UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
--------------------------
COMMISSION FILE NUMBER 011-31333
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
--------------------------
EON LABS, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 13-3653818
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation) Identification Number)
227-15 NORTH CONDUIT AVENUE 11413
LAURELTON, NEW YORK (Zip Code)
(Address of Principal Executive Offices)
(718) 276-8600
(Registrant's Telephone Number, Including Area Code)
--------------------------
Indicate by check mark whether the Registrant (1) has filed all
reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days: Yes /X/ No/ /
As of August 12, 2002, there were 43,559,902 shares of the Registrant's
Common Stock, $0.01 par value per share, outstanding.
EON LABS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PAGE NO.
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets as of December 31, 2001 and
June 30, 2002 (unaudited)
Condensed Consolidated Statements of Income (unaudited) for the
Three and Six Months Ended June 30, 2001 and June 30, 2002
Condensed Consolidated Statements of Cash Flows (unaudited) for the
Six Months Ended June 30, 2001 and June 30, 2002
Notes to Condensed Consolidated Financial Statements (unaudited)
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
ITEM 3. Quantitative and Qualitative Disclosure about Market Risk
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
ITEM 2. Changes in Securities and Use of Proceeds
ITEM 6. Exhibits and Reports on Form 8-K
SIGNATURES
EXHIBIT 3.1 Restated Certificate of Incorporation of the Company
EXHIBIT 99.1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
EXHIBIT 99.2 Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
EON LABS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share amounts)
DECEMBER 31, JUNE 30,
2001 2002
------------ -----------
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 17,624 $ 64,414
Restricted cash in escrow 877 806
Investments - 12,395
Accounts receivable, net of allowances of $6,882 and $25,867
in 2001 and 2002, respectively 27,290 39,127
Inventories 31,192 37,802
Deferred tax assets, net 19,566 19,566
Prepaid expenses and other current assets 4,478 7,199
Due from related party 200 52
------------ -----------
TOTAL CURRENT ASSETS 101,227 181,361
Property, plant and equipment, net 38,496 39,885
Goodwill and other intangible assets, net 78,805 78,754
Other assets 874 2,620
------------ -----------
TOTAL ASSETS $ 219,402 $ 302,620
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 10,430 $ 10,115
Accrued expenses and other liabilities 37,301 42,804
Current portion of note payable 24,400 14,169
------------ -----------
TOTAL CURRENT LIABILITIES 72,131 67,088
LONG-TERM LIABILITIES
Long-term portion of note payable 2,353 -
Deferred tax liabilities, net 7,153 7,153
Deferred revenue 660 545
Loans and advances from Hexal AG 90,114 -
------------ -----------
TOTAL LIABILITIES 172,411 74,786
------------ -----------
Contingencies (Note 8)
STOCKHOLDERS' EQUITY
Class A voting common stock, par value $.01 per share; 60,000,000 shares
authorized, no shares issued or outstanding at December 31, 2001, and no shares
authorized or outstanding at June 30, 2002 - -
Common stock, par value $.01 per share; no shares authorized or outstanding at
December 31, 2001, and 70,000,000 authorized and 42,739,629 outstanding at
June 30, 2002 - 436
Class B convertible, non-voting common stock, par value $.01 per share; 3,000,000
shares authorized and no shares issued or outstanding at December 31, 2001; and
no shares authorized or outstanding at June 30, 2002 - -
Preferred stock, par value $.01 per share, Series A convertible; 35,000,000 shares
authorized, 30,000,000 issued and outstanding at December 31, 2001 and no shares
authorized or outstanding at June 30, 2002 300 -
Preferred stock, par value $.01 per share; no shares authorized and no shares
issued or outstanding at December 31, 2001, and 5,000,000 shares authorized and
no shares issued or outstanding at June 30, 2002 - -
Additional paid-in capital 26,101 190,380
Retained earnings 22,376 38,226
------------ -----------
48,777 229,042
Less: Unearned deferred stock-based compensation (1,786) (1,208)
------------ -----------
TOTAL STOCKHOLDERS' EQUITY 46,991 227,834
------------ -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 219,402 $ 302,620
============ ===========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
EON LABS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands except per share amounts) (unaudited)
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- ------------------------------
2001 2002 2001 2002
Net sales $ 42,586 $ 52,000 $ 81,682 $ 100,198
Cost of sales 16,379 23,697 34,767 48,682
------------ ------------ ------------ -------------
GROSS PROFIT 26,207 28,303 46,915 51,516
------------ ------------ ------------ -------------
Operating expenses
Selling, general and administrative expenses:
Amortization of goodwill and other intangibles 1,780 940 3,560 1,880
Deferred stock appreciation rights
compensation 3,279 - 6,558 -
Other selling, general and administrative
expenses 6,143 7,075 12,560 13,228
Research and development expenses 3,008 2,985 5,111 6,266
------------ ------------ ------------ -------------
TOTAL OPERATING EXPENSES 14,210 11,000 27,789 21,374
------------ ------------ ------------ -------------
OPERATING INCOME 11,997 17,303 19,126 30,142
------------ ------------ ------------ -------------
Other expense, net
Interest income 104 126 240 166
Interest expense (2,309) (1,331) (4,686) (3,444)
Other income, net 5 11 6 11
------------ ------------ ------------ -------------
TOTAL OTHER EXPENSE, NET (2,200) (1,194) (4,440) (3,267)
------------ ------------ ------------ -------------
Income before income taxes 9,797 16,109 14,686 26,875
Provision for income taxes (4,429) (6,605) (6,638) (11,025)
------------ ------------ ------------ -------------
NET INCOME $ 5,368 $ 9,504 $ 8,048 $ 15,850
============ ============ ============ =============
Net income per common share
Basic $ - $ 0.51 $ - $ 1.70
============ ============ ============ =============
Diluted $ 0.17 $ 0.25 $ 0.25 $ 0.44
============ ============ ============ =============
Weighted average common shares outstanding
Basic - 18,497,264 - 9,299,729
============ ============ ============ =============
Diluted 31,680,528 38,405,203 31,680,528 35,956,869
============ ============ ============ =============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
EON LABS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands) (unaudited)
FOR THE SIX MONTHS ENDED
JUNE 30,
-------------------------------------
2001 2002
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 8,048 $ 15,850
