 2005
will increase approximately 20% from fiscal year 2004. Implementation of the
Company's business plan may require additional debt and/or equity financing and
there can be no assurance that the Company will be able to obtain any additional
financing when needed on terms acceptable or favorable to it.
FINANCING
At December 31, 2004, the Company's total outstanding short-term and
long-term debt, including the current portion, was $204,623. The amount
consisted primarily of senior subordinated convertible notes, financing for
product liability insurance and capital leases for computer equipment. In
September 2003, the Company sold an aggregate principal amount of $200,000 of
senior subordinated convertible notes pursuant to Rule 144A under the Securities
Act of 1933. The notes bear interest at an annual rate of 2.875%, payable
semi-annually on March 30 and September 30 of each year. The first payment of
$2,875 was made on March 29, 2004 and the second payment of $2,875 was made on
September 29, 2004. The notes are convertible into shares of Common Stock at an
initial conversion price of $88.76 per share, only upon the occurrence of
certain events. Upon conversion, the Company has the right to deliver, in lieu
of Common Stock, cash or a combination of cash and Common Stock. It is the
Company's current intention to satisfy the Company's obligation upon a
conversion of the notes in cash in an amount equal to the principal amount of
the notes converted. The notes mature on September 30, 2010, unless earlier
converted or repurchased. The Company may not redeem the notes prior to their
maturity date.
CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES
Critical accounting policies are those policies that are most important to
the portrayal of the Company's financial condition and results of operations,
and require management's most difficult, subjective and complex judgments,
resulting from the need to make estimates about the effect of matters that are
inherently uncertain. The Company's most critical accounting policies, as
discussed below, pertain to revenue recognition including the determination of
deductions from gross revenues, the determination of whether certain costs
pertaining to the Company's significant development and marketing agreements are
capitalized or expensed as incurred, the valuation and assessment of impairment
of intangible assets, the determination of depreciable and amortizable lives and
issues related to legal proceedings. In applying such policies, management must
use some amounts that are based on its informed judgments and estimates. Because
of the uncertainties inherent in these estimates, actual results could differ
from estimates used in applying the critical accounting policies. The Company is
not aware of any reasonably likely events or circumstances that would result in
different amounts being reported and that would materially affect its financial
condition or results of operations.
REVENUE RECOGNITION AND ACCOUNTS RECEIVABLE AND ALLOWANCES:
The Company recognizes revenues for product sales when title and risk of
loss pass to its customers, and simultaneously records estimates for sales
allowances, the most significant of which are described below and include
rebates, chargebacks, returns, price adjustments and other sales allowances, as
reductions to gross revenues, with corresponding adjustments to the accounts
receivable allowances (see "Notes to Consolidated Financial Statements- Note 4 -
Accounts Receivable"). The Company has the historical experience and access to
other information, including rebate agreements with each customer, resales by
its customers to end-users having contracts with the Company, the total demand
for each drug that the Company manufactures or distributes, its market share,
recent or pending new drug introductions and inventory practices of the
Company's customers, it believes is necessary to reasonably estimate the amount
of such sales allowances. Some of the assumptions used for certain of the
Company's estimates are based on information received from third parties, such
as customer inventories at a particular point in time and market data, or other
market factors beyond the Company's control. The Company regularly reviews all
information related to these estimates and adjusts its reserves accordingly if
and when actual experience differs from previous estimates.
Customer rebates are price reductions that generally are provided to
customers as an incentive for them to continue to carry the Company's products
or substitute the Company's products for competing products to be sold through
the customers' distribution channels. This incentive is generally based on a
customer's volume of purchases made during an applicable monthly, quarterly or
annual period.
Chargebacks are given to the wholesale customer for product it resells to
specific healthcare providers on the basis of prices negotiated between the
Company and the providers. Chargeback credits are issued to wholesalers for the
difference between the Company's invoice price and the contract price through
which the wholesaler resells the product.
30
The Company accepts returns of product according to the following: (i) the
returns must be approved by authorized personnel in writing or by telephone with
the lot number and expiration date accompanying any request, (ii) the Company
generally will accept returns of products from any customer and will give such
customer a credit for such return provided such product is returned within six
months prior to, and until 12 months following, such product's expiration date,
(iii) any product that has more than six months until its expiration date may be
returned to the Company; however, no credit will be issued to the customer and
(iv) generally the Company will not accept returns of products if such products
cannot be resold, unless the reason that such products cannot be resold is that
the expiration date has passed.
Price adjustments include term discounts, sales promotions and shelf-stock
adjustments. Term discounts are given to customers that pay within a specific
period of time. The Company may conduct sales or trade show promotions where
additional discounts may be given on a new product or certain existing products
as an added incentive to stock the Company's products or for the customer to
substitute the Company's products for competing products. The Company may, from
time to time, also provide price and/or volume incentives on new products that
have multiple competitors and/or on existing products that confront new
competition in order to secure or maintain a certain market share. The Company
does not provide incentives designed to increase shipments to its customers that
it believes would result in out-of-the ordinary course of business inventory for
them. Shelf-stock adjustments are typically provided to a customer when the
Company lowers its invoice pricing and provides a credit for the difference
between the old and new invoice prices for the inventory that the customer has
on hand at the time of the price reduction.
Due to competitive factors, the Company may also provide for price
protection. The Company will generally offer price protection for sales of new
generic drugs for which its market exclusivity period has expired or with
respect to products for which it anticipates significant price erosion through
increases in competition. Such price protection accounts for the fact that the
prices of such drugs typically will decline, sometimes substantially, when
additional generic manufacturers introduce and market a comparable generic
product following the expiration of an exclusivity period or at the time of a
price decrease. Such price protection plans, which are common in the Company's
industry, are given through lower contract pricing at the wholesalers, which
could result in an increased chargeback per unit on existing inventory levels,
or through shelf-stock adjustments. At December 31, 2004, 2003 and 2002, the
Company did not have any material price protection reserves but had issued
significant price protection credits and had generally lowered contract pricing
on several of its key products throughout fiscal year 2004 due to competition.
The following table summarizes activity for the years ended December 31,
2004, 2003 and 2002 in the accounts affected by the accruals described above:
FOR THE YEARS ENDED
-------------------
RESERVES FOR REBATES AND CHARGEBACKS: 2004 2003 2002
------------------------------------- ---- ---- ----
Balance, beginning of the period $(99,391) $(76,751) $(55,911)
Provision recorded (628,130) (358,265) (319,255)
Credits processed 624,914 335,625 298,415
------- ------- -------
Balance, end of the period $(102,607) $(99,391) $(76,751)
======= ====== ======
RESERVES FOR DOUBTFUL ACCOUNTS, RETURNS,
PRICE ADJUSTMENTS AND OTHER ALLOWANCES: 2004 2003 2002
--------------------------------------- ---- ---- ----
Balance, beginning of the period $(40,357) $(36,257) $(47,168)
Provision recorded (204,636) (119,761) (113,828)
Credits processed 202,677 115,661 124,739
------- ------- -------
Balance, end of the period $(42,316) $(40,357) $(36,257)
====== ====== ======
RESEARCH AND DEVELOPMENT AGREEMENTS:
The Company capitalizes or expenses amounts related to the development of
new products and technologies through agreements with third parties based on the
Company's determination of its ability to recover in a reasonable period of time
the estimated future cash flows anticipated to be generated pursuant to each
agreement. Accordingly, amounts related to the Company's funding of the research
and development efforts of others or to the purchase of contractual rights to
products that have not been approved by the FDA and where the Company has no
alternative future use for the product, are expensed and
31
included in research and development costs. Amounts for contractual rights
acquired by the Company to a process, product or other legal right having
multiple or alternative future uses that support its realizability, as well as
to an approved product, are capitalized and included in intangible assets on the
consolidated balance sheets. Capitalized costs are amortized over the estimated
useful lives that the related cash flows are expected to be generated and
charged to cost of goods sold. Market, regulatory and legal factors, among other
things, may affect the realizability of the projected cash flows that an
agreement was initially expected to generate. The Company regularly monitors
these factors and subjects all capitalized costs to periodic impairment testing.
GOODWILL AND INTANGIBLE ASSETS:
The Company determines the estimated fair values of goodwill and certain
intangible assets with definitive lives based on valuations performed by the
Company at time of their acquisition in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 142, "Accounting for Goodwill and Other
Intangible Assets". In addition, the fair value of certain amounts paid to third
parties related to the development of new products and technologies, as
described above, are capitalized and included in intangible assets on the
accompanying consolidated balance sheets. Goodwill is not amortized but tested
at least annually for impairment using a fair value approach. Intangible assets
with definitive lives, also tested periodically for impairment, are capitalized
and amortized over their estimated useful lives. As a result of the acquisitions
of Kali in fiscal year 2004 and of FineTech in fiscal year 2002, the Company had
amounts recorded as goodwill of $77,919 at December 31, 2004 and $24,662 at
December 31, 2003. In addition, intangible assets with definitive lives, net of
accumulated amortization, totaled $51,491 and $35,564, respectively, at December
31, 2004 and 2003.
COSTS FOR PATENT LITIGATION AND LEGAL PROCEEDINGS:
Costs for patent litigation or other legal proceedings are expensed as
incurred and included in selling, general and administrative expenses. As
discussed in "Notes to Consolidated Financial Statements - Note 15 -
Commitments, Contingencies and Other Matters," the Company is a party to several
patent infringement matters whose outcomes could have a material impact on its
future profitability, cash flows and financial condition. The Company is also
currently involved in other litigation matters, including certain patent
actions, product liability and actions by former employees and believes that
these actions are incidental to the business and that the ultimate resolution
thereof will not have a material adverse effect on its future profitability,
cash flows or financial condition. The Company is defending or intends to defend
vigorously or, in cases where the Company is plaintiff, prosecute these actions.
NEW ACCOUNTING PRONOUNCEMENTS:
In November 2003, the Emerging Issues Task Force ("EITF") of the Financial
Accounting Standards Board ("FASB") reached a consensus on EITF Issue No. 03-1,
"The Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments" ("EITF 03-1"). EITF 03-1 provides guidance on determining
other-than-temporary impairments and its application to marketable equity
securities and debt securities accounted for under SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." In September 2004, the FASB
issued FASB Staff Position ("FSP") EITF Issue 03-1-1, "Effective Date of
Paragraphs 10-20 of EITF Issue No. 03-1, The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments" which delayed the
effective date for the measurement and recognition guidance contained in the
EITF 03-1 pending finalization of the draft FSP EITF Issue 03-1-a,
"Implementation Guidance for the Application of Paragraph 16 of EITF 03-1." The
disclosure requirements of EITF 03-1 remain in effect. The Company adopted the
disclosure requirement of EITF 03-1 as of September 30, 2004. The adoption of
the recognition and measurement provisions of EITF 03-1 are not expected to have
a material impact on the Company's results of operations, financial position or
cash flows.
In December 2003, the FASB issued a revision to SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits," ("SFAS 132") to
improve financial statement disclosure for defined benefit plans. This statement
requires additional disclosures about the assets (including plan assets by
category), obligations and cash flows of defined pension plans and other defined
benefit postretirement plans. It also requires reporting of various elements of
pension and other postretirement benefit costs on a quarterly basis. Generally,
the disclosure requirements are effective for interim periods beginning after
December 15, 2003; however, information about foreign plans is effective for
fiscal years ending after June 15, 2004. The Company adopted the revised SFAS
132 during the quarter ended March 31, 2004.
In December 2003, the SEC issued Staff Accounting Bulletin ("SAB") No. 104,
"Revenue Recognition," ("SAB 104") which superseded SAB No. 101, "Revenue
Recognition in Financial Statements" ("SAB 101"). SAB 104's primary purpose is
32
to rescind accounting guidance contained in SAB No. 101 related to multiple
element revenue arrangements, superseded as a result of the issuance of EITF
00-21, "Revenue Arrangements with Multiple Deliverables" ("EITF 00-21"). The
issuance of SAB 104 reflects the concepts contained in EITF 00-21. The other
revenue recognition concepts contained in SAB 101 remain largely unchanged. The
issuance of SAB 104 did not have a material impact on the Company's results of
operations, financial position or cash flows.
In January 2003, the FASB issued Financial Interpretation Number ("FIN")
No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"), an
interpretation of Accounting Research Bulletin No. 51, "Consolidated Financial
Statements". FIN 46 establishes accounting guidance for consolidation of
variable interest entities that function to support the activities of the
primary beneficiary. In December 2003, the FASB revised FIN 46 and issued FIN 46
(revised December 2003) ("FIN 46R"). In addition to conforming to previously
issued FASB Staff positions, FIN 46R deferred the implementation date for
certain variable interest entities. This revised interpretation is effective for
all entities no later than the end of the first reporting period that ends after
March 15, 2004. The Company does not have any investments in or contractual
relationship or other business relationship with a variable interest entity and,
therefore, the adoption of this interpretation will not have any impact on its
financial position or results of operations.
In May 2004, the FASB issued FSP 106-2, "Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003" ("FSP 106-2") This guidance supersedes FSP 106-1,
"Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003" issued in January 2004 and
clarifies the accounting and disclosure requirements for employers with
postretirement benefit plans that have been or will be affected by the passage
of the Medicare Prescription Drug Improvement and Modernization Act of 2003 (the
"Medicare Act"). The Medicare Act introduces two new features to Medicare that
an employer needs to consider in measuring its obligation and net periodic
postretirement benefit costs. The effective date for the new requirements is the
first interim or annual period beginning after June 15, 2004. The adoption of
FSP 106-2 did not have a material impact on the Company's results of operations,
financial position or cash flows.
In September 2004, the EITF reached a consensus on EITF Issue No. 04-8 "The
Effect of Contingently Convertible Instruments on Diluted Earnings per Share"
("EITF 04-8"). EITF 04-8 requires that contingently convertible debt securities
with a market price trigger be included in diluted earnings per share,
regardless of whether the market price trigger has been met. EITF 04-8 is
effective for all periods ending after December 15, 2004 and requires the
retroactive restatement of previously reported earnings per share. Any
contingently convertible instrument that is settled in cash before December 31,
2004 would not be reflected in the retroactive restatement. The adoption of EITF
04-8 did not have a material impact on the Company's results of operations,
financial position or cash flows.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an
amendment of ARB No. 43, Chapter 4" ("SFAS 151"). SFAS 151 amends Accounting
Research Bulletin ("ARB") No. 43, Chapter 4, to clarify that abnormal amounts of
idle facility expense, freight, handling costs and wasted materials (spoilage)
should be recognized as current-period charges. In addition, SFAS 151 requires
that allocation of fixed production overhead to inventory be based on the normal
capacity of the production facilities. SFAS 151 is effective for inventory costs
incurred during fiscal years beginning after June 15, 2005. The Company is
currently assessing the impact that SFAS 151 will have on its results of
operations, financial position or cash flows.
In December 2004, the FASB issued SFAS No. 123R (Revised 2004),
"Share-Based Payment" ("SFAS 123R"). SFAS 123R requires all share-based payments
to employees, including grants of employee stock options and shares issued under
employee stock purchase plans, to be recognized in the income statement based on
their grant-date fair values. SFAS 123R requires the Company to adopt the new
accounting provision beginning in its third quarter of fiscal year 2005. The
Company is currently evaluating the provisions of SFAS 123R.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
- ------- ----------------------------------------------------------
The Company is subject to market risk primarily from changes in the market
values of investments in marketable debt and government agency securities. These
instruments are classified as available for sale securities for financial
reporting purposes and have minimal interest risk due to their short-term
nature. Professional portfolio managers managed 100% of these available for sale
securities at December 31, 2004. Additional investments are made in overnight
33
deposits and money market funds. These instruments are classified as cash and
cash equivalents for financial reporting purposes and have minimal interest risk
due to their short-term nature.
The following table summarizes the available for sale securities that
subject the Company to market risk at December 31, 2004 and 2003:
2004 2003
---- ----
Debt securities issued by various state and
local municipalities and agencies $82,678 $185,450
Securities issued by United States government
and agencies 69,176 10,050
------ ------
Total $151,854 $195,500
======= =======
AVAILABLE FOR SALE SECURITIES:
The primary objectives for the Company's investment portfolio are liquidity
and safety of principal. Investments are made to achieve a high rate of return
while retaining safety of principal. This investment policy limits investments
to certain types of instruments issued by institutions and governmental agencies
with investment-grade credit ratings. A significant change in interest rates
could affect the market value of the Company's $151,854 of available for sale
securities that have a maturity greater than one year.
In addition to the short-term investments described above, the Company is
also subject to market risk in respect to its investments in Advancis, New
River, and Abrika.
The Company paid $10,000 to purchase 1,000 shares of the common stock of
Advancis at $10 per share in its initial public offering of 6,000 shares on
October 16, 2003. The transaction closed on October 22, 2003. The Company's
investment in Advancis is subject to fluctuations in the price of Advancis
common stock, which is publicly traded. The value of the Company's investment in
Advancis as of December 31, 2004 was $3,820.
