NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2013
(Unaudited)
Par Pharmaceutical Companies, Inc. operates primarily through its wholly owned subsidiary, Par Pharmaceutical, Inc. (collectively referred to herein as “the Company,” “we,” “our,” or “us”), in two business segments. Our generic products division, Par Pharmaceutical (“Par”), develops (including through third party development arrangements and product acquisitions), manufactures and distributes generic pharmaceuticals in the United States. Our branded products division, Strativa Pharmaceuticals (“Strativa”), acquires (generally through third party development arrangements), manufactures and distributes branded pharmaceuticals in the United States. The products we market are principally in the solid oral dosage form (tablet, caplet and two-piece hard-shell capsule), although we also distribute several oral suspension products and nasal spray products.
We were acquired at the close of business on September 28, 2012 through a merger transaction with Sky Growth Acquisition Corporation, a wholly-owned subsidiary of Sky Growth Holdings Corporation (“Holdings”). Holdings was formed by investment funds affiliated with TPG Capital, L.P. (“TPG” and, together with certain affiliated entities, collectively, the “Sponsor”). Holdings is owned by affiliates of the Sponsor and members of management. The acquisition was accomplished through a reverse subsidiary merger of Sky Growth Acquisition Corporation with and into the Company, with the Company being the surviving entity (the “Merger”). Subsequent to the Merger, we became an indirect, wholly owned subsidiary of Holdings (see Note 2, “Sky Growth Merger”). Prior to September 29, 2012, the Company operated as a public company with its common stock traded on the New York Stock Exchange.
Although the Company survived the Merger as the successor entity, the accompanying condensed consolidated statements of operations, comprehensive income (loss), and cash flows for 2012 are presented for two periods: Predecessor and Successor, which relate to the period preceding the Merger and the period succeeding the Merger. The Merger and the allocation of the purchase price were recorded as of September 29, 2012. Although the accounting policies followed by the Company are consistent for the Predecessor and Successor periods, with the exception of the change in the annual evaluation date for goodwill from December 31
st
to October 1
st
, financial information for such periods have been prepared under two different historical cost bases of accounting and are therefore not comparable. The results of the periods presented are not necessarily indicative of the results that may be achieved in future periods.
Note 1 – Basis of Presentation:
The accompanying condensed consolidated financial statements at
September 30, 2013
and for the three-month and
nine
-month periods ended
September 30, 2013
and
September 30, 2012
are unaudited. In the opinion of management, however, such statements include all normal recurring adjustments necessary to present fairly the information presented therein. The condensed consolidated balance sheet at
December 31, 2012
was derived from the Company’s audited consolidated financial statements included in the 2012 Annual Report as part of our Form S-4 Registration Statement filed with the SEC on August 14, 2013.
The accompanying condensed consolidated financial statements and these notes to condensed consolidated financial statements do not include all disclosures required by the accounting principles generally accepted in the United States of America for audited financial statements. Accordingly, these statements should be read in conjunction with our 2012 Annual Report. Results of operations for interim periods are not necessarily indicative of those that may be achieved for full fiscal years.
Certain reclassifications have been made to the September 2012 statements of operations to reflect the presentation of provision for income taxes related to discontinued operations for the period from July 1, 2012 to September 28, 2012 (
$28 thousand
) and the period from January 1, 2012 to September 28, 2012 (
$83 thousand
) as a component of (Benefit) provision for income taxes to conform to the
September 30, 2013
presentation. Corresponding line items on the condensed consolidated statements of cash flows for the period from January 1, 2012 to September 28, 2012 were also reclassified.
In the third quarter of 2013, we entered into interest rate cap agreements to increase the percentage of our debt that has an associated fixed annual rate of interest. Refer to Note 15, "Derivatives Instruments and Hedging Activities," for further information. In conjunction with the execution of the interest rate cap agreements, we set our related accounting policy as follows:
Derivative Instruments and Hedging Activities
As required by ASC 815, Derivatives
and Hedging ("ASC 815"), we record all derivatives on our consolidated balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether we have elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Derivatives may also be designated as hedges of the foreign currency exposure of a net investment in a foreign operation. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. We may enter into derivative contracts that are intended to economically hedge certain of our risks, even though hedge accounting does not apply or we elect not to apply hedge accounting under ASC 815.
Note 2 – Sky Growth Merger:
The Transactions
We were acquired at the close of business on September 28, 2012 through the Merger. Holdings and its wholly-owned subsidiaries were formed by affiliates of TPG solely for the purposes of completing the Merger and the related transactions. At the time of the Merger, each share of our common stock issued and outstanding immediately prior to the close of the Merger was converted into the right to receive cash. Aggregate consideration tendered at September 28, 2012 was for
100%
of the equity of the Company. Subsequent to the Merger, we became an indirect, wholly owned subsidiary of Holdings.
The Merger was accounted for as a purchase business combination in accordance with ASC 805, "Business Combinations," whereby the purchase price paid to effect the Merger was allocated to recognize the acquired assets and liabilities assumed at fair value. The acquisition method of accounting uses the fair value concept defined in ASC 820, Fair Value Measurements and Disclosures. ASC 805 requires, among other things, that most acquired assets and liabilities in a business purchase combination be recognized at their fair values as of the Merger date. The process for estimating the fair values of acquired in-process research and development, identifiable intangible assets and certain tangible assets required the use of significant estimates and assumptions, including estimating future cash flows, developing appropriate discount rates, estimating the costs, timing and probability of success to complete in-process projects and projecting regulatory approvals. Under ASC 805, transaction costs are not included as a component of consideration transferred. The Merger related transaction costs were comprised of investment bank fees, accounting fees, legal fees, and other fees. The excess of the purchase price (consideration transferred) over the estimated amounts of identifiable assets acquired and liabilities assumed as of the effective date of the Merger was allocated to goodwill in accordance with ASC 805, which mainly represents intangible assets related to our know-how, including our workforce’s expertise in R&D and manufacturing that do not qualify for separate recognition. The purchase price allocation was subject to completion of our analysis of the fair value of the assets and liabilities as of the effective date of the Merger. The final valuation was completed as of September 30, 2013.
Transactions with Manager
In connection with the Merger and the related transactions, the Company entered into a management services agreement with an affiliate of TPG (the “Manager”). Pursuant to the agreement, in exchange for on-going consulting and management advisory services, the Manager receives an annual monitoring fee paid quarterly equal to
1%
of EBITDA as defined under the Company’s senior secured credit facilities. There is an annual cap of
$4 million
for this fee. The Manager also receives reimbursement for out-of-pocket expenses incurred in connection with services provided pursuant to the agreement. The Company recorded an expense of
$1,023 thousand
for the three months ended September 30, 2013 and
$2,417 thousand
for the
nine months ended
September 30, 2013
for consulting and management advisory service fees and out-of-pocket expenses, which are included in selling, general and administrative expenses in the condensed consolidated statement of operations.
Note 3 – Acquisition of Divested Products from the Watson/Actavis Merger:
In connection with the merger of Watson Pharmaceuticals, Inc. (“Watson”) and Actavis Group (“Actavis”) on November 6, 2012, (the “Watson/Actavis Merger”), Par acquired the U.S. marketing rights to
five
generic products that were marketed by Watson or Actavis, as well as
eight
Abbreviated New Drug Applications (“ANDA”) awaiting regulatory approval and a generic product in late-stage development for
$110,000 thousand
. Par also acquired a number of supply agreements each with a term of
three
years. The purchase price was paid in cash and funded from our cash on hand.
The acquisition was accounted for as a business combination and a bargain purchase under ASC 805, "Business Combinations". The purchase price of the acquisition was allocated to the assets acquired, with the excess of the fair value of assets acquired over the purchase price recorded as a gain. The gain was mainly attributed to the FTC mandated divestiture of products by Watson and Actavis in conjunction with the approval of the related merger. ASC 805 requires, among other things, that the fair value of acquired in-process research and development be recorded on the balance sheet regardless of the likelihood of success of the related product or technology as of the completion of the acquisition. The process for estimating the fair values of acquired in-process research and development requires the use of significant estimates and assumptions, including estimating future cash flows, developing appropriate discount rates, estimating the costs, timing and probability of success to complete in-process projects and projecting regulatory approvals. The establishment of the fair value of the consideration for an acquisition, and the allocation to identifiable assets requires the extensive use of accounting estimates and management judgment. We believe the fair values assigned to the assets acquired were based on reasonable estimates and assumptions based on data available at the time of the acquisition.
Note 4 – Edict Acquisition:
On February 17, 2012, through Par Pharmaceutical, Inc., our wholly-owned subsidiary, we completed our acquisition of privately-held Edict Pharmaceuticals Private Limited, which has been renamed Par Formulations Private Limited (referred to as “Par Formulations”), for cash and our repayment of certain additional pre-close indebtedness (the “Edict Acquisition”). The operating results of Par Formulations were included in our consolidated financial results from the date of acquisition. The operating results were reflected as part of the Par Pharmaceutical segment. We funded the purchase from cash on hand.
The addition of Par Formulations broadened our industry expertise and expanded our R&D and manufacturing capabilities. The Edict Acquisition was revalued as part of the Merger. Refer to Note 2, “Sky Growth Merger.”
Consideration Transferred
The acquisition-date fair value of the consideration transferred consisted of the following items ($ in thousands):
|
|
|
|
|
|
|
|
|
Cash paid for equity
|
$
|
20,659
|
|
|
|
Contingent purchase price liabilities
|
11,641
|
|
(1)
|
|
Cash paid for assumed indebtedness
|
4,300
|
|
|
|
Total consideration
|
$
|
36,600
|
|
|
|
|
|
|
(1)
|
Contingent purchase price liabilities represent subsequent milestone payments related to successful FDA inspection of the Par Formulations manufacturing facility and Abbreviated New Drug Application (“ANDA”) filings. All contingent purchase price liabilities were paid in full within
18 months
of the acquisition date.
|
Note 5 – Anchen Acquisition:
On November 17, 2011, through Par Pharmaceutical, Inc., our wholly-owned subsidiary, we completed our acquisition of Anchen Incorporated and its subsidiary Anchen Pharmaceuticals, Inc. (collectively referred to as “Anchen”) for
$412,753 thousand
in aggregate consideration (the “Anchen Acquisition”), subject to post-closing adjustment. During the second quarter of 2012, we collected
$3,786 thousand
as a result of post-closing adjustments with the former Anchen securityholders and adjusted goodwill associated with the Anchen Acquisition. The purchase price allocation was final at that time. All of the assets acquired and liabilities assumed as part of the Anchen Acquisition were revalued as part of the Merger. Refer to Note 2, “Sky Growth Merger.”
Anchen was a privately-held generic pharmaceutical company until our acquisition. Anchen broadened our industry expertise and expanded our R&D and manufacturing capabilities and product pipeline.
The Anchen Acquisition was accounted for as a business purchase combination using the acquisition method of accounting under the provisions of ASC 805. The acquisition method of accounting uses the fair value concept defined in ASC 820. ASC 805 requires, among other things, that most assets acquired and liabilities assumed in a business purchase combination be recognized at their fair values as of the Anchen Acquisition date and that the fair value of acquired in-process research and development (“IPR&D”) be recorded on the balance sheet regardless of the likelihood of success of the related product or technology as of the completion of the Anchen Acquisition. The process for estimating the fair values of IPR&D, identifiable intangible assets and certain tangible assets requires the use of significant estimates and assumptions, including estimating future cash flows, developing appropriate discount rates, estimating the costs, timing and probability of success to complete in-process projects and projecting regulatory approvals. Under ASC 805, transaction costs are not included as a component of consideration transferred and were expensed as incurred.
Note 6 – Available for Sale Marketable Debt Securities:
At
September 30, 2013
and
December 31, 2012
, all of our investments in marketable debt securities were classified as available for sale and, as a result, were reported at their estimated fair values on the condensed consolidated balance sheets. Refer to Note 7, “Fair Value Measurements.” The following is a summary of amortized cost and estimated fair value of our marketable debt securities available for sale at
September 30, 2013
($ amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
Unrealized
|
|
Fair
|
|
|
Cost
|
|
Gain
|
|
(Loss)
|
|
Value
|
|
Corporate bonds
|
$
|
3,538
|
|
|
$
|
26
|
|
|
$
|
—
|
|
|
$
|
3,564
|
|
All available for sale marketable debt securities are classified as current on our condensed consolidated balance sheet as of
September 30, 2013
.
The following is a summary of amortized cost and estimated fair value of our investments in marketable debt securities available for sale at
December 31, 2012
($ amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
Unrealized
|
|
Fair
|
|
|
Cost
|
|
Gain
|
|
(Loss)
|
|
Value
|
|
Corporate bonds
|
$
|
11,666
|
|
|
$
|
61
|
|
|
$
|
—
|
|
|
$
|
11,727
|
|
The following is a summary of the contractual maturities of our available for sale debt securities at
September 30, 2013
($ amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2013
|
|
|
|
|
Estimated Fair
|
|
|
Cost
|
|
Value
|
|
Less than one year
|
$
|
2,631
|
|
|
$
|
2,646
|
|
|
Due between 1-2 years
|
907
|
|
|
918
|
|
|
Total
|
$
|
3,538
|
|
|
$
|
3,564
|
|
Note 7 – Fair Value Measurements:
ASC 820-10 defines fair value as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:
Level 1: Quoted market prices in active markets for identical assets and liabilities. Active market means a market in which transactions for assets or liabilities occur with “sufficient frequency” and volume to provide pricing information on an ongoing unadjusted basis. Cash equivalents include highly liquid investments with an original maturity of three months or less at acquisition. We have determined that our cash equivalents in their entirety are classified as Level 1 within the fair value hierarchy.
Level 2: Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Our Level 2 assets primarily include debt securities, including corporate bonds with quoted prices that
are traded less frequently than exchange-traded instruments. All of our Level 2 asset values are determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. The pricing model information is provided by third party entities (e.g., banks or brokers). In some instances, these third party entities engage external pricing services to estimate the fair value of these securities. We have a general understanding of the methodologies employed by the pricing services in their pricing models. We corroborate the estimates of non-binding quotes from the third party entities’ pricing services to an independent source that provides quoted market prices from broker or dealer quotations. We investigate large differences, if any. Based on historical differences, we have not been required to adjust quotes provided by the third party entities’ pricing services used in estimating the fair value of these securities.
Level 3: Unobservable inputs that are not corroborated by market data.
Financial assets and liabilities
The fair value of our financial assets and liabilities measured at fair value on a recurring basis as of
September 30, 2013
were as follows ($ amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Fair Value at
|
|
|
|
|
|
|
|
|
September 30, 2013
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Corporate bonds (Note 6)
|
$
|
3,564
|
|
|
$
|
—
|
|
|
$
|
3,564
|
|
|
$
|
—
|
|
|
Cash equivalents
|
$
|
66,779
|
|
|
$
|
66,779
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Senior secured term loan (Note 14)
|
$
|
1,055,360
|
|
|
$
|
—
|
|
|
$
|
1,055,360
|
|
|
$
|
—
|
|
|
7.375% senior notes (Note 14)
|
$
|
509,600
|
|
|
$
|
—
|
|
|
$
|
509,600
|
|
|
$
|
—
|
|
|
Derivative instruments - Interest rate caps (Note 15)
|
$
|
2,935
|
|
|
$
|
—
|
|
|
$
|
2,935
|
|
|
$
|
—
|
|
The fair value of our financial assets and liabilities measured at fair value on a recurring basis as of
December 31, 2012
were as follows ($ amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Fair Value at
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Corporate bonds (Note 6)
|
$
|
11,727
|
|
|
$
|
—
|
|
|
$
|
11,727
|
|
|
$
|
—
|
|
|
Cash equivalents
|
$
|
14,370
|
|
|
$
|
14,370
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Senior secured term loan (Note 14)
|
$
|
1,052,363
|
|
|
$
|
—
|
|
|
$
|
1,052,363
|
|
|
$
|
—
|
|
|
7.375% senior notes (Note 14)
|
$
|
484,488
|
|
|
$
|
—
|
|
|
$
|
484,488
|
|
|
$
|
—
|
|
The carrying amount reported in the condensed consolidated balance sheets for accounts receivables, net, inventories, prepaid expenses and other current assets, accounts payable, payables due to distribution agreement partners, accrued salaries and employee benefits, accrued government pricing liabilities, accrued legal fees, accrued legal settlements, payable to former Anchen securityholders, and accrued expenses and other current liabilities approximate fair value because of their short-term nature.