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for accounts receivable allowances (2,166) 18,985
Depreciation and amortization 5,074 3,790
Deferred compensation 6,558 578
Amortization of deferred revenue (365) (115)
Amortization of discount on note payable 1,320 788
Interest paid in-kind 3,366 2,463
Changes in assets and liabilities:
Accounts receivable (4,203) (30,822)
Inventories (5,930) (6,610)
Prepaid expenses and other current assets (1,644) (2,721)
Other assets (367) (1,746)
Accounts payable (2,331) (315)
Accrued expenses and other liabilities (2,403) 4,358
Deferred revenue 325 -
------------- ---------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 9,944 4,483
============= ===============
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (1,176) (3,299)
Purchases of short-term investments - (12,395)
============= ===============
NET CASH USED IN INVESTING ACTIVITIES (1,176) (15,694)
============= ===============
CASH FLOWS FROM FINANCING ACTIVITIES
Decrease in loans and advances to Hexal AG (6,682) (66,942)
Payment on seller note - (15,201)
Proceeds from initial public offering of common stock - 142,303
Costs of initial public offering of common stock - (3,066)
Advances from related parties, net 38 836
Decrease in restricted cash 709 71
============= ===============
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (5,935) 58,001
============= ===============
NET INCREASE IN CASH AND CASH EQUIVALENTS 2,833 46,790
Cash and cash equivalents at beginning of year 6,378 17,624
------------- ---------------
Cash and cash equivalents at end of year $ 9,211 $ 64,414
============= ===============
Non-cash financing activities:
Conversion of preferred stock $ - $ 300
Exercise of warrants $ - $ 17
Issuance of common stock to repay loans and advances to
Hexal AG $ - $ 25,178
The accompanying notes are an integral part of these condensed consolidated
financial statements.
EON LABS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
1. BASIS OF PRESENTATION
The condensed consolidated financial statements included herein have been
prepared by Eon Labs, Inc. (the "Company") without audit pursuant to the
rules and regulations of the United States Securities and Exchange
Commission. Certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules
and regulations. In the opinion of management, the accompanying unaudited
condensed consolidated financial statements reflect all adjustments
(consisting only of normal recurring accruals) necessary for a fair
presentation of the financial position as of June 30, 2002 and results of
operations and cash flows for the periods presented. The consolidated
balances as of December 31, 2001 were derived from audited financial
statements but do not include all disclosures required by generally
accepted accounting principles. The accompanying condensed consolidated
financial statements have been prepared in accordance with accounting
standards for interim financial statements and should be read in
conjunction with the Company's audited consolidated financial statements
and the notes thereto for the year ended December 31, 2001. The results of
operations for the interim periods are not necessarily indicative of the
results of operations to be expected for the year.
CHANGE OF COMPANY OWNERSHIP AND REORGANIZATION
Prior to the reorganization described below, Hexal Pharmaceuticals, Inc.
("HPI"), a wholly-owned United States subsidiary of Santo Holding
(Deutschland) GmbH ("Santo" or the "Parent"), which is under common control
with Hexal AG, owned 50% of the outstanding capital stock of the Company.
The remaining 50% was owned by Eon Holdings, Inc. ("EHI"), whose principal
asset was its 50% ownership of the Company.
Effective May 22, 2002, in conjunction with the initial public offering of
the Company's common stock, the Company was combined with HPI and EHI into
a single entity through a series of reorganization mergers. EHI was merged
with and into HPI and HPI was subsequently merged with and into the
Company. This reorganization was accounted for as a merger of entities
under common control and the accounts of the companies were combined in a
manner similar to a pooling of interests effective January 1, 2000. The
condensed consolidated financial statements for the three and six months
ended June 30, 2001 and 2002 reflect results on a combined basis.
SHIPPING AND HANDLING COSTS
The Company classifies shipping and handling costs as part of selling,
general and administrative expenses. Shipping and handling costs were $0.4
million and $0.6 million in the three months ended June 30, 2001 and 2002,
respectively, and $0.8 million and $1.2 million for the six months ended
June 30, 2001 and 2002, respectively.
INVESTMENTS
The Company invests in publicly traded debt securities which are
categorized as securities available-for-sale and are carried at fair value,
with unrealized gains and losses excluded
EON LABS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
from income and recorded directly to stockholders' equity. The book value
was equal to the market value of such securities at June 30, 2002.
2. INITIAL PUBLIC OFFERING AND SHAREHOLDERS' EQUITY
On June 11, 2002, the Company completed its initial public offering of
common stock which resulted in net proceeds of $139,236 and the issuance of
10,200,813 shares of common stock. Upon the consummation of the Company's
initial public offering, all of the previously outstanding shares of the
Company's preferred stock were converted into 30,000,000 shares of common
stock and warrants were exercised resulting in the issuance of 1,680,528
shares of common stock. Immediately following the closing of the Company's
initial public offering, debt of $25,178 due to Hexal AG was converted into
1,678,561 shares of common stock and debt of $66,942 to Hexal AG was paid
with the proceeds of the offering.
STOCK SPLITS
In May 2002, the Company effected a 30-for-1 stock split of the Company's
preferred stock and the Company's non-voting common stock with no change in
par value. Additional paid-in capital, preferred stock, common stock, per
share and shares outstanding data in the unaudited Condensed Consolidated
Financial Statements and Notes to the unaudited Condensed Consolidated
Financial Statements have been retroactively restated to reflect this stock
split.
In May 2002, the outstanding 30,000,000 preferred shares were converted to
common stock. In addition, the Company changed the number of shares of
authorized preferred stock to 5,000,000, increased the number of shares of
authorized voting common stock to 70,000,000 and converted shares of
non-voting common stock to shares of a single class of common stock. The
Company amortized deferred stock compensation of $288 and $578 during the
three and six months ended June 30, 2002, respectively.