The Company purchased 875 shares of common stock of New River on August 5,
2004 in its initial public offering for $8 per share for a total purchase price
of $7,000. This investment is subject to fluctuations in the price of New River
common stock, which also is publicly traded. As of December 31, 2004, the fair
value of the Company's investment in New River was $13,090, based on the market
value of the common stock of New River at that date.
In December 2004, the Company acquired a 5% partnership interest in Abrika,
a privately-held specialty generic pharmaceutical company located in Sunrise,
Florida for $8,361, including costs. The investment is monitored on a periodic
basis to evaluate whether any changes in value become other than temporary.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
- ------ --------------------------------------------------------
See "Index to Consolidated Financial Statements and Schedule."
ITEM 9. Changes In and Disagreements With Accountants on Accounting and
- ------ ---------------------------------------------------------------
Financial Disclosure.
--------------------
During 2004, there were no disagreements with Deloitte & Touche, LLP
("Deloitte & Touche") on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedures that if not
resolved to Deloitte & Touche's satisfaction, would have caused them to make
reference to the subject matter in connection with their report on the Company's
consolidated financial statements for 2004 and there were no reportable events,
as listed in Item 304(a)(1)(v) of Regulation S-K.
ITEM 9A. CONTROLS AND PROCEDURES.
- ------- -----------------------
Based on an evaluation under the supervision and with the participation of
the Company's management, the Company's principal executive officer and
principal financial officer have concluded that the Company's disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended) (the "Exchange Act") were effective
as of December 31, 2004 to ensure that information required to be disclosed by
the Company in reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms.
34
There were no changes in the Company's internal control over financial
reporting identified in management's evaluation during the fourth quarter of
fiscal 2004 that have materially affected or are reasonably likely to materially
affect the Company's internal controls over financial reporting.
ITEM 9B. OTHER INFORMATION.
- ------- -----------------
None
35
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
- ------- --------------------------------------------------
The Company hereby incorporates by reference the information set forth
under the caption "Election of Directors" from its definitive proxy statement to
be delivered to stockholders of the Company in connection with its 2005 Annual
Meeting of Stockholders scheduled to be held on May 24, 2005.
ITEM 11. EXECUTIVE COMPENSATION.
- ------- ----------------------
The Company hereby incorporates by reference the information set forth
under the caption "Executive Compensation" from its definitive proxy statement
to be delivered to stockholders of the Company in connection with its 2005
Annual Meeting of Stockholders scheduled to be held on May 24, 2005.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
- ------- RELATED STOCKHOLDER MATTERS.
------------------------------------------------------------------
The Company hereby incorporates by reference the information set forth
under the caption "Security Ownership" from its definitive proxy statement to be
delivered to stockholders of the Company in connection with its 2005 Annual
Meeting of Stockholders scheduled to be held on May 24, 2005.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- ------- ----------------------------------------------
The Company hereby incorporates by reference the information set forth
under the caption "Certain Relationships and Related Transactions" from its
definitive proxy statement to be delivered to stockholders of the Company in
connection with its 2005 Annual Meeting of Stockholders scheduled to be held on
May 24, 2005.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
- ------- --------------------------------------
The Company hereby incorporates by reference the information set forth
under the caption "Audit Committee Report - Independent Auditor Fees" from its
definitive proxy statement to be delivered to stockholders of the Company in
connection with its 2005 Annual Meeting of Stockholders scheduled to be held on
May 24, 2005.
36
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
- ------- ------------------------------------------
(a)(1)&(2) FINANCIAL STATEMENTS AND SCHEDULES.
See Index to Consolidated Financial Statements and Schedules after
Signature Page.
(a)(3) EXHIBITS.
3 Agreement and Plan of Merger, dated as of May 12, 2003 - previously
filed as an exhibit to the Registrant's Report on Form 8-K, dated
July 9, 2003, and incorporated herein by reference.
3.1 Certificate of Incorporation of the Company, dated May 9, 2003 -
previously filed as an exhibit to the Registrant's Report on Form
8-K, dated July 9, 2003, and incorporated herein by reference.
3.2 By-Laws of the Company, as last amended on June 18, 2003 -
previously filed as an exhibit to the Registrant's Report on Form
8-K, dated July 9, 2003, and incorporated herein by reference.
4.1 Rights Agreement, dated as of October 27, 2004, by and between the
Company and American Stock Transfer & Trust Company - previously
filed as an exhibit to the Registrant's Current Report on Form 8-K,
dated October 27, 2004, and incorporated herein by reference.
10.1 1989 Employee Stock Purchase Program of the Company - previously
filed as an exhibit to the Registrant's proxy statement, dated
August 16, 1990, and incorporated herein by reference.
10.2 1990 Stock Incentive Plan of the Company, as amended - previously
filed as an exhibit to the Registrant's Annual Report on Form 10-K
for the 1997 fiscal year and incorporated herein by reference.
10.3 Amended and Restated 1997 Directors' Stock Option Plan - previously
filed on July 1, 2003 as an exhibit to the Registrant's
Registration Statement on Form S-8 (File No. 333-106685) and
incorporated herein by reference.
10.4 2000 Performance Equity Plan - previously filed as an exhibit to
the Registrant's Annual Report on Form 10-K for the fiscal year
2000 and incorporated herein by reference.
10.5 2001 Performance Equity Plan (as amended on April 26, 2002, January
14, 2003, May 6, 2003 and June 18, 2003) - previously filed on June
30, 2003 as an exhibit to the Registrant's Registration Statement
on Form S-8 (File No. 333-106681) and incorporated herein by
reference.
10.6 Form of Retirement Plan of Par Pharmaceutical, Inc. - previously
filed as an exhibit to the Registrant's Registration Statement on
Form S-1 (File No. 2-86614) and incorporated herein by reference.
37
10.6.1 First Amendment to Par Pharmaceutical, Inc.'s Retirement Plan,
dated October 26, 1984 - previously filed as an exhibit to the
Registrant's Annual Report on Form 10-K for the 1990 fiscal year
and incorporated herein by reference.
10.7 Form of Retirement Savings Plan of Par Pharmaceutical, Inc -
previously filed as an exhibit to the Registrant's Registration
Statement on Form S-1 (File No. 2-86614) and incorporated herein by
reference.
10.7.1 Amendment to Par Pharmaceutical, Inc.'s Retirement Savings Plan,
dated July 26, 1984 - previously filed as an exhibit to the
Registrant's Registration Statement on Form S-1 (File No. 33-4533)
and incorporated herein by reference.
10.7.2 Amendment to Par Pharmaceutical, Inc.'s Retirement Savings Plan,
dated November 1, 1984 - previously filed as an exhibit to the
Registrant's Registration Statement on Form S-1 (File No. 33-4533)
and incorporated herein by reference.
10.7.3 Amendment to Par Pharmaceutical, Inc.'s Retirement Savings Plan,
dated September 30, 1985 - previously filed as an exhibit to the
Registrant's Registration Statement on Form S-1 (File No. 33-4533)
and incorporated herein by reference.
10.8 Par Pharmaceutical, Inc. Pension Plan, effective October 1, 1984 -
previously filed as an exhibit to the Registrant's Annual Report on
Form 10-K for the fiscal year 1991 and incorporated herein by
reference.
10.9 Terms of Separation from Employment, Consulting, and
Post-Employment Obligations, dated as of June 18, 2003, between the
Registrant and Kenneth I. Sawyer - previously filed as an exhibit
to the Registrant's Quarterly Report on Form 10-Q for the quarter
ended June 29, 2003 and incorporated herein by reference.
10.9.1 Employment Agreement, dated as of February 9, 2004, by and between
the Registrant and Scott L. Tarriff - previously filed as an
exhibit to the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 2003 and incorporated herein by
reference.
10.9.2 First Amendment to Employment Agreement, dated as of February 20,
2004, between the Registrant and Dennis J. O'Connor - previously
filed as an exhibit to the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 2003 and incorporated herein
by reference.
10.9.3 Employment Agreement, dated as of February 6, 2003, by and between
the Registrant and Dennis J. O'Connor - previously filed as an
exhibit to the Registrant's Annual Report on Form 10-K for the
fiscal year 2002 and incorporated herein by reference.
10.9.4 Employment Agreement, dated as of December 18, 2002, by and between
the Registrant and Dr. Arie Gutman - previously filed as an exhibit
to the Registrant's Quarterly Report on Form 10-Q for the quarter
ended March 30, 2003 and incorporated herein by reference.
10.9.5 Employment Agreement, dated as of November 24, 2003, by and between
the Registrant and Thomas Haughey - previously filed as an exhibit
to the Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 2003 and incorporated herein by reference.
10.10 Lease Agreement, dated as of January 1, 1993, between Par
Pharmaceutical, Inc. and Ramapo Corporate Park Associates -
previously filed as an exhibit to the Registrant's Annual Report on
Form 10-K for fiscal year 1996 and incorporated herein by
reference.
10.11 Lease Agreement, dated as of May 24, 2002, between Par
Pharmaceutical, Inc. and 300 Tice Realty Associates L.L.C. -
previously filed as an exhibit to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 2003 and
incorporated herein by reference.
38
10.11.1 Second Amendment to Lease Agreement, dated as of December 19, 2002,
between Par Pharmaceutical, Inc. and 300 Tice Realty Associates
L.L.C. - previously filed as an exhibit to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 2003 and
incorporated herein by reference.
10.11.2 Third Amendment to Lease Agreement, dated as of December 20, 2002,
between Par Pharmaceutical, Inc. and 300 Tice Realty Associates
L.L.C. - previously filed as an exhibit to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 2003 and
incorporated herein by reference.
10.12 Lease Extension and Modification Agreement, dated as of August 30,
1997, between Par Pharmaceutical, Inc. and Ramapo Corporate Park
Associates - previously filed as an exhibit to the Registrant's
Annual Report on Form 10-K for the fiscal year 1997 and
incorporated herein by reference.
10.14 Release and Amendment Agreement, dated as of May 1, 1998, among the
Company, Par Pharmaceutical, Inc., Sano Corporation and Elan
Corporation, plc - previously filed as an exhibit to the
Registrant's Current Report on Form 8-K, dated June 30, 1998, and
incorporated herein by reference.*
10.19 Distribution Agreement, dated March 25, 1998, between the Company
and Genpharm, Inc. - previously filed as an exhibit to the
Registrant's Current Report on Form 8-K, dated June 30, 1998, and
incorporated herein by reference.*
10.20 Services Agreement, dated June 26, 1998, between the Company and
Merck KGaA - previously filed as an exhibit to Registrant's Current
Report on Form 8-K, dated June 30, 1998, and incorporated herein by
reference.
10.21 Services Agreement, dated June 26, 1998, between the Company and
Genpharm, Inc - previously filed as an exhibit to the Registrant's
Current Report on Form 8-K, dated June 30, 1998, and incorporated
herein by reference.
10.22 Manufacturing and Supply Agreement, dated April 30, 1997, between
Par Pharmaceutical, Inc. and BASF Corporation - previously filed as
an exhibit to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended March 29, 1997 and incorporated herein by
reference.
10.23 Agreement of Lease, dated as of March 17, 1999, between Par
Pharmaceutical, Inc. and Halsey Drug Co., Inc. - previously filed
as an exhibit to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended April 3, 1999 and incorporated herein by
reference.
10.24 Manufacturing and Supply Agreement, dated as of March 17, 1999,
between Par Pharmaceutical, Inc. and Halsey Drug Co., Inc. -
previously filed as an exhibit to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended April 3, 1999 and incorporated
herein by reference.
10.25 Letter Agreement, dated as of January 21, 1999, between the
Registrant and Genpharm, Inc. - previously filed as an exhibit to
the Registrant's Quarterly Report on Form 10-Q for the quarter
ended April 3, 1999 and incorporated herein by reference.*
10.26 License Agreement, dated as of July 9, 2001, between Breath Easy
Limited and Par Pharmaceutical, Inc. - previously filed as an
exhibit to Amendment No. 1 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 29, 2001 and incorporated
herein by reference.
10.27 License and Supply Agreement, dated as of April 26, 2001, between
Elan Transdermal Technologies, Inc. and Par Pharmaceutical, Inc. -
previously filed as an exhibit to Amendment No. 1 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 29, 2001 and incorporated herein by reference. *
10.28 Development and Supply Agreement, dated as of April 17, 2001,
between Par Pharmaceutical, Inc., Dr. Reddy's Laboratories Limited
and Reddy-Cheminor, Inc. - previously filed as an exhibit to
Amendment No. 1 to the Registrant's Quarterly Report on Form 10-Q
39
for the quarter ended September 29, 2001 and incorporated herein by
reference.*
10.29 Supply and Marketing Agreement, dated as of November 19, 2001,
between Pentech Pharmaceuticals, Inc. and Par Pharmaceutical, Inc.
- previously filed as an exhibit to Amendment No. 1 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 29, 2001 and incorporated herein by reference.
10.30 Development, License and Supply Agreement, dated as of December 11,
2001, between Elan Corporation PLC. and Par Pharmaceutical, Inc. -
previously filed as an exhibit to Amendment No. 1 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 29, 2001 and incorporated herein by reference. *
10.31 Letter Agreement, dated as of December 28, 2001, among the
Registrant, ISP Hungary Holdings Limited, ISP Investments, Inc.,
ISP Chemicals, Inc. and ISP Technologies Inc. (with the attached
form of Purchase Agreement) - previously filed as an exhibit to the
Registrant's Current Report on Form 8-K, dated January 11, 2002,
and incorporated herein by reference.
10.32 Purchase Agreement among ISP Hungary Holdings Limited, ISP
Investments Inc., ISP Chemco Inc. and Par Pharmaceutical, Inc.,
dated April 17, 2002 - previously filed as an exhibit to the
Registrant's Current Report on Form 8-K, dated April 17, 2002, and
incorporated herein by reference.
10.35 Asset Purchase Agreement between Bristol-Myers Squibb Company and
Par Pharmaceutical, Inc. in respect of the sale of the Capoten(R),
Capozide(R), Questran(R) and Questran Light(R) Brands - previously
filed as an exhibit to the Registrant's Current Report on Form 8-K,
dated March 7, 2002, and incorporated herein by reference.
10.36 Asset Purchase Agreement between Bristol-Myers Squibb Company and
Par Pharmaceutical, Inc. in respect of the sale of the Sumycin(R)
Brand - previously filed as an exhibit to the Registrant's Current
Report on Form 8-K, dated March 7, 2002, and incorporated herein by
reference.
10.37 11 Product Development Agreement, effective April 2002, between the
Registrant and Genpharm, Inc. - previously filed as an exhibit to
the Registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2002 and incorporated herein by reference.*
10.38 SVC Pharma LP Limited Partnership Agreement, dated April 2002,
among Par SVC, LLC, SVC Pharma Inc., and UDF LP, a Delaware limited
partnership, and the other parties named therein - previously filed
as an exhibit to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended June 30, 2002 and incorporated herein by
reference.
10.39 Patent and Know How License Agreement, dated May 24, 2002, among
Nortec Development Associates, Inc. and Par Pharmaceutical, Inc -
previously filed as an exhibit to the Registrant's Quarterly Report
on Form 10-Q/A Amendment No. 1 for the quarter ended June 30, 2002
and incorporated herein by reference.*
10.40 Amendment No. 1 to the Patent and Know How License Agreement, dated
May 24, 2002, among Nortec Development Associates, Inc. and Par
Pharmaceutical, Inc. - previously filed as an exhibit to the
Registrant's Quarterly Report on Form 10-Q/A Amendment No. 1 for
the quarter ended June 30, 2002 and incorporated herein by
reference.*
10.41 Patent and Know How License Agreement dated, June 14, 2002, among
Nortec Development Associates, Inc. and Par Pharmaceutical, Inc. -
previously filed as an exhibit to the Registrant's Quarterly Report
on Form 10-Q/A Amendment No. 1 for the quarter ended June 30, 2002
and incorporated herein by reference.*
40
10.42 License and Distribution Agreement, dated July 3, 2002, between Par
Pharmaceutical, Inc. and Three Rivers Pharmaceuticals, LLC. -
previously filed as an exhibit to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended September 30, 2002 and
incorporated herein by reference. *
10.43 First Amendment to License and Distribution Agreement, dated
October 18, 2002, between Par Pharmaceutical, Inc. and Three Rivers
Pharmaceuticals, LLC. - previously filed as an exhibit to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2002 and incorporated herein by reference.
10.44 First Amendment to the Supply and Marketing Agreement, dated as of
November 12, 2002, between Pentech Pharmaceuticals, Inc. and Par
Pharmaceutical, Inc. - previously filed as an exhibit to the
Registrant's Annual Report on Form 10-K for fiscal year 2002 and
incorporated herein by reference. *
10.45 Termination Agreement, dated December 20, 2002, relating to
Development, License and Supply Agreement, dated as of December 11,
2001, between Elan Corporation PLC. and Par Pharmaceutical, Inc. -
previously filed as an exhibit to the Registrant's Annual Report on
Form 10-K for fiscal year 2002 and incorporated herein by reference
*
10.46 Asset Purchase Agreement, dated December 5, 2002, by and between
Israel Pharmaceutical Resources L.P. and Trima, Israel
Pharmaceutical Products, Maabarot LTD - previously filed as an
exhibit to the Registrant's Annual Report on Form 10-K for fiscal
year 2002 and incorporated herein by reference.
