1 BLANK ROME LLP MICHAEL JOSEPH (Pro Hac Vice) 2 JOSEPH O. CLICK (Pro Hac Vice) KERRY BRAINARD (Pro Hac Vice) 3 600 New Hampshire Avenue, N.W. Washington, D.C. 20037 4 Phone: 202-772-5800 Facsimile: 202-772-5858 5 BINGHAM MCCUTCHEN LLP 6 DALE E. BARNES (SBN 99273) Three Embarcadero Center 7 San Francisco, CA 94111-4067 Telephone: (415) 393-2000 8 Facsimile: (415) 393 2286
9 Attorneys for Defendants
10 UNITED STATES DISTRICT COURT 11 NORTHERN DISTRICT OF CALIFORNIA 12 SAN JOSE DIVISION 13 ) 14 In re IMPAX LABORATORIES, INC. ) Master File No. C-04-4802-JW SECURITIES LITIGATION ) enue, NW, Washington, DC, 20037 enue, NW, 15 ) CLASS ACTION ) 16 This Document Relates To: ) DEFENDANTS’ REQUEST FOR Blank Rome LLP ) JUDICIAL NOTICE IN SUPPORT OF 17 ALL ACTIONS. ) DEFENDANTS’ MOTION TO DISMISS THE FIRST AMENDED 18 CONSOLIDATED CLASS ACTION COMPLAINT 19
20 Date: October 31, 2005 Watergate, 600 New Hampshire Av Watergate, 600 Time: 9:00 a.m. 21 Place: Courtroom 8, 4th Floor Judge: Hon. James Ware 22
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1 Defendants Impax Laboratories, Inc., Barry Edwards, Charles Hsiao, Larry Hsu, Cornel 2 Spiegler, David Doll and David Edwards respectfully request that the Court take judicial notice 3 of each of the following documents pursuant to Federal Rule of Evidence 201 (“Rule 201”): 4 DOCUMENTS FILED WITH THE SEC: 5 1. The Strategic Alliance Agreement between Teva Pharmaceuticals Curacao N.V. and 6 Impax Laboratories, Inc. (“Impax”) dated June 27, 2001 included as Exhibit 10.55 to the 7 Form 10-QSB for the quarterly period ending June 30, 2001, filed with the Securities and 8 Exchange Commission (“SEC”) on July 31, 2001. A true and correct copy of this 9 document is attached hereto as Exhibit A. 10 2. Impax’s Form 10-Q for the quarter ending March 31, 2004, filed with the SEC on May 11 10, 2004. A true and correct copy of this document is attached hereto as Exhibit B. 12 3. Impax’s Form 10-Q for the quarter ending June 30, 2004, filed with the SEC on August 13 9, 2004. A true and correct copy of this document is attached hereto as Exhibit C. 14 4. Impax’s Amended Form 10-Q for the quarter ending March 31, 2004, filed with the SEC enue, NW, Washington, DC, 20037 enue, NW, 15 on November 16, 2004. A true and correct copy of this document is attached hereto as 16 Exhibit D. Blank Rome LLP 17 5. Impax’s Amended Form 10-Q for the quarter ending June 30, 2004, filed with the SEC 18 on November 17, 2004. A true and correct copy of this document is attached hereto as 19 Exhibit E. 20 6. Impax’s Form 10-Q for the quarter ending September 30, 2004, filed with the SEC on Watergate, 600 New Hampshire Av Watergate, 600 21 November 16, 2004. A true and correct copy of this document is attached hereto as 22 Exhibit F. 23 7. Cornel Spieger’s Amended Form 4 for the period ending June 7, 2004, filed with the SEC 24 on June 18, 2004. A true and correct copy of this document is attached hereto as Exhibit 25 G. 26 8. Charles Hsiao’s Amended Schedule 13D filed with the SEC on June 15, 2004. A true 27 and correct copy of this document is attached hereto as Exhibit H. 28
1 9. Larry Hsu’s Amended Schedule 13D filed with the SEC on June 15, 2004. A true and 2 correct copy of this document is attached hereto as Exhibit I. 3 10. David J. Edwards’ Form 4 for the period ending May 12, 2004 filed with the SEC on 4 May 14, 2004. A true and correct copy of this document is attached hereto as Exhibit J. 5 11. David S. Doll’s Amended Form 4 for the period ending June 7, 2004 filed with the SEC 6 on June 17, 2004. A true and correct copy of this document is attached hereto as Exhibit 7 K. 8 12. Barry R. Edwards’ Amended Form 4 for the period ending June 7, 2004 filed with the 9 SEC on June 17, 2004. A true and correct copy of this document is attached hereto as 10 Exhibit L. 11 13. Impax’s Press Release Form 8-K filed with the SEC on June 27, 2005, without exhibits. 12 A true and correct copy of this document is attached hereto as Exhibit M. 13 14. Andrx Corporation’s Form 10-Q for the quarter ending September 30, 2004, filed with 14 the SEC on November 3, 2004. A true and correct copy of this document is attached
enue, NW, Washington, DC, 20037 enue, NW, 15 hereto as Exhibit N. 16 HISTORICAL STOCK PRICE Blank Rome LLP 17 15. The historical quote of the stock price for Impax for the period of May 5, 2004 and 18 December 1, 2004. A true and correct copy of this document is attached hereto as 19 Exhibit O. 20 RELATED PLEADINGS IN THIS MATTER Watergate, 600 New Hampshire Av Watergate, 600 21 16. The First Amended Consolidated Complaint for violations of the securities laws, In re 22 Impax Laboratories, Inc. Sec. Litig., Master File No. C-04-4802-JW, filed with the Court 23 on September 9, 2005. A true and correct copy of this document is attached hereto as 24 Exhibit P. 25 26 27 28
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1 PRESS RELEASES REFERRED TO IN THE COMPLAINT 2 17. Impax Press Release dated November 3, 2004. A true and correct copy of this document 3 is attached hereto as Exhibit Q. 4 18. Impax Press Release dated November 9, 2004. A true and correct copy of this document 5 is attached hereto as Exhibit R. 6 19. Impax Press Release dated August 3, 2005, attached to Impax’s Form 8-K filed with the 7 SEC on August 3, 2005. A true and correct copy of this document is attached hereto as 8 Exhibit S. 9 20. Andrx Corporation Press Release dated November 3, 2004, attached to Andrx’s Form 8- 10 K filed with the SEC on November 3, 2004. A true and correct copy is attached hereto as 11 Exhibit T. 12 21. Eon Labs’s Press Release dated January 14, 2004. A true and correct copy of this 13 document is attached hereto as Exhibit U. 14 22. Eon Labs’s Press Release dated January 15, 2004. A true and correct copy of this
enue, NW, Washington, DC, 20037 enue, NW, 15 document is attached hereto as Exhibit V. 16 23. Eon Labs’s Press Release dated February 4, 200. A true and correct copy of this Blank Rome LLP 17 document is attached hereto as Exhibit W. 18 19 20 Watergate, 600 New Hampshire Av Watergate, 600 21 22 23 24 25 26 27 28
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1 DISCUSSION 2 These documents are proper subjects of judicial notice. The Court may take judicial 3 notice of and consider on a motion to dismiss documents filed with the SEC. See Janas v. 4 McCracken (In re Silicon Graphics Sec. Litig.), 183 F.3d 970, 983 (9th Cir. 1999); In re Nuko 5 Info. Sys. Sec. Litig., 199 F.R.D. 338, 341 (N.D. Cal. 2000). The above-referenced disclosure 6 statements, attached hereto as Exhibits A through N, constitute “relevant public disclosure 7 documents filed with the Securities Exchange Commission[.]” Ronconi v. Larkin, No. C-97- 8 1319, 1998 U.S. Dist. LEXIS 6364, *2 (N.D.Cal. May 1, 1998). Because it would be “highly 9 impractical and inconsistent with Fed. R. Evid. 201 to preclude a district court from considering 10 such documents when faced with a motion to dismiss a securities action based on allegations of 11 material misrepresentations or omissions,” this Court may take judicial notice of the SEC Forms 12 8-K, 10-QSB, 10-Q, 10-Q/A, 13D and 4 for purposes of this motion. Lovelace v. Software 13 Spectrum, Inc., 78 F.3d 1015, 1018 n.1 (5th Cir. 1996) (citation omitted); accord Fla. State Bd. 14 of Admin. v. Green Tree Fin. Corp., 270 F.3d 645, 663 (8th Cir. 2001).
enue, NW, Washington, DC, 20037 enue, NW, 15 The Court may also consider “the full text of documents cited by the plaintiffs” in the 16 Consolidated Complaint. Ronconi, 1998 U.S. Dist. LEXIS 6364, at *2; Silicon Graphics, 183 Blank Rome LLP 17 F.3d at 986. Thus, the Court may take judicial notice of the full text of the Form 8-Ks and press 18 releases referenced or quoted in the Complaint. In re Gilead Sciences Sec. Litig., 2005 WL 19 181885 at *3 (N.D. Cal. Jan. 26 2005); Wiestschner v. Monterey Pasta Co., 294 F. Supp. 2d, 20 1102, 1108-09 (N.D. Cal. 2003). In addition, the Court may take judicial notice of stock prices Watergate, 600 New Hampshire Av Watergate, 600 21 in ruling on a motion to dismiss. In re 3Com Sec. Litig., 199 WL 1039715 at *4 (N.D. Cal. July 22 8, 1999); Ravens v. Iftikar, 174 F.R.D. 651, 661 (N.D. Cal. 1997) (noting that the Court may, on 23 its own motion, take judicial notice of historical stock prices). 24 Although virtually all of the documents referred to in the Memorandum of Points & 25 Authorities in Support of Defendants’ Motion to Dismiss are quoted or cited in the Complaint, 26 documents upon which the Complaint is based can be considered irrespective of whether 27 plaintiff has chosen to cite or quote from them. In re Metricom Secs. Litig., 2004 U.S. Dist. 28
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1 LEXIS 7834, *23-*24 (N.D. Cal. May 4, 2004);Wietschner, 294 F. Supp. 2d at 1109; see also In 2 re Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1426 (3d Cir. 1997) (“Plaintiffs cannot 3 prevent a court from looking at the text[] of the documents on which its claim is based by failing 4 to attach or explicitly cite to them.”); see also Parrino v. FHP, Inc., 146 F.3d 699, 705-06 (9th 5 Cir. 1998). 6 Therefore, the Court may take judicial notice of the historical stock price for Impax 7 attached hereto as Exhibit O, the documents relied on to determine the amount of stock and 8 options held by the defendants attached hereto as Exhibits G-L, as well as the press releases that 9 the plaintiffs cited or relied upon in the Complaint, attached hereto as Exhibits Q-W.
10 For the foregoing reasons, Defendants respectfully request that the Court take judicial 11 notice of each of the documents listed above. 12 Respectfully submitted, 13
14 Dated: October 7, 2005 BLANK ROME LLP
enue, NW, Washington, DC, 20037 enue, NW, BINGHAM MCCUTCHEN LLP 15
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Blank Rome LLP __/s/ Michael Joseph______17 MICHAEL JOSEPH (pro hac vice)
18 Attorneys for Defendants 19 20 Watergate, 600 New Hampshire Av Watergate, 600 21 22 23 24 25 26 27 28
5 EXHIBIT A STRATEGIC ALLIANCE AGREEMENT
betwee n
TEVA PHARMACEUTICALS CURACAO N .V . World Trade Center Curacao , Unit T .M .I . 14 , Piscadera Bay Curacao, Netherlands Antilles ("Teva" )
and
IMPAX LABORATORIES, INC . a corporation organized under the laws of Delaware, 30831 Huntwood Avenue, Hayward, CA 94544 ; ("Impax" )
WHEREAS, Impax is engaged in the development, manufacture, sale, marketing and distribution of pharmaceutical products and has in various stages of development the pharmaceutical products listed in Annex A hereto (collectively the "Products" as defined further below) ;
WHEREAS, Teva together with its Affiliates (as defined below) is engaged in the development, manufacture, sale, marketing and distribution of pharmaceutical products ;
WHEREAS, Teva and Impax desire to cooperate in co leting the development of the Products and to register, manufacture, market, sel and distribute the Products in the United States and, at Teva's option, Canada Israel, Mexico, the European Union, Central America and South America (collects ely, as defined furthe r below, the "Territory"), all in accordance with th terms and subject to the conditions set forth in this Agreement ; and
WHEREAS, in connection with the above-referenced cooperative effort and in accordance with the terms and subject to the conditions set forth below, (a) Impax, with the financial support of Teva provided for herein, shall develop, manufacture, and package the Products and seek regulatory approval of the Products for the United States, and (b) Teva, with the technical support of Impax provided for herein, shall market, sell and distribute the Products in the Territory and, to the extent applicable, manufactu a and/or seek regulatory approval of the Products for the Optional Territory (as defined below) .
NOW THEREFORE, intending to be legally bound hereby and in consideration of the mutual representations, warranties and covenants set forth herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, IT IS HEREBY AGREED BY THE PARTIES A FOLLOWS : INTERPRETATION AND DEFINITIONS
1 .1 The preamble to this Agreement forms an integral part hereof .
1 .2 Sections headings in this Agreement are intended solely for convenience of reference and shall be given no effect in the interpretation of this Agreement .
1 .3 All annexes to this Agreement, signed by both Parties, whether attached at the time of signature hereof or at any time thereafter, shall be construed as an integral part of this Agreement .
1 .4 For the purposes of this Agreement, the following words and phrases shall bear the respective meanings assigned to them below (and cognate expressions shall bear corresponding meanings) :
1 .4 .1 "Affiliates" - shall mean with respect to any Party, any Person that is controlled by, controls, or is under common control with that Party . For this purpose, "control" of a corporation or other business entity shall mean direct or indirect beneficial ownership of more than fifty percent (504) of the voting interest in, or more than fifty percent (50%) in the equity of, or the right to appoint more than fifty percent (50%) of the directors or management of such corporation or other business entity .
1 .4 .2 "ANDA" - shall mean an Abbreviated New Drug Application filed with the FDA pursuant to its rules and regulations .
1 .4 .3 "Applicable Law" - shall mean the applicable laws, rules, regulations, guidelines and requirements related to the development, registration, manufacture, importation, Marketing, sale and distribution of the Products in the Territory .
1 .4 .4 "Approval(s)" - shall mean any and all approvals, licenses, registrations or authorizations of the applicable Regulatory Authority necessary for the Marketing of the Products and reimbursement, if applicable, in the relevant country of the Territory .
1 .4 .5 "API" - shall mean the bulk unformulated drug substances used in the manufacture of each of the Products .
1 .4 .6 "Calendar Quarter" - shall mean a three (3) consecutive month period ending on March 31, June 30, September 30 or December 31 . 1 .4 .7 "Canada" - shall mean Canada and its territories , districts and possessions .
1 .4 .8 "cGMP" - shall mean current good manufacturing practices as required by the rules and regulation s of the FDA or such similar requirements of non-U.S . Regulatory Authorities, as applicable to th e manufacture, packaging, handling, storage an d control of the Products in the Territory .
1 .4 .9 "Competing Product" - shall mean on a Product-by-Product basis any finishe d pharmaceutical product for sale in the prescriptio n drug marketplace that contains the same activ e ingredients in the same dosage form and strength a s the subject Product .
1 .4 .10 "Confidential Information" - shall mean al l information, data and/or know-how disclosed b y either Party to the other Party in writing (or i f disclosed orally, visually and/or in anothe r non-written form, identified as confidential at th e time of disclosure, and summarized in reasonabl e detail in writing as to its general content withi n thirty (30) days after original disclosure ) concerning the Products or concerning th e technology, marketing strategies or business of th e disclosing Party (whether disclosed prior to o r subsequent to the Effective Date) . Confidentia l Information shall not include information, data o r know-how that the receiving Party can show :
(a) was in the public domain at the time of th e disclosure by the disclosing Party, o r thereafter becomes part of the public domai n without any fault of the receiving Party ;
(b) rightfully was in its possession prior t o the disclosure by the disclosing Party ;
(c) was lawfully obtained from a third party , who had the right to make such disclosure s as evidenced by written records ; or (d) was developed by it independently of such disclosure as evidenced by written records .
1 .4 .11 "Cost of Materials" - shall mean on a Product-by-Product basis the actual direct cost fo r inactive and active materials required for th e manufacture of the particular Product (which fo r purposes of clarity shall not include handling, inspection or any other indirect charges) . 1 .4 .12 "Designated Share Price" - shall mean, with respect to the applicable Teva investment or stock payment to Teva pursuant to Section 10, the average closing sale price for the Impax Common Stock measured over the ten (10) trading days ending two (2) days prior to the date on which the Impax Common Stock i s acquired by Teva or its Affiliate .
1 .4 .13 "Effective Date" - shall mean the date on whic h this Agreement is signed by the latter of th e Parties to sign this Agreement .
1 .4 .14 "EU" - shall mean those countries set forth in Annex F .
1 .4 .15 "FDA" - shall mean the United States Food and Drug Administration and all agencies under its direc t control or any successor organization .
1 .4 .16 "First to File Exclusivity" - shall mean, to the extent applicable, up to six (6) months o f marketing exclusivity in the U .S . from the FDA under and pursuant to 21 U .S .C . Section 355(j)(5)(B)(iv) of the Federal Food, Drug an d Cosmetic Act, as amended .
1 .4 .17 "Force Majeure Events" - shall have the meaning set forth in Section 25 .1 .
1 .4 .18 "Impax Common Stock" - shall mean Impax common stock, $0 .01 par value .
1 .4 .19 "IMS Data" - shall mean total prescription dat a from IMS Health National Prescription Audit Plu s (TM), Complete Package - (retail, mail order, LTC , prescriber specialty report) .
1 .4 .20 "Impax Margin" - shall mean on a Product-by-Produc t basis for each country in the Territory, an amoun t equal to + percent (+%) of the Profit ; provided , however, for the Tier 2 Products in the U .S . such amount shall be equal to + percent (+%) of the Profit .
1 .4 .21 "Intellectual Rights Legal Expenses" - shall mea n all fees, out of pockets costs and expense s (including, without limitation, all attorneys fee s and settlement costs), third party damages , verdicts and/or awards incurred by either Part y and/or their respective Affiliates in connectio n with the defense and/or arising out of a judgmen t or settlement of an Intellectual Rights Suit .
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+ Confidential portions omitted and filed separately with the Commission . 1 .4 .22 "Intellectual Rights Suit" - shall mean any litigation instituted by a third party relating to a claim or claims of infringement of patents or other intellectual property rights against Teva and/or an Affiliate of Teva and/or their respective directors and/or officers and/or employees and/or consultants, and/or against Impax or an Affiliate of Impax and/or their respective directors and/or officers and/or employees and/or consultants during or prior to the Term, related to or arising from the filing of Regulatory Documentation for any Product( s) and /or the manufacturing, Marketing, use or offer for sale of any Product(s) . An Intellectual Rights Suit shall also include a declaratory judgment action as referenced in Section 17 .
1 .4 .23 "Launch Date" - shall mean on a Product-by-Product basis the date on which Teva makes its first commercial sale of a particular Product to an unrelated third party in an arms-length transaction in a particular country in the Territory, and Impax has supplied to Teva full launch quantities of such Product for such country pursuant to Teva's forecast .
1 .4 .24 "Manufacturing Costs" - shall mean on a Product-by-Product basis, the total of all actual direct manufacturing (including packaging material) costs allocable to the manufacture of the particular Products for each country in the Territory, as determined in accordance with U .S . QAAP, not to exceed, however, (i) for each Tier 1 Product, the amounts set forth in Annex B, plus the Cost of Materials ; and (ii) for each Tier 2 Product and Tier 3 Product, the amounts to be agreed upon by the Parties and added to Annex B promptly following the filing of each ANDA for each Tier 2 Product and Tier 3 Product, plus the Cost of Materials .
1 .4 .25 "Market" - shall mean to promote, distribute, market, advertise and/or sell .
1 .4 .26 "Net Sales" - shall mean, on a Product-by-Product basis, the gross amount invoiced for each of the Products sold by Teva or Teva's Affiliates on an arms-length basis in each country in the Territory, less the sum of : (a) trade, quantity and/or cash discounts, allowances, rebates, retroactive price adjustments, free goods, bad debts, cash incentive payments (e .g . slotting allowance), and chargebacks ; (b) credits or refunds for rejected, outdated or returned Product ; (c) any tax, duty or other government charge upon or related to the sale, delivery or use of that Product ; (d) cost of short dated Product, which is destroyed by Teva or its Affiliates ; (e) three percent (3t) as a contribution towards selling, administrative and other similar expenses of Teva ; and (f) other specifically identifiable amounts included in the Product's gross sales that will have been or ultimately will be credited and are substantially similar to those listed above ; in each case determined in accordance with U .S . GAAP . 1 .4 .27 "Optional Products" - shall have the meaning set forth in Section 4 .1 .
1 .4 .28 "Optional Territory" - shall mean Canada, Israel , Mexico and each of the countries in the EU, Centra l America and South America .
1 .4 .29 "OTC Product(s)" - shall mean the finished pharmaceutical products listed in Annex A for the non-prescription drug marketplace .
1 .4 .30 "Party", "Parties" - shall mean Teva and/or Impax , as applicable .
1 .4 .31 "Person" - shall mean any individual, partnership , association, corporation, limited liabilit y company, trust, or other legal person or entity .
1 .4 .32 "Product(s)" - shall mean the finishe d pharmaceutical products listed in Annex A for the prescription drug marketplace developed by or for Impax or any of its Affiliates, including the fiv e (5) Tier 1 Products ("Tier 1 Products"), the thre e (3) Tier 2 Products ("Tier 2 Products") the thre e (3) additional Products to be agreed upon by th e Parties ("Tier 3 Products"), and subject to Sectio n 4 hereof the Optional Products listed in Annex G .
1 .4 .33 "Profit" - shall mean, with respect to each Product, calculated separately for each country i n the Territory, an amount equal to Net Sales les s the applicable Manufacturing Costs .
1 .4 .34 "Regulatory Authority" - shall mean any and al l governmental bodies, organizations and agencie s whose approval is necessary to develop , manufacture, import, use, and/or Market th e Products in the relevant country of the Territory .
1 .4 .35 "Regulatory Documentation" - shall mean al l submissions to Regulatory Authorities, includin g clinical studies, tests, and biostudies relating t o the Products, including, without limitation, al l ANDAs, 505(b)(2) applications, and DMFs, as well a s all correspondence with Regulatory Authoritie s (registration and licenses, regulatory drug lists , advertising and promotion documents), adverse even t files, complaint files, manufacturing records and inspection reports . 1 .4 .36 "Regulatory Expenses " - shall mean all costs and expenses in connection with preparing, submitting, obtaining and maintaining Approvals of the subject Products .
1 .4 .37 "Revised Impax Margin" - shall mean, on a Product-by-Product basis, an amount equal to the product obtained by multiplying (a) a fraction, the numerator of which is the subject Product sales in the subject country in the Territory by Teva and its Affiliates, based upon the IMS Data for the three (3) month period immediately preceding the Transaction Event, and the denominator of which is the sum of the numerator plus the applicable Competing Product sales in the subject country in the Territory based upon the IMS Data for the three (3) month period immediately preceding the Transaction Event, by (b) the Impax Margin ; provided, however, that if such three (3) month sales data is not available for either the Product or the Competing Product, then the Revised Impax Margin shall be deemed to be + percent (+%) of the Profit unless and until the Parties otherwise agree in good faith, taking into account the principles underlying the above formula and the relative commercial potential of each such Product and Competing Product . For the purposes of calculating the Revised Impax Margin, Net Sales, Manufacturing Costs, and Profit for a Competing Product, shall be calculated in the same manner as Net Sales, Manufacturing Costs, and Profit are calculated for a Product hereunder .
1 .4 .38 "Specifications" - shall mean, for a particular Product, the agreed specifications, methods and processes of the Product as contained in the applicable Approval for that Product .
1 .4 .39 "Supply Term" - shall mean , on a Product-by-Product basis for each country in the Territory, an initial period of ten (10) years from the Launch Date of that Product in the particular country in the Territory and any extension periods pursuant to Section 21 .1, unless terminated prior to such date as expressly provided for in this Agreement .
1 .4 .40 "Term" - shall mean the duration of this Agreement starting on the Effective Date and continuing until the end of the last to expire of the Supply Terms, unless terminated prior to such date pursuant to Section 21 .
+ Confidential portions omitted and filed separately with the Commission . 1 .4 .41 "Territory" - shall mean the U .S . and, subject to Section 3, the Optional Territory .
1 .4 .42 "Transaction Event" - shall mean any merger, acquisition, business combination or transaction of any kind pursuant to which Teva or any of its Affiliates acquires or obtains the right to Market Competing Products in any countries in the Territory .
1 .4 .43 "U .S ." - shall mean the United States of America and its territories, districts and possessions .
1 .4 .44 "U .S . GAAP' - shall mean generally accepte d accounting principles in the U .S ., consistently applied .
GRANT OF RIGHTS
2 .1 Impax, for itself and its Affiliates, grants to Teva and its Affiliates in accordance with the terms and conditions of this Agreement, the exclusive right (even as to Impax and its Affiliates), under applicable Approvals and all other existing or future rights owned or controlled by Impax or its Affiliates, to Market the Products in the Territory throughout the respective Supply Terms . The effective date of such grant for (a) each of the Tier 1 Products for the U .S . shall be the date that the Loan is reduced by the Milestone Amount corresponding to the Launch Date Milestone Event for such Product as set forth in Annex C or Annex D, as applicable, or the date the Loan is reduced by fifty percent (50t) of such Milestone Amount pursuant to Section 10 .1 (b), as applicable, and (b) for the Tier 2 Products and Tier 3 Products, collectively, for the U .S ., on the first Launch Date of any Tier 2 Product or Tier 3 Product in the U .S . and (c) for the Products for the Optional Territory as provided in Section 3 .1 . Teva accepts the grant of such exclusive Marketing rights from Impax .
2 .2 Except as otherwise expressly provided in this Agreement and subject to the provisions of Section 8, Impax and its Affiliates shall, during the period from the Effective Date to the expiration of the Supply Term for each of the Products , (a) manufacture and supply to Teva and its Affiliates all of their requirements for the Products in the Territory, and (b) supply the Products for the Territory exclusively and only to Teva and Teva's Affiliates in accordance with the terms of this Agreement .
2 .3 Teva and its Affiliates shall, during the period from the Effective Date to the expiration of the Supply Term for each of the Products, obtain all quantities of the Products it requires for Marketing the Products in the Territory from Impax, except as otherwise specifically permitted by the terms of this Agreement . 2 .4 Neither Impax nor its Affiliates shall, directly or indirectly, during the period from the Effective Date to the expiration of the Supply Term for each of the Products, Market such Product or cause or permit such Product to be Marketed in or for the subject countries in the Territory, except as otherwise specifically permitted by the terms of this Agreement .
2 .5 Neither Impax nor its Affiliates shall, directly or indirectly, during the period from the Effective Date to the expiration of the Supply Term for each of the Products, register, develop, manufacture, supply or market any competing Product to such Product for any countries in the Territory, except as otherwise may be specifically permitted by the terms of this Agreement .
2 .6 Neither Teva nor its Affiliates shall, directly or indirectly, during the Supply Term for each of the Products, Market any Competing Product to such Product in the subject countries of the Territory in which the applicable Product is Marketed by Teva and/or its Affiliates hereunder, except as otherwise may be specifically permitted by the terms of this Agreement .
2 .7 Teva shall within thirty (30) days of the completion of a Transaction Event provide Impax with written notice of same (a "Transaction Event Notice") . Notwithstanding the provisions of Section 2 .6, Teva shall have one (1) year from the date of such Transaction Event to determine, in its sole discretion, whether or not Teva or any of its Affiliates wish to Market in any countries in the Territory the Competing Product and if so with or without the subject Product . From and after the date of written notice to Impax communicating such decision, Teva shall pay Impax the Revised Impax Margin rather than the Impax Margin with respect to the sale of such Competing Product and/or Product in the subject countries in the Territory ; provided, however, if final Approval for the subject Product has not been obtained in the given country then neither the Impax Margin nor the Revised Impax Margin shall be payable to Impax, and provided further that if the final Approval for the subject Product has been obtained in the given country and final Approval for the Competing Product has not been obtained, then the Impax Margin (and not the Revised Impax Margin) shall continue to be paid until such Approval for the Competing Product has been obtained .
2 .8 In the event Teva or its Affiliate decides to Market in the subject countries in the Territory only the Competing Product pursuant to Section 2 .7, then the grant hereunder to Teva pursuant to section 2 .1 to Market such applicable Product for the subject countries of the Territory shall terminate and immediately revert back to Impax . Teva and Impax shall within thirty (30) days of Teva's decision to Market only the Competing Product make a good faith determination of the financial consideration payable to Teva for such reversion giving due regard to the financial contributions made by Teva hereunder (including, without limitation, the Loan hereunder and forgiveness of portions thereof) . If the Parties are unable to agree upon such consideration and terms of payment within such thirty (30) days the dispute shall be resolved by arbitration pursuant to Section 32 . 2 .9 In the event Teva or its Affiliate decides to Market in the U.S . only the Competing Product of an applicable Tier 1 Product pursuant to Section 2 .7, then, for purposes of determining whether or not the relevant milestone events for such Tier 1 Product have been met (assuming such milestone events have not already been met on or before the date of the Transaction Event), the respective Loan amount for such milestones will be forgiven if Impax has achieved final Approval (instead of meeting the Launch Date for such milestone) in the U .S . for the subject Tier 1 Product no later than the dates set forth in Annex C or Annex D, as applicable, for the given Launch Date .
2 .10 In the event Teva or its Affiliate decides to Market both the Competing Product and the applicable Product pursuant to Section 2 .7, Impax shall not be obligated to fill any purchase order for such Product for the subject countries of the Territory in excess of one hundred and thirty percent (1301) of the amount last forecasted for the Calendar Quarter immediately preceding the date Teva or its Affiliates commences Marketing the Competing Product in such countries .
2 .11 Except as may otherwise be provided for under the provisions of this Agreement, Teva shall use its commercially reasonable best efforts to Market the Products in and for the Territory in order to maximize Profits .
2 .12 Impax and its Affiliates shall not, directly or indirectly, during the Term disclose to any third party any data , know-how or information used or useful to develop, register or manufacture the Products , if such third party may or has the ability to use such data, know-how or information to directly or indirectly Market a Competing Product in or for the Territory .
2 .13 Impax shall provide to Teva within thirty ( 30) days of the Effective Date and , thereafter , as soon as available, all technical information , data and know -how in Impax ' s possession or under its control with respect to the Products useful or necessary for Teva or its nominee to set up a facility for the commercial manufacture of the Products ( the "Technical Package ") in accordance with and subject to the provisions of this Agreement . Teva shall maintain the Technical Package subject to the confidentiality restrictions set forth in Section 20 .
10 2 .14 Teva and Impax, through the Working Committee referenced in Section 6, below, shall in good faith negotiate and agree upon the Tier 3 Products within ninety (90) days of the Effective Date or such longer period of time as may be necessary and as mutually agreed upon by the Parties (the "Tier 3 Period") . During the Tier 3 Period or until three (3) Tier 3 Products have been agreed upon whichever shall first occur, neither Impax nor any of its Affiliates shall directly or indirectly grant to any third party the right to Market any product in the Territory without first disclosing that product to Teva and if Teva so desires, then the Parties shall designate that product as a Tier 3 Product subject to the terms of this Agreement .
2 .15 . Notwithstanding anything contained herein to the contrary, in the event that Impax or any of its Affiliates shall directly or indirectly develop, register, manufacture and/or Market any OTC Products in the Territory the Parties shall in each such case equally share any revenues, royalties or other consideration received, directly or indirectly, by Impax or any of its Affiliates on account of such activity in excess of the first Five Hundred Thousand Dollars ($500,000) received, directly or indirectly, by Impax and its Affiliates for all OTC Products in the aggregate less, to the extent Impax shall manufacture the subject OTC Product(s), documented consideration paid to Impax to cover direct manufacturing costs of such OTC Products .
2 .16 If any product containing the same active ingredients in the same dosage form and strength as any of the Products is approved by the FDA for sale by any third party to the non-prescription drug marketplace prior to Impax achieving the Milestone Amount corresponding to the Launch Date Milestone Event set forth in Annex C or Annex D, as applicable, for the corresponding Product or within six (6) months after Impax achieves such milestone, then Teva shall have a credit in an amount equal to fifty percent (50%) of all milestone amounts corresponding to the subject Product to apply against the payment of its share of any Regulatory Expenses and Intellectual Rights Legal Expenses for any of the Products hereunder .
2 .17 If any product containing the same active ingredients in the same dosage form and strength as any of the Products is approved by the FDA for sale by any third party to the non-prescription drug marketplace after six (6) months and prior to twelve (12) months following the achievement by Impax of the Milestone Amount corresponding to the Launch Date Milestone Event set forth in Annex C or Annex D, as applicable, for the corresponding Product, then Teva shall have a credit in an amount equal to twenty five percent (25%) of all milestone amounts corresponding to the subject Product to apply against the payment of its share of any Regulatory Expenses and Intellectual Rights Legal Expenses for any of the Products hereunder .
11 OPTIONAL TERRITORY
3 .1 Teva shall have the option on a Product-by-Product basis to add any or all of the Optional Territory to this Agreement by delivering a notice in writing to Impax within twelve (12) months following the Effective Date . During such twelve (12) month period neither Impax nor any of its Affiliates shall directly or indirectly negotiate with or grant any rights to any of the Products to any third parties in or for the Optional Territory . In the event that Teva exercises such option, Impax shall have six (6) months following Teva's written notification of exercise to choose on a country-by-country basis with respect to the countries selected by Teva to either (a) manufacture and supply Teva's and its Affiliates' requirements and grant Teva and its Affiliates the exclusive right to Market the Product(s) designated by Teva in the subject countries, or (b) grant Teva a non-exclusive right to manufacture, register and Market the Product(s) designated by Teva in the subject countries . In the event Impax chooses option (a), above, the Parties shall share equally all future Regulatory Expenses and Intellectual Rights Legal Expenses, attributable to such Product(s) in such countries in the Territory, and Impax shall receive the Impax Margin for the applicable Product(s) . In the event Impax chooses option (b), above, Teva and/or its nominee shall have the right at its option to carry out in its discretion and at its cost and expense all future activities to obtain Approvals attributable to such Products in such countries of the Territory and manufacture such Product(s) for such countries in the Territory . In such case, the applicable Approvals shall be in Teva's name and Teva shall be the sole owner thereof, and Impax shall receive an amount equal to + percent (+%) of Net Sales of the applicable Product(s) in the subject countries (the "Optional Territory Fee") . Impax shall be deemed to have chosen option (b), above, if Teva fails to receive written notification from Impax within the applicable six (6) month period .
3 .2 In the event option 3 .1 (a) is exercised by Impax, the terms and conditions of this Agreement respecting the U .S . shall apply to such Products for the subject countries with the following modifications : (in addition and subject to the above provisions in Section 3 .1 (a)) .
3 .2 .1 Teva shall prepare each Approval for each of the selected Products and use its commercially reasonable beat efforts to file such Approval and to obtain Approval of each of the Products in the subject countries from the Regulatory Authorities as promptly as possible .
3 .2 .2 Teva shall use its commercially reasonable beat efforts to conduct all tests and studies reasonably required to enable Teva to apply for, obtain and maintain Approval for each of the Products in the subject countries .
+ Confidential portions omitted and filed separately with the Commission .
12 3 .2 .3 Impax shall grant Teva reasonable and unrestricted access , without any charges, costs or expense, to any and all relevant documentation, data, information, tests , studies or know-how related to the Products, including without limitation, any Regulatory Documentation, in its possession or under its control, and provide free of charge any and all assistance that Teva may reasonable request in order for Teva to perform its obligations under this Agreement .
3 .2 .4 Teva shall be primarily responsible for all communications with the Regulatory Authorities in the subject countries relating to the Approval of the Products in the subject countries ; provided, however, Teva and Impax shall collaborate in determining the appropriate strategy for obtaining and maintaining Approval of the Products in the subject countries and Teva shall promptly provide to Impax copies of all filings, documents and correspondence directed to such Regulatory Authorities and related to the Products in draft form for comment by Impax and, provided further, that Teva shall in good faith give due regard to reasonable comments , suggestions and input from Impax . Teva shall promptly provide to Impax copies of all documents and correspondence received by Teva from the Regulatory Authorities that are related to obtaining and maintaining Approval of the Products, and Teva shall allow Impax to attend in all meetings with same .
3 .2 .5 The Approvals shall be filed in Impax's name and Impax shall be the sole owner of such Approvals and Regulatory Documentation in connection therewith to the extent permitted by Applicable Law and subject to the grant hereunder to Teva . If not permitted the Approvals shall be filed in Teva's or its nominee's name .
3 .2 .6 Teva shall assume direction and control of any Intellectual Rights Suit for the Tier 1 Products in the manner provided for the Tier 2 Products and Tier 3 Products as set forth in Section 15 .5 . Settlement of payments with respect to such expenses shall be effected within thirty (30) days following each Calendar Quarter and payment made to the Party entitled .
3 .2 .7 Teva shall have the right to appoint a third party on a country-by-country and/or Product-by-Product basis to register and/or Market the Products in th e Optional Territory . Teva shall provide written notice to Impax of any such appointment .
13 3 .2 .8 The Profit for the applicable Products in the subject countries shall be reduced by Teva's and/or its nominee's direct Marketing expenses .
3 .2 .9 Subject to Section 3 .2 .6, the provisions of Section 15 .5 and 15 .6 hereof shall apply to all Teva selected Products in the subject countries .
3 .2 .10 With respect to any Transaction Events that have occurred prior to such exercise by Impax, Teva shall have the right to issue a Transaction Event Notice within sixty (60) days of Impax's exercise of option (a) .
3 .3 In the event option 3 .1 (b) is exercised by Impax, (a) none of the provisions of this Agreement, except Sections 1, 2 .15, 3 .1, 3 .3, 4 .1, 9, 11 .4, 11 .6, 11 .8, 12, 13, 14 and 20 - 33 shall apply to Teva and/or Impax or their respective Affiliates for the subject countries ; and (b) Impax shall grant Teva reasonable and unrestricted access without charge to any and all relevant documentation, data, information, tests, studies, or know how related to such Products, including without limitation, the Regulatory Documentation, in its possession or under its control, and provide free of charge any and all assistance that Teva may reasonably request in order for Teva to prepare, file, obtain and maintain the Approvals for the subject countries, and to manufacture the Products for the subject countries .
OPTIONAL PRODUC T
4 .1 Teva shall have the option to add the products listed in Annex G (the "Optional Products") to this Agreement as Tier 1 Products upon issuance of written notice to Impax at any time from the Effective Date until February 1, 2002 . In the event of such election, the terms and conditions of this Agreement respecting Tier 1 Products shall apply in the same manner to the Optional Products with the following modifications :
(a) Impax shall provide to Teva the Technical Package with respect to the optional Products within thirty (30) days following receipt of Teva's written notice pursuant to this Section 4 .1 .
(b) Teva shall have six (6) months following the written notification to Impax pursuant to this Section 4 .1 to add the Optional Products to any or all of the Optional Territory in accordance with the terms and conditions set forth in Sections 3 .1 - 3 .3 .
14 4 .2 In the event Teva does not exercise the option under Section 4 .1 to add the Optional Products to this Agreement, it shall have the right to extend the option period, upon written notice of extension given to Impax prior to February 1, 2002, until ten (10) business days following the last tentative Approval by the FDA for all Optional Products . If Teva extends the option period and subsequently does not exercise this option with respect to the Optional Products in the U .S ., and thereafter during the Term, Markets in the U .S . a product containing the same active ingredients in the same dosage form and strength as any of the Optional Products, Teva shall pay to Impax consideration for such extension to be agreed upon by the Parties in good faith .
4 .3 In the event that Teva does not add the Optional Products to this Agreement pursuant to Section 4 .1 or 4 .2, then, the milestones in Annex C shall be amended as provided in Annex D, and Impax shall repay to Teva on January 15, 2004 pursuant to the provisions of Section 10 .1 Five Million U .S . Dollars (U .S . $5,000,000) in addition to any other amounts owed to Teva if Impax fails to meet any of the milestones set forth in Annex D .
REGULATORY APPROVAL
5 .1 Impax shall prepare each ANDA for each of the Products and use its commercially reasonable best efforts to file such ANDAs and to obtain Approval of each of the Products in the U .S . from the FDA as promptly as possible .
5 .2 Impax shall use its commercially reasonable best efforts to conduct all tests and studies reasonably required to enable Impax to apply for, obtain and maintain Approval for each of the Products in the U .S .
5 .3 Impax shall be primarily responsible for all communications with the FDA relating to the Approval of the Products in the U .S . ; provided, however, Teva and Impax shall collaborate in determining the appropriate strategy for obtaining an d maintaining Approval of the Products in the U .S . and Impax shall promptly provide to Teva copies of all Regulatory Documentation and all other filings, documents and correspondence directed to the FDA and related to the Products in draft form for comment by Teva and, provided further, that Impax shall in good faith give due regard to the reasonable comments, suggestions and input from Teva . Impax shall promptly provide to Teva copies of all Regulatory Documentation and all other documents and correspondence received by Impax from the FDA that are related to obtaining and maintaining Approval of the Products, and Impax shall allow Teva to attend all meetings with the FDA .
5 .4 The ANDAs shall be filed in Impax's name and Impax shall be the sole owner of such Approvals and Regulatory Documentation in connection therewith, subject to Teva's rights hereunder .
15 5 .5 Impax shall grant Teva reasonable and unrestricted access, without any charges, costs or expense , to any and all relevant documentation , data , information, tests , studies or know-how related to the Products , including without limitation, the ANDA and/or other Regulatory Documentation, in its possession or under its control , and provide free of charge any and all assistance that Teva may reasonably request in order for Teva to perform its obligations under this Agreement .
5 .6 Teva or its Affiliates shall be responsible for filing each of the Products , and thereafter processing such filings with appropriate federal , state or private formularies in the Territory .
5 .7 Each Party shall perform , or cause to be performed, its activities in furtherance of the provisions of this Section 5 in a good scientific manner , in compliance in all material respects with all requirements of Applicable Law, and in an efficient and expeditious manner .
5 .8 Impax and Teva shall share equally all reasonable out-of -pocket Regulatory Expenses incurred by either Party and/or their respective Affiliates , after the Effective Date for the Territory ; provided, however, Impax shall bear all Regulatory Expenses for Tier 1 Products for the U .S . and fifty-five percent ( 55%) of Regulatory Expenses for Tier 2 Products for the U .S . Settlement of payments with respect to Regulatory Expenses shall be effected within thirty (30) days following the end of each month and payment made to the Party entitled .
5 .9 Teva shall pay to Impax Three Hundred Thousand U .S . Dollars (U .S . $300 , 000) within thirty ( 30) days following the Effective Date for regulatory expenses incurred by Impax prior to the Effective Date for development of the Tier 2 Products .
WORKING COMMITTE E
Within thirty (30) days of the Effective Date, each of Teva and Impax shall appoint three (3) appropriately qualified representatives to a working committee to coordinate the selection and identification of the Tier 3 Products, to facilitate the exchange of information relating to the development of the Products, to monitor the costs and activities related to the development and manufacture of the Products, and to oversee the renovation and construction of the new Impax manufacturing facilities in Hayward, California (the "Working Committee") . In each instance such activities shall not extend beyond the scope of this Agreement relating to the Products in the Territory .
SUPPLY
7 .1 Subject to Teva's compliance with Section 8, Impax shall us e its commercially reasonable best efforts to supply on a timely basis all of Teva's and its Affiliates' requirements for the Products for the Territory .
16 7 .2 Without limiting the provisions of Section 8 .2, Impax shall use its commercially reasonable best efforts to ensure that it has an adequate supply of API and other ingredients required for the manufacture of the Products in order to meet at least one hundred and twenty percent (1201) of Teva's and its Affiliates' forecasted requirements for the Products for the Territory . In furtherance of the foregoing obligation, Impax hereby acknowledges that Teva (including its Affiliates) is and shall remain throughout the Supply Term a preferred customer and as such shall have priority over all other parties (including Impax and its Affiliates) with regard to the supply of API and Products .
7 .3 Without limiting any of its obligations under this Agreement, in the event that for any reason Impax may have an insufficient supply of API and other required ingredients to meet its obligations under Section 7 .1, Impax shall use its commercially reasonable best efforts to obtain a third party source for such API and other required ingredients in consultation with Teva through the Working Committee .
7 .4 Impax shall supply the Products to Teva and its Affiliates in finished final dosage form and fully packaged .