As noted in Note 4, “Edict Acquisition,” we had contingent purchase price liabilities that represented subsequent milestone payments related to a successful FDA inspection of the Par Formulations manufacturing facility and ANDA filings. All contingent purchase price liabilities were paid within
18 months
of the acquisition date. Through
September 30, 2013
, we had paid the full
$11,641 thousand
contingent purchase price liabilities.
Non-financial assets and liabilities
The Company does not have any non-financial assets or liabilities as of
September 30, 2013
or
December 31, 2012
that are measured in the condensed consolidated financial statements at fair value.
Intangible Assets
We evaluate long-lived assets, including intangible assets with definite lives, for impairment periodically or whenever events or other changes in circumstances indicate that the carrying value of an asset may no longer be recoverable. If such circumstances are determined to exist, projected undiscounted future cash flows to be generated by the long-lived asset or the appropriate grouping of assets (level 3 inputs), is compared to the carrying value to determine whether impairment exists at its lowest level of identifiable cash flows. During the three months ended September 30, 2013, we recorded intangible asset impairments totaling
$39,480 thousand
for
five
generic products not expected to achieve their originally forecasted operating results. During the three months ended June 30, 2013, we ceased selling a product that had been acquired with the divested products from the Watson/Actavis Merger and recorded a total corresponding intangible asset impairment of
$466 thousand
. During the
nine months ended
September 30, 2012
, we abandoned an in-process research and development project that was acquired in the Anchen Acquisition and recorded a corresponding intangible asset impairment of
$2,000 thousand
. Additionally, during the
nine months ended
September 30, 2012
, we exited the market of a
commercial product that was acquired in the Anchen Acquisition and recorded a corresponding intangible asset impairment of
$3,700 thousand
.
Derivative Instruments - Interest Rate Caps
We use interest rate cap agreements to manage our interest rate risk on our variable rate long-term debt. Refer to Note 15, "Derivatives Instruments and Hedging Activities," for further information.
Note 8 – Accounts Receivable:
We account for revenue in accordance with ASC 605, "Revenue Recognition." In accordance with that standard, we recognize revenue for product sales when title and risk of loss have transferred to our customers, when reliable estimates of rebates, chargebacks, returns and other adjustments can be made, and when collectability is reasonably assured. This is generally at the time that products are received by our direct customers. We also review available trade inventory levels at certain large wholesalers to evaluate any potential excess supply levels in relation to expected demand. We determine whether we will recognize revenue at the time that our products are received by our direct customers or defer revenue recognition until a later date on a product by product basis at the time of launch. Upon recognizing revenue from a sale, we record estimates for chargebacks, rebates and incentive programs, product returns, cash discounts and other sales reserves that reduce accounts receivable.
The following tables summarize the impact of accounts receivable reserves and allowance for doubtful accounts on the gross trade accounts receivable balances at each balance sheet date ($ amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
|
|
2013
|
|
2012
|
|
Gross trade accounts receivable
|
$
|
349,351
|
|
|
$
|
318,793
|
|
|
Chargebacks
|
(48,721
|
)
|
|
(41,670
|
)
|
|
Rebates and incentive programs
|
(66,628
|
)
|
|
(59,426
|
)
|
|
Returns
|
(77,400
|
)
|
|
(68,062
|
)
|
|
Cash discounts and other
|
(32,011
|
)
|
|
(26,544
|
)
|
|
Allowance for doubtful accounts
|
(2
|
)
|
|
—
|
|
|
Accounts receivable, net
|
$
|
124,589
|
|
|
$
|
123,091
|
|
Allowance for doubtful accounts
($ amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
|
|
For the period
|
|
|
September 30,
|
|
January 1, 2012 to
|
|
September 29, 2012 to
|
|
|
2013
|
|
September 28, 2012
|
|
September 30, 2012
|
|
|
(Successor)
|
|
(Predecessor)
|
|
(Successor)
|
|
Balance at beginning of period
|
$
|
—
|
|
|
$
|
(100
|
)
|
|
$
|
(89
|
)
|
|
Additions – charge to expense
|
4
|
|
|
(4
|
)
|
|
—
|
|
|
Adjustments and/or deductions
|
(6
|
)
|
|
15
|
|
|
—
|
|
|
Balance at end of period
|
$
|
(2
|
)
|
|
$
|
(89
|
)
|
|
$
|
(89
|
)
|
The following tables summarize the activity for the
nine months ended
September 30, 2013
and the period from September 29, 2012 to
September 30, 2012
and the period from January 1, 2012 to September 28, 2012, in the accounts affected by the estimated provisions described below ($ amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2013
|
|
|
(Successor)
|
|
Accounts receivable reserves
|
Beginning balance
|
|
Provision recorded for current period sales
|
|
(Provision) reversal recorded for prior period sales
|
|
Credits processed
|
|
Ending balance
|
|
Chargebacks
|
$
|
(41,670
|
)
|
|
$
|
(455,191
|
)
|
|
$
|
—
|
|
(1)
|
$
|
448,140
|
|
|
$
|
(48,721
|
)
|
|
Rebates and incentive programs
|
(59,426
|
)
|
|
(197,693
|
)
|
|
574
|
|
|
189,917
|
|
|
(66,628
|
)
|
|
Returns
|
(68,062
|
)
|
|
(31,709
|
)
|
|
—
|
|
|
22,371
|
|
|
(77,400
|
)
|
|
Cash discounts and other
|
(26,544
|
)
|
|
(139,855
|
)
|
|
269
|
|
|
134,119
|
|
|
(32,011
|
)
|
|
Total
|
$
|
(195,702
|
)
|
|
$
|
(824,448
|
)
|
|
$
|
843
|
|
|
$
|
794,547
|
|
|
$
|
(224,760
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued liabilities
(2)
|
$
|
(42,162
|
)
|
|
$
|
(61,745
|
)
|
|
$
|
3,566
|
|
(4)
|
$
|
50,425
|
|
|
$
|
(49,916
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from September 29, 2012 to September 30, 2012
|
|
|
(Successor)
|
|
Accounts receivable reserves
|
Beginning balance
|
|
Provision recorded for current period sales
|
|
(Provision) reversal recorded for prior period sales
|
|
Credits processed
|
|
Ending balance
|
|
Chargebacks
|
$
|
(24,224
|
)
|
|
$
|
(3,554
|
)
|
|
$
|
—
|
|
(1)
|
$
|
—
|
|
|
$
|
(27,778
|
)
|
|
Rebates and incentive programs
|
(43,864
|
)
|
|
(1,851
|
)
|
|
—
|
|
|
—
|
|
|
(45,715
|
)
|
|
Returns
|
(64,119
|
)
|
|
(380
|
)
|
|
—
|
|
|
—
|
|
|
(64,499
|
)
|
|
Cash discounts and other
|
(30,818
|
)
|
|
(1,481
|
)
|
|
—
|
|
|
—
|
|
|
(32,299
|
)
|
|
Total
|
$
|
(163,025
|
)
|
|
$
|
(7,266
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(170,291
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued liabilities
(2)
|
$
|
(42,455
|
)
|
|
$
|
(555
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(43,010
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from January 1, 2012 to September 28, 2012
|
|
|
(Predecessor)
|
|
Accounts receivable reserves
|
Beginning balance
|
|
Provision recorded for current period sales
|
|
(Provision) reversal recorded for prior period sales
|
|
Credits processed
|
|
Ending balance
|
|
Chargebacks
|
$
|
(20,688
|
)
|
|
$
|
(309,411
|
)
|
|
$
|
—
|
|
(1)
|
$
|
305,875
|
|
|
$
|
(24,224
|
)
|
|
Rebates and incentive programs
|
(35,132
|
)
|
|
(147,112
|
)
|
|
(59
|
)
|
|
138,439
|
|
|
(43,864
|
)
|
|
Returns
|
(58,672
|
)
|
|
(24,793
|
)
|
|
1,602
|
|
(3)
|
17,744
|
|
|
(64,119
|
)
|
|
Cash discounts and other
|
(28,672
|
)
|
|
(102,718
|
)
|
|
(809
|
)
|
|
101,381
|
|
|
(30,818
|
)
|
|
Total
|
$
|
(143,164
|
)
|
|
$
|
(584,034
|
)
|
|
$
|
734
|
|
|
$
|
563,439
|
|
|
$
|
(163,025
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued liabilities
(2)
|
$
|
(39,614
|
)
|
|
$
|
(49,536
|
)
|
|
$
|
—
|
|
|
$
|
46,695
|
|
|
$
|
(42,455
|
)
|
|
|
|
|
(1)
|
Unless specific in nature, the amount of provision or reversal of reserves related to prior periods for chargebacks is not determinable on a product or customer specific basis; however, based upon historical analysis and analysis of activity in subsequent periods, we believe that our chargeback estimates remain reasonable.
|
|
|
|
|
(2)
|
Includes amounts due to indirect customers for which no underlying accounts receivable exists and is principally comprised of Medicaid rebates and rebates due under other U.S. Government pricing programs, such as TriCare and the Department of Veterans Affairs.
|
|
|
|
|
(3)
|
The amount principally represents the resolution of a customer dispute in the first quarter of 2012 regarding invalid deductions taken in prior years of approximately
$1,600 thousand
.
|
|
|
|
|
(4)
|
Based upon additional available information related to Managed Medicaid utilization in California and a recalculation of average manufacturer’s price, we reduced our Medicaid accruals for the periods January 2010 through December 2012 by approximately
$3,600 thousand
. Our Medicaid accrual represents our best estimate at this time.
|
The Company sells its products directly to wholesalers, retail drug store chains, drug distributors, mail order pharmacies and other direct purchasers as well as customers that purchase its products indirectly through the wholesalers, including independent pharmacies, non-warehousing retail drug store chains, managed health care providers and other indirect purchasers. The Company often negotiates product pricing directly with health care providers that purchase products through the Company’s wholesale customers. In those instances, chargeback credits are issued to the wholesaler for the difference between the invoice price paid to the Company by our wholesale customer for a particular product and the negotiated contract price that the wholesaler’s customer pays for that product. The information that the Company considers when establishing its chargeback reserves includes contract and non-contract sales trends, average historical contract pricing, actual price changes, processing time lags and customer inventory information from its three largest wholesale customers. The Company’s chargeback provision and related reserve vary with changes in product mix, changes in customer pricing and changes to estimated wholesaler inventory.
Customer rebates and incentive programs are generally provided to customers as an incentive for the customers to continue carrying the Company’s products or replace competing products in their distribution channels with our products. Rebate programs are based on a customer’s dollar purchases made during an applicable monthly, quarterly or annual period. The Company also provides indirect rebates, which are rebates paid to indirect customers that have purchased the Company’s products from a wholesaler under a contract with us. The incentive programs include stocking 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. We 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 attempt to secure or maintain a certain market share. The information that the Company considers when establishing its rebate and incentive program reserves are rebate agreements with, and purchases by, each customer, tracking and analysis of promotional offers, projected annual sales for customers with annual incentive programs, actual rebates and incentive payments made, processing time lags, and for indirect rebates, the level of inventory in the distribution channel that will be subject to indirect rebates. We do not provide incentives designed to increase shipments to our customers that we believe would result in out-of-the-ordinary course of business inventory for them. The Company regularly reviews and monitors estimated or actual customer inventory information at its three largest wholesale customers for its key products to ascertain whether customer inventories are in excess of ordinary course of business levels.
Pursuant to a drug rebate agreement with the Centers for Medicare and Medicaid Services, TriCare and similar supplemental agreements with various states, the Company provides a rebate on drugs dispensed under such government programs. The Company determines its estimate of the Medicaid rebate accrual primarily based on historical experience of claims submitted by the various states and any new information regarding changes in the Medicaid program that might impact the Company’s provision for Medicaid rebates. In determining the appropriate accrual amount we consider historical payment rates; processing lag for outstanding claims and payments; levels of inventory in the distribution channel; and the impact of the healthcare reform acts. The Company reviews the accrual and assumptions on a quarterly basis against actual claims data to help ensure that the estimates made are reliable. TriCare rebate accruals reflect the Fiscal Year 2008 National Defense Authorization Act and are based on actual and estimated rebates on Department of Defense eligible sales.
The Company accepts returns of product according to the following criteria: (i) the product returns must be approved by authorized personnel with the lot number and expiration date accompanying any request and (ii) we generally will accept returns of products from any customer and will provide the customer with a credit memo for such returns if such products are returned between
six
months prior to, and
12 months
following, such products’ expiration date. The Company records a provision for product returns based on historical experience, including actual rate of expired and damaged in-transit returns, average remaining shelf-lives of products sold, which generally range from
12
to
48 months
, and estimated return dates. Additionally, we consider other factors when estimating the current period return provision, including levels of inventory in the distribution channel, significant market changes that may impact future expected returns, and actual product returns, and may record additional provisions for specific returns that we believe are not covered by the historical rates.
The Company offers cash discounts to its customers, generally
2%
of the sales price, as an incentive for paying within invoice terms, which generally range from
30
to
90 days
. The Company accounts for cash discounts by reducing accounts receivable by the full amount of the discounts that we expect our customers to take.
In addition to the significant gross-to-net sales adjustments described above, we periodically make other sales adjustments. The Company generally accounts for these other gross-to-net adjustments by establishing an accrual in the amount equal to its estimate of the adjustments attributable to the sale.
The Company may at its discretion provide price adjustments due to various competitive factors, through shelf-stock adjustments on customers’ existing inventory levels. There are circumstances under which we may not provide price adjustments to
certain customers as a matter of business strategy, and consequently may lose future sales volume to competitors and risk a greater level of sales returns on products that remain in the customer’s existing inventory.
As detailed above, we have the experience and access to relevant information that we believe are necessary to reasonably estimate the amounts of such deductions from gross revenues, except as described below. Some of the assumptions we use for certain of our estimates are based on information received from third parties, such as wholesale customer inventories and market data, or other market factors beyond our control. The estimates that are most critical to the establishment of these reserves, and therefore, would have the largest impact if these estimates were not accurate, are estimates related to contract sales volumes, average contract pricing, customer inventories and return volumes. The Company regularly reviews the information related to these estimates and adjusts its reserves accordingly, if and when actual experience differs from previous estimates. With the exception of the product returns allowance, the ending balances of accounts receivable reserves and allowances generally are processed during a
two
-month to
four
-month period.
Use of Estimates in Reserves
We believe that our reserves, allowances and accruals for items that are deducted from gross revenues are reasonable and appropriate based on current facts and circumstances. It is possible however, that other parties applying reasonable judgment to the same facts and circumstances could develop different allowance and accrual amounts for items that are deducted from gross revenues. Additionally, changes in actual experience or changes in other qualitative factors could cause our allowances and accruals to fluctuate, particularly with newly launched or acquired products. We review the rates and amounts in our allowance and accrual estimates on a quarterly basis. If future estimated rates and amounts are significantly greater than those reflected in our recorded reserves, the resulting adjustments to those reserves would decrease our reported net revenues; conversely, if actual product returns, rebates and chargebacks are significantly less than those reflected in our recorded reserves, the resulting adjustments to those reserves would increase our reported net revenues. We regularly review the information related to these estimates and adjust our reserves accordingly, if and when actual experience differs from previous estimates.
As is customary and in the ordinary course of business, our revenue that has been recognized for product launches included initial trade inventory stocking that we believed was commensurate with new product introductions. At the time of each product launch, we were able to make reasonable estimates of product returns, rebates, chargebacks and other sales reserves by using historical experience of similar product launches and significant existing demand for the products.
