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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended June 30, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from to .
Commission file number: 39040
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ENDO PHARMACEUTICALS HOLDINGS INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 13-4022871
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
223 Wilmington-West Chester Pike
Chadds Ford, Pennsylvania 19317
(Address of Principal Executive Offices)
(610) 558-9800
(Registrant's Telephone Number, Including Area Code)
----------------
Indicate by check X whether the registrant: (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 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 [_] NO [X]
The aggregate number of shares of the Registrant's common stock outstanding
as of August 14, 2000 was 89,138,950.
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ENDO PHARMACEUTICALS HOLDINGS INC.
REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets (Unaudited)
June 30, 2000 and December 31, 1999.......................... 1
Consolidated Statements of Operations (Unaudited)
Three and Six Months Ended June 30, 2000 and 1999............ 2
Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended June 30, 2000 and 1999...................... 3
Notes to Consolidated Financial Statements (Unaudited)......... 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................... 6
Overview....................................................... 6
General........................................................ 6
Three Months Ended June 30, 2000 Compared to the Three Months
Ended June 30, 1999............................................ 6
Six Months Ended June 30, 2000 Compared to the Six Months Ended
June 30, 1999.................................................. 7
Liquidity and Capital Resources................................ 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk..... 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 11
Item 2. Changes in Securities and Use of Proceeds...................... 11
Item 3. Defaults Upon Senior Securities................................ 11
Item 4. Submission of Matters to a Vote of Security Holders............ 11
Item 5. Other Information.............................................. 11
Item 6. Exhibits and Reports on Form 8-K............................... 11
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
ENDO PHARMACEUTICALS HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands except share data)
June 30, December 31,
2000 1999
-------- ------------
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents............................. $ 29,858 $ 22,028
Accounts receivable, net.............................. 43,789 62,254
Inventories........................................... 32,343 21,269
Prepaid expenses...................................... 2,648 3,356
Deferred income taxes................................. 13,473 9,520
-------- --------
Total current assets................................ 122,111 118,427
-------- --------
PROPERTY AND EQUIPMENT, Net............................. 5,448 5.712
GOODWILL AND OTHER INTANGIBLES, Net..................... 188,526 192,081
DEFERRED INCOME TAXES................................... 15,009 8,636
OTHER ASSETS............................................ 4,608 4,580
-------- --------
TOTAL ASSETS............................................ $335,702 $329,436
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable...................................... $ 21,776 $ 19,185
Accrued expenses...................................... 31,732 33,641
Income taxes payable.................................. 75
Current portion of long-term debt..................... 14,567 15,985
-------- --------
Total current liabilities........................... 68,075 68,886
-------- --------
LONG-TERM DEBT, Less current portion.................... 168,469 175,218
OTHER LIABILITIES....................................... 16,768 6,745
STOCKHOLDERS' EQUITY
Preferred Stock, $.01 par value; 40,000,000 shares
authorized; none issued
Common Stock, $.01 par value; 175,000,000 shares
authorized; and 71,328,424 and 71,323,644 issued and
outstanding at June 30, 2000 and December 31, 1999,
respectively......................................... 713 713
Additional paid-in capital............................ 130,496 109,707
Accumulated deficit................................... (48,819) (31,833)
-------- --------
Total Stockholders' Equity.......................... 82,390 78,587
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.............. $335,702 $329,436
======== ========
See Notes to Consolidated Financial Statements
1
ENDO PHARMACEUTICALS HOLDINGS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands except share and per share data)
Three Months Ended June Six Months Ended June
30, 30,
----------------------- ------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
NET SALES................... $ 41,934 $ 26,125 $ 68,934 $ 54,686
COST OF SALES............... 16,271 12,686 28,333 26,126
----------- ----------- ----------- -----------
GROSS PROFIT................ 25,663 13,439 40,601 28,560
----------- ----------- ----------- -----------
COSTS AND EXPENSES:
Selling, general and
administrative........... 14,065 10,198 26,138 19,861
Research and development.. 4,668 2,057 7,696 4,040
Depreciation and
amortization............. 2,175 2,082 4,326 3,961
Separation benefits....... 22,034
----------- ----------- ----------- -----------
OPERATING INCOME (LOSS)..... 4,755 (898) (19,593) 698
----------- ----------- ----------- -----------
INTEREST EXPENSE, Net....... 3,781 3,414 7,718 6,776
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME
TAX (BENEFIT).............. 974 (4,312) (27,311) (6,078)
----------- ----------- ----------- -----------
INCOME TAX (BENEFIT)........ 366 (1,674) (10,325) (2,361)
----------- ----------- ----------- -----------
NET INCOME (LOSS)........... $ 608 $ (2,638) $ (16,986) $ (3,717)
=========== =========== =========== ===========
NET INCOME (LOSS) PER SHARE:
Basic and Diluted......... $ .01 $ (.04) $ (.24) $ (.05)
Weighted average shares
(Basic and Diluted)...... 71,328,424 71,333,979 71,326,680 71,335,335
See Notes to Consolidated Financial Statements.