3. EARNINGS PER SHARE
Basic net income per share is computed by dividing net income by the
weighted average number of common shares outstanding for the period. There
were no common shares outstanding for the three and six months ended June
30, 2001 and for the three months ended March 31, 2002. For the three and
six months ended June 30, 2001, diluted earnings per share reflect the
potential dilution of warrants and the conversion of preferred stock.
Diluted earnings per share for the three and six months ended June 30, 2001
include 30,000,000 shares of preferred stock assumed converted to common
and the dilutive effect of warrants of 1,680,528 shares. Basic weighted
average shares outstanding for the three and six months ended June 30, 2002
reflect the impact of common shares issued resulting from the conversion of
30,000,000 shares of preferred stock converted to common stock, the
exercise by warrant holders of 1,680,528 shares, debt of $25,178 converted
to 1,678,561 shares and the issuance of 10,200,813 shares in connection
with the Company's initial public offering. The issuance of such shares
resulted in basic weighted average shares outstanding of
EON LABS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
18,497,264 and 9,299,729 for the three and six months ended June 30, 2002.
Basic earnings per share for the six months ended June 30, 2002 is
significantly lower than for the three months then ended since there were
no common shares outstanding until May 23, 2002. Weighted average shares
outstanding on a diluted basis for the 2002 periods reflect the shares
issued as noted above, assuming that the preferred stock that was converted
to common was outstanding for the full six-month period and the diluted
effect of stock options of 1,800,804 and 1,804,781 for the three and
six-month periods ended June 30, 2002, respectively, which resulted in
weighted average shares outstanding on a diluted basis of 38,405,203 and
35,956,869, respectively.
4. ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board issued SFAS No. 142,
"Goodwill and Other Intangible Assets." SFAS No. 142 modifies the
accounting and reporting for acquired intangible assets at the time of
acquisition and in subsequent periods. Intangible assets which have finite
lives must be amortized over their estimated useful life. Intangible assets
with indefinite lives will not be amortized, but evaluated annually for
impairment. The Company has completed its impairment assessment and
determined that there is no impairment of goodwill or identifiable
intangibles upon initial adoption of SFAS No. 142. SFAS No. 142 is
effective for fiscal years beginning after December 15, 2001. The Company's
value of existing products are intangible assets with finite lives that are
being amortized over 10 years. The Company's goodwill and workforce
intangibles which were being amortized over 15 and 5 year lives,
respectively, have not been amortized during the six-month period ended
June 30, 2002. Had this pronouncement been retroactively applied, net
income would have increased approximately $835 and $1,670, respectively,
and diluted earnings per share would have increased $0.03 per share and
$0.06 per share, respectively, in the three and six months ended June 30,
2001. During the three months ended March 31, 2002, the Company transferred
the net book value of its workforce intangible of $1,136 to goodwill,
resulting in goodwill of $47,107 at June 30, 2002. The recorded amount of
the existing product intangible of $37,600, before accumulated amortization
of $5,953 as of June 30, 2002, will be amortized through 2010 with annual
charges of $3,760.
In October 2001, the Financial Accounting Standards Board issued SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets," that
replaces SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of." SFAS No. 144 requires that
long-lived assets be measured at the lower of carrying amount or fair
value, less cost to sell, whether reported in continuing operations or in
discontinued operations. SFAS No. 144 is effective for fiscal years
beginning after December 15, 2001. The adoption of SFAS No. 144 will not
have a material impact on the measurement of its long-lived assets.
5. INVENTORIES
Inventories consist of the following:
EON LABS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
DECEMBER 31, JUNE 30,
2001 2002
------------- -----------
Raw material $ 16,909 $ 19,873
Work-in-process 6,026 8,122
Finished goods 8,257 9,807
------------- -----------
$ 31,192 $ 37,802
============= ===========
6. LINE OF CREDIT
On February 8, 2002, the Company entered into a three-year $25 million
credit agreement, which is collateralized by accounts receivable and
inventory. Interest on any borrowing under the line will accrue at the rate
of interest equal to either the adjusted LIBOR rate plus 1.5%, the prime
rate or the fixed rate (as set by the bank). The rate will depend upon the
terms of the selected borrowings. The agreement has covenants which require
the maintenance of certain financial ratios including leverage,
consolidated debt and asset coverage, as defined. The Company paid down the
line of credit balance outstanding with the proceeds of the initial public
offering.
7. RELATED PARTY TRANSACTIONS
The amounts due to Hexal AG increased from $90,114 at December 31, 2001 to
$92,120 at March 31, 2002 due to interest charges of $1,468 and advances of
$538. The balance was extinguished in May 2002 by a cash payment of $66,942
with the balance of $25,178 settled through the issuance of 1,678,561
shares of common stock. Additional interest charges were $995 for the three
months ended June 30, 2002.
During the three and six months ended June 30, 2002, the Company incurred
royalty expense of $746 and $1,805 to Hexal AG and subsidiaries of Hexal AG
returned $0.1 million of products to the Company in the six months ended
June 30, 2002.
The Company reimbursed Hexal AG $0.2 million for expenditures that Hexal
incurred on behalf of the Company during the three months ended June 30,
2002.
Included in accrued expenses are amounts due to Hexal AG of $1,416 at
June 30, 2002.
8. LITIGATION
PRODUCT LIABILITY LITIGATION
FEN-PHEN AND PHENTERMINE LITIGATION
Since May 1997, the Company has been named as a defendant in numerous
product liability lawsuits, some of which are class actions, filed in
various state and federal courts in
EON LABS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
connection with its manufacture of phentermine hydrochloride. These
lawsuits typically name as defendants manufacturers and distributors of
phentermine and two other anti-obesity drugs, fenfluramine and
dexfenfluramine. The plaintiffs claim that taking these drugs results in
instances of valvular heart disease, primary pulmonary hypertension, and
other injuries. Fenfluramine and phentermine were prescribed in combination
in an off-label use commonly called "fen-phen." Dexfenfluramine was
generally prescribed alone. In September 1997, the manufacturers of
fenfluramine and dexfenfluramine agreed with the Food and Drug
Administration ("FDA") to voluntarily withdraw both products from the
market. The FDA has not requested that phentermine be withdrawn from the
market.