7 .5 Subject to the provisions of Section 8, Teva, its Affiliates and/or a third party reasonably acceptable to both Parties shall have the right, at Teva's sole option, to manufacture any of the Products in the event of the inability of Impax to meet Teva 's and/or its Affiliates' requirements for such Products for any reason including, but not limited to, force majeure, provided, however, that Impax shall have failed to cure such inability within sixty (60) days of written notice from Teva . In the event Teva and/or its Affiliate and/or such third party, as applicable, shall elect to manufacture any of the Products : ( a) Impax agrees that upon receipt of the above- referenced notice and expiration of the sixty (60) day cure period, to the extent not otherwise contained in the Technical Package , it shall promptly furnish free of charge all technical information, data and know-how, including without limitation, any Regulatory Documentation, and provide such cooperation (including the reasonable availability of Impax personnel) as reasonably required to enable Teva, its Affiliate and/or such third party, as applicable, to effectively manufacture and supply Teva's and its Affiliates' requirements of the Products for the applicable countries of the Territory ; (b) the Impax Margin or Revised Impax Margin (as the case may be) for such Products shall be reduced by fifty percent (50%) (in half) ; and (c) Teva shall receive a credit against any payments thereafter due or outstanding to Impax under this Agreement for any and all reasonable out-of-pocket costs incurred by Teva and/or its Affiliates, and/or paid by Teva to Impax, in connection with or resulting from the foregoing manufacturing activities and/or transfer (including, without limitation, for any required tests or studies and for any expenses incurred by Teva and/or its Affiliates pursuant to Section 7 .10 in connection with the applicable Products) .
17 7 .6 Impax shall use its commercially reasonable best efforts in accordance with its standard manufacturing practices to reduce its Manufacturing Costs of each of the Products throughout the respective Supply Term in order to maximize Profit . In the event that any of Impax's Manufacturing Costs excluding Cost of Materials for any of the Products equal or exceed seventy-five percent (75%) of the amounts set forth in Annex B, the Parties shall negotiate on a Product-by-Product basis in good faith a way to reduce such Manufacturing Costs, including, without limitation, by transferring the manufacture of the Products to Teva, its Affiliates and/or a third party, and the sharing of costs associated with such transfer .
7 .7 If Teva believes that all or any part of any lot of Product it obtains from Impax has not been manufactured in accordance with the requirements of this Agreement, including, without limitation, with the Specifications, Impax's representations and warranties hereunder or any other defect in the Product, or that there is a shortage of Product, then Teva will promptly notify Impax in writing setting forth in reasonable detail the alleged nonconformity, defect or shortage . Subject to the provisions of Section 7 .9, Teva agrees to notify Impax of any nonconformity, defect or shortage of any shipment of Product that Teva discovers by its standard receiving procedures within thirty (30) days after Teva's receipt of the Product from Impax . Upon receipt of such notification of nonconformance, defect or shortage, Impax will have fifteen (15) days to inspect the affected Product and make a reasonable assessment of the alleged nonconformance, defect or shortage . If the Parties agree that there is a nonconformance, defect or shortage, Impax, at its sole cost and expense, shall promptly replace any nonconforming or defective Product or make up the shortage, to be shipped at Impax's cost . Nonconforming or defective Product will be returned to Impax at its expense .
7 .8 Any dispute between the Parties concerning the rejection of all or any part of a shipment of Product (including, without limitation, any Latent Defects) which the parties are unable to resolve within a sixty (60) day period will be submitted to an agreed upon qualified independent laboratory for testing using test methods set forth in the Approval for the Product and/or any other mutually agreed upon test methods . Impax will use its best efforts to replace promptly any shipment or portion of a shipment under dispute until the dispute is resolved . The replacement Product and the cost of the laboratory will be at Impax's cost if the laboratory finds that the lot in question is non-conforming to Specifications or otherwise defective . The costs of the independent laboratory will be paid by Teva if the lot in question is found by the laboratory to be conforming and compliant . The findings of the laboratory shall be final and binding upon the Parties, and shall not be subject to appeal or review by any third party .
18 7 .9 The Parties acknowledge that it is possible for Product to have manufacturing defects that are not discoverable upon reasonable physical inspection or testing (referred to as "Latent Defect" or "Latent Defects") . Latent Defects may include, by way of illustration and not definition or limitation, defects not present in preshipment samples, loss of stability, separation, discoloration or other manufacturing defects . Impax is responsible for all Latent Defects that are attributable to the production of the Product by or on behalf of Impax or failure of such Product to otherwise comply with the provisions of this Agreement (including without limitation, Impax's representations and warranties hereunder) . As soon as Impax discovers or becomes aware of a Latent Defect in any Product it produced and shipped, it will immediately notify Teva of the lot(s) involved and Impax will replace that Product in the manner described in Sections 7 .7 and 7 .8, above .
7 .10 In order to ensure continuous supply of the Products and to maximize sales and profits, commencing six (6) months following the Effective Date, at Teva's option, on a Product-by-Product and country-by-country basis, the Parties shall use their commercially reasonable best efforts to supplement for each of the Products the ANDAs submitted with the FDA as of the Effective Date, as well as any Approvals (including ANDAs) to be submitted with the FDA or any non-U .S . Regulatory Authority thereafter in order to permit Teva and/or its Affiliate or a third party reasonably acceptable to both Parties, to manufacture and/or package the Products for the Territory. Subject to Impax providing an estimate of anticipated expenses , and except as otherwise provided in Section 7 .5 and 7 .6, above Teva shall pay all expenses associated with the foregoing, such expenses consisting of pre-approved reasonable out-of-pocket expenses of Impax, supply of API at cost to Impax, and a per diem charge of One Thousand U .S . Dollars (U .S . $1,000) for each employee of Impax, assisting at Teva's request, with supplementing the ANDAs .
FORECASTS AND ORDER S
8 .1 Within one hundred and eighty (180) days prior to the anticipated Launch Date for each of the Products for each country in the Territory, Teva shall provide to Impax a nonbinding written forecast of estimated quantities of Product that Teva and its Affiliates anticipate ordering from Impax during the twelve (12) month period commencing with the Launch Date for such country . Teva shall update such forecast on a Calendar Quarter rolling basis, for the twelve (12) month period commencing ninety (90) days from each such update . Teva shall communicate any changes to its forecast as soon as the changes are known by Teva . Teva shall use its commercially reasonable best efforts to ensure the accuracy of its forecasts . The first quarter of each such updated forecast shall be deemed a firm purchase order .
19 8 .2 Each firm purchase order shall set forth the quantities of Products ordered, dates for delivery of the Products, the country for which the Products are designated, the place of delivery and reasonable instructions for shipping . Impax shall supply to Teva and its Affiliates' the quantity of Products on the delivery dates and at the delivery destination stated therein] provided, however, Impax shall not be obligated but shall be required to use its commercially reasonable best efforts to fill any purchase order to the extent of quantities exceeding one hundred and twenty percent (120%) of the amount last forecasted for the applicable calendar Quarter except as otherwise provided in Section 2 .10 .
8 .3 Any terms and conditions of an invoice, acknowledgement or similar document provided by Impax for Products, or, any terms and conditions of purchase orders provided by Teva for Products, which are inconsistent with or in addition to the terms of this Agreement shall be null and void .
TRADEMARK(S)
Teva and its Affiliates shall have the right, in their respective sole discretion and at their expense, to select and to register any of their trademarks, as they wish to employ in connection with the Marketing of any of the Products in any of the countries in the Territory and to Market Product using such trademarks . Teva or its Affiliate shall own all right, title and interest in and to all such trademarks, and Impax hereby agrees it shall have no right, title or interest in same .
10 CONSIDERATION AND LOAN
10 .1 Teva shall, within five (5) business days of the Effective Date, loan to Impax the sum of Twenty Two Million U .S . Dollars (U .S . $22,000,000) (the "Loan") towards the development of the Products and the establishment of the production facilities and infrastructure necessary to meet Teva's and/or its Affiliates' Product requirements hereunder . Impax hereby undertakes and agrees that it shall expend not less than Twenty Two Million U .S . Dollars (U .S . $22,000,000) towards the construction of the production facilities located in Hayward California, including the facility located on San Antonio Street (the "New Facility") and the development of the Products . The Loan shall be evidenced by Impax's promissory note in the form annexed hereto at Annex H (the "Note") . Without limiting any other rights and remedies available to Teva under this Agreement, the Note, at law or in equity, from and after the occurrence of an Event of Default as defined in Section 10 .7 Teva shall have the right to declare the Loan immediately due and payable by delivering written notice to such effect to Impax . Impax shall repay the then outstanding balance of the Loan to Teva, in cash, within thirty (30) days of its receipt of such notice . In the event Impax achieves the milestones set forth in Annex C or Annex D, as applicable, on a timely basis, then the outstanding balance of the Loan shall be reduced by the corresponding amounts designated for each such achieved milestone (each such amount is referred to herein as the "Milestone Amount") . If, on the other hand, Impax fails to meet any of the milestones set forth in Annex C or Annex D, as applicable, by the respective dates set forth for each such milestone (including as a result of an early termination of this Agreement), then Teva shall have the option, on a Product-by-Product basis with respect to the applicable milestone, to either :
20 (a) require Impax to repay to Teva that portion of the Loan equal to the applicable Milestone Amount ; or
(b) require Impax to repay to Teva that portion of the Loan equal to fifty percent (50%) of the applicable Milestone Amount .
Repayment by Impax of the amounts under subparagraphs (a) and (b), above, and Section 4 .3, if applicable, shall be made to Teva not later than January 15, 2004, and shall be paid, at the option of Impax, in cash or (subject to Section 10 .5) in Impax Common Stock at the Designated Share Price .
10 .2 In the event Teva chooses option 10 .1(a), above, then the grant to Teva with respect to the Marketing of the subject Product for the U .S . shall be deemed nonexclusive an d effective as of such exercise, and the provisions of Sections 2 .3 - 2 .11 and such other provisions of this Agreement respecting Competing Products of the subject Products shall no longer apply to Teva and/or Impax or their respective Affiliates with respect to such Products for the U .S . ; provided, however, in any event, Impax shall remain obligated to supply Teva's and/or its Affiliates' requirements of the applicable Product on a most-favored basis .
10 .3 Subject to the provisions of the Stock Purchase Agreement, being executed by the Parties concurrently herewith, and Section 10 .5, Teva shall, on each of September 15, 2001, December 15, 2001, March 15, 2002 and June 15, 2002, purchase from Impax such number of shares of Impax Common Stock at the Designated Share Price as equals Three Million Seven Hundred and Fifty Thousand U .S . Dollars (U .S . $3,750,000) .
10 .4 Upon the first Launch Date of any Tier 2 or Tier 3 Product in the U .S ., Teva shall sell back to Impax for an aggregate purchase price of One U .S . Dollar (U .S . $1 .00) such number of shares of Impax Common Stock that equals sixteen and two thirds percent (16 2/3%) of the aggregate shares of Impax Common Stock purchased by Teva from Impax pursuant to Section 10 .3 .
21 10 .5 Notwithstanding anything contained in Sections 10 .1 or 10 .3 to the contrary, in no event shall Teva be obligated to purchase (or accept as repayment of the Loan pursuant to Section 10 .1) such number of shares of Impax Common Stock that at the time of transfer to Teva or its Affiliate would, in the aggregate, exceed nineteen point nine percent (19 .9%) of the then issued and outstanding shares of Impax Common Stock . If any such transfer would result in Teva and its Affiliates owning more than nineteen point nine percent (19 .9%) of the outstanding Impax Common Stock then, at Teva' s request, such excess amounts shall be paid by Impax to Teva in cash .
10 .6 Throughout the period that the Loan, or any portion thereof, is outstanding, Impax hereby covenants and agrees it will not, nor will it permit any of its Affiliates to :
(a) Liquidate, windup or dissolve .
(b) Assume , endorse , be or become liable for or guarantee any indebtedness of any Person excluding however, the endorsement of negotiable instruments for deposit or collection in the ordinary course of business .
(c) Declare or pay any dividends on its capital stock (other than dividends payable solely in shares of Impax Common Stock), or purchase, redeem, retire or otherwise acquire any of its capital stock at any time outstanding except as provided in Section 10 .4, except any Affiliate wholly owned by Impax may declare and pay dividends to Impax .
(d) Materially alter the nature of its business .
(e) Directly or indirectly purchase, acquire or lease any property from, or sell, transfer or lease any property to, or enter into any other transaction, with any Affiliate of Impax or any party related to the management of Impax except the assignment of Impax's right to purchase the New Facility to Affiliates (subject to Teva's rights pursuant to Section 10 .11) at prices and on terms not less favorable to it than those which would have been obtained in an arm's-length transaction with a non-affiliated third party .
22 10 .7 Subject to any applicable grace, notice and cure period provided for herein the occurrence and the continuance of any of the following events is referred to herein as an "Event of Default" :
(a) If Impax shall fail to pay, when due, any portion of the Loan or interest thereon ; or
(b) Any representation or warranty made by Impax herein or in the Stock Purchase Agreement or Registration Rights Agreement shall prove to have been false in any material respect on or as of the date made ; or
(c) This Agreement or the Stock Purchase Agreement or the Registration Rights Agreement is terminated by Teva as a result of a breach, default, misrepresentation or other act or omission by Impax giving rise to the right of termination by Teva hereunder or thereunder, respectively .
10 .8 The purchase of Impax Common Stock by Teva or the repayment of all or a portion of the Loan by Impax in shares of Impax Common Stock pursuant to this Section 10 shall be conditioned upon the execution by the Parties of a Stock Purchase Agreement and Registration Rights Agreement in the form attached as Annex E .
10 .9 The Loan shall bear interest at the annual rate of eight percent (8t) accruing from the date of grant (the "Interest Obligation") . The Interest Obligation shall be due and payable on January 15, 2004 or such earlier date that the outstanding balance of the Loan is due (without right of set-off, deduction or other withholding), to the extent there remains any outstanding balance on the Loan pursuant to this Section 10, and only with respect to such portion of the Loan that had not been forgiven as of such date . Notwithstanding the foregoing, Teva agrees to forgive the Interest Obligation in the event and upon the date that Impax has obtained tentative or final Approvals for any three of the Products .
10 .10 By no later than December 31, 2001, as additional security for the repayment of the Loan, Impax shall grant to Teva a mortgage on the New Facility subordinate to a senior lien of up to Three Million U .S . Dollars ($3,000,000) in form and substance reasonably satisfactory to Teva, or such other collateral as may be reasonably satisfactory to Teva .
11 PRICES, TERMS, CONDITIONS, TITLE AND RIS K
11 .1 Impax shall deliver each order of Products to Teva and its Affiliates CIP (as per Incoterms 2000) to a location to be designated by Teva or its Affiliates .
11 .2 Impax will invoice Teva when Product is shipped to Teva at an amount equal to the applicable Manufacturing Cost . Teva shall subject to Sections 7 .7, 7 .8 and 7 .9 pay for such Product thirty (30) days from the date of receipt of the applicable shipment .
23 11 .3 within thirty (30) days following each Calendar Quarter during the Supply Term, Teva shall compute and report to Impax in a mutually acceptable format the Net Sales and Profit for each Product in each country in the Territory during that Calendar Quarter and Teva shall pay to Impax the Impax Margin, Revised Impax Margin, or Optional Territory Fee, as the case may be, for each Product for that Calendar Quarter as reflected in the report . In addition, within seven (7) business days after the end of each month, Teva shall provide to Impax information (which could be good faith estimates if final data is not available) as to the amount of Net Sales, Profit, and number of units sold of each Product during that month .
11 .4 Teva shall have the sole and exclusive right to determine all terms and conditions of sale of the Products to its customers .
11 .5 Subject to Teva having received full launch quantities of the applicable Product based upon Teva's forecast, Teva shal l launch each Product on a country-by-country basis within fifteen (15) days of final Approval of each Product ; provided, however, that if either Party has a written opinion of patent counsel reasonably acceptable to the other Party that launch would result in a significant risk of damages for infringement of third party intellectual property rights, then the Parties shall agree upon a later launch for such Product in the subject country in the Territory or, alternatively, Teva may compel launch of the Product in such country in the Territory . If Teva so compels a launch of a Product in any country in the Territory, then it shall indemnify, defend and hold harmless Impax for any damages and expenses of an Intellectual Rights Suit to the extent directly related to the patents set forth in the above-referenced Impax patent opinion and to the extent caused by the launch of the Product and not attributable in whole or in part to any untrue representation or warranty of Impax or breach of a covenant made by Impax hereunder . Further, in such case, (a) during the period commencing with the applicable Launch Date and ending on the earlier of six (6) months or the date the Parties receive a final non-appealable court decision with respect to the applicable Intellectual Rights Suit, if any, the Impax margin shall be deemed to be + percent (+%) and Revised Impax Margin, if applicable, shall be reduced by thirty percent (30%) and (b) any expenses and/or damages paid by Teva in connection with any Intellectual Rights Suit related to the applicable Product, or the above indemnity, shall be set-off, credited or reimbursed against any amounts paid or payable to Impax hereunder related to such Product (including, without limitation, Impax Margin, Revised Impax Margin, and Optional Territory Fee) .
+ Confidential portions omitted and filed separately with the Commission .
24 11 .6 Teva and its Affiliates shall permit an independent certified public accounting firm selected by Impax , and reasonably acceptable to Teva , to have access, during normal business hours and upon reasonable prior notice (not more often than once in any calendar year ), to those books and records maintained by Teva necessary for Impax to verify the accuracy of Teva ' s calculation of any Net Sales, Profit , Regulatory Expenses , Impax Margin , Revised Impax Margin and/or Optional Territory Fee hereunder for any period ending not more than five ( 5) years prior to the date of such request . All such information shall be retained on a confidential basis by the accounting firm , and such accounting firm ' s use of such information shall be limited to the aforementioned verification .
11 .7 Impax and its Affiliates shall permit an independent certified public accounting firm selected by Teva, and reasonably acceptable to Impax, to have access , during normal business hours and upon reasonable prior notice (not more often than once in any calendar year), to those books and records maintained by Impax necessary for Teva to verify the accuracy of Impax's calculation of any Manufacturing Costs, Regulatory Expenses and/or Intellectual Rights Legal Expenses hereunder for any period ending not more than five (5) years prior to the date of such request . All such information shall be retained on a confidential basis by the accounting firm, and such accounting firm' s use of such information shall be limited to the aforementioned verification .
11 .8 Teva and Impax shall calculate and record Net Sales, Manufacturing Costs , Profit, Impax Margin , Revised Impax Margin, Optional Territory Fee, Regulatory Expenses and/or Intellectual Rights Legal Expenses in accordance with U .S . GAAP, and shall maintain all books and records related thereto in accordance with standard cost accounting policies and practices , in accordance with U . S . GAAP for the Term plus an additional three (3) years thereafter .
12 ADDITIONAL REPRESENTATIONS, WARRANTIES AND COVENANTS OF IMPA X
12 .1 Impax hereby represents and/or warrants and/or undertakes to Teva that :
12 .1 .1 it has the corporate authority to enter into this Agreement and to perform its obligations hereunder ;
25 12 .1 .2 neither the execution and delivery of this Agreement by Impax nor its performance hereunder conflicts with or results in any violation or breach of, or constitute (with or without due notice or lapse of time or both) a default under any of the terms or conditions of any note, bond, mortgage, indenture, license, agreement or other instrument or obligation to which it or any of its Affiliates is a party or by which it or any of its Affiliates or any of their respective properties or assets may be bound, or to its best knowledge, violate any statute, law, rule, regulation, writ, injunction, judgment, order or decree of any court, administrative agency or governmental authority binding on it or any of its Affiliates or any of their respective properties or assets , excluding any such breaches or defaults that, individually and in the aggregate, would not have a material adverse effect on its business or financial condition ;
12 .1 .3 this Agreement is a legal, valid and binding agreement of Impax enforceable in accordance with its terms ;
12 .1 .4 neither it nor any of its Affiliates have or will, directly or indirectly, enter into any contract or any other transaction with any third party o r Affiliate that conflicts or derogates from its undertakings hereunder ;
12 .1 .5 all Products supplied to Teva or its Affiliates shall : (a) meet the applicable Specifications at the time of shipment ; (b) meet regulatory requirements of any relevant Regulatory Authority in the Territory ; (c) be manufactured, packaged, tested, stored and shipped in accordance with applicable cGMPs, the Approvals, and Applicable Law; (d) not be adulterated or misbranded under the United States Food, Drug and Cosmetic Act including any other relevant laws and regulations of the Territory as amended from time to time ; and (e) be produced, packaged, tested and stored in facilities that have been approved by the applicable Regulatory Authority, to the extent required by Applicable Law ;
12 .1 .6 the API does not violate, infringe, or otherwise conflict or interfere with the intellectual property of any third party in the U .S . and, to Impax's best knowledge, the API does not violate, infringe, or otherwise conflict or interfere with the intellectual property of any third party in any other country of the Territory;
26 12 .1 .7 Impax has furnished Teva with access to a complete copy of the U .S . Regulatory Documentation for the Products, including all material amendments and supplements thereto ; Impax is and was, at all times prior to the Effective Date, the lawful holder of all rights under the Regulatory Documentation and to the best of Impax's knowledge, Impax has complied in all material respects with all Applicable Laws and regulations in connection with the preparation and submission to the FDA of the Regulatory Documentation ;
12 .1 .8 neither it nor any of its Affiliates have been debarred or is subject to debarment and will not use in any capacity, in connection with the services to be performed under this Agreement, any Person who has been debarred pursuant to Section 306 of the United States Food, Drug and Cosmetic Act or equivalent laws of any country in the Optional Territory selected hereunder ;
12 .1 .9 Impax's manufacturing facilities conform, and shall continue to conform throughout the Term, in all respects to Applicable Law governing such facilities ; and
12 .1 .10 all Products supplied hereunder shall be free and clear of all security interests, liens, or other encumbrances of any kind or character .
13 ADDITIONAL REPRESEtTATIONS , WARRANTIES AND COVENANTS OF TEVA
13 .1 Teva hereby represents and/or warrants and/or undertakes to Impax that :
13 .1 .1 it has the corporate authority to enter into this Agreement and to perform its obligations hereunder ;
13 .1 .2 neither the execution and delivery of thi s Agreement by Teva nor its performance hereunder conflicts with or results in any violation or breach of, or constitute (with or without due notice or lapse of time or both) a default under any of the terms or conditions of any note, bond, mortgage, indenture, license, agreement or other instrument or obligation to which it is a party or by which it or any of its properties or assets may be bound, or to its best knowledge, violate any statute, law, rule, regulation, writ, injunction, judgment, order or decree of any court, administrative agency or governmental authority binding on it or any of its properties or assets, excluding any such breaches or defaults that, individually and in the aggregate, would not have a material adverse effect on its business or financial condition ;
13 .1 .3 this Agreement is a legal, valid and binding agreement of Teva, enforceable in accordance with its terms ,
13 .1 .4 it has not and will not, directly or indirectly, enter into any contract or any other transaction with any third party or Affiliate (excluding those, if any, respecting, the Optional Territory or Optional Products) that conflicts or derogates from its undertakings hereunder ;
27 13 .1 .5 in the event and to the extent that Teva and/or its Affiliates shall manufacture the Products, all suc h Products shall : (a) meet the applicabl e Specifications at the time of shipment ; (b) mee t regulatory requirements of any relevant Regulatory Authority in the Territory ; (c) be manufactured , packaged, tested, stored and shipped in accordanc e with applicable cGMPs, the Approvals, an d Applicable Law; (d) not be adulterated o r misbranded under the United States Food, Drug and Cosmetic Act or relevant laws and regulations o f Canada, as amended from time to time ; and (e) b e produced, packaged, tested and stored in facilitie s that have been approved by the applicabl e Regulatory Authority, to the extent required b y Applicable Law;
13 .1 .6 in the event and to the extent that Teva and/or it s Affiliates shall manufacture the Products, Teva' s and/or its Affiliates' manufacturing facilities fo r such Products shall conform in all respects t o Applicable Law governing such facilities ;
13 .1 .7 neither it nor any of its Affiliates have bee n debarred or is subject to debarment and will no t use in any capacity, in connection with th e services to be performed under this Agreement, an y Person who has been debarred pursuant to Sectio n 306 of the United States Food, Drug and Cosmeti c Act or equivalent laws of any country in th e Optional Territory selected hereunder, or who i s the subject of a conviction described in suc h section ; and
13 .1 .8 all Products that it shall Market hereunder shal l have been Marketed and stored in accordance wit h Applicable Law .
14 INDEMNIFICATIONS AND LIABILIT Y
14 .1 Except as otherwise expressly provided in Section 15, Impax shall indemnify, defend and hold Teva, its Affiliates, and their respective officers, directors, employees, an d representatives harmless from and against any and all losses, liabilities, damages, costs and expenses, including reasonable attorney's fees and disbursements, (collectively, "Damages") in connection with any and all suits, investigations, claims or demands by third parties resulting from or arising out of : (a) any breach or alleged breach by Impax (or its Affiliates) of any representation, warranty, undertaking or covenan t hereunder ; (b) events occurring prior to the Effective Date and relating to the Products ; (c) any negligence or willful misconduct by Impax (or its Affiliates) ; or (d) a defect contained in a Product manufactured by Impax, its Affiliates or any third party on its behalf .
28 14 .2 Except as otherwise expressly provided in Section 15, Teva shall indemnify, defend and hold Impax, its Affiliates, and their respective officers, directors, employees, and representatives harmless from and against any and all Damages in connection with any and all suits, investigations, claims or demands by third parties resulting from or arising out of ; (a) any breach or alleged breach by Teva (or its Affiliates) of any representation, warranty, undertaking or covenant hereunder ; (b) any negligence or willful misconduct by Teva (or its Affiliates) ; (c) any defect contained in a Product manufactured by Teva, it Affiliates or any third party on its behalf ; or (d) any claim of trademark infringement arising from the use by Teva (or its Affiliates) of any of its trademarks in connection with the Products . 14 .3 In the event that in determining the respective obligations of indemnification under Section 14, it is found that the fault of Impax, Teva or their respective Affiliates, contributes to any Damages relating to the Products supplied and/o r distributed or sold hereunder, then each of Impax and Teva shall be responsible for that portion of the Damages to which its fault contributed .
14 .4 As soon as a Party becomes aware of the possibility of a claim involving indemnification under this Section 14, the indemnified Party shall give the indemnifying Party prompt written notice in writing and shall permit the indemnifying Party to have control over the defense of such claim or suit . The indemnified Party agrees to provide all reasonable information and assistance to the indemnifying Party in such defense . No such claims shall be settled other than by the Party defending the same , and then only with the consent of the other Party , which shall not be unreasonably withheld or delayed ; provided , however , that the indemnified Party shall have no obligation to consent to any settlement of any such claim which imposes on the indemnified Party any liability or obligation which cannot be assumed and performed in full by the indemnifying Party .
14 .5 Except in the event of and to the extent of Damages awarded to a third party in connection with the indemnification provisions not forth in Sections 14 .1 and 14 .2, above, or awarded to a third party in connection with an Intellectual Rights Suit, neither Teva nor Impax shall be liable to the other for special, indirect , incidental or consequential damages , whether in contract, warranty , negligence, tort, strict liability or otherwise, arising out of the manufacture, Marketing , distribution , sale or use of the Products .
14 .6 without limiting the respective obligations of the Parties hereunder, each Party shall maintain, throughout the Term sufficient product liability insurance coverage to satisfy its obligations hereunder . Each Party shall cause the other Party to be named in such policies as an additional insured and, upon request, each Party agrees to provide to the other certificates of insurance, evidencing such insurance . Without derogating from the foregoing, Impax shall purchase and maintain throughout the Term insurance provided by an insurance company reasonably satisfactory to Teva, at its own expense to cover product liability in an amount not leas than Twenty Million U .S . Dollars (U .S . $20,000,000) per occurrence and in the aggregate on or before the launch of the first Tier 1 Product (in any strength), one Hundred Million U .S . Dollars (U .S . $100,000,000) per occurrence and in the aggregate on or before the launch of the second Tier 1 Product (in any strength), and One Hundred and Fifty Million U .S . Dollars (U .S . $150,000,000) per occurrence and in the aggregate as of January 1, 2004 . In addition, the deductible for any Impax insurance policies shall not exceed one percent (1t) of the applicable coverage in the aggregate .
29 15 PATENT LITIGATION
15 .1 Promptly following the Effective Date , the Parties shall enter into a joint defense agreement mutually acceptable to both Parties containing customary terms and conditions for the purpose of, among other things, preserving confidentiality and any applicable privilege attaching to information and data exchanged by the Parties under and pursuant to this Agreement .
15 .2 Following execution of such joint defense agreement , Impax, upon receiving any written request from Teva , shall promptly provide Teva with reasonable access to information and data about, and personnel knowledgeable of the Products, their formulation, use and process of manufacture , to enable Teva to : (a) ascertain whether the Marketing of the Products in the Territory would infringe any existing patent or other third party intellectual property rights ; (b) determine its conduct in relation to any proceedings alleging infringement of a patent or other third party intellectual property right ; and/or (c) provide witnesses or documentation from Impax in connection with any proceedings alleging infringement of a patent or other third party intellectual property right .
Tier 1 Products for the U .S .
15 .3 With regard to the Tier 1 Products in the U .S ., Impax shall have the right to assume or continue , as applicable, the direction and control of any Intellectual Rights Suit and the defense of claims arising therefrom , including without limitation, the selection of legal counsel ; provided , however, that once it exercises its right to assume or continue control , Impax shall obtain the prior written consent of Teva prior to ceasing to defend , settling or otherwise disposing of such claim , said consent not to be unreasonably withheld or delayed . Furthermore, Impax shall provide Teva with copies of all pleadings and other litigation documents and shall consult with Teva in connection with litigation strategy . Teva shall fully cooperate with Impax in the defense or prosecution of any such litigation ( regardless of which party is a named party to such litigation ) . Notwithstanding anything to the contrary contained herein , with respect to any Product(s) that are currently the subject of litigation, legal counsel retained by Impax as of the Effective Date shall continue to prosecute or defend such litigation unless the Parties mutually agree to replace such legal counsel .
30 15 .4 With regard to the Tier 1 Products in the U . S ., Impax shall bear one hundred percent ( 100%) of all Intellectual Rights Legal Expenses in connection with the defense and/or arising out of a judgment or settlement of any Intellectual Rights Suit ; provided , however, that with respect to attorney fees and associated disbursements Impax shall bear one hundred percent (100%) of any and all such fees up to a maximum amount of Seven Million U . S . Dollars (U .S . $7,000,000) for all of the Tier 1 Products in the U .S . combined , after which, the Parties shall each bear fifty percent ( 50t) of such attorney fees and associated disbursements . If the foregoing $ 7,000,000 limitation is exceeded then Impax shall invoice Teva on a monthly basis and Teva shall reimburse Impax for Teva ' s share of such attorney fees and associated disbursements within thirty (30) days of receipt of such invoice .
Tier 2 and Tier 3 Products for the Territor y
15 .5 With regard to the Tier 2 and Tier 3 Products in the Territory, Teva shall have the right to assume direction and control of any Intellectual Rights Suit and the defense of claims arising there from, including without limitation, subject to the consent of Impax , not to be unreasonably withheld, the selection of legal counsel ; provided , however, that once it exercises its right to assume control , Teva shall obtain the prior written consent of Impax prior to ceasing to defend, settling or otherwise disposing of such claim, said consent not to be unreasonably withheld or delayed . Furthermore , Teva shall provide Impax with copies of all pleadings and other litigation documents and shall consult with Impax in connection with litigation strategy . Impax shall fully cooperate with Teva in the defense or prosecution of any such patent litigation (regardless of which Party is a named party to that litigation) .
15 .6 Teva and Impax shall share equally all Intellectual Rights Legal Expenses for the Tier 2 Products and Tier 3 Products for the Territory incurred following the Effective Date ; provided, however, with regard to the Tier 2 Products for the U .S ., Impax shall bear fifty-five percent (55%) and Teva shall bear forty-five percent (45%) of all Intellectual Rights Legal Expenses . Teva shall invoice Impax on a monthly basis and Impax shall reimburse Teva for Impax's share of such Intellectual Rights Legal Expenses within thirty (30) days of receipt of such invoice .
15 .7 With regard to any of the Products, the provisions set forth in Sections 15 .4, 15 .5 and 15 .6, above, relating to Intellectual Rights Legal Expenses (for the U .S . and all other countries in the Territory), shall not apply with respect to litigation relating to any breach by Impax of its representations and warranties set forth in Section 12 .1 .6 or 12 .1 .7 of this Agreement . In such instance, and to the extent related thereto, Impax shall be responsible for one hundred percent (100%) of all Intellectual Rights Legal Expenses .
31 15 .8 With regard to any of the Products, each Party shall obtain the prior written consent of the other Party prior to ceasing to defend, settling or otherwise disposing of any intellectual Rights Suit or other intellectual property dispute related to the Products . Each Party further agrees that it will not whether in the context of litigation or otherwise related thereto, without the prior written consent of the other Party, enter into any agreement or arrangement with any third party which in any way compromises, relinquishes, waives, or otherwise affects , in whole or in part, the rights of the other Party under this Agreement in respect of the Products .
16 REGULATORY LITIGATION
If Teva and Impax mutually agree in writing to commence legal proceedings against any Regulatory Authority, including without limitation, the FDA, in connection with the Product(s) in order to accelerate the Approval and/or Launch Date of the Product(s), the Parties shall each bear fifty percent (50%) of all out of pocket costs and expenses incurred by either Party in connection with that litigation including, without limitation, legal fees and disbursements . Impax and Teva shall cooperate with one another (regardless of which Party is a named party to that litigation) and shall jointly direct and control the litigation, including without limitation, selection of legal counsel, decisions to settle or compromise the case or a position, and taking any other action .
17 DECLARATORY JUDGMENT LITIGATION
If Teva and Impax mutually agree in writing to institute a declaratory judgment action with respect to any intellectual property rights of any third party relating to the Products, the provisions set forth i n Section 16 shall apply mutatis mutandis to this Section 17 .
18 ADVERSE REACTIONS , COMPLAINTS AND RECALL S
18 .1 Each Party shall provide prompt notice to the other Party of any information concerning side effects, injury, toxicity, or sensitivity reaction associated with the Products, whether or not determined to be attributable to the Products . Further, each Party shall notify the other Party in writing within one (1) business day of the time such Party first becomes aware of a circumstance that might necessitate expedited notification of relevant Regulatory Authorities or significant change in the labeling of the Product(s) . The holder of the Approval shall be responsible for all adverse drug event reporting for the applicable countries of the Territory for the Products and responding to all adverse drug event reports received from lay persons and/or health care professionals respecting the Products .
32 18 .2 Copies of complaints with regard to the Products received by either Party will be sent promptly by facsimile to the other Party . Impax shall investigate all complaints associated with the manufacturing of the Products and shall provide a written summary to Teva of all such investigations and a prompt written response to the complainant, with a copy to Teva .
18 .3 To the extent permitted or required by law, any decision to recall, withdraw or cease distribution of any Product as a result of a violation of the applicable Approval or any Applicable Law, or because the Product presents a possible safety risk may be made by either Party after consulting with the other Party and taking such reasonable action as the Parties consider to be appropriate under the circumstances to minimize the risk to both Parties and to assure compliance by the Parties with the requirements of the applicable Approval . Any such recall or market withdrawal shall be controlled by Teva ; provided, however, that the Parties shall use their best efforts to work together to repossess the affected Product . If any recall or market withdrawal of any Product is the result of the negligence of either Party (or its Affiliate) or the breach by either Party (of its Affiliate) of any representation, warranty, covenant or agreement under this Agreement by that Party (or its Affiliate), including the Product warranties, then the negligent or breaching Party shall pay the costs of any such recall action and such costs shall not be charged to the other Party . If any such recall or market withdrawal of any Product is not the result of negligence of either Party (or its Affiliate) or the breach by either Party (or its Affiliate) of any representation, warranty, covenant or agreement under this Agreement, then the Parties shall equally share the out of pocket cost of any such recall or market withdrawal . For the purposes of this Section 18 .3, expenses of recall shall include, without limitation, the expenses of notification and destruction or return of the recalled Product(s) and the refund to consumers of amounts paid for the recalled Product(s) .
19 AUDIT S
19 .1 Teva or its Affiliates shall have the right, at its own cost, to visit any manufacturing site at which any of the Products or API are being manufactured and/or stored, during regular business hours and upon not leas than three (3) business days prior written notice to Impax . During any such visit, Teva or its Affiliates shall have the right : (a) to inspect the manufacturing, packaging, testing, quality control, transport and/or storage facilities for such Products or API ; (b) to inspect the procedures relating to any of the activities referred to in subsection (a) above ; and/or (c) to audit any books, records and reports pertinent to the activities referred to in subsection (a) above to ensure compliance with all Applicable Laws, including without limitation, compliance with COMP, ANDAs, and other Approvals .
19 .2 Impax or its Affiliates shall have the right , at its own cost, to visit any manufacturing site at which any of the Products or API are being manufactured and/or stored, during regular business hours and upon not less than three ( 3) business days prior written notice to such manufacturer and Teva . During any such visit, Impax or its Affiliates shall have the right : (a) to inspect the manufacturing , packaging , testing , quality control, transport and/or storage facilities for such Products or API ; ( b) to inspect the procedures relating to any of the activities referred to in subsection ( a) above ; and/or (c) to audit any books , records and reports pertinent to the activities referred to in subsection (a) above to ensure compliance with all Applicable Laws , including without limitation, compliance with cGMP , ANDAs, and other Approvals .
33 19 .3 Each Party shall promptly supply the other Party with a copy of any notices or reports received from any Regulatory Authority related to an audit or other investigation by the Regulatory Authority with respect to the API and/or Products . Each Party shall use its commercially reasonable best efforts to provide such Regulatory Authority with a prompt, accurate and complete response to any deficiencies noted, and to promptly address , and if necessary correct , any and all such deficiencies to the satisfaction of the Regulatory Authority .
20 CONFIDENTIALIT Y
20 .1 Each of the Parties agrees that : (a) it will not disclose any Confidential Information of the other to any third party at any time during the Term without the prior written consent of the disclosing Party ; (b) it will not make use of any Confidential Information of the other Party for any purpose other than for the purposes set forth in, . or in furtherance of the transactions contemplated by this Agreement ; and/or (c) it will use all reasonable efforts to prevent unauthorized publication or disclosure by any person of such Confidential Information including requiring its employees, consultants or agents to enter into similar confidentiality agreements in relation to such Confidential Information .
20 .2 Notwithstanding the foregoing , either Party shall be permitted upon reasonable prior written notice to the other Party to disclose Confidential Information if required by law or court order .
20 .3 All Confidential Information in any form will be returned to the Party who disclosed the Confidential Information within thirty ( 30) days of the termination or expiration of this Agreement , save for the retention of one ( 1) copy of the Confidential Information by the receiving Party as a record of the receiving Party's ongoing confidentiality obligations under this Agreement .
34 20 .4 Neither Party shall use the name of the other Party in any publicity or advertising nor, except as required by law or court order, publicly disclose information related to this Agreement or the terms and conditions hereof without the prior written consent of the other Party .
20 .5 Each of the Parties agrees that all Confidential Information that it receives from the other Party and/or its Affiliates in connection with the Products is the sole property of the disclosing Party and shall be used by it only in accordance with the terms and provisions of this Agreement .
20 .6 This Section 20 shall be in effect during the Term and for a period of five (5) years following the termination or expiration thereof .
20 .7 The Parties acknowledge that it is their intention to limit the disclosure of Confidential Information hereunder to the Products and matters directly related thereto .
21 TERM AND TERMINATION
21 .1 Any Supply Term shall be extended for successive terms of two (2) years unless either Teva or Impax provides the other with written notice of its intention not to extend that Supply Term at least twelve (12) months before the expiration of such initial Supply Term or any extension thereof .
21 .2 Subject to Sections 21 .2 .1 and 21 .2 .2, this Agreement may be terminated by either Party by written notice provided to the other Party at any time during the Term if the other Party (the "Breaching Party") is in material breach or default of any of its obligations hereunder (including, without limitation, any payment obligations) or any of its representations or warranties hereunder were untrue in a material respect when made, as follows : (i) the terminating Party shall send written notice of the material breach or material default to the Breaching Party, and (ii) the termination shall become effective sixty (60) days after written notice thereof was provided to the Breaching Party, unless the Breaching Party has cured any such material breach or default prior to the expiration of the sixty (60) day period or if such material breach or material default is not capable of being cured within such sixty (60) day period, and the Breaching Party has commenced activities reasonably expected to cure such material breach or material default within such sixty (60) day period and thereafter uses diligent efforts to complete the cure as soon as practicable, but in no event shall such period exceed ninety (90) days .
35 21 .2 .1 Teva's right to terminate in the event of Impax's failure to supply Teva's or its Affiliates' requirements for Products hereunder shall be on a Product-by-Product basis for each of the relevant countries of the Territory .
21 .2 .2 The failure of Impax to supply Teva's or its Affiliates' requirements for Products hereunder shall not give rise to a right of termination by Teva if following such failure, Teva, its Affiliate or a third party designated by Teva manufactures the Product pursuant to the provisions of Section 7 .5 hereof .
21 .3 Subject to the provisions of section 22 .3 hereof, either Party may terminate this Agreement effective upon issuance of written notice if, at any time, the other Party files a petition in bankruptcy, or enters into an arrangement with its creditors, or applies for or consents to the appointment of a receiver or trustee, or makes an assignment for the benefit of creditors, or suffers or permits the entry of an order adjudicating it to be bankrupt or insolvent .
21 .4 In addition to the other provisions of this Section 21, Teva shall be entitled to terminate this Agreement with respect to any Tier 2 Product in the U .S . by providing written notice to Impax by no later than the earlier of (i) twelve (12) months following the Effective Date, or (ii ) fifteen (15) days after acceptance by the FDA of the ANDA for the applicable Tier 2 Product( s) . Upon such termination the grant hereunder to Teva to Market such Tier 2 Products in the U .S . shall revert to Impax and , except as provided in this Section 21 . 4, Teva's obligations hereunder with regard to such Tier 2 Products shall terminate . To the extent applicable , Teva shall indicate in its notice if it intends to commercialize a Competing Product to the subject Tier 2 Product that it inte rn ally developed (as distinguished from a "Transaction Event") . Upon receipt of Teva ' s written notice, Impax shall have sixty (60) days to elect to, if applicable (as a result of Teva setting forth in its notice its intention to commercialize a competing Product), to participate in Teva ' s commercialization of such Competing Product ( s), in the U .S ., in which case, such Competing Product( s) shall be deemed to be the corresponding Tier 2 Product terminated by Teva for purposes of this Agreement . In the event Impax elects to participate in Teva's commercialization of the Competing Product, Teva shall manufacture the applicable Competing Product , carry out all regulatory and legal activities and Impax shall reimburse Teva twenty-five percent ( 25%) for all past and future Regulatory Expenses and Intellectual Rights Legal Expenses incurred by Teva and /or its Affiliates for such Competing Product ( s), and the Impax Margin for such Competing Product ( s) payable to Impax shall be deemed to be twenty - five percent ( 25%) of Profit . Within sixty ( 60) days following launch of the applicable terminated Tier 2 Product (s) by Impax or Impax's Affiliate , nominee , assignee , licensee or other similar entity, Impax shall reimburse Teva an amount equal to all Regulatory Expenses and Intellectual Rights Legal Expenses paid by Teva under this Agreement with respect to the applicable Tier 2 Product(s) .
36 21 .5 Teva shall be entitled to terminate this Agreement, upon thirty ( 30) days notice to Impax , in the event of an Event of Default ( as set forth in Section 10 .7) .
21 .6 In the event that there is no launch of any of the Products in any of the countries in the Territory by July 15, 2004, Teva shall have the right , at its option , to terminate this Agreement on ten ( 10) days notice .
22 CONSEQUENCES OF TERMINATION
22 .1 Termination of this Agreement for whatever reason shall not affect the liabilities or obligations of the Parties hereunder in respect of matters accrued at the time of such termination, and shall be without prejudice to any other right or remedies available at law or in equity . (Impax acknowledges and agrees, however, that notwithstanding the immediately precedin g sentence it shall not have any other rights or remedies against Teva in the event of a termination pursuant to Section 21 .4, 21 .5, or 21 .6) .
22 .2 In the event of early termination of this Agreement by Teva pursuant to Section 21 .3 or 21 .5, and without derogating from any other rights or remedies available to Teva, Impax shall, at the election of Teva exercised within thirty (30) days of Teva's notice to Impax of termination, promptly and free of charge :
22 .2 .1 transfer to Teva or a Teva designee all information, data and know-how in its possession or control necessary for the manufacture of the API and Products ;
22 .2 .2 grant and/or transfer to Teva the right of access or use of all Regulatory Documentation and Approvals in its possession or control for the Products to enable Teva to manufacture and/or Market the Products in the Territory ; and
22 .2 .3 use its best efforts to assist Teva to assure that such transfers as set forth in this Section 22 .2 are effected as effectively and expeditiously as possible .
37 22 .3 In the event this Agreement is terminated under Section 21 .3, all rights and licenses granted pursuant to this Agreement are, and shall otherwise be deemed to be, for purposes of Section 365(n) of 11 U .S .C . se .101 et seq . (the "Bankruptcy Code"), licenses of rights to "intellectual property" as defined under Section 101(35A) of the Bankruptcy Code . The Parties agree that Teva, as a licensee of such rights under this Agreement, shall retain and may fully exercise all of its rights (including, without limitation, any right to enforce any exclusivity provision of this Agreement (including any embodiment of such "intellectual property")), remedies and elections under the Bankruptcy Code . To the fullest extent permitted by Applicable Law, the Parties further agree that, in the event of the commencement of a bankruptcy proceeding by or against Impax under the Bankruptcy Code, Teva shall be entitled to all applicable rights under Section 365 of the Bankruptcy Code, including but not limited to, a complete duplicate of (or complete access to, as appropriate) any such intellectual property and all embodiments of such intellectual property upon written request therefore by Teva, and such, if not already in its possession, shall be promptly delivered to Teva .