2
ENDO PHARMACEUTICALS HOLDINGS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
Six Months Ended
June 30,
-----------------
2000 1999
-------- -------
OPERATING ACTIVITIES
Net Loss.................................................. $(16,986) $(3,717)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization........................... 4,326 3,961
Amortization of deferring financing costs............... 600 583
Accretion of promissory notes........................... 1,506 764
Deferred income taxes................................... (10,401) (2,362)
Compensation related to stock options................... 20,782
Changes in assets and liabilities which provided (used)
cash:
Accounts receivable..................................... 18,465 (845)
Inventories............................................. (11,074) (2,864)
Other assets............................................ 81 958
Accounts payable........................................ 2,591 2,041
Accrued expenses........................................ (1,909) 3,806
Other liabilities....................................... 10,023 9,301
-------- -------
Net cash provided by operating activities............. 18,004 11,626
-------- -------
INVESTING ACTIVITIES:
Purchase of property and equipment........................ (507) (1,545)
Acquisition of Licensing Rights........................... (5,950)
-------- -------
Net cash used in investing activities................. (507) (7,495)
-------- -------
FINANCING ACTIVITIES:
Repayments of long-term debt.............................. (9,674)
Repurchase of Class A Common Stock........................ (13)
Issuance of Class A Common Stock.......................... 7
-------- -------
Net cash used in financing activities................. (9,667) (13)
-------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 7,830 4,118
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 22,028 17,367
-------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 29,858 $21,485
======== =======
SUPPLEMENTAL INFORMATION:
Interest Paid............................................. $ 6,576 $ 5,893
Income Taxes Paid......................................... $ 75
See Notes to Consolidated Financial Statements.
3
ENDO PHARMACEUTICALS HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2000
1. CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of management, the accompanying condensed consolidated
financial statements of Endo Pharmaceuticals Holdings Inc. ("Endo" or the
"Company") and its subsidiaries, which are unaudited, include all normal and
recurring adjustments necessary to present fairly the Company's financial
position as of June 30, 2000 and the results of operations and cash flows for
the periods presented. The accompanying consolidated balance sheet as of
December 31, 1999 is derived from the Company's audited financial statements.
Certain information and footnote disclosure normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted as promulgated by APB Opinion No. 28 and Rule
10.01 of Regulation S-X. These condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto as of and for the year ended December 31, 1999 contained in the
Company's effective registration statement on Form S-4 filed with the
Securities and Exchange Commission on June 9, 2000, as amended.
2. MERGER AGREEMENT
On November 29, 1999, the Company and Algos Pharmaceutical Corporation
("Algos") announced that they had entered into a definitive merger agreement
providing for the merger (the "Merger") of Algos into Endo Inc., a newly
formed, wholly owned subsidiary of the Company. The Merger, which was completed
on July 17, 2000, will be accounted for by the Company using the purchase
method of accounting. The assets acquired and liabilities assumed of Algos will
be recorded at their fair values upon completion of an independent appraisal.
The assets acquired and liabilities assumed, results of operations and cash
flows of Algos will be included in the Company's financial statements
prospectively for reporting periods beginning July 17, 2000.
3. RECAPITALIZATION
In connection with the Merger, the Company effected a recapitalization of
its common stock, par value $.01 per share ("Common Stock"), Class A common
stock, par value $.01 per share ("Class A Comon Stock") and preferred stock
(the "Recapitalization"). The Recapitalization was effected on July 17, 2000
through a stock dividend of approximately 64.59 shares of Common Stock for each
share of Common Stock and Class A Common Stock outstanding immediately prior to
the Merger. Immediately prior to the Merger, the Company amended and restated
its certificate of incorporation to effect the Recapitalization and to
eliminate its Class A Common Stock. The effect of the Recapitalization has been
reflected in the accompanying financial statements.
4. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, which establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts (collectively
referred to as "derivatives") and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statements of financial position and measure those instruments at fair value.
This statement, as
4
amended by SFAS No. 137, Accounting for Derivative Instruments and Hedging
Activities Deferral of the Effective Date of FASB Statement No. 133 and SFAS
No. 138, Accounting for Certain Derivative Instruments and Certain Hedging
Activities, is effective for all fiscal quarters of fiscal years beginning
after June 15, 2000. Management has not yet determined what effect, if any,
this statement will have on the Company.
5. COMMITMENTS AND CONTINGENCIES
The Company has entered into employment agreements with certain members of
management.
The Company is subject to various claims arising out of the normal course of
business with respect to commercial matters, including product liabilities,
governmental regulation and other actions. In the opinion of management, the
amount of ultimate liability with respect to these actions will not materially
affect the financial position, results of operations or liquidity of the
Company.
Kelso & Company provides ongoing financial advisory services to the Company
for an annual fee of $347,000 plus the reimbursement of expenses. In connection
with the Merger which was completed on July 17, 2000, the Company terminated
this agreement to pay an annual fee to Kelso by making a one-time payment to
Kelso of $1.5 million.
6. SEPARATION BENEFITS
During the period ended March 31, 2000 and immediately thereafter, the
Company entered into separation and release agreements with two executives. The
agreements were accounted for during the period ended March 31, 2000 as all
material terms and conditions were known as of March 31, 2000. Severance and
other termination benefits provided by the agreements amounting to $1,252,000
were accrued as of March 31, 2000.
The separation and release agreements provided that certain options granted
to the two executives under existing option plans became fully vested on the
effective dates of the agreements. The agreements also provided that other
options previously granted to the executives would terminate. The agreements
further provided terms and conditions for the exercise of the vested options.
Cost related to stock options resulting from the agreements resulted in a
charge of $20,782,000 during the period ended March 31, 2000.
******
5
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Except for the historical information contained in this Report, this Report,
including the following discussion, contains forward-looking statements that
involve risks and uncertainties.
Overview
The Company, through its wholly owned subsidiary, Endo Pharmaceuticals Inc.,
is engaged in the research, development, sales and marketing of branded and
generic prescription pharmaceuticals used primarily for the treatment and
management of pain. Branded products comprised approximately 69%, 68% and 72%
of net sales for the year ended December 31, 1998, the year ended December 31,
1999 and the six months ended June 30, 2000, respectively. Percocet(R)
comprised approximately 41%, 37% and 45% of the Company's net sales in the
years ended December 31, 1998 and 1999, and the six months ended June 30, 2000,
respectively. On August 26, 1997, an affiliate of Kelso & Company and certain
existing management entered into an asset purchase agreement with the then
DuPont Merck Pharmaceutical Company to acquire certain branded and generic
pharmaceutical products and exclusive worldwide rights to a number of new
chemical entities in the DuPont research and development pipeline from DuPont
Merck through the newly-formed Endo Pharmaceuticals. The Company was formed as
a holding company and incorporated on November 18, 1997 under the laws of the
state of Delaware and has its principal executive offices at 233 Wilmington-
West Chester Pike, Chadds Ford, Pennsylvania 19317 (telephone number: (610)
558-9800).