Major Customers – Gross Accounts Receivable
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
|
|
2013
|
|
2012
|
|
McKesson Corporation
|
27%
|
|
27%
|
|
Cardinal Health, Inc.
|
26%
|
|
26%
|
|
AmerisourceBergen Corporation
|
13%
|
|
13%
|
|
CVS Caremark
|
10%
|
|
9%
|
|
Other customers
|
24%
|
|
25%
|
|
Total gross accounts receivable
|
100%
|
|
100%
|
Note 9 – Inventories:
($ amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
|
|
2013
|
|
2012
|
|
Raw materials and supplies
|
$
|
40,811
|
|
|
$
|
37,457
|
|
|
Work-in-process
|
9,456
|
|
|
10,063
|
|
|
Finished goods
|
76,546
|
|
|
64,654
|
|
|
|
$
|
126,813
|
|
|
$
|
112,174
|
|
Inventory write-offs (inclusive of pre-launch inventories detailed below)
($ amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
For the period
|
|
Nine months ended
|
|
For the period
|
|
|
September 30, 2013
|
|
July 1, 2012 to September 28, 2012
|
|
September 29, 2012 to September 30, 2012
|
|
September 30, 2013
|
|
January 1, 2012 to September 28, 2012
|
|
September 29, 2012 to September 30, 2012
|
|
|
(Successor)
|
|
(Predecessor)
|
|
(Successor)
|
|
(Successor)
|
|
(Predecessor)
|
|
(Successor)
|
|
Inventory write-offs
|
|
$955
|
|
|
|
$8,639
|
|
|
|
$—
|
|
|
|
$11,484
|
|
|
|
$17,209
|
|
|
|
$—
|
|
The Company capitalizes inventory costs associated with certain products prior to regulatory approval and product launch, based on management's judgment of reasonably certain future commercial use and net realizable value, when it is reasonably certain that the pre-launch inventories will be saleable. The determination to capitalize is made once the Company (or its third party development partners) has filed an ANDA that has been acknowledged by the FDA as containing sufficient information to allow the FDA to conduct its review in an efficient and timely manner and management is reasonably certain that all regulatory and legal hurdles will be cleared. This determination is based on the particular facts and circumstances relating to the expected FDA approval of the generic drug product being considered, and accordingly, the time frame within which the determination is made varies from product to product. The Company could be required to write down previously capitalized costs related to pre-launch inventories upon a change in such judgment, or due to a denial or delay of approval by regulatory bodies, or a delay in commercialization, or other potential factors. Pre-launch inventories at
September 30, 2013
were comprised of generic products in development.
Strativa also capitalizes inventory costs associated with in-licensed branded products subsequent to FDA approval but prior to product launch based on management’s judgment of probable future commercial use and net realizable value. We believe that numerous factors must be considered in determining probable future commercial use and net realizable value including, but not limited to, Strativa’s limited number of historical product launches, as well as the ability of third party partners to successfully manufacture commercial quantities of product. Strativa could be required to expense previously capitalized costs related to pre-launch inventory upon a change in such judgment, due to a delay in commercialization, product expiration dates, projected sales volume, estimated selling price or other potential factors. There was no Strativa-related pre-launch inventory at
September 30, 2013
.
The amounts in the table below represent inventories related to products that were not yet available to be sold and are also included in the total inventory balances presented above.
Pre-Launch Inventories
($ amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
|
|
2013
|
|
2012
|
|
Raw materials and supplies
|
$
|
5,794
|
|
|
$
|
4,019
|
|
|
Work-in-process
|
532
|
|
|
655
|
|
|
Finished goods
|
476
|
|
|
—
|
|
|
|
$
|
6,802
|
|
|
$
|
4,674
|
|
Write-offs of pre-launch inventories
($ amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
For the period
|
|
Nine months ended
|
|
For the period
|
|
|
September 30, 2013
|
|
July 1, 2012 to September 28, 2012
|
|
September 29, 2012 to September 30, 2012
|
|
September 30, 2013
|
|
January 1, 2012 to September 28, 2012
|
|
September 29, 2012 to September 30, 2012
|
|
|
(Successor)
|
|
(Predecessor)
|
|
(Successor)
|
|
(Successor)
|
|
(Predecessor)
|
|
(Successor)
|
|
Pre-launch inventory write-offs, net of partner allocation
|
|
$665
|
|
|
|
$3,701
|
|
|
|
$—
|
|
|
|
$1,354
|
|
|
|
$10,208
|
|
|
|
$—
|
|
Note 10 – Property, Plant and Equipment, net:
($ amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
|
|
2013
|
|
2012
|
|
Land
|
$
|
4,553
|
|
|
$
|
4,553
|
|
|
Buildings
|
29,271
|
|
|
28,781
|
|
|
Machinery and equipment
|
56,387
|
|
|
48,026
|
|
|
Office equipment, furniture and fixtures
|
5,309
|
|
|
5,130
|
|
|
Computer software and hardware
|
20,972
|
|
|
19,034
|
|
|
Leasehold improvements
|
25,782
|
|
|
22,720
|
|
|
Construction in progress
|
9,136
|
|
|
10,933
|
|
|
|
151,410
|
|
|
139,177
|
|
|
Accumulated depreciation and amortization
|
(24,900
|
)
|
|
(7,547
|
)
|
|
|
$
|
126,510
|
|
|
$
|
131,630
|
|
Depreciation and amortization expense related to property, plant and equipment
($ amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
For the period
|
|
Nine months ended
|
|
For the period
|
|
|
September 30, 2013
|
|
July 1, 2012 to September 28, 2012
|
|
September 29, 2012 to September 30, 2012
|
|
September 30, 2013
|
|
January 1, 2012 to September 28, 2012
|
|
September 29, 2012 to September 30, 2012
|
|
|
(Successor)
|
|
(Predecessor)
|
|
(Successor)
|
|
(Successor)
|
|
(Predecessor)
|
|
(Successor)
|
|
Depreciation and amortization expense
|
|
$6,013
|
|
|
|
$4,369
|
|
|
|
$99
|
|
|
|
$17,718
|
|
|
|
$13,230
|
|
|
|
$99
|
|
Note 11 – Intangible Assets, net:
($ amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2013
|
|
December 31, 2012
|
|
|
|
|
Accumulated
|
|
|
|
|
|
Accumulated
|
|
|
|
|
Cost
|
|
Amortization
|
|
Net
|
|
Cost
|
|
Amortization
|
|
Net
|
|
Developed products
|
$
|
530,759
|
|
|
$
|
(126,691
|
)
|
|
$
|
404,068
|
|
|
$
|
552,700
|
|
|
$
|
(33,321
|
)
|
|
$
|
519,379
|
|
|
Other product related royalty streams
|
115,600
|
|
|
(17,803
|
)
|
|
97,797
|
|
|
115,600
|
|
|
(5,289
|
)
|
|
110,311
|
|
|
IPR&D
|
445,500
|
|
|
—
|
|
|
445,500
|
|
|
584,000
|
|
|
—
|
|
|
584,000
|
|
|
Subsequently developed annual IPR&D groups
|
163,100
|
|
|
(15,035
|
)
|
|
148,065
|
|
|
24,600
|
|
|
(257
|
)
|
|
24,343
|
|
|
Par trade name
|
26,400
|
|
|
—
|
|
|
26,400
|
|
|
26,400
|
|
|
—
|
|
|
26,400
|
|
|
Watson/Actavis Divestiture Products
|
83,179
|
|
|
(19,000
|
)
|
|
64,179
|
|
|
101,200
|
|
|
(3,934
|
)
|
|
97,266
|
|
|
Watson/Actavis related IPR&D
|
14,300
|
|
|
—
|
|
|
14,300
|
|
|
14,300
|
|
|
—
|
|
|
14,300
|
|
|
Other
|
1,000
|
|
|
—
|
|
|
1,000
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
$
|
1,379,838
|
|
|
$
|
(178,529
|
)
|
|
$
|
1,201,309
|
|
|
$
|
1,418,800
|
|
|
$
|
(42,801
|
)
|
|
$
|
1,375,999
|
|
We recorded amortization expense related to intangible assets of
$135,744 thousand
for the
nine months ended
September 30, 2013
and
$31,197 thousand
for the period from January 1, 2012 to September 28, 2012 and
$832 thousand
for the period from September 29, 2012 to
September 30, 2012
. After the Merger, amortization expense was included in cost of goods sold. Prior to the Merger, the majority of amortization expense was included in cost of goods sold with the remainder in selling, general and administrative expense.
Intangible Assets Acquired in the Merger
We were acquired on September 28, 2012 through the Merger. Refer to Note 2, “Sky Growth Merger,” for details of the Merger and related transactions. As part of the Merger, we revalued intangible assets related to commercial products (developed technology), royalty streams, IPR&D, and our trade name.
The fair value of the developed technology and in-process research and development intangible assets were estimated using the discounted cash flow method of the income approach. Under this method, an intangible asset’s fair value is equal to the present value of the after-tax cash flows (excess earnings) attributable solely to the intangible asset over its remaining useful life. To calculate fair value, we estimated the present value of cash flows discounted at rates commensurate with the inherent risks associated with each type of asset. We believe that the level and timing of cash flows appropriately reflect market participant assumptions. Some of the significant assumptions inherent in the development of the identifiable intangible asset valuations, from the perspective of a market participant, include the estimated net cash flows by year by project or product (including net revenues, costs of sales, research and development costs, selling and marketing costs and other charges), the appropriate discount rate to select in order to measure the risk inherent in each future cash flow stream, the assessment of each asset's life cycle, competitive trends impacting the asset and each cash flow stream and other factors. The major risks and uncertainties associated with the timely and successful completion of the IPR&D projects include legal risk and regulatory risk.
The developed product intangible assets are composite assets, comprising the market position of the product, the developed technology utilized and the customer base to which the products are sold. Developed technology and the customer base were considered but have not been identified separately as any related cash flows would be intertwined with the product related intangibles. Developed products held by the Company are considered separable from the business as they could be sold to a third party. The Developed products were valued using an excess earnings method, with the exception of the royalty revenue stream products not manufactured by us, which were valued using a relief from royalty method of the income approach. The remaining net book value of the related intangible asset related to developed products will be amortized over a weighted average amortization period of approximately
seven years
.
IPR&D is related to R&D projects that were incomplete at the Merger. There were
86
projects associated with IPR&D at the Merger. As of the Merger, we grouped and valued IPR&D based on the projected year of launch for each group. IPR&D are considered separable from the business as they could be sold to a third party. The value of IPR&D was accounted for as an indefinite-lived intangible asset and will be subject to impairment testing until the completion or abandonment of each group. Upon the successful completion and launch of a product in an annual group, we will make a separate determination of useful life of the IPR&D annual group and commence amortization. This methodology resulted in
five
annual groups of IPR&D (2012 through 2016). When the first product of each annual IPR&D group launches, it is our policy to commence amortization of the entire annual group utilizing the related cash flows expected to be generated for the annual group. Due to the nature of our generic product portfolio pipeline, individual products in the annual IPR&D groups are expected to launch within an annual time period or reasonably close thereto.
Subsequently developed annual IPR&D groups represent IPR&D annual groups that have had the first product in the group launched. The remaining net book value of the related intangible asset associated with subsequently developed annual IPR&D groups will be amortized over a weighted average amortization period of approximately
seven years
.
Trade names constitute intellectual property rights and are marketing-related intangible assets. Our corporate trade name was valued using a relief from royalty method of the income approach and accounted for as an indefinite-lived intangible asset that will be subject to annual impairment testing or whenever events or changes in business circumstances necessitate an evaluation for impairment using a fair value approach.
Intangible Assets acquired with the Divested Products from the Watson/Actavis Merger
On November 6, 2012, in connection with the Watson/Actavis Merger, we acquired the U.S. marketing rights to
five
generic products that were marketed by Watson or Actavis,
eight
ANDAs that were awaiting regulatory approval and a generic product in late-stage development. Refer to Note 3, “Acquisition of Divested Products from the Watson/Actavis Merger,” for details of the transaction.
Developed products are defined as products that are commercialized, all research and development efforts have been completed by the Seller, and final regulatory approvals have been received. The developed product intangible assets are composite assets, comprising the market position of the product, the developed technology utilized and the customer base to which the products are sold. Developed technology and the customer base were considered but have not been identified separately as any related cash flows would be very much intertwined with the product related intangibles. Developed products held by the Company are considered separable from the business as they could be sold to a third party. The Developed products were valued using a multi-period excess earnings method under the income approach. The principle behind this method is that the value of the intangible asset is equal to the present value of the after-tax cash flows attributable to the intangible asset only. The remaining net book value of the related intangible asset related to developed products will be amortized over a weighted average amortization period of approximately
seven years
.
IPR&D consists of technology-related intangible assets used in R&D activities, which are still incomplete. IPR&D products held by the Company are considered separable from the business as they could be sold to a third party. The IPR&D products were valued using multi-period excess earnings method under the income approach as the most reasonable approach for estimating the fair value of acquired IPR&D Products. The value of IPR&D was accounted for as an indefinite-lived intangible asset and will be subject to impairment testing until the completion or abandonment of the group of projects. Upon the successful completion and launch of a
product in the group, we will make a separate determination of useful life of the related IPR&D intangible and commence amortization.
Intangible Asset Impairments
During the three months ended September 30, 2013, we recorded intangible asset impairments totaling
$39,480 thousand
related to an adjustment to the forecasted operating results of five Par Pharmaceutical segment products compared to their originally forecasted operating results at date of acquisition. The estimated fair values of the assets were determined by completing updated discounted cash flow models. During the three months ended June 30, 2013, we ceased selling a product that had been acquired with the divested products from the Watson/Actavis Merger and recorded a total corresponding intangible asset impairment of
$466 thousand
. During the period from January 1, 2012 to September 28, 2012, we abandoned an in-process research and development project that was acquired in the Anchen Acquisition and recorded a corresponding intangible asset impairment of
$2,000 thousand
, and we exited the market of a commercial product that was acquired in the Anchen Acquisition and recorded a corresponding intangible asset impairment of
$3,700 thousand
.
Estimated Amortization Expense for Existing Intangible Assets at
September 30, 2013
The following table does not include estimated amortization expense for future milestone payments that may be paid and result in the creation of intangible assets after
September 30, 2013
and assumes the intangible asset related to the Par trade name as an indefinite lived asset will not be amortized in the future.
($ amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
Amortization
|
|
|
|
Expense
|
|
Remainder of 2013
|
|
$
|
51,283
|
|
|
2014
|
|
182,764
|
|
|
2015
|
|
159,253
|
|
|
2016
|
|
171,014
|
|
|
2017
|
|
201,294
|
|
|
2018 and thereafter
|
|
409,301
|
|
|
|
|
$
|
1,174,909
|
|
Note 12 – Goodwill:
($ amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
|
|
2013
|
|
2012
|
|
Balance at beginning of period
|
$
|
850,652
|
|
|
$
|
—
|
|
|
Additions:
|
|
|
|
|
Sky Growth Merger
|
—
|
|
|
850,652
|
|
|
Deductions:
|
|
|
|
|
Finalization of purchase accounting
|
(1,000
|
)
|
|
—
|
|
|
Balance at end of period
|
$
|
849,652
|
|
|
$
|
850,652
|
|
As noted in Note 2, “Sky Growth Merger,” we were acquired through the Merger. Based upon purchase price allocation in accordance with ASC 350-20-35-30, we recorded goodwill in the amount of
$850,652 thousand
at
December 31, 2012
, which was allocated to Par.
Goodwill is not being amortized, but is tested at least annually, on or about October 1st
or whenever events or changes in business circumstances necessitate an evaluation for impairment using a fair value approach. The goodwill impairment test consists of a two-step process. The first step is to identify a potential impairment and the second step measures the amount of impairment, if any. Goodwill is deemed to be impaired if the carrying amount of a reporting unit exceeds its estimated fair value. As of October 1, 2012, Par performed its annual goodwill impairment assessment and concluded there was no impairment. No impairments of goodwill had been recognized through
September 30, 2013
.
Note 13 – Income Taxes:
($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
For the period
|
|
Nine months ended
|
|
For the period
|
|
|
September 30, 2013
|
|
July 1, 2012 to September 28, 2012
|
|
September 29, 2012 to September 30, 2012
|
|
September 30, 2013
|
|
January 1, 2012 to September 28, 2012
|
|
September 29, 2012 to September 30, 2012
|
|
|
(Successor)
|
|
(Predecessor)
|
|
(Successor)
|
|
(Successor)
|
|
(Predecessor)
|
|
(Successor)
|
|
(Benefit) provision for income taxes
|
$
|
(18,797
|
)
|
|
$
|
(3,588
|
)
|
|
$
|
927
|
|
|
$
|
(36,077
|
)
|
|
$
|
29,529
|
|
|
$
|
927
|
|
|
Effective tax rate
|
39
|
%
|
|
72
|
%
|
|
37
|
%
|
|
35
|
%
|
|
58
|
%
|
|
37
|
%
|
The effective tax rate for the three months ended September 30, 2013 reflects our nondeductible portion of the annual pharmaceutical manufacturers’ fee under the Patient Protection and Affordable Care Act, offset by benefits for deductions specific to U.S. domestic manufacturing companies and our R&D credit. The effective tax rate for the period from July 1, 2012 to September 28, 2012 (Predecessor) reflects our estimate of the non-deductible portion of loss contingencies provided for in the quarter and by non-deductibility of our portion of the annual pharmaceutical manufacturer fee under the Patient Protection and Affordable Care Act, offset by benefit for tax deductions specific to U.S. domestic manufacturing companies. For purposes of determining our tax provision for the period from July 1, 2012 to September 28, 2012 (Predecessor), a certain litigation matter was treated as a discreet event under the provisions of ASC 740, "Income Taxes" ("ASC 740").