10.47 Supply and Distribution Agreement, dated as of December 20, 2002,
between Genpharm, Inc., Leiner Health Products, LLC and Par
Pharmaceutical, Inc. - previously filed as an exhibit to the
Registrant's Annual Report on Form 10-K for the fiscal year 2002
and incorporated herein by reference. *
10.48 Amended and Restated License and Supply Agreement, dated as of
April 16, 2003, among SB Pharmco Puerto Rico Inc., SmithKline
Beecham Corporation, Beecham Group p.l.c. and Par Pharmaceutical,
Inc. - previously filed as an exhibit to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 29, 2003 and
incorporated herein by reference.*
10.49 Amended and Restated Settlement Agreement, dated as of April 16,
2003, among SmithKline Beecham Corporation, Beecham Group p.l.c.
and Par Pharmaceutical, Inc. and Pentech Pharmaceuticals, Inc. -
previously filed as an exhibit to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended June 29, 2003 and incorporated
herein by reference.*
10.50 License Agreement, dated as of August 6, 2003, by and between Mead
Johnson & Company, Bristol-Myers Squibb Company and Par
Pharmaceutical, Inc. - previously filed as an exhibit to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 28, 2003 and incorporated herein by reference.*
10.51 Supply and Distribution Agreement, dated as of September 4, 2003,
by and between Advancis Pharmaceutical Corporation and Par
Pharmaceutical, Inc. - previously filed as an exhibit to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 28, 2003 and incorporated herein by reference.*
10.52 Purchase Agreement between the Company, Bear, Stearns & Co. Inc.,
CIBC World Markets Corp. and U.S. Bancorp Piper Jaffray Inc., dated
September 25, 2003 - previously filed on December 24, 2003 as an
exhibit to the Registrant's Registration Statement on Form S-3
(File No. 333-111567) and incorporated herein by reference.
10.53 Indenture between the Company and American Stock Transfer & Trust
Company, dated September 30, 2003 - previously filed on December
24, 2003 as an exhibit to the Registrant's Registration Statement
on Form S-3 (File No. 333-111567) and incorporated herein by
reference.
10.54 Registration Rights Agreement between the Company, Bear, Stearns &
Co. Inc., CIBC World Markets Corp. and U.S. Bancorp Piper Jaffray
Inc., dated September 30, 2003- previously filed on December 24,
2003 as an exhibit to the Registrant's Registration Statement on
Form S-3 (File No. 333-111567) and incorporated herein by reference
10.55 Product Development and Patent License Agreement, dated as of
October 22, 2003, by and between Nortec Development Associates,
Inc. and Par Pharmaceutical, Inc. - previously filed as an exhibit
to the Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 2003 and incorporated herein by reference.*
10.56 Stock Purchase and Shareholders Agreement, dated as of October 22,
2003, by and between Nortec Development Associates, Inc., Nortec
Holding LLC and Par Pharmaceutical, Inc. - previously filed as an
exhibit to the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 2003 and incorporated herein by
reference.*
41
10.57 Development and Commercialization Agreement, dated May 28, 2004, by
and between Par Pharmaceutical, Inc. and Advancis Pharmaceutical
Corporation - previously filed as an exhibit to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended October 3, 2004
and incorporated herein by reference.*
10.58 Stock Purchase Agreement, dated as of April 2, 2004, by and among
the Company, Kali Laboratories, Inc., VGS Holdings, Inc. and the
Shareholders of Kali Laboratories, Inc. - previously filed as an
exhibit to the Registrant's Current Report on Form 8-K, dated April
13, 2004, and incorporated herein by reference.
10.59 First Amendment, dated as of June 9, 2004 to Stock Purchase
Agreement, dated as of April 2, 2004, by and among the Company,
Kali Laboratories, Inc., VGS Holdings, Inc. and the Shareholders of
Kali Laboratories, Inc. - previously filed as an exhibit to the
Registrant's Current Report on Form 8-K, dated June 14, 2004, and
incorporated herein by reference.
10.60 Employment Agreement, dated as of May 28, 2004, by and between Par
Pharmaceutical, Inc. and Shankar Hariharan - previously filed as an
exhibit to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended July 4, 2004, and incorporated herein by reference.
10.61 Securities Purchase Agreement, dated as of November 18, 2004, by
and between the Company and Abrika, LLLP.
10.62 Asset Purchase Agreement, dated as of December 21, 2004, by and
between FSC Laboratories, Inc. and Par Pharmaceutical, Inc.*
10.63 First Amendment to Development and Commercialization Agreement,
dated December 14, 2004, by and between the Company and Advancis
Pharmaceutical Corporation.*
21 List of subsidiaries of the Registrant.
31.1 Certification of Principal Executive Officer.
31.2 Certification of Principal Financial Officer.
32.1 Certification by the Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification by the Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
- --------------------------------
* Certain portions have been omitted and have been filed with the SEC pursuant
to a request for confidential treatment thereof.
42
SIGNATURES
Pursuant to the requirements of Section 13 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.
Dated: March 16, 2005 PAR PHARMACEUTICAL COMPANIES, INC.
----------------------------------
(REGISTRANT)
/s/ Scott Tarriff
-----------------
Scott Tarriff
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant in
the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Mark Auerbach Executive Chairman of the Board of Directors March 16, 2005
- -----------------------
Mark Auerbach
/s/ Scott Tarriff President, Chief Executive Officer and Director March 16, 2005
- -----------------------
Scott Tarriff
/s/ Dennis J. O'Connor Vice President and Chief Financial Officer March 16, 2005
- ----------------------- (Principal Accounting and Financial Officer)
Dennis J. O'Connor
/s/ John D. Abernathy Director March 16, 2005
- -----------------------
John D. Abernathy
/s/ Arie Gutman Director March 16, 2005
- -----------------------
Arie Gutman
/s/ Peter S. Knight Director March 16, 2005
- -----------------------
Peter S. Knight
/s/ Ronald M. Nordmann Director March 16, 2005
- -----------------------
Ronald M. Nordmann
/s/ L. William Seidman Director March 16, 2005
- -----------------------
L. William Seidman
/s/ Joseph E. Smith Director March 16, 2005
- -----------------------
Joseph E. Smith
/s/ Peter W. Williams Director March 16, 2005
- -----------------------
Peter W. Williams
43
PAR PHARMACEUTICAL COMPANIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
FILED WITH THE ANNUAL REPORT OF THE
COMPANY ON FORM 10-K
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
PAGE
----
INCLUDED IN PART II:
- -------------------
Report of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheets at December 31, 2004 and 2003 F-3
Consolidated Statements of Operations for the years
ended December 31, 2004, 2003 and 2002 F-4
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 2004, 2003 and 2002 F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 2004, 2003 and 2002 F-6
Notes to Consolidated Financial Statements F-7 through F-28
INCLUDED IN PART IV:
- -------------------
SCHEDULE:
II Valuation and qualifying accounts F-29
-------------------------------------------------
Other financial statement schedules are omitted because the conditions requiring
their filing do not exist or the information required thereby is included in the
financial statements filed, including the notes thereto.
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Par Pharmaceutical Companies, Inc.:
We have audited the accompanying consolidated balance sheets of Par
Pharmaceutical Companies, Inc. and subsidiaries (the "Company") as of December
31, 2004 and 2003, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 2004. Our audits also included the financial statement
schedule listed in the index on page F-1. These financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Par Pharmaceutical Companies, Inc.
and subsidiaries as of December 31, 2004 and 2003, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2004, in conformity with accounting principles generally accepted
in the United States of America. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidation financial
statements taken as a whole, present fairly, in all material respects, the
information set forth therein.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of the Company's
internal control over financial reporting as of December 31, 2004, based on the
criteria established in Internal Control--Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report
dated March 15, 2005 expressed an unqualified opinion on management's assessment
of the effectiveness of the Company's internal control over financial reporting
and an unqualified opinion on the effectiveness of the Company's internal
control over financial reporting.
/s/ DELOITTE & TOUCHE LLP
Parsippany, New Jersey
March 15, 2005
F-2
PAR PHARMACEUTICAL COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2004 AND 2003
(In Thousands, Except Share Data)
ASSETS 2004 2003
------ ---- ----
Current assets:
Cash and cash equivalents $36,534 $162,549
Available for sale securities 151,854 195,500
Accounts receivable, net of allowances of
$42,316 and $40,357 149,107 157,707
Inventories, net 86,835 66,713
Prepaid expenses and other current assets 17,072 10,033
Deferred income tax assets 52,580 34,473
------ ------
Total current assets 493,982 626,975
Property, plant and equipment, at cost, less
accumulated depreciation and amortization 66,642 46,813
Investments 25,271 7,500
Intangible assets, net 51,491 35,564
Goodwill 77,919 24,662
Deferred charges and other assets 11,234 6,899
Non-current deferred income tax assets, net 42,465 14,399
------ ------
Total assets $769,004 $762,812
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Short-term and current portion of long-term debt $4,348 $4,755
Accounts payable 45,832 20,157
Payables due to distribution agreement partners 40,149 88,625
Accrued salaries and employee benefits 8,745 7,363
Accrued expenses and other current liabilities 16,554 20,021
Income taxes payable 39,116 26,252
------ ------
Total current liabilities 154,744 167,173
Long-term debt, less current portion 200,275 200,211
Other long-term liabilities 395 347
Commitments and contingencies
Stockholders' equity:
Preferred Stock, par value $.0001 per share; authorized
6,000,000 shares; none issued and outstanding - -
Common Stock, par value $.01 per share; authorized 90,000,000
shares; issued 34,759,265 and 34,318,163 shares 348 343
Additional paid-in capital 192,231 171,931
Retained earnings 253,726 224,480
Accumulated other comprehensive loss (689) (1,673)
Treasury stock, at cost, 843,700 and no shares (32,026) -
------ -----
Total stockholders' equity 413,590 395,081
------- -------
Total liabilities and stockholders' equity $769,004 $762,812
======= =======
The accompanying notes are an integral part of these consolidated financial statements.
F-3
PAR PHARMACEUTICAL COMPANIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(In Thousands, Except Per Share Amounts)
2004 2003 2002
---- ---- ----
Revenues:
Net product sales $687,570 $646,023 $380,848
Other product related revenues 2,446 15,665 755
----- ------ ---
Total revenues 690,016 661,688 381,603
Cost of goods sold 443,958 378,513 198,313
------- ------- -------
Gross margin 246,058 283,175 183,290
Operating expenses (income):
Research and development 50,517 24,581 17,910
Acquired in-process research and development 84,000 - -
Selling, general and administrative 69,735 57,575 40,215
Settlements, net (2,846) - (9,051)
Gain on sale of facility (2,812) - -
Acquisition termination charges - - 4,262
-------- ------ ------
Total operating expenses 198,594 82,156 53,336
------- ------ ------
Operating income 47,464 201,019 129,954
Other expense, net (313) (95) (305)
Interest (expense) income, net (1,048) (281) 604
----- --- ---
Income before provision for income taxes 46,103 200,643 130,253
Provision for income taxes 16,857 78,110 50,799
------ ------ ------
NET INCOME $29,246 $122,533 $79,454
====== ======= ======
NET INCOME PER SHARE OF COMMON STOCK:
BASIC $0.86 $3.66 $2.46
===== ==== ====
DILUTED $0.84 $3.54 $2.40
===== ==== ====
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING:
BASIC 34,142 33,483 32,337
====== ====== ======
DILUTED 34,873 34,638 33,051
====== ====== ======
The accompanying notes are an integral part of these consolidated financial statements.
F-4
PAR PHARMACEUTICAL COMPANIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(In Thousands)
ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON STOCK PAID-IN RETAINED COMPREHENSIVE TREASURY STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS INCOME/(LOSS) STOCK EQUITY
------ ------ ------- -------- ------------- ----- ------
Balance, December 31, 2001 32,035 $320 $115,610 $22,493 $ - $ - $138,423
Comprehensive income:
Net income - - - 79,454 - - 79,454
Exercise of stock options 761 8 2,471 - - - 2,479
Tax benefit from exercise of stock
options - - 220 - - - 220
Employee stock purchase 8 - 177 - - - 177
Compensatory arrangements - - 37 - - - 37
------ ---- -------- ------- ------- ------- --------
Balance, December 31, 2002 32,804 328 118,515 101,947 - - 220,790
Comprehensive income:
Net income - - - 122,533 - - 122,533
Defined benefit pension plan - - - - (118) - (118)
Unrealized loss on marketable
securities, net of tax - - - - (1,555) - (1,555)
Exercise of stock options 1,506 15 33,871 - - - 33,886
Sold warrants - - 32,563 - - - 32,563
Purchased call options - - (49,368) - - - (49,368)
Tax benefit from purchased call options - - 19,253 - - - 19,253
Tax benefit from exercise of stock options - - 12,616 - - - 12,616
Employee stock purchase 8 - 308 - - - 308
Compensatory arrangements - - 4,173 - - - 4,173
------ ---- -------- ------- ------- ------- --------
Balance, December 31, 2003 34,318 343 171,931 224,480 (1,673) - 395,081
Comprehensive income:
Net income - - - 29,246 - - 29,246
Defined benefit pension plan - - - - (100) - (100)
Unrealized gain on marketable
securities, net of tax - - - - 1,084 - 1,084
Exercise of stock options 384 4 8,933 - - - 8,937
Warrants - Kali acquisition - - 2,530 - - - 2,530
Tax benefit from exercise of stock options - - 7,136 - - - 7,136
Employee stock purchase program 12 - 422 - - - 422
Purchase of treasury stock - - - - - (32,026) (32,026)
Compensatory arrangements - - 1,040 - - - 1,040
Restricted stock 45 1 239 - - - 240
------ ---- -------- ------- ------- ------- --------
Balance, December 31, 2004 34,759 $348 $192,231 $253,726 $(689) $(32,026) $413,590
====== === ======= ======= === ====== =======
The accompanying notes are an integral part of these consolidated financial statements.
F-5
PAR PHARMACEUTICAL COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(In Thousands)
2004 2003 2002
---- ---- ----
Cash flows from operating activities:
Net income $29,246 $122,533 $79,454
Adjustments to reconcile net income to
net cash provided by operating activities:
Deferred income taxes (45,950) 667 1,045
Acquired in-process research and development 84,000 - -
Depreciation and amortization 13,546 10,131 5,775
Inventory reserves (2,279) (748) 1,073
Allowances against accounts receivable 1,959 4,100 (10,911)
Settlements - - (9,051)
Stock option activity 1,278 4,173 37
Gain on sale of property (2,812) - -
Other (213) 628 991
Changes in assets and liabilities:
Decrease (increase) in accounts receivable 6,828 (106,497) (6,390)
Increase in inventories (17,715) (14,374) (21,138)
Increase in prepaid expenses and other assets (4,765) (6,141) (7,610)
Increase (decrease) in accounts payable 24,780 5,520 (3,469)
(Decrease) increase in payables due to
distribution agreement partners (48,475) 70,462 (14,132)
(Decrease) Increase in accrued expenses and other liabilities (6,495) 12,175 8,325
Increase in income taxes payable 20,001 12,794 11,528
------ ------ ------
Net cash provided by operating activities 52,934 115,423 35,527
------ ------- ------
Cash flows from investing activities:
Capital expenditures (25,818) (24,035) (6,921)
Purchases of intangibles (15,700) (1,900) (3,024)
Purchases of available for sale securities (385,484) (195,530) -
Proceeds from available for sale securities 428,493 - -
Purchase of investments (15,362) (10,000) -
Issuance of promissory note receivable (3,000) - -
Acquisition of subsidiaries, net of cash acquired (144,104) - (32,618)
Proceeds from sale of fixed assets 5,036 - 751
----- ------- ---
Net cash used in investing activities (155,939) (231,465) (41,812)
------- ------- ------
Cash flows from financing activities:
Proceeds from issuances of Common Stock 9,359 34,194 2,656
Purchases of treasury stock (32,026) - -
Sales of warrants - 32,563 -
Purchase of call options - (49,368) -
Debt issuance costs - (5,863) -
Net (payments) proceeds from short-term notes (491) 4,633 (715)
Issuance of long-term debt 399 200,301 -
Restricted proceeds from industrial revenue bond - - 2,000
Principal payments under long-term debt and other borrowings (251) (2,990) (277)
--- ----- ---
Net cash provided by (used in) financing activities (23,010) 213,470 3,664
------ ------- -----
Net increase (decrease) in cash and cash equivalents (126,015) 97,428 (2,621)
Cash and cash equivalents at beginning of year 162,549 65,121 67,742
------- ------ ------
Cash and cash equivalents at end of year $36,534 $162,549 $65,121
====== ======= ======
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Taxes $42,811 $64,790 $38,211
======= ====== ======
Interest $5,917 $168 $148
====== === ===
Non-cash transactions:
Issuance of warrants $2,530 $- $-
===== = =
Tax benefit from exercise of stock options $7,136 $12,616 $220
===== ====== ===
Tax benefit from purchased call options $- $19,253 $-
= ====== =
Increase (Decrease) in fair value of available for sale
securities $1,758 $(2,530) $-
===== ===== =
The accompanying notes are an integral part of these consolidated financial statements.