On July 17, 2000, the Company completed the Merger with Algos. The assets
acquired and liabilities assumed, results of operations and cash flows of Algos
will be included in the Company's financial statements and Management's
Discussion and Analysis of Financial Conditions and Results of Operations
prospectively for reporting periods beginning July 17, 2000.
The Company's quarterly results have fluctuated in the past, and may
continue to fluctuate. These fluctuations are primarily due to the timing of
new product launches, purchasing patterns of the Company's customers, market
acceptance of the Company's products and the impact of competitive products and
pricing.
Results of Operations
General
Goodwill and other intangibles represent a significant portion of the assets
and stockholders' equity of the Company. As of June 30, 2000, goodwill and
other intangibles comprise approximately 56% of total assets and 229% of
stockholders' equity. The Company assesses the recoverability and the
amortization period of goodwill by determining whether the amount can be
recovered through undiscounted net cash flows of the businesses acquired over
the remaining amortization period. The Company reviews for the impairment of
long-lived assets whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable, such as in the event of a
significant adverse change in business conditions or a significant change in
the intended use of an asset. An impairment loss would be recognized when
estimated undiscounted future cash flows expected to result from the use of the
asset are less than its carrying amount. Assets are grouped at the lowest level
for which there are identifiable cash flows that are largely independent from
other asset groups. The Company uses the discounted future expected net cash
flows, as its estimate of fair value, to determine the amount of impairment
loss. As a result of the significance of goodwill and other intangibles,
amortization of goodwill and other intangibles will significantly impact the
results of operations of the Company. In addition, the Company's results of
operations and financial position in a future period could be negatively
impacted should an impairment of goodwill and other intangible assets occur.
Three Months Ended June 30, 2000 Compared to the Three Months Ended June 30,
1999
Net sales for the three months ended June 30, 2000 increased by 61% to $41.9
million from $26.1 million in the comparable 1999 period. This increase in net
sales was primarily due to the increase in net sales from
6
several recently launched new products. In November 1999, the Company launched
Percocet(R) 2.5/325, Percocet(R) 7.5/500 and Percocet(R) 10.0/650 to complement
the existing Percocet(R) 5.0/325 for the relief of moderate-to-severe pain. In
September 1999, the Company launched Lidoderm(R), the first and only FDA-
approved product for the treatment of the pain of post-herpetic neuralgia. In
November 1998, the Company launched Morphine Sulfate Extended Release Tablets,
the therapeutic equivalent version of MS Contin(R), for moderate-to-severe
pain.
Gross profit for the three months ended June 30, 2000 increased by 92% to
$25.7 million from $13.4 million in the comparable 1999 period. Gross profit
margins increased to 61% from 51% due to the Company's continued focus since
the asset purchase transaction in August 1997 on a more favorable mix of higher
margin products both through product launches as discussed above, as well as
the discontinuation of some lower margin non-core products. In addition, the
increase in gross profit margins was also due to the fixed cost nature of the
Company's most significant contract manufacturing relationship with DuPont
Pharmaceuticals. If the Company achieves its forecast for revenue and product
mix, it expects the increase in gross profits to continue.
Selling, general and administrative expenses for the three months ended June
30, 2000 increased by 38% to $14.1 million from $10.2 million in the comparable
1999 period. This increase was due to a $2.7 million increase in sales and
promotional efforts in 2000 over the comparable 1999 period to support the
recent launch of Lidoderm(R) and the launches of Percocet(R) 2.5/325,
Percocet(R) 7.5/500 and Percocet(R) 10.0/650 to complement the existing
Percocet(R) 5.0/325. In February 1999, the Company deployed a dedicated
contract field force of approximately 300 sales representatives to promote
these new products. In addition, the Company experienced an increase in
personnel-related costs in the general and administrative functions in order to
support its growth.
Research and development expenses for the three months ended June 30, 2000
increased by 124% to $4.7 million from $2.1 million in the comparable 1999
period. This increase was due to the Company's increased spending on products
under development that are focused in pain management.
Depreciation and amortization for the three months ended June 30, 2000
increased by 5% to $2.2 million from $2.1 million in the comparable 1999
period. This increase was due to a $.1 million increase in depreciation expense
resulting from capital expenditure spending subsequent to the August 26, 1997
acquisition.
Interest expense, net for the three months ended June 30, 2000 increased by
12% to $3.8 million from $3.4 million in the comparable 1999 period. The
increase was due to an increase in interest expense of $.4 million due to an
increase in long-term debt outstanding and an increase in interest expense of
$.2 million due to an increase in interest rates. These increases are offset by
an increase in interest income of $.2 million due to an increase in the average
cash balance for the three months ended June 30, 2000 compared to three months
ended June 30, 1999.
Income tax for the three months ended June 30, 2000 increased to $.4 million
from a benefit of $1.7 million in the comparable 1999 period due to the
increase in the income before income tax (benefit).