Plaintiffs seek payment of unspecified damages and medical monitoring of
people who took either the fen-phen combination or fenfluramine or
dexfenfluramine alone. While the number of lawsuits being filed has
decreased substantially, the Company expects additional, similar lawsuits
to be filed. The Company and its outside counsel believe that the Company
has substantial defenses to these claims, though the ultimate outcome
cannot be determined. As of June 30, 2002, over 94% of the fen-phen cases
filed against the Company had been dismissed. All of these dismissals were
accomplished without the Company paying any judgments or settlements.
During 2000, the United States District Court for the Eastern District of
Pennsylvania, the federal court before which all federal cases were
consolidated for discovery, found that proposed anti-phentermine
"causation" testimony by two expert witnesses was not supported by
scientific evidence and thus would be barred. These two experts were the
only "national" anti-phentermine "causation" experts identified in the
consolidated federal litigation, and were to have been "generic" experts in
hundreds of cases. The Court's decision to substantially curb their
testimony has resulted in many cases being dismissed.
In August 2000, the United States District Court for the Eastern District
of Pennsylvania certified a nationwide settlement class and approved a
proposed settlement put forth by Wyeth (formerly American Home Products),
the principal defendant in the fen-phen litigation. The settlement excludes
claims for certain serious medical conditions. The Court's order became
final in January 2002. Although claims against Eon were not part of this
settlement, the Company believes this settlement will result in additional
cases being dismissed as to the Company, its customers and other
phentermine defendants.
Additionally, the Company has been named as a defendant in several cases
alleging injury from the use of phentermine alone, and in one case alleging
injury from the use of the Company's phentermine in combination with
phenylpropanolamine (PPA) made by another company. Discovery and trial
preparation in these cases is ongoing. The Company believes it has
substantial defenses to these claims, though the ultimate outcome of these
cases cannot be determined.
The Company has exhausted its insurance coverage for all fen-phen claims,
and for non-combination phentermine claims that allege ingestion prior to
June 1998. Because
EON LABS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
predicting the ultimate outcome of those lawsuits is not possible, no
provision for any liability has been reflected in the Company's financial
statements. Defense costs are being expensed as incurred. Such costs for
the three months ended June 30, 2001 and 2002 were $1.8 million and $1.0
million, respectively, and for the six months ended June 30, 2001 and 2002
were $4.1 million and $1.7 million, respectively.
Gross sales of phentermine by the Company for the three months ended June
30, 2001 and 2002 were $23.5 million and $12.2 million, respectively, and
for the six months ended June 30, 2001 and 2002 were $35.4 million and
$19.7 million, respectively.
OTHER PRODUCT LIABILITY LITIGATION
In addition to the litigation described above, the Company has been named
as a defendant in several other product liability lawsuits. Three of the
lawsuits allege injury or wrongful death from the use of
Company-manufactured pharmaceuticals containing phenylpropanolamine (PPA).
The Company manufactured two low-volume prescription products containing
PPA that were discontinued in 1999 and 2000, respectively. The single
wrongful death claim, a federal case, was dismissed without prejudice in
the Company's favor in November 2001 because plaintiffs failed to prosecute
the claim, and plaintiffs have indicated that they might seek to reinstate
the case. A second case was served on the Company in January 2002 and was
subsequently dismissed without prejudice. The third case was served on the
company in June 2002. All federal cases involving PPA claims are subject to
transfer to the nationwide, multi-district litigation now pending in the
United States District Court for the Western District of Washington.
Finally, the Company was a defendant in a lawsuit alleging injury from use
of leuprolide acetate, a drug that is distributed by the Company. The
plaintiff alleged various injuries from taking the drug. The Company is
being defended in this action by the supplier's insurance company, which
recently settled the case at no cost to the Company.
INSURANCE INDEMNITY LITIGATION
In January 1998, the Company's primary product liability insurer brought a
suit in state court in Delaware against the Company and several of the
Company's customers, seeking a declaration of rights and responsibilities
under its insurance program with the Company. The Company's excess carriers
were later added to this action. Subsequently, the court ruled that the
insurer had a duty to defend the Company's customers in pending lawsuits.
In December 1999, the Company completed a court-approved settlement with
its excess carriers that provided, among other things, for an additional
$17.75 million of insurance for these lawsuits. As part of that settlement,
the Company agreed to place an additional $5 million in escrow out of its
own cash reserves to pay for defense costs that it contends should have
been paid by its primary product liability carrier, which was expensed in
December 1999. The Company also settled outstanding disputes with several
of its customers regarding their contributions to defense costs. In
general, the settlement provides
EON LABS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
for varying contributions based on their purchases of the Company's
phentermine versus those from other manufacturers.
Also, in December 1999, the Company agreed in principle with its primary
product liability insurer to settle all outstanding disputes. In May 2000,
the court approved the terms of the settlement and provided, among other
things, that the insurer would partially reimburse the Company based on
certain conditions up to an amount of $3.75 million for legal costs
previously paid by the Company and to provide for $1.25 million of
additional insurance that could be used for defense costs. This additional
insurance would be applicable after the Company exhausted all existing
product liability insurance. In 2000, the Company received $3.75 million
from its primary product liability insurer that the Company had recorded as
a reduction of legal costs. In addition, the $1.25 million of additional
insurance was exhausted during 2000.
The Company's product liability coverage was obtained on a claims made
basis and covers liability for judgments and settlements and legal defense
costs. On or about April 2000, the Company had exhausted all its available
product liability coverage for all fen-phen claims and for non-combination
phentermine claims that allege ingestion prior to June 1998 that aggregated
approximately $48 million. Beginning in May 2000, the Company began to
provide for legal defense costs based on services rendered on behalf of the
Company and its customers. Coinciding with the exhaustion of its insurance
coverage, the Company entered into negotiations with several of its
customers to reduce legal costs by streamlining their legal defense
structure and or by increasing their contributions to defense costs. The
Company has obtained written agreements with these customers.