23 INDEPENDENT CONTRACTORS
The status of the Parties under this Agreement shall be that of independent contractors . Nothing is this Agreement shall be construed as establishing a partnership or joint venture relationship between the Parties hereto . No Party shall have the right to enter into any agreements on behalf of the other Party, nor shall it represent to any person that it has any such right or authority . All persons employed by a Party shall be employees of such Party and not of the other Party and all costs and obligations incurred by reason of any such employment shall be for the account and expense of such Party .
24 SUCCESSORS AND ASSIGN S
The terms and provisions hereof shall inure to the benefit of, and be binding upon, Teva, Impax and their respective successors and permitted assigns . Neither Party shall assign this Agreement or any part of it to any third party without the prior written consent of the other Party ; provided, however, that Teva may, without obtaining the consent of Impax, assign this Agreement or delegate any of its rights or obligations hereunder to any of its Affiliates, provided that Teva agrees to remain primarily liable for the full and timely performance by such Affiliate of all its obligations hereunder .
25 FORCE MAJEUR E
25 .1 Neither Party shall be liable for non- performance or delay in the fulfillment of its obligations with the exception of payment obligations and those obligations respecting the timely achievement of the applicable milestones, when any such non-performance or delay shall be occasioned by any unforeseeable cause beyond the reasonable control of Teva or Impax, as the case may be , including without limitation, acts of God, fire, flood, earthquakes , explosions, sabotage, strikes, or labor disturbances ( regardless of the reasonableness of the demands of the labor force), civil commotion, riots, military invasions, wars , failure of utilities, failure of carriers , or any acts , restraints, requisitions, regulations, or directives issued by a competent government authority (" Force Majeure Events") .
38 25 .2 In the event that either Party is prevented from discharging its obligations under this Agreement on account of a Force Majeure Event , such Party shall notify the other forthwith, and shall nevertheless make every endeavor , in the utmost good faith, to discharge its said obligations, even if in a partial or compromised manner .
26 CURRENC Y
All payments under this Agreement shall be made in U .S . Dollars and, as applicable , the calculation of exchange rates shall be based upon the average over a twenty ( 20) business day period preceding the date that payment is due of the applicable rate of exchange as published in the Wall Street Journal .
27 PUBLICITY AND DISCLOSURE OF AGREEMENT
Concurrently with the execution of this Agreement , the Parties shall agree in good faith on a form of press release which Impax may release . The Parties agree that until February 1, 2002, no future publicity release or announcement conce rning the transactions contemplated hereby shall be issued without the advance written consent of the other Party, which consent shall not be unreasonably withheld, to the extent such release or announcement includes statements concerning terms of this Agreement and/or explicitly includes the Products or either Parties' name ( s), except to the extent such release or announcement may be required by Applicable Law . For releases or announcements required by law, the Party making the release or announcement shall , before making any such release or announcement , afford the other Party a reasonable opportunity to review and comment . Any copy of this Agreement to be filed with the Securities and Exchange Commission or any other Regulatory Authority shall be redacted to the fullest extent permitted by Applicable Law and to the reasonable satisfaction of both Parties ; provided, however, in the event that the Securities and Exchange Commission or Regulatory Authority , as applicable, objects to the redaction of any portion of the Agreement after the initial submission, the filing Party shall inform the other Party of the objections and shall in good faith respond to the objections in an effort to limit the disclosure required by the Securities and Exchange Commission or Regulatory Authority, as applicable .
28 SEVERABILIT Y
Should any part or provision of this Agreement be held unenforceable or in conflict with applicable law, the invalid or unenforceable part or provision shall, provided that it does not go to the essence of this Agreement , be replaced with a revision which accomplishes, to the extent possible, the original commercial purpose of such part or provision in a valid and enforceable manner , and the balance of this Agreement shall remain in full force and effect and binding upon the Parties hereto .
39 29 ENTIRE AGREEMENT
This Agreement (including its Annexes), together with the Note, the Stock Purchase Agreement and Registration Rights Agreement constitutes the entire agreement between the Parties with respect to its subject matter and supersedes all prior agreements, arrangements, dealings or writings between the Parties . This Agreement may not be amended or modified except in writing executed by the duly authorized representatives of both Parties .
30 WAIVER
No waiver of a breach or default hereunder shall be considered valid unless in writing and signed by the Party giving such waiver, and no such waiver shall be deemed a waiver of any subsequent breach or default of the same or similar nature .
31 GOVERNING LAW
This Agreement shall be governed , interpreted and construed in accordance with the laws of the Commonwealth of Pennsylvania , without regard to principles of conflicts of law . Subject to Section 32, each of the Parties hereby irrevocably submits to the exclusive jurisdiction of the Commonwealth of Pennsylvania or United States Federal Court sitting in the City of Philadelphia and Commonwealth of Pennsylvania over any action or proceeding arising out of or relating to this Agreement , and each hereby waives the defense of any inconvenient fo rum for the maintenance of such action or proceeding . To the extent that it may otherwise be applicable, the Parties hereby expressly agree to exclude from the operation of this Agreement the United Nations Convention on Contracts for the Inte rn ational Sale of Goods , concluded at Vienna , on 11 April 1980, as amended and as may be amended further from time to time .
32 WORKING COMMITTEE AND SECTION 2 . 8 DISPUTE RESOLUTION
Any and all disputes within the Working Committee as well as pursuant to Section 2 .8 shall be submitted to a panel of three (3) arbitrators having expertise in the specific area that is the subject of dispute . Teva and Impax shall each select one arbitrator . The arbitrators selected by Teva and Impax shall select the third arbitrator . All arbitrators shall be selected within twenty (20) days . Any arbitration shall be held in Philadelphia, Pennsylvania at such place as may be agreed upon by the Parties . The arbitrators shall have sole discretion with regard to the admissibility of any evidence and all other matters relating to the conduct of the arbitration and the arbitration shall be conducted in accordance with the American Arbitration Association . The arbitrators shall in rendering their decision, apply the substantive laws of the Commonwealth of Pennsylvania (regardless of its or any other jurisdiction's choice of law principles) . The decision of the arbitrators shall be final and not appealable, except in the case of fraud or bad faith on the part of the arbitrators or any Party to the arbitration proceeding in connection with the conduct of such proceedings . The arbitrators shall determine the proportion in which the Parties shall pay the costs and fees of the arbitration, and each Party shall pay its own costs (including, without limitation, reasonable attorney's fees) and expenses in connection with such arbitration . The arbitration proceeding shall be confidential and, except as required by Applicable Law, neither Party shall make (or instruct the arbitrators to make) any public announcement with respect to the proceedings or decision of the arbitrator without prior written consent of the other Party . The existence of any dispute submitted for arbitration, and the award of the arbitrator, shall be kept in confidence by the Parties and the arbitrators, except as required in connection with the enforcement of such award or as otherwise required by Applicable Law .
40 33 NOTICE S
Notices provided for under this Agreement shall be given in writing, in English, by facsimile ; by first-class mail, federal express or similar service to the mailing address or facsimile numbers set out below :
If to Teva : TEVA PHARMACEUTICALS CURACAO N .V . World Trade Center Curacao, Unit T .M .I . 14 Piscadera Bay, Curaca o Netherlands Antille s Attention : General Manager Telephone : 599-9-463-6388 Facsimile : 599-9-463-658 8
With a copy to : TEVA PHARMACEUTICALS USA, INC . 1090 Horsham Roa d North Wales , Pennsylvania 1945 4 Attention : Vice President and General Counsel Teva North Americ a Telephone : ( 215) 591-3000 Facsimile : ( 215) 591-8813
If to Impax : IMPAX LABORATORIES, INC . 3735 Castor Avenue Philadelphia , PA 19124 Attention : Barry R . Edwards, CEO Telephone : (215) 289-2220 Facsimile : ( 215) 289-593 2
41 With a copy to : IMPAX LABORATORIES, INC . 30831 Huntwood Avenue Haywood , California 9454 4 Attention : Larry Hsu, President and COO Telephone (510) 471-360 0 Facsimile : ( 510) 471-159 5
or to such other addresses or facsimile numbers as a Party shall designate by notice, similarly given, to the other Party . Notices shall be deemed to have been sufficiently given and served the day transmitted by facsimile (with confirmed transmission ) or a date five ( 5) business days after the date of express mail or by mail courier .
IN WITNESS WHEREOF, each of the Parties has executed this Agreement and Annexes as of the date below .
TEVA PHARMACEUTICALS CURACAO N .V . IMPAX LABORATORIES, INC .
Signature : Signature : ------Name : Name : ------Title ------Title : : ------Date : Date : ------
Signature : Signature : ------Name : Name : ------Title ------Title : : ------Date : Date : ------
42 ANNEX A
The Product s
BRAND- GENERIC STRENGTH ------
------Tier 1 Products + + + ------+ +
------+ + + ------+ + + ------
------
------
------Tier 2 Products + + + ------
------
------Tier 3 Products Three additional product s to be determined by the Parties as provided herein . ------
* including, without limitation, any additional brands . + Confidential portions omitted and filed separately with the Commission .
43 ANNEX B
Tier 1 Products and Optional Products : Manufacturing Caps
Optional Optional Optional + + + + + Product Product Product + + + + + 10mg 20 mg 40mg + + +
Bottle + + + + + + + + size $ $ $ $ $ $ $ $ Labor, OH 4 QC cost + + + + + + + +
Pkg . Nat'l + + + + + + + +
Total Cost + + + + + + + +
Bottle + + + + + + + + size
Labor,OH a Qc cost + + + + + + + +
Pkg . Nat 'l + + + + + + + +
Total Cost + + + + + + + +
+ Confidential portions omitted and filed separately with the Commission .
44 Annex C
Milestones (If Teva exercises the option for the Optional Products pursuant to Section 4 )
------Milestone Event Amount Forgiven (US$)* *
1 . *Tentative Approval for all of the optional Products, (+mg, + mg, and + mg) in the U .S . by no later than+ . ------2 . *Launch Date for all of the optional Products, (+ mg, + mg, and + mg) in the U .S within fifteen (15) days from the expiration of First to File Exclusivity, but in no event later than+ . ------3 . Launch Date for + in the U .S . no later than + . ------4 . Launch Date for all of + mg and + Tablets in th e U .S . within fifteen (15) days from the expiration of First to File Exclusivity, but in no event later than + . ------5 . Tentative Approval for all of + mg and + mg in the U .S . by no later than +, provided that the facility in which Impax will manufacture such Product has been approved by the FDA for commercial launch . ------6 . Launch Date for all of + mg, and + mg in the U .S . within fifteen (15) days from the expiration of First to File Exclusivity, but in no event later than + . ------
* If Impax fails to meet the Tentative Approval condition but subsequently meets the Launch Date condition, the $+ shall nevertheless be forgiven . ** For the sake of clarification, the applicable milestone shall be achieved only if the tentative Approval and/or Launch Date is for the prescription drug marketplace only .
+ Confidential portions omitted and filed separately with the Commission .
45 Annex D
Milestones ( If Teva does not exercise the option for the Optional Products pursuant to Section 4 )
------Milestone Event Amount Forgiven (US$) * ------
1 . Launch Date for + in the U .S . no later than + . + ------2 . Launch Date for all of + mg and + in the U .S . + within fifteen (15) days from the expiration of First to File Exclusivity, but in no event later than + . ------3 . Tentative Approval for all of + mg and + mg in the + U.S . by no later than+, provided that the facility in which Impax will manufacture such Product has been approved by the FDA for commercial launch . ------4 . Launch Date for all of + mg, and + mg in the U .S . + within fifteen (15) days from the expiration of First to File Exclusivity, but in no event later than + . ------
* For the sake of clarification, the applicable milestone shall be achieved only if the tentative Approval and/or Launch Date is for the prescription drug marketplace only .
+ Confidential portions omitted and filed separately with the Commission .
46 Annex E
Stock Purchase Agreement and Registration Rights Agreemen t
47 Annex F
EU Countries *
Austria Luxembourg Belgium Netherland s Denmark Portuga l Finland Spain France Swede n Germany Switzerland Greece United Kingdom Irelan d Italy
* Plus any other country added to the European Union during the Term . Teva shall have the option in the manner provided by Section 3 .1 for twelve (12) months from such date of inclusion to include any such country to the Territory .
48 Annex G
Optional Product s
------Brand * Generic Strengths ------+ + + ------
*including, without limitation, any additional brand .
+ Confidential portions omitted and filed separately with the Commission .
49 Annex H
The Note pursuant to Section 10 . 1
50 EXHIBIT B United States Securities and Exchange Commission Washington, D.C. 20549 Form 10-Q
(Mark One)
(X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 193 4 For the quarterly pe riod ended March 31, 2004 OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to
Commission file number 0-27354
Impax Laboratories, Inc.
(Exact name of registrant as specified in its cha rter)
Delaware 65-040331 1
(State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No .)
30831 Huntwood Avenue - Hayward, California 94544
(Address of principal executive offices) (Zip code) Registrants telephone number including area code (510) 476-200 0
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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 _A_ No _
Indicate by check mark whether registrant is an accelerated filer (as defined in Rule 12b-2 of the Act .) Yes -X- No -
The number of shares outstanding of the registrant s common stock as of April 30. 2004 was approximately 58.028 .543 . IMPAX LABORATORIES, INC .
INDEX TO FORM 10- Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004
PART I . FINANCIAL INFORMATION
PAS'iI:
PART II. OTHER INFORMATION AND SIGNATURE S
It em 1, Legal Proceedings 1$
Iteni 2 . C hanaes in Securities- Use of Proceeds and Issuer Purchases of Ecuity Securities 2.1 j(S n, i 6 . Exhibits and Rcoorts on Form 8-K .'}
Siunatures z
Certifications Rack to Contents
PART I - FINANCIAL INFORMATION
ITEM 1 . FINANCIAL STATEMENTS IMPAX LABORATORIES, INC . BALANCE SHEETS (unaudited) (in thousands , except share and per share data)
March 31, December 31, 2004 2003
ASSETS
Current assets : Cash and cash equivalents $ 19,491 $ 15,505 Accounts receivable, net 24,052 9,885 Inventory 30,148 28,479 Prepaid expenses and other assets 1,704 1,427 Total current assets 75,395 55,296 Restricted cash 10,000 10,000 Property, plant and equipment, net 39,231 38,132 Investments and other assets 1,371 1,325 Goodwill, net 27,574 27,574 Intangibles, net 283 379
Total assets $ 153,854 $ 132,706
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities: Current portion of long-term debt &sp;S 1,166 $ 1,068 Accounts payable 33,590 22,783 Revolving line of credit 6,953 7,642 Accrued expenses and deferred revenues 13,620 10,872
Total current liabilities 55,329 42,365 Refundable deposit from Teva - 5,000 Long term debt 8,489 8,854 Deferred revenues and other liabilities 2,895 2,879
Total liabilities 66,713 59,09 8
Commitments and Contingencie s Mandatorily redeemable convertible Preferred Stock : Series 2 mandatory redeemable convertible Preferred Stock, $0.01 par value 0 shares outstanding at March 31, 2004, and 75,000 shares outstanding at December 31, 2003, redeemable at $100 per share - 7,50 0
Stockholders' equity : Common stock, $0.01 par value, 75,000,000 shares authorized and 57,961,990 and 55,307,136 shares issued and outstanding at March 31, 2004, and December 31, 2003, respectively 580 553 Additional paid-in capital 182,062 170,104 Accumulated deficit (95,501) (104,549)
Total stockholders' equity 87,141 66,108
Total liabilities and stockholders' equity S 153, 854 S 132,706
The accompanying notes are an integral part of these financial statements .
1 Back to Contents
IMPAX LABORATORIES, INC. STATEMENTS OF OPERATIONS (unaudited) (dollars in thousands, except share and per share data)
Three Months Ended March 31 ,
2004 2003
Net sales S 35,822 S 11,066 Revenue from reversal of refundable deposit from Teva 2,500 -
Other revenues 531 35 9
Total revenues 38,853 11,425 Cost Of sales 18,550 8,14 7
Gross margin 20,303 3,27 8
Research and development 6,504 3,75 5 Reimbursements from Teva (11) (132 )
Research and development, net 6,493 3,623 Selling expenses 726 568
General and administrative expenses 3,351 2,122 Other operating income (expense), net 7 1 1
Net income (loss) from operations 9,740 (3,024) Interest income 56 42 Interest expense (272) (231 )
Income (Loss) before provision for income taxes 9,524 (3,213)
Provision for income taxes 476 -
Net income (loss) $ 9,048 $ (3,213)
Earnings per share : Basic $ 0.16 S (0.07 )
Diluted $ 0.15 S (0.07 )
Weighted average common shares outstanding : Basic 56,978,095 47,876,830
Diluted 6 1,481,932 47, 876,830
The accompanying notes are an integral part of these financial statements.
2 IMPAX LABORATORIES, INC. STATEMENTS OF CASH FLOWS (unaudited) (down in thousands)
Throe Months Ended March 31 ,
2004 2103
Cub flows from operating activities : Net income (loss) S 9,048 S (3,213) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation and amortization 1,022 885 Reversal of refundable deposit from Teva (2,500) - Non-cash compensation charge (warrants and options) - 119 Change in assets and liabilities: Accounts receivable (14,167) 790 Inventory (1,669) (2,310) Prepaid expenses and other assets 50 Accounts payable 10,807) 2,164 Other liabilities 2,764 644
Net cash provided by (used in) operating activities 4,982 (871 )
Cash flows from Investing activities : Purchases of property and equipment (2,025) (698)
Net cash used in investing activities (2,025) (698)
Cash flows from financing activities: Revolving line of credit borrowings (repayments) (689) 1,826 Additions to long-term debt - 896 Repayment of long-term debt (267) (163) Proceeds from issuance of common stock (upon exercise o f stock options and warrants and under ESPP) 1,985 15
Net cash provided by financing activities 1,029 2,574
Net increase in cash and cash equivalents 3,986 1,005
Cash and cash equivalents, beginning of the quarter $ 15,505 S 10,21 9
Cash and cash equivalents, end of the quarter $ 19,491 $ 11,224
Cash paid for interest $ 273 $ 232
Cash paid for income taxes $ - $ -
Supplemental disclosure of non-cash financing activities : In January 2004, the Company issued 160,751 shares of our common stock to Teva to satisfy the remaining $2.5 million refundable deposit to Teva. Also, in January 2004, the holders of the Series 2 Preferred Stock converted their entire 75,000 preferred shares into 1,500,000 shares of common stock .
The accompanying notes are an integral part of these financial statements.
3 NOTES TO FINANCIAL STATEMENTS Three Months Ended March 31, 2004 and March 31, 2003
Note 1. The financial statements included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission . Certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations; however, the Company believes that the disclosures are adequate to make the information presented not misleading . These financial statements should be read in conjunction with the financial statements and the notes thereto included in the Company's latest Annual Report on Form 10-K . The results of operations for the three months ended March 31, 2004 are not necessarily indicative of the results of operations expected for the year ending December 31, 2004.
Impax Laborato ries, Inc. ("IMPAX, "we,"'tis," or "the Company") focuses on the development, manufacturing, and marketing of special ty pharmaceutical products utilizing its own formulation expertise and drug delivery technologies . As of March 31, 2004, the Company is marketin .* thirty-three generic pharmaceu ticals, which represent dosage varia tions of fourteen different pharmaceutical compounds , and has seventeen applications under review with the Food and Drug Administration (FDA), including five tentatively approved, addressing app roximately $5 .4 billion in U .S . product sales in the twelve months ended Februa ry 29, 2004, according to NDCHealth . Thirteen of these pending filings we re filed under Paragraph IV of the Hatch-Waxman Amendments . The Company has app roximately twenty-seven other products in various stages of development for which applications have not yet been filed. Th ese other products are generic versions of pharmaceutical products that had U .S. sales of approximately S 14.5 billion in the twelve months ended February 29, 2004 , according to NDCHealth .
Except for the three months ended March 31, 2004, we have experienced operating losses and negative cash flow from operations and our future profitability continues to be uncertain. As of March 31, 2004, our accumulated deficit was $95,501,000 and we had outstanding indebtedness in an aggregate principal amount of $16,608,000. To remain operational, we must, among other things :
• obtain FDA approval for our products ; • prevail in patent infringement li tigation in which we are involved;
• successfully launch our new products ; and comply with the many complex governmental regulati ons that deal with virtually eve ry aspect of our business activities. We expect to incur signi ficant operating expenses , pa rticularly for research and development, for the foreseeable future in order to execute our business plan. We , therefore, anticipate that such operating expenses , as well as planned capital expenditures, will constitute a material use of our cash resourc es.
On April 5, 2004, the Company completed a convertible senior subordinated debenture offering of $95,000,000 for net proceeds of $91 ,675,000. The proceeds of the debentures will be used for general corporate purposes, including working capital requi rements , manufactu ring of our products, and research and development .
To date, the Company has funded its research and development and other operating ac tivities through equity and debt financings and strategic alliances .
Critical Accounting Policy Related to Revenue Recognition
The Company recognizes revenue in accordance with SEC Staff Accounting Bulletin ("SAB") 101 issued by the SEC in December 1999. We recognize revenue from the sale of products when the shipment of p roducts is received and accepted by the customer . Provisions for estimated discounts, rebates, chargebacks , returns and other adjustments are provided for in the period the related sales are recorded . In December 2003, the SAB 104 was issued by the SEC. This bulletin revises and clarifies portions of Topic 13 of the Staff Accounting Bulle ti n to be consistent with current accounting and auditi ng guidance and SEC rules and regulations .
Emerging Issues Task Force (EITF) No. 00-21 supplemented SAB 101 for accounting for mul tiple element arrangements. Th e Company has entered into several strategic alliances that involve the delive ry of multiple products and se rvices over an extended pe riod of time . In multiple element arrangements, the Company must determine whether any or all of the elements of the arrangement can be separated from one another . If separation is possible, revenue is recognized for each deliverable when the revenue recogni tion criteria for the specific deliverable is achieved . If separation is not possible, revenue recognition is required to be spread over an extended period. Under EITF No . 00-21, in an arrangement with multiple elements, the delivered item should be considered a separate unit of accounting if all of the following criteria are met :
1) the delivered item has value to the customer on a standalone basis; 2) there is objective and reliable evidence of the fair value of the undelivered item; and
3) if the arrangement included a general right of return, or whether delivery or performance of the undelivered item is considered probable . The Company reviews all of the terms of its strategic alliances and follows the guidance from EITF No. 00-21 for multiple element arrangements.
In June 2001 , the Company entered into a Strategic Alliance Agreement with a subsidia ry of Teva for twelve controlled-release generic pharmaceutical products. Th e agreement granted Teva exclusive U .S. prescription marketing rights for these products for a period of ten years from the date of Teva's first sale of the products.
Revenues from product sales for these products under our strategic alliance are recognized at the time title and risk of loss transfers to Teva 's customers . During the three months ended March 31, 2004, the Company commenced shipping its Bup ropion Hydrochloride 100 mg and 150 mg Cont rolled Release Tablets. Teva ships the Bupropion products to its customers and reports the results on a monthly basis. Teva provides to IMPAX a financial repo rt detailing its g ross sales less applicable chargebacks , rebates and other credits to arrive at net sales, cost of sales information and gross margins for the Bup ropion products. Th e information on the fin ancial report is used by IMPAX to record its monthly revenue for the Bup ropion 100 mg and 150 mg products . Additionally, the amount of revenue that IMPAX cams is based on a fixed gross margin sharing percentage .
Under the July 2003 Exclusivity Transfer Agreement with Andrx and Teva pertaining to the Bupropion Hydrochloride products, Andrx is entitled to certain payments for the sales of the 150 mg strength for a 180-day period from the product launch date. These payments are made directly by Teva to Andrx.
Earnings Per Share
Basic earnings per share is computed by dividing net income by the weighted average common shares outstanding. Diluted earnings per share is based on the treasury stock method and is computed by dividing net income by the weighted average number of common shares and dilutive potential common shares outstanding, assuming the exercise of all in-the-money stock options . A reconciliation of the numerators and denominators of basic and diluted earnings per share consisted of the following ( in thousands, except per share amounts):
Three Months Ended March 31 ,
2004 2003
Numerator: Net income (loss) $ 9,048 $ (3,213 )
Denominator : Basic weighted average common shares outstanding 56,978,095 47,876,830 Effect of dilutive options and warrants 4,503,837 -
Fully diluted weighted average common shares outstandin g 61,481,932 47,876,830 Basic earnings per share S 0.16 S (0 .07)
Fully diluted earnings per share $ 0.15 S (0 .07)
Included in the computation of fully diluted earnings per share are outstanding stock options and warrants with an exercise price less than the average market price of the common shares for the period. As of March 31, 2004 there were no stock options or warrants excluded from the fully diluted earnings per share calculation because all options and warrants exercise pri ce were less than the average market p rice of common shares.
Stock-Based Employee Compensation
The Company accounts for stock-based employee compensation arrangements in accordance with provisions of Accounting Principles Board (APB) Opinion No . 25, "Accounting for Stock Issued to Employees ." Compensation cost for stock options, if any, is measured as the excess of the quoted market price of the stock at the date of grant over the amount an employee must pay to acquire the stock. The Company has adopted the disclosure only provisions of SFAS No . 123, "Accounting for Stock-Based Compensation" and SFAS No . 148, "Accounting for Stock- Based Compensation - Transition and Disclosure - An Amendment to FASB Statement No. 123 ." Back to Contents
Had compensation cost for the Company's Plans been determined based on the fair value at the grant dates for the awards under a method prescribed by SFAS No. 123, the Company' s income and income per share would have been decreased to the p ro forms amounts indicated below ( in thousands , except per share amounts):
Three Months Boded March 3 1 ,
2004 2003
Net income (loss), as reported $ 9,048 $ (3,213) Add : Stock-based employee compensatio n included in reported net income , net of related tax effects - - Deduct Total stock-based employe e compensation expense determined under fair value based method for all awards, net of related tax effects (959) (862)
Pro forms net income (loss) $ 8,089 $ (4,075)
Earnings per share : Basic - as reported S 0.16 $ (0 .07)
Basic - pro forma $ 0.14 $ (0 .09)
Diluted - as reported $ 0.15 $ (0.07)
Diluted - p ro forms $ 0.13 $ (0.09)
The Company calculated the fair value of each option grant on the date of the grant using Black-Scholes pricing method with the following assumptions: for the three months ended March 31, 2004 and 2003 , the dividend yield was 0'/. and 0% ; the weighted average expected option term was five years ; risk-free interest rate was 3% and 2 .69%; the stock volatility for the three months ended March 31, 2004 and 2003 was 79 .48% and 69%, respectively. The weighted average fair value of op tions for March 31, 2004 and 2003 was $14 .12 and 51 .96, respec tively .
The Company reports both basic earnings per share, which is based on the weighted-average number of common shares outstanding, and diluted earnings per share, which is based on the weighted-average number of common shares outstanding and all dilu tive potential common shares outstanding .
Note 2. Convertible Senior Subordinated Debentures
On April 5, 2004, the Company issued and sold $95 .0 million in aggregate principal amount of its 1 .250%convertible senior subordinated debentures due 2024 . The debentures were sold by the Company to Citigroup Global Markets Inc ., Wachovia Capital Markets, LLC and First Albany Capital Inc., as initial purchasers , in a private placement exempt from registration under the Securities Act of 1933, as amended (the "Securities Act") . We have been advised by the initial purchasers that they have resold, and/or intend in the future to resell, the debentures to "qualified institutional buyers" (as defined in Rule 144A promulgated under the Securities Act) in transactions exempt from the registration requirements of the Securities Act in reliance on Rule 144A.
The issuance and sale of the debentures resulted in net proceeds to the Company of app roximately $91,675 ,000 . These proceeds are being used for general corporate purposes , including working capital requirements , manufacturing of our products and research and development.
The debentures bear interest at the rate of 1 . 250% per year. Interest on the debentures is payable on April I and October l of each year, beginning on October 1, 2004. The debentures are convertible by holders into shares of our common stock at a conversion p rice of $28 .08 per share (which represented a 300A premium over our stock p rice at the ti me the debentures were issued). The conversion price is subject to adjustment in certain events if. ( 1) the pri ce of our common stock reaches a specific threshold; (2) the trading price for the debentures falls below certain thresholds ; ( 3) the debentures have been called for redemp tion; or (4) certain corporate transactions occur. Back to Contents
The debentures mature on April 1, 2024, unless earlier redeemed, repurchased or converted. Before April 5 , 2007, we may redeem some or all of the debentures if the p rice of our common stock reaches a specific threshold, at a redemption price that includes an additional payment on the redeemed debentures equal to $230.77 per S 1,000 p rincipal amount of debentures , less the amount of any interest actually paid or accrued and unpaid on the debentures . On and after April 5, 2007, the Company may redeem some or all of the debentures at certain specified redemption prices.
Th e debentures are the Company 's unsecured obligations and are subordinated in right of payment to all of the Company's existing and future senior indebtedness. On April 1 , 2009 , April 1, 2014, and April 1, 2019, and under certain circumstances , holders of the debentures will have the right to require us to repurchase all or any part of their debentures at a repurchase price equal to 1009A of the principal amount of the debentures, plus accrued and unpaid interest and liquidated damages, if any, to, but excluding the repurchase date.
In connection with the offe ring of the debentures, we are required to file a shelf registra tion statement by July 5, 2004 with the Securities and Exchange Commission covering resales of the debentures and of the common stock issuable upon conversion of the debentures . Th e S-3 must be declared effective by the SEC by October 4, 2004.
Note 3. Recent Accounting Pronouncements
In November 2002, the EITF reached a consensus on Issue No . 00-21 . "Revenue Arrangements with Multiple Deliverables ." EITF Issue No. 00-2 1 T videa guidance on how to account for arrangements that involve the delivery or performance of multiple products, services, and/or rights to use assets. e Provisions of EITF Issue No . 00-21 applies to revenue arrangements entered into in fiscal periods beginning after June 15, 2003 . We implemented the provisions of EITF Issue No. 00-21 in revenue reco of certain strategic agreements . The Company reviews all of the terms of its strategic alliances and follows the guidance from this Issue for all multiple element arrangements.
In December 2002, the Financial Accounting Standards Board (FASB) issued SFAS No . 148, "Accounting for Stock-Based Compensation - Transition and Disclosure, amendment of FASB Statement No. 123 ." This statement provides additional transition guidance for those entities that elect to voluntarily adopt the provisions of SFAS No. 123, "Accounting for Stock Based Compensation." Furthermore, SFAS No. 148 mandates new disclosures in both interim and year-end financial statements within the Company's Significant Accounting Policies footnote . The Company has elected not to adopt the recognition Provisions of SFAS No . 123, as amended by SFAS No. 148 . However, the Company has adopted the disclosure provisions and has included this information in Note I to the Company's financial statements.
In January 2003, the FASB issued FASB Interpretation No . 46 ("FIN 46"), "Consolidation of Variable Interest Entities ." FIN 46 clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties . FIN 46 applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date . It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003 . FIN 46 applies to public enterprises as of the beginning of the applicable interim or annual period . On October 8, 2003, the FASB decided to defer FIN 46 until the first reporting period ending after December 15, 2003 . The provisions of this Interpretation did not have a material impact on the Company's financial condition or results of operations .
In December 2003, the FASB issued FIN No . 46R, Consolidation of Variable Interest Entities, clarifying the application of Accounting Research Bulletin No. 51, Consolidated Financial Statements, to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support . The provisions of this Interpretation do not have a material impact on the Company' s financial condition or results of operations .
In February 2004, the FASB issued revised FASB Staff Position ("FSP") pertaining to FIN 46(R) . The revised FSPs replace certain previously issued FIN 46 FSP for entities to which FIN 46(R) is applicable . This revision to FIN 46 did not have a material impact on the Company's financial condition or results of operation.
In February 2004, the FASB revised SFAS 133, Accounting for Derivative Instruments and Hedging Activities for Implementation issue E2L, AIJ, and C6 . The revisions to SFAS 133 did not have a material impact on the Company's financial condition or results of operation .
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In December 2003, the FASB revised SFAS 132, "Employers ' Disclosure About Pensions and Other Post Retirement Benefits ." This Statement does not change the measurement or recognition of those plans required by FASB 87, "Employers' Accoun ting for Pensions," and No . 106, "Employers ' Accounting for Post Retirement Bene fits Other than Pensions." This Statement retains the disclosure requirements contained in FASB No . 132, "Employers' Disclosure about Pensions and Other Post Retirement Plans ." The provisions of this Statement do not have a material impact on the Company's financial condi tion or results of operations. During the three months ended March 31, 2004 and 2003, the employer 401-K match was $24 ,352 and $21,347, respec ti vely .
In January 2004, the FASB issued FASB Staff Posi tion FAS 106-I to provide temporary guidance concerning the Medicare Presc ription Drug Improvement and Modernization Act of 2003 . The provisions of this pronouncement did not have a material impact on the Company's financial condition or results of operations .
Note 4. Our gross receivables and related deductions activity for the three months ended March 31 , 2004 and 2003, and the year ended December 31, 2003 was :
Three Months Ended Year Ende d
March 31, Marc h 31, December 31 , (1a$0008) 2004 2003 2003
Gross accounts receivable $ 30,853 $ 8,828 S 17,091 Lou : Accrued rebates (3,010) (1,585) (2,700) Less : Accrued chargebacks (3,505 ) (1,137) (4,10 1 Less : Other deductions (286) (372) (405
Net accounts receivable S 24,052 $ 5 ,734 S 9,885
Other deductions include allowance for disputable items, doubtful accounts, and cash discounts .
Net accounts receivable balance at March 31, 2004 includes $17,028,000 due from Teva.
Chargebacks and Rebates Accrual activity for the three months ended March 31, 2004 and 2003, and the year ended December 31, 2003 was:
CHARGEBACKS ACCRUAL
Three Months Ended Year Ended
(10$0001) March 31, Merck 31, December 31, 2004 2003 2003
Beginning Balance $ 4,101 S 1,373 $ 1,373 Add: Provision related to sales made in current period 2,148 1,314 10,571 Less : Credits issued during the current period (2,744) (1,550) (7,843 )
Ending Balance $ 3,505 $ 1,137 S 4,10 1
Three Months Ended Year Ended
(in $000.) March 31, March 31, December 31, 2004 2003 2003
Beginning Balanc e S 2,700 S 1,525 $ 1,525 Add: Provision related to sales made in current period 1,120 1,062 6,680 Less: Credits issued during the current period (810) (1,002) (5,505)
Ending Balance S 3,010 S 1,585 S 2,70 0
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Note S. Our inventory consists of the following:
March 31, December 31, 00 $0001) 2004 2003
Raw materials S 16,387 S 9,671 Work in process 2,011 5,303 Finished goods 11,750 13,505
$ 30,148 $ 28,479&sp;
The Company, as most companies in the generic pharmaceutical industry, may build invento ries of certain ANDA related products that have not yet received FDA approval and/or satisfactory resolution of patent in fringement litigation, when it believes that such action is appropriate to increase its commercial opportunity.
As of March 31, 2004, the Company 's total inventory of $30 ,148,000 included $4,495, 000 in invento ries relating to products pending launch while IMPAX awaits receipt of FDA marketing approval and/or satisfactory resolution of patent infringement litigation , as follows :
(in $000,)
Raw mate rials S 3,876 Work in process - Finished goods 619
Total $ 4,495
Note 6. Intangibles consist of the following :
Estimated useful lire March 31, December 31 , (in $000e) ( years) 2004 2003
Product rights and licenses 3-8 S 2,691 S 2,691
Less: Accumulated amortization (2,408) (2,312 )
$ 283 $ 379
Amortization expense was $96,000 for the three months ended March 31, 2004 . Expected amortization expense for 2004 will be approximately $379,000.
Note 7. Accrued Expenses and Deferred Revenue
March 31, December 31, (10 $0001$) 2004 2003
Sales returns S 4,980 S 4,12 1 Deferred revenues 1,821 1,75 1 Accrued salaries and payroll expenses 2,875 1,64 9 Patent infringement and other legal expenses 1,623 1,32 7 Accrued Medicaid rebates 586 61 3 Accrued royalty and gross profit sharing expense 457 55 9 Other accruals 1,013 46 9 Accrued shelf stock protection 175 232 Accrued professional fees 90 15 1
S 13,620 S 10,87 2
9 Note S. Returns Accrual
Three Months Ended Year Ended
On soft) March 31, March 31, December 31 , 2104 2003 2003
Beginning Balance 4,121 S 3,100 $ 3,100 Add : Provision related to sales made in current period 1,781 132 2,276 Less : Credits issued during the current period (922) (132) (1,255)
Ending Balance S 4,980 $ 3,100 S 4,12 1
Note 9. Commitments and Contingencies
Patent Litigation
There has been substantial litigation in the pharmaceutical, biological , and biotechnology industries with respect to the manufacture , use, and sale of new products that are the subject of conflicting patent rights. One or more patents cover most of the brand name cont rolled-release products for which we are developing generic versions. Under the Hatch-Waxman Amendments, when a drug developer files an ANDA for a gene ric drug, and the developer believes that an unexpired patent which has been listed with the FDA as covering that b rand name product will not be infringed by the developer 's product or is invalid or unenforceable, the developer must so certify to the FDA . That ce rtification must also be provided to the patent holder, who may challenge the developer's certification of non-infringement, invalidity or unenforceability by filing a suit for patent infringement within 45 days of the patent holder's receipt of such certification. If the patent holder files suit, the FDA can review and app rove the ANDA, but is prevented from granti ng final marketing approval of the product until a final judgment in the action has been rendered, or 30 months from the date the certification was received , whichever is sooner. Should a patent holder commence a lawsuit with respect to an alleged patent in fringement by us, the uncertainties inherent in patent litigation make the outcome of such litigation difficult to predict. The delay in obtaining FDA app roval to market our product candidates as a result of litigation, as well as the expense of such litigation, whether or not we are successful , could have a material adverse effect on our results of operations and financial posi tion . In addition , there can be no assurance that any patent li tigation will be resolved prior to the 30-month pe riod . As a result, even if the FDA were to app rove a product upon expiration of the 30-month period, we may not commence marketing that product if patent litigation is s till pending.
Lawsuits have been filed against us in connection with fourteen of our Paragraph IV filings . The outcome of such litigation is difficult to predict because of the uncertainties inherent in patent litigation .
As part of our patent litigation strategy, we had obtained two policies covering up to $7 million of patent infringement liability insurance from American International Specialty Line Company ("AISLIC"), an affiliate of AIG International. This litigation insurance covered us aga inst the costs associated with patent infringement claims made against us relating to seven of the ANDAS we filed under Paragraph IV of the Hatch-Waxman Amendments. Both policies have reached their limit of liability. While Teva has agreed to pay 45% to 50'% of the attorneys' fees and costs (in excess of the $7 million covered by our insurance policies) related to the twelve products covered by our strategic alliance agreement with Teva, we will be responsible for the remaining expenses and costs for these products, and all of the costs associated with patent litigation for our other products and our future products .
We do not believe that this type of litigation insurance will be available on acceptable terms for our current or future ANDAs. In those cases, our policy is to record such expenses as incurred.
Although the outcome and costs of the asserted and unasserted claims is difficult to predict because of the uncertainties inherent in patent litigation, management does not expect the Company's ultimate liability for such matters to have a material adverse effect on its financial condition, results of operations, or cash flows .
FIN 4 5 In November 2002, the FASB issued FIN No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." Guarantees and claims arise during the ordinary course of business from relationships with suppliers, customers, and strategic partners when the Company undertakes an obligation to guarantee the performance of others through the delivery of cash or other assets if specified tri ggering events occur . Non-performance under a contract by the guaranteed party triggers the obligation of the Company . As of March 31, 2004, all indemnifications included in agreements as of that date are excluded from the scope of FIN No . 45 as they relate primarily to our own future performance and do not require any contingent payments .
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As of March 31, 2004, our total contractual commitments on loans , operating leases, and royalty agreements have not materially changed since December 31, 2003, as disclosed in our Report Form 10-K .
Note 10. Changes in Securities
As part of the strategic alliance agreement that we entered into with a subsidia ry of Teva Pharmaceutical Industries Ltd. (Teva) in June 2001, we received $22.0 million from Teva which assisted in the construction and improvement of our Hayward, Califo rnia facilities and the development of the twelve products specified in our strategic alliance agreement. The $22.0 million was reflected on the balance sheet as a refundable deposit. The refundable deposit was p rovided in the form of a loan. Pursuant to the agreement, accrued and future interest on the refundable deposit was forgiven during 2002 as a result of our receipt of tentative or final approvals for at least three of our products . In addition, Teva forgave portions of this loan as we achieved certain milestones relating to the development and launch dates of the products desc ribed in our strategic alliance agreement . In addition, by requiring us to repay only 50% of the portion of the loan related to certain missed milestones , Teva chose to continue to have exclusive marketing rights for those products . At our option, we could repay Teva any amounts we owed it as part of the loan in cash or in shams of our common stock . The price of the common stock for purposes of repaying any amounts owed under the loan was the average closing ale price of our common stock measured over a ten-trading-day period ending two days prior to repayment.
In September 2003, we issued 888,918 shares of common stock to Teva, paying $13 .5 million of the original $22 .0 million refundable deposit . In December 2003, Teva exercised its option to retain marketing exclusivi ty for certain products and, accordingly , reduced the refundable deposit by $3 .5 million to $5 .0 million . In Janua ry 2004 , Teva's exercise of the marketing exclusivi ty option for certain p roducts reduced the refundable deposit to $2 .5 million. On Janua ry 15, 2004 , we satis fied the remaining $2 .5 million refundable deposit obligation to Tevs by issuing 160,751 shares of our common stock to Teva. These shares were issued to Teva without registration under the Securi ti es Act of 1933, as amended, in reiance upon the exemption from registration provided by Section 4(2) of the Securities Act of 1933 .
On January 30, 2004, the holders of the Series 2 Preferred Stock converted their entire 75,000 preferred shares into 1,500,000 shares of common stock.
ITEM 2 . MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION S To the extent any statements made in this report contain information that is not historical, these statements areforward- looking in nature andexpress the beliefs, expectations or opinions of management. For example, words such as "may, " "will, " "should, " "estimates, " 'predicts" "potential, " "continue, " "strategy, " "believes, " "anticipates, " "plans, " "expects, " "Intend,, " and similar expressions are intended to identify forward- looking statements. Such statements are based on current expectations and involve a number of known and unknown risks and uncertainties that could cause IMPAX s future results, performance, or achievements to differ significantly from theresults, performance, or achievements expressed or implied by suchforward-looking statements. Such risks and uncertainties include, but are not limited to, IMPAX's ability to obtain sufflcient capital to fund its operations, the difficulty of predicting FDA filings and approvals, consumer acceptance and demand for new pharmaceutical products, the impact of competitive products and pricing, IMPAX's ability to successfully develop, test and commercialize pharmaceutical products, IMPAX's limited manufacturing capability may require it to build additional capacity, IMPAX's ability to develop an effective sales organization to market and sell future brand nameproducts, IMPAX's reliance on key strategic alliances, the uncertainty 9fpatent litigation, the availability of raw materials, the regulatory environment, decreases in healthcare reimbursements could limit IMPAX's ability to sell products or decrease its revenues, dependence on patent and other protection for innovative products, exposure to product liability claims, fluctuations in operating results, terrorist attacks, the location of its Corporate Headquarters in an earthquake zone, future dilution in ownership as a result of terms ofoutstanding and future issuances of securities, the volatility of IMPAX's stock price, controlof IMPAX is concentrated in its directors and executive officers who own approximately 28% of its stock and other risks detailed from time to time in IMPAX's f lings with the Securities and Exchange Commission . Forward-looking statements speak only as to the date on which they are made, and IMPAX undertakes no obligation to update publicly or revise any forward- looking statement, regardless of whether new information becomes available, future developments occur, or otherwise.
General
Impax Laboratories, Inc. was formed through a business combination on December 14, 1999 between Impax Pharmaceuticals, Inc ., a privately held drug delivery company, and Global Pharmaceutical Corporation, a generic pharmaceutical company . Impax Pharmaceuticals, Inc . merged with and into Global, with Impax stockholders receiving 3.3358 shares of Global common stock for each share of Impax Pharmaceuticals, Inc . At the conclusion of the merger, Impax Pharmaceuticals, Inc. stockholders held over 70%6 of the combined company. For accounting purposes, the merger has been treated as a recapitalization of Impax Pharmaceuticals, Inc. with Impax Pharmaceuticals, Inc . deemed the acquirer of Global in a reverse acquisition. As a reverse acquisition, our historical operating results prior to the merger are those of Impax Pharmaceuticals, Inc. and only include the operating results of Global after the merger. In connection with the merger, the surviving company changed its name to Impax Laboratories, Inc . Back to Contents
We are a technology based, specialty pharmaceutical company applying formulation and development expertise, as well as our drug delivery technology, to the development of controlled-release and niche generics, in addition to the development of branded products . As of March 31, 2004, the Company markets thirty- three generic pharmaceuticals, which represent dosage variations of fourteen different pharmaceutical compounds, and have seventeen applications pending at the FDA, including five tentatively approved, that address approximately $5.4 billion in U.S. product sales for the twelve months ended February 29, 2004, according to NDCHealth. Thirteen ofthese pending filings were made under Paragraph IV of the Hatch-Waxman Amendments . We have approximately twenty-seven other products in various stages of development for which applications have not yet been filed . These products are generic versions of pharmaceutical products that had U .S . sales of approximately $14 .5 billion for the twelve months ended February 29, 2004, according to NDCHealth .