F-6
PAR PHARMACEUTICAL COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
(Amounts in Thousands, Except Per Share Amounts)
Par Pharmaceutical Companies, Inc. (the "Company" or "PRX") operates
primarily through its wholly-owned subsidiary, Par Pharmaceutical, Inc. ("Par"),
in one business segment, the manufacture and distribution of generic
pharmaceuticals principally in the United States. The Company wholly owns Kali
Laboratories, Inc. ("Kali"), a generic pharmaceutical research and development
company located in Somerset, New Jersey, which was acquired on June 10, 2004.
Marketed products are principally in the solid oral dosage form (tablet, caplet
and two-piece hard-shell capsule). The Company also distributes one product in
the semi-solid form of a cream and one oral suspension product.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of PRX and its
wholly owned subsidiaries. All intercompany transactions are eliminated in
consolidation. References herein to the "Company" refer to PRX and its
subsidiaries.
On June 10, 2004, the Company purchased all of the capital stock of Kali.
The acquisition was accounted for as a purchase under Statement of Financial
Accounting Standards ("SFAS") No. 141, "Business Combinations," ("SFAS 141") and
the accompanying consolidated financial statements include the operating results
of Kali from the date of acquisition.
On April 17, 2002, the Company purchased FineTech Laboratories, Ltd
("Finetech") from International Specialty Products, Inc. ("ISP"). The
acquisition was accounted for as a purchase under SFAS 141 and the accompanying
consolidated financial statements include the operating results of FineTech from
the date of acquisition.
USE OF ESTIMATES:
The consolidated financial statements are prepared in conformity with
accounting principles generally accepted in the United States. The consolidated
financial statements include certain amounts that are based on management's best
estimates and judgments. Estimates are used in determining such items as
provisions for sales returns, rebates, chargebacks, price adjustments and other
sales allowances, depreciable/amortizable lives, pension benefits, and amounts
recorded for contingencies and other reserves. Because of the uncertainty
inherent in such estimates, actual results may differ from these estimates. The
Company is not aware of any reasonably likely events or circumstances that would
result in different amounts being reported that would have a material impact on
its results of operations or financial condition.
INVENTORIES:
Inventories are stated 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 in order to properly reflect inventory
value. Changes in these provisions are charged to cost of goods sold. The
Company records distribution costs related to shipping product to the Company's
customers, primarily through the use of common carriers or external distribution
services, in selling, general and administrative expenses. Distribution costs
for fiscal years 2004, 2003 and 2002 were approximately $2,700, $2,700 and
$2,800, respectively.
DEPRECIATION AND AMORTIZATION:
Property, plant and equipment are depreciated on a straight-line basis over
their estimated useful lives, which range from three to 40 years. Leasehold
improvements are amortized over the shorter of the estimated useful life or the
term of the lease.
IMPAIRMENT OF LONG-LIVED ASSETS:
The Company evaluates long-lived assets, including intangible assets with
definitive 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.
RESEARCH AND DEVELOPMENT AGREEMENTS:
Costs incurred by the Company's internal product development program
F-7
to develop new products and obtain pre-marketing regulatory approval for such
products are expensed as incurred and charged to research and development. The
Company capitalizes or expenses amounts related to the development of new
products and technologies through agreements with third parties based on the
Company's determination of its ability to recover in a reasonable period of time
the estimated future cash flows anticipated to be generated pursuant to each
agreement. Accordingly, amounts related to the Company's funding of the research
and development efforts of others or to the purchase of contractual rights to
products that have not been approved by the United States Food and Drug
Administration (the "FDA") and where the Company has no alternative future use
for the product, are expensed and included in research and development costs.
Amounts for contractual rights acquired by the Company to a process, product or
other legal right having multiple or alternative future uses that support its
realizability, as well as to an approved product, are capitalized and included
in intangible assets on the consolidated balance sheets. Capitalized costs are
amortized over the estimated useful lives that the related cash flows are
expected to be generated and charged to cost of goods sold. Market, regulatory
and legal factors, among other things, may affect the realizability of the
projected cash flows that an agreement was initially expected to generate. The
Company regularly monitors these factors and subjects all capitalized costs to
periodic impairment testing.
COSTS FOR PATENT LITIGATION AND LEGAL PROCEEDINGS:
Costs for patent litigation or other legal proceedings are expensed as
incurred and included in selling, general and administrative expenses.
GOODWILL AND INTANGIBLE ASSETS:
The Company determines the estimated fair values of goodwill and certain
intangible assets with definitive lives based on valuations performed by the
Company at the time of their acquisition in accordance in with SFAS No. 142,
"Accounting for Goodwill and Other Intangible Assets" ("SFAS 142"). In addition,
the fair value of certain amounts paid to third parties related to the
development of new products and technologies, as described above, are
capitalized and included in intangible assets on the accompanying consolidated
balance sheets. Goodwill is not amortized, but tested at least annually for
impairment using a fair value approach. Intangible assets with definitive lives,
also tested periodically for impairent, are capitalized and amortized over their
estimated useful lives.
INCOME TAXES:
Deferred income tax assets and liabilities are computed annually based on
enacted tax laws and rates for temporary differences between the financial
accounting and income tax bases of assets and liabilities. 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.
PENSION BENEFITS:
The determination of the Company's obligations and expenses for pension
benefits is dependent on its application of certain assumptions used by
actuaries in calculating such amounts. Those assumptions are described in
Footnote 15 -"Commitments, Contingencies and Other Matters-Retirement Plans" to
the consolidated financial statements and include, among others, the discount
rate, expected long-term rate of return on plan assets and rates of increase in
compensation. In accordance with accounting principles generally accepted in the
United States, actual results that differ from the Company's assumptions are
accumulated and amortized over future periods and, therefore, generally affect
the recognized expense and recorded obligation in future periods. While the
Company believes that its assumptions are appropriate, significant differences
in actual experience or significant changes in assumptions could materially
affect pension obligations and future expense.
REVENUE RECOGNITION AND ACCOUNTS RECEIVABLE AND ALLOWANCES:
The Company recognizes revenues for product sales when title and risk of
loss pass to its customers, and simultaneously records estimates for sales
allowances, the most significant of which are described in Note 4 - Accounts
Receivable and include rebates, chargebacks, returns, price adjustments and
other sales allowances, as reductions to gross revenues, with corresponding
adjustments to the accounts receivable allowances. The Company has the
historical experience and access to other information, including rebate
agreements with each customer, resales by its customers to end-users having
contracts with the Company, the total demand for each drug that the Company
manufactures or distributes, its market share, recent or pending new drug
introductions, and inventory practices of the Company's customers, it believes
is necessary to reasonably estimate the amount of such sales allowances. Some of
the assumptions used for certain of the Company's estimates are based on
information received from third parties, such as customer inventories at a
particular point in time and market data, or other market factors beyond the
Company's control. The Company regularly reviews all information related to
these estimates and adjusts its reserves accordingly if and when actual
experience differs from previous estimates.
EARNINGS PER COMMON SHARE DATA:
Earnings per common share were computed by dividing earnings by the
weighted average number of common shares outstanding. Earnings per common share
assuming dilution were computed assuming that all potentially dilutive
securities, including "in-the-money" stock options, were converted into common
shares.
F-8
FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying amounts of the Company's accounts receivable, accounts payable
and accrued liabilities approximate fair market values based upon the relatively
short-term nature of these financial instruments. The carrying amount of the
Company's long-term debt, including the current portion, approximates fair
market value based upon current borrowing rates available to the Company.
CONCENTRATION OF CREDIT RISK:
Financial instruments that potentially subject the Company to credit risk
consist of trade receivables. The Company markets its products primarily to
wholesalers, retail drug store chains, managed health care providers and drug
distributors. The Company believes the risk associated with this concentration
is somewhat limited due to the number of wholesalers, drug store chains, managed
health care providers and drug distributors, and their geographic dispersion and
its performance of certain credit evaluation procedures (see "Note 4 - Accounts
Receivable-Major Customers").
CASH EQUIVALENTS:
The Company considers all highly liquid money market instruments with an
original maturity of three months or less when purchased to be cash equivalents.
At December 31, 2004, cash equivalents were deposited in financial institutions
and consisted of immediately available fund balances.
MARKETABLE 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 SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" ("SFAS 115"). 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 marketable 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 stockholders' equity.
STOCK-BASED COMPENSATION:
The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of Accounting Principles Board ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB Opinion 25") and complies
with the disclosure provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). Under APB Opinion 25, compensation expense is based
on any difference, as of the date of a stock option grant, between the fair
value of the Company's Common Stock and the option's per share exercise price.
In December 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure - an Amendment of FASB Statement No. 123" ("SFAS 148") to provide
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, this
Standard amends the disclosure requirements of SFAS 123 to require prominent
disclosure in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effects of the method
used on reported results.
The following table illustrates the effects on net income and net income
per share of Common Stock if the Company had applied the fair value recognition
provisions of SFAS 123 to its stock-based employee compensation:
FOR THE YEARS ENDED DECEMBER 31,
2004 2003 2002
Net income as reported $29,246 $122,533 $79,454
Add: Stock-based employee compensation
expense included in reported net income,
net of related tax effects 146 1,263 -
Deduct: Stock-based employee compensation
expense determined under the fair value based
method, net of related tax effects (16,625) (10,372) (7,702)
------ ------ -----
Pro forma net income $12,767 $113,424 $71,752
====== ======= ======
F-9
Net income per share of common stock:
As reported -Basic $0.86 $3.66 $2.46
==== ==== ====
As reported -Diluted $0.84 $3.54 $2.40
==== ==== ====
Pro forma -Basic $0.37 $3.39 $2.22
==== ==== ====
Pro forma -Diluted $0.37 $3.32 $2.22
==== ==== ====
In February 2005, the Company accelerated the vesting on 820 outstanding,
non-vested stock options, which represented all awards with per share exercise
prices exceeding $60. The fair value of these options using the Black-Scholes
stock option pricing model and the Company's stock option assumptions at the
date of their grant was approximately $27,869. This action will cause an
increase in pro forma compensation expense in the first quarter of 2005. The
Company considered a number of factors in making this decision, including the
issuance and anticipated implementation of the revision to SFAS 123 which will
be effective for the company in the third quarter of 2005. Over the last 15
years the closing price of the stock has traded above $60 for only 118 days in
2004 and 2003. The Company believes the $27,869 of value assigned to these
options is inappropriate considering the historical price chart and the current
trading price of the stock which is substantially below the exercise price.
SEGMENTS OF AN ENTERPRISE:
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" establishes standards for reporting of financial information about
operating segments in annual financial statements. The Company's management
considers its business to be a single segment entity, as its revenues are
primarily attributable to its generic drug product line, which does not focus on
a specific therapeutic category.
RECLASSIFICATIONS:
Certain items in the consolidated financial statements and in the Notes to
Consolidated Financial Statements for the prior periods have been reclassified
to conform to the current period's consolidated financial statement
presentation.
NEW ACCOUNTING PRONOUNCEMENTS:
In November 2003, the Emerging Issues Task Force ("EITF") of the FASB
reached a consensus on EITF Issue No. 03-1, "The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments" ("EITF 03-1"). EITF 03-1
provides guidance on determining other-than-temporary impairments and its
application to marketable equity securities and debt securities accounted for
under SFAS No. 115. In September 2004, the FASB issued FASB Staff Position
("FSP") EITF Issue 03-1-1, "Effective Date of Paragraphs 10-20 of EITF Issue No.
03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments," which delayed the effective date for the measurement and
recognition guidance contained in the EITF 03-1 pending finalization of the
draft FSP EITF Issue 03-1-a, "Implementation Guidance for the Application of
Paragraph 16 of EITF 03-1." The disclosure requirements of EITF 03-1 remain in
effect. The Company adopted the disclosure requirement of EITF 03-1 as of
September 30, 2004. The adoption of the recognition and measurement provisions
of EITF 03-1 are not expected to have a material impact on the Company's results
of operations, financial position or cash flows.
In December 2003, the FASB issued a revision to SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits," ("SFAS 132") to
improve financial statement disclosure for defined benefit plans. This statement
requires additional disclosures about the assets (including plan assets by
category), obligations and cash flows of defined pension plans and other defined
benefit postretirement plans. It also requires reporting of various elements of
pension and other postretirement benefit costs on a quarterly basis. Generally,
the disclosure requirements are effective for interim periods beginning after
December 15, 2003; however, information about foreign plans is effective for
fiscal years ending after June 15, 2004. The Company adopted the revised SFAS
132 during the quarter ended March 31, 2004.
In December 2003, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 104, "Revenue Recognition," ("SAB 104") which
superseded SAB No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"). SAB 104's primary purpose is to rescind accounting guidance contained in
SAB No. 101 related to multiple element revenue arrangements, superseded as a
result of the issuance of EITF 00-21, "Revenue Arrangements with Multiple
Deliverables" ("EITF 00-21"). The issuance of SAB 104 reflects the concepts
contained in EITF 00-21. The other revenue recognition concepts contained in SAB
101 remain largely unchanged. The issuance of SAB 104 did not have a material
impact on the Company's results of operations, financial position or cash flows.
In January 2003, the FASB issued Financial Interpretation Number ("FIN")
No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"), an
interpretation of Accounting Research Bulletin No. 51, "Consolidated Financial
Statements". FIN 46 establishes accounting guidance for consolidation of
variable interest entities that function to support the activities of the
primary beneficiary. In December 2003, the FASB revised FIN 46 and issued FIN 46
(revised December 2003) ("FIN 46R"). In addition to conforming to previously
issued FASB Staff positions, FIN 46R deferred the implementation date for
certain variable interest entities. This revised interpretation is effective for
all entities no later than the end of the first reporting period that ends after
March 15, 2004. The Company does not have any investments in or contractual
relationship or other business relationship with a variable interest entity and,
F-10
therefore, the adoption of this interpretation will not have any impact on its
financial position, cash flows or results of operations.
In May 2004, the FASB issued FSP 106-2, "Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003" ("FSP 106-2") This guidance supersedes FSP 106-1,
"Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003" issued in January 2004 and
clarifies the accounting and disclosure requirements for employers with
postretirement benefit plans that have been or will be affected by the passage
of the Medicare Prescription Drug Improvement and Modernization Act of 2003 (the
"Medicare Act"). The Medicare Act introduces two new features to Medicare that
an employer needs to consider in measuring its obligation and net periodic
postretirement benefit costs. The effective date for the new requirements is the
first interim or annual period beginning after June 15, 2004. The adoption of
FSP 106-2 did not have a material impact on the Company's results of operations,
financial position or cash flows.
In September 2004, the EITF reached a consensus on EITF Issue No. 04-8 "The
Effect of Contingently Convertible Instruments on Diluted Earnings per Share"
("EITF 04-8"). EITF 04-8 requires that contingently convertible debt securities
with a market price trigger be included in diluted earnings per share,
regardless of whether the market price trigger has been met. EITF 04-8 is
effective for all periods ending after December 15, 2004 and requires
retroactive restatement of previously reported earnings per share. Any
contingently convertible instrument that is settled in cash before December 31,
2004 would not be reflected in the retroactive restatement. The adoption of EITF
04-8 did not have a material impact on the Company's results of operations,
financial position or cash flows.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an
amendment of ARB No. 43, Chapter 4" ("SFAS 151"). SFAS 151 amends Accounting
Research Bulletin ("ARB") No. 43, Chapter 4, to clarify that abnormal amounts of
idle facility expense, freight, handling costs and wasted materials (spoilage)
should be recognized as current-period charges. In addition, SFAS 151 requires
that allocation of fixed production overhead to inventory be based on the normal
capacity of the production facilities. SFAS 151 is effective for inventory costs
incurred during fiscal years beginning after June 15, 2005. The Company is
currently assessing the impact that SFAS 151 will have on its results of
operations, financial position or cash flows.
In December 2004, the FASB issued SFAS No. 123R (Revised 2004),
"Share-Based Payment" ("SFAS 123R"). SFAS 123R requires all share-based payments
to employees, including grants of employee stock options and shares issued under
employee stock purchase plans, to be recognized in the income statement based on
their grant-date fair values. SFAS 123R requires the Company to adopt the new
accounting provision beginning in its third quarter of fiscal year 2005. The
Company is currently evaluating the provisions of SFAS 123R.