PATENT INFRINGEMENT LITIGATION
In 2000, Novartis Pharmaceuticals Corporation filed an action in the United
States District Court for the District of Delaware alleging that by
manufacturing, using, selling and offering to sell Cyclosporine capsules
the Company is infringing on a Novartis patent. Novartis seeks injunctive
relief as well as an unspecified amount of damages and has also asserted a
claim that the alleged infringement was willful, that the case is therefore
exceptional and that Novartis should therefore be awarded the attorney fees
it has incurred in the action. The Company has denied that it has infringed
any valid patent claims. The Company has also alleged affirmatively, among
other things, that the patent is invalid and that it is not infringed by
the Company's manufacture, use, sale or offer to sell its Cyclosporine
capsules. Our potential liability and expenses in this matter are not
covered by insurance. An adverse outcome in this litigation could result in
our being unable to market Cyclosporine, which could materially harm our
profits and cash flows, and could result in our paying damages, costs,
expenses and fees that could have a material impact on our financial
performance.
In January 2001, Apotex, Inc. filed an action in the United States District
Court for the Eastern District of New York alleging that by manufacturing,
selling and offering to sell Cyclosporine capsules the Company is
infringing a patent of which Apotex alleges it is the
EON LABS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
exclusive licensee. Apotex seeks injunctive relief as well as an
unspecified amount of damages and has also asserted a claim that the
alleged infringement was willful, that the case is therefore exceptional
and that Apotex should therefore be awarded the attorney fees it has
incurred in the action. Our potential liability and expenses in this matter
are not covered by insurance. An adverse outcome in this litigation could
result in our being unable to market Cyclosporine, which could materially
harm our profits and cash flows, and could result in our paying damages,
costs, expenses and fees that could have a material impact on our financial
performance.
The Company has denied that it has infringed any valid patent claims
asserted by Apotex, has alleged affirmatively, among other things, that the
patent is invalid and that it is not infringed by the Company's
manufacture, sale or offer to sell its cyclosporine capsules.
In addition, the Company has been named in several other patent
infringement actions alleging that the Company has infringed patents by
filing an application with the Food and Drug Administration (FDA) for
approval to market products before the plaintiffs' patents expire. In
general, plaintiffs seek judgments precluding the FDA from approving the
Company's application to market the product before their patent expires and
have asserted claims that the alleged infringement was willful, that the
action is therefore exceptional and that plaintiffs should therefore be
awarded the attorney fees they have incurred in the action.
The Company and its outside counsel believe that the Company has
substantial defenses and counterclaims to these above patent infringement
actions, though the ultimate outcome cannot be determined.
Because predicting the ultimate outcome of these actions is not possible,
no provision for any liability has been reflected in the Company's
financial statements.
OTHER LITIGATION
The Company is in other litigation incidental to its business activities.
The ultimate disposition of such lawsuits will not materially affect the
Company's financial statements.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our consolidated financial
statements, the related notes to consolidated financial statements and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in the Company's Registration Statement on Form S-1 (File
No. 333-83638) (the "Form S-1") and the unaudited interim condensed consolidated
financial statements included in Item 1 of this Quarterly Report on Form 10-Q.
SIX MONTHS ENDED JUNE 30, 2001 COMPARED WITH SIX MONTHS ENDED JUNE 30, 2002
NET SALES. Net sales increased 22.7% from $81.7 million for the six months ended
June 30, 2001 to $100.2 million for the comparable period in 2002. The net sales
increase was attributable primarily to sales of products that were introduced
after June 30, 2001. These products include Lovastatin USP, Metformin HCl, and
Nabumetone. Other factors impacting sales for the six months ended June 30, 2002
included an increase in unit volumes of existing products and changes in product
mix and unit prices. The change in product mix and price had an unfavorable
impact principally due to a decline in both unit volume and selling prices of
Fluvoxamine Maleate and a decline in unit volume of Phentermine HCl, USP.
Additional competitive activity caused the decrease in Fluvoxamine Maleate unit
volume and price. Phentermine HCl, USP sales in the six months ended June 30,
2001 reflected an increase in unit volume from the refilling of distribution
channels following a shortage of the product in the market due to the limited
availability of the active pharmaceutical ingredient.
GROSS PROFIT. Gross profit as a percentage of net sales decreased from 57.4% for
the six months ended June 30, 2001 to 51.4% in the comparable period in 2002.
The decrease was primarily due to a decrease in sales and margins for
Phentermine HCl, USP and Fluvoxamine Maleate, which had higher gross profit
margins than most of the Company's other products in 2001. The Company's gross
profit margins are dependent on several factors, including product sales mix,
cost, volumes and competitive activity.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES. Amortization of goodwill and
other intangibles decreased $1.7 million from $3.6 million for the six months
ended June 30, 2001 to $1.9 million in the comparable period in 2002. The
decrease was the result of the adoption of SFAS No. 142 "Goodwill and Other
Intangible Assets", which the Company adopted on January 1, 2002. Under SFAS No.
142, goodwill and intangibles with indefinite lives are no longer amortized but
are evaluated annually for impairment. Therefore, the Company is no longer
required to amortize its goodwill and workforce intangible assets.
DEFERRED STOCK APPRECIATION RIGHTS COMPENSATION. Deferred stock appreciation
rights compensation was $6.6 million for the six months ended June 30, 2001.
There were no charges for stock appreciation rights in the comparable period in
2002 because the Company's Stock Appreciation Rights Plan was converted to a
Stock Option Plan as of September 30, 2001.
OTHER SELLING, GENERAL AND ADMINISTRATIVE. Other selling, general and
administrative increased $0.6 million from $12.6 million for the six months
ended June 30, 2001 to $13.2 million in the
comparable period in 2002. As a percentage of sales, other selling, general and
administrative expenses decreased 2.2% from 15.4% for the six months ended June
30, 2001 to 13.2% in the comparable period in 2002. The increase was principally
due to increases of $1.2 million in compensation costs (which included $0.6
million of deferred compensation), $0.5 million in selling and marketing
expenses, $0.4 million in shipping expenses and $0.3 million in other expenses,
offset by a decrease of $1.8 million in legal expenses. The decrease in legal
expenses was due to a decrease in Phentermine HCl, USP litigation expenses of
$2.4 million, offset by an increase of $0.6 million in other legal expenses,
principally related to patent challenges.