Six Months Ended June 30, 2000 Compared to the Six Months Ended June 30, 1999
Net sales for the six months ended June 30, 2000 increased by 26% to $68.9
million from $54.7 million in the comparable 1999 period. This increase in net
sales was primarily due to the increase in net sales from several recently
launched new products. In November 1999, the Company launched Percocet(R)
2.5/325, Percocet(R) 7.5/500 and Percocet(R) 10.0/650 to complement the
existing Percocet(R) 5.0/325 for the relief of moderate-to-severe pain. In
September 1999, the Company launched Lidoderm(R), the first and only FDA-
approved product for the treatment of the pain of post-herpetic neuralgia. In
November 1998, the Company launched Morphine Sulfate Extended Release Tablets,
the therapeutic equivalent version of MS Contin(R), for moderate-to-severe
pain.
7
Gross profit for the six months ended June 30, 2000 increased by 42% to
$40.6 million from $28.6 million in the comparable 1999 period. Gross profit
margins increased to 59% from 52% due to the Company's continued focus since
the asset purchase transaction in August 1997 on a more favorable mix of higher
margin products both through product launches as discussed above, as well as
the discontinuation of some lower margin non-core products. In addition, the
increase in gross profit margins was also due to the fixed cost nature of the
Company's most significant contract manufacturing relationship with DuPont
Pharmaceuticals. If the Company achieves its forecast for revenue and product
mix, management expects the increase in gross profits to continue.
Selling, general and administrative expenses for the six months ended June
30, 2000 increased by 31% to $26.1 million from $19.9 million in the comparable
1999 period. This increase was due to a $3.6 million increase in sales and
promotional efforts in 2000 over the comparable 1999 period to support the
recent launches of Zydone(R), Lidoderm(R) and the launches of Percocet(R)
2.5/325, Percocet(R) 7.5/500 and Percocet(R) 10.0/650 to complement the
existing Percocet(R) 5.0/325. In February 1999, the Company deployed a
dedicated contract field force of approximately 300 sales representatives to
promote these new products, which was an increase from the prior field force of
approximately 100 sales representatives. In addition, the Company experienced
an increase in personnel-related costs in the general and administrative
functions in order to support its growth and the Company recorded a provision
for doubtful accounts of $.8 million for a customer who filed for bankruptcy.
Research and development expenses for the six months ended June 30, 2000
increased by 93% to $7.7 million from $4.0 million in the comparable 1999
period. This increase was due to the Company's increased spending on products
under development focused in pain management.
Depreciation and amortization for the six months ended June 30, 2000
increased by 8% to $4.3 million from $4.0 million in the comparable 1999
period. This increase was due to a $.2 million increase in depreciation expense
resulting from capital expenditure spending subsequent to the August 26, 1997
acquisition and a $.1 million increase in amortization expense from license
arrangements entered into during 1998 and 1999.
Separation benefits of $22.0 million in the six months ended June 30, 2000
resulted from a $20.8 million charge related to the acceleration of vesting of
stock options held by two former executives and a $1.2 million charge from
compensation and other benefits pursuant to two separation and release
agreements entered into by the Company. The stock compensation charge reflects
the estimated difference in the fair value and the exercise price of such
options on the effective date of the separation and release agreements.
Interest expense, net for the six months ended June 30, 2000 increased by
13% to $7.7 million from $6.8 million in the comparable 1999 period. The
increase was due to an increase in interest expense of $.8 million due to an
increase in long-term debt outstanding and an increase in interest expense of
$.6 million due to an increase in interest rates. These increases are offset by
an increase in interest income of $.5 million due to an increase in the average
cash balance for the six months ended June 30, 2000 compared to the six months
ended June 30, 1999.
Income tax benefit for the six months ended June 30, 2000 increased to $10.3
million from $2.4 million in the comparable 1999 period due to the increase in
the loss before income tax benefit.
Liquidity and Capital Resources
Net cash provided by operating activities increased to $18.0 million for the
six months ended June 30, 2000 from $11.6 million for the six months ended June
30, 1999. This increase was substantially due to a higher amount of cash
provided by the increase in accounts receivable due to the growth in net sales
versus the comparable period in 1999. This increase was offset by the
utilization of cash for the build-up in inventories to support the recent
launches of Lidoderm(R), Percocet(R) 2.5/325, Percocet(R) 7.5/500 and
Percocet(R) 10.0/650 as well as the utilization of cash for other working
capital purposes.
8
Net cash utilized in investing activities decreased to $.5 million for the
six months ended June 30, 2000 from $ 7.5 million for the six months ended June
30, 1999 due to a $6.0 million payment for the license of Lidoderm(R) in 1999
and a $1.0 million decrease in capital expenditures due to the completion of an
enterprise software system implementation during 1999.
Net cash utilized in financing activities increased by $9.7 million due to
repayments made on the Company's credit facility.
The Company's cash and cash equivalents totaled $29.9 million at June 30,
2000. The Company believes that its (a) cash and cash equivalents, (b) cash
flow from operations and (c) existing credit facility, which has an available
unused line of credit of $25 million, will be sufficient to meet its normal
operating, investing and financing requirements in the foreseeable future. In
the event that the Company makes any significant acquisitions or other
strategic investments, it may be required to raise additional funds, through
the issuance of additional debt or equity securities.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
The Company's primary market risk exposure is to changes in interest rates
(LIBOR) on its variable rate borrowings. The Company does not utilize financial
instruments for trading purposes and holds no derivative financial instruments
that could expose it to significant market risk. The Company monitors interest
rates and enters into interest rate agreements as considered appropriate. To
manage a portion of its exposure to fluctuations in interest rates, the Company
has entered into an interest rate cap agreement with a notional amount of $82.5
million that sets a maximum LIBOR rate of 8% that it will pay on the related
notional amount. This interest rate cap agreement expires on August 27, 2000.
Effective August 27, 2000, the Company has entered into a new interest rate cap
agreement with a notional amount of $70.0 million that sets a maximum LIBOR
rate of 8% that the Company will pay on the related notional amount through
August 27, 2003.