NOTE 2 - AVAILABLE FOR SALE SECURITIES:
At December 31, 2004, all of the Company's investments in marketable
securities were classified as available for sale, and, as a result, were
reported at fair value. The following is a summary of the Company's available
for sale securities, classified as short-term, at December 31, 2004:
UNREALIZED
---------- FAIR
COST GAIN LOSS VALUE
---- ---- ---- -----
Debt securities issued by various state
and local municipalities and agencies $82,894 $- $(216) $82,678
Securities issued by United States
government and agencies 69,642 - (466) 69,176
------ -- --- ------
Total $152,536 - $(682) $151,854
======= == === =======
Of the $682 of unrealized loss as of December 31, 2004, $36 has been in an
unrealized loss position for greater than a year. All of the securities are
available for immediate sale and have been classified as short-term. In fiscal
year 2004, the Company sold approximately $428,500 of these securities. The
following table summarizes the contractual maturities of debt securities at
December 31, 2004:
FAIR
COST VALUE
---- -----
Less than one year $93,907 $93,250
Due in 1-2 years - -
Due in 2-5 years 3,592 3,594
Due after 5 years 55,037 55,010
------ ------
Total $152,536 $151,854
======= =======
F-11
NOTE 3 - INVESTMENTS:
The Company holds investments in New River Pharmaceuticals Inc. ("New
River"), Advancis Pharmaceutical Corporation ("Advancis") and Abrika
Pharmaceuticals, LLLP ("Abrika"). The Company assesses whether temporary or
other-than-temporary gains or losses on its investments have occurred due to
increases or declines in fair value or other market conditions. Because the
Company has determined that all of its investments are available-for-sale,
unrealized gains and losses are reported as a component of accumulated other
comprehensive income (loss) in stockholders' equity.
In December 2004, the Company acquired a 5% partnership interest in Abrika,
a privately-held specialty generic pharmaceutical company located in Sunrise,
Florida for $8,361, including costs. Additionally, the Company has entered into
an agreement with Abrika to collaborate on the marketing of five products to be
developed by Abrika. The first product is expected to be a transdermal fentanyl
patch for the management of chronic pain. This patch is a generic version of
Duragesic(R), marketed by Janssen Pharmaceutica Products, L.P., a division of
Johnson & Johnson that according to the Company's marketing estimates achieved
U.S. sales of more than $1.0 billion in 2004. The Company is required to pay up
to $9,000 to Abrika at the time of the commercial launch of this product subject
to the attainment of certain profit targets. The Company also holds a
convertible promissory note for principle of $3,000 plus interest accruing at
8.0% annually for money loaned to Abrika. Because Abrika is privately-held, the
Company monitors the investment on a periodic basis to evaluate whether any
changes in value becomes other-than-temporary.
The Company purchased 875 shares of common stock of New River on August 5,
2004 in its initial public offering for $8 per share. The Company's investment
of $7,000 represented an ownership position of 4.9% of the outstanding common
stock of New River. New River, based in Radford, Virginia, is a specialty
pharmaceutical company focused on developing novel pharmaceuticals that are
safer and improved versions of widely-prescribed drugs, including amphetamines
and opioids. As of December 31, 2004, the fair value of the Company's investment
in New River was $13,090, based on the market value of the common stock of New
River at that date. To date, the Company has recorded unrealized gains on this
investment of $6,090, with a corresponding credit of $3,715 to accumulated other
comprehensive gains and $2,375 to deferred income taxes.
The Company paid $10,000 to purchase 1,000 shares of the common stock of
Advancis, a pharmaceutical company based in Germantown, Maryland, at $10 per
share in its initial public offering of 6,000 shares on October 16, 2003. The
transaction closed on October 22, 2003. The Company's investment represented an
ownership position of 4.4% of the outstanding common stock of Advancis. As of
December 31, 2004, the fair value of the Company's investment in Advancis was
$3,820, based on the market value of the common stock of Advancis at that date.
To date, the Company has recorded net unrealized losses on this investment of
$6,180, with corresponding charges of $3,770 to accumulated other comprehensive
losses and $2,410 to deferred income taxes.
NOTE 4 - ACCOUNTS RECEIVABLE:
DECEMBER 31, DECEMBER 31,
2004 2003
---- ----
Gross trade accounts receivable $294,030 $296,279
Allowances for rebates and chargebacks 102,607 99,391
------- ------
Trade accounts receivable, net of customer rebates
and chargebacks 191,423 196,888
Other accounts receivable - 1,176
------- -------
191,423 198,064
Allowances:
Doubtful accounts 1,847 1,756
Returns 23,392 13,256
Price adjustments and allowances 17,077 25,345
------ ------
42,316 40,357
------ ------
Accounts receivable,
net of allowances $149,107 $157,707
======== =======
At the time the Company recognizes revenues for product sales, it
simultaneously records estimates for sales allowances, the most significant of
which are described below and include rebates, chargebacks, returns, price
adjustments and other sales allowances, as reductions to gross revenues, with
corresponding adjustments to the accounts receivable allowances.
Customer rebates are price reductions that generally are provided to
customers as an incentive for them to continue to carry the Company's products
or substitute the Company's products for competing products to be sold through
the customers' distribution channels. This incentive is generally based on a
customer's volume of purchases made during an applicable monthly, quarterly or
annual period.
F-12
Chargebacks are given to the wholesale customer for product it resells to
specific healthcare providers on the basis of prices negotiated between the
Company and the providers. Chargeback credits are issued to wholesalers for the
difference between the Company's invoice price and the contract price through
which the wholesaler resells the product.
The Company accepts returns of product according to the following: (i) the
returns must be approved by authorized personnel in writing or by telephone with
the lot number and expiration date accompanying any request, (ii) the Company
generally will accept returns of products from any customer and will give such
customer a credit for such return provided such product is returned within six
months prior to, and until 12 months following, such product's expiration date,
(iii) any product that has more than six months until its expiration date may be
returned to the Company; however, no credit will be issued to the customer and
(iv) generally the Company will not accept returns of products if such products
cannot be resold, unless the reason that such products cannot be resold is that
the expiration date has passed.
Price adjustments include terms discounts, sales promotions and shelf-stock
adjustments. Term discounts are given to customers that pay within a specific
period of time. The Company may conduct sales or trade show promotions where
additional discounts may be given on a new product or certain existing products
as an added incentive to stock the Company's products or for the customer to
substitute the Company's products for competing products. The Company may, from
time to time, also provide price and/or volume incentives on new products that
have multiple competitors and/or on existing products that confront new
competition in order to secure or maintain a certain market share. The Company
does not provide incentives designed to increase shipments to its customers that
it believes would result in out-of-the ordinary course of business inventory for
them. Shelf-stock adjustments are typically provided to a customer when the
Company lowers its invoice pricing and provides a credit for the difference
between the old and new invoice prices for the inventory that the customer has
on hand at the time of the price reduction.
Due to competitive factors, the Company may also provide for price
protection. The Company will generally offer price protection for sales of new
generic drugs for which its market exclusivity period has expired or with
respect to products for which it anticipates significant price erosion through
increases in competition. Such price protection accounts for the fact that the
prices of such drugs typically will decline, sometimes substantially, when
additional generic manufacturers introduce and market a comparable generic
product following the expiration of an exclusivity period or at the time of a
price decrease. Such price protection plans, which are common in the Company's
industry, are given through lower contract pricing at the wholesalers, which
could result in an increased chargeback per unit on existing inventory levels,
or through shelf-stock adjustments. At December 31, 2004, 2003 and 2002, the
Company did not have any material price protection reserves but had issued
significant price protection credits and had generally lowered contract pricing
throughout fiscal year 2004 due to competition on its key products.
The following summarizes the activity for the years ended December 31, 2004
and 2003 in the accounts affected by the accruals described above:
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------
RESERVES FOR REBATES AND CHARGEBACKS: 2004 2003
- ------------------------------------- ---- ----
Balance, beginning of the period $(99,391) $(76,751)
Provision recorded (628,130) (358,265)
Credits processed 624,914 335,625
------- -------
Balance, end of the period $(102,607) $(99,391)
======= ======
RESERVES FOR DOUBTFUL ACCOUNTS, RETURNS,
PRICE ADJUSTMENTS AND OTHER ALLOWANCES: 2004 2003
--------------------------------------- ---- ----
Balance, beginning of the period $(40,357) $(36,257)
Provision recorded (204,636) (119,761)
Credits processed 202,677 115,661
------- -------
Balance, end of the period $(42,316) $(40,357)
====== ======
MAJOR CUSTOMERS:
The Company's top four customers by sales volume accounted for
approximately 15%, 13%, 13% and 9% of net sales in fiscal year 2004, 17%, 13%,
11% and 11% of net sales in fiscal year 2003 and 17%, 16%, 15% and 10% of net
sales in fiscal year 2002.
The amounts due from these four customers accounted for approximately 18%,
14%, 10% and 7% of the accounts receivable balance at December 31, 2004 and 19%,
17%, 16% and 9% of the accounts receivable balance at December 31, 2003.
F-13
NOTE 5 -INVENTORIES, NET:
DECEMBER 31, DECEMBER 31,
2004 2003
---- ----
Raw materials and supplies, net $30,773 $21,551
Work in process, net 11,041 7,166
Finished goods, net 45,021 37,996
------ ------
$86,835 $66,713
====== ======
NOTE 6 - PROPERTY, PLANT AND EQUIPMENT, NET:
DECEMBER 31, DECEMBER 31,
2004 2003
---- ----
Land $1,892 $2,231
Buildings 22,660 26,445
Machinery and equipment 40,594 30,359
Office equipment, furniture and fixtures 5,866 3,420
Computer software and hardware 19,905 11,851
Leasehold improvements 8,032 4,052
----- -----
98,949 78,358
Less accumulated depreciation and amortization 32,307 31,545
------ ------
$66,642 $46,813
====== ======
Depreciation and amortization expense related to the property, plant and
equipment was $7,229, $3,896 and $3,183, respectively, for the years ended
December 31, 2004, 2003 and 2002. In March 2004, the Company sold the Congers
Facility to Ivax Pharmaceuticals New York, LLC for $4,980 and recorded a gain on
the sale of $2,812. The facility of approximately 33,000 square feet was located
on six acres in Congers, New York (the "Congers Facility").
NOTE 7 - INTANGIBLE ASSETS, NET:
DECEMBER 31, DECEMBER 31,
2004 2003
---- ----
FSC Laboratories Agreement $15,000 $ -
Trademark licensed from BMS 5,000 5,000
BMS Asset Purchase Agreement, net of accumulated
amortization of $4,736 and $3,064 6,964 8,636
Product License fees, net of accumulated amortization
of $3,480 and $1,135 7,525 9,170
Genpharm Distribution Agreement, net of accumulated
amortization of $4,694 and $3,972 6,139 6,861
Intellectual property, net of accumulated amortization
of $2,071 and $1,202 7,234 5,378
Genpharm Profit Sharing Agreement, net of accumulated
amortization of $2,500 and $1,981 - 519
Other intangible assets, net of accumulated
amortization of $191, and $0 3,629 -
----- -----
$51,491 $35,564
====== ======
Intangible assets include estimated fair values of certain distribution
rights acquired by the Company for equity instruments or in legal settlements,
amounts paid for contractual rights acquired by the Company to a process,
product or other legal right having multiple or alternative future uses that
support its realizability and intellectual property. The values of the
distribution rights, pursuant to agreements with Bristol-Myers Squibb Company
("BMS") and Genpharm, Inc. ("Genpharm"), are capitalized and amortized on a
straight-line basis over the products' estimated useful lives of seven to 15
years. The values of the product license fees, the Genpharm Profit Sharing
Agreement, the FSC Laboratories, Inc. ("FSC") Agreement and the trademark
licensed from BMS are, or will be, amortized, beginning in the period in which
the product or products are brought to market, over the estimated useful life in
which the related cash flows are generated. The values of the intellectual
property, consisting of trademarks, patents, product and core technology, and
research contracts acquired in the purchases of FineTech and Kali, are amortized
on a straight-line basis over their estimated useful lives of six to ten years.
All capitalized costs are subject to periodic impairment testing. The Company's
intangible assets included on its consolidated balance sheets at December 31,
2004 include the following:
In December 2004, the Company entered into an agreement with FSC and
purchased the New Drug Application ("NDA") for Isoptin(R) SR for $15,000. The
Company and FSC have entered into an economic sharing agreement related to sales
of Isoptin(R) SR and other verapamil hydrochloride sustained release products.
F-14
Par entered into an agreement with Mead Johnson & Company ("Mead") and BMS,
dated August 6, 2003, to license the use of the Megace(R) trade name in
connection with a potential new product being developed by Par in exchange for
$5,000 paid by the Company in August 2003. Under the terms of the agreement, Par
provided BMS funding of approximately $400 in fiscal year 2003 to support BMS's
active promotion of Megace O/S(R) (megestrol acetate oral suspension), which was
expensed as incurred, and provided an additional $500 in fiscal year 2004 to
help retain its brand awareness among physicians.
In March 2002, the Company entered into an agreement with BMS (the "BMS
Asset Purchase Agreement") and acquired the United States rights to five of
BMS's brand products. Pursuant to the BMS Asset Purchase Agreement, the Company
terminated its outstanding litigation against BMS involving megestrol acetate
oral suspension and buspirone and paid BMS $1,024 in March 2002 and $1,025 in
April 2003. The Company determined the fair value of the product rights received
to be $11,700, which exceeded the cash consideration of $2,049 and associated
costs of $600 by $9,051. The $9,051 value was assigned to the litigation
settlements and included in settlement income in the first quarter of 2002. The
fair value of the product rights received is being amortized on a straight-line
basis over seven years which began in March 2002. The amortization is included
as a non-cash charge to cost of goods sold.
In April 2002, the Company entered into an agreement (the "Genpharm 11
Product Agreement") with Genpharm, a Canadian subsidiary of Merck KGaA, to
expand its strategic product partnership. Pursuant to the Genpharm 11 Product
Agreement, the Company paid Genpharm a non-refundable fee of $2,000 in the
second quarter of 2002, included in intangible assets as product license fees,
for two products, loratadine 10 mg tablets (Claritin(R)) and mirtazapine tablets
(Remeron(R)), both of which were brought to market in fiscal year 2003. The
Company is marketing one of the products and receives a royalty on sales of the
other product, which is being sold by another company.
In November 2001, the Company entered into a joint development and
marketing agreement with Breath Ltd. of the Arrow Group ("Breath") to pursue the
worldwide distribution of latanoprost ophthalmic solution 0.005%, the generic
equivalent of Pharmacia Corporation's ("Pharmacia") Xalatan(R), a glaucoma
medication. Pursuant to the agreement, the Company has the right to market the
product upon FDA approval in the United States and certain United States
territories while Breath has the rights to all worldwide markets outside of the
United States and such territories. As a result of this agreement, Par filed an
Abbreviated New Drug Application ("ANDA") for latanoprost, including a Paragraph
IV certification that the existing patents for the product will not be infringed
by Par's generic product. Par has reason to believe that its ANDA is the first
to be filed for this drug with a Paragraph IV certification. In December 2001,
Pharmacia, among others, initiated a patent infringement action against Par. The
Company and Pharmacia are currently in litigation over patent infringement in
regards to latanoprost (see "Note 15 - Commitments, Contingencies and Other
Matters-Legal Proceedings"). Pursuant to this agreement, Par made payments of
$2,500 in fiscal year 2001 and $2,500 in the first quarter of fiscal year 2002
to Breath, which amounts are included in intangible assets as product license
fees.
In April 1999, the Company entered into an agreement with FineTech for the
right to use a process for the pharmaceutical bulk active latanoprost. Pursuant
to this agreement, the Company paid FineTech approximately $2,000 in fiscal
years 2000 and 2001, which is included in intangible assets as product license
fees, for a completed process together with its technology transfer package and
patent. The Company subsequently purchased FineTech and pursuant to this
agreement, the Company is obligated to pay royalties on gross profits from sales
of all products developed under this agreement to the President of FineTech, Dr.
Gutman, who is a director of the Company. In addition, Dr. Gutman is entitled to
royalties on gross profits from sales of several other products pursuant to
agreements made with FineTech prior to the Company's acquisition.
On June 30, 1998, the Company completed a strategic alliance with Merck
KGaA, a pharmaceutical and chemical company located in Darmstadt, Germany.
Pursuant to a Stock Purchase Agreement, dated March 25, 1998, the Company issued
10,400 shares of the Company's Common Stock to Merck KGaA, through its
subsidiary EMD, Inc. ("EMD" formerly known as Lipha Americas, Inc.), in exchange
for cash of $20,800 and the exclusive United States distribution rights to a set
of products covered by a distribution agreement with Genpharm (the "Genpharm
Distribution Agreement") (see "Note 10 - Distribution and Supply
Agreements-Genpharm, Inc."). The Company determined the fair value of the Common
Stock sold to Merck KGaA to be $27,300, which exceeded the cash consideration of
$20,800 received by the Company by $6,500. That $6,500 was assigned to the
Genpharm Distribution Agreement, with a corresponding increase in stockholders'
equity. Additionally, the Company recorded a deferred tax liability of $4,333
and a corresponding increase in the financial reporting basis of the Genpharm
Distribution Agreement to account for the difference between the basis in the
Genpharm Distribution Agreement for financial reporting and income tax purposes
as required by SFAS No. 109, "Accounting for Income Taxes." The aggregate amount
of $10,833 assigned to the Genpharm Distribution Agreement is being amortized on
a straight-line basis over 15 years beginning in the third quarter of fiscal
1998. The amortization is included as a non-cash charge in selling, general and
administrative expenses.