The effective tax rate for the nine months ended September 30, 2013 reflects our non-deductible portion of the annual pharmaceutical manufacturer fee under the Patient Protection and Affordable Care Act, offset by benefit for tax deductions specific to U.S. domestic manufacturing companies and our R&D tax credit. The R&D tax credit was retroactively reinstated by Congress in the American Taxpayer Relief Act in January 2013. Current deferred income tax assets at September 30, 2013 consist of temporary differences primarily related to accounts receivable reserves, accrued legal settlements and net operating loss carryforwards. Non-current deferred income tax liabilities at September 30, 2013 consist of timing differences primarily related to intangible assets, debt and depreciation.
The effective tax rate for the period from January 1, 2012 to September 28, 2012 (Predecessor) reflects the portion of certain 2012 loss contingencies which may not be tax deductible and non-deductibility of our portion of the annual pharmaceutical manufacturer fee under the Patient Protection and Affordable Care Act offset by benefit for agreement with the IRS on the deductibility of certain loss contingencies previously unrecognized. Current deferred income tax assets at September 28, 2012 consisted of temporary differences primarily related to accounts receivable reserves, accrued legal settlements and net operating loss carryforwards. Non-current deferred income tax liabilities at September 28, 2012 consisted of timing differences primarily related to intangible assets, stock options and depreciation.
The Company and Anchen are currently being audited by the IRS for the tax years 2009, 2010 and 2011. Par Pharmaceutical Companies, Inc. is no longer subject to IRS audit for periods prior to 2009. Anchen is also currently under audit in
one
state jurisdiction for the years 2005 to 2010. We are also currently under audit in
one
additional state jurisdiction for the years 2003 through 2009. In most other state jurisdictions, we are no longer subject to examination by state tax authorities for years prior to 2008.
We reflect interest and penalties attributable to income taxes, to the extent they arise, as a component of income tax provision or benefit.
The difference between a tax position taken or expected to be taken in a tax return and the benefit recognized and measured pursuant to ASC 740-10 represents an unrecognized tax benefit. An unrecognized tax benefit is a liability that represents a potential future obligation to the taxing authorities. As of September 30, 2013, we had
$17,562 thousand
included in “Long-term liabilities” and
$949 thousand
in “Accrued expenses and other current liabilities” on the condensed consolidated balance sheet that represented unrecognized tax benefits, interest and penalties based on evaluation of tax positions. During the three months ended September 30, 2013, we recorded an increase in unrecognized tax benefits of
$2,684 thousand
as result of tax positions taken during the quarter. We also recorded a reduction to our unrecognized tax benefit of
$1,000 thousand
. This was recorded as a reduction of "Goodwill" on our condensed consolidated balance sheet as of September 30, 2013 as it related to a purchase accounting adjustment from the Sky Growth Merger. We expect a portion of this total liability could potentially settle in the next 12 months. However, the dollar range for a potential settlement cannot be estimated at this time.
Note 14 - Debt:
($ amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
|
|
2013
|
|
2012
|
|
Senior credit facilities:
|
|
|
|
|
Senior secured term loan
|
$
|
1,058,005
|
|
|
$
|
1,052,363
|
|
|
Senior secured revolving credit facility
|
—
|
|
|
—
|
|
|
7.375% senior notes
|
490,000
|
|
|
490,000
|
|
|
|
1,548,005
|
|
|
1,542,363
|
|
|
Less unamortized debt discount to senior secured term loan
|
(8,172
|
)
|
|
—
|
|
|
Less current portion
|
(10,660
|
)
|
|
(10,550
|
)
|
|
Long-term debt
|
$
|
1,529,173
|
|
|
$
|
1,531,813
|
|
Senior Credit Facilities
In connection with the Merger, on September 28, 2012, we entered into a credit agreement (the "Credit Agreement") with a syndicate of banks, led by Bank of America, N.A., as Administrative Agent, Bank of America, N.A., Deutsche Bank Securities, Inc., Goldman Sachs Bank USA, Citigroup Global Markets, Inc., RBC Capital Markets LLC and BMO Capital Markets as Joint Lead Arrangers and Joint Lead Bookrunners, Deutsche Bank Securities, Inc. and Goldman Sachs Bank USA as Co-Syndication Agents, and Citigroup Global Markets Inc. and RBC Capital Markets LLC as Co-Documentation Agents, to provide Senior Credit Facilities comprised of a
seven
-year senior secured term loan in an initial aggregate principal amount of
$1,055 million
(the “Term Loan Facility”) and a
five
-year senior secured revolving credit facility in an initial amount of
$150 million
(the “Revolving Facility”). The proceeds of the Revolving Facility are available for general corporate purposes.
The Credit Agreement contains customary representations and warranties, as well as customary events of default, in certain cases subject to reasonable and customary periods to cure, including but not limited to: failure to make payments when due, breach of covenants, breach of representations and warranties, insolvency proceedings, certain judgments and any change of control. The Credit Agreement also contains various customary covenants that, in certain instances, restrict our ability to: (i) create liens on assets; (ii) incur additional indebtedness; (iii) engage in mergers or consolidations with or into other companies; (iv) engage in dispositions of assets, including entering into a sale and leaseback transaction; (v) pay dividends and distributions or repurchase capital stock; (vi) make investments, loans, guarantees or advances in or to other companies; (vii) change the nature of our business; (viii) repay or redeem certain junior indebtedness, (ix) engage in transactions with affiliates; and (x) enter into restrictive agreements. In addition, the Credit Agreement requires us to demonstrate compliance with a maximum senior secured first lien leverage ratio whenever amounts are outstanding under the revolving credit facility as of the last day of any quarterly testing period. All obligations under the Credit Agreement are guaranteed by our material domestic subsidiaries.
We are also obligated to pay a commitment fee based on the unused portion of the Revolving Facility. The Credit Agreement includes an accordion feature pursuant to which we may increase the amount available to be borrowed by up to an additional
$250,000 thousand
(or a greater amount if we meet certain specified financial ratios) under certain circumstances. Repayments of the proceeds of the term loan are due in quarterly installments over the term of the Credit Agreement. Amounts borrowed under the Revolving Facility are payable in full upon expiration of the Credit Agreement.
Refinancing of the Term Loan Facility
On February 6, 2013, the Company, Par Pharmaceutical, Inc., as co-borrower, Sky Growth Intermediate Holdings II Corporation (“Intermediate Holdings”), the subsidiary guarantor party thereto, Bank of America, as administrative agent, and the lenders and other parties thereto modified the Term Loan Facility (as amended, the “New Term Loan Facility”) by entering into Amendment No. 1 (“Amendment No. 1”) to the Credit Agreement.
Amendment No. 1 replaced the existing term loans with a new class of term loans in an aggregate principal amount of
$1,066 million
(the “New Term Loans”). Borrowings under the New Term Loan Facility bear interest at a rate per annum equal to an applicable margin plus, at the Company’s option, either LIBOR (which is subject to a
1.00%
floor) or the base rate rate (which is subject to a
2.00%
floor). The applicable margin for borrowings under the New Term Loans is
3.25%
for LIBOR borrowings and
2.25%
for base rate borrowings. Amendment No. 1 provides for a soft call option applicable to the New Term Loans. The soft call option provides for a premium equal to
1.00%
of the amount of the outstanding principal if, on or prior to August 6, 2013, the Company entered into certain repricing transactions. The other terms applicable to the New Term Loans are substantially the same terms as the original term loans. We were in compliance with all applicable covenants as of
September 30, 2013
.
In connection with the transactions described herein, the Company paid a
1.00%
soft call premium in an aggregate amount of approximately
$10,500 thousand
on the existing term loan in February 2013, a portion of which was capitalized as a discount to the New Term Loan Facility. In accordance with the applicable accounting guidance for debt modifications and extinguishments, approximately
$5,923 thousand
of the existing unamortized deferred financing costs and
$1,412 thousand
of the related
$10,500
thousand
soft call premium were written off in connection with this refinancing and included in the condensed consolidated statements of operations as a loss on debt extinguishment.
Repricing of the Revolving Facility
The Company and Par Pharmaceutical, Inc., as co-borrower, Intermediate Holdings, the subsidiary guarantor party thereto, Bank of America, as administrative agent, and the lenders and other parties thereto modified the Revolving Credit Facility by entering into Amendment No. 2 (“Amendment No. 2”), dated February 22, 2013, and Amendment No. 3 (“Amendment No. 3” and, together with Amendment No. 2, the “Revolver Amendments”), dated February 28, 2013, to the Credit Agreement.
The Revolver Amendments extend the scheduled maturity of the revolving credit commitments of certain existing lenders (the “Extending Lenders”) who have elected to do so, such extension to be effected by converting such amount of the existing revolving credit commitments of the Extending Lenders into a new tranche of revolving credit commitments (the “Extended Revolving Facility”). The Revolver Amendments also set forth the interest rate payable on borrowings outstanding under the Extended Revolving Facility, as described below. The aggregate commitments under the Extended Revolving Facility are
$127.5 million
and the aggregate commitments under the non-extended portion of the Revolving Facility are
$22.5 million
. There were
no
outstanding borrowings from the Revolving Facility or the Extended Revolving Facility as of
September 30, 2013
.
Borrowings under the Extended Revolving Facility bear interest at a rate per annum equal to an applicable margin plus, at the Company’s option, either LIBOR or the base rate. The initial applicable margin for borrowings under the Extended Revolving Facility is
3.25%
for LIBOR borrowings and
2.25%
for base rate borrowings. The Extended Revolving Facility will mature on December 28, 2017. Borrowings and repayments of loans under the Extended Revolving Facility and the non-extended portion of the Revolving Facility may be made on a non-pro rata basis with one another, and the commitments under the non-extended portion of the Revolving Facility may be terminated prior to the commitments under the Extended Revolving Credit Facility. The other terms applicable to the Extended Revolving Credit Facility are substantially identical to those of the Revolving Credit Facility.
7.375% Senior Notes
In connection with the Merger, on September 28, 2012, we issued
$490,000 thousand
aggregate principal amount of
7.375%
senior notes due 2020 (the “Notes”). The Notes were issued pursuant to an indenture entered into as of the same date between the Company and Wells Fargo Bank, National Association, as trustee. Interest on the Notes is payable semi-annually on April 15 and October 15, commencing on April 15, 2013. The Notes mature on October 15, 2020.
We may redeem the Notes at our option, in whole or in part on one or more occasions, at any time on or after October 15, 2015, at specified redemption prices that vary by year, together with accrued and unpaid interest, if any, to the date of redemption. At any time prior to October 15, 2015, we may redeem up to
40%
of the aggregate principal amount of the Notes with the net proceeds of certain equity offerings at a redemption price equal to the sum of (i)
107.375%
of the aggregate principal amount thereof, plus (ii) accrued and unpaid interest, if any, to the redemption date. At any time prior to October 15, 2015, we may also redeem the Notes, in whole or in part on one or more occasions, at a price equal to
100%
of the principal amount of the Notes, plus accrued and unpaid interest and a specified “make-whole premium.”
The Notes are guaranteed on a senior unsecured basis by our material existing direct and indirect wholly-owned domestic subsidiaries and, subject to certain exceptions, each of our future direct and indirect domestic subsidiaries that guarantees the Senior Credit Facilities or our other indebtedness or indebtedness of the guarantors will guarantee the Notes. Under certain circumstances, the subsidiary guarantors may be released from their guarantees without consent of the holders of Notes.
The Notes and the subsidiary guarantees will be our and the guarantors’ senior unsecured obligations and will (i) rank senior in right of payment to all of our and the subsidiary guarantors’ existing and future subordinated indebtedness; (ii) rank equally in right of payment with all of our and the subsidiary guarantors’ existing and future senior indebtedness; (iii) be effectively subordinated to any of our and the subsidiary guarantors’ existing and future secured debt, to the extent of the value of the assets securing such debt; and (iv) be structurally subordinated to all of the existing and future liabilities (including trade payables) of each of our subsidiaries that do not guarantee the Notes.
The indenture governing the Notes contains customary representations and warranties, as well as customary events of default, in certain cases subject to reasonable and customary periods to cure, including but not limited to: failure to make payments when due, breach of covenants, a payment default or acceleration equaling
$40,000 thousand
or more according to the terms of certain other indebtedness, failure to pay final judgments aggregating in excess of
$40,000 thousand
when due, insolvency proceedings, a required guarantee shall cease to remain in full force. The indenture also contains various customary covenants that, in certain instances, restrict our ability to: (i) pay dividends and distributions or repurchase capital stock; (ii) incur additional indebtedness; (iii) make investments, loans, guarantees or advances in or to other companies; (iv) engage in dispositions of assets, including entering into a sale and leaseback transaction; (v) engage in transactions with affiliates; (vi) create liens on assets; (vii) redeem or repay certain subordinated indebtedness, (viii) engage in mergers or consolidations with or into other companies; and (ix) change the nature of our business. The covenants are subject to a number of exceptions and qualifications. Certain of these covenants will be suspended during any period of time that (1) the Notes have Investment Grade Ratings (as defined in the indenture) from both Moody’s Investors Service, Inc. and Standard & Poor’s, and (2) no default has occurred and is continuing under the indenture. In the event that the Notes
are downgraded to below an Investment Grade Rating, the Company and certain subsidiaries will again be subject to the suspended covenants with respect to future events. We were in compliance with all covenants as of
September 30, 2013
.
Par Pharmaceutical Companies, Inc., the parent company, is the sole issuer of the Notes. The Notes are guaranteed on a senior unsecured basis by Par Pharmaceutical Companies, Inc.'s material direct and indirect wholly-owned domestic subsidiaries. The guarantees are full and unconditional and joint and several. Par Pharmaceutical Companies, Inc. has no independent assets or operations. Each of the subsidiary guarantors is
100%
owned by Par Pharmaceutical Companies, Inc. and all non-guarantor subsidiaries of Par Pharmaceutical Companies, Inc. are minor subsidiaries.
Debt Maturities as of
September 30, 2013
($ amounts in thousands)
|
|
|
|
|
|
|
|
2013
|
$
|
2,665
|
|
|
2014
|
10,660
|
|
|
2015
|
10,660
|
|
|
2016
|
10,660
|
|
|
2017
|
10,660
|
|
|
2018
|
10,660
|
|
|
2019
|
1,002,040
|
|
|
2020
|
490,000
|
|
|
Total debt at September 30, 2013
|
$
|
1,548,005
|
|
Note 15 - Derivative Instruments and Hedging Activities:
Risk Management Objective of Using Derivatives
We are exposed to certain risks arising from global economic conditions. We manage economic risks, including interest rate risk primarily through the use of derivative financial instruments to mitigate the potential impact of interest rate risk. All derivatives are carried at fair value on our condensed consolidated balance sheets. We do not enter into speculative derivatives. Specifically, we enter into derivative financial instruments to manage exposures that arise from payment of future known and uncertain cash amounts related to our borrowings, the value of which are determined by LIBOR interest rates. We may net settle any of our derivative positions under agreements with our counterparty, when applicable.
Cash Flow Hedges of Interest Rate Risk via Interest Rate Caps
Our objective in using interest rate derivatives is to add certainty to interest expense amounts and to manage our exposure to interest rate movements, specifically to protect us from variability in cash flows attributable to changes in LIBOR interest rates.
To accomplish this objective, we primarily use interest rate caps as part of our interest rate risk management strategy. Interest rate caps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty if LIBOR exceeds the strike rate in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. During the three months ended September 30, 2013, we entered into such derivatives to hedge the variable cash flows associated with existing variable-rate debt under our Credit Agreement beginning as of September 30, 2013. These instruments are designated for accounting purposes as cash flow hedges of benchmark interest rate risk related to our Credit Agreement. We assess effectiveness and the effective portion of changes in the fair value of derivatives designated and qualified as cash flow hedges for financial reporting purposes. Such effective portion of changes in fair value are recorded in “Accumulated other comprehensive loss” on our condensed consolidated balance sheet and will be subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. Any ineffective portion of the change in fair value of the derivatives would be recognized directly in earnings.