RESEARCH AND DEVELOPMENT. Research and development expenses increased $1.2
million from $5.1 million for the six months ended June 30, 2001 to $6.3 million
in the comparable period in 2002. The increase was attributable primarily to
increases in costs related to personnel, bio-studies, supplies and outside
contract development.
OPERATING INCOME. Operating income increased $11.0 million from $19.1 million
for the six months ended June 30, 2001 to $30.1 million for the comparable
period in 2002. The increase in operating income was the result of increased
sales and gross profit, lower amortization expense and the elimination of
deferred stock appreciation rights compensation expense, offset by an increase
in other selling, general and administrative and research and development costs.
INTEREST INCOME (EXPENSE). Net interest expense decreased $1.2 million from $4.4
million for the six months ended June 30, 2001 to $3.2 million for the
comparable period in 2002. The decrease in interest expense was primarily the
result of a decrease in outstanding debt during 2002.
TAXES ON INCOME. Taxes on income increased $4.4 million from $6.6 million for
the six months ended June 30, 2001 to $11.0 million in the comparable 2002
period. The effective tax rate decreased from 45.2% to 41.0% due to the
elimination of non-deductible goodwill amortization in 2002.
NET INCOME. Net income increased $7.9 million from $8.0 million for the six
months ended June 30, 2001 to $15.9 million for the comparable 2002 period for
the reasons described above.
THREE MONTHS ENDED JUNE 30, 2001 COMPARED WITH THREE MONTHS ENDED JUNE 30, 2002
NET SALES. Net sales increased 22.1% from $42.6 million for the three months
ended June 30, 2001 to $52.0 million for the comparable period in 2002. The net
sales increase was attributable primarily to sales of products that were
introduced after June 30, 2001. These products include Lovastatin USP, Metformin
HCl, and Nabumetone. Other factors impacting sales for the three months ended
June 30, 2002 included an increase in unit volumes of existing products and
changes in product mix and unit prices. The change in product mix and price had
an unfavorable impact principally due to a decline in selling prices of
Fluvoxamine Maleate and a decline in unit volume of Phentermine HCl, USP.
Additional competitive activity caused the decrease in Fluvoxamine Maleate
price. Phentermine HCl, USP sales in the three months ended June 30, 2001
reflected an increase in unit volume from the refilling of distribution channels
following a shortage of the product in the market due to the limited
availability of the active pharmaceutical ingredient.
GROSS PROFIT. Gross profit as a percentage of net sales decreased from 61.5% for
the three months ended June 30, 2001 to 54.4% in the comparable period in 2002.
The decrease was primarily due to a decrease in sales for Phentermine HCl, USP,
a product which had higher gross profit margins than most of the Company's other
products in 2001. The Company's gross profit margins are dependent on several
factors, including product sales mix, cost, volumes and competitive activity.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES. Amortization of goodwill and
other intangibles decreased $0.8 million from $1.7 million for the three months
ended June 30, 2001 to $0.9 million in the comparable period in 2002. The
decrease was the result of the adoption of SFAS No. 142 "Goodwill and Other
Intangible Assets", which the Company adopted on January 1, 2002. Under SFAS No,
142, goodwill and intangibles with indefinite lives are no longer amortized but
are evaluated annually for impairment. Therefore, the Company is no longer
required to amortize its goodwill and workforce intangible assets.
DEFERRED STOCK APPRECIATION RIGHTS COMPENSATION. Deferred stock appreciation
rights compensation was $3.3 million for the three months ended June 30, 2001.
There were no charges for stock appreciation rights in the comparable period in
2002 because the Company's Stock Appreciation Rights Plan was converted to a
Stock Option Plan as of September 30, 2001.
OTHER SELLING, GENERAL AND ADMINISTRATIVE. Other selling, general and
administrative expenses increased $1.0 million from $6.1 million for the three
months ended June 30, 2001 to $7.1 million in the comparable period in 2002. As
a percentage of sales, other selling, general and administrative expenses
decreased 0.8% from 14.4% for the three months ended June 30, 2001 to 13.6% in
the comparable period in 2002. The increase was principally due to increases of
$0.5 million in compensation costs (which included $0.3 million of deferred
compensation), $0.2 million in selling and marketing expenses, $0.3 million in
shipping expenses and $0.1 million in other expenses, offset by a decrease of
$0.1 million in legal expenses. The decrease in legal expenses was due to a
decrease in Phentermine HCl, USP litigation expenses of $0.8 million, offset by
an increase of $0.7 million in other legal expenses, principally related to
patent challenges.
RESEARCH AND DEVELOPMENT. Research and development expenses were $3.0 million
for both the three-month period ended June 30, 2001 and the comparable period in
2002. Increases in certain line items, including an increase in compensation
expenses of $0.3 million, were offset by decreases principally related the
timing of material purchases and the cost of producing ANDA filing batches.
OPERATING INCOME. Operating income increased $5.3 million from $12.0 million for
the three months ended June 30, 2001 to $17.3 million for the comparable period
in 2002. The increase in operating income was the result of increased sales and
gross profit, lower amortization expense and the elimination of deferred stock
appreciation rights compensation expense, offset by an increase in other
selling, general and administrative costs.
INTEREST INCOME (EXPENSE). Net interest expense decreased $1.0 million from $2.2
million for the three months ended June 30, 2001 to $1.2 million for the
comparable period in 2002. The
decrease in interest expense was primarily the result of a decrease in
outstanding debt during 2002.
TAXES ON INCOME. Taxes on income increased $2.2 million from $4.4 million for
the three months ended June 30, 2001 to $6.6 million in the comparable period in
2002. The effective tax rate decreased from 45.2% to 41.0% due to the
elimination of non-deductible goodwill amortization in 2002.
NET INCOME. Net income increased $4.1 million from $5.4 million for the three
months ended June 30, 2001 to $9.5 million for the comparable period in 2002 for
the reasons described above.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $17.6 million at December 31, 2001 as compared to
$64.4 million at June 30, 2002.
At June 30, 2002, our total debt of $14.2 million was classified as current and
is shown under the balance sheet caption "current portion of note payable". The
debt represents the remaining balance on a note issued in connection with the
acquisition of EHI. At June 30, 2002 the note had a remaining discounted value
of $14.2 million and a face value of $14.8 million. Principal payments of $10.0
million and $4.8 million are due on September 30, 2002 and 2003, respectively.