Critical Accounting Poli cy Related to Revenue Recognition
The Company recognizes revenue in accordance with SEC Staff Accoun ting Bulletin ("SAB") 101 issued by the SEC in December 1999 . We recognize revenue from the sale of products when the shipment of products is received and accepted by the customer . Provisions for estimated discounts, rebates, chargebacks, returns and other adjustments are provided for in the period the related sales are recorded . In December 2003, the SAB 104 was issued by.the SEC. This bulletin revises and clarifies portions of Topic 13 of the Staff Accoun ting Bulletin to be consistent with current accounting and auditing guiance and SEC rules and regulations .
Emerging Issues Task Force (EITF) No. 00-21 supplemented SAB 101 for accounting for multiple element arrangements . The Company has entered into several strategic alliances that involve the delive ry of multiple products and services over an extended period of time . In multiple element arrangements, the Company must determine whether any or all of the elements of the arrangement can be separated from one another. If separation is possible, revenue is recognized for each deliverable when the revenue recognition c riteria for the specific deliverable is achieved. If separation is not possible , revenue recogni tion is required to be spread over an extended period .
Under EITF No . 00 -21, in an arrangement with multiple elements , the delivered item should be considered a separate unit of accounting if all of the following criteria are met:
1) the delivered item has value to the customer on a standalone basis ; 2) there is objective and reliable evidence of the fair value of the undelivered item; and 3) if the arrangement included a general right of return, or whether delivery or performance of the undelivered item is considered probable. The Company reviews all of the terms of its strategic alliances and follows the guidance from EITF No. 00-21 for multiple element arrangements.
In June 2001, the Company entered into a Strategic Alliance Agreement with a subsidiary of Teva for twelve controlled- release generic PharmaceuticaI products . The agreement granted Teva exclusive U .S. prescription marketing rights for these products for a period of ten years from the date of Teva's first sale of the products .
Revenues from product sales for these products under our strategic alliance are recognized at the time title and risk of loss transfers to Teva's customers. During the three months ended March 31, 2004, the Company commenced shipping its Bupropion Hydrochloride 100 mg and 150 mg Controlled Release Tablets . Teve ships the Bupropion products to its customers and reports the results on a monthly basis . Teva provides to IMPAX a financial report detailing its gross sales less applicable chargebacks, rebates and other credits to arrive at net sales, cost of sales information and gross margins for the Bupropion products . The information on the financial report is used by IMPAX to record its monthly revenue for the Bupropion 100 mg and 150 mg products . Additionally, the amount of revenue that IMPAX earns is based on a fixed gross margin sharing percentage. 12 Back to Contents
Under the July 2003 Exclusivity Transfer Agreement with Andrx and Teva pertaining to the Bup ropion Hydrochloride p roducts, Andrx is entitled to certain payments for the sales of the 150 mg strength for a 180-day period from the product launch date . These payments are made directly by Teva to Andrx.
Results of Operation s
Except for the three months ended March 31, 2004, we have incurred net losses in each quarter since our inception . We had an accumulated de ficit of $95,501 ,000 at March 31, 2004 .
THREE MONTHS ENDED MARCH 31, 2004 , COMPARED TO THREE MONTHS ENDED MARCH 31, 2003
Overview
The net income for the three months ended March 31, 2004, was $9,048,000 as compared to a net loss of $3 ,213,000 for the three months ended March 31, 2003.
Revenues
Revenues for the first quarter of 2004 were a record $38,853,000, up more than 240% compared with revenues of $11,425,000 in the prior year's first quarter . The year-over-year increase for the first quarter was primarily due to shipments of our generic versions of Wellbutrin® SR (Bupropion Hydrochloride) 100 mg and 150 mg Controlled Release Tablets, both of which were approved by the FDA during the quarter and represented approximately 61% of total re venues . During the quarter, upon approval from the FDA, we also commenced shipments of Demeclocycline Hydrochloride (Declomycin®) 150 mg and 300 mg Tablets .
Th e Company generated $3,031,000 of other revenues in the 2004 pe riod,as compared to $359,000 in the 2003 period. Other revenue for the 2004 period consisted of $2,500,000 from Teva, which represented the reversal of a portion of the refundable deposit for its exercise of the exclusivity option for certain products. The balance of $531 ,000 of other revenue represents revenues recognized pursuant to strategic a greements with Schering-Plough, Wyeth, and Novertis. The following table summarizes the activi ty in net revenues for the three months ended March 31, 2004 and 2003 :
2004 2003
Product sales S 41,552 S 14,153 Less : Rebates (I 120 Chargebacks (1 ,314) Product return reserve (1,781) (132) Other credits (681) (579)
Net sales 35,822 11,066 Revenue from reversal of refundable deposit from Teva 2,500 - Other Revenues 531 359
Total Revenues $ 38,853 S 11,425
The rebates, chargebacks, returns and other credits decreased for the three months ended March 31, 2004 to approximately 14% of product sales as compared to approximately 22% for the comparable period in 2003 . This decrease was mainly due to Bupropton Hydrochloride 100 mg and 150 mg Controlled Release Tablets, Loratadine, and Pseudoephedrine Sulfate (5mgtl20mg) 12-hour Extended Release Tablets which are exempt from rebates, chargebacks and other credits as per the agreements with Schering-Plough, Wyeth, and Novartis . The increase in the reserve for product returns was primarily due to returns for LIPRAM products. Product returns for the three months ended March 31, 2004 and 2003 were $922,000 and $132,000, respectively.
Cost of Sales
The cost of sales for the three months ended March 31, 2004, was S 18,550,000 as compared to $8,147,000 for the same period in 2003 . The overall increase in cost of sales was primarily due to the increase in cost of materials as a result of increased product sales, primarily from Bupropion Hydrochloride 100 mg and 150 mg Controlled Release Tablets .
13 Gross Margin
Gross margin for the three months ended March 31, 2004 was $20,303,000 as compared to $3 ,278,000 for the same period in 2003 . The g ross margin improvement was prima rily due to higher net product sales, such as Bup ropion Hydrochloride 100 mg and 150 mg Controlled Release Tablets and Demeclocycline Hydrochloride 150 and 300 mg Tablets and bigha revenue from strategic alliances , which include amortization of deferred revenue for up-front and milestone payments of $531,000, as compared to $359,000 in 2003. In addition, $2,500,000 of other revenues represented the reversal of a portion of the refundable deposit from Teva under the strategic alliance agreement for its exercise of the exclusivity option for certain products .
Research and Development Expenses
The research and development expenses for the three months ended March 31 , 2004 were $6,504,000 less reimbursements of S 11,000 by a subsidiary of Teva Pharmaceutical Industries, Ltd. under the Strategic Alliance Agreement signed in June 2001 , as compared to $3,755,000 less reimbursements of S 132,000 for the same period in 2003. The higher research and development expenditures in 2004 as compared to 2003 we re attributable to higher legal expenses related to patents and alleged patent infringement lawsuits , higher pe rsonnel costs, Active Pharmaceutical Ingredient (API) costs, clinical studies, and new product introduction costs.
Se ing Expenses
The selling expenses for the three months ended March 31, 2004 were $726,000 as compared to $568 ,000 for the same period in 2003 . The increase in selling expenses as compared to 2003 was primarily due to higher personnel costs.
General and Administrative Expenses
The general and administrative expenses for the three months ended March 31, 2004 were $3,351 ,000 as compared to $2,122,000 for the same pe riod in 2003 . The increase in general and administrative expenses as compared to 2003 was p rimarily due to higher professional fees, insurance premiums, and personnel costs.
Interest Incom e
Interest income for the three months ended March 31 , 2004 was $56,000 as compared to $42,000 for the same period in 2003 , primarily due to higher average cash equivalents for the quarter.
Interest Expense
Interest expense for the three months ended March 31, 2004 was $272,000 as compared to $231,000 for the same period in 2003 . The interest expense for 2004 relates p rimarily to the two Cathay Bank loans, and the revolving credit facility and term loan agreement with Wachovia Bank N .A. The following table summarizes the activity for the three months ended March 31, 2004 and 2003 :
2004 200 3
(in $000s) Interest expense 272 $ 23 1
Total interest expens e S 272 $ 23 1
Income Taxes
In March 2004, the Company provided for income taxes of $476,000, or 5% of income before taxes, as compared to SO for the 2003 period . Such income tax provision reflects the partial reversal of the deferred income tax asset valuation allowance recognized in prior years . The valuation allowance was reduced to reflect the realization of federal and state net operating loss carryforwards that offset the current tax component of the income tax provision. At December 31, 2003, the Company had a net operating loss-carryforward totaling approximately $94,600,000, which expires from 2009 through 2023 . Net Income
The net income for the three months ended March 31, 2004, was $9,048,000 as compared to a net loss of $3,213,000 for the same period in 2003 . The net income for the three months ended March 31, 2004 was due primarily to the introduction of the Bupropion 100 mg and 150 mg products marketed by Teva, and Demeclocycline Hydrochloride 150 and 300 mg. Tablets. In addition, the other revenues of $3,031,000 contributed to the profitability for the quarter . Hack to Contents
Liquidity and Capital Resources
As of March 31, 2004, we had S 19,491,000 in cash and cash equivalents. Only $200,000 of the account balances are insured by the Federal Depository Insurance Company (FDIC). The balance of the Company' s cash equivalents are held in U.S . Treasury securities, which are not insured by the FDIC .
We generated cash in excess of our working capital requirements for the three months ended March 31, 2004 . Our cash flows provided by operations were a positive amount of $4,982,000, as compared to a negative amount of $871,000 in the prior year . This increase was primarily related to the change, year-over-year, in net income, partially offset by increases in working capital account balances . In addition, the remaining balance of the refundable deposit was satisfied by issuing 160,751 shares of common stock to Teva and by Teva's exercise of the exclusivity option for certain products . As of March 31, 2004, to our knowledge, Teve owns 2,511,752 shares of IMPAX common stock, or approximately 4 .3% of the outstanding stock.
The net cash provided by financing activities for the three months ended March 31, 2004, was approximately $1,029,000 consisting of the $1,985,000 net proceeds from issuance of common stock upon exercise of stock options and warrants, and net repayments of $956,000 primarily from the Wachovia credit facility.
Our capital expenditures for the three months ended March 31, 2004 were $2,025,000 as compared to $698,000 for the same period in 2003.
In December 2003 , the Company transferred the $25 million Loan and Security Agreement from Congress Financial Corporation to Wachovia Bank, N.A ., thereby securing lower interest and less restrictive borrowing terms. The revolving loan is collateralized by eligible accounts receivable and inventory, subject to sublimits and other terms , and the term loan is collateralized by machine ry and equipment, with a 60-month amor tization. In addition, a $10 million restricted cash account was established as collateral for this credit facility , to be reduced based on meeting certain cumulative positive cash flow targets. The interest rates for the revolving loans are prime rate plus 0 .75%, or eurodollar rate plus 2.75%, at our option, based on excess availability . The term loan has an interest rate of prime rate plus 1 .5%, or eurodollar rate plus 4%, at our option. As of March 31, 2004, we borrowed approximately $6,953,000 against the revolving credit line and $3,085,000 against the term loan. Th e borrowing availability under the revolving credit line changes daily based on eligible accounts receivable and inventory . The revolving credit facili ty and the term loan agreement have two financial covenants : one related to Adjusted Excess Availability, and the other one related to Capital Expenditures limits. At March 31, 2004, both financial covenants were met .
We have no interest rate or derivative financial instruments nor mate rial foreign exchange risks. We are also not party to any off-balance-sheet arrangements, other than operating leases .
We expect to incur signi ficant operati ng expenses, particularly research and development, for the foreseeable future in order to execute our business plan . We, therefore, anticipate that such operating expenses, as well as planned capital expenditures , will constitute a material use of our cash resources.
On April 5, 2004, the Company completed a convertible senior subordinated debenture offering of $95,000,000 for net proceeds of $91,675,000. The proceeds of the debentures will be used for general corporate purposes , including working capital requirements, manufacturing of our p roducts , and research and development.
To date, we have funded our research and development and other operating activities through equity and debt financing , and strategic alliances.
We have not paid any cash dividends on our common stock and we do not plan to pay any such cash dividends in the foreseeable future . We plan to retain any earnings for the operation and expansion of our business. Our loan agreements and our strategic agreement with Teva prohibit the payment of dividends without the other party's consent .
Recent Accounting Pronouncement s
In November 2002, the EITF reached a consensus on Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables ." EITF Issue No. 00-21 Provides guidance on how to account for arrangements that involve the delivery or performance of multiple products, services, and/or rights to use assets. The provisions of EITF Issue No. 00-21 applies to revenue arrangements entered into in fiscal periods beginning after June 15, 2003 . We implemented the provisions of EITF Issue No . 00-21 in revenue recognition of certain strategic agreements . The Company reviews all of the terms of its strategic alliances and follows the guidance from this Issue for all multiple element arrangements .
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In December 2002 , the FASB issued SFAS No . 148, "Accounting for Stock-Based Compensation - Transition and Disclosure , amendment of FASB Statement No. 123 ." This statement provides additional t ransition guidance for those entities that elect to voluntarily adopt the provisions of SFAS No. 123, "Accounting for Stock Based Compensation ." Furthermore, SFAS No. 148 mandates new disclosures in both interim and year-end financial statements within the Company's Significant Accounting Policies footnote. The Company has elected not to adopt the recognition provisions of SFAS No. 123, as amended by SFAS No . 148. However, the Company has adopted the disclosure provisions and has included this information in Note Ito the Company's financial statements .
In January 2003 , the FASB issued FASB Interpretation No. 46 ("FIN 46'), "Consolidation of Variable Interest Entities ." FIN 46 clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements,"to certain entities in which equi ty investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the en tity to finance its activities without addi tional subordinated financial support from other parties . FIN 46 applies immediately to variable interest en tities created after January31, 2003, and to variable interest entities in which an enterprise obtains as interest after that date. It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that tt acquired before February 1, 2003. FIN 46 applies to public enterprises as of the beginning of the applicablero interim or annual period. On October 8, 2003, the FASB decided to defer FIN 46 undl the first reporting period ending after December 15, 2003 . The p visions of this Interpretation did not have a material impact on the Company 's financial condition or results of operations .
In December 2003 , the FASB issued FIN No . 46R, Consolidation of Variable Interest Entities, clarifying the application of Accounting Research Bulletin No. 51, Consolidated Financial Statements , to certain entities in which equity investors do not have the characte ristics of a controlling financial interest or do not have sufficient equity at risk for the enti tyto finance its activities without additional subordinated financial support. The provisions of this Interpretation do not have a material impact on the Company 's financial condition or results of operations.
In February 2004 , the FASB issued revised FSP pertaining to FIN 46(R). The revised FSPs replace certain previously issued FIN 46 FSP for en tities to which FIN 46(R) is applicable . This revision to FIN 46 did not have a mate rial impact on the Company's financial condition or results of operation .
In February 2004, the FASB revised SFAS 133, Accounting for Derivative Instruments and Hedging Activities for Implementation issue E2L , AIJ, and C6 . The revisions to SFAS 133 did not have a mate rial impact on the Company 's financial condition or results of operati on .
In December 2003, the FASB revised SFAS 132, 'Employers' Disclosure About Pensions and Other Post Retirement Benefits ." This S tatement does not change the measurement or recognition of those plans required by FASB 87, "Employers' Accounting for Pensions ," and No. 106, "Employers ' Accounting for Post Retirement Benefits Other than Pensions ." This Statement retains the disclosure requirements contained in FASB No. 132, "Employers ' Disclosure about Pensions and Other Post Retirement Plans." The provisions of this Statement do not have a material impact on the Company's financial condi tion or results of operations. Du ring the three months ended March 31, 2004 and 2003 , the employer 401-K match was $24 ,352 and $21,347 , respectively.
In January2004, the FASB issued FASB Staff Position FAS 106 -1 to provide temporary guidance concerning the Medicare Prescription Drug Improvement and Modernization Act of 2003 . The provisions of this pronouncement did not have a material impact on the Company 's financial condition or results of ope rations .
Major Operational Highlight for the Three Months Ended March 31, 2004
• On January 28, 2004 , IMPAX Laboratories, Inc. announced that the U.S. Food and Drug Administ ration (FDA) has granted final approval to the Company's Abbreviated New Drug Applica tion (ANDA) for its generic version of Wellbutrin® SR (Bupropion Hydrochlo ride) 100 mg Cont rolled Release Tablets and has granted tentative approval to the Company 's generic version of Wellbutrin SR 150 mg Controlled Release Tablets . GlaxoSmithKline markets Wellbutrin SR for the treatment of depression . According to NDCHealth, U.S. sales of these dosage forms of Wellbutrin SR Tablets were approximately $1 .4 billion in the twelve months ended Februa ry 29, 2004 . • On January 29, 2004, IMPAX Laboratories , Inc. announced that the Court of Appeals for the Fede ral Circuit in Washington, D.C . upheld a lower court decision that ruled against certain claims by GlaxoSmithKline in regards to the Company's Abbreviated New Drug Applications (ANDAs) for Wellbutrin SR(R) (Bupropion Hydrochloride) 100 mg and 150 mg and for Zyban(R) (Bupropion Hydrochloride) 150 mg. GlaxoSmithKline markets Wellbutrin SR for the treatment of depression and Zyban for smoking cessa tion. 16 On February 27, 2004, IMPAX Laboratories, Inc. announced that the U .S . Food and Drug Administration (FDA) has granted tentative approval to the Company's Abbreviated New Drug Application for its generic version of Allegra(R)-D (Fexofenadine Hydrochloride and Pseudoephedrine Hydrochloride 60mg/ 120mg) Extended Release Tablets . Aventis Pharmaceuticals markets Allegra-D for the treatment of the symptoms associated with seasonal allergic rhinitis. According to NDCHealth, U .S . sales of Allegra-D were approximately $452 million in the twelve months ended February 29, 2004 . • On March 5, 2004, IMPAX Laboratories, Inc . announced that the U.S. Food and Drug Administration (FDA) has granted final approval to the Company's Abbreviated New Drug Application for a generic version of Claritin®-D 24-Hour (Loratedine and Pseudoephedrine Sulfate, 10mg/240mg) Extended Release Tablets . Schering-Plough Corporation markets Claritin-D 24-Hour as an over-the -counter (OTC) drug for the reliefof symptoms of seasonal allergic rhinitia (hay fever). According to NDCHealth, U.S. sales of Claritin-D 24-Hour were $21 million for the twelve months ended February 29, 2004. The Company is working with its marketing partner toward the commercial launch of this product . • On March 8, 2004, IMPAX Laboratories, Inc . announced that the U.S. Food and Drug Administration (FDA) has granted tentative approval to the Company's Abbreviated New Drug Application (ANDA) for its generic version of Tricor(R) (Fenofibrate) Tablets . Trim Tablets are marketed by Abbott Laboratories, Inc. to assist patients in managing their cholesterol levels. The drug is indicated for use in reducing elevated LDL cholesterol, total cholesterol, triglycerides and Apo B and increasing HDL cholesterol in patients with primary hypercholesterolemia or mixed lipidemia . The drug has also been approved as adjunctive therapy for the treatment of hypertriglyceridemia, a disorder characterized by elevated levels of very low density lipoprotein (VLDL) in the plasma . According to NDCHealth, U .S . sales of Tricor Tablets were approximately $620 million for the twelve months ended February 29, 2004 . • On March 22, 2004, IMPAX Laboratories, Inc . announced that the U.S. Food and Drug Administration (FDA) has granted final marketing approval to the Company's Abbreviated New Drug Application (ANDA) for its generic version of Wellbutrin(R) SR (Bupropion Hydrochloride) 150 mg Controlled Release Tablets. The FDA had previously granted final approval for the Company's application for the 100 mg strength . GlaxoSmithKline markets Wellbutrin SR for the treatment of depression. Both products were shipped to our marketing partner, Teva. • On March 23, 2004, IMPAX Laboratories, Inc. announced that the U.S. Food and Drug Administration (FDA) has granted final marketing approval to the Company's Abbreviated New Drug Application (ANDA) for its generic version of Declomycin® (Demeclocycline Hydrochloride) 150 and 300 mg. Tablets. ESP Pharma marketsDeclomycin for the treatment of various infections . According to NDCHealth, U .S . sales of Declomycin were approximately $24 million for the twelve months ended February 29, 2004 . IMPAX's Global Pharmaceuticals division began marketing the product immediately. • On March 30, 2004, IMPAX Laboratories, Inc . announced the pricing of its private offering of $95 million agg regate principal amount of 1 .250% convertible senior subordinated debentures due 2024, to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. (For additional details, please see Note 2.) ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RIS K The Company 's cash and cash equivalents includes U.S. government and short term commercial paper stated at cost which approximates market value . The primary objective of the Company's investment ac ti vities is to preserve principal while, at the same time, maximize yields without signi ficantly increasing risk . To achieve this objective, the Company maintains its portfolio in a variety of high credit quality secu rities, including U .S. Government securities, treasu ry bills, and short-term commercial paper. One hundred percent of the Company 's portfolio matures in less than one year. The car rying value of the portfolio app roximates the market value at March 31 , 2004 . The Company's debt instruments at March 31, 2004, are subject to fix ed and variable interest rates and principal payments . We believe that the fair value of our fixed and variable rate long-term debt approximates their carrying value of approximately S 16.6 million at March 31 , 2004 . While changes in market interestrates may affect the fair value of our fixed and variable rate long-term debt, we believe the effect, if any, of reasonably possible near-term changes in the fair value of such debt on the Company 's financial statements will not be material.
We have no interest rate or derivative financial instruments nor material foreign exchange risks . We are also not party to any off-balance-sheet arrangements, other than operating leases.
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ITEM 4 . CONTROLS AND PROCEDURE S Th e Company, under the supervision and with the participation of our management, including our principal executive officers and our principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report . Based on this evaluation, our principal executive officers and our principal financial officer concluded that our disclosure controls and procedures are effective in reaching a reasonable level of assurance that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized, and reported within the time period specified in the Securities and Exchange Commission's rules and forms . The CEO and CFO also conducted an evaluation of internal control over financial reporting ("Internal Control") to determine whether any changes in Internal Controls occurred during the quarter that have materially affected, or which are reasonably likely to materially affect, Internal Controls.
Based on this evaluation, there has been no such change during the quarter covered by this report . A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met . Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs . Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. The Company conducts periodic evaluations of its internal controls to enhance, where necessary, its procedures and controls . Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detecte d
ITEM 1. LEGAL PROCEEDINGS Patent Litigatio n
There has been substantial litigation in the pharmaceutical , biological, and biotechnology industries with respect to the manufacture, use, and sale of new products that ere the subject of conflicting patent rights . One or more patents cover most of the brand name controlled-release products for which we are developing generic versions. Under the Hatch-Waxman Amendments, when a drug developer files an ANDA for a generic drug, and the developer believes that an unexpired patent which has been listed with die FDA as covering t at brand name product will not be infringed by the developer 's product or is invalid or unenforceable, the developer must so certify to the FDA . That certification must also be provided to the patent holder, who may challenge the developer's certification ofnon-infringement, invalidity or unenforceability by filing a suit for patent in fringement within 45 days of the patent holder's receipt of such certification . If the patent holder files suit, the FDA can review and approve the ANDA, but is prevented from granting final marketing approval of the product until a final judgment in the action has been rendered,or 30 months from the date the certification was received, whichever is sooner. Should a patent holder commence a lawsuit with respect to an alleged patent infringement by us, the uncertainties inherent in tent litigation make the outcome of such litigation difficult to predict . The delay in obtaining FDA approval to market our product candidates as a result of litigation , as well as the expense of such litigation, whether or not we are successful , could have a material adverse effect on our results of operations and financial position . In addition , there can be no assurance that any patent litigation will be resolved prior to the 30-month pe riod. As a result, even if the FDA were to app rove a product upon expiration of the 30-month period , we may not commence marketing that product if patent litigation is still pending.
Lawsuits have been filed against us in connection with fourteen of our Paragraph IV filings. The outcome of such litigation is difficult to predict because of the uncertainties inherent in patent litigation .
p The Omeprazole Cases
In May 2000, AstraZeneca AB and four of its related companies filed suit against IMPAX in the U.S. District Court in Wilmington, Delaware claiming that IMPAX's submission of an ANDA for Omeprazole Delayed Release Capsules , 10 mg and 20 mg, constitutes infringement of six U .S . patents relating to AstraZeneca's P rilosec product . The action seeks an order enjoining IMPAX from marketing Omeprazole Delayed Release Capsules, 10 mg and 20 mg until Feb ruary 4, 2014, and awarding costs and attorney fees. There is no claim for damages .
In February 2001, AstraZeneca and the same related companies filed the same suit against IMPAX in the same federal court in Delaware for infringement, based upon IMPAX's amendment to its ANDA adding 40 mg strength Omeprazole Delayed Release Capsules.
AstraZeneca filed essentially the same lawsuits against nine other gene ric pharmaceutical companies (Andrx, Genpharm, Cheminor, Kremers, LEK, Eon, Mylan, Apotex, and Zenith). Due to the number of these cases, a multidistrict li tigation proceeding, In re Omeprazole 10 m g , 20 mg, and 40 mg Delayed Released Capsules Patent Litigation, MDL-1291, has been established to coordinate pre-tr ial proceedings. Both lawsuits filed by AstraZeneca against IMPAX have been transferred to the multidistrict litigation. l8 Back to Contents
Early in the multidist rict litigation, the trial court ruled that one of the six patents-in-suit was not infringed by the sale of a gene ric omeprazole product and that certain other patents were invalid. These rulings effectively eliminated four patents from the trial of these infringement cases, although AstraZeneca may appeal these rulings as part of the overall appeal process in the case .
On October 11, 2002, after a trial involving Andrx , Genpharm, Cheminor, and Kremers, the trial judge handling the multidistrict litigation ruled on AstraZeneca's complaints that three of these four defendants (First Wave Defendants) infringed the remaining patents-in-suit. The trial judge ruled that three of the Fi rst Wave defendants , Andrx , Genpharm, and Cheminor, infringed the remaining two patents asserted by AstraZeneca in its complaints, and that those patents are valid until 2007. In the same ruling , the trial court ruled that the remaining First Wave Defendant, Kremers, did not infringe either of the remaining two patents. This defendant's formulation differed from the formulation used by the other First Wave Defendants in several respects . In mid-December 2003, the U.S. Court of Appeals for the Federal Circuit a ffirmed the October 2002 ruling in all respects . Subsequent peti ti ons for rehearing have been denied.
The formulation that IMPAX would employ in manufacturing its generic equivalent of omeprazole has not been publicly announced . IMPAX's formulation has elements that resemble those of other First Wave Defendants, but it also has elements that differ . Although the ruling by the trial court in the multidistrict litigation has a significant effect on the course of AstraZeneca's litigation a$sinst IMPAX, application of the trial court's opinion is not certain . IMPAX believes that it has defenses to AstraZeneca's claims of infringement, but the opinion rendered by the trial court in the First Wave cases makes the outcome of AstraZeneca's litigation against IMPAX uncertain .
Two of the remaining six defendants (Second Wave Defendants) filed Motions for Summary Judgment of Non-Infringement, based upon the October 2002 ruling. The trial court has deferred ruling on those motions until discovery is completed .
In December 2003, the trial court entered a new scheduling order gove rning pre-trial proceedings relating to the Second Wave Defendants, including IMPAX . The schedule for completion of the li tigation in the Second Wave, including AstraZeneca's litigation against IMPAX, now provides that all fact discovery (with certain exceptions) is complete. AstraZeneca 's expert reports on issues as to which it bears the burden of proof, including issues of alleged infringement , were produced on February 17, 2004. IMPAX's responsive expert reports will be completed by July 12 , 2004. Any rebuttal reports by AstraZeneca will be required to be produced by August 6, 2004. The parties have not submitted their joint schedule for expe rtdepositions to the Special Master and the S pecial Master has not issued an order regarding expert depositions. Depositions of the parties ' experts are expected to occur thereafter and to be completed by mid-December 2004 . Motions for Summary Judgment and responses must be filed and fully b riefed by November 18, 2004. Given the delays which have thus far occurred in the litiga tion and the number of experts already designated by the parties, it is uncertain whether the expert depositions can be completed in the time allotted by the present schedule.
Under the scheduling order, any further Motions for Summary Judgment must be filed by early Fall, and they will be heard by the trial court a fter briefing is completed in November 2004 . IMPAX may file Mo ti ons for Summary Judgment, including a Motion for Summary Judgment of Non-Infringement, following the close of all discovery. If the case is not resolved by summary judgment, the case involving IMPAX will be returned to the U.S. District Court in Delaware for trial. It is likely, given the proceedings in the First Wave cases, that the case against IMPAX will be transferred back to New York for a consolidated trial before the same judge who decided the First Wave cases . Trial will commence as soon as practicable thereafter. If IMPAX does not file a Motion for Summary Judgment , or if such a Motion is denied, the court will schedule a date for trial. IMPAX intends to vigorously defend the action brought by AstraZeneca.
In August 2003 , the court issued an order dismissing four of the patents -in-suit, three with prejudice. On September 30, 2003 , as a result of the court's dismissal, AstraZeneca se rved each of the Second Wave Defendants , including IMPAX, with an amended complaint. In October 2003 , IMPAX filed an answer to the amended complaint in which we asse rted a new counterclaim with antitrust allega tions. The counterclaim will be severed, and proceedings relating to it will be stayed until after trial of the patent infringement case.
GlaxoSmithKline (Glaxo) v. IMPAX: The Buproplon Cases
Glaxo filed a Complaint (Case No. 00-04403) against IMPAX in the U .S . District Court for the Northern District of California on November 3, 2000 alleging infringement of U .S. Patent No. 5,427,798 covering Wellbutrin SR and Zyban . On November 7, 2000, IMPAX filed its Answer to the Complaint which included defenses to the infringement claim, and counterclaimed for patent invalidity. Glaxo has filed suit against Andrx, Watson, Eon (only with regard to Wellbutrin SR) and Excel for similar ANDA filings. 19 Back to Contents
IMPAX filed a Summary Judgment Motion , based upon prosecution history estoppel grounds. The parties completed the briefing on this issue and oral argument was held on November 19, 2001 . At the request of the Court, in July 2002 , both sides submitted briefs on the impact of the recent Sup reme Court decision in Festo v . Shoketsu Kinzoku Kogyo Kabushi Co ., et al . (which we refer to as the Festo decision ) to the pending Motion for Summary Judgment. IMPAX brought an additional Mo ti on for Summary Judgment in early August 2002 , requesting that the court apply another court's decision which limited the scope of the Glaxo '798 patent .
On August 21, 2002 , IMPAX's Motions for SummaryJudgment were granted. Glaxo has appealed this decision to the Court of Appeals for the Federal Circuit and that appeal was fully b riefed on January 22, 2003. Oral argument was heard on June 2, 2003 and the District Court's decision in favor of IMPAX was affirmed by the Cou rt of Appeals on January 29, 2004. Glaxo has filed a request for rehearing or rehea ring en banc.
Previously, Olaxo had decided to settle its Bupropion Hydrochloride 100 mg and 150 mg Extended Release Tablets li tigation with Watson Pharmaceuticals on terms that are confidential.
Aventis Pharmaceuticals Inc .. et aL v.IMPAX: The Fexofenadlue Case s
On March 25 , 2002 , Aventis Pharmaceuticals Inc., Merrell Pharmaceuticals Inc ., and Carderm Capital L.P. (collectively referred to as Aventis) sued IMPAX in the U .S. District Court for the District of New Jersey (Civil Action No. 02-CV- 1322) alleging that IMPAX 's proposed fexofenadine and pseudoephedrine hydrochloride tablets , containing 60 mg of fexofenadine and 120 mg of paeudoephedrine hyd rochlo ride, infringe U.S. Patent Nos. 6,039,974; 6,037,353 ; 5,738 ,872 ; 6,187,791 ; 5,855 ,912; and 6,113,942 . On November 7, 2002, Aventis filed an amended complaint , which added an allegation that IMPAX's Fexofenadine and Pseudoephedrine Hydrochloride 60 mg/120 mg Extended Release Tablet product infringes U.S. Patent No. 6,399,632 . Aventis seeks an injunction preventing IMPAX from marketing its Fexofenadine and Pseudoephedrine Hydrochlo ride 60 mg/120 mg Extended Release Tablet product until the patents-in--suit have expired, and an award of damages for any commercial manufactu re, use, or sale of IMPAX's Fexofenadine and Pseudoephednne Hydrochlo ride 60 mg/120 mg Extended Release Tablet product, together with costs and a ttorneys' fees .
Fact discovery in this action is scheduled to close on October 29, 2004. IMPAX believes that it has defenses to the claims made by Aventis based on noninfringement and invalidity. No trial date has been set.
Aventis has also filed a suit against Barr Laboratories, Inc., Mylan Pharmaceuticals, Inc., Dr. Reddy's Pharmaceu ti cals and Teva Pharmaceuticals USA, Inc. in New Jersey asserting the same patent infringement against these defendants' proposed Fexofenadine and Pseudoephedrine or Fexofenadine p roducts. The IMPAX case has been consolidated for trial with the Barr, Mylan, Dr. Reddy and Teva cases.
On July 23, 2003, IMPAX filed Summary Judgment motions for non-infringement of U.S . Patent Nos. 6,039,974, 6,113,942, and 5,855,912 ; and for non-infringement and invalidity of U.S. Patent No. 5,738,872. Opposition papers were filed on August 11, 2003 . Reply papers were filed on September 24, 2003 . On October 24, 2003, IMPAX filed a brief discussing the impact of the recent Feato decision on their Motions for Summary Judgment of non-infringement . Oral argument for the Summary Judgment Motion regarding the '912, '942, and '974 patents was heard on November 3, 2003 . Oral argument for the Summary Judgment Motion regarding the '872 patent was heard on December 8, 2003 . IMPAX is currently awaiting a decision on these motions.
Purdue Pharma L.P. et al, v IMPAX: The Oxycodone Cases
On April 11, 2002, Purdue Pharma and related companies filed a complaint in the U .S. District Court for the Southe rn District of New York alleging that IMPAX's submission of ANDA No. 76-318 for 80 mg OxyContin Tablets infringes three patents owned by Purdue . The Purdue patents are U.S . Patent Nos. 4,861,598, 4,970,075 and 5 ,266,331 ; all directed to cont rolled release opi~formulations . On September 19, 2002, Purdue filed a second Infringement Complaint regarding IMPAX's 40 mg OxyContin generic product. On October 9, 2002 , Purdue filed a third Infringement Complaint regarding IMPAX's 10 mg and 20 m~ OxyContin generic products. IMPAX filed its answer and wtwterclaims in each case on October 3, 2003 . On November 25, 2003 , Purdue submitted then reply to our counterclaims . Purdue is seeking, among other things, a court order preventing IMPAX from manufacturing, using or selling any drug product that infringes the subject Purdue patents. IMPAX had disputed~juriadiction of the New York courts and brought an action for a Declaratory Judgment of Patent Invalidity in Delaware . The New York court denied IMPAX s Motion to Dismiss and the Delaware action was dismissed.
Purdue previously sued Boeh ringer Ingelheim/Roxane, Endo and Teva on the same patents . One or more of these defendants may resolve the invalidity issues surrounding the Purdue patents prior to IMPAX' s case goes to trial. The Boehringer Ingelheim/Roxane suit is stayed. The Endo action was t ried in June 2003 and post trial b riefs have been filed. In January 2004, the judge in the Endo action ruled that the three patents in suit, the same patents that Purdue had asserted against IMPAX, are unenforceable because they were inequitably procured and enjoined their enforcement . There can be no assurances that such ruling will not be challenged or, if sustained upon challenge , that the rulings in IMPAX's cases will be consistent with such rulings . 20 Back to Contents
IMPAX Y. Aventis Pharmaceuticals . Inc. The Riluzole Cas e
In June 2002, IMPAX filed suit against Aventis Pharmaceuticals, Inc . in the U .S . District Court in Wilmington, Delaware, seeking a declaration that the filing of an ANDA to engage in a commercial manufacture and/or sale of Riluzole 50 mg Tablets for treatment of patients with amyotrophic lateral scleroses (ALS) does not infringe claims of Aventis' U .S. Patent No. 5,527,814 ('814 patent) and a declaration that this patent is invalid .
In response to IMPAX's complaint, Aventis filed counterclaims for direct infringement and inducement of infringement of the '814 patent. In December 2002, the distri ct court granted Aventis ' Motion for Preliminary Injunction and enjoined IMPAX from in fringing , contributory infringm$, or inducing any other person to infringe Claims 1, 4 or 5 of the '814 patent by selling, offering for sale, distribu ting, marketing or exporting from the United States any pharmaceutical product or compound containing riluzole or salt thereof for the treatment of ALS .
The t rial was completed on October 30, 2003 , and post-trial briefing was completed in December 2003 . IMPAX is pursuing its assertions that claims of the '814 patent are invalid in view of prior art and are unenforceable in view of inequitable conduct committed during the p rosecution of the patent before the United States Patent and Trademark Office (USPTO) .
On January 30, 2004, the court denied IMPAX 's Motion for Summary Judgment on inequitable conduct and, on February 5, 2004 , the court denied IMPAX 's Motion for Summary Judgment on non-infringement of certain claims . The court has not issue its trial rulings and did not rule on the third pre-trial Motion for Summary Judgment based on invalidity of the patent-in-suit.
If IMPAX is not ultimately successful in proving invalidity or unenforceability, there is a substantial likelihood that the court will enter a Permanent Injunction enjoining IMPAX from marketing Riluzole 50 mg Tablets for the treatment of ALS in the United States until the ex pira tion of the '814 patent (June 18, 2013). If IMPAX is ultimately successful in proving either defense , the Preliminary Injunction would be set aside and IMPAX would be permitted to market its Riluzole 50 mg Tablet product for the treatment of ALS in the United States.
Abbott Laboratories Y. IMPAX : The Feno llbrate Tablet Case s
In January 2003 , Abbott Laborato ries and Fournier Industrie et Sante and a related company filed suit against IMPAX in the U .S. District Court in Wilmington , Delaware claiming that IMPAX 's submission of an ANDA for Fenofibrate Tablets , 160 mg, constitutes infringement of two U.S. patents owned by Fournier and exclusively licensed to Abbott, relating Abbott's Tricor tablet product.
In March 2003 , Abbott and Fournier filed a second action against IMPAX in the same court making the same claims against IMPAX 's 54 mg Fenofibrate Tablets . These cases were consolidated in April 2003 .
In September 2003, Abbo tt and Fournier filed a third action against IMPAX in the U.S. District Court in Wilmington , Delaware , claiming that IMPAX's submission of its ANDA for 54 mg and 160 mg Fenofibrate Tablets cons ti tutes infringement of a third patent recently issued to Fou rnier and exclusively licensed to Abbott. This action was also consolidated with the two previously consolidated actions in December 2003 . In January 2004, Abbott and Fournier filed a fourth action relating to IMPAX's 54 mg and 160 mg Fenofibrate Tablets based u pon a claim of in fringement of a fourth patent. All four cases were consolidated in March 2004 . Discovery in the consolidated cases closes in June 2004 and the trial is currently set for June 2005 . IMPAX has responded to all four complaints by asser ti ng that its proposed generic Fenofibrate Tablet products do not infringe the patents-in-suit and by asserting that the patents-in-suit are invalid .
All four actions seek an injunc ti on preventing IMPAX from marketing its Fenofibrate Tablet products until the expiration of the patents (January 9, 2018) and an award of damages for any commercial manufacture , use, or sale of IMPAX 's Fenofibrate Tablet product, together with costs and attorney fees.
Solvay Pharmaceuticals Y. IMPAX : The Croon Case
On April 11, 2003, Solvay Pharmaceuticals , Inc ., manufacturer of the Croon line pancreatic enzyme products, brought suit against IMPAX in the U .S. District Court for the District of Minnesota claiming that IMPAX has engaged in false advertising , unfair competition, and unfair trade practices under federal and Minnesota law in connec ti on with the Company's marketi ng and sale of its Lipram products . The suit seeks actual and consequential dame es, including treble damages, atto rneys' fees, injunctive relief and declaratory judgments that would prohibit the subs titution of Lipram for prescriptions of Croon . On June 6, 2003, IMPAX filed a Moti on for Dismissal of Plaintiff's Complaint, which seeks to dismiss each count of Solvay's complaint. Oral argument on that Motion was heard on November 7, 2003 . On Janua ry 9, 2004, the U.S . District Cou rt issued a ruling on IMPAX 's Motion for Dismissal, dismissing two of the counts set forth in the Complaint, including the count which sought a declaratory judgment that Lipram may not lawfully be substituted for prescriptions of Croon. On Janua ry 26, 2004, IMPAX filed its Answer to the Complaint and Counterclaim alleging that Solvay w rongfully interfered with IMPAX 's business relationships. On February 17, 2004 , Solvay filed its Reply to IMPAX' s Counterclaim . On February 24, 2004, the Rule 16 Scheduling Conference was held and, on Februa ry 25, 2004, the Court issued a Scheduling Order setting the deadline for discovery on January 14, 2005, and a trial date for July 1, 2005 . Fact discovery is currently ongoing in this case. IMPAX believes it has defenses to Solvay's allega ti ons and intends to pu rsue these defenses vigorously. 21 Back to Contents
Aiza Corporation v . IMPAX : The Oxybutynln Case
On September 4, 2003, Alza Corporation ("Alza") filed a lawsuit against IMPAX in the U .S . District Court for the Northern District of California alleging patent in fringement of one patent related to IMPAX's filing of an ANDA for a generic version of Ditropan XL (Oxybutynin Chloride) Tablets, S mg, to mg, and 15 mg. Alta seeks an injunction, a declaration of infringement, attorney's fees and costs. On October 24, 2003, IMPAX filed its Answer to the Complaint , which included defenses to the infringement claim, and counterclaimed for patent non-infringementand invalidity.
On October 24, 2003, IMPAX filed a lawsuit against Alza in the U.S. District Court for the Northern District of California seeking a declaratory judgment that four Alza patents relating to IMPAX's filing of an ANDA for a generic version of Ditropan XL (Oxybutynin Chloride) Tablets, 5 mg, 10 mg, and 15 mg (the "Product") are invalid and/or not infringed by the commercial manufacture, use, offer for sale, sale, or importation of the IMPAX Product . On November 17, 2003, AIm moved to dismiss the Company's complaint for lack of subject matter jurisdiction based on Alza' s argument that there is no can or controversy between the parties with respect to these four patents. The U.S. District Court for the Northern District of California has ordered a mediation on June 20, 2004.
: The Adderall Case
On December 29, 2003, Shire Laboratories, Inc., a subsidiary of Shire Pharmaceuticals Group , PLC, filed a lawsuit against IMPAX in the U .S. Dist rict Court for the District of Delaware alleging patent infringement on U.S. Patent Nos. 6,322 ,819 and 6,605,300 related to filing of an ANDA to market a generic version of Adderall 30 mg capsules . IMPAX filed its answer on January 20, 2004 , denying infringement and contes ting the validity of both patents. A tentative court date has been scheduled for October 11, 2005 .
OTHER LITIGATIO N
State of California v. IMPAX
On August 7, 2003, IMPAX received an Accusation from the Department of Justice , Bureau of Narcotic Enforcement, State of California ("BNE"), alleging that IMPAX failed to maintain adequate con trols to safeguard precursors from theft or loss regarding our pseudoephedrine product in January 2003. IMPAX contested the allegations in the Accusation and entered into discussions with the State of California, Department of Justice , to bring resolution to this matter. IMPAX has implemented a number of remedial measures aimed at imp roving the security and accountability of precursor substances used by IMPAX and regulated by the Califo rnia Department of Justice , Bureau of Narcotic Enforcement. In March 2004, following a theft of pseudoephedrine from IMPAX's facilities, the BNE filed an Amended Accusation, again alleging that IMPAX failed to maintain adequate controls to safeguard precursors from theft or loss regarding our pseudoephedrine product. IMPAX is continuing its discussions with the State of California, Department of Justice , and hopes to resolve this matter without the need for a formal hearing.
Other than the legal proceedings desc ribed above, we are not aware of any other material pending or threatened legal actions , private or governmental, against us. However, as we file additional applications with the FDA that contain Paragraph IV Certifica ti ons and develop new products, it is likely we will become involved in additional litigation related to those filings or products .