Interest Rate Caps
As of September 30, 2013, we had
five
outstanding interest rate caps with various termination dates and notional amounts, which we deemed to be effective for accounting purposes. The derivatives had a combined notional value of
$600,000 thousand
, all with an effective date as of September 30, 2013 and with termination dates each September 30th beginning in 2014 and ending in 2018. Consistent with the terms of the Credit Agreement, the interest rate caps have a strike of
1%
which matches the LIBOR floor of
1.0%
on the debt. The premium is deferred and paid over the life of the instrument. The effective annual interest rate related to these interest rate caps was a fixed weighted average rate of approximately
4.9%
(including applicable margin of
3.25%
per the Credit Agreement) at September 30, 2013. These instruments are designated for accounting purposes as cash flow hedges of interest rate risk related to our Credit Agreement. Amounts reported in “Accumulated other comprehensive loss” on our condensed consolidated balance sheet related to derivatives will be reclassified to interest expense as interest payments are made on our variable-rate debt under the Credit Agreement. At the effective date of these interest rate caps approximately
30%
of our total outstanding debt at September 30, 2013 remains subject to variability in cash flows attributable to changes in LIBOR interest rates. During the next twelve months, we estimate that
$4,000 thousand
will be reclassified from “Accumulated other comprehensive loss” on our condensed consolidated balance sheet at September 30, 2013 to interest expense.
Fair Value
As of the effective date, we designated the interest rate swap agreements as cash flow hedges. As cash flow hedges, unrealized gains are recognized as assets while unrealized losses are recognized as liabilities. The interest rate swap agreements are highly correlated to the changes in LIBOR interest rates. The effective portion of such gains or losses is recorded as a component of accumulated other comprehensive income or loss, while the ineffective portion of such gains or losses will be recorded as a component of interest expense. As of September 30, 2013, we recorded
$2,935 thousand
as part of “Accumulated other comprehensive loss” on our condensed consolidated balance sheet. Future realized gains and losses in connection with each required interest payment will be reclassified from Accumulated other comprehensive loss to interest expense.
We elected to use the income approach to value the derivatives, using observable Level 2 market expectations at each measurement date and standard valuation techniques to convert future amounts to a single present amount (discounted) assuming that participants are motivated, but not compelled to transact. Level 2 inputs for the cap valuations are limited to quoted prices for similar assets or liabilities in active markets (specifically futures contracts) and inputs other than quoted prices that are observable for the asset or liability (specifically LIBOR cash and swap rates, volatility and credit risk at commonly quoted intervals). Mid-market pricing is used as a practical expedient for fair value measurements. Key inputs for valuation models include the cash rates, futures rates, swap rates, credit rates and interest rate volatilities. Reset rates, discount rates and volatilities are interpolated from these market inputs to calculate cash flows as well as to discount those future cash flows to present value at each measurement date. Refer to Note 7 for additional information regarding fair value measurements.
The fair value of our derivative instruments measured as outlined above as of
September 30, 2013
was as follows:
($ amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
Quoted Prices
|
|
Significant Other Observable Inputs
|
|
Significant Other Unobservable Inputs
|
|
Description
|
2013
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
Derivatives
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Derivatives
|
$
|
(2,935
|
)
|
|
$
|
—
|
|
|
$
|
(2,935
|
)
|
|
$
|
—
|
|
|
|
$
|
(2,935
|
)
|
|
$
|
—
|
|
|
$
|
(2,935
|
)
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the fair value and presentation in our condensed consolidated balance sheets for derivative instruments as of September 30, 2013 and 2012:
($ amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives
|
|
Liability Derivatives
|
|
|
|
|
|
September 30, 2013
|
|
September 30, 2012
|
|
|
|
September 30,
2013
|
|
September 30,
2012
|
|
|
|
Balance Sheet Location
|
|
Fair Value
|
|
Fair Value
|
|
Balance Sheet Location
|
|
Fair Value
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives designated as hedging instruments under ASC 815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate cap contracts
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Accrued expenses and other current liabilities
|
|
$
|
(4,000
|
)
|
|
$
|
—
|
|
|
Interest rate cap contracts
|
|
|
|
—
|
|
|
—
|
|
|
Other Assets
|
|
1,065
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives designated as hedging instruments under ASC 815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
$
|
(2,935
|
)
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
$
|
(2,935
|
)
|
|
$
|
—
|
|
The following tables summarize our five interest cap agreements with a single counterparty and that each agreement represented a net liability for us and none of our interest cap agreements represented a net asset as of September 30, 2013:
($ amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Offsetting of Derivative Liabilities
|
|
|
|
|
As of September 30, 2013
|
|
|
|
|
|
|
|
Gross Amounts Not Offset in the Statement of Financial Position
|
|
|
Description
|
Gross Amounts of Recognized Liabilities
|
Gross Amounts Offset in the Statement of Financial Position
|
Net Amounts of Liabilities Presented in the Statement of Financial Position
|
Financial Instruments
|
Cash Collateral Pledged
|
Net Amount
|
|
Derivatives by counterparty
|
|
|
|
|
|
|
|
Counterparty 1
|
$
|
(2,935
|
)
|
$
|
(1,065
|
)
|
$
|
(4,000
|
)
|
$
|
1,065
|
|
$
|
—
|
|
$
|
(2,935
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
(2,935
|
)
|
$
|
(1,065
|
)
|
$
|
(4,000
|
)
|
$
|
1,065
|
|
$
|
—
|
|
$
|
(2,935
|
)
|
|
|
|
|
|
|
|
|
|
($ amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Offsetting of Derivative Assets
|
|
|
|
|
As of September 30, 2013
|
|
|
|
|
|
|
|
Gross Amounts Not Offset in the Statement of Financial Position
|
|
|
Description
|
Gross Amounts of Recognized Assets
|
Gross Amounts Offset in the Statement of Financial Position
|
Net Amounts of Assets Presented in the Statement of Financial Position
|
Financial Instruments
|
Cash Collateral Pledged
|
Net Amount
|
|
Derivatives by counterparty
|
|
|
|
|
|
|
|
Counterparty 1
|
$
|
—
|
|
$
|
1,065
|
|
$
|
1,065
|
|
$
|
(1,065
|
)
|
$
|
—
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
—
|
|
$
|
1,065
|
|
$
|
1,065
|
|
$
|
(1,065
|
)
|
$
|
—
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes information about the fair values of our derivative instruments on the condensed consolidated statements of other comprehensive income (loss) for the nine months ended September 30, 2013:
|
|
|
|
|
|
|
|
|
Other Comprehensive Income (Loss) Rollforward:
|
|
Amount
($ thousands)
|
|
Beginning Balance Gain/(Loss) as of
|
December 31, 2012
|
$
|
—
|
|
|
Amount Recognized in Other Comprehensive Income (Loss) on Derivative (Pre-tax)
|
|
(2,935
|
)
|
|
Amount Reclassified from Other Comprehensive Income (Loss) into Income (Loss)
|
|
—
|
|
|
Ending Balance Gain/(Loss) (Pre-tax) as of
|
September 30, 2013
|
$
|
(2,935
|
)
|
The following table summarizes the effect and presentation of derivative instruments, including the effective portion or ineffective portion of our cash flow hedges, on the condensed consolidated statements of operations for the periods ending September 30, 2013 and 2012:
($ amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Effect of Derivative Instruments on the Statement of Financial Performance
|
|
For the Three and Nine Month Periods Ended September 30, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives in ASC 815 Cash Flow Hedging Relationships
|
|
Amount of Gain or (Loss) Recognized in Other Comprehensive Income (Loss) on Derivative
(Effective Portion)
|
Location of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income (Loss) into Income (Loss) (Effective Portion)
|
|
Amount of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income into Income (Loss)
(Effective Portion)
|
Location of Gain or (Loss) Recognized in Income (Loss) on Derivative (Ineffective Portion )
|
|
Amount of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion )
|
|
|
2013
|
2012
|
|
2013
|
2012
|
|
2013
|
2012
|
|
Interest rate cap contracts
|
|
$
|
(2,935
|
)
|
—
|
|
Interest Expense
|
|
$
|
—
|
|
—
|
|
Interest Expense
|
|
$
|
—
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(2,935
|
)
|
—
|
|
|
|
$
|
—
|
|
—
|
|
|
|
$
|
—
|
|
—
|
|
Note 16 – Changes in Stockholders’ Equity:
Changes in our Common Stock, Additional Paid-In Capital and Accumulated Other Comprehensive Income accounts during the
nine
-month period ended
September 30, 2013
were as follows (share amounts and $ amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Additional Paid-In Capital
|
|
Accumulated Other Comprehensive Loss
|
|
|
Shares
|
|
Amount
|
|
|
|
|
|
Balance, December 31, 2012
|
—
|
|
|
$
|
—
|
|
|
$
|
677,650
|
|
|
$
|
(10
|
)
|
|
Unrealized loss on available for sale securities, net of tax
|
—
|
|
|
—
|
|
|
—
|
|
|
(22
|
)
|
|
Unrealized loss on cash flow hedges, net of tax
|
|
|
|
|
—
|
|
|
(1,878
|
)
|
|
Compensatory arrangements
|
—
|
|
|
—
|
|
|
6,823
|
|
|
—
|
|
|
Other
|
—
|
|
|
—
|
|
|
(316
|
)
|
|
—
|
|
|
Balance, September 30, 2013
|
—
|
|
|
$
|
—
|
|
|
$
|
684,157
|
|
|
$
|
(1,910
|
)
|
Note 17 – Share-Based Compensation:
We account for share-based compensation as required by ASC 718-10, Compensation – Stock Compensation, ("ASC 718-10") which requires companies to recognize compensation expense in the amount equal to the fair value of all share-based payments granted to employees. Under ASC 718-10, we recognize share-based compensation ratably over the service period applicable to the award. ASC 718-10 also requires that excess tax benefits be reflected as financing cash flows.
Successor Share-Based Compensation
Stock Options
In conjunction with the Merger, certain senior level employees of the Company were granted stock options in Holdings, effectively granted as of September 28, 2012, under the terms of the Sky Growth Holdings Corporation 2012 Equity Incentive Plan. The share-based compensation expense relating to awards to those persons has been pushed down from Holdings to the Company.
Each optionee received
two
equal tranches of stock options. Tranche 1 options vest based upon continued employment over a
five
year period, ratably
20%
each annual period. Our policy is to recognize expense for this type of award on a straight-line basis over the requisite service period for the entire award (
5 years
). Tranche 2 options vest based upon continued employment and the Company achieving specified annual or bi-annual EBITDA targets. Compensation expense will be recognized on a graded vesting schedule. In circumstances where the specified annual or bi-annual EBITDA targets are not met, Tranche 2 options may also vest in amounts of either
50%
or
100%
of the original award in the event of a initial public offering or other sale of Holdings to a third party buyer (a market condition) that returns a specified level of proceeds calculated as a multiple of the original equity invested in the Company as of September 28, 2012.
We used the Black-Scholes stock option pricing model to estimate the fair value of all Tranche 1 options and Tranche 2 options without a market condition (i.e., Tranche 2 options with service and performance conditions only).
The Tranche 2 options with a market condition were valued using a Monte Carlo simulation. The Monte Carlo simulation developed a range of projected outcomes of the market condition by projecting potential share prices over a 5 year simulation and determining if the share price had reached the specified level of proceeds stipulated in the equity plan. We ran one million simulations and concluded the fair value of the Tranche 2 options with market condition as the average of present value of the payoffs across all simulations.
A summary of the calculated estimated grant date fair value per option is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Nine months ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2013
|
|
2013
|
|
Fair value of stock options
|
(Successor)
|
|
(Successor)
|
|
TRANCHE 1
|
|
$0.67
|
|
|
|
$0.67
|
|
|
TRANCHE 2 without market condition
|
|
$0.68
|
|
|
|
$0.68
|
|
|
TRANCHE 2 with market condition
|
|
$0.76
|
|
|
|
$0.76
|
|
For Tranche 2 options, each quarter we will evaluate the probability of the Company achieving the annual or the bi-annual EBITDA targets (“Vesting Event A”) and the probability of an initial public offering or other sale of the Company to a third party buyer (“Vesting Event B”). If it is probable that the Company will achieve Vesting Event A, then the Company will recognize expense
for Tranche 2 options at the
$0.68
per option value with any necessary adjustments to expense to be equal to the ratable expense as of the end of that particular quarter end. If it is probable that the Company will achieve Vesting Event B, then the Company will recognize expense for Tranche 2 options at the
$0.76
per option value (which is the fair value taking into account the market condition) with any necessary adjustment to expense to be equal to the ratable expense as of the end of that particular quarter end.
We granted a member of the Board of Directors of Holdings stock options in Holdings during the three months ended March 31, 2013 under similar terms as the Tranche 1 options granted as of September 28, 2012 under the Sky Growth Holdings Corporation 2012 Equity Incentive Plan. These stock options vest based upon continued service over an approximate
five
year period, ratably
20%
each period ending September 28
th
. We will recognize expense on a straight-line basis over the requisite service period for the entire award. The share-based compensation expense relating to the award has been pushed down from Holdings to the Company. We used the Black-Scholes stock option pricing model to estimate the fair value of the stock option awards.
Set forth below is the impact on our results of operations of recording share-based compensation from stock options ($ amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Nine months ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2013
|
|
2013
|
|
|
(Successor)
|
|
(Successor)
|
|
Cost of goods sold
|
$
|
226
|
|
|
$
|
674
|
|
|
Selling, general and administrative
|
2,040
|
|
|
6,068
|
|
|
Total, pre-tax
|
$
|
2,266
|
|
|
$
|
6,742
|
|
|
Tax effect of share-based compensation
|
(838
|
)
|
|
(2,495
|
)
|
|
Total, net of tax
|
$
|
1,428
|
|
|
$
|
4,247
|
|
The following is a summary of our stock option activity (shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted Average Exercise Price
|
|
Weighted Average Remaining Life
|
|
Aggregate Intrinsic Value
|
|
TRANCHE 1
|
|
|
|
|
|
|
|
|
Balance at December 31, 2012
|
21,630
|
|
|
|
$1.00
|
|
|
|
|
|
|
Granted
|
500
|
|
|
1.00
|
|
|
|
|
|
|
Exercised
|
—
|
|
|
—
|
|
|
|
|
|
|
Forfeited
|
(300
|
)
|
|
1.00
|
|
|
|
|
|
|
Balance at September 30, 2013
|
21,830
|
|
|
|
$1.00
|
|
|
9.0
|
|
$
|
—
|
|
|
Exercisable at September 30, 2013
|
4,366
|
|
|
|
$1.00
|
|
|
9.0
|
|
$
|
—
|
|
|
Vested and expected to vest at September 30, 2013
|
20,742
|
|
|
|
$1.00
|
|
|
9.0
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted Average Exercise Price
|
|
Weighted Average Remaining Life
|
|
Aggregate Intrinsic Value
|
|
TRANCHE 2
|
|
|
|
|
|
|
|
|
Balance at December 31, 2012
|
21,630
|
|
|
|
$1.00
|
|
|
|
|
|
|
Granted
|
—
|
|
|
—
|
|
|
|
|
|
|
Exercised
|
—
|
|
|
—
|
|
|
|
|
|
|
Forfeited
|
(300
|
)
|
|
1.00
|
|
|
|
|
|
|
Balance at September 30, 2013
|
21,330
|
|
|
|
$1.00
|
|
|
9.0
|
|
$
|
—
|
|
|
Exercisable at September 30, 2013
|
—
|
|
|
|
$—
|
|
|
0.0
|
|
$
|
—
|
|
|
Vested and expected to vest at September 30, 2013
|
20,242
|
|
|
|
$1.00
|
|
|
9.0
|
|
$
|
—
|
|
Rollover Options
As part of the Merger, certain employees of the Company were given the opportunity to exchange their stock options in Predecessor for stock options in Holdings (“Rollover Stock Options”). Sponsor was not legally or contractually required to replace
Predecessor stock options with Holdings stock options, therefore the Rollover Stock Options were not part of the purchase price. The ratio of exchange was based on the intrinsic value of the Predecessor stock options at September 28, 2012.
The term of the Predecessor stock options exchanged for Holdings stock options were not extended. All Rollover Stock Options maintained their
10
year term from original grant date.
All of the Rollover Stock Options were either vested prior to September 27, 2012 or were accelerated vested on September 27, 2012 (date of the Predecessor shareholders’ meeting that approved the Merger) in accordance with the terms of the Predecessor stock option agreements. No additional vesting conditions were imposed on the holders of the Rollover Stock Options. All remaining unrecognized share-based compensation expense associated with the Rollover Stock Options was recognized during the Predecessor period.