The second payment is subject to acceleration under the note agreement if
certain EBITDA levels are reached. We expect to have EBITDA levels in excess of
the acceleration thresholds, and therefore, classified the remaining discounted
value of the $ 4.8 million due September 30, 2003 as current.
On February 8, 2002, the Company secured a three-year $25 million credit
facility with a borrowing cost of LIBOR plus 1.5% or the bank's prime rate. The
credit facility, which is for working capital purposes, had no outstanding
borrowings against it at June 30, 2002.
Stockholders' equity increased from $46.9 million at December 31, 2001 to $227.8
million at June 30, 2002. Stockholders' equity was increased by proceeds from
our initial public offering of $139.2 million, $25.2 million for the
capitalization of Hexal AG debt, earnings of $15.9 million for the six months
ended June 30, 2002 and $0.6 million for the amortization of deferred
compensation costs.
A portion of the $139.2 million of proceeds from our initial public offering in
May 2002 were utilized to pay $66.9 million of debt due to Hexal AG, with the
remainder available for general corporate purposes.
During the six months ended June 30, 2002, the Company generated net cash of
$46.8 million. Operations generated $4.5 million, which resulted from net
earnings of $15.9 million, non-cash items totaling $26.5 million and an increase
in working capital, which used $37.9 million. The most significant working
capital requirement related to a $30.8 million increase in accounts receivable
resulting from higher sales and the timing of customers' payments. Outflows from
investing activities for this period totaling $15.7 million were the aggregate
of capital expenditures of $3.3 million and the investment in marketable
securities of $12.4 million. Financing activities generated $58.0 million for
the period. The cash generated from financing activities is the net of $139.2
million in net proceeds raised in the Company's initial public offering, $0.8
million of advances received from a related party and a $0.1 million decrease
in restricted cash, offset by $82.1 million of debt repayments.
The Company is involved in various litigation matters in which the potential
liabilities and/or related expenses are not covered by insurance. In addition,
an adverse outcome in patent litigation with Novartis and Apotex involving
Cyclosporine, USP (Modified) could result in the Company being unable to market
this product which would materially harm its profits and cash flows and could
result in the Company paying damages, cost, expenses, and fees that could have
a material adverse impact on its financial performance. See the Company's Form
S-1 and the notes to the Company's six months unaudited condensed consolidated
financial statements.
The Company does not currently have or anticipate any short-term funding
requirements outside of the ordinary course of our business, and the Company
does not have or anticipate any liquidity concerns. The Company's principal
future cash requirements are associated with increased working capital to
support future growth, capital additions, legal defense cost and debt service.
The Company anticipates that its operating cash flows, together with its
available borrowings under its credit facility and current cash balances will be
sufficient to meet all of its working capital, capital expenditures and debt
payment requirements for both the short-term and foreseeable future.
CRITICAL ACCOUNTING POLICIES
Our critical accounting policies are those policies which are important to the
portrayal of our financial condition and results of operations and require
management's subjective judgments. As a result, these judgments are subject to
an inherent degree of uncertainty. We base our judgments on our experience and
various other assumptions that we believe to be reasonable under the
circumstances. On an ongoing basis, we evaluate our estimates, including those
related to returns, inventories, income taxes and litigation. Our actual results
could differ from these estimates under different assumptions or conditions. We
believe the following accounting policies to be critical:
Revenues are recognized when the products are received by the customer, which
represents the point when the risks and rewards of ownership are transferred to
the customer. Sales are shown net of discounts, rebates, contract pricing
adjustments and returns, which are estimated based on our experience. Discounts,
rebates and contract pricing adjustments are recorded as a reduction of sales
based on agreed upon terms with our customers at the time of sale. We calculate
a reserve for discounts and rebates based upon actual sales under such
arrangements. Reserves for contract pricing adjustments represent the difference
between the prices wholesalers are billed by us and the prices billed to their
customers to whom we have given contract prices. In determining a reserve for
contract pricing adjustments, we take into account an estimate of the percentage
of product sales subject to such pricing adjustments based on historical trends.
Historical trends are adjusted for new product introductions and changes in
wholesaler or contract prices.
Shelf stock adjustments are provided following a reduction in the prices of any
of our products due to the competitive environment. Such adjustments are
credited to our customers based on their on-hand inventory quantities. Reserves
are generally established when we reduce our prices.
Estimates for returns, which are recorded at the time of sale, relate primarily
to returns of expiring products. We utilize historical trends to estimate the
amount of products to be returned due to product expiration.
In determining whether liabilities should be recorded for pending litigation
claims, we must assess the allegations made and the likelihood that we will
successfully defend ourselves. When we believe it is probable that we will not
prevail in a particular matter, we will then make an estimate of the amount of
liability based in part on advice of outside legal counsel.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board issued SFAS No. 142,
"Goodwill and Other Intangible Assets." SFAS No. 142 modifies the accounting and
reporting for acquired intangible assets at the time of acquisition and in
subsequent periods. Intangible assets which have finite lives must be amortized
over their estimated useful life. Intangible assets with indefinite lives will
not be amortized, but evaluated annually for impairment. The Company has
completed its impairment assessment and determined that there is no impairment
of goodwill or identifiable intangibles upon initial adoption of SFAS No. 142.
SFAS No. 142 is effective for fiscal years beginning after December 15, 2001.
The Company's value of existing products are intangible assets with finite lives
that are being amortized over 10 years. The Company's goodwill and workforce
intangibles which were being amortized over 15 and 5 year lives, respectively,
have not been amortized during the six-month period ended June 30, 2002. Had
this pronouncement been retroactively applied, net income would have increased
approximately $835 and $1,670, respectively, and diluted earnings per share
would have increased $0.03 per share and $0.06 per share, respectively, in the
three and six months ended June 30, 2001. During the three months ended March
31, 2002, the Company transferred the net book value of its workforce intangible
of $1,136 to goodwill, resulting in goodwill of $47,107 at June 30, 2002. The
recorded amount of the existing product intangible of $37,600, before
accumulated amortization of $5,953 as of June 30, 2002, will be amortized
through 2010 with annual charges of $3,760.