Insurance
As part of our patent litigation strategy, we had obtained two policies covering up to $7 million of patent infringement liability insurance from American International Specialty Line Company ("AISLIC"), an affiliate of AIG International . This litigation insurance covered us against the costs associated with patent infringement claims made against us relating to seven of the ANDAs we filed under Paragraph IV of the Hatch-Waxman Amendments . Both policies had reached their limits of liability. While Teva has agreed to pay 45% to SOV. of the attorneys' fees and costs (in excess of the $7 million expected to be covered by our insurance policies for six products) related to the twelve products covered by our strategic alliance agreement with them, we will be responsible for the remaining expenses and costs for these products, and all of the costs associated with patent litigation for our other products and our future products . However, we do not believe that this type of litigation insurance will be available to us on acceptable terms for our other current or future ANDAs . In those cases, our policy is to record such expenses as incurred.
Product liability claims by customers constitute a risk to all pharmaceutical manufacturers . We carry $20 million of product liability insurance for our own manufactured products. This insurance may not be adequate to cover any product liability claims to which we may become subject. 22 ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES 1.250% Convertible Senior Subordinated Debentures
On April 5 , 2004, the Company issued and sold $95 .0 million in aggregate p rincipal amount of its 1 .250% convertible senior subordinated debentures due 2024. The debentures were sold by the Company to Citi $roup Global Markets Inc., Wachovia Capital Markets, LLC and First Albany Capital Inc ., as initial purchasers, in a p rivate placement exempt from registration under the Securi ties Act of 1933 , as amended (the "Securities Act") . We have been advised by the initial purchasers that they have resold, and/or intend in the future to resell, the debentures to "qualified institutional buyers " (as defined in Rule 144A promulgated under the Secur ities Act) in transactions exempt from the registration requirements of the Securities Act in reliance on Rule 144A.
The issuance and sale of the debentures resulted in net proceeds to the Company of approximately $91,675,000 . These proceeds are being used for general corporate purposes , including working capital requirements , manufacturing of our products and research and development.
The debentures bear interest at the rate of 1 .250% per year. Interest on the debentures is payable on Ap ril 1 and October 1 of each year, beginning on October 1, 2004. The debentures are convertible by holders into shares of our common stock at a conversion p rice of $28 .08 per share (which represented a 30% premium over our stock price at the time the debentures were issued). The conversion price is subject to adjustment in certain events if (1) the p rice of our common stock reaches a specific threshold; (2) the trading price for the debentures falls below certain thresholds ; (3) the debentures have been called for redemption; or (4) certain corporate transac tions occur.
The debentures mature on Ap ril 1, 2024, unless earlier redeemed, repurchased or converted. Before April 5, 2007 , we may redeem some or all of the debentures if the price of our common stock reaches a speci fic threshold , at a redempti on p rice that includes an additional payment on the redeemed debentures equal to $230 .77 per S 1,000 principal amount of debentures, less the amount of any interest actually paid or accrued and unpaid on the debentures . On and after April 5 , 2007 , the Company may redeem some or all of the debentures at certain specified redemption prices .
The debentures are the Company's unsecured obli gations and are subordinated in right of payment to all of the Com pany's existing and future senior indebtedness. On April 1, 2009, April 1, 2014 , and April 1, 2019, and under certain circumstances , holders of the debentures will have the right to require us to repurchase all or any part of their debentures at a repurchase price equal to 100% of the principal amount of the debentures, plus accrued and unpaid interest and liquidated damages, if any, to, but excluding the repu rchase date.
In connection with the offe ring of the debentures, we are required to file a shelf registra tion statement with the Securities and Exchange Commission covering resales of the debentures and of the common stock issuable upon conversion of the debentures .
Strategic Alliance Agreement with Tev a
As part of the strategic alliance agreement that we entered into with a subsidia ry of Teva Pharmaceutical Industries Ltd. (Teva) in June 2001 , we received $22.0 million from Teva which assisted in the construction and improvement of our Hayward, California facilities and the development of the twelve products specified in our strategic alliance agreement. The $22 .0 million was reflected on the balance sheet as a refundable deposit. The refundable deposit was provided in the form of a loan . Pursuant to the agreement, accrued and future interest on the refundable deposit was forgiven during 2002 as a result of our receipt of tentative or final approvals for at least three of our products . In addi tion, Teva forgave portions of this loan as we achieved certain milestones relating to the development and launch dates of the p roducts desc ribed in our strategic alliance agreement . In addition, by requiring us to repay only 50% of the portion of the loan related to certain missed milestones , Teva chose to continue to have exclusive marke ting rights for those p roducts . At our option, we could repay Teva any amounts we owed it as part of the loan in cash or in shares of our common stock . The price of the common stock for purposes of repaying any amounts owed under the loan was the average closing sale p rice of our common stock measured over a ten -trading-day period ending two days prior to repayment.
In September 2003, we issued 888 ,918 shares of common stock to Teva, paying $13 .5 million of the orig inal $22.0 million refundable deposit. In December 2003 , Teva exercised its opti on to retain marketing exclusivity for certain products and, accordingly,reduced the refundable deposit by $3 .5 million to $5 .0 million . In Janua ry 2004 , Teva 's exercise of the marketing exclusivity option for certain p roducts reduced the refundable deposit to $2 .5 million . On January 15, 2004 , we satisfied the remaining $2 .5 million refundable deposit obligation to Teve by issuing 160,751 shares of ourcommon stock to Tevs . These shares were issued to Teva without registration under the Securi ti es Act of 1933, as amended, in reliance upon the exemption from registra ti on provided by Section 4(2) of the Securities Act of 1933. 23 ITEM 6 . EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits • 4.1 Registration Rights Agreement between Impax Laboratories, Inc ., as Issuer, and Citigroup Global Markets Inc ., as representative of the - Initial Purchasers, dated as of April 5, 2004 . • 4 .2 Indenture, between Impax Laboratories, Inc. and Wachovia Bank, National Association, as Trustee, dated as of April 5, 2004 .
• 10 .1 Purchase Agreement between Impax Laboratories, Inc., Citigroup Global Markets, Inc., Wachovia Capital Markets, LLC and First - Albany Capital Inc. (the "Initial Purchasers") dated March 30, 2004. • 31 .1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
• 31 .2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes -Oxley Act of 2002.
• 32 .1 Certifications pursuant to Section 906 of the Sarbanes -Oxley Act of 2002 .
(b) Reports
• On January 6, 2004, the Company filed a report on Form 8-K (Item 9) announcing that Chairman Charles Hsiao, Ph.D ., will be leading a new venture: Impax Technologies . Dr. Hsiao is relinquishing his position of Co-CEO but will remain as Chairman . Barry R . Edwards has been elected as sole Chief Executive Officer effective January 1, 2004 . • On January 28, 2004, the Company filed a report on Form 8-K (Item 9) announcing that the U .S. Food and Drug Administration (FDA) has granted final approval to the Company's ANDA for its gene ric version of Wellbutrin SR 100 mg Controlled Release Tablets. • On January 29, 2004, the Company filed a report on Form 8-K (Item 9) announcing that the Court of Appeals forthe Federal Circuit in Washington, D .C. upheld a lower court decision that ruled against certain claims by GlaxoSmithKline in regards to the Company's ANDAs for Wellbutrin SR 100 mg and 150 mg, and for Zyban 150 mg . • On February 17, 2004, the Company filed a report on Form 8-K (Items 9 and 12) announcing earnings for the quarter and the year ended December 31, 2003. • On March 5, 2004, the Company filed a report on Form 8-K (Item 9) announcing that the FDA had granted final approval to the Company's ANDA for its generic version of ClaritinV- D 24-Hour Extended Release Tablets. • On March 22, 2004, the Company filed a report on Form 8-K (Item 9) announcing that the FDA had granted final marketing approval to the Company's ANDA for its generic version of Wellbutrin® SR 150 mg Controlled Release Tablets. • On March 23, 2004, the Company filed a report on Form 8-K (Item 9) announcing that the FDA had granted final marketing approval to the Company's ANDA for its gene ric version of Declomycin® 150 and 300 mg Tablets. • On March 30, 2004, the Company filed a report on Form 8-K (Item 9) announcing its intention to offer in a private placement, subject to market and other conditions, $75 million aggregate principal amount of convertible senior subordinated debentures, due 2024, to qualified institutional buyers pursuant to Rule 144A under the SEC Act of 1933 , as amended . In addition , the Company granted initial purchasers an option to purchase up to an additional $11,250,000 of the debentures. • On March 31, 2004, the Company filed a report on Form 8-K (Item 9) announcing the pricing of its private offering of $82 million aggregate principal amount of 1 .2501/6 convertible senior subordinated debentures due 2024. 24 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 .
IMPAX LABORATORIES, INC .
By : /s/ BARRY R. EDWARD S May 10, 2004
Chief Executive Officer (Principal Executive Officer)
By : Is/ CORNEL C . SPIEGLER May 10, 200 4
Chief Financial Officer (Principal Financial and Accounting Officer) 25 CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Barry R. Edwards, Chief Execu tive O fficer, certify that :
1 . I have reviewed this quarterly report on Form 10-Q for the three months ended March 31 , 2004 of Impax Laboratories, Inc . 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact, or omit to state a material fact necessa ry to make the statements made , in light of the circumstances under which such statements were made, not misleading,with respect to the period covered by this quarterly report.
3. Based on my knowledge , the financial statements, and other financial information included in this quarterly rcport, fairly present , in all material respects , the financial condition , results of operations, and cash flows of the registrant as of, and for, the periods presented in this quarterly report.
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure cont rols and procedures (as defined in Exchange Act Rules 13a-14 and I Sd-14) for the registrant, and we have: a) designed such disclosure controls and procedures to ensure that mate rial information relating to the registrant, including its consolidated subsidiaries , is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared ; b) (intentionally omitted) c) evaluated the effectiveness of the registrant's disclosure controls and procedures; and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation ; d) disclosed in this report any change in the registrant 's internal control over financial reporting that occurred during the registrant 's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected , or is reasonably likely to materially affect, the registrant 's internal control over financial reporting, and ; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the Audit Committee of registrant's Board of Directors (or persons performing the equivalent func tion): a) all significant deficiencies in the design or operation of internal cont rols which could adversely affect the registrant 's ability to record, process, summarize , and report financial data, and have identified for the registrant's auditors any material weaknesses in internal cont rols; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal cont rols.
/s/ Barry R. Edwards
Barry R. Edwards Chief Executive Officer
May 10, 2004
26 CERTIFICATION OF CHIEF FINANCIAL OFFICER
1, Cornel C. Spiegler, Chief Financial Officer, certify that:
1. 1 have reviewed this quarterly report on Form 10 -Q for the three months ended March 31, 2004 of Impax Laboratories, Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact, or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading, with respect to the period covered by this quarterly report . 3. Based on my knowledge, the financial statements , and other financial information included in this quarterly report, fairly present, in all material respects, the financial condition, results of operations , and cash flows of the registrant as of , and for, the periods presented in this quarterly report . 4. The registrant 's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as de fined in Exchange Act Rules 13a-14 and 15d-14) for the registrant, and we have: 8. a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this quarterly report is being prepared; b) (intentionally omi tted)
c) evaluated the effectiveness of the registrant 's disclosure controls and procedures ; and presented in this quarterly report our conclusions about the effec tiveness of the disclosure controls and p rocedures based on our evaluation ; d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant 's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to mate rially affect, the registrant's internal control over financial reporting, and; 5. The re*istrant's other certifying officers and I have disclosed , based on our most recent evaluati on, to the registrant's auditors and the Audit Committee of registrant 's Board of Directors (or persons performing the equivalent function) : a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summa rize , and report financial data , and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material , that involves management or other employees who have a significant role in the registrant's internal controls.
/s/ Comel C. Spiegler
Cornel C . Spiegler Chief Financial Officer
May 10, 2004
27 EXHIBIT C United States Securities and Exchange Commission Washington , D.C. 20549
Form 10-Q
(Mark 0-)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 193 4
For the quarterly period ended June 30.2004 O R
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 193 4 For the transition period from to
Commission file number 0-2735 4
Impax Laboratories, Inc .
(Exact name of registrant as specified in its charter )
Delaware 65-0403311
(State or other jurisdiction of (I.R.S . Employer incorporation or organization) Identification No .)
30831 Huntwood Avenue - Hayward, Californi a 94544
(Address of principal executiveoffices) (Zip code)
Registrant s telephone number including area code (5101476-2000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
Yes No _
Indicate by check mark whether registrant is an accelerated filer (as defined in Rule 12b-2 of the Act .) Yes _A_ No _
The number of shares outstanding of the re gistrant s common stock as of July 30. 2004 was approximately 58.464.926 IMPAX LABORATORIES, INC.
INDEX TO FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004
PART I. FINANCIAL INFORMATION
PAG E
Item 1 . Financial Statements :
Condensed Balance Sheets as of June 30- 2004 and December 31 . 2003 (unaudited) j
Condensed Statements of Income for the Three Months and Six Month s Ended Lune 30 .2004 and 2003 (unaudited)
Condensed Statements of Cash Flows for the Six Months Ended June 30, 2004 and 2003 (unaudited)
Notes to Financial Statements (unaudited I
Management s Discussions and Analysis of Financial Condition and Results of Operations 12
Ouantiitative and Oualitative Disclosures About Market Risk 22 jj~m 4• Controls and Procedures 21
PART 11. OTHER INFORMATION AND SIGNATURES P
Item 1 . Legal Proceedings 21
Chan es in Securities- Use of Prose s. and hs r ~rchases of Fauity Se . ,rities 21
Item 4. Submission of Matters to a Vote of Security Holders 21 jjtm 6• Exhibits and Reports on Form 8-K 22
Signatures . IQ
Certifications 31 PART I - FINANCIAL INFORMATION ITEM 1 . FINANCIAL STATEMENTS
IMPAX LABORATORIES, INC . CONDENSED BALANCE SHEETS (unaudited) (in thousands, except share and per share data )
June 30, December 31, 2004 2043
ASSETS
Current assets : Cash and cash equivalents $ 53,312 S 15,505 Short term investments 45,244 - Accounts receivable, net 23,340 9,88 5 Inventory 37,102 28,479 Prepaid expenses and other asset s 2,692 1,427
Total current assets 161,690 55,296 Restricted cas h - 10,000 Property, plant and equipment, net 42,511 38,132 Investments and other assets 3,844 1,32 5 Goodwill, net 27,574 27,574 Intangibles, net 187 37 9
Total assets $ 235,806 $ 132,706
LIABILITIES AND STOCKHOLDERS EQUITY
Current liabilities: Current portion of long-term debt S 915 S 1,068 Accounts payable 22,312 22,783 Revolving line of credit 5,000 7,642 Accrued expenses and deferred revenues 12,719 10,872
Total current liabilities 40,946 42,365 Convertible senior subordinated debentures 95,000 - Refundable deposit from Tev a - 5,00 0 Long term debt 7,507 8,854 Defer ed revenues and other liabilities 2,768 2,87 9
Total liabilities 146,221 59,098
Commitments and Contingencies Mandatorily redeemable convertible Preferred Stock : Series 2 mandatory redeemable convertible Preferred Stock, $0.01 par value 0 shares outstanding at June 30, 2004, and 75,000 shares outstanding at December 31, 2003, redeemable at $100 per share - 7,500
Stockholders equity: Common stock, $0.01 par value, 90,000, 000 shares autho rized and 58,463,237 and 55,307,136 shares issued and outstandin g at June 30, 2004, and December 31, 2003, respectively 584 553 Additional paid-in capital 183,930 170,104 Accumulated deficit (94,929) (104,349)
Total stockholders equity 89,585 66,108
Total liabilities and stockholders equity $ 235,806 $ 132,706
The accompanying notes are an integral pan of these financial statements.
IMPAX LABORATORIES, INC . CONDENSED STATEMENTS OF INCOME (unaudited) (dollars in thousands, except share and per share data)
Three Moathh Ended Six MoatM Ended Jeae 30, Jane 30,
2004 2003 2004 2003
Net sales S 30,304 $ 13,460 S 66,126 S 24,526
Revenue from reversal of refundable deposit from Teva - - 2,500 -
Other revenues 541 607 1,072 966
Total revenues 30,845 14,067 69,698 25,492
Cost of sales 18,537 9,321 37,087 17,46 8
Gross margi n 12,308 4,746 32,611 8,024
Research and development 5,104 3,558 9,810 7,00 6
Reimbursements from Teva (78) (22) (89) (154)
Research and development, net 5,026 3,536 9,721 6,852
Patent and patent litigation expenses 2,563 789 4,361 1,096
Selling expenses 711 438 1,437 1,006
General and administrative expenses 3,117 2,083 6,468 4,205
Other operating income (expense), net 4 10 11 21
Net income (loss) from operations 895 (2 ,090) 10,635 (5,114)
Interest income 271 70 327 11 2
Interest expens e (564) (264) (836) (495)
Net income (loss) before provision for income taxes S 602 $ (2,284) S 10,126 S (5,497)
Provision for income taxes 30 - 506 -
Net income (loss) S 572 S (2,284) $ 9,620 $ (5,497 )
Earnings per share: Basic S 0 .01 S (0.05) S 0.17 S (0 .11 )
Diluted S 0.01 S (0 .05) $ 0.16 S (0 .11 )
Weighted average common shares outstanding : Basic 58,152 ,703 50,608,445 57,543,768 49,250,04 9
Diluted 62,417,454 50,608,445 61 ,808,519 49 ,250,049 The accompanying notes are an integral part of these financial statements. IMPAX LABORATORIES, INC. CONDENSED STATEMENTS OF CASH FLOW S (unaudited) (dollars In thousands)
Six MoatM Laded Jsae 30,
2004 2003
Cash flows from operating activities: Net income / (loss) S 9,620 S (5,497) Adjustments to reconcile net income (loss) to net cash used by operating activities: Depreciation and amortization 2,082 1,782 Reversal of refundable deposit from Teva (2,500) - Non-cash compensation charge (options) 87 429 Change in assets and liabilities: Accounts receivable (13,455) (2,060) Inventory (8,623) (4,564) Prepaid expenses and other assets (172) (127) Accounts payable (471) 2,853 Other liabilities 1,736 (981 )
Net cash provided by (used in) operating activities (11,696) (8,165 )
Cash flows from investing activities : Purchase of short term investments (45,244) (13,920) Purchases of property and equipment (6,269) (1,125)
Net cash (used in) provided by investing activities (51,513) (15,045)
Cash flows from financing activities: Revolving line of credit borrowings (repayments) (2,642) 1,77 9 Additionsto long-term debt - 896 Repayment of long-term debt (1,501) (412 ) Proceeds from convertible debentures 95,000 - Capitali zed Financing Costs (3,612) - Proceeds from sale of common stock - 23,324 Reversal of Restricted Cash 10,000 - Proceeds from issuance of common stock (upon exercise of stock options and warrants) 3,771 27 7
Net cash provided by financing activities 101,016 25,86 4
Net increase in cash and cash equivalents 37,807 2,654
Cash and cash equivalents, beginning of the pe riod $ 15,505 $ 10,21 9
Cash and cash equivalents, end of the quarter S 53,312 S 12,873
Cash paid for interest S 266 S 497
Cash paid for income taxes S - S -
The accompanying notes are an integral part of these financial statements.
3 NOTES TO CONDENSED FINANCIAL STATEMENTS Six Months Ended June 30, 2004 and June 30, 2003 (unaudited)
Note 1 . These condensed financial statements included he rein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Certain informati on and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of Ame rica have been condensed or omitted pursuant to such rules and regulations; however, the Company believes that the disclosures are adequate to make the information presented not misleading. These financial statements should be read in conjunction with the financial statements and the notes thereto included in the Company s latest Annual Report on Form 10-K. The results of operations for the six months ended June 30, 2004 are not necessarily indicative of the results of ope rations expected for the year ending December 31, 2004 .
Impax Laboratories, Inc. ( IMPAX, we, us, or the Company ) focuses on the development, manufacturing,and marke ti ng of specialty pharmaceutical products utilizing its own formulation expertise and drug delivery technologies . As of June 30, 2004, the Company is marketing thirty -three generic pharmaceuticals, which represent dosage variations of fourteen diffe rent pharmaceutical compounds, and has fourteen applications under review with the Food and Drug Administration (FDA), including five tentatively approved. Eleven of these pending filings were filed under Paragraph IV of the Hatch -Waxman Amendments. The Company has approximately twenty-four other products in various stages of development for which applications have not yet been filed.
Except for the six months ended June 30, 2004 , we have experienced operating losses and our future p rofitability continues to be uncertain . We have also experienced negati ve cash flow from operations. As of June 30, 2004 , our accumulated deficit was $94,929 ,000 and we had outstanding indebtedness in an aggregate principal amount of S 108,422,000. To remain operational , we must, among other things:
• obtain FDA approvals for our products ; • prevail in patent infringement litigation in which we are involved ; • successfully launch our new products; and comply with the many complex gove rnmental regulations that deal with virtually every aspect of our business ac tivities. We expect to incur significant operat ing expenses , particularly for research and development , for the fo reseeable future in order to execute our business plan. We, therefore, an ticipate that such operating expenses, as well as planned capital expenditures for the next twelve months , of $18 to $22 million, primarily in plant capacity expansion, will constitute a mate rial use of our cash resources .
To date, the Company has primarily funded its resea rch and development and other operating ac tivities through equity , debt financings and strategic alliances .
Critical Accounting Policy Related to Revenue Recogni tion
The Company recognizes revenue in accordance with SEC Staff Accoun ting Bulle ti n (SAB ) 101 issued by the SEC in December 1999. We recognize revenue from the sale of products when the shipment of products is received and accepted by the customer . Provisions for estimated discounts, rebates, chargebacks, retu rns and other adjustments are provided for in the period the related sales are recorded. In December 2003 , the SAB 104 was issued by the SEC . This bulletin clarifies portions of Topic 13 of the Staff Accoun tingBulletin to be consistent with current accoun ting and auditing guidance and SEC rules and regulations, and revises accounting guidance contained in SAB 101 related to mul tiple element revenue arrangements of Emerging Issues Task Force (EITF) No. 00-21 superseded as a result of the issuance .
Emerging Issues Task Force (EITF) No. 00-21 supplemented SAB 101 for accounting for multiple element arrangements . The Company has entered into several s trategic alliances that involve the delivery of multiple products and services over an extended period of ti me . In multiple element arrangements, the Company must determine whether any or all of the elements of the arrangement can be separated from one another. If separation is possible, revenue is recognized for each deliverable when the revenue recognition criteria for the specific deliverable is achieved . If separation is not possible,revenue recognition is required to be spread over an extended pe riod.
Under EITF No. 00-21, in an arrangement with multiple elements , the delivered item should be considered a separate unit of accounting if all of the following criteria are met :
1) the delivered item has value to the customer on a standalone basin; 4 to Contents
2) there is objective and reliable evidence of the fair value of the undelivered item; and
3) if the arrangement included a general right of return, or whether delivery or performance of the undelivered item is considered p robable. The Company reviews all of the terms of its strategic alliances and follows the guidance from SAB 104 and EITF No. 00-21 for multiple element arrangements. Upfront and milestone payments from these strategic alliances are deferred and recognized over the life of the agreements as the Compan y fulfills its contractual obligation to manufacture and supplies products during this pe riod. In addi tion, in some agreements, the Company receives and records royalty revenue based on a percentage of the strategic partners total sales to their customers of the products supp lied by IMPAX .
In June 2001, the Company entered into a Strategic Alliance A greement with a subsidiary of Teva for twelve controlled-release generic pharmaceutical products . The agreement granted Teva exclusive U .S. prescription marketing rights for these products for a period of ten years from the date of Teva s first sale of the products .
Revenues from product sales for these products under our strategic alliance are recognized at the time ti tle and risk of loss transfers to Teva s customers. During the six months ended June 30, 2004, the Company commenced shipping its Bup ropion Hydrochloride 100 mg and 150 mg Controlled Release Tablets. Teva ships the Bupropion products to its customers and reports the results on a monthly basis. Teva provides to IMPAX a financial report detailing its gross sales less applicable char gebacks , rebates and other credits to arrive at net sales , cost of sales information and gross margins for the Bupropion products. The information on the financial report is used by IMPAX to record its monthly revenue for the Bupropion products. Additionally , the amount of revenue that IMPAX ears is based on a fixed gross margin sharing percentage.
Under the July 2003 Exclusivity Transfer Agreement with Andrx and Teva pertaining to the Bup ropion Hydrochlo ride products, Andrx is entitled to certain payments for the sales of the 150 mg strength for a 180-day period from the product launch date. These payments are made directly by Teva to Andrx .
Earnings Per Share (EPS)
Basic earnings per share is computed by dividing net income by the weighted average common shares outstanding . Diluted earnings per share is based on the treasury stock method and is computed by dividing net income by the weighted average number of common shares and dilutive potential common shares outstanding, assuming the exercise of all in-the-money stock options . A reconciliation of the numerators and denominators of basic and diluted ea rnings per share consisted of the following (in thousands, except per share amounts) :
Three Months Ended Six Mont hs Ended June M , Jose 30,
2001 2003 2001 no
Numerator : Net income(loss) S 572 S (2,284) $ 9,620 $ (5,497)
Denominator: Basic weighted average common shares outstanding 58,152,703 50,608,445 57,543,768 49,250,04 9
Effect of dilutive options and warrants 4,264,750 - 4,264,750
Fully diluted weighted average common shares outstanding 62,417,453 50,608,445 61,808,518 49,250,049
Basic earnings per share $ 0 .01 $ (0.05) $ 0.17 $ (0.11)
Fully diluted earnings per share $ 0.01 $ (0.05) $ 0.16 S (0.11)
Included in the computation of fully diluted earnings per share are outstanding stock options and warrants with an exercise price less than the average market price of the common shares for the period.
Excluded from the computation of diluted earnings per share are outatandina common stock options with an exercise price greater than the average market price of the common shares for the period reported. For the three month period ended June 30, 2004, excluded from the computation of diluted earnings per sham were stock options to purchase 969,389 common shares. For the six month period ended June 30.2003, excluded from the computation of diluted earnings per share were stock options to purchase 969,389 common shares.
5 Th e effect of approximately 3 .4 million shares related to the assumed conversion of the S95 million convertible senior subordinated debentures has been excluded from the computation of diluted earnings per share for the three and six months ended June 30, 2004 as none of the conditions that would permit conversion have been satisfied.
Stock-Based Employee Compensation
The Company accounts for stock-based employee compensation arrangements in accordance with provisions of Accounting Principles Board (APB) Opinion No . 25, Accounting for Stock Issued to Employees. Compensation cost for stock options, if any, is measured as the excess of the quoted market price of the stock at the date of grant over the amount an employee must pay to acquire the stock. The Company has adopted the disclosure only provisions of SFAS No. 123, Accounting for Stock-Based Compensation and SFAS No . 148, Accounting for Stock-Based Compensation - Transition and Disclosure - An Amendment to FASB Statement No . 123 .
Had compensation cost for the Company s Plans been determined based on the fair value at the grant dates for the awards under a method prescribed by SFAS No. 123, the Company a income and earnings per share would have been decreased to the pro forma amounts indicated below (in thousands, except per share amounts):
Three Month Ended Six Month Ended Jose 30, June 34,
2004 2003 2004 2003
Net income (loss), as reported S 572 S (2,284) $ 9,620 S (5,497) Add: Stock-based employee compensation included i n reported net income, net of related tax effects 87 -- 87 -
Deduct: Total stock-based employee compensation expense determined under fair value based method for al l awards, net of related tax effects (1,990) (946) (2,999) ( 1,808)
Pro forma net income (loss) $ (1,331) $ (3,230) $ 6,708 $ (7,305)
Earnings per share: Basic - as reported $ 0.01 $ (0 .05) $ 0 .17 $ (0.11 )
Basic - pro forma $ (0.02) S (0 .06) $ 0.12 S (0.15)
Diluted- as reported s 0.01 $ (0.05) $ 0.16 S (0.11)
Diluted-pro forma $ (0.02) S (0.06) S 0.11 $ (0.15)
The Company calculated the fair value of each option grant on the date of the grant using Black -Scholes pricing method with the following assumptions : for the six months ended June 30, 2004 and 2003 , the dividend yield was 0% and 0% ; the weighted average expected option term was five years; risk-free interest rate was 3.5% and 2.8% ; the stock volatility for the six months ended June 30, 2004 and 2003 was 78% and 69%, respectively. The weighted average fair value of options for June 30, 2004 and 2003 was $14.17 and $2.87, respectively.
The Company reports both basic earnings per share , which is based on the weighted-average number of common shares outstanding, and diluted earnings per share, which is based on the weighted- average number of common shares outstanding and all dilutive potential common shares outstanding .
Note 2. Convertible Senior Subordinated Debentures
On April 5, 2004, the Company issued and sold 595.0 million in gate principal amount of its 1 .250% convertible senior subordinated debentures due 2024 . The debentures we re sold by the Company to Citigroup Global Markets Inc ., Wachovia Capital Markets, LLC and First Albany Capital Inc., as initial purchasers, in a private placement exempt from registration under the Securities Act of 1933, as amended (the Securities Act ). We have been advised by the initial purchasers that they have resold , and/or intend in the future to resell, the debentu res to qualified institutional buyers (as defined in Rule 144A promulgated under the Securities Act) in transactions exempt from the registration requirements of the Securities Act in reliance on Rule 144A. 6 The issuance and sale of the debentures resulted in net proceeds to the Company of approximately $91,388,000. These proceeds are being used for general corporate purposes, including working capital requirements, manufacturing of our products and research and development.
The debentures bear interest at the rate of 1 .250% per year . Interest on the debentures is payable on April I and October 1 of each year , be#inning on October 1, 2004 . The debentures are convertible by holders into shares of our common stock at a conversion price of $28.08 per share (which are subject to adjustment upon certain events , but represented a 30% premium over our stock p rice at the time the debentures were issued). The debentures are convertible by holders into shares of our common stock if. (1) the price of our common stock reaches a specific threshold; (2) the trading price for the debentures falls below certain thresholds; (3) the debentures have been called for redemption; or (4) certain corporate transactions occur.
The debentures mature on April 1, 2024, unless earlier redeemed, repurchased or converted. Before April 5, 2007 , we may redeem some or all of the debentures if the price of our common stock reaches a specific threshold, at a redemption price that includes an additional payment on the redeemed debentures equal to $230.77 per $1,000 principal amount of debentures, less the amount of any interest actually paid or accrued and unpaid on the debentures. On and after April 5, 2007, the Company may redeem some or all of the debentures at certain speci fied redemption prices.
The debentures are the Company s unsecured obligations and are subordinated in right of payment to all of the Company s existi ng and future senior indebtedness. On April 1, 2009, April 1, 2014, and April 1, 2019, and under certain circumstances, holders of the debentures will have the right to require us to repurchase all or any part of their debentures at a repurchase price equal to 100% of the principal amount of the debentures , plus accrued and unpaid interest and liquidated damages , if any, to, but excluding the repurchase date .
In June 2004, the FASB discussed EITF 04-08, The Effect of Contingently Conver tible Debt on Diluted Earnings Per Share. The EITF task force has proposed that companies count the shares that could be issued upon conversion of secu rities like the Company s debentures when calculating fully diluted per share earnings . Had EITF 04-08 been effective as of June 30, 2004, the Company s income and earnings per share would have been as indicated below:
Three Months Ended Six Months Ended June 30, Jose 30,
21104 2003 2004 2003
Numerator: Net income (loss) plus interest expense $ 869 S (2,284) $ 9,917 S (5,497)
Denominator: Basic weighted average common shares outstanding 58,152,703 50,608,445 57,543,768 49,250,049
Effect of dilutive options and warrants 4,264,750 - 4,264,750 -
Fully diluted weighted average common shares outstanding 62,417,453 50,608,445 61,808,518 49,250,04 9
Convertible debenture shares as converted 3,383,191 - 3,383,191 -
Fully diluted weighted average common shares outstanding includ ing converted shares pro-forms 65,800,644 - 65,191,709 -
Basic earnings per share $ 0 .01 S (0 .05) $ 0.17 $ (0.11 )
Fully diluted earnings per share $ 0.01 $ (0.05) $ 0.16 S (0.11 )
Fully diluted earnings per share include converted shares - pro forma $ 0.01 N/A S 0.15 N/A
In connection with the offering of the debentures , we filed a shelf registration statement on June 14, 2004 with the Securities and Exchange Commission (SEC) covering resales of the debentures and of the common stock issuable upon conversion of the debentures . If the registration statement on Form S-3 is not declared effective by the SEC by October 4, 2004, then the interest rate payable on the debentures will be subject to increase . 7 Back to Contents
Note 3. Recent Accounting Pronouncements
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46 ), Consolidation of Variable Interest Entities. FIN 46 clarifies the application of Accoun ting Research Bulle ti n No . 51, Consolidated Financial Statements , to certain entities in which equity investors do not have the characteris tics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties . FIN 46 applies immediately to variable interest entities created after January 31 , 2003, and to variable interest entities in which rprise obtains an interest after that date . It applies in the fiat fiscal year or interim period beginning after June 15, 2003, to variable interest entities i n Zench an enterprise holds a variable interest that it acquired before Febn 1, 2003 . FIN 46 applies to public enterprises as of the beginning of the applicable interim or annual period. On October 8, 2003, the FASB decide to defer FIN 46 until the first reporting period ending after December 15, 2003 . The provisions of this Interpretation did not have a material impact on the Company a financial condition or results of operations.
In December 2003, the FASB issued FIN No. 46R, Consolidation of Variable Interest Entities, clarifying the application of Accounting Research Bulle tin No. 51, Consolidated Financial Statements, to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without addi tional subordinated financial support. The p rovisions of this Interpretati on do not have a material impact on the Company s financial condi tion or results of operations.
In December 2003 ,the FASB revised SFAS 132, Employers Disclosure About Pensions and Other Post Retirement Bene fits. This Statement does not change the measurement or recognition of those plans required by FASB 87, Employers Accounting for Pensions , and No . 106, Employers Accounting for Post Retirement Benefits Other than Pensions . This Statement retains the disclosure requirements contained in FASB No . 132, Employers Disclosure about Pensions and Other Post Retirement Plans. The p rovisions of this Statement do not have a material impact on the Company s financial condi ti on or results of operations. During the six months ended June 30 ,2004 and 2003, the emp loyer 401-K match was $218,000 and $150,000, respectively .
In February 2004 ,the FASB issued revised FASB Staff Positions (FSP ) pertaining to FIN 46(R). The revised FSPs replace certain previously issued FIN 46 FSP for entities to which FIN 46(R) is applicable . This revision to FIN 46 did not have a material impact on the Company s financial condi tion or results of operation.
In February 2004 , the FASB revised SFAS 133, Accounting for De rivative Instruments and Hedging Activities for Implementation issue E2L, AIJ, and C6 . The revisions to SFAS 133 did not have a mate rial impact on the Company s financial condition or results of operation .
In June 2004, the FASB discussed EITF 04 -08, The Effect of Contingently Convertible Debt on Diluted Ea rnings Per Share . The EITF task force has proposed that companies count the shares that could be issued upon convers ion of securities like the Company s debentures when calcula ting fully diluted per share earnings. This EITF is not yet effective. However, we disclosed in Note 2 the potential effect of this EITF on the Company s fully diluted EPS calcula tion.
Note 4. Our gross receivables and related deductions ac tivity for the six months ended June 30, 2004 and 2003 , and the year ended December 31, 2003 was :
St: Moatb Ended Year Ended
(in $0003) June 36, June 30, December 31 , 2004 2003 2603
Gross accounts receivable $ 31,744 $ 12,329 $ 17,09 1 Less: Accrued rebates (3,632) (2,165) (2,700) Less : Accrued chargebacks (4,543) (1,200) (4,101 ) Less: Other deductions (229) (380) (405)
Net accounts receivable $ 23,340 $ 8,584 S 9,885
Other deductions include allowance for disputable items, doubtful accounts, and cash discounts .
Net accounts receivable balance at June 30, 2004 includes $8,541,000 due from Teva as compared to zero at December 31, 2003 . Chargebacks and Rebates Accrual activity for the six months ended June 30, 2004 and 2003 , and the year ended December 31, 2003 was:
CHARD .BA - . ACCRUAL
Six Moottu Ended Y ear Ended
(in $000s) J60038. Just 36, DMU&IM31, 2001 2903 2003
Beginning Balance $ 4,101 S 1,373 S 1,373 Add: Provision related to sales made in current period 5 ,962 3,354 10,571 Less : Credits issued during the current period (5,520) (3,527) (7,843)
Ending Balance S 4,543 $ 1,200 $ 4,10 1
Six Month Ended Year Ended
(in $0008 ) June 30, June 30, Deeese er 3l, 2104 2003 2003
Beginning Balance S 2,700 S 1,525 S 1,525 Add Provision related to sales made in current period 3,326 2,803 6,680 Less: Credits issued during the current period (2,394) (2,163) (5,505)
Ending Balance S 3,632 S 2,165 S 2,70 0
Note S. Our invento ry consists of the following:
(in $000s) Juae 3Y , December 31, 2"d 2003
Raw mate rials &.&&&&&&&&&&&&&&&&&.... S 22,247 S 9,671 Work in process &&&&&dc&&&&&&&&& ..&&.. 4,256 5,303 Finished goods &&&&&&&&&&&&&&&&&& . 10,599 13,505
$ 37,102 S 28,479
The Company, as most co ies in the generic pharmaceutical industry, may build inventories of certain ANDA related products that have not yet received FDA approval or satisfactory resolu tion of patent infringement litigation, when it believes that such action is appropriate to increase its commercial opportunity.
As of June 30, 2004, the Company s total inventory of $37,102,000 included $5,343,000 it inventories relating to products pending launch while IMPAX awaits receipt of FDA marketing approval and/or satisfactory resolution of patent infringement litigation, as follows:
(in S000s) Raw materials S 5,34 3 Work in process Finished goods
Total S 5,343
9 Note 6. Intangibles consist of the following:
Estimated Jul.. 3a, December 31, affil aft 2YM 2003 (in $000s) (years )
Product rights and licenses &&&&&&&&&&&.... 3-8 S 2,691 $ 2,69 1
Leas: Accumulated amortization &&&&&&&&& .... (2,504) (2,312)
$ 187 S 379
Amortization expense was S 192,000 for the six months ended June 30, 2004. Expected amortization expense for 2004 will be approximately $379,000 .
Note 7. Accrued Expenses and Deferred Revenu e
(in $000 s) Juno 30, December 31 , 2004 2003
Sales returns $ 5,187 $ 4,12 1 Deferred revenues 1,905 1,75 1 Accrued salaries and payroll expenses 2,037 1,649 Legal and professional fees 1,314 1,47 8 Accrued Medicaid rebates 550 61 3 Accrued royalty and gross profit sharing expense 462 55 9 Accrued shelf stock protection 281 23 2 Accrued interest 310 - Accrued taxes 524 - Other accruals 149 46 9
$ 12,719 S 10,87 2
Note 8. Returns Accrual
Six Months Ended Year Ended
(in S000s) Jaoe 30, June 30, December 3 1 . 2004 2003 2003
Beginning Balance $ 4,121 S 3,100 S 3,100 Add: Provision related to sales made in current pe riod 2,802 320 2,276 Less : Credits issued during the current period (1,736) (320) (1,255 )
Ending Balance $ 5,187 $ 3,100 $ 4,12 1
Note 9. Commitments and Contingencies
Patent Litigation
Th ere has been substantial litigation in the pharmaceutical , biological, and biotechnology industries with respect to the manufacture , use, and sale of new products that are the subject of con flicting patent rights. One or more patents cover most of the brand name cont rolled-release products for which we are developing gene ric versions . Under the Hatch-Waxman Amendments, when a drug developer files an ANDA for a generic drug, and the developer believes that an unexpired patent which has been listed with the FDA as covering that brand nanx product will not be infr inged by the developer a product or is invalid or unenforceable , the developer must so certify to the FDA . Th at certification must also be provided to the patent holder, who may challenge. the developers certification of non-infringement , invalidity or unenfarceabilty by filing a suit for patent infrin(pement within 45 days of the patent holer s receipt of such certification. If the patent holder files suit, the FDA can review and approve the ANDA, but is prevented from granting final marketing approval of the product until a final judgment in the action has been rendered , or 30 months from the date the certification was received, whichever is sooner. Should a patent holder commence a lawsuit with respect to an alleged patent in fringement by us, the uncertainties inherent in test tilitigation make the outcome of such litigation difficult to predict. The delay in obtaining FDA approval to market our product candidates as a result of litiga on, as well u the expense of such litigation, whether or not we are successflil, could have a material adverse effect on our results of opera tions and financial position. In addition, there can be no assurance that any patent li ti gation will be resolved prior to the 30-month period. As a result, even if the FDA were to approve a product upon expiration of the 30-month period, we may not commence marketing that product if patent litigation is still pending .
10 Back to Contents
Lawsuits have been filed against us in connec tion with fourteen of our Paragraph IV filings. The outcome of such litigation is difficult to p redict because of the uncertainties inherent in patent litigation.
As part of our patent litigation strategy, we obtained two policies covering up to $7 million of patent infringement liability insurance from American international Special ty Line Company (AISLIC ), an affiliate of AIG intemationa1. This li tigation insurance covered us against the costs associated with patent infringement claims made agamat ua relating to seven of the ANDAa we filed under Paragraph IV of the Hatch-Waxman Amendments . Both policies have reached their limit of liability. While Teva has agreed to pay 45% to 50% of the atto rneys fees and costs (in excess of the $7 million covered by our insurance policies) related to the twelve products covered by out strafe g~c alliance agreement with Teva , we will be responsible for the remaining expenses and cosh for these products , and all of the costs associated with patent litigation for our other products and our future products.
We do not believe that this type of li tigation insurance will be available on acceptable terms for our current or future ANDAs. In those cases, our policy is to record such expenses as incurred.
Although the outcome and costs of the asserted and unasse rted claims is difficult to predict because of the uncertainties inherent in patent li tigation, management does not expect the Company s ul ti mate liability for such matters to have a material adverse effect on its financial condition, results of opera tions, or cash flows .
FIN 45 in November 2002, the FASB issued FIN No . 45, Guarantors Accoun ting and Disclosure Requirements for Guarantees , Including Indirect Guarantees of Indebtedness of Others. Guarantees and claims arise during the ordina rycourse of business from relationships with suppliers, customers, and strategic partners when the Company undertakes an obligation to guarantee the performance of other through the delivery of cash or other assets if specified triggering events occur. Non-performance under a contract by the guaranteed party trigger the obligation of the Company . As of June 30, 2004, all indemnifications included in agreements as of that date are excluded from the scope of FIN No . 45 as they relate primarily to our own future performance and do not require any contingent payments .
As of June 30, 2004 , our total contractual commitments on loam, operating leases , and royalty agreements have not mate rially changed since December 31, 2003, as disclosed in our Report Form 10-K .
Note 10 . Loan Agreements with PIDA and DRP A
In April 2004 , the Company terminated the loan agreements with Pennsylvania Industrial Development Authority (PIDA) and Delaware River Pon Authority (DRPA ) and repaid the remaining balances totaling app roximately $992,000 .
Note 11. Loan and Security Agreement with Wachovia Bank N .A.
In June 2004 , the $25 million Loan and Security Agreement with Wachovia Bank N .A. was amended, as follows :
• The cash collateral requirement of $10,000,000 was removed. • The Adjusted Excess Availability Covenant was removed. • IMPAX will maintain at Wachovia Bank cash and investments in an amount not less than $25,000,000 . • If the amount of cash and investments decline below $25,000,000, then the Cash Collateral requirement of S 10 ,000,000 and Adjusted Excess AvailabilityCovenant will be re-establishe d • If the Company reports negative free cash flow in any quarter , then reserves in the amount of the negative free cash flow will be reported on the Borrowing Base. • The maximum aggregate Capital Expenditures during any fiscal year in the amount of $8 ,000,000 was amended to permit a maximum cumulative aggregated amount of $45,000,000 for fiscal years 2004 and 2005 . Note 12. Income Taxes
For the six months ended June 30, 2004 , the Company provided for income taxes of $506,000 or 5% of income before taxes , as compared to $0 for the 2003 period. The effective tax rate in 2004 reflects the partial reversal of the deferred income tax asset valua tion allowance recognized. The valuation allowance was reduced to reflect the utilization of federal and state loss carryforwards that offset the current tax component of the income tax provision. We evaluate the realizability of deferred tax assets on an annual and quarterly basis or if there is a significant change in circumstance that may cause a change in our judgment about the realizability of our deferred tax assets. Any valuation allowance that may be released as a result of the evaluation process could have a material effect on our future results of operations . At December 31, 2003 , the Company had a net operating loss-carryforward totaling approximately $94,600,000, which expires from 2009 through 2023.