The Company recorded amortization expense related to intangible assets of
$6,317, $6,235 and $2,592 respectively, for fiscal years 2004, 2003 and 2002.
Amortization expense related to the intangible assets currently being amortized
and the FSC agreement is expected to total approximately $7,959 in 2005, $8,131
in 2006, $6,701 in 2007, $5,960 in 2008, $4,197 in 2009 and $6,544 thereafter.
F-15
Intangible assets not being amortized were the FSC agreement of $15,000 at
December 31, 2004, and product license fees of $6,999 and a trademark licensed
from BMS of $5,000 at December 31, 2004 and December 31, 2003. These assets are
not currently being amortized because they have not begun to contribute to the
Company's cash flows, however, the Company will begin to amortize them over
their useful lives as they begin to contribute.
NOTE 8 - ACQUISITIONS:
KALI
On June 10, 2004, the Company acquired all of the capital stock of Kali for
$142,861 in cash and warrants to purchase 150,000 shares of the Company's common
stock valued at $2,530. The former Kali stockholders are entitled to up to an
additional $10,000 if certain product-related performance criteria are met over
the next four years. As of December 31, 2004, the former Kali stockholders had
earned $2,500 of these contingent payments and the Company recorded this amount
as additional goodwill on the accompanying balance sheet. The Company paid the
$2,500 in January 2005. The acquisition did not require the approval of the
Company's stockholders. The Company acquired the physical facilities, acquired
in-process research and development and intellectual property of Kali and
retained all of its 59 employees. The acquisition of Kali expands the Company's
research and development capabilities and provides additional sustained-release
technology and oral disintegrating tablet technology.
The pro forma adjustments in the tables below are based upon available
information and assumptions that the Company believes are reasonable. The
unaudited condensed consolidated pro forma financial statements do not purport
to represent what the consolidated results of operations of the Company would
actually have been if the acquisition had occurred on the date referred to
below, nor do they purport to project the results of operations of the Company
for any future period.
The unaudited condensed consolidated pro forma statements of operations
data were prepared by combining the Company's statement of operations for the
years ended December 31, 2004, 2003 and 2002 with Kali's statements of
operations for the same periods, giving effect to the acquisition as if it had
occurred on January 1, 2002. The unaudited condensed consolidated pro forma
statements of operations do not give effect to any restructuring costs or any
potential cost savings or other operating efficiencies that could result from
the acquisition.
Condensed Consolidated Pro Forma Statement of Operations Data
FISCAL YEARS ENDED DECEMBER 31,
-------------------------------
2004 2003
---- ----
Total revenue $690,800 $662,695
Net income $26,170 $121,125
Net income per basic share of common stock $0.77 $3.62
==== ====
Net income per diluted share of common stock $0.75 $3.50
==== ====
The purchase price was allocated to the assets and liabilities of Kali
based on the Company's determination of fair value. The following table sets
forth the allocation of the purchase price:
Current assets $2,513
Property, plant and equipment 3,224
Receivable from VGS Holdings, Inc. 2,688
Deferred income tax assets 897
Intellectual property 2,725
Other intangible assets 3,820
In-process research and development 84,000
Goodwill 53,257
------
Total assets acquired 153,124
Current liabilities 5,233
-----
Total liabilities assumed 5,233
-----
Net assets acquired $147,891
=======
In accordance with SFAS 142, the goodwill will not be amortized, but will
be tested at least annually for impairment using a fair value approach.
F-16
The Company's acquisition of Kali is consistent with its long-term strategy
to supplement internal growth with acquisitions, joint ventures and product
licensing agreements. The Company performed a complete evaluation of Kali as an
operating business, including all of the assets acquired and liabilities
assumed. Based on this evaluation the Company identified and valued all tangible
and intangible assets acquired and liabilities assumed and recorded the
difference between the purchase price and the aggregate of these net values as
goodwill. The Company valued and classified the technology assets, including the
additional sustained-release technology and oral disintegrating tablet
technology acquired from Kali, on a product-by-product basis as either
core/developed or in-process based on the stage of development that the product
was in at the time of acquisition.
The core/developed technology, capitalized as intellectual property, was
valued product-by-product for an aggregate value of $2,725. This intellectual
property includes the value of six products that had completed the final
approval stage, including the approval process with the FDA and the Company's
assessments of patent issues and batch-size compatibility.
The acquired in-process research and development, valued at $84,000 and
written off in third quarter 2004, included the valuation of 29 products where
there was a material investment made in the research and development activities
relating to them and a set amount of development work had been completed in
respect of them. The most significant of these products was tramadol/APAP
(Ultracet(R)), valued at $30,000. Of the remaining products, no single product
was valued at more than $4,900. The development work on 16 of these products was
considered complete and ANDAs for 14 of the products were filed with the FDA;
however, the value of the products was expensed, consistent with the Company's
accounting policies, as disclosed in "Note-1-Summary of Significant Accounting
Polices" and in accordance with FASB No. 2, "Accounting for Research and
Development Costs", because such products have not yet been approved.
All core/developed and in-process technology was valued using the income
approach, which focuses on the income-producing capability of the subject
assets. The underlying premise of the income approach is that the value of an
asset can be measured by the present worth of the net economic benefit (cash
receipts less cash outlays) to be received over the life of the subject asset.
The Company also acquired a favorable leasehold interest it valued at
$3,820 as part of the Kali acquisition. Kali leases, with a purchase option, a
45,000-square foot manufacturing facility located in Somerset, New Jersey. The
building is subject to a triple net lease between VGS Holdings, Inc. ("VGS") and
Kali that terminates on June 9, 2006. VGS is owned by the former owners of Kali
and one former owner is now an employee of the Company. On June 10, 2004, the
lease was assigned to Par. Because the rent under the lease was below market
value, the Company determined the value of the net rental benefit to be $3,820,
which was recorded in other intangible assets in the third quarter 2004. That
value was determined as the net present fair value of the difference between the
current market rental rate for a similar facility and the contract rent.
NOTE 9 - RESEARCH AND DEVELOPMENT AGREEMENTS:
To supplement its own internal development program, the Company seeks to
enter into development and license agreements with third parties with respect to
the development and marketing of new products and technologies. To date, the
Company has entered into several of these types of agreements and advanced funds
to several non-affiliated companies for products in various stages of
development. Payments related to these agreements are either expensed as
incurred or capitalized according to the Company's significant accounting
policies. The Company believes that the following product development agreements
are those that are the most significant to its business.
ADVANCIS PHARMACEUTICAL CORPORATION:
In June 2004, Par entered into an agreement with Advancis to develop and
market a novel formulation of the antibiotic amoxicillin. Pursuant to this
agreement, Par paid Advancis $14,000 which was charged to research and
development expense in fiscal year 2004, and Par will fund future development of
$19,000 through fiscal year 2005. Advancis agreed to grant Par the exclusive
right to sell and distribute the product and the co-exclusive right to market
the product. In addition, the parties signed an amendment to this agreement in
December 2004. The amendment adds a new formulation of amoxicillin to treat
otitis media in pediatrics to the original agreement. Advancis will be
responsible for the development and manufacture of the products and the two
parties have agreed to share in marketing expenses and profits equally if the
products are successfully developed and brought to market.
NORTEC DEVELOPMENT ASSOCIATES, INC.:
Par and Nortec Development Associates, Inc. (a Glatt company) ("Nortec")
entered into an agreement, dated October 22, 2003, pursuant to which the two
companies have agreed to develop additional products that are not part of the
two previous agreements between Par and Nortec. During the first two years of
the agreement, Par is obligated to make aggregate initial research and
development payments to Nortec in the amount of $3,000, of which $1,500 was paid
by the Company in fiscal year 2003, $1,000 was paid in fiscal year 2004 and $500
was paid in January 2005. On or before October 15, 2005, Par will have the
option to either (i) terminate the arrangement with Nortec, in which case the
initial research and development payments will be credited against any
development costs that Par shall owe Nortec at that time or (ii) acquire all of
the capital stock of Nortec over the subsequent two years, including the first
50% of the capital stock of Nortec over the third and fourth years of the
agreement for $4,000, and the remaining capital stock of Nortec from its owners
F-17
at the end of the fourth year for an additional $11,000. The parties have agreed
to certain revenue and royalty sharing arrangements before and after Par's
acquisition, if any, of Nortec.
In May 2002, Par entered into an agreement with Nortec to develop an
extended release generic version of a currently marketed branded extended
release pharmaceutical product. Under the terms of the agreement, Par obtained
the right to utilize Nortec/Glatt's drug delivery system technology in its ANDA
submission for the potential product covered in the agreement. Par and Nortec
have agreed to collaborate on the formulation, and Par has agreed to serve as
the exclusive marketer and distributor of the product.
In June 2002, Par expanded its collaboration with Nortec to develop an
extended release generic version of another currently marketed, branded extended
release pharmaceutical product. Under the terms of the new agreement, Par also
obtained the right to utilize Nortec/Glatt's drug delivery system technology in
its ANDA submission for the potential product covered in the agreement. Par and
Nortec have agreed to collaborate on the formulation, while Par will serve as
the exclusive marketer and distributor of the product.
Pursuant to the May 2002 and June 2002 agreements with Nortec, the Company
made non-refundable payments totaling $1,000, which were charged to research and
development expenses in fiscal year 2002. The Company also agreed to pay a total
of $800 in various installments related to the achievement of certain milestones
in the development of the two potential products and $600 for each product on
the day of the first commercial sale. In addition to these payments, the Company
has agreed to pay Nortec a royalty on net sales of the products, as defined in
the agreements.
AVEVA DRUG DELIVERY SYSTEMS INC. (FORMERLY ELAN TRANSDERMAL TECHNOLOGIES, INC.):
In April 2001, Par entered into a licensing agreement with Aveva Drug
Delivery Systems Inc. (formerly Elan Transdermal Technologies, Inc.) ("Aveva"),
a U.S. subsidiary of Nitto Denko, to market a clonidine transdermal patch, a
generic version of Boehringer Ingelheim's Catapres TTS(R). Aveva filed an ANDA
for the product with the FDA earlier in fiscal year 2001, including a Paragraph
IV certification, certifying that the product did not infringe the branded
product's formulation patent, which expired in May 2003. Under the agreement,
Aveva is responsible for the development and manufacture of the products, while
Par is responsible for their marketing, sales and distribution. Par has agreed
to reimburse Aveva for research and development costs and Aveva will receive a
royalty from the sale of the product. Pursuant to the agreement, the Company
paid Aveva $1,167 and $833, respectively, in fiscal years 2001 and 2002, which
was charged to research and development expenses. In addition, Par has agreed to
pay to Aveva $1,000 upon FDA approval of the product, and a royalty on all
future sales of the product.
NOTE 10 - DISTRIBUTION AND SUPPLY AGREEMENTS:
The Company enters into marketing and license agreements with third parties
to market new products and technologies in an effort to broaden its product
line. To date, the Company has entered into and is selling product through
several of these agreements. The Company believes that the following agreements
are those that are the most significant to its business.
SMITHKLINE BEECHAM CORPORATION:
Par and GlaxoSmithKline Inc. ("GSK") and certain of its affiliates entered
into a license and supply agreement (the "GSK Supply Agreement"), dated April
16, 2003, pursuant to which Par is marketing paroxetine, supplied and licensed
from GSK, in the United States, including the Commonwealth of Puerto Rico. Under
the GSK Supply Agreement, GSK has agreed to manufacture the product and Par has
agreed to pay GSK a percentage of Par's net sales of the product, as defined in
the agreement. Pursuant to the GSK Supply Agreement, GSK is entitled to suspend
Par's right to distribute paroxetine if at any time another generic version of
Paxil(R) is not being marketed.
PENTECH PHARMACEUTICALS, INC.:
In November 2002, the Company amended its agreement (the "Pentech Supply
and Marketing Agreement") with Pentech Pharmaceuticals, Inc. ("Pentech"), dated
November 2001, to market paroxetine capsules. Pursuant to the Pentech Supply and
Marketing Agreement, the Company paid all legal expenses up to $2,000, which
were expensed as incurred, to obtain final regulatory approval. Legal expenses
in excess of $2,000 are fully creditable against future profit payments to
Pentech. The Company had agreed to reimburse Pentech for costs associated with
the project of up to $1,300. In fiscal year 2003, the Company paid Pentech $771
of these costs, which were charged to research and development expenses as
incurred. Pursuant to the Pentech Supply and Marketing Agreement, the Company
had agreed to pay Pentech a percentage of the gross profits, as defined in such
agreement, on all its sales of paroxetine. The Company and Pentech are currently
in litigation regarding a dispute over the gross profit share amount.
DR. REDDY'S LABORATORIES LTD.:
In April 2001, the Company and Dr. Reddy's Laboratories Ltd. ("Dr. Reddy"),
a producer of bulk active ingredients for the pharmaceutical industry and a
developer and manufacturer of finished dosage forms located in India, entered
into a broad-based co-marketing and development agreement (the "Reddy
Development and Supply Agreement") covering up to 14 generic pharmaceutical
F-18
products to be marketed exclusively by Par in the United States and certain
other United States territories. Four products covered under this agreement are
being marketed by Par. Dr. Reddy is required to use commercially reasonable
efforts to develop the products covered by the Reddy Development and Supply
Agreement, and is responsible for the completion of product development and for
obtaining all applicable regulatory approvals. The products covered by the Reddy
Development and Supply Agreement are in addition to four products being marketed
by the Company under prior agreements with Dr. Reddy. Pursuant to these
agreements with Dr. Reddy, the Company has agreed to pay Dr. Reddy a certain
percentage of the gross profits, as defined in each agreement, on sales of
products covered by such agreements.
GENPHARM, INC.:
Pursuant to the Genpharm Distribution Agreement, the Company has the
exclusive distribution rights within the United States and certain United States
territories to approximately 40 generic pharmaceutical products. To date, 22 of
such products have obtained FDA approval and are currently being marketed by
Par. The remaining products are either being developed, have been identified for
development or have been submitted to the FDA for approval. Currently, there are
seven ANDAs for potential products (two of which have been tentatively approved)
that are covered by the Genpharm Distribution Agreement pending with, and
awaiting approval from, the FDA. Genpharm is required to use commercially
reasonable efforts to develop the products and is responsible for the completion
of product development and obtaining all applicable regulatory approvals. The
Company has agreed to pay Genpharm a percentage of the gross profits, as defined
in the agreement, on sales of products covered by the Genpharm Distribution
Agreement.
The Company and Genpharm entered into a distribution agreement (the
"Genpharm Additional Product Agreement"), dated November 27, 2000, pursuant to
which Genpharm has granted the Company exclusive distribution rights within the
United States and certain other United States territories with respect to five
generic pharmaceutical products not included in the Company's other distribution
agreements with Genpharm. To date, two of such products have obtained FDA
approval and are currently being marketed by Par. Currently, there is one ANDA
for a potential product that is covered by the Genpharm Additional Product
Agreement pending with, and awaiting approval from, the FDA. The remaining
products are either being developed or have been identified for development.
Genpharm and the Company are sharing the costs of developing the products and
obtaining all applicable regulatory approvals. The Company has agreed to pay
Genpharm a percentage of the gross profits, as defined in the agreement, on
sales made by the Company of products included in the Genpharm Additional
Product Agreement.
PAYABLES DUE TO DISTRIBUTION AGREEMENT PARTNERS:
Pursuant to these distribution agreements, the Company pays its partners a
percentage of gross profits as defined in each agreement. As of December 31,
2004 and 2003, the Company had payables due to distribution agreement partners
of $40,149 and $88,625, respectively. The decrease was related primarily to
lower sales of products sold under these distribution agreements, particularly
amounts owed to GSK in respect of paroxetine.
NOTE 11 - SHORT-TERM AND LONG-TERM DEBT:
SHORT-TERM DEBT
The Company finances a portion of its insurance premiums and classifies the
amounts due as short-term debt. As of December 31, 2004 and 2003, the Company
had recorded $4,142 and $4,633, respectively, as short-term debt related to
financing these insurance premiums.
LONG-TERM DEBT
DECEMBER 31, DECEMBER 31,
2004 2003
---- ----
Senior subordinated convertible notes (a) $200,000 $200,000
Other (b) 481 333
--- ---
200,481 200,333
Less current portion (206) (122)
--- ---
$200,275 $200,211
======= =======
(a) Senior subordinated convertible notes in the aggregate principal amount of
$200,000. The notes bear interest at an annual rate of 2.875%, payable
semi-annually on March 30 and September 30 of each year. The notes are
convertible into Common Stock at an initial conversion price of $88.76 per
share, upon the occurrence of certain events. Upon conversion, the Company
has the right to deliver, in lieu of Common Stock, cash or a combination of
cash and Common Stock. It is the Company's current intention to satisfy the
Company's obligation upon a conversion of the notes in cash in an amount
equal to the principal amount of the notes converted. The notes mature on
September 30, 2010, unless earlier converted or repurchased. The Company
may not redeem the notes prior to their maturity date.