Forward Looking Statements
This Report contains forward-looking statements, within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, as amended, that are based on management's beliefs and
assumptions, current expectations, estimates and projections. Statements that
are not historical facts, including statements which are preceded by, followed
by, or that include, the words "believes," "anticipates," "plans," "expects" or
similar expressions and statements. Endo's estimated or anticipated future
results, product performance or other non-historical facts are forward-looking
and reflect Endo's current perspective on existing trends and information. Many
of the factors that will determine the Company's future results are beyond the
ability of the Company to control or predict. These statements are subject to
risks and uncertainties and, therefore, actual results may differ materially
from those expressed or implied by these forward-looking statements. The reader
should not rely on any forward-looking statement. The Company undertakes no
obligations to update any forward-looking statements whether as a result of new
information, future events or otherwise. Several important factors, in addition
to the specific factors discussed in connection with these forward-looking
statements individually, could affect the future results of the Endo and could
cause those results to differ materially from those expressed in the forward-
looking statements contained herein. Important factors that may affect future
results include, but are not limited to: market acceptance of the Company's
products and the impact of competitive products and pricing; dependence on sole
source suppliers; the success of the Company's product development activities
and the timeliness with which regulatory authorizations and product launches
may be achieved; successful compliance with extensive, costly, complex and
evolving governmental regulations and restrictions; the availability on
commercially reasonable terms of raw materials and other third party
manufactured products; exposure to product liability and other lawsuits and
contingencies; the ability to timely and cost effectively integrate
acquisitions; uncertainty associated with pre-clinical studies and clinical
trials and regulatory approval; uncertainty of market acceptance of new
products; impact of
9
competitive products and pricing; product development; changes in laws and
regulations; customer demand; possible future litigation; availability of
future financing and reimbursement policies of government and private health
insurers and others; and other risks and uncertainties detailed in Endo's
Registration Statement on Form S-4 filed with the Securities and Exchange
Commission on June 9, 2000, as amended. Readers should evaluate any statement
in light of these important factors.
10
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
Exhibit No. Title
----------- -----
2.1 Amended and Restated Agreement and Plan of Merger, dated as of
March 3, 2000 (the "Merger Agreement"), by and among Endo
Pharmaceuticals Holdings Inc. ("Endo"), Endo Inc. and Algos
Pharmaceutical Corporation ("Algos") (incorporated herein by
reference to Exhibit 2.1 of the Registration Statement on Form
S-4 of the Registrant (Registration No. 333-39040) (the
"Registration Statement"), filed with the Securities and
Exchange Commission (the "Commission") on June 9, 2000)
2.2 Amendment, dated as of April 17, 2000, to the Merger
Agreement, by and between Endo, Endo Inc. and Algos
(incorporated herein by reference to Exhibit 2.2 of the
Registration Statement filed with the Commission on June 9,
2000)
2.3 Asset Purchase Agreement, dated as of August 27, 1997, by and
between Endo Pharmaceuticals Inc. ("Endo Pharmaceuticals") and
The DuPont Merck Pharmaceutical Company ("DuPont Merck
Pharmaceutical") (incorporated herein by reference to Exhibit
2.3 of the Registration Statement filed with the Commission on
June 9, 2000)
3.1 Amended and Restated Certificate of Incorporation of Endo
3.2 Amended and Restated By-laws of Endo
4.1 Amended and Restated Executive Stockholders Agreement, dated
as of July 14, 2000, by and among Endo, Endo Pharma LLC ("Endo
LLC"), Kelso Investment Associates V, L.P. ("KIA V"), Kelso
Equity Partners V, L.P. ("KEP V") and the Management
Stockholders (as defined therein)
4.2 Amended and Restated Employee Stockholders Agreement, dated as
of July 14, 2000, by and among Endo, Endo LLC, KIA V, KEP V
and the Employee Stockholders (as defined therein)
4.3 Form of Stock Certificate of Endo Common Stock
4.4 Registration Rights Agreement, dated as of July 17, 2000, by
and between Endo and Endo LLC
11
Exhibit No. Title
----------- -----
9 Form of Voting Agreement, by and among Endo, Endo Inc. and
each of Karen B. Lyle, John W. Lyle, Michael Hyatt, Roger H.
Kimmel, Hyatt Family Trust, Trust Under the Will of Inez L.
Kimmel, Todd Kimmel Trust, Melissa Kimmel Trust, Anita Hyatt
Family Trust, Donald Drapkin, Donald G. Drapkin, James R.
Ledley, Frank S. Caruso, Frank S. Caruso Irrevocable Trust and
Patricia Caruso (incorporated herein by reference to Exhibit 9
of the Registration Statement filed with the Commission on
June 9, 2000)
10.1 Endo Warrant Agreement, dated as of July 17, 2000, by and
between Endo and United States Trust Company of New York
10.2 Algos Warrant Agreement, dated as of July 17, 2000, by and
between Endo and United States Trust Company of New York
10.3 Form of Series A Warrant to Purchase Shares of Common Stock
and Warrants of Endo (incorporated herein by reference to
Exhibit 10.3 of the Registration Statement filed with the
Commission on June 9, 2000)
10.4 Letter Agreement, dated as of November 26, 1999, by and among
Algos, Endo, KIA V and KEP V (incorporated herein by reference
to Exhibit 10.4 of the Registration Statement filed with the
Commission on June 9, 2000)
10.5 Tax Sharing Agreement, dated as of July 17, 2000, by and among
Endo, Endo Inc. and Endo LLC
10.6 Agreement, dated as of July 17, 2000, by and between Endo and
Endo LLC
10.7 Credit Agreement, dated as of August 26, 1997, by and between
Endo Pharmaceuticals and The Chase Manhattan Bank
(incorporated herein by reference to Exhibit 10.7 of the
Registration Statement filed with the Commission on June 9,
2000)
10.8 Co-Promotion Agreement, dated as of March 1, 2000, by and
between Endo Pharmaceuticals and Elan Pharmaceuticals, Inc.