Note 13. Subsequent Events
On July 12, 2004 , the Company announced that it has signed a series of agreements with Leiner Health Products , LLC for the supply and distribution of the Company's Loratadine Orally Disintegrating Tablets (ODT) and Loratsdine and Pseudoephedrine Sulfate Extended Release Tablets 24 hour p roducts. Both of these products are indicated for the relief of symptoms of seasonal allergic rhinitis (bay fever). These products will be manufactured by IMPAX and marketed by Leiner as over the counter (OTC) store brand equivalents to both Claritin® Reditabs® and Clari tin-D® 24-hour respective y. ITEM 2. MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This report containsforward- looking statements within the meaning ofSection 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements include statements about our business strategies, our expected financial position and operating results. the projected size of our markets and ourifnancingplans and similar matters. The words believe, expect. Intend, anticipate, plan, may, will, could, should, estimate, potential, opportunity, future, project, forecast, and simila r expressions, as they relate to us, our management and our industry are intended to ldent forward-looking statements. We have based these forward- looking statements largely on our current expectations and projections about juture events and financial trends affecting the financial condition of our business. Thereforward-looking statements involve known and unknown risks and uncertainties. Our actual results could differ materially from the results discussed in theforward-looking statements. You should not place undue relian ce on ourforward-looking statements. Further, any forward- looking statement speaks only as of the date on which it Is made, and we undertake no obligation to update or revise any forward-looking statementsfor any reason, whether as a result of new information, future developments or otherwise.
Many factors could cause or contribute to a material changefrom the results discussed in theforward- looking statements. Such factors include, in no particular order:
• our ability to successfully develop and commercialize additional products; • changes in the degree of competition/or our products; • the difficulty of predicting U.S. Food and Drug Administration (FDA) and other regulatory authority approvals; • our reliance on strategic alliances and the success of such strategic alliances; • the inability to acquire sufficient supplies of raw materials; • litigation and/or threats of litigation ; • changes in our growth rates or the growth rates of our competitors; • 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 fuwncial markets in general or in general economic conditions; • our inability to raise additional capital when needed,, • the impact of competition from brand-name companies that sell their own generic products or successfully extend the exclusivity period of their branded products; • the di culty in predicting the timing and outcome of legal proceedings , including patent -related matters such as patent infringement cases and patent challenge settlements; • court and FDA decisions on exclusivityperiods under the Hatch- Waxman Amendments ; • our dependence on revenuesfrom significant customers; • our dependence on revenuesfrom signifcant products; and • the increasing cost of insurance and the availability of product liability insurance coverage. General
Impax Laborato ries, Inc. was formed through a business combination on December 14, 1999 between Impax Pharmaceuticals, Inc., a privately held drug delivery company, and Global Pharmaceutical Corporation, a generic pharmaceutical company . Impax Pharmaceuticals, Inc. merged with and into Global, with Impax stockholders receiving 3.3358 shares of Global common stock for each share of Impax Pharmaceu ticals , Inc. At the conclusion of the merger, Impax Pharmaceuticals, Inc. stockholders held over 70%of the combined company. For accounting purposes, the merger has been treated as a recapitalization of Impax Pharmaceuticals, Inc. with Impax Pharmaceuticals , Inc. deemed the acquirer of Global in a reverse acquisition. As a reverse acquisi tion, our historical operating results prior to the merger are those of Impax Pharmaceuticals, Inc. and only include the operating results of Global after the merger. In connec ti on with the merger, the surviving company changed its name to Impax Laboratories, Inc .
We are a technology based, specialty pharmaceutical company applying formulation and development expertise, as well as our drug delive ry technology, to the development of controlled-release and niche generics , i n addition to the development of branded p roducts . As of June 30, 2004 , the Company is marketing thirty-three generic pharmaceuticals , which represent dosage variations of fourteen different pharmaceutical compounds, and has fou rteen applications under review with the Food and Drug Administration (FDA), including five tentatively approved, addressing approximately $5 .2 billion in U .S . prod es in the twelve months ended April 30, 2004rs , according to NDCHealth. Eleven of these pending filings were filed under Paragraph IV of the Hatch-Waxman Amendments . The Company has approximately twenty-four other products in various stages of development for which applications have not yet been filed . These other products are generic ve ions of pharmaceutical products that had U.S. sales of approximately $14.6 billion in the twelve months ended April 30, 2004, according to NDCHealth
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Critical Accounting Policies
The Company recognizes revenue in accordance with SEC Staff Accounting Bulletin ( SAB) 101 issued by the SEC in December 1999. We recognize revenue from the sale of products when the shipment of products is received and accepted by the customer. Provisions for estimated discounts, rebates, chargebacks, returns and other adjustments are provided for in the period the related sales are recorded . In December 2003, the SAB 104 was issued by the SEC. This bulletin clarifies portions of Topic 13 of the Staff Accounting Bulletin to be consistent with current accounting and auditing guidance and SEC rules and regulations and revises accounting guidance contained in SAB 101 related to multiple element revenue arrangements of Emerging Issues Task Force (EITF) No. 00-21 superseded as a result of the issuance .
Emerging Issues Task Force (EITF) No. 00-21 supplemented SAB 101 for accounting for multiple element arrangements. The Company has entered into several strategic alliances that involve the delivery ofmultiple Products and se rvices over an extended pe riod of time . In multiple element arrangements, the Company must determine whether any or all of the elements of the arrangement can be separated from one another. If separation is possible, revenue is recognized for each deliverable when the revenue recognition criteria for the speci fic deliverable is achieved. If separation is not possible, revenue recogni tion is required to be spread over an extended period.
Under EITF No . 00-21, in an arrangement with multiple elements, the delivered item should be considered a separate unit of accounting if all of the following criteria are met:
1) the delivered item has value to the customer on a standalone basis; 2) there is objective and reliable evidence of the fair value of the undelivered item ; and 3) if the arrangement included a general right of retu rn, or whether delivery or performance of the undelivered item is considered p robable. The Company reviews all of the terms of its strategic alliances and follows the guidance from SAB 104 AND EITF No. 00-21 for multiple element arrangements. Up front and mi lestone payments from these strategic allianc es are deferred and recognized over the life of the agreements as the Company fulfills its contractual obligation to manufacture and supplies products during this period. In addition , in some agreements, the Company receives and records royalty revenue based on a percentage of the strategic partners total sales to their customers of the p roducts supplied by IMPAX .
In June 2001 , the Company entered into a Strategic Alliance Aunt with a subsidia ryof Teva for twelve controlled-release generic pharmaceutical products. The agreement granted Teva exclusive U.S. prescription marketing rights for these products for a period of ten years from the date of Teva s first sale of the products .
Returns Reserv e
The Company estimates future product returns at the time of ask. Product returns by wholesalers principally relate to the return of expired products . For product return rese rves, we consider volume and mix of p roduct in the marketplace, historical return rates, and the competitive environment, all of which require us to use estimates and assumptions . IMPAX introduces a number of new products each year. As a result , the Company has been able to monitor historical return rates for new products. Based on our histo rical data, since we are in one business segment, we have found that generic pharmaceu ti cal product returns are alike and that new product returns have similar characteristics to existing products . Usually , new products are AB rated (products that demonstrated bioequivalence with innovator products), have 24 month expiration dating, and are marketed to the same customers, i .e., wholesalers, warehousing chains, distributors , etc . The AB rated products are substitutable by the pharmacist for the innovator products . The non-AB rated products, such as the LIPRAM product family, generally, may not be substituted by the pharmacist as they are therapeutic alternatives, not generic substitutes . Any change to a pati ent 's prescription to an alternati ve product requires the patient a physician approval for the substitution. We are monitoring returns by product and, where applicable , we establish specific product retu rn reserves and/or adjust our estimates of the future return rates based on va rious business and compe titive assumptions.
Th e sales return rese rve is calculated using an historical lag nod that is, the time between when the product is sold and when it is ultimately returned as determined from the Company a system generated lag pen od report and return rates, adjusted by estimates of the future return rates based on various assumptions which may include changes to internal policies and procedures,changes in business practices and commercial terms with customers, competitive position of each product, amount of inventory in the pipeline, the introduction of new products , and changes in market sales informati on .
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Our returned goods policy requires prior authorization for the return , with corresponding credits being issued at the original invoice prices, less amounts previously gtyranted to the customer for rebates and chargebacka . Products eligible for return must be expired and returned within one year following the expiration date of the product. Prior to 2002, we required returns of products within six months of expiration date. Because of the lengths of the lag period and volatili that may occur from quarter to quarter,we arc currently using a rolling 22-month calculation to estimate our product return rate .
The Company believes that its es timated returns reserves were adequate at each balance sheet data since they were formed based on the informa tion that was known and available,which were supported by the Company s historical experience when similar events occurred in the past , and management s overall knowledge of and experience in the generic pharmaceutical industry. In estimating its returns rese rve, the Company looks to returns after the balance sheet date , but prior to filing its financial statements to ensure that any unusual trends are considered .
Generally, sales rebates are calculated at the point ofWe, based on pre-existing written customer agreements by product and accrued on a monthly basis. However, we do estimate additional rebates for specific purposes, i .e., new pharmacy store openings.
The vast majority of chargebacks are also calculated at the point of sale as the difference between list price and contract price by product (with the wholesalers) and accrued on a monthly basis . There are additional chargebacks that are estimated at the point of sale to the wholesaler as the difference between the wholesalers contract price and the Company s contract price with retail pharmacies and buying groups .
The Company believes it is important for the users of its financial statements to understand the key components, which reduce gross sales to net sales .
Inventor y
Our inventories are valued at the lower of cost or market. Costs are determined using a standard cost method, first-in, first-out (FIFO) flow of goods . Costs include materials, labor, quality control and production overhead . We review and adjust inventory for short-dated product and inventory commitments under supply agreements based on projections of future sales and market conditions . The Company, as do most companies in the generic pharmaceutical industry, may build inventories of certain ANDA-related products that have not yet received FDA approval and/or satisfactory resolution of patent infringement litigation, when it believes that such action is appropriate to increase its commercial opportunity . If our inventory is greater than estimated shipments to our customers, there may be an inventory write-down . Therefore, the Company s management must make significant estimates relating to inventory .
Imnaired Assets
The Company evaluates the carrying value of long-lived assets to be held and used, including definite lived intangible assets, on an annual basis, when events or changes in circumstances indicate that the carrying value may not be recoverable. The carrying value of a long-lived asset is considered impaired when the total projected undiacounted cub flows from such asset is separately identifiable and is less than its carrying value . In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the long-lived asset . Fair value is determined primarily using the projected cash flows discounted at a rate commensurate with the risk involved . Losses on long-lived assets to be disposed of are determined in a similar manner . As the Company s assumptions related to assets to be held and used are subject to change, additional write-downs maybe required in the future .
Goodwill
Prior to the adoption of Statement of Financial Accounting Standards (SFAS ) No. 142, Goodwill and Other Intangible Assets, we amortized goodwil l on a straight-line basis over its estimated useful life . The Company adopted the provisions of SFAS No. 142, effective January 1, 2002; no impairment was noted. Under the provisions of SFAS No . 142, the Company performs the annual review for impairment at the reporting unit level, which the Company has determined to be consistent with its business segment, that is, the entire Company .
Effective January 1, 2002, we evaluated the recoverability and measured the possible impairment of our goodwill under SFAS 142 . The impairment test is a two-step process that begins with the estimation of the fair value of the reporting unit . The first stop screens for potential impairment and the second step measures the amount of the impairment, if any. Our estimate of fair value considers publicly available information regarding the market capitalization of our Company, as well as (i) publicly available information regarding comparable publicly-traded companies in the generic pharmaceutical industry, (ii) the financial projections and future prospects of our business, including its growth opportunities and likely operational improvements, and (iii) comparable sales prices, if available.
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As part of the first step to assess potential impairment, we compare our estimate of fair value for the Company to the book value of our consolidated net assets. If the book value of our net assets is greater than our estimate of fair value, we would then proceed to the second step to measure the impairment, if any.
The second step compares the implied fair value of goodwill with its carrying value . The implied fair value is determined by allocating the fair value of the reporting unit to all of the assets and liabilities of that unit as if the reporting unit had been acquired in a business combination, and the fair value of the reporting unit was the purchase price paid to acquire the reporting unit. The excess of the fair value of the reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill . If the carrying amount of the reporting unit goodwill is greater than its implied fair value, an impairment loss will be recognized in the amount of the excess.
On a quarterly basis, we perform a review of our business to determine if events or changes in circumstances have occurred which could have a material adverse effect on the fair value of the Company and its goodwill . If such events or changes in circumstances were deemed to have occurred, we would consult with one or more valuation specialists in estimating the impact on our estimate of fair value . We believe the estimation methods are reasonable and reflective of common valuation practices. We perform our annual goodwill impairment test in the fourth quarter of each year.
Results of Operations
Except for the six months ended June 30, 2004, we have incurred net losses in each quarter since our inception. We had an accumulated deficit of $94,929,000 at June 30, 2004.
Three Months Ended June 30, 2004, Compared to Three Months Ended June 30, 2003
Overview
The net income for the three months ended June 30, 2004, was $572 ,000 as compared to a net loss of $2,284,000 for the three months ended June 30, 2003
Revenue s
Revenues for the second quarter of 2004 were $30,845,000, up more than 119% compared with revenues of 514,067,000 h the prior years second quarter . The year-over-year increase for the quarter was primarily due to shipments of our generic versions of Wellbutrin® SR (Bupropion Hydrochloride) 100 mg and 150 mg Controlled Release Tablets, and Dec of mycin® (Demeclocycline Hydrochloride) ISO mg and 300 mg Tablets, which commenced during the first quarter of 2004; Zyban® (Bupropion Hydrochloride) and Sinemet® CR (Carbidope/Levodope) Extended Release Tablets, which commenced during the second quarter of 2004 ; and higher over-the-counter (OTC) product revenues . The sequential quarter decline was due to timing of product shipments and pipeline filling, particularly as related to the launch of Bupropion Hydrochloride in the fiat quarter. During the 2004 second quarter, IMPAX s revenues from sales of Bupropion Hydrochloride products, through our strategic alliance agreements with Teva and Andrx, were approximately $8,089,000, compared with $23,870,000 in the first quarter. In addition, in the first quarter the Company recognized revenue of $2 .5 million from Teva related to the refundable deposit under its strategic alliance agreement.
The balance of $541,000 of other revenue represents revenues recognized pursuant to strategic agreements with Sche ring-Plough , Wyeth, and Novartis . These amounts represent the amortiza tion of the milestone payments received by the Company over the life of the agreements. The following table summarizes the activity in net revenues for the three months ended June 30, 2004 and 2003 :
2004 2083
(in 000 s ) Product sales $ 38,364 S 17,932 Less: Rebates (2,207) (1,741 ) Chargebacks (3,814) (2,040) Product retu rn reserve (1,021) (188) Other credits (1,018) (503 )
Net sales 30,304 13,460 Other Revenues 541 607
Total Revenues S 30,845 S 14,067
IS The rebates, chargebacks, returns and other credits decreased for the three months ended June 30, 2004 to approximately 21% of product sales as compared to approximately 25% for the comparable period in 2003 . This decrease was mainly due to Bupropion Hydrochloride 100 mg and 150 mg Cont rolled Release Tablets, Loratadine and Pseudoephedrine Sulfate (Smg/120mg) 12-hour Extended Release Tablets which are exempt from rebates, chargebacks and other credits as per the agreements with Teva, Schering-Plough, Wyeth, and Novartis.
Currently, the Company has one reportable operating segment : generic pharmaceutical business. However, we currently market our products through three different channels, as follows:
• Direct sale of prescription (Rx) products, such as LIPRAM, Fludrocortisone, Terbutaline, Minocycline, Demeclocycline, Flavoxate, Carbidopa/Levodopa and others, through our Global Pharmaceuticals division, called Global ;
• Sale of prescription (Rx) products, such as Bupropion Hydrochloride, exclusively, through marketing partners, pursuant to strategic alliance agreements, such as Teva, called Rx Partners ; and
• Sale of Loratadine OTC products through marketing partners, pursuant to strategic alliance agreements, such as Schering, Wyeth, Novartis, and Leiner, called OTC . The following table summarizes the net sales for the three months ended June 30, 2004 compared to the three months ended June 30, 2003 by marketing channel:
2554 2003
(in 000 s) Global 16,649 S 9,709 Rx Partners 8,628 - OTC 5,027 3,75 1
Total Revenues 30,304 S 13,460
The quarter-to-qua rter increase of app roximately $6.9 million in Global products were primarily due to new products introduced in 2004 and late 2003, such as Demeclocycline of approximately $3 .6 million, Carbidop"evodopa of approximately $0 .8 mil lion, and Flavoxate of approximately $0 .9 million, as well as higher LIPRAM products of approximately $1 .2 million .
Rollforward analyses for each significant revenue dilution item are listed on Note 4.
Cost of Sales
The cost of sales for the three months ended June 30 , 2004, was $18,537 ,000 as compared to $9,321,000 for the same period in 2003 . The overall increase in cost of sales was primarily due to the increase in cost of mate rials as a result of increased product sales .
Gross Margin
Gross margin for the three months ended June 30, 2004 was $12,308,000, or app roximately 39.9% of total revenues, compared with gross margin of $4,746,000, or approximately 33.7% of total revenues, in the prior years second quarter, and down sequen tially from $20,303,000, orapproximately 52.3'4 of total revenues in the first quarter of 2004. The year-over-year increase in the gross margin percentage was primarily due to the int roduction of new products since last year with higher margtns, such as Bupropion Hydrochloride, Demeclocycline Hydrochloride, Flavoxate, and Carbido The decrease in the gross margin percentage from the first quarter of 2004 to the second quarter of 2004 was primarily due to changes in p t mix : higher OTC product revenues that have lower margins and lower Bupropion Hydrochloride product sales that have higher margins in the second qua rter, and the $2 ,500,000 first quarter revenue from Teva related to the refimdable deposit .
Research and Development Expe,ues
The research and development expenses for the three months ended June 30, 2004 were $5,104,000 less reimbursements of 578,000 by a subsidiary of Teva Pharmaceutical Industries , Ltd. under the Strategic Alliance Agreement signed in June 2001, as compared to $3,558,000 less reimbursements of $22,000 for the same period in 2003 . The research and development expenditures in 2004 as compared to 2003 were attributable to higher personnel costs , biostudies, clinical studies, and new product introduction costs (technical transfer, scale-up and validation) .
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Patent and Patent Litigation Costs
The patent and patent litigation expenses for the three months ended June 30, 2004 , were $2,563,000 as compared to $789,000 for the name pe riod in 2003 . The year-to-year increase for the three months was primarily due to the ongoing Paragraph IV li tigation related to our Omeprazole Capsules and Fenofibrate Tablets ANDAs.
Selling Expenses
The selling expenses for the three months ended June 30, 2004 were $711,000 as compared to $438,000 for the same pe riod in 2003 . The increase in selling expenses as compared to 2003 was primarily due to higher personnel costs .
Generaland Administrative Expenses
The general and administrative expenses for the three months ended June 30, 2004 were $3,117,000 as compared to $2,083,000 for the same pe riod in 2003 . The increase in general and administrative expenses as compared to 2003 was primarily due to higher p rofessional fees , insurance premiums,and personnel costs.
Interest Income
Interest income for the three months ended June 30, 2004 was $271 ,000 as compared to $70 ,000 for the same period in 2003, primarily due to higher average cash equivalents and short-term investments generated from the net proceeds of the Company s S95 million convertible senior subordinated debentures.
Interest Expense
Interest expense for the three months ended June 30, 2004 was $564,000 as compared to $264,000 for the same period in 2003 . The increase in the interest expense for 2004 was primarily due to the 1 .25% interest accrued on the Company s $95 million conver tible senior subordinated debentures.
Income Taxes
In the second quarter 2004 , the Company provided for income taxes of $30,000 or 5 % of income before taxes, as compared to $0 for the 2003 pe riod . The effective tax rate in 2004 reflects the partial reversal of the defer red income tax asset valuation allowance recognized. The valuation allowance was reduced to reflect the utilization of federal and state loss carryforwards that offset the current tax component of the income tax p rovision . We evaluate the realizability of deferred tax assets on an annual and quarterly basis or if there is a signi ficant change in circumstance that may causes change in our judgment about the realizabili tyof our deferred tax assets. Any valuation allowance that may be released as a result of the evaluation process could have a material effect on our future results of operations . At December 31, 2003 , the Company had a net operating loss-carryforward totaling approximately $94,600,000, which expires from 2009 th rough 2023.
Net Income
The net income for the three months ended June 30, 2004 , was $572,000 as compared to a net loss of $2,284 ,000 for the same period in 2003, primarily due to higher sales, partially offset by higher research and development, selling , and general administrative expenses .
Six Months Ended June 30, 2004, Compared to Six Months Ended June 30, 2003
Overview
The net income for the six months ended June 30, 2004, was $9 ,620,000 as compared to a net loss of $5,497,000 for the six months ended June 30, 2003 .
Revenues
Revenues for the six months ended June 30, 2004 were $69,698 ,000, up more than 173% compared with revenues of $25 ,492,000 in the comparable period of the previous year . The year-over-year increase for the six months was primarilydue to shipments of our generic versions of Wellbutring) SR (Bupropion Hydrochloride) 100 mg and 150 mg Controlled Release Tablets, and Declomycin® (Demeclocycline Hydrochloride) 150 mg and 300 mg Tablets, which commenced during the first quarter of 2004, and Zyban® ( Bupropion Hydrochloride) and Sinemet® CR (CarbidopaILevodopa ) Extended Release Tablets, which commenced during the second quarter of 2004.
17 The Company g enerated $3,572,000 of other revenues in the 2004 period compared to $966,000 in the 2003 period. Other revenue for the 2004 period included $2,500,000 from Teva, which represented the reversal of a portion of the refundable deposit for its exercise of the exclusivity option for certain products .
The balance of $1,072,000 of other revenue represents revenues recognized pursuant to strategic agreements with Schering-Plough, Wyeth, and Novartis. These amounts represent the amorti zation of the milestone payments received by the Company, over the life ofthe agreement. The following table summarizes the activity in net revenues for the six months ended June 30, 2004 and 2003 :
2804 2003
Product sales 79,916 $ 32,08 5 Less : Rebates (3,326) (2,803) Chargebacks (5,962) (3,354 ) Product return reserve (2,802) (320) Other credits (1,700) (1,082 )
Net sales 66,126 24,52 6 Revenue from reversal of refundable deposit from Teva 2,500 - Other Revenues 1,072 96 6
Total Revenues $ 69,698 S 25,492
The rebates, chargebacks , returns and other credits decreased for the s ix months ended June 30, 2004 to approximately 17% of product sales as compared to approximately 24% for the comparable period in 2003. This decrease was mainly due to Bup ropion Hydrochloride 100 mg and ISO mg Cont rolled Release Tablets , Loratadine and Pseudoephedrine Sulfate (5mg/120mg) 12-hour Extended Release Tablets, which are exempt from rebates, chargebacks and other credits as per the agreements with Teva, Schering-Plough, Wyeth, and Novartis. The following table summarizes the net sales for the s ix months ended June 30, 2004 as compared to the six months ended June 30, 2003 by marketing channel :
2004 2003
(in 000 s) Global S 25,835 $ 16,865 Rx Partners 32,501 - OTC 7,790 7,661
Total Revenues S 66,126 $ 24,52 6
The increase in Global products of approximately $9 million in the first six months of 2004 as compared to the same period in 2003 was primarily due to new products introduced in 2004 and late 2003, such as Demeclocycline of approximately $4 .9 million, Flavoxate of approximately $1 .4 million, Carbidopa/Levodopa of approximately $0 .8 million, and higher sales of previously introduced products, such as Orphenadrine, of approximately $0 .8 million, and LIPRAM products of approximately $0.8 million.
Cost of Sales
The cost of sales for the six months ended June 30, 2004, was $37,087,000 as compared to S 17,468,000 for the same period in 2003 . The overall increase in cost of sales was primarily due to the increase in cost of materials as a result of increased product sales .
Gross Margin
Gross margin for the six months ended June 30, 2004 was 532,611,000, or app roximately 46.8% of total revenues , as compared to $8,024,000, or app roximately 31 .5% of total revenues , for the same period in 2003. The year -over-year increase in the gross margin percentage was primarily due to the introduction of new products since last year with higher margins, such as Bupropion Hydrochloride, Demeclocycline Hydrochloride, Flavoxate, and Carbidopa/Levodopa, and the $2 ,500,000 revenue from Teva related to the refundable deposit
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Research and Development Expenses
The research and development expenses for the six months ended June 30 , 2004 were $9,810,000 less reimbursements of $89 ,000 by a subsidiary of Teva Pharmaceutical Industries , Ltd . under the Strategic Alliance Agreement signed in June 2001, as compared to $7,006,000 less reimbu rsements of $154,000 for the same period in 2003 . The higher research and development expenditures in 2004 as compared to 2003 were attributable to higher personnel costs, biostudies, clinical studies, and new product introduction costs .
Patens and Patent Litigation Expenses
The patent and patent li ti gation expenses for the six months ended June 30, 2004 were $4,361,000 as compared to $1,096 ,000 for the same period in 2003. The year-to-year increase for the six months was primarily due to the ongoing Paragraph IV litigation related to our Omeprazole Capsules and Fenofibrate Tablets ANDAs .
Se ingExpenses
Th e selling expenses for the six months ended June 30, 2004 were $1,437 ,000 as compared to $1,006,000 for the same pe riod in 2003 . The increase in selling expenses as compared to 2003 was primarily due to higher personnel costs.
General and Administrative Expenses
The general and administrative expenses for the six months ended June 30 , 2004 were S6,468,000 as compared to $4,205,000 for the same pe riod in 2003 . Th e increase in general and administrative expenses as compared to 2003 was p rimarily due to higher professional fees, insurance premiums , and pe rsonnel costs .
Interest Income
Interest income for the six months ended June 30, 2004 was $327,000 as compared to $112,000 for the same pe riod in 2003, primarily due to higher average cash equivalents and short-term investments generated from the net proceeds of the Company s $95 minion conver tible senior subordinated debentures.
InterestExpense
Interest expense for the six months ended June 30, 2004 was $836,000 as compared to $495,000 for the same pe riod in 2003 . The increase in interest expense for 2004 was primarily due to the 1 .25% interest accrued on the Company a $95 million convertible senior subordinated debentures.
Income Taxes
For the six months ended June 30, 2004 , the Company provided for income taxes of $506 ,000 or 5% of income before taxes , as compared to SO for the 2003 period. The effec tive tax rate in 2004 reflects the partial reversal of the deferred income tax asset valuation allowance recognized. The valuation allowance was reduced to reflect the utilization of federal and state loss carryforwards that offset the current tax component of the income tax p rovision. We evaluate the realizability of deferred tax assets on an annual and quarterly basis or if there is a significant change in circumstance that may cause a change in our judgment about the realizability of our deferred tax assets . Any valuation allowance that may be released as a result of the evalua tion process could have a material effect on our future results of operations. At December 31, 2003, the Company had a net operating loss-carryforward totaling approximately S94,600,000, which expires from 2009 through 2023 .
NetIncome
The net income for the six months ended June 30, 2004, was $9 ,620,000 as compared to a net loss of $5 ,497,000 for the same period in 2003 ,primarily due to higher sales, partially offset by higher research and development, selling, and general administrative expenses .
Liquidity and Capital Resources
As of June 30, 2004 , we had $98,556,000 in cash, cash equivalents and short-term investments . Only $200,000 of the account balances are insured by the Federal Depository Insurance Company (FDIC) . The balance of the Company s cash equivalents and the sho rt-term investments are hid in US . Treasury securities and high-grade commercial paper, which are not insured by the FDIC.
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The net cash provided by financing activities for the six months ended June 30 , 2004, was approximately $101,016 ,000, consis ting primarily of the $95,000,000 proceeds, less capitalized costs of $3,612 ,000, from the Company s convertible senior subordinated debentures offering completed in April 2004 , and proceeds of $3,771 ,000 from issuance of common stock upon the exercise of options and warrants .
In April 2004, the Company terminated the loan agreements with PIDA and DRPA and repaid the remaining balances totaling approximately $992,000 .
For the six months ended June 30, 2004 , significant uses of cash from operating activities included, primarily, the increase in accounts receivable balance of $13,455,000 and inventory buildup of $8,623,000, partially offset by favorable cash flow from operati ons, (excluding depreciation and amortization) of $11,702,000. During the three months ended June 30, 2004 , we repaid our partners, Teva and Andrx, approximately $11 .8 million for their portion of finding the invento ry buildup for the Bupropion Hyd rochloride products.
Our capital expenditures for the six months ended June 30, 2004 were $6 ,269,000 as compared to S 1,125 ,000 for the same period in 2003 . The net cash used in investing activities included $45,244,000 for the purchase of the short term investments in U.S. Treasu ry securities and high-grade commercial paper ,
In December 2003, the Company transferred the $25 million Loan and Security Agreement from Congress Financial Corporation to Wachovia Bank, N.A ., thereby securing lower interest and less restrictive borrowing terms. The interest rates for the revolving loans are prime rate plus 0 .75%, or eurodollar rate plus 2.75%, at our option, based on excess availability. The term loan has an interest rate of prime rate plus 1 .5•/., or eurodollar rate plus 4%, at our option . As of June 30, 2004 , we borrowed approximately $5,000,000 against the revolving credit line and $2,880 ,000 against the term loan. In April 2004, the $25 million loan and security agreement was amended, as follows ) the cash collateral requirement of S10 million was removed; (2) the adjusted excess availability covenant was removed ; (3) the maximum permitted: 1 capital expenditure amount was aggregated to $45,000,000 for the years 2004 and 2005, and (4) as a condition of items (1) and (2) above , IMPAX is required to maintain a minimum cash balance at Wachovia of $25,000,000 .
We have no interest rate or de rivative financial instruments nor material foreign exchange risks. We are also not party to any of -balance-sheet arrangements, other than operating leases .
We expect to incur significant operati ng expenses, particularly research and development, for the foreseeable future in order to execute our business plan. We, there fore, anticipate that such operating expenses , as well u planned capital expenditures for the next twelve months ranging from $18 to $22 million, prima rily in plant capacity expansion, will constitute a mate rial use of our cash resources .
To date, we have primarily funded our research and development and other opera ting activities through equi ty and debt financing, and strategic alliances .
We have not paid any cash dividends on our common stock and we do not plan to pay any such cash dividends in the foreseeable future . We plan to retain any earnings for the operation and expansion of our business. Our loan agreements prohibit the payment of dividends without the other par ty s consent.
Recent Accounting Pronouncements
In Janua ry 2003 , the FASB issued FASB Interpretation No . 46 ( FIN 46 ), Consolidation of Variable Interest En tities. FIN 46 clarifies the application of Accounting Research Bulletin No. 51, Conso lidated Financial Statements, to certain en tities in which equity investors do not have the characte ristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 applies immediately to variable interest entities created after Janua ry 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date . It applies in the fiat fiscal year or interim period beginning after June 15, 2003 , to variable interest entities in which an enterp rise holds a variable interest that it acquired before February 1, 2003. FIN 46 applies to public enterprises as of the beginning of the applicable inte rim or annual period. On October 8, 2003, the FASB decided to defer FIN 46 until the firstreporting pe riod ending after December 15, 2003 . The provisions of this Interpretation did not have a material impact on the Company s financial condition or results of operations.
In December 2003, the FASB issued FIN No. 46R, Consolidation of Variable Interest Entities, cla rifying the application of Accounting Research Bulletin No. 51, Consolidated Financial Statements, to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. The provisions of this Interpretation do not have a material impact on the Company a financial condi tion or results of operati ons.
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In December 2003 , the FASB revised SFAS 132, Employers Disclosure About Pensions and Other Post Re tirement Benefits. Th is Statement does not change the measurement or recognition of those plans required by FASB 87 , Employers Accounting for Pensions, and No. 106, Employers Accounting for Post Re ti rement Benefits Other than Pensions . This Statement retains the disclosure requir ements contained in FASB No. 132, Employers Disclosure about Pensions and Other Post Re tirement Plans. The p rovisions of this Statement do not have a material impact on the Company s financial condition or results of operations. During the six months ended June 30, 2004 and 2003, the employer 401-K match was $218,00 0 and S 150,000, respectively.
In February 2004, the FASB issued revised FSP pertaining to FIN 46(R) . The revised FSPs replace certain previously issued FIN 46 FSP for en tities to which FIN 46(R) is applicable. Th is revision to FIN 46 did not have a material impact on the Company s financial condi tion or results of opera ti on .
In February 2004 , the FASB revised SFAS 133, Accounting for Derivative Instruments and Hedging Activities for Implementation issue E2L, AIJ, and C6 . The revisions to SFAS 133 did not have a mate rial impact on the Company s financial condi tion or results of operation.
In June 2004 , the FASB discussed EITF 04-08, The Effect of Contingently Conve rtible Debt on Diluted Earnings Per Share . The EITF task force has proposed that co mpanies count the shares that could be issued upon conversion of securities like the Company s debentures when calculating fully diluted per share earnings. This EITF is not yet effective. However, we disclosed in Note 2 the poten tial effect of this EITF on the Company s fully diluted EPS calculation .
Major Operational Highlights for the Six Months Ended June 30, 2004
• On January 28, 2004, IMPAX announced that the U.S. Food and Drug Administration (FDA) granted final approval to the Company's Abbreviated New Drug Application (ANDA) for its generic version of Wellbutrin® SR (Bupropion Hydrochloride) 100 mg Controlled Release Tablets and granted tentative approval to the Company's gene ric version of Wellbutrin SR 150 mg Controlled Release Tablets. GlaxoSmithKline markets Wellbutrin SR for the treatment of depression . According to NDCHealth, U .S . sales of these dosage forms of Wellbutrin SR Tablets were app roximately $1 .2 billion in the twelve months ended June 30, 2004.
• On January 29, 2004 , IMPAX announced that the Court of Appeals for the Federal Circuit in Washington, D.C. upheld a lower court decision that ruled against certain claims by GlaxoSmithKline in regards to the Company's ANDA for Wellbutrin SR (Bupropion Hydrochloride) 100 mg and 150 mg and for Zybant (Bupropion Hydrochloride) 150 mg. GlaxoSmithKline markets Wellbutrin SR for the treatment of depression and Zyban for smoking cessation .
• On February 27, 2004, IMPAX announced that the FDA granted tentative approval to the Company's ANDA for its generic version of Allegratll -D (Fexofenadine Hydrochloride and Pseudoephedrine Hydrochloride 60mg/ 120mg) Extended Release Tablets . Aven ti s Pharmaceuticals markets Allegra-D for the treatment of the symptoms associated with seasonal al lergic rhinitis. According to NDCHealth , U.S. sales of Allegra-D were approximately $438 million in the twelve months ended June 30, 2004.
• On March 5, 2004, IMPAX announced that the FDA granted final approval to the Company's ANDA for a gene ric version of Claritint-D 24-Hour (Loratadine and Pseudoephedrine Sulfate, IOmg/240mg) Extended Re le ase Tablets. Schering-Plough Corpora tion markets Claritin-D 24-Hour as an over-the-counter (OTC) drug for the relief of symptoms of seasonal allergic rhinitis (hay fever ). According to NDCHealth, U.S. sales of Claritin-D 24-Hour were $7 million for the twelve months ended June 30, 2004 .
• On March 8, 2004, IMPAX announced that the FDA granted tenta tive approval to the Company's ANDA for its gene ric version of Tricot (Fenofibrate)Tablets . Tricor Tablets are marketed by Abbott Laboratories, Inc. to assist patients in managing their cholesterol levels . The drug is indicated for use in reducing elevated LDL cholesterol, total cholesterol, triglycerides and Apo B and increasing HDL choleste rol in patients with primary hypercholesterolemia or mixed lipidemia . The drug has also been approved as adjunctive therapy for the treatment of hypertriglyceridemia, a disorder characterized by elevated levels of very low density lipoprotein (VLDL) in the plasma. According to NDCHealth, U.S . sales of Tricor Tablets were approximately $684 million for the twelve months ended June 30, 2004 .
• On March 22, 2004 , IMPAX announced that the FDA granted final marketing approval to the Company's ANDA for its generic version of Wellbutrin SR (Bupropion Hydrochloride) 150 mg Cont rolled Release Tablets.The FDA had previously granted final approval for the Company's application for the 100 mg strength . GlaxoSmithKline markets Wellbutrin SR for the treatment of depression . Both products were shipped to our marketing partner, Teva. Back to Contents
• On March 23, 2004, IMPAX announced that the FDA granted final marketing approval to the Company's ANDA for its gene ric version of Declomycin® (Demeclocycline Hydrochloride) 150 and 300 mg.Tablets . ESP Phartna markets Declomycin for the treatment of various infections. According to NDCHealth, U.S . sales of Declomycin were approximately $30 million for the twelve months ended June 30, 2004.
• On May 17, 2004 , IMPAX announced that the FDA granted final approval to the Companys ANDA for Carbidopa/Levodopa Extended Release Tablets, its generic version of Sinemet® CR tablets. Bristol-Myers Squibb markets Merck & Co .'s Sinemet CR exclusively in the U.S. for the treatment of Parkinsonism. According to NDCHealth, U.S . prescription sales of Sinemet CR and the one currently marketed gene ric equivalent were $123 million in the twelve months ended June 30, 2004.
• On May 27, 2004, IMPAX announced that the FDA granted final marketing approval to the Company's ANDA for its generic version of Zyban, Bupropion Hydrochloride 150 mg Cont rolled Release Tablets. GlaxoSmithKhne markets Zyban for smoking cessation. According to NDCHealth, U .S . sales of Zyban were app roximately $59 million in the twelve months ended June 30, 2004 .
• On May 28, 2004, IMPAX announced that the FDA granted final marketing approval to the Company's ANDA for its generic version of Proamatine®, Midodrine Hydrochloride 2 .5 and 5 mg Tablets . Shire Pharmaceuticals Group plc markets Prosmatine for treatment of symptomatic orthostatic hypotension. According to NDCHealth, U.S. market sales of Proama tine 2.5 mg and 5 mg and the two other marketed generic versions were approximately $48 million in the twelve months ended June 30, 2004.
• On June 18, 2004 , IMPAX announced that the FDA gran ted IMPAX a second tier 180-day exclusivity related to its pending ANDA for a gene ric version of Glucophage XRB, Metformin HCI Extended Release Tablets , 500mg. IMPAX has selectively waived its rights to this exclusivity to Teva Pharmaceuticals USA Inc. and will be sharing in the profits of Teva's Metfonnin HCI Extended Release Tablets as provided for in the Strategic Alliance A greement between IMPAX and Teva signed in June 2001 .On August 2, 2004 , the FDA granted final marketing. approval to the Company a ANDA for its generic version of Glucophage XR, Metformin HCI Extended Release Tablets, 500 mg . Bristol-Myers Squibb markets Glucophage XR for the improvement of glycemic control in patients with type 2 diabetes . According to NDCHealth, U.S. market sales of Glucophage XR 500 mg and other marketed generic versions were approximately $376 million in the twelve months ended June 30, 2004 .
ITEM 3 . QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RIS K The Company s cash and cash equivalents includes U .S. government and short-term high-grade commercial paper stated at cost which approximates market value. The pri mary objec ti ve of the Company s investment activities is to preserve principal and maximi zeyields without significantly increasing risk. To achieve this objec tive, the Company maintains its portfolio in a variety of h~h credit quality securities, including U.S. Government securities, treasu ry bills, and short-term high-grade commercial paper. One hundred percent of the Company s portfolio matures in less than one year . The carrying value of the portfolio approxima tes the market value at June 30 ,2004.The Company s debt instruments at June 30, 2004, are subject to fixed and variable interest rates and principal payments. We believe that the fair value of our fixed and variable rate long-term debt approximates their carrying value of approximately $108 million at June 30, 2004 . While changes in market interest rates may affect the fair value of our fix ed and variable rate long-term debt, we believe the effect, if any, of reasonably possible near-term changes in the fair value of such debt on the Company s financial statements will not be material.
We have no interest rate or derivative financial instruments nor material foreign exchange risks . We are also not party to any off-balance-sheet arrangements , other than operating leases.
ITEM 4. CONTROLS AND PROCEDURES The Company, under the supervision and with the participation of our management, including our principal executive officer and our principal financial officer, evaluated the effectiveness of our disclosure controls and procedures (u defined in Exchange Act Rule 13a- 15[e)), as of the end of the period covered by this report . Based on this evaluation, our principal executiveofficer and our principal financial officer concluded that our disclosure cont rols and procedures are effective in reaching a reasonable level of assurance that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded,processed, summarized, and reported within the time period specified in the Securities and Exchange Commission s rules and forms. The p rincipal executive officer and principal financial officer also conducted an evaluation of inte rnal control over financial reporting ( Internal Control) to determine whether any changes in Internal Controls occurred during the quarter that have materiall y affected, or which are reasonably likely to materially affect , Inte rnal Cont rols.
Based on this evaluation, there has been no such change during the quarter covered by this report. A control system, no matter how well conceived and operated , can provide only reasonable , not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resou rce constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems,no evaluation of cont rols can provide absolute assurance that all cont rol issues and instances of fraud, if any, within the Company have been detected. The Company conducts periodic evaluations of its internal cont rols to enhance, where necessary, its procedures and controls . Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
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PART 11- OTHER INFORMATION
ITEM 1 . LEGAL PROCEEDING S
Patent Litigatio n
There has been substantial li tigation in the pharmaceutical , biological, and biotechnology industries with respect to the manufacture, use, and sale of new products that are the subject of conflic ting patent rights. One or more patents cover most of the brand name controlled-release products for which we are developing gene ric versions . Under the Hatch-Waxman Amendments, when a drug developer files an ANDA for a generic drug, and the developer believes that an unexpired patent which has been listed with the FDA as covering that brand rtame product will not be infringed by the developers product or is invalid or unenforceable, the developer must so certify to the FDA. That certification must also be provided to the patent holder, who may challenge the developers certification of non -infringement, invalidity or uncnforceabilty by filing a suit for patent infrin?ement within 45 days of the patent holder s receipt of such cer tification. If the patent holder files suit, the FDA can review and approve the ANDA, but is prevented from granting final marketing approval of the product until a final judgment in the action has been rendered , or 30 months from the date the certifica tion was received, whichever is sooner. Should a patent holder commence a lawsuit with respect to an alleged patent infringement by us, the uncertainties inherent in patent litigation make the outcome of such litigation difficult to predict. The delay in obtaining FDA app roval to market our product candidates as a result of litigation, as well as the expense of such litigation, whether or not we are successful , could have a material adverse effect on our results of opera tions and financial position. In addition, there can be no assurance that any patent litigation will be resolved p rior to the 30-month pe riod. As a result, even if the FDA were to approve a product upon expiration of the 30-month period, we may not commence marketing that product if patent litigation is s till pending .
Lawsuits have been filed against us in connection with fourteen of our Paragraph IV filings. The outcome of such litigation is difficult to predict because of the uncertainties inherent in patent litigation.
;The Omeprazole Cas a
In May 2000, AstraZeneca AB and four of its related companies filed suit against IMPAX in the U.S. District Courtin Wilmington, Delaware claiming that IMPAX s submission of an ANDA for Omeprazole Delayed Release Capsules, 10 mg and 20 mg, cons titutes infringement of six U.S. patents relating to AstraZeneca s Prilosec product. The action seeks an order enjoining IMPAX from marketing Omeprazole Delayed Release Capsules, 10 as and 20 mg until February 4, 2014 , and reimbursement for costs and atto rney fees associated with this litigation .
In February 2001, AstraZeneca and the same related companies filed the same suit against IMPAX in the same federal court in Delaware for infringement, based upon IMPAX s amendment to its ANDA adding 40 mg strength Omeprazole Delayed Release Capsules .
AstraZeneca filed essentially the same lawsuits against nine other generic pharmaceutical companies (Andrx, Genpharm, Cheminor, Kremers, LEK, Eon, Mylan, Apotex, and Zenith). Due to the number of these cases, a multidistrict litigation proceeding, In re Omeprazole 10 mg, 20 mg, and 40 mg Delayed Released Capsules Patent Litigation, MDL-1291, has been established to coordinate pre- trial proceedings. Both lawsuits filed by AstraZeneca against IMPAX have been transferred to the mul ti district litigation.
Early in the multidistrict litigation, the trial court ruled that one of the six patents-in-suit was not infringed by the sale of a gene ric omeprazole product and that certain other patents were invalid. These rulings effectively eliminated four patents from the trial of these infringement can, although AstraZeneca may appeal these rulings as part of the overall appeal process in the case .
On October 11, 2002 , after a t rial involving Andrx, Genpharm Cheminor, and Kretners, the t rial judge handling the multidistrict litiga ti on ruled on AstraZeneca s complaints that three of these four defendants (First Wave Defendants ) infringed the remaining patents-in-suit. The trial judge ruled that three of the First Wave defendants, Andrx, Genpharm, and Cheminor , infringed the rcmaininp two patents asserted by AstraZeneca in its complaints, and that those patents are valid un til 2007 . In the same ruling, the trial court ruled that the rem aining First Wave Defendant , Kremers , did not infringe either of the remaining two patents . This defendants formula tion differed from the formula tion used by the other First Wave Defendants in several respects. In mid-December 2003 , the U .S. Court of Appeals for the Federal Circuit affirmed the October 2002 ruling in all respects . Subsequent petitions for rehearing have been denied.