The following is a summary of our Rollover Stock Options activity (shares and aggregate intrinsic value in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted Average Exercise Price
|
|
Weighted Average Remaining Life
|
|
Aggregate Intrinsic Value
|
|
Balance at December 31, 2012
|
18,100
|
|
|
|
$0.25
|
|
|
|
|
|
|
Granted
|
—
|
|
|
—
|
|
|
|
|
|
|
Exercised
|
(749
|
)
|
|
0.25
|
|
|
|
|
|
|
Forfeited
|
—
|
|
|
—
|
|
|
|
|
|
|
Balance at September 30, 2013
|
17,351
|
|
|
|
$0.25
|
|
|
4.0
|
|
$
|
13,013
|
|
|
Exercisable at September 30, 2013
|
17,351
|
|
|
|
$0.25
|
|
|
4.0
|
|
$
|
13,013
|
|
Restricted Stock
In conjunction with the Merger, certain senior level employees were granted restricted stock units ("RSUs") in Holdings. The share-based compensation expense relating to awards to those persons has been pushed down from Holdings to the Company.
Each RSU has only a time-based service condition and will vest no later than the fifth anniversary of the grant date (September 28, 2017) upon fulfillment of the service condition.
The fair value of each RSU is based on fair value of each share of Holdings common stock on the grant date. The RSUs are classified as equity awards. The total calculated value, net of estimated forfeitures, will be recognized ratably over the
5
year vesting period.
We granted RSUs to a member of the Board of Directors during the
nine months ended
September 30, 2013
that will vest within
two
years of the grant upon fulfillment of the service condition over the same time period.
Set forth below is the impact on our results of operations of recording share-based compensation from RSUs for the
nine
-month period ended
September 30, 2013
($ amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Nine months ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2013
|
|
2013
|
|
|
(Successor)
|
|
(Successor)
|
|
Cost of goods sold
|
$
|
2
|
|
|
$
|
7
|
|
|
Selling, general and administrative
|
22
|
|
|
75
|
|
|
Total, pre-tax
|
$
|
24
|
|
|
$
|
82
|
|
|
Tax effect of stock-based compensation
|
(9
|
)
|
|
(30
|
)
|
|
Total, net of tax
|
$
|
15
|
|
|
$
|
52
|
|
The following is a summary of our RSU activity for the
nine
-month period ended
September 30, 2013
(shares and aggregate intrinsic value in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted Average Grant Price
|
|
Aggregate Intrinsic Value
|
|
Balance at December 31, 2012
|
300
|
|
|
|
$1.00
|
|
|
|
|
Granted
|
65
|
|
|
1.00
|
|
|
|
|
Vested
|
—
|
|
|
—
|
|
|
|
|
Forfeited
|
—
|
|
|
—
|
|
|
|
|
Non-vested restricted stock unit balance at September 30, 2013
|
365
|
|
|
|
$1.00
|
|
|
$
|
365
|
|
Long-term Cash Incentive Awards
In conjunction with the Merger, certain employees were granted awards under the Long-term Cash Incentive Award Agreement incentive plan (the “Incentive Plan”) from Holdings. Each participant has the potential to receive a cash award based on specific achievements in the event of a transaction (e.g., initial public offering or sale of the company to a third party buyer) that returns a specified level of proceeds calculated as a multiple of the original equity invested in the company as of September 28, 2012. There is no vesting period under the Incentive Plan. The grantees must be employed by Sky Growth Holdings Corporation and its subsidiaries at the time of a transaction event in order to be eligible for a cash payment.
This plan is accounted for in accordance with ASC 450 and will be evaluated quarterly. If information available before the financial statements are issued indicates that it is probable that a liability had been incurred at the date of the financial statements then an accrual shall be made for the estimated cash payout. No amount was accrued for the Incentive Plan at
September 30, 2013
.
Predecessor Share-Based Compensation
As a result of the Merger, as of September 27, 2012, the Predecessor’s unvested share-based compensation instruments were accelerated to vest in accordance with the underlying Predecessor equity plans. These instruments, together with previously vested awards, and with the exception of Rollover Options discussed above, were settled in cash at the
$50.00
purchase price per share paid by Sponsor in the Merger. All previous share-based compensation plans were cancelled in conjunction with the Merger.
Stock Options
We used the Black-Scholes stock option pricing model to estimate the fair value of stock option awards.
Set forth below is the impact on our results of operations of recording share-based compensation from stock options for the
nine
-month period ended
September 30, 2012
($ amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the period
|
|
For the period
|
|
|
July 1, 2012 to
|
|
September 29, 2012 to
|
|
January 1, 2012 to
|
|
September 29, 2012 to
|
|
|
September 28, 2012
|
|
September 30, 2012
|
|
September 28, 2012
|
|
September 30, 2012
|
|
|
(Predecessor)
|
|
(Successor)
|
|
(Predecessor)
|
|
(Successor)
|
|
Cost of goods sold
|
$
|
100
|
|
|
$
|
—
|
|
|
$
|
300
|
|
|
$
|
—
|
|
|
Selling, general and administrative
|
900
|
|
|
—
|
|
|
2,700
|
|
|
—
|
|
|
Total, pre-tax
|
$
|
1,000
|
|
|
$
|
—
|
|
|
$
|
3,000
|
|
|
$
|
—
|
|
|
Tax effect of share-based compensation
|
(370
|
)
|
|
—
|
|
|
(1,110
|
)
|
|
—
|
|
|
Total, net of tax
|
$
|
630
|
|
|
$
|
—
|
|
|
$
|
1,890
|
|
|
$
|
—
|
|
Restricted Stock/Restricted Stock Units
Outstanding restricted stock and restricted stock units generally vested ratably over
four
years. The related share-based compensation expense was recorded over the requisite service period, which was the vesting period. The fair value of restricted stock was based on the market value of our common stock on the date of grant.
The impact on our results of operations of recording share-based compensation from restricted stock for the
nine
-month period ended
September 30, 2012
was as follows ($ amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the period
|
|
For the period
|
|
|
July 1, 2012 to
|
|
September 29, 2012 to
|
|
January 1, 2012 to
|
|
September 29, 2012 to
|
|
|
September 28, 2012
|
|
September 30, 2012
|
|
September 28, 2012
|
|
September 30, 2012
|
|
|
(Predecessor)
|
|
(Successor)
|
|
(Predecessor)
|
|
(Successor)
|
|
Cost of goods sold
|
$
|
132
|
|
|
$
|
—
|
|
|
$
|
377
|
|
|
$
|
—
|
|
|
Selling, general and administrative
|
1,183
|
|
|
—
|
|
|
3,390
|
|
|
—
|
|
|
Total, pre-tax
|
$
|
1,315
|
|
|
$
|
—
|
|
|
$
|
3,767
|
|
|
$
|
—
|
|
|
Tax effect of share-based compensation
|
(487
|
)
|
|
—
|
|
|
(1,394
|
)
|
|
—
|
|
|
Total, net of tax
|
$
|
828
|
|
|
$
|
—
|
|
|
$
|
2,373
|
|
|
$
|
—
|
|
Restricted Stock Unit Grants With Internal Performance Conditions
In January 2012, we issued restricted stock units with performance conditions (“performance units”) to
two
senior executives. The vesting of these performance units was contingent upon the achievement of certain financial and operational goals related to the Anchen Acquisition and corporate entity performance with cliff vesting after
three years
if the performance conditions and continued employment condition were met.
The
two
senior executives each received approximately
25 thousand
performance units. The value of the performance units awarded was approximately
$1.7 million
at the grant date. These awards were accelerated and vested upon the consummation of the Merger and all related compensation was recognized as of that date.
Cash-settled Restricted Stock Unit Awards
We granted cash-settled restricted stock unit awards that vested ratably over
four years
to certain employees. The cash-settled restricted stock unit awards were classified as liability awards and were reported within accrued expenses and other current liabilities and other long-term liabilities on the consolidated balance sheet. Cash-settled restricted stock units entitled such employees to receive a cash amount determined by the fair value of our common stock on the vesting date. The fair values of these awards were remeasured at each reporting period (marked to market) until the awards vested and were paid as of September 28, 2012. Fair value fluctuations were recognized as cumulative adjustments to share-based compensation expense and the related liabilities. Cash-settled restricted stock unit awards were subject to forfeiture if employment terminated prior to vesting. Share-based compensation expense for cash-settled restricted stock unit awards were recognized ratably over the service period.
The impact on our results of operations of recording share-based compensation from cash-settled restricted stock units for the
nine
-month period ended
September 30, 2012
was as follows ($ amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the period
|
|
For the period
|
|
|
July 1, 2012 to
|
|
September 29, 2012 to
|
|
January 1, 2012 to
|
|
September 29, 2012 to
|
|
|
September 28, 2012
|
|
September 30, 2012
|
|
September 28, 2012
|
|
September 30, 2012
|
|
|
(Predecessor)
|
|
(Successor)
|
|
(Predecessor)
|
|
(Successor)
|
|
Cost of goods sold
|
$
|
100
|
|
|
$
|
—
|
|
|
$
|
232
|
|
|
$
|
—
|
|
|
Selling, general and administrative
|
899
|
|
|
—
|
|
|
2,089
|
|
|
—
|
|
|
Total, pre-tax
|
$
|
999
|
|
|
$
|
—
|
|
|
$
|
2,321
|
|
|
$
|
—
|
|
|
Tax effect of share-based compensation
|
(370
|
)
|
|
—
|
|
|
(859
|
)
|
|
—
|
|
|
Total, net of tax
|
$
|
629
|
|
|
$
|
—
|
|
|
$
|
1,462
|
|
|
$
|
—
|
|
Note 18 – Commitments, Contingencies and Other Matters:
Legal Proceedings
Unless otherwise indicated in the details provided below, we cannot predict with certainty the outcome or the effects of the litigations described below. The outcome of these litigations could include substantial damages, the imposition of substantial fines, penalties, and injunctive or administrative remedies; however, unless otherwise indicated below, at this time we are not able to estimate the possible loss or range of loss, if any, associated with these legal proceedings. From time to time, we may settle or otherwise resolve these matters on terms and conditions that we believe are in the best interests of the Company. Resolution of any or
all claims, investigations, and legal proceedings, individually or in the aggregate, could have a material effect on our results of operations, cash flows or financial condition.
Patent Related Matters
On April 28, 2006, CIMA Labs, Inc. and Schwarz Pharma, Inc. filed separate lawsuits against us in the U.S. District Court for the District of New Jersey. CIMA and Schwarz Pharma each have alleged that we infringed U.S. Patent Nos. 6,024,981 (the “'981 patent”) and 6,221,392 (the “'392 patent”) by submitting a Paragraph IV certification to the FDA for approval of alprazolam orally disintegrating tablets. On July 10, 2008, the United States Patent and Trademark Office (“USPTO”) rejected all claims pending in both the '392 and '981 patents. On September 28, 2009, the USPTO's Patent Trial and Appeal Board (“PTAB”) affirmed the Examiner's rejection of all claims in the '981 patent, and on March 24, 2011, the PTAB affirmed the rejections pending for both patents and added new grounds for rejection of the '981 patent. On June 24, 2011, the plaintiffs re-opened prosecution on both patents at the USPTO. On May 13, 2013, the PTAB reversed outstanding rejections to the currently pending claims of the '392 patent reexamination application and affirmed a conclusion by the Examiner that testimony offered by the patentee had overcome other rejections. On September 20, 2013, a reexamination certificate was issued for the ’392 patent, incorporating narrower claims than the originally-issued patent. We intend to vigorously defend this lawsuit and pursue our counterclaims.
Unimed and Laboratories Besins Iscovesco (“Besins”) filed a lawsuit on August 22, 2003 against Paddock Laboratories, Inc. in the U.S. District Court for the Northern District of Georgia alleging patent infringement as a result of Paddock's submitting an ANDA with a Paragraph IV certification seeking FDA approval of testosterone 1% gel, a generic version of Unimed Pharmaceuticals, Inc.'s Androgel
®
. On September 13, 2006, we acquired from Paddock all rights to the ANDA, and the litigation was resolved by a settlement and license agreement that permits us to launch the generic version of the product no earlier than August 31, 2015, and no later than February 28, 2016, assuring our ability to market a generic version of Androgel
®
well before the expiration of the patents at issue. On January 30, 2009, the Bureau of Competition for the FTC filed a lawsuit against us in the U.S. District Court for the Central District of California, subsequently transferred to the Northern District of Georgia, alleging violations of antitrust laws stemming from our court-approved settlement, and several distributors and retailers followed suit with a number of private plaintiffs' complaints beginning in February 2009. On February 23, 2010, the District Court granted our motion to dismiss the FTC's claims and granted in part and denied in part our motion to dismiss the claims of the private plaintiffs. On September 28, 2012, the District Court granted our motion for summary judgment against the private plaintiffs' claims of sham litigation. On June 10, 2010, the FTC appealed the District Court's dismissal of the FTC's claims to the U.S. Court of Appeals for the 11th Circuit. On April 25, 2012, the Court of Appeals affirmed the District Court's decision. On June 17, 2013, the Supreme Court of the United States reversed the Court of Appeals’ decision and remanded the case to the U.S. District Court for the Northern District of Georgia for further proceedings. On October 23, 2013, the District Court issued an order on indicative ruling on a request for relief from judgment, effectively remanding to the District Court the appeal of the grant of our motion for summary judgment against the private plaintiffs’ claims and holding those claims in abeyance while the remaining issues pending before the Court are resolved. We believe we have complied with all applicable laws in connection with the court-approved settlement and intend to continue to vigorously defend these actions.
On September 13, 2007, Santarus, Inc. and The Curators of the University of Missouri (“Missouri”) filed a lawsuit against us in the U.S. District Court for the District of Delaware. The complaint alleges infringement of U.S. Patent Nos. 6,699,885; 6,489,346; and 6,645,988 because we submitted an ANDA with a Paragraph IV certification seeking FDA approval of 20 mg and 40 mg omeprazole/sodium bicarbonate capsules. On December 20, 2007, Santarus and Missouri filed a second lawsuit against us in the U.S. District Court for the District of Delaware alleging infringement of the patents because we submitted an ANDA with a Paragraph IV certification seeking FDA approval of 20 mg and 40 mg omeprazole/sodium bicarbonate powders for oral suspension. The complaints generally seek (i) a finding of infringement, validity, and/or enforceability; and (ii) a permanent injunction be entered, terminating at the expiration of the patents-in-suit. On March 4, 2008, the cases pertaining to our ANDAs for omeprazole capsules and omeprazole oral suspension were consolidated for all purposes. On April 14, 2010, the District Court ruled in our favor, finding that plaintiffs’ patents were invalid as being obvious and without adequate written description. Santarus appealed to the U.S. Court of Appeals for the Federal Circuit, and we cross-appealed the District Court’s decision of enforceability of plaintiffs’ patents. On July 1, 2010, we launched our generic Omeprazole/Sodium Bicarbonate product. On September 4, 2012, the Court of Appeals affirmed-in-part and reversed-in-part the District Court’s decision. On December 10, 2012, our petition for rehearing and rehearing
en banc
was denied without comment. A jury trial is now scheduled in the District Court for November 3, 2014. On March 1, 2013, we filed a motion for judgment on the pleadings seeking dismissal of the case. A contingent liability of
$9 million
was recorded on our condensed consolidated balance sheet as of
December 31, 2012
and September 30, 2013
for this matter. We can give no assurance that final resolution of this legal proceeding will not exceed the amount of the reserve. We have ceased further distribution of our generic omeprazole/sodium bicarbonate 20 mg and 40 mg capsule product pending further developments. We will continue to vigorously defend this action.
On September 20, 2010, Schering-Plough HealthCare Products, Santarus, Inc., and the Curators of the University of Missouri filed a lawsuit against us in the U.S. District Court for the District of New Jersey. The complaint alleges infringement of U.S. Patent Nos. 6,699,885; 6,489,346; 6,645,988; and 7,399,772 because we submitted an ANDA with a Paragraph IV certification seeking FDA approval of a 20mg/1100 mg omeprazole/sodium bicarbonate capsule, a version of Schering-Plough's Zegerid OTC
®
. The complaint generally seeks (i) a finding of infringement, validity, and/or enforceability; and (ii) a permanent injunction be entered, terminating at the expiration of the patents-in-suit. The case was stayed pending the decision by the Court of Appeals on the prescription product appeal described in the preceding paragraph, and the parties agreed to be bound by such decision for purposes of the OTC product
litigation. The case was re-opened on October 3, 2012, and a bench-trial is scheduled for January 26, 2015. We intend to defend this action vigorously.