(incorporated herein by reference to Exhibit 10.8 of the
Registration Statement filed with the Commission on June 9,
2000)
10.9 Collaboration Agreement, dated as of November 26, 1999, by and
between Endo Pharmaceuticals and Algos (incorporated herein by
reference to Exhibit 10.9 of the Registration Statement filed
with the Commission on June 9, 2000)
10.10 Sole and Exclusive License Agreement, dated as of November 23,
1998, by and between Endo Pharmaceuticals and Hind Health
Care, Inc. (incorporated herein by reference to Exhibit 10.10
of the Registration Statement filed with the Commission on
June 9, 2000)
10.11 Analgesic License Agreement, dated as of October 27, 1997, by
and among Endo Pharmaceuticals, Endo Laboratories, LLC and
DuPont Merck Pharmaceutical (incorporated herein by reference
to Exhibit 10.11 of the Registration Statement filed with the
Commission on June 9, 2000)
10.12 Anti-Epileptic License Agreement, dated as of October 27,
1997, by and among Endo Pharmaceuticals, Endo Laboratories,
LLC and DuPont Merck Pharmaceutical (incorporated herein by
reference to Exhibit 10.12 of the Registration Statement filed
with the Commission on June 9, 2000)
10.13 Product Development, Manufacturing and Supply Agreement, dated
as of October 29, 1999, by and between Endo Pharmaceuticals
and Lavipharm Laboratories Inc. (incorporated herein by
reference to Exhibit 10.13 of the Registration Statement filed
with the Commission on June 9, 2000)
10.14 Supply and Manufacturing Agreement, dated as of November 23,
1998, by and between Endo Pharmaceuticals and Teikoku Seiyaku
Co., Ltd (incorporated herein by reference to Exhibit 10.14 of
the Registration Statement filed with the Commission on June
9, 2000)
12
Exhibit No. Title
----------- -----
10.15 Supply Agreement, dated as of July 1, 1998, by and between
Endo Pharmaceuticals and Mallinckrodt Inc. ("Mallinckrodt")
(incorporated herein by reference to Exhibit 10.15 of the
Registration Statement filed with the Commission on June 9,
2000)
10.16 Supply Agreement for Bulk Narcotics Raw Materials, dated as of
July 1, 1998, by and between Endo Pharmaceuticals and
Mallinckrodt (incorporated herein by reference to Exhibit
10.16 of the Registration Statement filed with the Commission
on June 9, 2000)
10.17 Manufacture and Supply Agreement, dated as of August 26, 1997,
by and among Endo Pharmaceuticals, DuPont Merck Pharmaceutical
and DuPont Merck Pharma (incorporated herein by reference to
Exhibit 10.17 of the Registration Statement filed with the
Commission on June 9, 2000)
10.18 Strategic Alliance Agreement, dated as of September 17, 1997,
by and between Endo Pharmaceuticals and Penwest
Pharmaceuticals Group (incorporated herein by reference to
Exhibit 10.18 of the Registration Statement filed with the
Commission on June 9, 2000)
10.19 Agreement, dated as of February 1, 2000, by and between Endo
Pharmaceuticals and Livingston Healthcare Services Inc.
(incorporated herein by reference to Exhibit 10.19 of the
Registration Statement filed with the Commission on June 9,
2000)
10.20 Medical Affairs Support Services Agreement, dated as of June
1, 1999, by and between Endo Pharmaceuticals and Kunitz and
Associates, Inc. (incorporated herein by reference to Exhibit
10.20 of the Registration Statement filed with the Commission
on June 9, 2000)
10.22 Endo LLC Amended and Restated 1997 Employee Stock Option Plan
10.23 Endo LLC Amended and Restated 1997 Executive Stock Option Plan
10.24 Endo LLC 2000 Supplemental Employee Stock Option Plan
10.25 Endo LLC 2000 Supplemental Executive Stock Option Plan
10.26 Employment Agreement, dated as of July 17, 2000, by and
between Endo and John W. Lyle
10.27 Amended and Restated Employment Agreement, dated as of April
26, 2000, by and between Endo Pharmaceuticals and Carol A.
Ammon (incorporated herein by reference to Exhibit 10.27 of
the Registration Statement filed with the Commission on June
9, 2000)
10.28 Amended and Restated Employment Agreement, dated as of April
26, 2000, by and between Endo Pharmaceuticals and Jeffrey R.
Black (incorporated herein by reference to Exhibit 10.28 of
the Registration Statement filed with the Commission on June
9, 2000)
10.29 Amended and Restated Employment Agreement, dated as of April
26, 2000, by and between Endo Pharmaceuticals and David Allen
Harvey Lee, MD, Ph.D. (incorporated herein by reference to
Exhibit 10.29 of the Registration Statement filed with the
Commission on June 9, 2000)
10.30 Amended and Restated Employment Agreement, dated as April 26,
2000, by and between Endo Pharmaceuticals and Mariann T.
MacDonald (incorporated herein by reference to Exhibit 10.30
of the Registration Statement filed with the Commission on
June 9, 2000)
10.31 Separation and Release Agreement, dated as of March 22, 2000,
by and between Endo Pharmaceuticals, Endo and Osagie O.