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The formulation that IMPAX would employ in manufacturing its generic equivalent of omeprazole has not been publicly announced. IMPAX s formulation has elements that resemble those of other First Wave Defendants, but it also has elements that differ. Although the ruling by the trial court in the multidistrict litigation has a significant effect on the course of AstraZeneca s litigation against IMPAX, application of the trial courts opinion is no t certain. IMPAX believes that it has defenses to AstraZeneca s claims of infringement, but the opinion rendered by the trial court in the First Wave cases makes the outcome of AstraZeneca s litigation against IMPAX uncertain .
Two of the remaining six defendants (Second Wave Defendants) filed Motions for Summary Judgment of Non-Infringement, based upon the October 2002 ruling. The trial court has deferred ruling on those motions until discovery is complete d
In December 2003, the trial court entered a new scheduling order governing pre-trial proceedings relating to the Second Wave Defendants, including IMPAX. The schedule for comple tion of the litigation in the Second Wave , including AstraZeneca's litigation against IMPAX, now provides that all fact discovery (with certain ex ceptions) is complete. AstraZeneca's expert reports on issues as to which it bears the burden of proof, including issues of alleged infringement, were produced on February 17, 2004. IMPAX's responsive expert reports were produced on July 12, 2004.
Under the December 2003 scheduling order, Astra's reply reports would have been due on August 6, 2004 , and expert depositions would have commenced shortly thereafter. Following receipt of IMPAX's six expert reports on July 12, 2004 , as well as 17 other reports produced by four other defendants, Astra requested a further modification of the scheduling order . Astra's request for a three-month extension of the time for its reply reports was denied, but the Court granted Astra an additional five-week period to respond to the defendants' rebuttal reports on non-infringement. The schedule for expert depositions must be re-established Nevertheless, expert depositions will be conducted between Se ptember 14, 2004 , when reply reports are now due , and the end of 2004. Given the delays which have thus far occu rred in the litigation and the number of experts already designated by the pa rties, it is uncertain whether the expe rt depositions can be completed in the time allotted by the present schedule.
Under the December 2003 schedule , Motions for Summary Judgment may not be filed, as of right, until October 19, 2004 . IMPAX has recently requested permission to file an earlier motion for summary judgment on one aspect of the case. Other defendants have also requested permission to file early motions for summaryjudgment on other aspects of the litigation .
IMPAX may file additional Motions for Summa ry Judgment, including other Motions for SummaryJudgment of Non-Infringement, following the close of all discovery or after October 19, 2004, whichever conies first. If the case is not resolved by summary judgment, the case involving IMPAX will be returned to the U .S . Dist rict Court in Delaware for trial. It is likely, given the proceedings in the First Wave cases , that the case against IMPAX will be transferred back to New York for a consolidated trial before the saute judge who decided the First Wave cases . IMPAX believes, however, that any trial that might be scheduled in the case will commence in the first half of 2005 .
If IMPAX does not file a Motion for Summa ry Judgment, or if such a Motion is denied,the cou rt will schedule a date for trial. IMPAX intends to vigorously defend the action brought by AstruZeneca.
In August 2003, the court issued an order dismissing four of the patents -in-suit, three with prejudice . On September 30, 2003, as a result of the court s dismissal, AstraZeneca served each of the Second Wave Defendants , including IMPAX, with an amended complaint. In October 2003, IMPAX filed an answer to the amended complaint in which we asserted a new counterclaim with antitrust allegations . The counterclaim will be severed, and proceedings relating to it will be stayed until after trial of the patent infringement case .
Aventis Pharmaceuticals Inc- at al. Y. i_MPAX: The Fexofenadine Casa
On March 25 , 2002 , Aventis Pharmaceuticals Inc., Merrell Pharmaceuticals Inc., and Carderm Capital L.P . (collectively referred to as Aventis) sued IMPAX in the U.S . District Court for the District of New Jersey (Civil Action No. 02-CV-1322)alleging that IMPAX s proposed fexofenadine and pseudoephedrine hydrochloride tablets , containing 60 mg of fexofenadine and 120 mg of peeudoephedrine hyd rochloride, infringe U .S . Patent Nos . 6,039,974 ; 6,037,353 ; 5,738,872 ; 6,187,791 ; 5,855 ,912; and 6.113,942. On November 7, 2002, Aventis filed an amended complaint,which added an allegation that IMPAX s Fexofenadine and Pseudoephedrirne Hydrochloride 60 mg1I20 mg Extended Release Tablet product in fringes U.S. Patent No . 6,399,632 . Aventis seeks an injunction preventing IMPAX from marketing its Fexofenadine and Pseudoephedrine Hydrochloride 60 mg/120 mg Extended Release Tablet product until the patents-in-suit have expired, and an award of damages for any commercial manufacture, use, or sale of IMPAX s Fexofenadine and Pseudoephednne Hydroch lori de 60 mg/I20 mg Extended Release Tablet product , together with costs and attorneys fees .
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Fact discovery in this action is scheduled to close on October 29, 2004 . IMPAX believes that it has defenses to the claims made by Aventis based on noninfringement and invalidity. A tentative trial date has been scheduled for October 2005.
Aventis has also filed a suit against Barr Laboratories, Inc., Mylan Pharmaceu ticals, Inc., Dr. Reddy a Pharmaceuticals and Teva Pharmaceu ticals USA, Inc. in New Jersey asse rting the same patent infringement against these defendants proposed Fexofenadine and Pseudoephedrine or Fexofenadine products. The IMPAX case has been consolidated for trial with the Barr, Mylan, Dr. Reddy and Teva cases .
On March 25 , 2004, Aventis and AMR filed a complaint and first amended complaint against IMPAX and Ranbaxy, alleging infringement of two additional patents relating to the process for making the ac tive pharmaceutical ingredient, fexofenadine hydrochlo ride. These patents, United States Patent Nos . 5,581,011 and 5 ,750,703, are owned by AMR and exclusively licensed to Aventis .
On July 23, 2003 , IMPAX filed Summary Judgment motions for non-infringement of U.S. Patent Nos . 6,039,974, 6,113,942, and 5,855,912 ; and for non-infringement and invalidity of U.S. Patent No. 5,738 ,872. Opposition, papers were filed on August 11, 2003 . Reply papers were filed on September 24, 2003 . On October 24, 2003 , IMPAX filed a brief discussing the impact of the recent Festo decision on their Motions for Summa ry Judgment of non-infringement. Oral argument for the Summary Judgment Motion regarding the 912, 942, and 974 patents was heard on November 3, 2003. Oral argument for the Summary Judgment Motion regarding the 872 patent was heard on December 8, 2003 . On June 29, 2004 ,the court granted the Company s Motions for Summary Judgment ofNon-infringer ent of the 912 and 942 paints and denied the Company s Motion for Summary Judgment of Non-infringement of the 974 patent. At the same tine, the court ordered that a ruling on the Company s motion for Summary Judgment for the Non-infringement of the 872 patent is reserved pending a Markman hearing to be held on September 9, 2004 to assist the court in construing the patents product-by-process claims .
Purdue Pharma L.P. at aL v IMPAX: The Oxycodone Cases
On Ap ril 11, 2002, Purdue Pharma and related companies filed a complaint in the U .S. District Court for the Southern District of New York alleging that IMPAX s submission of ANDA No. 76-318 for 80 mg OxyContin Tablets infringes three patents owned by Purdue . The Purdue patents are U.S. Patent Nos . 5,508 ,042, 5,549,912 and 5 ,656,295; all directed to cont rolled release opioid formulations. On September 19, 2002, Purdue filed a second Infringement Complaint regarding IMPAX s 40 mg OxyContin generic product . On October 9, 2002, Purdue filed a third Infringement Complaint regarding IMPAX s 10 m* and 20 mg OxyContin generic products. IMPAX filed its answer and counterclaims in each an on October 3, 2003 . On November 25, 2003, Purdue submitted their reply to our counterclaims. Purdue is seeking, among other things, a court order preventing IMPAX from manufacturing , using or selling any drug product that infringes the subject Purdue patents .
Purdue previously sued Boehringer Ingelheim/Roxane, Endo and Teva on the same patents. One or more of these defendants may resolve the invalidi ty issues surrounding the Purdue patents prior to when IMPAX a case goes to trial. The Boehringer Ingelheim/Roxane suit is stayed . The Endo action was tried in June 2003 and post trial briefs have been filed In January 2004 , the judge in the Endo action ruled that the three patents in suit , the same patents that Purdue had asserted against IMPAX, are unenforceable because they were inequitably procured and enjoined their enforcement . Purdue has appealed that ruling to the Court of Appeals for the Federal Circuit.
: The RHuzole Case
In June 2002 , IMPAX filed suit against Aventia Pharmaceu ticals, Inc. in the U.S. District Court in Wilmington, Delaware, seeking a declaration that the filing of an ANDA to engage in a commercial manufacture and/or sale of Riluzole 50 mg Tablets for treatment of patients with amyot rophic lateral scleroses (ALS) does not infringe claims of Aventis U .S . PatentNo. 5,527,814 (814 patent) and a declaration that this patent is invalid .
In response to IMPAX s complaint, Aventis filed counterclaims for direct in fringement and inducement of infringement of the 814 patent In December 2002, the district court granted Aventis Motion for PreliminaryInjunction and enjoined IMPAX from infringing , contributory infringin , or inducing any other person to infringe Claims 1, 4 or 5 of the 814 patent by selling, offaing for sale, distributing, marketing or exporting from the United States any pharmaceu ti cal product or compound containing riluzole or salt thereof for the treatment of ALS .
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The trial was completed on October 30, 2003 , and post-trial briefing was completed in December 2003. IMPAX is pursuing its a ssertions that claims of the 814 patent are invalid in view of prior an and are unenforceable in view of inequitable conduct committed during the prosecution of the patent before the United States Patent and Trademark Office (USPTO) .
On January 30, 2004 , the courtdenied IMPAX s Motion for Summary Judgment on inequitable conduct and, on February 5, 2004,the court denied IMPAX s Motion for Summary Judgment on non -infringement of certain claims . The court has not issued its trial rulings and did not rule on the thrd pre-trial Motion for Summa ry Judgment based on invalidi ty of the patent-in-suit.
If IMPAX is not ultimately successful in provin g invalidity or unenforceability , there is a substantial likelihood that the court will enter a permanent injunction enjoining IMPAX from marketing Riluzole 50 mg Tablets for the treatment of ALS in the United States until the expiration of the 814 patent (June 18, 2013). If IMPAX is ultimately successful in proving either defense, the preliminary injunction would be set aside and IMPAX would be permitted to market its Riluzole 50 mg Tablet product for the treatment of ALS in the United States .
Abbott Laboratories v. IMP X : The Fenotlbrate Tablet Cases In January 2003, Abbott Laboratories and Fournier Indust rie et Sante and a re lated company filed suit against IMPAX in the U.S. District Court in Wilmington, Delaware claiming that IMPAX s submission of an ANDA for Fenofibrate Tablets , 160 mg, constitutes in fringement of two U .S . patents owned by Fournier and exclusively licensed to Abbott, relating to Abbott s Tricor tablet product .
In March 2003 , Abbott and Fournier filed a second action against IMPAX in the same court nuking the same claims against IMPAX s 54 mg Fenofibrate Tablets. These cases were consolidated in Ap ril 2003 .
In September 2003, Abbottand Fournier filed a third ac tion against IMPAX in the U .S . District Court in Wilmington, Delaware , claiming that IMPAX s submission of its ANDA for 54 mg and 160 m g Fenofibrate Tablets constitutes infringement of a third patent recently issued to Fournier and exclusively licensed to Abbott. This action was also consolidated with the previousltwo consolidatedy actions in December 2003 . In January 2004, Abbott and Fournier filed a fourth action relating to IMPAX s 54 tug and 160 mg Fenof ablets based upon a claim of infringement of a fourth patent. All four cases were consolidated in March 2004. Fact and expert discovery in the consolidated cases closes in November 2004 and the trial is currently act for June 2005 . IMPAX has responded to all four complaints by asserting that its p roposed generic Fenofibrate Tablet products do not infringe the patents-in-suit and by asserting that the patents-in-suit are invalid.
All four actions seek an injunction preventi ng IMPAX from marketing its Fenofibrate Tablet products un ti l the expirati on of the patents (January 9, 2018) and an award of damages for any commercial manufacture, use, or sale of IMPAX s Fenofibrate Tablet product , together with costs and attorney fees .
Solvay Pharmaceuticals v. IMPAX : The Creon Case
On April 1 1, 2003 , Solvay Pharmaceuticals , Inc., manufacturer of the Creon line pancreatic enzyme products, brought suit against IMPAX in the U .S. District Court for the District of Minnesota claiming that IMPAX has engaged in false adver tising, unfair competition, and unfair trade practices under federal and Minnesota law in connection with the Company s marketing and sale of its Lipram products . The suit seeks actual and consequen tial damages, including treb le damages, attorneys fees, injunctive relief and declaratoryjudgments that would prohibit the substitu tion of Lipram for presc ripti ons of Creon. On June 6, 2003, IMPAX fi led a Mo tion for Dismissal of Plaintiffs Complaint, which sought to dismiss each count of Solvay s complaint . On January 9, 2004, the U .S. District Court issued a ruling on IMPAX s Motion for Dismissal, dismissing two of the counts set forth in the Complain t. including the count which sought a declara tory judgment that Lipram may not lawfully be substituted for prescripttons of Croon . On January 26, 2004, IMPAX filed its Answer to the Complaint and Counterclaim alleging that Solvay wrongfully interfered with IMPAX s business relationships. On February 17, 2004 , Solvay filed its Reply to IMPAX s Counterclaim. On February 24, 2004, the Rule 16 Scheduling Conference was held and, on Februa ry 25, 2004 , the Court issued a Scheduling Order set ting the deadline for discovery on Janua ry 14, 2005, and a trial date for July 1, 2005. Fact discovery is currently ongoing it this case. IMPAX believes it has defenses to Solv ay a allegations and intends to pursue these defenses vigorously.
Aiza Corporation Y. IMPAX : The Ozvbutvnln Case
On September 4, 2003, Alza Corporation ( Alza) filed a lawsuit against IMPAX in the U.S. District Court for the Northern Dist rict of California alleging patent infringement of one patent related to IMPAX s filing of an ANDA for a generic version of Ditropan XL (Oxybutynin Chloride) Tablets, 5 mg, 10 tng, and 15 mg. Alza seeks an injunction, a declaration of infringement, attorney a fees and costs . On October 24, 2003, IMPAX filed its Answer to the Complaint, which included defenses to the infringement claim , and counterclaimed for patent non-infringement and invalidi ty. Discovery is on-going and trial is currently set for November 2005.
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On October 24, 2003, IMPAX filed a lawsuit against Alza in the U .S . District Court for the Northern District of California seeking a declaratoryjudgment that four Ain patents relating to IMPAX s filing of an ANDA fora generic version of Dit ropan XL (Oxybutynin Chloride ) Tablets, 5 rttg,10 mg, and 15 mg are invalid and/or not in fringed by the commercial manufacture,use, offer for sale, sale, or importation of the IMPAX product . On November 17, 2003, Alza moved to dismiss the Company s complaint for lack of subject matter jurisdic tion based on Alts s argument that there is no case or cont roversy between the parties with respect to these four patents . On Ap ril 19, 2004 , the Court denied Alza s motion . On May 18 , 2004, the Court ordered the ent ry of a stipulation of dismissal based on a covenant not to sue issued by Alza to the Company with respect to the four Alza patents in the case .
Shire Laboratories Inc. v IMPAX : The Adderall Case
On December 29, 2003 , Shire Laboratories, Inc., a subsidia ry of Shire Pharmaceuticals Group, PLC, filed a lawsuit against IMPAX in the U.S. District Cou rt for the District of Delaware alleging patent in fringement on U .S . Patent Nos . 6,322,819 and 6,605,300 related to filing of an ANDA to market a generic version of Adderall 30 mg capsules. IMPAX filed its answer on January 20, 2004, denying infringement and contesting the validity of both patents. All discovery is expected to be completed by March 2005 . A tentative court date has been scheduled for October It, 2005.
OTHER LITIGATION
State of California Y. IMPAX
On August 7, 2003, IMPAX received an Accusa tion from the Department of Justice, Bureau of Narcotic Enforcement, State of California ( BNE ) , alleging that IMPAX failed to maintain adequate controls to safeguard precu rsors from theft or loss regarding our pseudoephedrine product in Janua ry 2003 . IMPAX contested the allegations in the Accusation and entered into discussions with the State of California, Department of Justice, to bring resolution to this matter. IMPAX has implemented a number of remedial measures aimed at imp roving the security and accountability of precursor substances used by IMPAX and regulated by the California Department of Justice , Bureau of Narcotic Enforcement . In March 2004, followin g a theft of pseudoephedrine from IMPAX s facili ties, the BNE filed an Amended Accusation, again alleging that IMPAX failed to maintain adequate cont rols to safeguard precursors from theft or loss regarding our pseudoephedrine product. In May 2004, a Notice of Hearing was received from BNE, which set the hearing of this matter, should one be necessa ry, for October 18 and October 19, 2004 . IMPAX is continuing its discussions with the State of California, Department of Justice, and hopes to resolve this matter without the need for a formal hearing.
Other than the legal proceedings described above, we are not aware of any other mate rial pending or threatened legal ac tions, private or gove rnmental, against us. However, as we file additional applications with the FDA that contain Paragraph IV certifications and develop new products, it is likely we will become involved in additional li tigation related to those filings or products.
Insurance
As part of our patent litigation strategy, we had obtained two policies covering up to $7 million of patent infringement liabili ty insurance from American Interna tional Special ty Line Company (AISLIC ),an affiliate of AIG International. Th is litigation insurance covered us against the costs associated with patent infringement claims made against us re lating to seven of the ANDAs we filed under Paragraph IV of the Hatch-Waxman Amendments. Both policies had reached their limits of liability . Whi le Teva has a~ro~ to pay 45% to 50% of the attorneys fees and costs (in excess of the $7 million expected to be covered by our insurance policies for six products) related to the twelve products covered by our strategic alliance agreement with them, we will be responsible for the remaining expenses and costs for these products,and all of the costs associated with patent litigation for our other products and our future products .
We do not believe that this type of litigation insuran ce will be available to us on acceptable terms for our other current or future ANDAs . In those cases, our policy is to record such expenses as incurred .
Product liability claims by customers constitute a risk to all pharmaceutical manufacturers . We currently car ry $80 million of product liability insurance for our own manufactured products . This insurance may not be adequate tocover any product liability claims to which we may become subject.
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES
On May 17, 2004, we fi led an amendment to our Restated Certificate of Incorporation , as amended, with the Secretary of State of the State of Delaware, which amendment increased the number of our authorized shares of common stock f rom 75,000,000 to 90,000,000 . Ourboard will generally be able to issue additional shares of common stock without the approval of our stockholders . These future issuances will dilute the ownership interests of our stockholders .
27 1.250% Convertible Senior Subordinated Debentures
On Ap ril 5, 2004, the Company issued and sold $95.0 million in aggregate principal amount of its 1 .250% convertible senior subordinated debentures due 2024. The debentures were sold by the Company to Citi*roup Global Markets Inc., Wachovia Capital Markets, LLC and First Albany Capital Inc., as initial purchasers, in a private placement exempt from rc;istrati on under the Securities Act of 1933, as amended (the Securities Act ) . We have been advised by the initial purchasers that they have resold ,and/or intend in the future to resell , the debentures to qualified institutional buyers (as defined in Rule 144A promulgated under the Securities Act) in transactions exempt from the registration requirements of the Secu rities Act in reliance on Rule 144A.
The issuance and sale of the debentures resulted in net proceeds to the Company of approximately $91,388,000 . These proceeds are being used for general corporate purposes, including working capital requirements , manufacturing of our products and research and development .
The debentures bear interest at the rate of 1 .250% per year. Interest on the debentures is payable on April I and October 1 of each year, be*inning on October 1, 2004 . The debentures are convertible by holders into shares of our common stock at a conversion price of $28.08 per share (which is subject to adjustment upon certain events , but represented a 30% premium over our stock price at the time the debentures were issued) . The debentures are convertible by holders into shares of our common stock if (1) the p rice of our common stock reaches a specific threshold; (2) the trading price for the debentures falls below certain thresholds; (3) the debentures have been called for redemption; or (4) certain corporate transactions occur.
The debentures mat re on April 1, 2024 , unless earlier redeemed, repurchased or converted. Before April 5, 2007 , we may redeem some or all of the debentures if the price of our common stock reaches a specific threshold , at a redemp ti on price that includes an additional payment on the redeemed debentures equal to $230.77 per $1,000 principal amount of debentures, less the amount of any interest actually paid or accrued and unpaid on the debentures . On and after April 5, 2007, the Company may redeem some or all of the debentures at certain specified redemp tion prices.
The debentures are the Company s unsecured obligati ons and are subordinated in right of payment to all of the Company s existing and future senior indebtedness. On Ap ril 1 , 2009, April 1, 2014, and April 1, 2019, and under certain circumstances, holders of the debentures will have the right to require us to repurchase all or any pa rt of their debentures at a repurchase price equal to 100% of the principal amount of the debentures, plus accrued and unpaid interest and liquidated damages, if any, to, but excluding the repurchase date .
In connection with the offering of the debentures, we filed a Form S- 3 registration statement with the SEC in June 2004. The registration statement has not yet been declared effective by the SEC. If the registration statement on Form S-3 is not declared effective by the SEC by October 4, 2004, then the interest rate payable on the debentures will be subject to increase.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company s Annual Meeting of Stockholders held on May 17, 2004 ,the following actions were approved, by the votes indicated : a) Ten directors were elected :
Leslie Z . Benet , Ph.D . 43,846,077 For 732,889 Withhold authority Robert L. Burr 43,735,232 For 843,734 Withhold authority Barry R . Edwards 44,288,225 For 290,741 Withhold authority David J. Edwards 43,791,680 For 787,286 Withhold authority Nigel Fleming, Ph.D. 43,823,169 For 755,797 Withhold authority Charles Hsiao , Ph.D. 44,186,440 For 392,526 Withhold authority Larry Hsu, Ph.D. 44,287,092 For 291,874 Withhold authority Michael Markbreiter 44,204,397 For 374,569 Withhold authority Oh Kim Sun 44,405,446 For 173,520 Withhold authority Peter R. Terreri 44,402,145 For 176,821 Withhold authority
The proposed increase in the authorized shares of the Company a common stock from 75,000,000 to 90,000,000, was approved as follows : 43,025,827 For 1,510,097 Against 10,041 Abstaining 28 Back to Contents
appointntent of Deloitte & Touche LLP as the Company s independent accountants for the fiscal year ending December 31, 2004 was ratified, as c) follows:
44,013,036 For 556,763 Against 9,167 Abstaining ITEM 6. EXHIBITS AND REPORTS ON FORM 8- K
(a) Exhibits
• 3 .18 - Certificate of Amendment of Restated Certificate of Incorporation of Impax Laboratories, Inc . dated as of May 17, 2004 .
• 10.65 - Second Amendment to Loan and Security Agreement between Wachovia Bank and Impax Laboratories, Inc . dated June 23, 2004 .
• 10.66 - Amendment to the Development, License and Supply Agreement between Wyeth Consumer Healthcare Division and Impax Laboratories, Inc . dated as of July 9, 2004.
• 31.1 - Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 .
• 31.2 - Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 .
• 32.1 - Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 . (b) Reports
• On May 5, 2004, the Company furnished a report on Form 8-K (Items 9, 12) announcing earnings for the first quarter ended March 31, 2004 .
• On May 17, 2004, the Company filed a report on Form 8-K (Item 9) announcing that the FDA had granted final approval to the Company's ANDA for Carbidopa/Levodopa Extended Release Tablets.
• On May 27, 2004, the Company filed a report on Form 8-K (Item 9) announcing that the FDA hadgranted final marketing approval to the Company's ANDA for its generic version of Zyban® 150 mg Controlled Release Tablets.
• On May 28, 2004, the Company filed a report on form 8-K (Item 9) announcing that the FDA had granted final marketing approval to the Company's ANDA for its generic version of Promatine 2.5 mg and 5 mg Tablets .
29 SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalfby the undersigned thereunto duly authorized.
IMPAX LABORATORIES, INC.
By: /a/ BARRY R. EDWARD S August 9, 2004
Chief Executive Officer (Principal Executive Officer)
By: /s/ CORNEL C. SPIEGLER August 9, 200 4
Chief Financial Officer (Principal Financial and Accounting Officer) 30 EXHIBIT D United States Securities and Exchange Commission
Washington, D .C . 2054 9
FORM 10-Q/A
Amendment No . 1
(Mark One )
(X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 193 4
For the quarterly period ended March 31, 2004 ------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 193 4
For the transition period from to
Commission file number 0-2735 4
Impax Laboratories, Inc . ------(Exact name of registrant as specified in its charter )
Delaware 65-0403311 ------(State or other jurisdiction of (I .R .S . Employer incorporation or organization) Identification No . )
30831 Huntwood Avenue - Hayward, California 94544 ------(Address of principal executive offices) (Zip code)
Registrant's telephone number including area code (510) 476-2000 ------
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Ac t 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
Indicate by check mark whether registrant in an accelerated filer (as defined in Rule 12b-2 of the Act .) Yes X No
The number of shares outstanding of the registrant's common stock as of April 30, 2004 was approximately 58,028,54 3 -- ^------EXPLANATORY NOTE ------
This amendment is being filed to reflect the restatement of the Company's condensed financial statements, as discussed in Note 11 thereto, and other information related to such restated financial statements . Except for Items 1, 2 and 4 of Part I, no other information included in the original report on Form 10-Q is amended by this Form 10-Q/A . Items not being amended are presented for the convenience of the reader only . This report continues to be presented as of the date of the original Quarterly Report on Form l0-Q and the Company has not updated the disclosure in this report to a later date . Therefore, this amendment should be read together with other documents that the Company has filed with the Securities and Exchange Commission subsequent to the filing of the original Quarterly Report on Form l0-Q . Information in such reports and documents updates and supersedes certain information contained in this amendment . IMPAX LABORATORIES, INC .
INDEX TO FORM 10-Q/A
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 200 4
PART 1 . FINANCIAL INFORMATION
PRO S Item 1 . financial Statements :
Condensed Balance Sheets as of March 31, 2004 (am restated) and December 31, 2003 (unaudited) ...... 1
Condensed003 Statements of Income for the Three Months laded March 31, 2004 (as restated ) and 2 (unaudited) ...... 2
Condensed Statements of Cash Flows for the Three Months inded March 3 1, 2004 (as restated) and 2007 (unaudited) ...... 3
Notes to Financial Statements (unaudited) ...... 4
Item 2 . Management's Discussions and Analysis of Financial Condition and Results of operations ...... 12
Item 3 . Quantitative and Qualitative Disclosures About Market Risk ...... 19
Item 4 . Controls and Procedures ...... 19
PART II . OTHER INFORMATION AND SIOSGTOR RS
Item 1 . Legal Proceedings ...... 20
Item 2 . Changes in Securities, Use of Proceeds, and Issuer Purchases of Iquity Securities ...... 24
Item i . Lxhibits and Reports on Form S-X ...... 2S
Signatures ...... 27
Certifications ...... 2 9
i PART I - FINANCIAL INFORMATION ------
ITEM 1 . FINANCIAL STATEMENTS
IMPAX LABORATORIES, INC . CONDENSED BALANCE SHEETS (UNAUDITED ) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA )
MARCH 31, DECEMBER 31 , 2004 200 3 ------(AS RESTATED - SEE NOTE 11 )
ASSETS
Current assets : Cash and cash equivalents $ 19,491 $ 15,50 5 Accounts receivable, net 20,533 9,88 5 Inventory 30,148 28,47 9 Prepaid expenses and other assets 1,70 4 1,42 7 ------Total current assets 71,876 55,296 Restricted cash 10,000 10,000 Property, plant and equipment, not 39,231 38,13 2 Investments and other assets 1,371 1,32 5 Goodwill, net 27,574 27,574 Intangibles, net 263 37 9 ...... ------Total assets $ 150,33 5 $ 132,706 ......
LIABILITIES AND STOCKHOLDERS- EQUITY
Current liabilities : Current portion of long- term debt $ 1 , 166 $ 1,06 8 Accounts payable 33,590 22,78 3 Revolving line of credit 6,953 7,642 Accrued expenses and deferred revenue s 13,93 3 10,87 2 ------Total current liabilitie s 55,642 42,36 5 Refundable deposit from Teva -- 5,00 0 Long term debt 8,489 8,85 4 Deferred revenues and other liabilities 2,895 2,87 9 ------Total liabilities 67,02 6 59,09 8 ...... Commitments and Contingencie s Mandatorily redeemable convertible Preferred Stock : Seriss 2 mandatory redeemable convertible Preferred Stock , $0 .01 par value 0 shares outstanding at March 31 , 2004 , and 75,000 shares outstanding a t December 31, 2003, redeemable at $100 per share - - 7,50 0 ------
Stockholders , equity : Common stock, $ 0 .01 par value , 75,000 , 000 shares authorized and 57,961 , 990 and 55 , 307,136 shares issued and outstanding at March 31 , 2004 , and December 31, 2003, respectively 580 S5 3 Additional paid - in capital 182,062 170,10 4 Accumulated deficit ( 99,333 ) ( 104,549 )
Total stockholders ' equity 83,309 66,10 8 ------Total liabilities and stockholders ' equity $ 150 , 33 5 $ 132,70 6 ......
The accompanying notes are an integral part of these financial statements .
1 IMPAX LABORATORIES, INC . CONDENSE STATEMENTS OF INCOME (UNAUDITED) (DOLLARS IN THOUSAND , EXCEPT SHARE AND PER SHARE DATA )
Three Months Ende d March 31 , ------(As restated - see Note 11 ) ------_-_--- - 2004 200 3
Net sales $ 31,514 $ 11,06 6
Revenue from reversal of refundable deposit from Teva 2,500 - -
Other revenue s ------53 1 ------_35 9
Total revenues 34,545 11,47 5
Cost of sale s . . .18,550 ------8,14 7 ...... ------
Gross margi n 15,995 3,27 8
Research and development 4,984 3,54 7
Reimbursements from Teva (11 ) (132 ) ------_-•------
Research and development, net 4,873 3,41 5
Patent litigatio n 1,620 20 8
Selling expense s 726 56 8
General and administrative expenses 3,351 2,12 2
Other operating income ( expense), ne t 7 1 1 ------
Net income (loss) from operations 5,432 ( 3,024 )
Interest income 56 4 2
Interest expens e (272 ) (231 ) ------• -
Net income (loss) before provision for income 5,216 (3,213 )
Provision for income taxe s ------' ------
Net income (loss) $ 5,216 $ ( 3,213 ) ......
Earnings per share ; Basic $ 0 .09 $ (0 .07 )
Diluted $ 0 .0 8 $ (0 .07 ) ------weighted average common shares outstanding : Basic 56,978,095 47,876,830 ------Diluted 61,481,932 47,876,830 ------
The accompanying notes are an integral part of these financial statements .
2 IMPAX ORATORIES, INC . CONDENSED S ATEMENTS OF CASH FLOW S (UNAUDITED) (DOL S IN THOUSANDS)
THREE MONTHS ENDED MARCH 31 ,
2004------2003 ------(AS RESTATED - SEE NOTE 11 )
CASH FLOWS FROM OPERATING ACTIVITIES : Net income (loss ) $ 5,21 6 $ (3,213) Adjustments to reconcile net loss to net can used by operating activities : Depreciation and amortization 1,022 885 Reversal of refundable deposit from Teva (2,500 ) Non-cash compensation charge (warrants a options ) 11 9 Change in assets and liabilities : Accounts receivable (10,648) 790 Inventory (1,669) (2,310 ) Prepaid expenses and other assets (323 ) 50 Accounts payable 10,807 2,164 other liabilities 3,07 7 644
Net cash provided by (used in ) activitie s 4,98 2 (871 )
CASH FLOWS FROM INVESTING ACTIVITIESs Purchases of property and equipmen t (2,025) (698)
Net cash used in investing activ tie s (2,025 ) (698 )
CASH PLOWS FROM FINANCING ACTIVITIES : Revolving line of credit borrowings (repayme (689) 1,826 Additions to long-term deb t 896 Repayment of long-term debt (267 ) (163 ) Proceeds from issuance of common stock (upon of stock options and warrants and under ESP 1,985 15
Net cash provided by financing activities 1 .029 2,574
Net increase in cash and cash equivalents 3,98 6 1,00 5
Cash and cash equivalents, beginning of the $ 15,505 $ 10,219
Cash and cash equivalents, and of the quarto . $ 19,491 $ 11,224
Cash paid for interest $ 273 $ 23 2
Cash paid for income taxes
Supplemental disclosure of non-cas financing activities : In January 2004, the Company issue 160,751 shares of our common stock to Teva to satisfy the remaining $2 .5 mill on refundable deposit to Teva . Also, in January 2004, the holders of the S ries 2 Preferred Stock converted their entire 75,000 preferred shares into 1,500 000 shares of common stock .
The accompanying notes are an iltegral part of these financial statements .
3 NOTES TO FINANCIAL STATEMENTS THRHB MONTHS ENDE D MARCH 31, 2004 AND MARCH 31, 200 3
NOTE 1 . The financial statements included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission . Certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations ; however, the Company believes that the disclosures are adequate to make the information presented not misleading . These condensed financial statements should be read in conjunction with the financial statements and the notes thereto included in the Company's latest Annual Report on Form 10-K . The results of operations for the three months ended March 31, 2004 are not necessarily indicative of the results of operations expected for the year ending December 31, 2004 .
Impax Laboratories, Inc . ("IMPAX," "we,' *us," or "the Company") focuses on the development, manufacturing, and marketing of specialty pharmaceutical products utilizing its own formulation expertise and drug delivery technologies . As of March 31, 2004, the Company is marketing thirty-three generic pharmaceuticals, which represent dosage variations of fourteen different pharmaceutica l compounds, and has seventeen applications under review with the Food and Drug Administration (FDA), including five tentatively approved, addressing approximately $5 .4 billion in U .S . product sales in the twelve months ended February 29, 2004, according to NDCHealth . Thirteen of these pending filings were filed under Paragraph IV of the Hatch-Waxman Amendments . The Company has approximately twenty-seven other products in various stages of development for which applications have not yet been filed . These other products are generic versions of pharmaceutical products that had U .S . sales of approximately $14 .5 billion in the twelve months ended February 29, 2004, according to NDCHealth .
Except for the three months ended March 31, 2004, we have experienced operating losses and negative cash flow from operations and our future profitability continues to be uncertain . As of March 31, 2004, our accumulated deficit was $99,333,000 and we had outstanding indebtedness in an aggregate principal amount of $16,608,000 . To remain operational, we must, among other things :
obtain FDA approval for our products ; prevail in patent infringement litigation in which we are involved, successfully launch our new products ; and comply with the many complex governmental regulations that deal with virtually every aspect of our business activities .
We expect to incur significant operating expenses, particularly for research and development, for the foreseeable future in order to execute our business plan . We, therefore, anticipate that such operating expenses, as well as planned capital expenditures, will constitute a material use of our cash resources .
On April 5, 2004, the Company completed a convertible senior subordinated debenture offering of $95,000,000 for net proceeds of $91,675,000 . The proceeds of the debentures will be used for general corporate purposes, including working capital requirements, manufacturing of our products, and research an d development .
To date, the Company has funded its research and development and other operating activities through equity and debt financings and strategic alliances .
CRITICAL ACCOUNTING POLICY RELATED TO REVENUE RECOGNITION
The Company recognizes revenue in accordance with SEC Staff Accounting Bulletin ("SAB") 101 issued by the BBC in December 1999 . We recognize revenue from the sale of products when the shipment of products is received and accepted by the customer . Provisions for estimated discounts, rebates, chargebacks, returns and other adjustments are provided for in the period the related sales are recorded . In December 2003, the SAD 104 was issued by the BBC . This bulletin revises and clarifies portions of Topic 13 of the Staff Accounting Bulletin to be consistent with current accounting and auditing guidance and SEC rules and regulations .
Emerging Issues Task Force (BITE) No . 00-21 supplemented SAB 101 for accounting for multiple element arrangements . The Company has entered into several strategic alliances that involve the delivery of multiple products and services over an extended period of time . In multiple element arrangements, the Company must determine whether any or all of the elements of the arrangement can be separated from one another . If separation is possible, revenue is recognized for each deliverable when the revenue recognition criteria for the specific deliverable is achieved . If separation is not possible, revenue recognition is required to be spread over an extended period . Under BIT? No . 00 -21, in an arrangement with multiple elements , the delivered item should be considered a separate unit of accounting if all of the following criteria are met :
the delivered item has value to the customer on a standalone basis, there is objective and reliable evidence of the fair value of the undelivered item ; an d if the arrangement included a general right of return, or whether delivery or performance of the undelivered item is considered probable .
The Company reviews all of the terms of its strategic alliances and follows the guidance from SIT? No . 00-21 for multiple element arrangements .
In June 2001 , the Company entered into a Strategic Alliance Agreement with e subsidiary of Teve for twelve controlled - release generic pharmaceutical products . The agreement granted Teva exclusive U .S . prescription marketing rights for these products for a period of ten years from the date of Teva's first sale of the products . Under the terms of this agreement, Teva has sole and exclusive right to determine all terms and conditions of sale to its customers, including pricing discounts , allowances , price adjustments , returns and rebates .
Revenues from product sales for these products under our strategic alliance are recognized at the time title and risk of loss transfers to Teva ' s customers . During the three months ended March 31, 2004 , the Company commenced shipping its Bupropion Hydrochloride 100 mg and 150 mg Controlled Release Tablets . Teva ships the Bupropion products to its customers and reports the results on a monthly basis . Teva provides to IMPAX a financial report detailing its gross sales less applicable chargebacks , rebates and other credits to arrive at net sales, cost of sale s information and gross margins for the Bupropion products . The Company is endeavoring to take steps under the Strategic Alliance Agreement to ensure that all such adjustments granted by its strategic partner in the future are reported to the Company on a timely basis . These steps include , but are not limited to, regular discussions with Teva management regarding their monthly financial reports to IMPAX on our products marketed by Teve via monthly teleconferences and quarterly meetings . These discussions will cover all the areas of revenue recognition for these products , including but not limited to, sales credits , product returns and internal control s over Teva's financial reporting to IMPAX . Our procedures will include a review of applicable documentation for IMPAX revenue sharing . The Audit Committee of the Company's Board of Directors may take additional steps as deemed necessary . Under the terms of the contract , the Company has the option to perform an annual audit with our strategic partner . The information on the financial report is used by IMPAX to record its monthly revenue for the Bupropion 100 mg and 150 mg products . Effective with the three months ended March 31 , 2004 , we began estimating returns for prescription products marketed by our strategic partners, such as Teva , called ' Rx Partners ," based on our internal returns analysis and historical indust ry statistics . Additionally, the amount of revenue that IMPAX ea rns is based on a reimbursement of manufacturing costs plus a fixed gross margin percentage .
Under the July 2003 Exclusivity Transfer Agreement with Andrx and Teva pertaining to the Bupropion Hydrochloride products, Andrx is entitled to certain payments for the sales of the 150 mg s trength for a 190-day period from the product launch date . These payments are made directly by Teva to Andrx .
EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income by the weighted average common shares outstanding . Diluted earnings per share is based on the treasury stock method and is computed by dividing net income by the weighted average number of common shares and weighted average dilutive potential common shares outstanding, assuming the exercise of all in-the-money stock options . A reconciliation of the numerators and denominators of basic and diluted earnings per share consisted of the following (in thousands, except per share amounts) :
Mt lnewnllw.l t . . . .. / ...... w.s+wur Y ./a w0 401 Mr.1. .ar. Wn. wrt .t.rlq 8 , 0) . U,7 ;1 . 11. . ;)0 "tlrt .! Ylntlw ytlr W wrr✓.. t . N) .I if • • ...... Mttr umw wipe.. .+.ryt ar . .Wnt wtaWW . . .. .nt . . .. .ue
Wle un3M Nr Wn 1 8 .0 I (1 .17 1 rWlr Yl,.ar wn{.1. Mr .Mn 1 8 .t/ 1 11 .111 Included in the computation of fully diluted earnings per share are outstanding stock options and warrants with an exercise price less than the average market price of the common shares for the period . As of March 31, 2004 there were no stock options or warrants excluded from the fully diluted earnings per share calculation because all options and warrants exercise price were less than the average market price of common shares .
STOCK- BASED EMPLOYEE COMPENSATION
The Company accounts for stock-based employee compensation arrangements in accordance with provisions of Accounting Principles Board (APB) Opinion No . 25, "Accounting for Stock Issued to Employees ." Compensation cost for stock options, if any, is measured as the excess of the quoted market price of the stock at the date of grant over the amount an employee must pay to acquire the stock . The Company has adopted the disclosure only provisions of SPAS No . 123, "Accounting for Stock- Based Compensation" and SFAS No . 145, "Accounting for Stock-Based Compensation - Transition and Disclosure - An Amendment to PASS Statement No . 123 . "
Had compensation cost for the Company's Plans been determined based on the fair value at the grant dates for the awards under a method prescribed by SFAS No . 123, the Company's income and income per share would have been decreased to the pro forma amounts indicated below (in thousands, except per share amounts) :
Three Months Ended March 31 ,
2004 200 3 ------......
Net income (loss), as reported $ 5,216 $ (3,213 ) Add : Stock-based employee compensation included in reported net income , net of related tax effects - - Deduct : Total stock-based employe e compensation expense determined unde r fair value based method for all awards , net of related tax effects (959 ) (862 ) ""------
Pro forma net income (loss) $ 4,25 7 $ (4,075 ) ......
Earnings per share : Basic - as reported $ 0 .09 $ (0 .07 )
Basic - pro forma $ 0 .0 7 $ (0 .09 ) -- -'------
Diluted - as reported $ 0 .08 $ (0 .07 ) ------Diluted - pro forma $ 0 .0 7 $ (0 .09 ) ......
The Company calculated the fair value of each option grant on the date of the grant using Black-Scholes pricing method with the following assumptions : for the three months ended March 31, 2004 and 2003, the dividend yield was 0% and 0% ; the weighted average expected option term was five years ; risk-free interest rate was 3% and 2 .694 ; the stock volatility for the three months ended March 31, 3004 and 2003 was 79 .48% and 69t, respectively . The weighted average fair value of options for March 31, 2004 and 2003 was $14 .12 and $1 .96, respectively .
The Company reports both basic earnings per share, which is based on the weighted-average number of common shares outstanding, and diluted earnings per share, which is based on the weighted-average number of common shares outstanding and all dilutive potential common shares outstanding .
NOTE 2 . Convertible Senior Subordinated Debentures
On April 5, 2004, the Company issued and sold $95 .0 million in aggregate principal amount of its 1 .250% convertible senior subordinated debentures due 2024 . The debentures were sold by the Company to Citigroup Global Markets Inc ., Wachovia Capital Markets, LLC and First Albany Capital Inc ., as initial purchasers, in a private placement exempt from registration under the securities Act of 1933, as amended (the "Securities Act") . We have been advised by the initial purchasers that they have resold, and/or intend in the future to resell, the debentures to "qualified institutional buyers" (as defined in Rule 144A promulgated under the Securities Act) in transactions exempt from the registration requirements of the Securities Act in reliance on Rule 144A . The issuance and sale of the debentures resulted in not proceeds to the Company of approximately $91,675,000 . These proceeds are being used for general corporate purposes, including working capital requirements, manufacturing of our products and research and development .
The debentures bear interest at the rate of 1 .2506 per year . Interest on the debentures is payable on April 1 and October 1 of each year, beginning on October 1, 2004 . The debentures are convertible by holders into shares of our common stock at a conversion price of $26 .06 per share (which represented a 30% premium over our stock price at the time the debentures were issued) . The conversion price is subject to adjustment in certain events if, (1) the price of our common stock reaches a specific threshold ; (2) the trading price for the debentures falls below certain thresholds, (3) the debentures have been called for redemption, or (4) certain corporate transactions occur .
The debentures mature on April 1, 2024, unless earlier redeemed, repurchased or converted . before April 5, 2007, we way redeem move or all of the debentures if the price of our common stock reaches ■ specific threshold, at a redemption price that includes an additional payment on the redeemed debentures equal to $230 .77 per $1,000 principal amount of debentures, less the amount of any interest actually paid or accrued and unpaid on the debentures . On and after April S, 2007, the Company may redeem some or all of the debentures at certain specified redemption prices .
The debentures are the Company's unsecured obligations and are subordinated in right of payment to all of the Company's existing and future senior indebtedness . On April 1, 2009, April 1, 2014, and April 1, 2019, and under certain circumstances, holders of the debentures will have the right to require us to repurchase all or any part of their debentures at a repurchase price equal to 1001 of the principal amount of the debentures, plus accrued and unpaid interest and liquidated damages, if any, to, but excluding the repurchase date .
In connection with the offering of the debentures, we are required to file a shelf registration statement by July S . 2004 with the Securities and Exchange Commission covering resales of the debentures and of the common stock issuable upon conversion of the debentures . The s-3 oust be declared effective by the SRC by October 4, 2004 .