(b) Includes primarily amounts due under capital leases for computer equipment.
F-19
Long-term debt maturities during the next five years, including the portion
classified as current, are as follows: $206 in 2005, $207 in 2006, and $68 in
2007. In addition, the Company has senior subordinated convertible notes in the
aggregate principal amount of $200,000 that will mature on September 30, 2010,
unless earlier converted or repurchased.
During fiscal years 2004, 2003 and 2002, the Company incurred interest
expense of $5,917, $1,606 and $148, respectively. Interest accrued on the senior
subordinated convertible notes since September 30, 2004 is payable on March 30,
2005.
NOTE 12 - EARNINGS PER SHARE:
The following is a reconciliation of the amounts used to calculate basic
and diluted earnings per share:
FOR THE YEARS ENDED DECEMBER 31,
2004 2003 2002
---- ---- ----
NET INCOME $29,246 $122,533 $79,454
Basic:
Weighted average number of common
shares outstanding 34,142 33,483 32,337
------ ------ ------
Net income per share of common stock $0.86 $3.66 $2.46
==== ==== ====
Assuming dilution:
Weighted average number of common
shares outstanding 34,142 33,483 32,337
Effect of dilutive options 731 1,155 714
--- ----- ---
Weighted average number of common and common
equivalent shares outstanding 34,873 34,638 33,051
------ ------ ------
Net income per share of common stock $0.84 $3.54 $2.40
==== ==== ====
Outstanding options and warrants of 1,479, 175 and 2,298 as of December 31,
2004, 2003 and 2002, respectively, were not included in the computations of
diluted earnings per share because the exercise prices were greater than the
average market price of the Common Stock during the respective years and would,
therefore, have been anti-dilutive. In addition, outstanding warrants sold
concurrently with the sale of the subordinated convertible notes were not
included in the computation of diluted earnings per share as of December 31,
2004. The warrants are exercisable for an aggregate of 2,253 shares of Common
Stock at an exercise price of $105.20 per share.
NOTE 13 - STOCKHOLDERS' EQUITY:
PREFERRED STOCK:
In 1990, the Company's stockholders authorized 6,000 shares of preferred
stock, par value $.0001 per share. The preferred stock is issuable in such
classes and series and with such dividend rates, redemption prices, preferences,
and conversion and other rights as the Company's board of directors (the
"Board") may determine at the time of issuance. At December 31, 2004 and 2003,
the Company did not have preferred stock issued and outstanding.
DIVIDEND:
The Company did not pay any dividends to holders of its Common Stock in
fiscal years 2004, 2003 and 2002.
COMPREHENSIVE INCOME:
FOR THE YEARS ENDED DECEMBER 31,
2004 2003 2002
---- ---- ----
Net income $29,246 $122,533 $79,454
Other comprehensive gains (losses):
Defined benefit pension plan (100) (118) -
Unrealized gain (loss) on marketable securities,
net of tax 1,084 (1,555) -
----- -----
Other comprehensive losses 984 (1,673) -
------ ----- ------
Comprehensive income $30,230 $120,860 $79,454
====== ======= ======
F-20
TREASURY STOCK:
In April 2004, the Board authorized the repurchase of up to $50,000 of the
Company's Common Stock. The repurchases are made, subject to compliance with
applicable securities laws, from time to time in the open market or in privately
negotiated transactions. Common Stock acquired through the repurchase program is
and will be available for general corporate purposes. At December 31, 2004, the
Company had repurchased 844 shares of its Common Stock for approximately $32,026
pursuant to the program.
PURCHASED CALL OPTIONS:
Concurrently with the sale of the subordinated convertible notes described
above, the Company purchased call options on its Common Stock (the "purchased
call options") designed to mitigate the potential dilution from conversion of
the convertible notes. Under the terms of the purchased call options, the
Company has the right to purchase from an affiliate of one of the initial
purchasers (the "counterparty") at a purchase price of $88.76 per share the
aggregate number of shares that the Company would be obligated to issue upon
conversion of the convertible notes, which is a maximum of 2,253 shares. The
Company has the option to settle the purchased call options with the
counterparty through a net share settlement or net cash settlement, either of
which would be based on the extent to which the then-current market price of the
Common Stock exceeds $88.76 per share. The cost of the purchased call options of
$49,368 was charged to additional paid-in-capital on the Company's consolidated
balance sheets. The cost of the purchased call options was partially offset by
the sale of warrants (the "sold warrants") to acquire shares of the Common Stock
to the counterparty with which the Company entered into the purchased call
options. The sold warrants are exercisable for an aggregate of 2,253 shares at
an exercise price of $105.20 per share. The sold warrants may be settled, at the
Company's option, either through a net share settlement or a net cash
settlement, either of which would be based on the extent to which the
then-current market price of the Common Stock exceeds $105.20 per share. The
gross proceeds from the sold warrants of $32,563 were recognized as additional
paid-in-capital on the Company's consolidated balance sheets. The net effect of
the purchased call options and the sold warrants is to either reduce the
potential dilution from the conversion of the convertible notes if the Company
elects a net share settlement or to increase the net cash proceeds of the
offering, if a net cash settlement is elected and the convertible notes are
converted at a time when the market price of the Common Stock exceeds $88.76 per
share. If the market price of the Common Stock at the maturity of the sold
warrants exceeds $105.20, the dilution mitigation under the purchased call
options will be capped, meaning that there would be dilution from the conversion
of the convertible notes to the extent that the then market price per share of
the Common Stock exceeds $105.20 at the time of conversion.
EMPLOYEE STOCK PURCHASE PROGRAM:
The Company maintains an Employee Stock Purchase Program (the "Program").
The Program is designed to qualify as an employee stock purchase plan under
Section 423 of the Internal Revenue Code of 1986, as amended. It enables
eligible employees to purchase shares of Common Stock at a discount of up to 15%
of the fair market value. An aggregate of 1,000 shares of Common Stock have been
reserved for sale to employees under the Program. Employees purchased 12 and 8
shares in fiscal years 2004 and 2003, respectively. At December 31, 2004, 793
shares remain available for issuance and sale under the Program.
STOCK OPTIONS:
The following is a summary of stock option activity in each of the periods
as indicated:
FOR THE YEARS ENDED DECEMBER 31,
2004 2003 2002
---- ---- ----
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ ----- ------ ----- ------ -----
Outstanding at
beginning of year 3,376 $28.83 3,764 $23.04 3,754 $18.88
Granted 1,382 56.30 1,242 38.38 891 23.99
Exercised (385) 23.24 (1,506) 22.56 (761) 3.26
Canceled/Surrendered (156) 44.81 (124) 24.69 (120) 25.38
--- --- ---
Outstanding at
end of year 4,217 37.78 3,376 28.83 3,764 23.04
===== ===== =====
F-21
At December 31, 2004, 2003 and 2002, exercisable options amounted to 1,232,
463 and 931, respectively. The weighted average exercise prices of the options
for these periods were $29.89, $24.18 and $20.23, respectively. Exercise price
ranges and additional information regarding the 4,217 options outstanding at
December 31, 2004 follows:
EXERCISABLE OPTIONS
OUTSTANDING OPTIONS -------------------
EXERCISE NUMBER WEIGHTED AVERAGE WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
PRICE RANGE OF OPTIONS EXERCISE PRICE REMAINING LIFE OF OPTIONS EXERCISE PRICE
----------- ---------- -------------- -------------- ---------- --------------
$2.25 26 $2.25 2.8 years 26 $2.25
$4.13 to $5.69 124 $5.19 5.5 years 72 $5.25
$7.63 210 $7.63 6.0 years 67 $7.63
$21.65 to $31.70 2,231 $29.29 6.0 years 876 $29.89
$33.80 to $48.75 412 $39.57 8.8 years 137 $43.34
$53.40 to $72.54 1,214 $62.10 8.6 years 54 $69.55
In fiscal year 2004, the Company's stockholders approved the 2004
Performance Equity Plan (the "2004 Plan"). The 2004 plan provides for the
granting of incentive and non-qualified stock options, stock appreciation
rights, restricted stock and restricted stock units or other stock based awards
to employees of the Company or others. The 2004 Plan became effective on April
8, 2004 and will continue until April 8, 2014 unless terminated sooner. The
Company has reserved 1,433 shares of Common Stock for issuance of stock options
and reserved an additional 350 shares of common stock for issuance of restricted
stock and restricted stock units under the 2004 plan. Vesting and option terms
are determined in each case by the Compensation and Stock Option Committee of
the Board. The maximum term of the stock options and the stock appreciation
rights are ten years. In fiscal year 2004, the Company issued 45 restricted
shares of Common Stock to an employee and two restricted stock units to a
director. The restricted stock and the restricted stock units vest over four
years. The Company recorded $239 of compensation expense in fiscal year 2004
related to the restricted stock and restricted stock units.
In fiscal year 2001, the Company's stockholders approved the 2001
Performance Equity Plan (the "2001 Plan"), which was subsequently amended at the
Company's 2003 Annual Meeting of Shareholders. The 2001 Plan provides for the
granting of incentive and non-qualified stock options to employees of the
Company or to others. The 2001 Plan became effective July 12, 2001 and will
continue until July 11, 2011 unless earlier terminated. Pursuant to the 2004
Plan, the Company decreased the shares of Common Stock reserved for issuance
under the 2001 Plan to 4,917. The maximum term of an option under the 2001 Plan
is ten years. Vesting and option terms are determined in each case by the
Compensation and Stock Option Committee of the Board.
In fiscal year 2000, the Board adopted the 2000 Performance Equity Plan
(the "2000 Plan"), which plan was subsequently amended, making it a
non-qualified, broad-based plan not subject to stockholder approval. The 2000
Plan provides for the granting of incentive and non-qualified stock options to
employees of the Company and to others. The 2000 Plan became effective March 23,
2000 and will continue until March 22, 2010 unless earlier terminated. The
Company has reserved 1,025 shares of Common Stock for issuance under the 2000
Plan. The maximum term of an option under the 2000 Plan is ten years. Vesting
and option terms ae determined in each case by the Compensation and Stock Option
Committee of the Board. The maximum term of the option is reduced to five years
if an incentive stock option is granted to a holder of more than 10% of the
total combined voting power of all the classes of capital stock of the Company.
In fiscal year 1998, the Company's stockholders approved the 1997
Directors' Stock Option Plan (the "1997 Directors' Plan"), which was
subsequently amended at the 2003 Annual Meeting of Stockholders, pursuant to
which options are granted to non-employee directors of the Company. The 1997
Directors' Plan became effective October 28, 1997 and will continue until
October 28, 2013 unless earlier terminated. Options granted under the 1997
Directors' Plan will become exercisable in full on the first anniversary of the
date of grant, provided that the eligible director has not been removed "for
cause" as a member of the Board on or prior to the first anniversary of the date
of grant. The maximum term of an option under the 1997 Directors' Plan is ten
years. Pursuant to the amendment, the Company increased the number of shares of
Common Stock for issuance under the 1997 Directors' Plan to 650 and extended the
expiration date of the 1997 Directors' Plan from October 28, 2007 to October 28,
2013.
Under all the stock option plans, the stock option exercise price of all
the option grants equaled the market price on the date of grant. At December 31,
2004 and 2003, options for 1,485 and 1,911 shares, respectively, were available
for future grant under the Company's various stock option plans. In addition, At
December 31, 2004, 353 restricted stock and restricted stock units were
available for future grant.
As permitted under SFAS No. 123, the Company elected to follow APB Opinion
25 and related interpretations in accounting for stock-based compensation to its
employees. Pro forma information regarding net income is required by SFAS No.
123, as amended by SFAS No. 148. This required information is to be determined
as if the Company had accounted for its stock-based compensation to employees
under the fair value method of that Standard. The fair value of the options
granted during each of the years ended December 31, 2004, 2003 and 2002 were
F-22
estimated at the date of grant using the Black-Scholes stock option pricing
model, based on the following assumptions:
FOR THE YEARS ENDED DECEMBER 31,
2004 2003 2002
---- ---- ----
Risk-free interest rate 3.9% 4.0% 4.3%
Expected term 4.9 years 4.8 years 5.5 years
Expected volatility 60.1% 61.2% 68.6%
It is assumed that no dividends will be paid for the entire term of the
option. The weighted-average fair value of options granted in fiscal years 2004,
2003, and 2002 were $31.33, $24.04 and $14.89, respectively.
In February 2005, the Company accelerated the vesting on 820 outstanding,
non-vested stock options that represented all awards with per share exercise
prices exceeding $60. The fair value of these options using the Black-Scholes
stock option pricing model and the Company's stock option assumptions at the
date of their grant was approximately $27,869. This action will cause an
increase in pro forma compensation expense in the first quarter of 2005. The
Company considered a number of factors in making this decision, including the
issuance and anticipated implementation of the revision to SFAS 123 which will
be effective for the Company in the third quarter of 2005. Over the last 15
years the closing price of the stock has traded above $60 for only 118 days in
2004 and 2003. The Company believes the $27,869 of value assigned to these
options is inappropriate considering the historical price chart and the current
trading price of the stock which is substantially below the exercise price.
In October 2004, the Board adopted a stockholder rights plan designed to
ensure that all stockholders of the Company receive fair and equal treatment in
the event of an unsolicited attempt to acquire the Company. The adoption of the
rights plan is intended to deter partial and "two step" tender offers or other
coercive takeover tactics, and to prevent an acquirer from gaining control of
the Company without offering a fair price to all of the Company's stockholders.
The rights plan was not adopted in response to any known offers for the Company
and is similar to stockholder rights plans adopted by many other companies.
To implement the rights plan, the Board declared a distribution of one
preferred stock purchase right per share of common stock, payable to all
stockholders of record as of November 8, 2004. The rights will be distributed as
a non-taxable dividend and will expire on October 27, 2014. The rights will be
evidenced by the underlying Company Common Stock, and no separate preferred
stock purchase rights certificates will presently be distributed. The rights to
acquire preferred stock are not immediately exercisable and will become
exercisable only if a person or group acquires or commences a tender offer for
15% or more of the Company's Common Stock.
If a person or group acquires or commences a tender offer for 15% or more
of the Company's Common Stock, each holder of a right, except the acquirer, will
be entitled, subject to the Company's right to redeem or exchange the right, to
exercise, at an exercise price of $225, the right for one one-thousandth of a
share of the Company's newly-created Series A Junior Participating Preferred
Stock, or the number of shares of the Company's Common Stock equal to the
holder's number of rights multiplied by the exercise price and divided by 50% of
the market price of the Company's Common Stock on the date of the occurrence of
such an event. The Board may terminate the rights plan at any time or redeem the
rights, for $0.01 per right, at any time before a person or group acquires 15%
or more of the Company's Common Stock.
NOTE 14 - INCOME TAXES:
The components of the Company's provision for income taxes for the years
ended December 31, 2004, 2003 and 2002 are as follows:
FOR THE YEARS ENDED DECEMBER 31,
2004 2003 2002
---- ---- ----
Current income tax provision:
Federal $54,755 $66,915 $43,682
State 8,052 10,528 6,072
----- ------ -----
62,807 77,443 49,754
------ ------ ------
Deferred income tax provision (benefit):
Federal (40,059) 581 938
State (5,891) 86 107
------ -- ---
$16,857 $78,110 $50,799
====== ====== ======
F-23
Deferred tax assets and (liabilities) as of December 31, 2004 and 2003 are as
follows:
DEFERRED TAX ASSET, NET:
DECEMBER 31, DECEMBER 31,
2004 2003
---- ----
Current deferred assets:
Accounts receivable $45,336 $28,559
Inventories 4,288 2,152
Accrued expenses 476 1,768
Purchased call options 2,350 1,689
Other 130 305
--- ---
52,580 34,473
------ ------
Non-current deferred assets:
Purchased call options 14,142 16,496
Investments 301 975
Asset impairment reserve 34 381
Research and development expenses 377 377
BMS asset purchase agreement 985 637
Advancis payment 1,755 -
Other options 1,932 -
Kali intangible assets 30,804 -
Kali deferred income 897 -
Other 783 988
--- ---
52,010 19,854
------ ------
Deferred tax assets 104,590 54,327
------- ------
Deferred liabilities:
Fixed assets (7,570) (1,674)
Genpharm distribution agreement (2,394) (2,676)
FineTech intangible assets 437 (1,105)
Other (18) -
---- -
(9,545) (5,455)
------ -----
Net deferred tax asset $95,045 $48,872
====== ======
The exercise of stock options in fiscal years 2004 and 2003, respectively,
resulted in tax credits of $7,136 and $12,616 which were recorded to additional
paid-in capital.