Imasogie (incorporated herein by reference to Exhibit 10.31 of
the Registration Statement filed with the Commission on June
9, 2000)
10.32 Separation and Release Agreement, dated as of April 20, 2000,
by and between Endo Pharmaceuticals, Endo and Louis J. Vollmer
(incorporated herein by reference to Exhibit 10.32 of the
Registration Statement filed with the Commission on June 9,
2000)
13
Exhibit No. Title
----------- -----
10.33 Office Lease, dated as of August 26, 1997, by and between Endo
Pharmaceuticals and Northstar Development Company
(incorporated herein by reference to Exhibit 10.33 of the
Registration Statement filed with the Commission on June 9,
2000)
10.34 Lease Agreement, dated as of May 5, 2000, by and between Endo
Pharmaceuticals and Painters' Crossing One Associates, L.P.
(incorporated herein by reference to Exhibit 10.34 of the
Registration Statement filed with the Commission on June 9,
2000)
11 Statement Regarding Computation of per Share Earnings
27 Financial Data Schedule
(b) Reports on Form 8-K. During the quarter for which this Report is being
filed, no reports on Form 8-K have been filed.
14
SIGNATURES
Pursuant to the requirements of the Securities Exchange of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Endo Pharmaceuticals Holdings Inc.
(Registrant)
/s/ Carol A. Ammon
_____________________________________
Name: Carol A. Ammon
Title: President and Chief Executive
Officer
/s/ Jeffrey R. Black
_____________________________________
Name: Jeffrey R. Black
Title: Senior Vice President and
Chief Financial Officer
Date: August 14, 2000
15
Exhibit Index
Exhibit No. Title
----------- -----
2.1 Amended and Restated Agreement and Plan of Merger, dated as of
March 3, 2000 (the "Merger Agreement"), by and among Endo
Pharmaceuticals Holdings Inc. ("Endo"), Endo Inc. and Algos
Pharmaceutical Corporation ("Algos") (incorporated herein by
reference to Exhibit 2.1 of the Registration Statement on Form
S-4 of the Registrant (Registration No. 333-39040) (the
"Registration Statement"), filed with the Securities and
Exchange Commission (the "Commission") on June 9, 2000)
2.2 Amendment, dated as of April 17, 2000, to the Merger
Agreement, by and between Endo, Endo Inc. and Algos
(incorporated herein by reference to Exhibit 2.2 of the
Registration Statement filed with the Commission on June 9,
2000)
2.3 Asset Purchase Agreement, dated as of August 27, 1997, by and
between Endo Pharmaceuticals Inc. ("Endo Pharmaceuticals") and
The DuPont Merck Pharmaceutical Company ("DuPont Merck
Pharmaceutical") (incorporated herein by reference to Exhibit
2.3 of the Registration Statement filed with the Commission on
June 9, 2000)
3.1 Amended and Restated Certificate of Incorporation of Endo
3.2 Amended and Restated By-laws of Endo
4.1 Amended and Restated Executive Stockholders Agreement, dated
as of July 14, 2000, by and among Endo, Endo Pharma LLC ("Endo
LLC"), Kelso Investment Associates V, L.P. ("KIA V"), Kelso
Equity Partners V, L.P. ("KEP V") and the Management
Stockholders (as defined therein)
4.2 Amended and Restated Employee Stockholders Agreement, dated as
of July 14, 2000, by and among Endo, Endo LLC, KIA V, KEP V
and the Employee Stockholders (as defined therein)
4.3 Form of Stock Certificate of Endo Common Stock
4.4 Registration Rights Agreement, dated as of July 17, 2000, by
and between Endo and Endo LLC
9 Form of Voting Agreement, by and among Endo, Endo Inc. and
each of Karen B. Lyle, John W. Lyle, Michael Hyatt, Roger H.
Kimmel, Hyatt Family Trust, Trust Under the Will of Inez L.
Kimmel, Todd Kimmel Trust, Melissa Kimmel Trust, Anita Hyatt
Family Trust, Donald Drapkin, Donald G. Drapkin, James R.
Ledley, Frank S. Caruso, Frank S. Caruso Irrevocable Trust and
Patricia Caruso (incorporated herein by reference to Exhibit 9
of the Registration Statement filed with the Commission on
June 9, 2000)
10.1 Endo Warrant Agreement, dated as of July 17, 2000, by and
between Endo and United States Trust Company of New York
10.2 Algos Warrant Agreement, dated as of July 17, 2000, by and
between Endo and United States Trust Company of New York
10.3 Form of Series A Warrant to Purchase Shares of Common Stock
and Warrants of Endo (incorporated herein by reference to
Exhibit 10.3 of the Registration Statement filed with the
Commission on June 9, 2000)
10.4 Letter Agreement, dated as of November 26, 1999, by and among
Algos, Endo, KIA V and KEP V, L.P. (incorporated herein by
reference to Exhibit 10.4 of the Registration Statement filed
with the Commission on June 9, 2000)
10.5 Tax Sharing Agreement, dated as of July 17, 2000, by and among
Endo, Endo Inc. and Endo LLC
10.6 Agreement, dated as of July 17, 2000, by and between Endo and
Endo LLC
16
Exhibit No. Title
----------- -----
10.7 Credit Agreement, dated as of August 26, 1997, by and between
Endo Pharmaceuticals and The Chase Manhattan Bank
(incorporated herein by reference to Exhibit 10.7 of the
Registration Statement filed with the Commission on June 9,
2000)
10.8 Co-Promotion Agreement, dated as of March 1, 2000, by and
between Endo Pharmaceuticals and Elan Pharmaceuticals, Inc.