In October 2001, the Financial Accounting Standards Board issued SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," that replaces
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of." SFAS No. 144 requires that long-lived
assets be measured at the lower of carrying amount or fair value, less cost to
sell, whether reported in continuing operations or in discontinued operations.
SFAS No. 144 is effective for fiscal years beginning after December 15, 2001.
The adoption of SFAS No. 144 will not have a material impact on the measurement
of its long-lived assets.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The following discusses the Company's exposure to market risk related to changes
in interest rates, equity prices and foreign currency exchange rates. The
Company does not believe that its exposure to market risk is material.
As of June 30, 2002, the Company had cash and cash equivalents of $64.4 million.
Cash equivalents are interest-bearing investment grade securities, primarily
short-term, highly liquid investments with maturities at the date of purchase of
less than 90 days. These investments are subject to interest rate risk and will
decrease in value if market interest rates increase. A hypothetical increase or
decrease in the market interest rates by 10 percent from the rates in effect on
the date of this Form 10-Q would cause the fair value of these short-term
investments to decline by an insignificant amount. The Company has the ability
to hold these investments until maturity, and therefore it does not expect the
value of these investments to be affected to any significant degree by the
effect of a sudden change in market interest rates. Declines in interest rates
over time will, however, reduce the Company's interest income.
The Company currently owns $12.4 million in publicly traded debt securities
which are subject to market fluctuations.
The Company currently does not have any international operations, and currently
does not enter into forward exchange contracts or other financial instruments
with respect to foreign currency. Accordingly, the Company currently does not
have any significant foreign currency exchange rate risk.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q report contains forward-looking statements
relating to future events and future performance of the Company within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, including, without limitation, statements
regarding the Company's expectations, beliefs, intentions or future strategies
that are signified by the words "expects," "anticipates," "intends," "believes"
or similar language. Actual results could differ materially from those
anticipated in such forward-looking statements. Some specific factors that may
have a significant effect on our operating results and common stock market price
include:
- new product introductions;
- changes in the degree of competition for our products;
- regulatory issues, including, but not limited to, receipt of ANDA
approvals from the FDA, compliance with FDA or other agency regulations or
the lack or failure of either of the foregoing;
- the inability to acquire sufficient supplies of raw materials;
- litigation and/or threats of litigation;
- changes in our growth rates or our competitors' growth rates;
- legislative and FDA actions with respect to the government regulation of
pharmaceutical products;
- public concern as to the safety of our products;
- changes in health care policy in the United States;
- conditions in the financial markets in general or changes in general
economic conditions;
- our inability to raise additional capital;
- conditions of other generic pharmaceutical companies or the generic
pharmaceutical industry generally; and
- changes in stock market analyst recommendations regarding our common
stock, other comparable companies or the generic pharmaceutical industry
generally.
All forward-looking statements included in this document are based on
information available to the Company on the date hereof, and the Company assumes
no obligation to update any forward-looking statements. The Company cautions
investors that its business and financial performance are subject to substantial
risks and uncertainties.
PART II - OTHER INFORMATION
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
Pursuant to a Registration Statement on Form S-1 (File No. 333-83638) declared
effective by the Securities and Exchange Commission on May 23, 2002, the Company
sold an aggregate of 10,200,813 shares of Common Stock (including 820,273 shares
from the exercise of the over-allotment option), par value $.01 per share, for
an aggregate offering price of $153.0 million. Pursuant to the registration
statement, certain selling stockholders sold an aggregate of 419,460 shares of
Common Stock for an aggregate offering price of $6.3 million. The registration
statement registered securities with a proposed maximum aggregate offering price
of $200.0 million. The offering was commenced on May 23, 2002 and was completed
on June 11, 2002 without all shares registered in such offering being sold. The
expenses incurred by the Company in connection with the issuance and
distribution of such shares were approximately $3.1 million. None of such
expenses were paid to directors or officers of the Company or their associates
or to persons owning 10% or more of the Common Stock of the Company. The net
offering proceeds to the Company were approximately $139.2 million. The
underwriters were led by Credit Suisse First Boston Corporation, Goldman,
Sachs & Co., Banc of America Securities LLC and CIBC World Markets Corp.
Upon the consummation of the Company's initial public offering, all of the
previously outstanding shares of the Company's preferred stock were converted
into 30,000,000 of common stock and warrants were deemed exercised resulting in
the issuance of 1,680,528 shares of common stock. Immediately following the
closing of the Company's initial public offering, debt of $25.2 million due to
Hexal AG was converted into 1,678,561 shares of common stock and debt of $66.9
million due to Hexal AG was paid with the proceeds of the offering. The
remainder of the proceeds to the Company from the offering, approximately $72.3
million, were invested in cash investments and short-term investment grade
securities. The Company anticipates using the balance of the proceeds from the
offering for general corporate purposes, including to fund working capital,
increased research and development to expand the Company's product offerings and
the potential acquisition of product lines or companies. The Company has no
present understandings, commitments or agreements with respect to any
acquisitions. Other than the repayment of indebtedness to Hexal AG, the Company
has not determined the amounts it plans to spend on any of the areas listed
above or the timing of these expenditures.
In May 2002, the Company effected a 30-for-1 stock split of the Company's
preferred stock and the Company's non-voting common stock with no change in par
value. Additional paid-in capital, preferred stock, common stock, per share and
shares outstanding data in the unaudited Condensed Consolidated Financial
Statements and Notes to the unaudited Condensed Consolidated Financial
Statements have been retroactively restated to reflect this stock split. The
Company changed the number of shares of authorized preferred stock to 5,000,000,
increased the number of shares of authorized voting common stock to 70,000,000
and converted shares of non-voting common stock to shares of a single class of
common stock.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Restated Certificate of Incorporation of the Company
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EON LABS, INC.
August 13, 2002 By: /s/ Bernhard Hampl
---------------------
Bernhard Hampl, Ph.D.
President, Chief Executive Officer
and Director
August 13, 2002 By: /s/ William F. Holt
----------------------
William F. Holt
Chief Financial Officer