The table below provides a reconciliation between the statutory federal
income tax rate and the effective rate of income tax expense for each of the
years shown as follows:
FOR THE YEARS ENDED DECEMBER 31,
2004 2003 2002
---- ---- ----
Federal statutory tax rate 35% 35% 35%
State tax - net of federal benefit 4 4 4
Other (permanent items) (2) - -
--- - -
Effective tax rate 37% 39% 39%
== == ==
NOTE 15 - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS:
LEASES:
At December 31, 2004, the Company had minimum rental commitments
aggregating $22,076 under non-cancelable operating leases expiring through
fiscal year 2014. Amounts payable thereunder are $3,357 in 2005, $3,369 in 2006,
$3,038 in 2007, $3,010 in 2008, $3,009 in 2009 and $6,293 thereafter. Rent
expense charged to operations in fiscal years 2004, 2003 and 2002 was $3,054,
$2,820 and $1,513, respectively.
F-24
RETIREMENT PLANS:
The Company has a Retirement Savings Plan (the "Retirement Savings Plan")
whereby eligible employees are permitted to contribute annually from 1% to 25%
of their compensation to the Retirement Savings Plan. The Company contributes an
amount equal to 50% of up to the first 6% of compensation contributed by the
employee. Participants in the Retirement Savings Plan become vested with respect
to 20% of the Company's contributions for each full year of employment with the
Company and thus become fully vested after five full years. The Company also may
contribute additional funds each fiscal year to the Retirement Savings Plan, the
amount of which, if any, is determined by the Board in its sole discretion. The
Company's provisions for this plan and the defined benefit plan discussed below
were $2,974 in fiscal year 2004, $2,567 in fiscal year 2003 and $1,895 in fiscal
year 2002. In fiscal year 1998, the Company merged a defined contribution social
security integrated retirement plan into the Retirement Savings Plan. In
February 2005, 2004 and 2003, respectively, the Company made discretionary
contributions to the Retirement Savings Plan of approximately $2,057 for Plan
year 2004, $2,000 for Plan year 2003 and $1,500 for Plan year 2002.
The Company maintains a defined benefit plan (the "Pension Plan") that
covers eligible employees, as defined in the Pension Plan. The Pension Plan has
been frozen since October 1, 1989. Since the benefits under the Pension Plan are
based on the participants' length of service and compensation (subject to
Employee Retirement Income Security Act of 1974 and Internal Revenue Service
limitations), service costs subsequent to October 1, 1989 are excluded from
benefit accruals under the Pension Plan. The funding policy for the Pension Plan
is to contribute amounts actuarially determined as necessary to provide
sufficient assets to meet the benefit requirements of the Pension Plan retirees.
For fiscal year 2005, the contribution is estimated to be $22. The measurement
date of November 1 is used to value the assets and liabilities each year.
The primary investment objectives of the Pension Plan are: (i) to obtain a
reasonable long-term return consistent with the level of risk assumed (specific
return objectives may include fund performance that exceeds the rate of
inflation, the assumed actuarial discount rate and/or the total fund policy
return, which is typically defined as the return of a passively managed
benchmark comprised of the target portfolio weights to each asset class); (ii)
to control the cost of funding the Pension Plan within prudent levels of risk
through the investment of Pension Plan assets; and (iii) to provide
diversification of assets in an effort to avoid the risk of large losses and to
maximize the investment return to the Pension Plan consistent with market and
economic risk.
The majority of the Pension Plan assets are invested in short-term, high
quality debt securities including money market funds, stable value funds and
guaranteed interest arrangements. The fair value of the assets of the Pension
Plan at December 31, 2004 and 2003 are set forth in the table below.
DECEMBER 31, DECEMBER 31,
2004 2003
---- ----
Equity securities $287 $243
Debt securities 1,867 1,894
----- -----
Total assets $2,154 $2,137
===== =====
Net pension expense for fiscal years 2004, 2003 and 2002 included the
components set forth in the table below.
FOR THE YEARS ENDED DECEMBER 31,
2004 2003 2002
---- ---- ----
Interest cost $124 $130 $125
Expected return on Pension Plan assets (135) (135) (216)
Net amortization and deferral asset gain - - 78
Amortization of initial unrecognized transition
obligation 52 51 51
-- -- --
Net pension expense $41 $46 $38
== == ==
The weighted-average assumptions used to determine benefit obligations for
the Pension Plan at December 31, 2004 and 2003 included discount rates of 5.50%
and 5.75%, respectively. The weighted-average assumptions used to determine the
net periodic benefit cost for the years ended December 31, 2004, 2003 and 2002
included discount rates of 5.75%, 6.5%, and 6.25%, respectively, and the
expected long-term rates of return on plan assets of 6.5%, 6.5% and 7%,
respectively.
F-25
The following provides a reconciliation of the Pension Plan's benefit
obligations, assets and funded status.
DECEMBER 31, DECEMBER 31,
2004 2003
---- ----
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at the beginning of the year $2,228 $2,063
Interest cost 124 130
Actuarial loss 96 176
Benefits paid (139) (141)
--- ---
Benefit obligation at the end of the year $2,309 $2,228
===== =====
CHANGE IN PLAN ASSETS
Fair value of Pension Plan assets at the beginning of the year $2,137 $2,148
Actual return on assets 131 118
Employer contributions 25 12
Benefits paid (139) (141)
--- ---
Fair value of Pension Plan assets at the end of the year $2,154 $2,137
===== =====
FUNDED STATUS OF PLAN
Under funded status $ (154) $(91)
Unrecognized net actuarial loss 217 118
Unrecognized transition obligation 177 229
--- ---
Net amount recognized $240 $256
=== ===
Amounts recognized in the consolidated balance sheets consist of:
December 31, December 31,
2004 2003
---- ----
Accrued benefit cost $(154) $(91)
Intangible assets 176 229
Accumulated other comprehensive loss 218 118
--- ---
Net amount recognized $240 $256
=== ===
Pension benefits payable under the Pension Plan are expected to be $230 in
2005, $230 in 2006, $240 in 2007, $250 in 2008, $250 in 2009 and $1,290 in the
aggregate from 2010 through 2014.
The Company expects to contribute approximately $22 in cash to the plan in
2005.
In accordance with SFAS No. 87, "Employer's accounting for Pensions," the
Company recorded an additional minimum pension liability for underfunded plans
of $394 and $347 for fiscal years 2004 and 2003, respectively, representing the
excess of underfunded accumulated benefit obligations over previously recorded
pension cost liabilities. A corresponding amount is recognized as an intangible
asset, except to the extent that these additional liabilities exceed related
unrecognized prior service cost and net transition obligation, in which case the
increase in liabilities would be charged directly to stockholders' equity. As of
December 31, 2004, $218 of the excess minimum pension liability resulted in a
charge to equity. As of December 31, 2003, $118 of the excess minimum pension
liability resulted in a charge to equity.
LEGAL PROCEEDINGS:
On November 1, 2004, Morton Grove Pharmaceuticals, Inc. ("Morton Grove")
filed a lawsuit against the Company in the United States District Court for the
Northern District of Illinois, seeking a declaratory judgment that four Par
patents relating to megestrol acetate oral suspension are invalid, unenforceable
and not infringed by a Morton Grove product that was launched in the fourth
quarter of 2004. The Company intends to defend vigorously this action and has
asserted counterclaims against Morton Grove.
On May 3, 2004, Pentech filed an action against the Company in the United
States District Court for the Northern District of Illinois. This action alleges
that the Company breached its contract with Pentech relating to the supply and
marketing of paroxetine. The Company and Pentech are in dispute over the amount
of gross profit share. The Company intends to defend vigorously this action.
This case is currently in discovery. At this time the Company is not able to
predict with certainty the outcome of this litigation.
On March 9, 2004, the Congress of California Seniors brought an action
against GlaxoSmithKline, plc ("GSK") and the Company concerning the sale of
paroxetine in the State of California. This action alleges that the sale of
paroxetine by GSK and the Company in California constitutes, among other things,
unfair business practices. The Company intends to defend vigorously this action.
F-26
On September 10, 2003, Par and a number of other generic and brand
pharmaceutical companies were sued by a New York State county (the suit has
since been joined by three additional New York counties), which has alleged
violations of laws (including the Racketeer Influenced and Corrupt Organizations
Act, common law fraud and obtaining funds by false statements) related to
participation in the Medicaid program. The complaint seeks declaratory relief;
actual, statutory and treble damages, with interest; punitive damages; an
accounting and disgorgement of any illegal profits; a constructive trust and
restitution; and attorneys' and experts' fees and costs. This case was
transferred to the United States District Court for the District of
Massachusetts for coordinated and consolidated pre-trial proceedings. In
addition, on September 25, 2003, the Office of the Attorney General of the
Commonwealth of Massachusetts filed a complaint in the District of Massachusetts
against Par and 12 other leading generic pharmaceutical companies, alleging
principally that Par and such other companies violated, through their marketing
and sales practices, state and federal laws, including allegations of common law
fraud and violations of Massachusetts false statements statutes, by inflating
generic pharmaceutical product prices paid for by the Massachusetts Medicaid
program. Par waived service of process with respect to the complaint. The
complaint seeks injunctive relief, treble damages, disgorgement of excessive
profits, civil penalties, reimbursement of investigative and litigation costs
(including experts' fees) and attorneys' fees. On January 29, 2004, Par and the
other defendants involved in the litigation brought by the Office of the
Attorney General of the Commonwealth of Massachusetts filed a motion to dismiss,
which has not yet been ruled on. On August 4, 2004, Par and a number of other
generic and brand pharmaceutical companies were also sued by the City of New
York, which has alleged violations of laws (including common law fraud and
obtaining funds by false statements) related to participation in its Medicaid
program. The complaint seeks declaratory relief; actual, statutory and treble
damages, with interest; punitive damages; an accounting and disgorgement of any
illegal profits; a constructive trust and restitution; and attorneys' and
experts' fees and costs. This case was transferred to the U.S. District Court
for the District of Massachusetts for coordinated and consolidated pre-trial
proceedings. In addition to Massachusetts, the Commonwealth of Kentucky, the
State of Illinois and the State of Alabama have filed similar suits in their
respective jurisdictions. Par intends to defend vigorously this action.
On July 15, 2003, the Company and Par filed a lawsuit against Roxane in the
United States District Court for the District of New Jersey. The Company and Par
alleged that Roxane had infringed Par's U.S. Patents numbered 6,593,318 and
6,593,320 relating to megestrol acetate oral suspension. Roxane has denied these
allegations and has counterclaimed for declaratory judgments of non-infringement
and invalidity of both patents. In addition, Roxane has recently filed an
amended complaint asserting that Par's patents in the litigation are
unenforceable due to inequitable conduct before the U.S. Patent Office. Par
intends to defend vigorously this action.
In February 2003, Abbott, Fournier Industrie et Sante and Laboratoires
Fournier S.A. filed a lawsuit in the United States District Court for the
District of New Jersey against Par, alleging that Par's generic version of
TriCor(R) (fenofibrate) infringes one or more claims of their patents. The
Company had filed an ANDA for the product in October 2002. Par intends to defend
vigorously this action and has filed an answer and a counterclaim, alleging
non-infringement and patent invalidity.
On November 25, 2002, Ortho-McNeil Pharmaceutical, Inc. ("Ortho-McNeil")
filed a lawsuit against Kali, a wholly-owned subsidiary of the Company, 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 through an agreement entered into before the
Company's acquisition of Kali. 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. The referenced summary judgment motion was
fully briefed and submitted to the Court as of August 23, 2004. The Court has
stated that it will hold oral argument, which has not as of yet been scheduled.
The Company intends to defend vigorously against this action.
As a result of Par's filing of the ANDA for latanoprost (Xalatan(R)),
Pharmacia Corporation and the Trustees of Columbia University (collectively, the
"Plaintiffs") filed a lawsuit against Par on December 21, 2001 in the United
States District Court for the District of New Jersey, alleging patent
infringement. The Plaintiffs sought an injunction enjoining approval of the
Company's ANDA and the marketing of its generic product prior to the expiration
of their patents. On February 8, 2002, Par answered the complaint and filed a
counterclaim, which sought a declaration that the patents-in-suit are invalid,
unenforceable and/or not infringed by Par's products and that the extension of
the term of one of the patents was invalid. The trial concluded in March 2004
and on July 6, 2004 the Court issued an opinion and order ordering that judgment
be entered in favor of the Plaintiffs on their claims of infringement of U.S.
Patent Nos. 4,599,353 (expires July 28, 2006) and 5,296,504 (expires March 22,
2011); that the effective date of approval of Par's ANDA shall be a date which
is not earlier than the dates of expiration of those patents; and that Par is
enjoined from engaging in the commercial manufacture, use, offer to sell, or
sale within the United States, or importation into the United States, of any
drug product covered by, or the use of which is covered by, those two patents.
As to the third patent asserted by the Plaintiffs, U.S. Patent No. 5,422,368,
the Court dismissed the Plaintiffs' infringement claims and declared that the
patent is unenforceable due to inequitable conduct. The Court further dismissed
all of the parties' claims for attorneys' fees. Both Par and the Plaintiffs have
filed notices of appeal which are pending in the United States Court of Appeals
F-27
for the Federal Circuit. Par is appealing the Court's decision only insofar as
it relates to U.S. Patent No. 5,296,504.
Par entered into a licensing agreement with developer Paddock Laboratories,
Inc. ("Paddock") to market testosterone 1% gel, a generic version of Unimed
Pharmaceuticals, Inc.'s ("Unimed") product Androgel(R). The product, if
successfully brought to market, would be manufactured by Paddock and marketed by
Par. Paddock has filed an ANDA (that is pending with the FDA) for the
testosterone 1% gel product. As a result of the filing of the ANDA, Unimed and
Laboratories Besins Iscovesco ("Besins"), co-assignees of the patent-in-suit,
filed a lawsuit against Paddock in the United States District Court for the
Northern District of Georgia, alleging patent infringement on August 22, 2003.
Par has an economic interest in the outcome of this litigation by virtue of its
licensing agreement with Paddock. Unimed and Besins are seeking an injunction to
prevent Paddock from manufacturing the generic product. On November 18, 2003,
Paddock answered the complaint and filed a counterclaim, which seeks a
declaration that the patent-in-suit is invalid and/or not infringed by Paddock's
product. This case is currently in discovery. The Company intends to defend
vigorously against this action.
The Company cannot predict with certainty at this time the outcome or the
effects on the Company of the above listed actions. Accordingly, no assurances
can be given that such actions will not have a material adverse effect on the
Company's financial condition, results of operations, prospects or business.
The Company and/or Par are, from time to time, parties to certain other
litigations, including product liability and patent actions. The Company
believes that these actions are part of the ordinary course of its business and
that their ultimate resolution will not have a material adverse effect on its
financial condition, results of operations or liquidity. The Company intends to
vigorously defend or, in cases where the Company is plaintiff, to prosecute
these actions.
OTHER MATTERS:
In June 2003, the Company received notice from the U.S. Congress that the
Committee on Energy and Commerce (the "Committee") had begun an industry-wide
(brand and generic) investigation into pharmaceutical reimbursements and rebates
under Medicaid, to which the Company has responded. In order to conduct the
investigation, the Committee has requested certain pricing and other
information, which the Company delivered in August 2003, relating to certain
drugs produced by these pharmaceutical manufacturers. It is premature to
speculate what action, if any, the federal government may take and what impact
such action could have on the Company's business, prospects or financial
condition.
NOTE 16 - UNAUDITED SELECTED QUARTERLY FINANCIAL DATA:
Unaudited selected quarterly financial data for fiscal years of 2004 and
2003 is included in the table below:
FISCAL QUARTERS ENDED
------------------------------------------------------------------
APRIL 4, 2004 JULY 4, 2004 OCT. 3, 2004 DEC. 31, 2004
------------- ------------ ------------ -------------
Total revenues $211,767 $212,531 $151,566 $114,152
Gross margin 70,552 73,117 58,734 43,655
Net income 30,206 29,860 (35,085) 4,265
Net income per common share:
Basic $0.88 $0.87 $(1.03) $0.13
Diluted $0.85 $0.85 $(1.03) $0.12
FISCAL QUARTERS ENDED
------------------------------------------------------------------
MARCH 30, 2003 JUNE 29, 2003 SEPT. 28, 2003 DEC. 31, 2003
-------------- ------------- -------------- -------------
Total revenues $106,412 $115,861 $216,635 $222,780
Gross margin 55,303 60,970 84,926 81,976
Net income 22,433 23,146 38,742 38,212
Net income per common share:
Basic $.68 $.70 $1.15 $1.12
Diluted $.67 $.68 $1.11 $1.08
F-28
SCHEDULE II
PAR PHARMACEUTICAL COMPANIES, INC.
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- -------- -------- -------- -------- --------
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS PERIOD
- ----------- --------- -------- ---------- ------
Allowance for doubtful accounts:
Year ended December 31, 2004 $1,756 $150 $59 $1,847
Year ended December 31, 2003 $1,156 $600 - $1,756
Year ended December 31, 2002 $998 $547 $389(a) $1,156
Allowance for returns and price adjustments:
Year ended December 31, 2004 $38,601 $204,486 $202,618(b) $40,469
Year ended December 31, 2003 $35,101 $119,161 $115,661b) $38,601
Year ended December 31, 2002 $46,170 $113,281 $124,350(b) $35,101
(a) Write-off of uncollectible accounts.
(b) Returns and allowances charged against allowance provided therefore.
F-29