(incorporated herein by reference to Exhibit 10.8 of the
Registration Statement filed with the Commission on June 9,
2000)
10.9 Collaboration Agreement, dated as of November 26, 1999, by and
between Endo Pharmaceuticals and Algos (incorporated herein by
reference to Exhibit 10.9 of the Registration Statement filed
with the Commission on June 9, 2000)
10.10 Sole and Exclusive License Agreement, dated as of November 23,
1998, by and between Endo Pharmaceuticals and Hind Health
Care, Inc. (incorporated herein by reference to Exhibit 10.10
of the Registration Statement filed with the Commission on
June 9, 2000)
10.11 Analgesic License Agreement, dated as of October 27, 1997, by
and among Endo Pharmaceuticals, Endo Laboratories, LLC and
DuPont Merck Pharmaceutical (incorporated herein by reference
to Exhibit 10.11 of the Registration Statement filed with the
Commission on June 9, 2000)
10.12 Anti-Epileptic License Agreement, dated as of October 27,
1997, by and among Endo Pharmaceuticals, Endo Laboratories,
LLC and DuPont Merck Pharmaceutical (incorporated herein by
reference to Exhibit 10.12 of the Registration Statement filed
with the Commission on June 9, 2000)
10.13 Product Development, Manufacturing and Supply Agreement, dated
as of October 29, 1999, by and between Endo Pharmaceuticals
and Lavipharm Laboratories Inc. (incorporated herein by
reference to Exhibit 10.13 of the Registration Statement filed
with the Commission on June 9, 2000)
10.14 Supply and Manufacturing Agreement, dated as of November 23,
1998, by and between Endo Pharmaceuticals and Teikoku Seiyaku
Co., Ltd (incorporated herein by reference to Exhibit 10.14 of
the Registration Statement filed with the Commission on June
9, 2000)
10.15 Supply Agreement, dated as of July 1, 1998, by and between
Endo Pharmaceuticals and Mallinckrodt Inc. ("Mallinckrodt")
(incorporated herein by reference to Exhibit 10.15 of the
Registration Statement filed with the Commission on June 9,
2000)
10.16 Supply Agreement for Bulk Narcotics Raw Materials, dated as of
July 1, 1998, by and between Endo Pharmaceuticals and
Mallinckrodt (incorporated herein by reference to Exhibit
10.16 of the Registration Statement filed with the Commission
on June 9, 2000)
10.17 Manufacture and Supply Agreement, dated as of August 26, 1997,
by and among Endo Pharmaceuticals, DuPont Merck Pharmaceutical
and DuPont Merck Pharma (incorporated herein by reference to
Exhibit 10.17 of the Registration Statement filed with the
Commission on June 9, 2000)
10.18 Strategic Alliance Agreement, dated as of September 17, 1997,
by and between Endo Pharmaceuticals and Penwest
Pharmaceuticals Group (incorporated herein by reference to
Exhibit 10.18 of the Registration Statement filed with the
Commission on June 9, 2000)
10.19 Agreement, dated as of February 1, 2000, by and between Endo
Pharmaceuticals and Livingston Healthcare Services Inc.
(incorporated herein by reference to Exhibit 10.19 of the
Registration Statement filed with the Commission on June 9,
2000)
10.20 Medical Affairs Support Services Agreement, dated as of June
1, 1999, by and between Endo Pharmaceuticals and Kunitz and
Associates, Inc. (incorporated herein by reference to Exhibit
10.20 of the Registration Statement filed with the Commission
on June 9, 2000)
17
Exhibit No. Title
----------- -----
10.22 Endo LLC Amended and Restated 1997 Employee Stock Option Plan
10.23 Endo LLC Amended and Restated 1997 Executive Stock Option Plan
10.24 Endo LLC 2000 Supplemental Employee Stock Option Plan
10.25 Endo LLC 2000 Supplemental Executive Stock Option Plan
10.26 Employment Agreement, dated as of July 17, 2000, by and
between Endo and John W. Lyle
10.27 Amended and Restated Employment Agreement, dated as of April
26, 2000, by and between Endo Pharmaceuticals and Carol A.
Ammon (incorporated herein by reference to Exhibit 10.27 of
the Registration Statement filed with the Commission on June
9, 2000)
10.28 Amended and Restated Employment Agreement, dated as of April
26, 2000, by and between Endo Pharmaceuticals and Jeffrey R.
Black (incorporated herein by reference to Exhibit 10.28 of
the Registration Statement filed with the Commission on June
9, 2000)
10.29 Amended and Restated Employment Agreement, dated as of April
26, 2000, by and between Endo Pharmaceuticals and David Allen
Harvey Lee, MD, Ph.D. (incorporated herein by reference to
Exhibit 10.29 of the Registration Statement filed with the
Commission on June 9, 2000)
10.30 Amended and Restated Employment Agreement, dated as April 26,
2000, by and between Endo Pharmaceuticals and Mariann T.
MacDonald (incorporated herein by reference to Exhibit 10.30
of the Registration Statement filed with the Commission on
June 9, 2000)
10.31 Separation and Release Agreement, dated as of March 22, 2000,
by and between Endo Pharmaceuticals, Endo and Osagie O.
Imasogie (incorporated herein by reference to Exhibit 10.31 of
the Registration Statement filed with the Commission on June
9, 2000)
10.32 Separation and Release Agreement, dated as of April 20, 2000,
by and between Endo Pharmaceuticals, Endo and Louis J. Vollmer
(incorporated herein by reference to Exhibit 10.32 of the
Registration Statement filed with the Commission on June 9,
2000)
10.33 Office Lease, dated as of August 26, 1997, by and between Endo
Pharmaceuticals and Northstar Development Company
(incorporated herein by reference to Exhibit 10.33 of the
Registration Statement filed with the Commission on June 9,
2000)
10.34 Lease Agreement, dated as of May 5, 2000, by and between Endo
Pharmaceuticals and Painters' Crossing One Associates, L.P.
(incorporated herein by reference to Exhibit 10.34 of the
Registration Statement filed with the Commission on June 9,
2000)
11 Statement Regarding Computation of per Share Earnings
27 Financial Data Schedule
18