On November 14, 2008, Pozen, Inc. filed a lawsuit against us in the U.S. District Court for the Eastern District of Texas. The complaint alleges infringement of U.S. Patent Nos. 6,060,499; 6,586,458; and 7,332,183, because we submitted an ANDA with a Paragraph IV certification seeking FDA approval of 500 mg/85 mg naproxen sodium/sumatriptan succinate oral tablets. The complaint generally seeks (i) a finding of infringement, validity, and/or enforceability; and (ii) a permanent injunction be entered, terminating at the expiration of the patents-in-suit. On April 14, 2011, the Court granted a preliminary injunction to Pozen that prohibits us from launching our generic naproxen/sumatriptan product before the issuance of a final decision in the case. On August 5, 2011, the Court ruled in favor of Pozen and against us on infringement, validity, and enforceability. The U.S. Court of Appeals for the Federal Circuit affirmed the District Court's ruling on September 28, 2012, and we filed our petition for
en banc
rehearing on October 31
,
2012. On July 19, 2013, our rehearing petition was denied without comment and the mandate was issued on July 29, 2013.
On April 29, 2009, Pronova BioPharma ASA filed a lawsuit against us in the U.S. District Court for the District of Delaware. The complaint alleges infringement of U.S. Patent Nos. 5,502,077 and 5,656,667 because we submitted an ANDA with a Paragraph IV certification seeking FDA approval of omega-3-acid ethyl esters oral capsules. On May 29, 2012, the District Court ruled in favor of Pronova in the initial case, and we appealed to the U.S. Court of Appeals for the Federal Circuit on June 25, 2012. An oral hearing was held on May 8, 2013, and on September 12, 2013, the Court of Appeals ruled in our favor, reversing the lower District Court decision. On October 15, 2013, Pronova filed a petition for panel and
en banc
rehearing, and our response to the petition is due by November 20, 2013. We will continue to pursue this appeal vigorously.
On October 4, 2010, UCB Manufacturing, Inc. filed a verified complaint in the Superior Court of New Jersey, Chancery Division, Middlesex, naming us, our development partner Tris Pharma, and Tris Pharma's head of research and development, Yu- Hsing Tu. The complaint alleges that Tris and Tu misappropriated UCB's trade secrets and, by their actions, breached contracts and agreements to which UCB, Tris, and Tu were bound. The complaint further alleges unfair competition against Tris, Tu, and us relating to the parties' manufacture and marketing of generic Tussionex
®
seeking a judgment of misappropriation and breach, a permanent injunction and disgorgement of profits. On June 2, 2011, the court granted Tris's motion for summary judgment dismissing UCB's claims, and UCB appealed. An oral hearing was held on April 8, 2013. We intend to vigorously defend the lawsuit.
On August 10, 2011, Avanir Pharmaceuticals, Inc. et al. filed a lawsuit against us in the U.S. District Court for the District of Delaware. The complaint alleges infringement of U.S. Patent Nos. 7,659,282 and RE38,155 because we submitted an ANDA with a Paragraph IV certification seeking FDA approval of oral capsules of 20 mg dextromethorphan hydrobromide and 10 mg quinidine sulfate. The complaint generally seeks (i) a finding of infringement, validity, and/or enforceability; and (ii) a permanent injunction be entered, terminating at the expiration of the patents-in-suit. Our case was consolidated with those of other defendants, Actavis, Impax, and Wockhardt. A
Markman
ruling was entered December 3, 2012 and a bench trial was held from September 9-13 and October 15, 2013. We intend to defend this action vigorously.
On September 1, 2011, we, along with EDT Pharma Holdings Ltd. (now known as Alkermes Pharma Ireland Limited) (Elan), filed a complaint against TWi Pharmaceuticals, Inc. of Taiwan in the U.S. District Court for the District of Maryland and another complaint against TWi on September 2, 2011, in the U.S. District Court for the Northern District of Illinois. In both complaints, Elan and we allege infringement of U.S. Patent No. 7,101,576 because TWi filed an ANDA with a Paragraph IV certification seeking FDA approval of a generic version of Megace® ES. Our complaint seeks (i) a finding of infringement, validity, and/or enforceability; and (ii) a permanent injunction be entered, terminating at the expiration of the patents-in-suit. On July 17, 2013, the Court granted in part and denied in part TWi's motion for summary judgment of invalidity and noninfringement and granted summary judgment in our favor dismissing two of TWi's invalidity defenses. A bench trial was held from October 7-15, 2013. We intend to prosecute this infringement case vigorously.
On October 28, 2011, Astra Zeneca, Pozen, Inc., and KBI-E Inc., filed a lawsuit against our subsidiary, Anchen Pharmaceuticals, in the U.S. District Court for the District of New Jersey. The complaint alleges infringement of U.S. Patent No. 6,926,907; 6,369,085; 7,411,070; and 7,745 ,466 because Anchen submitted an ANDA with a Paragraph IV certification seeking FDA approval of delayed-release oral tablets of 375/20 and 500/20 mg naproxen/esomeprazole magnesium. The complaint generally seeks (i) a finding of infringement, validity, and/or enforceability; and (ii) a permanent injunction be entered, terminating at the expiration of the patents-in-suit. A
Markman
ruling was entered on May 1, 2013. On October 15, 2013, a draft stipulation of dismissal was offered to plaintiffs in light of our conversion of our Paragraph IV certification to a Paragraph III certification in our ANDA. As of October 31, 2013, plaintiffs continue to oppose the entry of the dismissal stipulation. We will continue to defend this action vigorously.
On March 28, 2012, Horizon Pharma Inc. and Horizon Pharma USA Inc. filed a lawsuit against us in the U.S. District Court for the District of Delaware. The complaint alleges infringement of U.S. Patent No. 8,067,033 because we submitted an ANDA with a Paragraph IV certification seeking FDA approval of oral tablets of 26.6/800 mg famotidine/ibuprofen. The complaint generally seeks (i) a finding of infringement, validity, and/or enforceability; and (ii) a permanent injunction be entered, terminating at the expiration of the patents-in-suit. On October 17, 2013, the case was dismissed pursuant to a confidential settlement agreement.
On April 4, 2012, AR Holding Company, Inc. filed a lawsuit against us in the U.S. District Court for the District of Delaware. The complaint alleges infringement of U.S. Patent Nos. 7,619,004; 7,601,758; 7,820,681; 7,915,269; 7,964,647; 7,964,648; 7,981,938; 8,093,296; 8,093,297; and 8,097,655 because we submitted an ANDA with a Paragraph IV certification seeking FDA approval of oral
tablets of 0.6 mg colchicine. On November 1, 2012, Takeda Pharmaceuticals was substituted as the plaintiff and real party-in-interest in the case. The complaint generally seeks (i) a finding of infringement, validity, and/or enforceability; and (ii) a permanent injunction be entered, terminating at the expiration of the patents-in-suit. On August 30, 2013, Takeda filed a new complaint against us in view of our change of the ANDA’s labeled indication. We intend to defend this action vigorously.
On August 22, 2012, we were added as a defendant to the action pending before the U.S. District Court for the Northern District of California brought by Takeda Pharmaceuticals, originally against Handa Pharmaceuticals. Takeda's complaints allege infringement of U.S. Patent Nos. 6,462,058; 6,664,276; 6,939,971; 7,285,668; 7,737,282; and 7,790,755 because Handa submitted an ANDA with a Paragraph IV certification to the FDA for approval of dexlansoprazole delayed release capsules, 30 mg and 60 mg. The complaint generally seeks (i) a finding of infringement, validity, and/or enforceability; and (ii) a permanent injunction be entered, terminating at the expiration of the patents-in-suit. We assumed the rights to this ANDA and are prosecuting the case vigorously. A bench trial was held on June 5-13, 2013. On April 26, 2013, we filed a declaratory judgment complaint in the U.S. District Court for the Northern District of California in view of U.S. Patent Nos. 8,105,626 and 8,173,158, and another in the same court on July 9, 2013 with respect to U.S. Patent No. 8,461,187, in each case against Takeda Pharmaceuticals, and asserting that the patents in questions are not infringed, invalid, or unenforceable. On October 17, 2013, a decision in favor of Takeda was entered in the original District Court case with respect to the ’282 and ’276 patents. We intend to continue to defend and prosecute, as appropriate, these actions vigorously.
On October 25, 2012, Purdue Pharma L.P. and Transcept Pharmaceuticals filed a lawsuit against us in the U.S. District Court for the District of New Jersey. The complaint alleged infringement of U.S. Patent Nos. 8,242,131 and 8,252,809 because we submitted an ANDA with a Paragraph IV certification seeking FDA approval of zolpidem tartrate sublingual tablets 1.75 and 3.5 mg. The complaint generally seeks (i) a finding of infringement, validity, and/or enforceability; and (ii) a permanent injunction be entered, terminating at the expiration of the patents-in-suit. A
Markman
hearing is scheduled for February 6, 2014, and pre-trial briefs are due October 24, 2014. We intend to defend this action vigorously.
On October 31, 2012, Acura Pharmaceuticals, Inc. filed a lawsuit against us in the U.S. District Court for the District of Delaware. The complaint alleged infringement of U.S. Patent No. 7,510,726 because we submitted an ANDA with a Paragraph IV certification seeking FDA approval of oxycodone oral tablets 5 and 7.5 mg. The complaint generally seeks (i) a finding of infringement, validity, and/or enforceability; and (ii) a permanent injunction be entered, terminating at the expiration of the patents-in-suit. On October 7, 2013, an order was entered to stay the case pending the Court’s review of a confidential settlement agreement.
On December 19, 2012, Endo Pharmaceuticals and Grunenthal filed a lawsuit against us in the U.S. District Court for the Southern District of New York. The complaint alleges infringement of U.S. Patent Nos. 7,851,482; 8,114,383; 8,192,722; 8.309, 060; 8,309,122; and 8,329,216 because we submitted an ANDA with a Paragraph IV certification to the FDA for approval of oxymorphone hydrochloride extended release tablets 40 mg. The complaint generally seeks (i) a finding of infringement, validity, and/or enforceability; and (ii) a permanent injunction be entered, terminating at the expiration of the patents-in-suit. We intend to defend this action vigorously.
On January 8, 2013, we were substituted for Actavis as defendant in litigation then pending in the U.S. District Court for the District of Delaware. The action was brought by Novartis against Actavis for filing an ANDA with a Paragraph IV certification seeking FDA approval of rivastigmine transdermal extended release film 4.6 and 9.5 mg/24 hr. The complaint alleges infringement of U.S. Patents 5,602,176; 6,316,023; and 6,335,031 and generally seeks (i) a finding of infringement, validity, and/or enforceability; and (ii) a permanent injunction be entered, terminating at the expiration of the patents-in-suit. A trial was held August 26 -29, 2013. We intend to defend this action vigorously.
On January 15, 2013, we were substituted for Actavis as defendant in litigation then pending in the U.S. District Court for the Southern District of New York. The action was brought by Purdue Pharma and Grunenthal against Actavis for filing an ANDA with a Paragraph IV certification seeking FDA approval of oxycodone hydrochloride extended release tablets 10, 15, 20, 30, 40, 60, and 80 mg. The complaint alleges infringement of U.S. Patent No. 8,114,383 and generally seeks (i) a finding of infringement, validity, and/or enforceability; and (ii) a permanent injunction be entered, terminating at the expiration of the patents-in-suit. On September 24, 2013, the case was dismissed pursuant to a confidential settlement agreement.
On January 31, 2013, Merz Pharmaceuticals filed a lawsuit against us in the U.S. District Court for the District of Delaware. The complaint alleges infringement of U.S. Patent Nos. 7,638,552 and 7,816,396 because we submitted an ANDA with a Paragraph IV certification to the FDA for approval of glycopyrrolate oral solution. The complaint generally seeks (i) a finding of infringement, validity, and/or enforceability; and (ii) a permanent injunction be entered, terminating at the expiration of the patents-in-suit. A bench trial has been scheduled for December 8, 2014. We intend to defend this action vigorously.
On February 7, 2013, Sucampo Pharmaceuticals, Takeda Pharmaceuticals, and R-Tech Ueno filed a lawsuit against us in the U.S. District Court for the District of Delaware. The complaint alleges infringement of U.S. Patent Nos. 6,414,016; 7,795,312; 8,026,393; 8,071,613; 8,097,653; and 8,338,639 because we submitted an ANDA with a Paragraph IV certification to the FDA for approval of lubiprostone oral capsules 8 mcg and 24 mcg. The complaint seeks (i) a finding of infringement; and (ii) a permanent injunction be entered, terminating at the expiration of the patents-in-suit. On July 3, 2013, an amended complaint was filed, adding U.S. Patent No. 8,389,542 to the case. We intend to defend this action vigorously.
On May 14, 2013, Bayer Pharma AG, Bayer IP GMBH, and Bayer Healthcare Pharmaceuticals, Inc. filed a lawsuit against us in the U.S. District Court for the District of Delaware. The complaint alleges infringement of U.S. Patent Nos. 6,362,178 and 7,696,206 because we submitted an ANDA with a Paragraph IV certification to the FDA for approval of vardenafil hydrochloride
orally disintegrating tablets. The complaint seeks (i) a finding of infringement; and (ii) a permanent injunction be entered, terminating at the expiration of the patents-in-suit. We intend to defend this action vigorously.
On May 15, 2013, Endo Pharmaceuticals filed a lawsuit against us in the U.S. District Court for the Southern District of New York. The complaint alleges infringement of U.S. Patent Nos. 7,851,482; 8,309,122; and 8,329,216 as a result of our November 2012 acquisition from Watson of an ANDA with a Paragraph IV certification seeking FDA approval of non-tamper resistant oxymorphone hydrochloride extended release tablets. The complaint generally seeks (i) a finding of infringement, validity, and/or enforceability; and (ii) a permanent injunction be entered, terminating at the expiration of the patents-in-suit. While Watson had settled patent litigation relating to this product in October 2010, Endo is asserting patents that issued after that settlement agreement was executed. We intend to defend this action vigorously.
On June 19, 2013, Alza Corporation and Janssen Pharmaceuticals, Inc. filed a lawsuit against us in the U.S. District Court for the District of Delaware. The complaint alleges infringement of U.S. Patent No. 8,163,798 as a result of our November 2012 acquisition from Watson of an ANDA with a Paragraph IV certification seeking FDA approval of methylphenidate hydrochloride extended release tablets. The complaint generally seeks (i) a finding of infringement, validity, and/or enforceability; and (ii) a permanent injunction be entered, terminating at the expiration of the patents-in-suit. A bench trial is scheduled for March 16, 2015. We intend to defend this action vigorously.
On June 21, 2013, we, along with Alkermes Pharma Ireland Ltd., filed a complaint against Breckenridge Pharmaceutical, Inc. in the U.S. District Court for the District of Delaware. In the complaint, we allege infringement of U.S. Patent Nos. 6,592,903 and 7,101,576 because Breckenridge filed an ANDA with a Paragraph IV certification seeking FDA approval of a generic version of Megace® ES. Our complaint seeks (i) a finding of infringement, validity, and/or enforceability; and (ii) a permanent injunction be entered, terminating at the expiration of the patents-in-suit. A bench trial is scheduled for February 17, 2015. We intend to prosecute this infringement case vigorously.
On September 23, 2013, Forest Labs and Royalty Pharma filed a lawsuit against us in the U.S. District Court for the District of Delaware. The complaint alleges infringement of U.S. Patent Nos., 6,602,911; 7,888,342; and 7,994,220 because we submitted an ANDA with a Paragraph IV certification to the FDA for approval of 12.5, 25, 50, and 100 mg milnacipran HCl oral tablets. The complaint seeks (i) a finding of infringement; and (ii) a permanent injunction be entered, terminating at the expiration of the patents-in-suit. We intend to defend this action vigorously.
On August 20, 2013, MonoSol RX and Reckitt Benckiser filed a lawsuit against us in the U.S. District Court for the District of Delaware. The complaint alleges infringement of U.S. Patent Nos., 8,017,150 and 8,475,832 because we submitted an ANDA with a Paragraph IV certification to the FDA for approval of EQ 2/0.5, 8/2, 4/1, 12/3 mg base buprenorphine HCl/naloxone HCl sublingual films. The complaint seeks (i) a finding of infringement; and (ii) a permanent injunction be entered, terminating at the expiration of the patents-in-suit. We intend to defend this action vigorously.
On October 22, 2013, Horizon Pharma and Jagotec AG filed a lawsuit against us in the U.S. District Court for the District of New Jersey. The complaint alleges infringement of U.S. Patent Nos., 6,488,960; 6,677,326; 8,168,218; 8,309,124; and 8,394,407 because we submitted an ANDA with a Paragraph IV certification to the FDA for approval of 2 and 5 mg prednisone delayed release oral tablets. The complaint seeks (i) a finding of infringement; and (ii) a permanent injunction be entered, terminating at the expiration of the patents-in-suit. We intend to defend this action vigorously.
Industry Related Matters
Beginning in September 2003, we, along with numerous other pharmaceutical companies, have been named as a defendant in actions brought by the Attorneys General of Illinois, Kansas, and Utah, as well as a state law
qui tam
action brought on behalf of the state of Wisconsin by Peggy Lautenschlager and Bauer & Bach, LLC, alleging generally that the defendants defrauded the state Medicaid systems by purportedly reporting or causing the reporting of AWP and/or “Wholesale Acquisition Costs” that exceeded the actual selling price of the defendants’ prescription drugs. These cases generally seek some combination of actual damages, and/or double damages, treble damages, compensatory damages, statutory damages, civil penalties, disgorgement of excessive profits, restitution, disbursements, counsel fees and costs, litigation expenses, investigative costs, injunctive relief, punitive damages, imposition of a constructive trust, accounting of profits or gains derived through the alleged conduct, expert fees, interest and other relief that the court deems proper. The lawsuit brought by the state of Illinois is scheduled for trial on January 13, 2014. The lawsuit brought by the state of Kansas is scheduled for trial on April 6, 2015. The remaining lawsuits have yet to be scheduled for trial. To date, we have settled the lawsuits brought by the states of Alabama, Alaska, Florida, Hawaii, Idaho, Iowa, Kentucky, Louisiana, Massachusetts, Mississippi, Oklahoma, South Carolina, and Texas, as well as the suit brought by the city of New York and New York Counties, and the federal qui tam action brought on behalf of the United States by the pharmacy Ven-A-Care of the Florida Keys, Inc. During the nine months ended September 30, 2013, we recorded an additional
$3,300 thousand
as "Settlements and loss contingencies, net" on the condensed consolidated statements of operations as we continue to periodically assess and estimate our remaining potential liability. A contingent liability of
$10,017 thousand
was recorded under the caption “Accrued legal settlements”
on our condensed consolidated balance sheet as of
September 30, 2013
, in connection with the remaining AWP actions. In each of the remaining matters, we have either moved to dismiss the complaints or answered the complaints denying liability. We will continue to defend or explore settlement opportunities in other jurisdictions as we feel are in our best interest under the circumstances presented in those jurisdictions. However, we can give no assurance that we will be able to settle the remaining actions on terms that we deem reasonable, or that such settlements or adverse judgments, if entered, will not exceed the amount of the reserve.
The Attorneys General of Florida, Indiana and Virginia and the United States Office of Personnel Management (the “USOPM”) have issued subpoenas, and the Attorneys General of Michigan, Tennessee, Texas, and Utah have issued civil investigative demands, to us. The demands generally request documents and information pertaining to allegations that certain of our sales and marketing practices caused pharmacies to substitute ranitidine capsules for ranitidine tablets, fluoxetine tablets for fluoxetine capsules, and two 7.5 mg buspirone tablets for one 15 mg buspirone tablet, under circumstances in which some state Medicaid programs at various times reimbursed the new dosage form at a higher rate than the dosage form being substituted. We have provided documents in response to these subpoenas to the respective Attorneys General and the USOPM. The aforementioned subpoenas and civil investigative demands culminated in the federal and state law
qui tam
action brought on behalf of the United States and several states by Bernard Lisitza. The complaint was unsealed on August 30, 2011. The United States intervened in this action on July 8, 2011 and filed a separate complaint on September 9, 2011, alleging claims for violations of the Federal False Claims Act and common law fraud. The states of Michigan and Indiana have also intervened as to claims arising under their respective state false claims acts, common law fraud, and unjust enrichment. On July 13, 2012, we filed an Answer and Affirmative Defense to Indiana's Amended Complaint. We intend to vigorously defend these lawsuits.
Other
We are, from time to time, a party to certain other litigations, including product liability litigations. We believe that these litigations are part of the ordinary course of our business and that their ultimate resolution will not have a material effect on our financial condition, results of operations or liquidity. We intend to defend or, in cases where we are the plaintiff, to prosecute these litigations vigorously.
Note 19 – Segment Information:
We operate in
two
reportable business segments: generic pharmaceuticals (referred to as “Par Pharmaceutical” or “Par”) and branded pharmaceuticals (referred to as “Strativa Pharmaceuticals” or “Strativa”). Branded products are marketed under brand names through marketing programs that are designed to generate physician and consumer loyalty. Branded products generally are patent protected, which provides a period of market exclusivity during which they are sold with little or no direct competition. Generic pharmaceutical products are the chemical and therapeutic equivalents of corresponding brand drugs. The Drug Price Competition and Patent Term Restoration Act of 1984 provides that generic drugs may enter the market upon the approval of an ANDA and the expiration, invalidation or circumvention of any patents on corresponding brand drugs, or the expiration of any other market exclusivity periods related to the brand drugs. Our chief operating decision maker is our Chief Executive Officer.
Our business segments were determined based on management’s reporting and decision-making requirements in accordance with ASC 280-10, "Segment Reporting." We believe that our generic products represent a single operating segment because the demand for these products is mainly driven by consumers seeking a lower cost alternative to brand name drugs. Par’s generic drugs are developed using similar methodologies, for the same purpose (e.g., seeking bioequivalence with a brand name drug nearing the end of its market exclusivity period for any reason discussed above). Par’s generic products are produced using similar processes and standards mandated by the FDA, and Par’s generic products are sold to similar customers. Based on the similar economic characteristics, production processes and customers of Par’s generic products, management has determined that Par’s generic pharmaceuticals are a single reportable business segment. Our chief operating decision maker does not review the Par (generic) or Strativa (brand) segments in any more granularity, such as at the therapeutic or other classes or categories. Certain of our expenses, such as the direct sales force and other sales and marketing expenses and specific research and development expenses, are charged directly to either of the two segments. Other expenses, such as general and administrative expenses and non-specific research and development expenses are allocated between the two segments based on assumptions determined by management.
Our chief operating decision maker does not review our assets or depreciation by business segment at this time as they are not material to Strativa. Therefore, such allocations by segment are not provided.
The financial data for the
two
business segments are as follows ($ amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
For the period
|
|
Nine months ended
|
|
For the period
|
|
|
September 30,
|
|
July 1, 2012 to
|
|
September 29, 2012 to
|
|
September 30,
|
|
January 1, 2012 to
|
|
September 29, 2012 to
|
|
|
2013
|
|
September 28, 2012
|
|
September 30, 2012
|
|
2013
|
|
September 28, 2012
|
|
September 30, 2012
|
|
|
(Successor)
|
|
(Predecessor)
|
|
(Successor)
|
|
(Successor)
|
|
(Predecessor)
|
|
(Successor)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Par Pharmaceutical
|
$
|
249,818
|
|
|
$
|
218,614
|
|
|
$
|
10,689
|
|
|
$
|
737,733
|
|
|
$
|
742,890
|
|
|
$
|
10,689
|
|
|
Strativa
|
17,503
|
|
|
19,449
|
|
|
—
|
|
|
53,453
|
|
|
60,978
|
|
|
—
|
|
|
Total revenues
|
$
|
267,321
|
|
|
$
|
238,063
|
|
|
$
|
10,689
|
|
|
$
|
791,186
|
|
|
$
|
803,868
|
|
|
$
|
10,689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin:
|
|
|
|
|
|
|
|
|
|
|
|
|
Par Pharmaceutical
|
$
|
69,506
|
|
|
$
|
86,611
|
|
|
$
|
3,627
|
|
|
$
|
175,502
|
|
|
$
|
296,184
|
|
|
$
|
3,627
|
|
|
Strativa
|
11,885
|
|
|
14,739
|
|
|
—
|
|
|
36,233
|
|
|
46,166
|
|
|
—
|
|
|
Total gross margin
|
$
|
81,391
|
|
|
$
|
101,350
|
|
|
$
|
3,627
|
|
|
$
|
211,735
|
|
|
$
|
342,350
|
|
|
$
|
3,627
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Par Pharmaceutical
|
$
|
(18,352
|
)
|
|
$
|
11,023
|
|
|
$
|
3,339
|
|
|
$
|
(19,169
|
)
|
|
$
|
116,466
|
|
|
$
|
3,339
|
|
|
Strativa
|
(6,373
|
)
|
|
(13,141
|
)
|
|
—
|
|
|
(4,446
|
)
|
|
(57,026
|
)
|
|
—
|
|
|
Total operating (loss) income
|
$
|
(24,725
|
)
|
|
$
|
(2,118
|
)
|
|
$
|
3,339
|
|
|
$
|
(23,615
|
)
|
|
$
|
59,440
|
|
|
$
|
3,339
|
|
|
Interest income
|
14
|
|
|
148
|
|
|
—
|
|
|
70
|
|
|
424
|
|
|
—
|
|
|
Interest expense
|
(23,385
|
)
|
|
(2,996
|
)
|
|
(824
|
)
|
|
(71,033
|
)
|
|
(9,159
|
)
|
|
(824
|
)
|
|
Loss on debt extinguishment
|
—
|
|
|
—
|
|
|
—
|
|
|
(7,335
|
)
|
|
—
|
|
|
—
|
|
|
(Benefit) provision for income taxes
|
(18,797
|
)
|
|
(3,588
|
)
|
|
927
|
|
|
(36,077
|
)
|
|
29,529
|
|
|
927
|
|
|
Net (loss) income
|
$
|
(29,299
|
)
|
|
$
|
(1,378
|
)
|
|
$
|
1,588
|
|
|
$
|
(65,836
|
)
|
|
$
|
21,176
|
|
|
$
|
1,588
|
|
Total revenues of our top selling products were as follows ($ amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
For the period
|
|
Nine months ended
|
|
For the period
|
|
|
September 30,
|
|
July 1, 2012 to
|
|
September 29, 2012 to
|
|
September 30,
|
|
January 1, 2012 to
|
|
September 29, 2012 to
|
|
|
2013
|
|
September 28, 2012
|
|
September 30, 2012
|
|
2013
|
|
September 28, 2012
|
|
September 30, 2012
|
|
Product
|
(Successor)
|
|
(Predecessor)
|
|
(Successor)
|
|
(Successor)
|
|
(Predecessor)
|
|
(Successor)
|
|
Par Pharmaceutical
|
|
|
|
|
|
|
|
|
|
|
|
|
Budesonide (Entocort® EC)
|
$
|
54,952
|
|
|
$
|
33,046
|
|
|
$
|
—
|
|
|
$
|
150,382
|
|
|
$
|
104,543
|
|
|
$
|
—
|
|
|
Divalproex (Depakote®)
|
26,343
|
|
|
2,772
|
|
|
—
|
|
|
20,116
|
|
|
9,353
|
|
|
—
|
|
|
Propafenone (Rythmol SR®)
|
19,423
|
|
|
17,237
|
|
|
—
|
|
|
53,919
|
|
|
54,217
|
|
|
—
|
|
|
Metoprolol succinate ER (Toprol-XL®)
|
12,277
|
|
|
45,875
|
|
|
—
|
|
|
45,206
|
|
|
156,593
|
|
|
—
|
|
|
Bupropion ER (Wellbutrin®)
|
11,450
|
|
|
12,695
|
|
|
—
|
|
|
31,268
|
|
|
36,059
|
|
|
—
|
|
|
Lamotrigine (Lamictal XR®)
|
11,079
|
|
|
—
|
|
|
—
|
|
|
41,725
|
|
|
—
|
|
|
—
|
|
|
Modafinil (Provigil®)
|
(225
|
)
|
|
32,683
|
|
|
—
|
|
|
22,530
|
|
|
90,166
|
|
|
—
|
|
|
Rizatriptan (Maxalt®)
|
5,283
|
|
|
—
|
|
|
—
|
|
|
42,296
|
|
|
—
|
|
|
—
|
|
|
Other (1)
|
102,013
|
|
|
67,908
|
|
|
10,689
|
|
|
308,094
|
|
|
273,503
|
|
|
10,689
|
|
|
Other product related revenues (2)
|
7,223
|
|
|
6,398
|
|
|
—
|
|
|
22,197
|
|
|
18,456
|
|
|
—
|
|
|
Total Par Pharmaceutical Revenues
|
249,818
|
|
|
218,614
|
|
|
10,689
|
|
|
737,733
|
|
|
742,890
|
|
|
10,689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Strativa
|
|
|
|
|
|
|
|
|
|
|
|
|
Megace® ES
|
$
|
9,455
|
|
|
$
|
12,279
|
|
|
$
|
—
|
|
|
$
|
31,009
|
|
|
$
|
38,670
|
|
|
$
|
—
|
|
|
Nascobal® Nasal Spray
|
7,592
|
|
|
6,382
|
|
|
—
|
|
|
20,596
|
|
|
17,693
|
|
|
—
|
|
|
Other
|
(398
|
)
|
|
—
|
|
|
—
|
|
|
(877
|
)
|
|
—
|
|
|
—
|
|
|
Other product related revenues (2)
|
854
|
|
|
788
|
|
|
—
|
|
|
2,725
|
|
|
4,615
|
|
|
—
|
|
|
Total Strativa Revenues
|
$
|
17,503
|
|
|
$
|
19,449
|
|
|
$
|
—
|
|
|
$
|
53,453
|
|
|
$
|
60,978
|
|
|
$
|
—
|
|
|
|
|
|
(1)
|
The further detailing of revenues of the other approximately
50
generic drugs was not considered significant to the overall disclosure due to the lower volume of revenues associated with each of these generic products. No single product in the other category was significant to total generic revenues for the
nine
-month periods ended
September 30, 2013
and 2012.
|
|
|
|
|
(2)
|
Other product related revenues represents licensing and royalty related revenues from profit sharing agreements.
|
Note 20 – Strativa Restructuring:
In January 2013, we initiated a restructuring of Strativa, our branded pharmaceuticals division, in anticipation of entering into a settlement agreement and corporate integrity agreement that terminated the U.S. Department of Justice’s ongoing investigation of Strativa’s marketing of Megace
®
ES. We reduced our Strativa workforce by approximately
70
people, with the majority of the reductions in the sales force. The remaining Strativa sales force has been reorganized into a single sales team of approximately
60
professionals that focus their marketing efforts principally on Nascobal
®
Nasal Spray. In connection with these actions, we incurred expenses for severance and other employee-related costs as well as the termination of certain contracts. The remaining liabilities at September 30, 2013 were included with accrued expenses and other current liabilities on the condensed consolidated balance sheet.
($ amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring Activities
|
|
Initial Charge
|
|
Cash Payments
|
|
Non-Cash Charge Related to Inventory and/or Intangible Assets
|
|
Reversals, Reclass or Transfers
|
|
Liabilities at September 30, 2013
|
|
Severance and employee benefits to be paid in cash
|
|
$
|
1,413
|
|
|
$
|
(1,091
|
)
|
|
$
|
—
|
|
|
$
|
(4
|
)
|
|
$
|
318
|
|
|
Asset impairments and other
|
|
403
|
|
|
—
|
|
|
(403
|
)
|
|
—
|
|
|
—
|
|
|
Total restructuring costs line item
|
|
$
|
1,816
|
|
|
$
|
(1,091
|
)
|
|
$
|
(403
|
)
|
|
$
|
(4
|
)
|
|
$
|
318
|
|
Note 21 - Subsequent Events:
On November 1, 2013, our wholly-owned subsidiary, Par Formulations Private Limited, entered into a definitive agreement to purchase privately-held Nuray Chemicals Private Limited ("Nuray"), a Chennai, India based API developer and manufacturer, for up to
$19 million
in cash and contingent payments. The closing of the acquisition is subject to the receipt of applicable regulatory approvals and other customary closing terms and conditions. The acquisition will be accounted for as a business combination under the guidance of ASC 805. The operating results of Nuray will be included in our consolidated financial results from the date of the closing of the acquisition as part of the Par Pharmaceutical segment. We will fund the purchase from cash on hand.