NOTE 3 . Recent Accounting Pronouncement s
In November 2003, the RITP reached a consensus on Issue No . 00-21, 'Revenue Arrangements with Multiple Deliverables ." RITP Issue No . 00-21 provides guidance on how to account for arrangements that involve the delivery or performance of multiple products, services, and/or rights to use assts . The provisions of IITF Issue No . 00-21 applies to revenue arrangements entered into in fiscal periods beginning after June 1S, 2003 . We implemented the provisions of RITP Issue No . 00-21 in revenue recognition of certain strategic agreements . The company reviews all of the terra of its strategic alliances and follows the guidance from this Issue for all multiple element arrangements .
In December 2002 . the Financial Accounting Standards Board (PASS) issued SPAS No . 144, "Accounting for Stock-Rased Compensation - Transition and Disclosure, amendment of PASS Statement No . 123 ." This statement provides additional transition guidance for those entities that elect to voluntarily adopt the provisions of SPAS No . 123, 'Accounting for Stock Based Compensation .' Furthermore, SFAS No . 146 mandates new disclosures in both interim and year-end financial statements within the Company's Significant Accounting Policies footnote . The Company has elected not to adopt the recognition provisions of SPAS No . 123, as amended by SPAS No . 146 . Rowwr, the Company has adopted the disclosure provisions and has included this information in Note 1 to the Company's financial statements .
In January 2003, the PASS issued PASS Interpretation No . 46 ("FIN 46"), "Consolidation of Variable Interest Entities ." FIN 46 clarifies the application of Accounting Research Bulletin No . 5 1, "Consolidated Financial Statements,' to certain entities in which equity Investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties . FIN 46 applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date . It applies in the first fiscal year or Interim period beginning after June 1 5 , 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003 . FIN 46 applies to public enterprises as of the beginning of the applicable interim or annual period . On October I, 2003, the PASS decided to defer PIN 46 until the first reporting period ending after December 1 3 , 2003 . The provisions of this Interpretation did not have a material impact on the Company's financial condition or results of operations .
In December 2003, the PASS issued PIN No . 46R, Consolidation of Variable Interest Entities, clarifying the application of Accounting Research Bulletin No . 51, Consolidated Financial Statements, to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support . The provisions of this Interpretation do not have a material impact on the Company's financial condition or results of operations . In February 2004, the FASB issued revised FASB Staff Position ("FSP") pertaining to FIN 46(R) . The revised FSPs replace certain previously issued FIN 46 FSP for entities to which FIN 46(R) is applicable . This revision to FIN 46 did not have a material impact on the Company's financial condition or results of operation .
In February 2004, the PASS revised SPAS 133, Accounting for Derivative Instruments and Hedging Activities for Implementation issue E2L, A1J, and C6 . The revisions to SFAS 133 did not have a material impact on the Company's financial condition or results of operation .
In December 2003, the PASS revised SFAS 132, "Employers' Disclosure About Pensions and Other Post Retirement Benefits ." This Statement does not change the measurement or recognition of those plans required by FASB 87, "Employers' Accounting for Pensions," and No . 106, "Employers' Accounting for Post Retirement Benefits Other than Pensions ." This Statement retains the disclosure requirements contained in PASS No . 132, "Employers' Disclosure about Pensions and Other Post Retirement Plans ." The provisions of this Statement do not have a material impact on the Company's financial condition or results of operations . During the three months ended March 31, 2004 and 2003, the employer 401-K match was $24,352 and $21,347, respectively .
In January 2004, the FASB issued FASB Staff Position FAS 106-1 to provide temporary guidance concerning the Medicare Prescription Drug Improvement and Modernization Act of 2003 . The provisions of this pronouncement did not have a material impact on the Company's financial condition or results of operations .
NOTE 4 . Our gross receivables and related deductions activity for the three months ended March 31, 2004 and 2003, and the year ended December 31, 2003 was :
Three Months Ended Year Ende d
March 31, March 31, December 31 , (in $000s) 2004 2003 2003 ------Gross accounts receivable $ 27,334 $ 8,828 $ 17,09 1 Less : Accrued rebates ( 3,010 ) ( 1,585 ) ( 2,700 ) Less : Acc rued chargebacks ( 3,505 ) (1,137) (4,101 ) Less : Other deductions ( 286) (372) (405 )
Net accounts receivable $ 20,53 3 $ 5,734 $ 9,88 5 ------
Other deductions include allowance for disputable items, doubtful accounts, and cash discounts .
Net accounts receivable balance at March 31, 2004 includes $13,509 , 000 due from Teva .
Chargebacks and Rebates Accrual activity for the three months ended March 31, 2004 and 2003 , and the year ended December 31, 2003 was :
CHARGIRAM ACCRUAL ...... Three Months Ended Year Ended ...... ------tin $0004) March 31, March 31 . December 31 ,
2003 200 3
Beginning Balance $ 4,101 1 .373 $ 1,373 Add : Provision related to sales made in current period 1,141 1 .314 10,57 1 Lose . Credits issued during the current period (2,744) (1 .550 ) (7,843) ------Ending Balance $ .3,50 5 $ 1,137 $ 4,10 1 ------......
U pimin ...... Th.- Months 6,d.d Year mans
(in $000.) INreh 11, match 31, D .c. h.r 31 , 7004 700 3 700 1 ......
6plnninq balance 0 2,700 $ 1,120 0 1,52 1 Ad d . Provision related to .10 .s me" In current period 1,120 1 .062 6,00 0 0 ..., Credit . 10Usd bring the current period (010) (1,002) (1,005 ) ...... coding Ml .. . $ 3,010 i 1,151 $ 2,70 0
NOTE S . Our inventory consists of the following :
Narch ,,31, December 31 , (in 1000*) 200 2003 ...... now materia l...... $ 16,307 0 9 .67 1 Mork In pree...... 2,011 3,10 3 Pini .h.d good...... 11,710 13 . S0 6
$ 30,1 ;0 i 21,47 1
The Company, as most companies in the generic pharmaceutical industry, may build inventories of certain ANDA related products that have not yet received FDA approval and/or satisfactory resolution of patent infringement litigation, when it believes that such action is appropriate to increase its commercial opportunity .
As of March 31, 2004, the Company's total inventory of $30,148,000 included $4,495,000 in inventories relating to products pending launch while IMPAX awaits receipt of FDA marketing approval and/or satisfactory resolution of patent infringement litigation, as follows : (in $0003 ) Raw materials $ 3,876 Work in process -- Finished goods 61 9
Total $ 4,49 5
NOTE 6 . Intangibles consist of the following :
I ti-td. NYreh 31, M. .. .r It . (in $000.) Mul ,if 2004 2003 (year.) ......
Product right s and lima...... 3 - 0 $ 2,091 $ 2,69 1
L ..., Accumulated .ortir .tion ...... ( 7,400) (2,312 ) $ 26 3 0 17 9 ......
Amortization expense was $96,000 for the three months ended March 31, 2004 . Expected amortization expense for 2004 will be approximately $379,000 .
NOTE 7 . ACCRUED EXPENSES AND DEFERRED REVENUE
March 31 , December 31, (in $000'6 ) 2004 200 3 ------
Sales returns $ 5,769 $ 4,121 Deferred revenue s 1,621 1,751 Accrued salaries and payroll expenaaa 3,675 1,649 Patent infringement and other legal expenses 1,623 1,32 7 Accrued Medicaid rebate s 566 613 Accrued royalty and gross profit sharing expense 457 559 Other accrual s 537 469 Accrued shelf stock reserve 175 23 2 Accrued professional fees 90 15 1
S 13,933 $ 10,672 ......
U NOTE S . RETURNS ACCRUAL
. . .vmu act4WL Three Month. Boded Year ended ...... It . $000 .) IYrch 11 . Mooch 21 . Oscs so 11 . . . 3 004 3 001 3 003 ...... Nginaing. .010041ng. 8&248w 1 2 1 1 .100 $ 1 .100 Add, Provis ion re lat ed to .a1.g no& in Current period 170 132 2 .77{ toes, Credit" l .w.d during the current period fir]]) (331) (1 .211)
i. .1 .70) $ 3,100 1 4,171......
The returns accrual balance at March 31, 2004 includes $789,000 for products marketed through Rx Partners, such as Teva, as compared to zero dollars at December 31, 2003 .
NOTE 9 . COMMITMENTS AND CONTINGENCIES
Patent Litigation
There has been substantial litigation in the pharmaceutical , biological, and biotechnology industries with respect to the manufacture , use, and s ale of new products that are the subject of conflicting patent rights . One or more patents cover most of the brand name controlled-release products for which we are developing generic versions . Under the Hatch - Waxman Amendments, when a dru g developer files an ANDA for a generic dru g, and the developer believes that an unexpired patent which has been listed with the FDA as covering that brand name product will not be infringed by the developer 's product or is invalid or unenforceable , the developer must so certify to the FDA . That certification must also be provided to the patent holder , who may challenge the developer's certification of non-infringement , invalidity or unenforceebility by filing a suit for patent infringement within 45 days of the patent holder's receipt of such certification . If the patent holder files suit , the FDA can review and approve the ANDA, but is prevented from granting final marketing approval of the product until a final judgment in the action has been rendered, or 30 months from the date the certification was received , whichever is sooner . Should a patent holder commence a lawsuit with respect to an alleged patent infringement by us, the uncertaintie s inherent in patent litigation make the outcome of such litigation difficult to predict . The delay in obtaining FDA approval to market our product candidates as a result of litigation, as well as the expense of such litigation , whether or not we are successful , could have a material adverse effect on our results of operations and financial position . In addition, there can be no assurance that any patent litigation will be resolved prior to the 30-month period . As a result , even if the PDA were to approve a product upon expiration of the 30-month period , we may not commence marketing that product if patent litigation is still pending .
Lawsuits have been filed against us in connection with fourteen of our Paragraph IV filings . The outcome of such litigation is difficult to predict because of the uncertainties inherent in patent litigation .
As part of our patent litigation strategy, we had obtained two policies covering up to $ 7 million of patent infringement liability insurance from American International Specialty Line Company (" AISLIC" ), an affiliate of Al0 International . This litigation insurance covered us against the costs associated with patent infringement claims made against us relating to seven of the ANDAs we filed under Paragraph IV of the Hatch - Waxman Amendments . Both policies have reached their limit of liability . while Teva has agreed to pay 45% to 50% of the attorneys ' fees and costs (in excess of the $7 million covered by our insurance policies ) related to the twelve products covered by our strategic alliance agreement with Teva , we will be responsible for the remaining expenses and costs for these products , and all of the costs associated with patent litigation for our other products and our future products .
We do not believe that this type of litigation insurance will be available on acceptable terms for our current or future ANDAS . In those cases, our policy in to record such expenses as incurred .
Although the outcome and costs of the asserted and unasserted claims is difficult to predict because of the uncertainties inherent in patent litigation, management does not expect the Company ' s ultimate liability for such matters to have a material adverse effect on its financial condition , results of operations, or cash flows .
10 FIN 4 5
In November 2002, the FASB issued FIN No . 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others ." Guarantees and claims arise during the ordinary cours e of business from relationships with suppliers, customers, and strategic partners when the Company undertakes an obligation to guarantee the performance of others through the delivery of cash or other assets if specified triggering events occur . Non-performance under a contract by the guaranteed party triggers the obligation of the Company . As of March 31, 2004, all indemnifications included in agreements as of that date are excluded from the scope of FIN No . 45 as they relate primarily to our own future performance and do not require any contingent payments .
As of March 31, 2004, our total contractual commitments on loans, operating leases, and royalty agreements have not materially changed since December 31, 2003, as disclosed in our Report Form 10-K .
NOTE 10 . CHANGES IN SECURITIES
As part of the strategic alliance agreement that we entered into with a subsidiary of Teva Pharmaceutical Industries Ltd . (Teva) in June 2001, we received $22 .0 million from Teva which assisted in the construction and improvement of our Hayward, California facilities and the development of the twelve products specified in our strategic alliance agreement . The $22 .0 million was reflected on the balance sheet as a refundable deposit . The refundable deposit was provided in the form of a loan . Pursuant to the agreement, accrued and future interest on the refundable deposit was forgiven during 2002 as a result of our receipt of tentative or final approvals for at least three of our products . In addition, Teva forgave portions of this loan as we achieved certain milestones relating to the development and launch dates of the products described in our strategic alliance agreement . In addition, by requiring us to repay only 50t of the portion of the loan related to certain missed milestones, Teva chose to continue to have exclusive marketing rights for those products . At our option, we could repay Teva any amounts we owed it as part of the loan in cash or in shares of our common stock . The price of the common stock for purposes of repaying any amounts owed under the loan was the average closing sale price of our common stock measured over a ten-trading-day period ending two days prior to repayment .
In September 2003, we issued 888,918 shares of common stock to Teva, paying $13 .5 million of the original $22 .0 million refundable deposit . In December 2003, Teva exercised its option to retain marketing exclusivity for certain products and, accordingly, reduced the refundable deposit by $3 .5 million to $5 .0 million . In January 2004, Teva's exercise of the marketing exclusivity option for certain products reduced the refundable deposit to $2 .5 million . On January 15, 2004, we satisfied the remaining $2 .5 million refundable deposit obligation to Teva by issuing 160,751 shares of our common stock to Teva . These shares were issued to Teva without registration under the Securities Act of 1933, as amended, in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act of 1933 .
On January 30, 2004, the holders of the Series 2 Preferred Stock converted their entire 75,000 preferred shares into 1,500,000 shares of common stock .
NOTE 11 . RESTATEMENT OF CONDENSED FINANCIAL STATEMENT S
Subsequent to the issuance of its condensed financial statements for the three months ended March 31, 2004, the Company determined that, based on information provided by Teva, its strategic partner, i) customer credits on sales of bupropion were not recorded in the proper periods, ii) the sales returns reserve was not properly recorded, and iii) sales invoices prepared by Teva, were incorrectly prepared . The impact of correcting these errors and reducing taxable income caused the previous tax provision to be reversed . As a result, the accompanying condensed financial statements for the three months ended March 31, 2004 have been restated from the amounts previously reported .
A summary of the effects of the restatement is as follows ;
11 IMPAX LABORATORIES, INC . CONDENSED STATEMENTS OF INCOME (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Three Months laded March 31, 2004
As Previously ------Reported As Restated ------
Net gales $ 35,622 8 31 .514 Total revenues 36,653 34,54 5 Oros■ margin 20,303 15 .995 Not income (lose) from operations 9,740 5,432 Income (loss) before provision for income taxes 9 .524 5,216 Provision for income taxes 47 6 Net income (lose) 8 9,045 0 5,216 earnings per share : Basic $ 0 .16 8 0 .09 Diluted $ 0 .15 $ 0 .06
CONDENSED BALANCE SHEETS (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA )
March 31, 2004 ------A. Previously Reported As Restated ------" ------
Accounts receivable, net $ 24,052 $ 20,53 3 Total current assets 75,395 71,87 6 Total assets 153,854 150,53 5 Accrued expenses and deferred revenues 13,620 13,93 3 Total current liabilities 55,329 55,64 2 Total liabilities 66,713 67,02 6 Accumulated deficit (95,501) (99,333 ) Total stockholders' equity 67,141 83,30 9 Total liabilities and stockholders' equity 153,854 150,33 5
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED ) (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA )
Three Months Ended March 31 , ------As Previously Reported As Restated ------
Cash flows from operating activities ; Net income ( loss) $ 9,048 $ 5,216 Change in assets and liabilities : Accounts receivable (14,167) ( 10,648) Other liabilities 2,764 3,077
WE HAVE RECLASSIFIED PATENT LITIGATION EXPENSE FROM RESEARCH AND DEVELOPMEN T EXPENSE FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND MARCH 31, 2003 .
12 ITEM 2 . MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
To the extent any statements made in this report contain information that is not historical, these statements are forward-looking in nature and express the beliefs, expectations or opinions of management . For example, words such as "may," "will," "should," "estimates," "predicts" "potential," "continue," "strategy," "believes," "anticipates," "plans," "expects," "intends," and similar expressions are intended to identify forward-looking statements . Such statements are based on current expectations and involve a number of known and unknown risks and uncertainties that could cause IMPAX's future results, performance, or achievements to differ significantly from the results, performance, or achievements expressed or implied by such forward-looking statements . Such risks and uncertainties include, but are not limited to, IMPAX's ability to obtain sufficient capital to fund its operations, the difficulty of predicting FDA filings and approvals, consumer acceptance and demand for new pharmaceutical products, the impact of competitive products and pricing, IMPAX's ability to successfully develop, test and commercialize pharmaceutical products, IMPAX's limited manufacturing capability may require it to build additional capacity, IMPAX's ability to develop an effective sales organization to market and sell future brand name products, IMPAX's reliance on key strategic alliances, the uncertainty of patent litigation, the availability of raw materials, the regulatory environment, decreases in healthcare reimbursements could limit IMPAX's ability to sell products or decrease its revenues, dependence on patent and other protection for innovative products, exposure to product liability claims, fluctuations in operating results, terrorist attacks, the location of its Corporate Headquarters in an earthquake zone, future dilution in ownership as a result of terms of outstanding and future issuances of securities, the volatility of IMPAX's stock price, control of IMPAX is concentrated in its directors and executive officers who own approximately 28% of its stock, and other risks detailed from time to time in IMPAX's filings with the Securities and Exchange Commission . Forward-looking statements speak only as to the date on which they are made, and IMPAX undertakes no obligation to update publicly or revise any forward-looking statement, regardless of whether new information becomes available, future developments occur, or otherwise .
The accompanying management's discussion and analysis of financial condition and results of operations gives effect to the restatement of the condensed financial statements for the three month period ended March 31, 2004 an described in Note 11 to the condensed financial statements .
GENERA L
Impax Laboratories, Inc . was formed through a business combination on December 14, 1999 between Impax Pharmaceuticals, Inc ., a privately held drug delivery company, and Global Pharmaceutical Corporation, a generic pharmaceutical company . Impax Pharmaceuticals, Inc . merged with and into Global, with Impax stockholders receiving 3 .3358 shares of Global common stock for each share of Impax Pharmaceuticals, Inc . At the conclusion of the merger, Impax Pharmaceuticals, Inc . stockholders held over 70% of the combined company . For accounting purposes, the merger has been treated as a recapitalization of Impax Pharmaceuticals, Inc . with Impax Pharmaceuticals, Inc . deemed the acquirer of Global in a reverse acquisition . As a reverse acquisition, our historical operating results prior to the merger are those of Impax Pharmaceuticals, Inc . and only include the operating results of Global after the merger . In connection with the merger, the surviving company changed its name to Impax Laboratories, Inc . we are a technology based, specialty pharmaceutical company applying formulation and development expertise, as well an our drug delivery technology, to the development of controlled-release and niche generics, in addition to the development of branded products . An of March 31, 2004, the Company markets thirty-three generic pharmaceuticals, which represent dosage variations of fourteen different pharmaceutical compounds, and have seventeen applications pending at the FDA, including five tentatively approved, that address approximately $5 .4 billion in U .S . product sales for the twelve months ended February 29, 2004, according to NDCHealth . Thirteen of these pending filings were made under Paragraph IV of the Hatch-Waxman Amendments . We have approximately twenty-seven other products in various stages of development for which applications have not yet been filed . These products are generic versions of pharmaceutical products that had U .S . sales of approximately $14 .5 billion for the twelve months ended February 29, 2004, according to NDCHealth . CRITICAL ACCOUNTING POLICY RELATED TO REVENUE RECOGNITION
The Company recognizes revenue in accordance with SEC Staff Accounting Bulletin ("SAB") 101 issued by the SEC in December 1999 . We recognize revenue from the sale of products when the shipment of products is received and accepted by the customer . Provisions for estimated discounts, rebates, chargebacks, returns and other adjustments are provided for in the period the related sales are recorded . In December 2003, the SAB 104 was issued by the SEC . This bulletin revises and clarifies portions of Topic 13 of the Staff Accounting Bulletin to be consistent with current accounting and auditing guidance and SEC rules and regulations .
Emerging Issues Task Force (EITF) No . 00-21 supplemented SAB 101 for accounting for multiple element arrangements . The Company has entered into several strategic alliances that involve the delivery of multiple products and services over an extended period of time . In multiple element arrangements, the Company must determine whether any or all of the elements of the arrangement can be separated from one another . If separation is possible, revenue is recognized for each deliverable when the revenue recognition criteria for the specific deliverable is achieved . If separation is not possible, revenue recognition is required to be spread over an extended period .
Under EITF No . 00-21, in an arrangement with multiple elements , the delivered item should be considered a separate unit of accounting if all of the following criteria are met :
1) the delivered item has value to the customer on a standalone basis ; 2) there is objective and reliable evidence of the fair value of the undelivered item ; and 3) if the arrangement included a general right of return, or whether delivery or performance of the undelivered item is considered probable .
13 The Company reviews all of the terms of its strategic alliances and follows the guidance from EITF No . 00-21 for multiple element arrangements .
In June 2001, the Company entered into a Strategic Alliance Agreement with a subsidiary of Teva for twelve controlled-release generic pharmaceutical products . The agreement granted Teva exclusive U .S . prescription marketing rights for these products for a period of ten years from the date of Teva's first sale of the products . Under the terms of this agreement, Teva has sole and exclusive right to determine all terms and conditions of sale to its customers, including pricing discounts, allowances, price adjustments, returns and rebates .
Revenues from product sales for these products under our strategic alliance are recognized at the time title and risk of loss transfers to Teva's customers . During the three months ended March 31, 2004, the Company commenced shipping its Bupropion Hydrochloride 100 mg and 150 mg Controlled Release Tablets . Teva ships the Bupropion products to its customers and reports the results on a monthly basis . Teva provides to IMPAX a financial report detailing its gross sales less applicable chargebacks, rebates and other credits to arrive at net sales, cost of sales information and gross margins for the Bupropion products . The Company is endeavoring to take steps under the Strategic Alliance Agreement to ensure that all such adjustments granted by its strategic partner in the future are reported to the Company on a timely basis . These steps include, but are not limited to, regular discussions with Teva management regarding their monthly financial reports to IMPAX on our products marketed by Teva via monthly teleconferences and quarterly meetings . These discussions will cover all the areas of revenue recognition for these products, including but not limited to, Bales credits, product returns and internal controls over Teva's financial reporting to IMPAX . Our procedures will include a review of applicable documentation for IMPAX revenue sharing . The Audit Committee of the Company's Board of Directors may take additional steps as deemed necessary . Under the terms of the contract, the Company has the option to perform an annual audit with our strategic partner . The information on the financial report is used by IMPAX to record its monthly revenue for the Bupropion 100 mg and 150 mg products . Effective with the three months ended March 31, 2004, we began estimating returns for prescription products marketed by our strategic partners, such as Teva, called "Rx Partners," based on our internal returns analysis and historical industry statistics . Additionally, the amount of revenue that IMPAX earns is based on a reimbursement of manufacturing costs plus a fixed gross margin percentage .
Under the July 2003 Exclusivity Transfer Agreement with Andrx and Teva pertaining to the Bupropion Hydrochloride products, Andrx is entitled to certain payments for the sales of the 150 mg strength for a 180-day period from the product launch date . These payments are made directly by Teva to Andrx .
RESULTS OF OPERATION S
Except for the three months ended March 31, 2004, we have incurred net losses in each quarter since our inception . we had an accumulated deficit of $99,333,000 at March 31, 2004 .
THREE MONTHS ENDED MARCH 31, 2004, COMPARED TO THREE MONTHS ENDED MARCH 31, 2003
OVERVIEW
The net income for the three months ended March 31, 2004, was $5,216,000 as compared to a net loss of $3,213,000 for the three months ended March 31, 2003 .
REVENUE S
Revenues for the first quarter of 2004 were a record $34,545,000, up more than 2021 compared with revenues of $11,425,000 in the prior year's first quarter . The year-over-year increase for the first quarter was primarily due to shipments of our generic versions of Wellbutrin(R) SR (Bupropion Hydrochloride) 100 mg and 150 mg Controlled Release Tablets, both of which were approved by the FDA during the quarter and represented approximately 57% of total revenues . During the quarter, upon approval from the FDA, we also commenced shipments of Demeclocycline Hydrochloride (Declomycin(R)) 150 mg and 300 mg Tablets .
The company generated $3,031,000 of other revenues in the 2004 period, as compared to $359,000 in the 2003 period . Other revenue for the 2004 period consisted of $2,500,000 from Teva, which represented the reversal of a portion of the refundable deposit for its exercise of the exclusivity option for certain
14 products . The balance of $531,000 of other revenue represents revenues recognized pursuant to strategic agreements with Schering-Plough, Wyeth, and Novartis . The following table summarizes the activity in net revenues for the three months ended March 31, 2004 and 2003)
3004 2007
rreduet sale . f 70,077 i 14,10 1 Less , RWt.. (1,1701 (1 1 061) ch.r"baek . (2,140) (1,314 ) P .4t retYrn rosy- (7,570) (1371 OnMr erWf . (fell ( 5 701 ...... Net ai1N 71,f1~ 11,0 6 6 Rewnu0 from reversal of refundable deposit Cram T." 7,00 0 Other Re venue s f 3 1 7! !
Total avenues t 34 .11 t 11,~2 f ......
The rebates, chargebacks, returns and other credits decreased for the three months ended March 31, 2004 to approximately 17% of product sales as compared to approximately 220 for the comparable period in 2003 . This decrease was due to Supropion Hydrochloride 100 mg and 150 mg Controlled Release Tablets and sales of Loratadins and Pseudoephedrine Sulfate (5sg/110ag) 12-hour Extended Release Tablets which are exempt from rebates, chargebacks and other credits as per the agreements with Schering-Plough, Wyeth, and Novartis . The increase in the reserve for sales returns was primarily due to returns for LIPRAM products, and products marketed by Rx Partners .
COST OF SALES
The cost of sales for the three months ended March 31, 2004, was $18,550,000 as compared to $8,147,000 for the same period in 2003 . The overall increase in cost of sales was primarily due to the increase in cost of materials as a result of increased product sales, primarily from eupropion Hydrochloride 100 mg and 150 mg Controlled Release Tablets .
GROSS MARGIN
Gross margin for the three months ended March 31, 2004 was $15,995,000 as compared to $3,278,000 for the same period in 2003 . The gross margin improvement was primarily due to higher net product sales, such as Supropion Hydrochloride 100 mg and 150 mg Controlled Release Tablets and Demeclocycline Hydrochloride 150 and 300 mg Tablets and higher revenue from strategic alliances, which include amortization of deferred revenue for up-front and milestone payments of $531,000, as compared to $359,000 in 2003 . In addition, $2,500,000 of other revenues represented the reversal of a portion of the refundable deposit from Teva under the strategic alliance agreement for its exercise of the exclusivity option for certain products .
RESEARCH AND DEVELOPMENT E XPENSES
The research and development expenses for the three months ended March 31, 2004 were $4,884,000 less reimbursements of $11,000 by a subsidiary of Teva Pharmaceutical Industries, Ltd . under the Strategic Alliance Agreement signed in June 2001, as compared to $3,547,000 less reimbursements of $132,000 for the same period in 2003 . The higher research and development expenditures in 2004 as compared to 2003 were attributable to higher legal expenses related to higher personnel costs, Active Pharmaceutical Ingredient (API) costs, clinical studies, and new product introduction costs .
PATENT LITIGATION EXPENSES
The patent litigation expenses for the three months were $1,620,000 an compared to $208,000 for the prior period in 2003 . The year-to-year increase for the three months was primarily due to ongoing Paragraph IV litigation related to our ANDA5 for Omeprazole Capsules, Penofibrate Tablets and Fexofenadine and Pseudoephedrine Tablets .
SELLING EXPENSES
The selling expenses for the three months ended March 31, 2004 were $726,000 as compared to $568,000 for the same period in 2003 . The increase in selling expenses as compared to 2003 was primarily due to higher personnel costs .
15 GENERAL AND ADMINISTRATIVE EXPENSES
The general and administrative expenses for the three months ended March 31, 2004 were $ 3,351,000 as compared to $2,122 , 000 for the same period in 2003 . The increase in general and administrative expenses as compared to 2003 was primarily due to higher professional fees, insurance premiums , and personnel costs .
INTEREST INCOME
Interest income for the three months ended March 31, 2004 was $56,000 as compared to $42,000 for the same period in 2003, primarily due to higher average cash equivalents for the quarter .
INTEREST EXPENSE
Interest expense for the three months ended March 31, 2004 was $272,000 as compared to $231,000 for the same period in 2003 . The interest expense for 2004 relates primarily to the two Cathay Bank loans, and the revolving credit facility and term loan agreement with Machovia Bank N .A . The following table summarizes the activity for the three months ended March 31, 2004 and 2003 :
2004 2003 (in $0000) ------Interest expense $ 272 $ 23 1
Total interest expense $ 272 $ 23 1
INCOME TAXES
On a quarterly basis, the Company evaluates its projected full year taxable income and related book-to-tax timing difference and the use of NOL carryforwards . The Company estimates that it is not subject to current year income taxes . we evaluate the realizability of deferred tax assets on an annual and quarterly basis or if there is a significant change in circumstance that may cause a change in our judgment about the realizability of our deferred tax assets . At December 31, 2003, the Company had a net operating loss carryforward totaling approximately $94,600,000, which expires from 2009 through 2023 .
NET INCOME
The net income for the three months ended March 31, 2004, was $5,216,000 as compared to ■ net loss of $3,213,000 for the some period in 2003 . The net income for the three months ended March 31, 2004 was due primarily to the introduction of the Bupropion 100 mg and 150 mg products marketed by Teva, and Demeclocycline Hydrochloride 150 and 300 mg . Tablets . In addition, the other revenues of $3,031,000 contributed to the profitability for the quarter .
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2004, we had $19,491,000 in cash and cash equivalents . Only $200,000 of the account balances are insured by the Federal Depository Insurance Company (FDIC) . The balance of the Company's cash equivalents are held in U .S . Treasury securities, which are not insured by the FDIC . we generated cash in excess of our working capital requirements for the three months ended March 31, 2004 . Our cash flows provided by operations were a positive amount of $4,982,000, as compared to a negative amount of $871,000 in the prior year . This increase was primarily related to the change, year-over-year, in not income, partially offset by increases in working capital account balances . In addition, the remaining balance of the refundable deposit was satisfied by issuing 160,751 shares of common stock to Teva and by Teva's exercise of the exclusivity option for certain products . As of March 31, 2004, to our knowledge, Teva owns 2,511,752 shares of IMPAX common stock, or approximately 4 .3% of the outstanding stock .
The net cash provided by financing activities for the three months ended March 31, 2004, was approximately $1,029,000 consisting of the $1,985,000 net proceeds from issuance of common stock upon exercise of stock options and warrants, and net repayments of $956,000 primarily from the Wachovia credit facility .
Our capital expenditures for the three months ended March 31, 2004 were $2,025,000 as compared to $698,000 for the some period in 2003 .
In December 2003, the Company transferred the $25 million Loan and Security Agreement from Congress Financial Corporation to Nachovia Bank, N .A ., thereby
16 securing lowe r interest and l oos restrictive borrowing terms . The revolving loan is collateralized by eligible accounts receivable and inventory, subject to sublinits and other term, and the term loan is collateralized by machine ry and equipment, with a 60-month amort isation . In addition , a $10 million restricted cash account was established as collateral for this credit facility, to be reduced based on meeting certain cumulative positive cash flow targets . The interest rates for the revolving loans are prime rate plus 0 . 75%, or eurodollar rate plus 2 .75% . at our option , based on excess availability . The term loan has an interest rats of prime rate plus 1 .51, or eurodollar rate plus 4%, at our option . As of March 31, 2004 , we borrowed approximately $6,953,000 against the revolving credit line and $3 , 055,000 against the term loan. The borrowing availability under the revolving credit line changes daily based on eligible account ceivable and inventory . The revolving credit facility and the term loan agreements re have t wo financial covenants , one related to Adjusted ixcess Availability , and the other one related to Capital expenditures limits . At March 31, 2004 , both financial covenants were met .
We have no interest rate or derivative financial instruments nor material foreign exchange risks . We are also not party to any off -balance-sheet arrange ments , other than operating leases . we expect to incur significant operating expenses , particularly re se arch and development , for the foreseeable future in order to execute our business plan . No, therefore , anticipate that such operating expenses, as well as planned capital expenditures, will constitute a material use of our cash resources .
On April S . 2004 , the Company completed a convertible senior subordinated debenture offering of $95 , 000,000 for net proceeds of $91 , 675,000 . The proceeds of the debentures will be used for general corporate purposes , including working capital requirements , manufacturing of our products, and research and development .
To date , we have funde d our research and development and other operating activities through equity and debt financing , and strategic alliances . we have not paid any cash dividends on our common stock and we do not plan to pay any such cash dividends in the foreseeable future . No plan to retain any earnings for the operation and expansion of our business . Our loan agreements and our strategic agreement with Teva prohibit the payment of dividends without the other party ' s consent .
RRCRH'r ACCOUNTING PRCNOUNCOIENT S
In November 2002 , the RIT9 reached a consensus on Issue No . 00 - 21, 'Revenue Arrangements with Multiple Deliverabl es .• BIT? Issue No . 00 - 21 provides guidance on how to account for arrangements that involve the delivery or performance of multiple products , services , and/or rights to use assets . The provisions of RITF Issue No . 00 - 21 applies to revenue arrangements entered into in fiscal periods beginning after June 15, 2003 . No implemented the provisions of BITr Issue No . 00-21 in revenue recognition of certain strategic agreements . The Company reviews all of the tern of its strat eg ic alliances and follows the guidance from this Iss ue for all multiple element arrangements .
In December 2002, the PASS issued SPAS No . 146 , 'Accounting for Stock-Based Compensation - Transition and Disclosure , amendment of FAIR Statement No . 123 .• This stateaent provides additional transition guidance for those entiti es that elect to voluntarily adopt the provisions of SPAS No. 123 , - Accounting for Stock Based Compensation .- Furthermore, SFAS No . 146 mandates new disclosures In both interim and year-end financial statements within the Company's significant Accounting policies footnote . The Company has elected not to adopt the recognition provisions of SFAS No . 123 , as amended by SFAS No. 146 . However, the Company has adopted the disclosure provisions and h as included this information in Note I to the Company ' s financial statements .
In January 2003 , the PASS i ssued PASS Interpretation No . 46 (- FIN 46 .1 . 'Consolidation of Variable Interest Intities .• FIN 46 clarifies the application of Accounting Research Bulletin No . S1, -Consolidated Financial Statements .' to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties . FIN 46 applies immediately to variable interest entities created after January 31, 2003 , end to variable interest entities in which an enterprise obtains an interest after that date . It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1 , 2003 . F IN 46 applies to public enterprises as of the beginning of the applicable interim or annual period . On October 6, 2003, the PASS decided to deter FIN 46 until the first repo rt ing period ending after December 15 , 2003 . The provisions of this interpretation did not have a material impact on the Company ' s financial condition or results of operations .
In December 2003, the PASS Issued WIN No . 461, Consolidation of Variable Interes t tntitiss, clarifying the application of Accounting Res ea rch Bulletin No . 51 , Consolidated Financial Statements , to certain entities in which equity investors do not have the characteristics of a controlli ng financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial suppo rt . The provisions of this Interpretation do not have a material impact on the Company's financial condition or results of operations .
In February 2004, the PASS issued revised FOP pertaining to FIN 46(R) . The revised FSPs replace certain previously issued FIN 46 FSP for entities to which FIN 46(R) is applicable . This revision to FIN 46 did not have a material impact on the Company's financial condition or results of operation .
In February 2004, the PASS revised SPAS 133, Accounting for Derivative Instruments and Hedging Activities for Implementation issue 52L, A1J, and C6 . The revisions to SPAS 133 did not have a material impact on the Company's financial condition or results of operation .
In December 2003, the FASB revised SFAS 132, "Employers' Disclosure About Pensions and Other Post Retirement Benefits ." This Statement does not change the measurement or recognition of those plans required by FASS 87, "Employers' Accounting for Pensions," and No . 106, 'Employers' Accounting for Post Retirement Benefits Other than Pensions ." This Statement retains the disclosure requirements contained in PASS No . 132, 'Employers' Disclosure about Pensions and Other Post Retirement Plans ." The provisions of this statement do not have a material impact on the Company's financial condition or results of operations . During the three months ended March 31, 2004 and 2003, the employer 401-K match was $24,352 and $21,347, respectively .
In January 2004, the PASS issued FASE Staff Position ?AS 106-1 to provide temporary guidance concerning the Medicare Prescription Drug Improvement and Modernization Act of 2003 . The provisions of this pronouncement did not have a material impact on the Company's financial condition or results of operations .
MAJOR OPERATIONAL HIGHLIGHT FOR THE THREE MONTHS ENDED MARCH 31, 200 4
o On January 28, 2004, INPAX Laboratories, Inc . announced that the U .S . Food and Drug Administration (FDA) has granted final approval to the Company's Abbreviated Now Drug Application (ANDA) for its generic version o f Wellbutrin(R) SR (Bupropion Hydrochloride) 100 mg Controlled Release Tablets and has granted tentative approval to the Company's generic version of Wellbutrin SR 150 mg Controlled Release Tablets . OlaxoSmithXline markets Nellbutrin SR for the treatment of depression . According to NDCHealth, U .S . sales of these dosage forms of Wellbutrin SR Tablets were approximately $1 .4 billion in the twelve months ended February 29, 2004 . o On January 29, 2004, IMPAX Laboratories, Inc . announced that the Court of Appeals for the Federal Circuit in Washington, D .C . upheld a lower court decision that ruled against certain claims by GlaxoSmithxline in regards to the Company's Abbreviated New Drug Applications (ANDAS) for Wellbutrin SR(R) (Bupropion Hydrochloride) 100 mg and 150 mg and for Zyban(R) (Bupropion Hydrochloride) 150 zg . OlaxoSmithKline markets Hellbutrin SR for the treatment of depression and Zyban for smoking cessation .
o On February 27, 2004, IMPAX Laboratories, Inc . announced that the U .S . Food and Drug Administration (FDA) has granted tentative approval to the Company's Abbreviated New Drug Application for its generic version of Allegra(R)-D (Fexofenadine Hydrochloride and Pseudoephedrine Hydrochloride 60mg/120mg) Extended Release Tablets . Aventis Pharmaceuticals markets Allegra-D for the treatment of the symptoms associated with seasonal allergic rhinitis . According to NDCNealth, U .S . sales of Allegra-D were approximately $452 million in the twelve months ended February 29, 2004 .
o On March 5, 2004, IMPAX Laboratories, Inc . announced that the U .S . Food and Drug Administration (FDA) has granted final approval to the Company's Abbreviated New Drug Application for a generic version of Claritin(R)-D 24-Hour (Loratadine and Pseudoephmdrtne Sulfate, 10mg/240mg) Extended Release Tablets . Schering-Plough Corporation markets Claritin-D 24-Hour as an over-the-counter (OTC) drug for the relief of symptoms of seasonal allergic rhinitis (hay fever) . According to NDCHealth, U .S . sales of Claritin-D 24-Hour were $21 million for the twelve months ended February 29, 2004 . The Company is working with its marketing partner toward the commercial launch of this product . o On March 8, 2004, IMPAX Laboratories, Inc . announced that the U .S . Food and Drug Administration (FDA) has granted tentative approval to the Company's Abbreviated New Drug Application (ANDA) for its generic version o f Tricor(R) (Fenofibrate) Tablets . Tricor Tablets are marketed by Abbott Laboratories, Inc . to assist patients in managing their cholesterol levels . The drug is indicated for use in reducing elevated LDL cholesterol, total cholesterol, triglycerides and Apo a and increasing HDL cholesterol in patients with primary hypercholasterolemia or mixed lipidemia . The drug has also been approved as adjunctive therapy for the treatment of hypertriglyceridemia, a disorder characterized by elevated levels of very low density lipoprotein (VLDL) in the plasma . According to NDCHealth, U .S . sales of Tricor Tablets were approximately $620 million for the twelve months ended February 29, 2004 .
18 o On March 32, 2004, IMPAX Laboratories, Inc . announced that the U .S . food and Drug Administration (FDA) has granted final marketing approval to the Company's Abbreviated Now Drug Application (ANDA) for its generic version of Mellbutrin(R) SR (Dupropion Hydrochloride) 150 mg Controlled Release Tablets . The FDA had previously granted final approval for the Company's application for the 100 mg strength . Olaxosmithxline markets Wellbutrin SR for the treatment of depression . both products were shipped to our marketing partner, Teva . o On March 23, 2004, IMPAX Laboratories, Inc . announced that the U.S . Food and Drug Administration (FDA) has granted final marketing approval to the Company's Abbreviated Now Drug Application (AMDR) for its generic version of Declosycin(R) (D.meclocycline Hydrochloride) 150 and 300 mg . Tablets . KSP Pharma markets Declomycia for the treatment of various infections . According to MDCMealth, U .S . sales of Declorycin were approximately $24 million for the twelve months ended February 29, 2004 . IMPAX's global Pharmaceuticals division began marketing the product Immediately . e On March 30, 2004, IMPAX Laboratories, Inc . announced the pricing of its private offering of $95 million aggregate principal amount of 1 .130% convertible senior subordinated debentures due 3024, to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended . (For additional details, please see Note 2 . )
ITEM 3 . QUAXTITATIVR AND QUALITATIVE DISCLOSURES ABOUT MARK= RIS K
The Company's cash and cash equivalents includes U .S . government and short term commercial paper stated at cost which approximates market value . The primary objective of the Company's investment activities is to preserve principal while, at the same time, maximise yields without significantly increasing risk . To achieve this objective, the Company maintains its portfolio in a variety of high credit quality securities, including U .S . Goverment securities, treasury bills, and short-term commercial paper . one hundred percent of the Company's portfolio matures in l ess than one year . The carrying value of the portfolio approximates the market value at March 31, 2004 . The Company's debt instruments at March 31, 2004, are subject to fixed and variable interest rates and principal payments . We belie" that the fair value of our fixed and variable rate long-term debt approximates their carrying value of approximately $16 .6 million at March 31 . 2004 . While changes in market interest rates may affect the fair value of our fixed and variable rate long-term debt, we believe the offset . if any, of reasonably possible near-term changes in the fair value of such debt on the Company's financial statements will not be material . We have no interest rate or derivative financial instruments nor material foreign exchange risks . We are also not party to any off-balance-shoot arrangements, other than operating leases .
ITEM 4 . CONTROLS AND PROCEDURE S
The Company, under the supervision and with the participation of our management, including our principal executive officer and our principal financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-16(e)), as of the end of the period covered by this report . Based on this evaluation, including consideration of the restatement discussed below, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures are effective in reaching a reasonable level of assurance that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed , summarised, and reported within the time period specified in the Securities and Exchange Commission's rules and forms .
The principal executive officer and principal financial officer also conducted an evaluation of internal control over financial reporting ('Internal control-) to determine whether any changes in internal Controls occurred during the quarter that have materially affected, or which are reasonably likely to materially affect, Internal Controls . Rased on this evaluation, there has been no such change during the quarter covered by this report .
A control system, no matter how we ll conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met . Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs . Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected . The company conducts periodic evaluations of its internal controls to enhance, where necessary, its procedures and controls . Because of the inherent limitations in a cost-effective control system . misstatements due to error or fraud may occur and not be detected . Subsequent to issuance of the condensed financial statements for the quarter ended March 31, 2004, the Company restated its condensed financial statements as described in Note 11 . The Company determined that a material weakness existed in its internal controls . The Company is endeavoring to take steps to correct the deficiency that gave rise to this restatement . These steps include, but are not limited to, regular discussions with Teve management regarding their monthly financial reports to IMPAX on our products marketed by Teva via monthly teleconferen ces and quarterly meetings . These discussions will cover all the areas of revenue recognition for these products , including but not limited to, sales credits , product returns and internal controls over Teva ' s financial report ing to IMPAX. Our procedures will include a review of applicable documentation for IMPAX revenue sharing . The Audit Committee of the Company's Board of Directors may take additional steps as deemed necessary . The Company is endeavoring to take steps under the strat egic Alliance Agreement to ensure that all such adjustments granted by its strategic partner in the future are repo rted to the Company on a timely basis . Under the contract terms, the Company has the option to perform an annual audit with our strategic partner . The Company has disclosed and discussed this with its Audit Committee . For more information concerning the res tatement , sea note 11 in the Notes to f inancial Statements contained in the Company's Quart erly Report an Form 10 - Q/A for the quarter ended March 32, 3004 .
PART It - OTHZR INFORMATION
ITEM 1 . LEGAL PROCSIDINGS
PATENT LITIGATION
There has been substantial litigation in the pharmaceutical, biological, and biotechnology industries with respect to the manufacture . use, and sale of now products that are the subject of conflicting patent rights . one or more patents cover most of the brand name controlled -release products for which we are developing generic versions . Under the Hatch-Waxman Amendments, when a drug developer files an ANDA for a generic drug , and the developer believes that an unexpired patent which has been listed with the FDA as covering that brand name product will not be infringed by the developer ' s product or is invalid or unenforceable , the developer must so certify to the FDA . That cert ification must also be provided to the patent holder , who may challenge the developer's certification of non - infringement , invalidity or unenforceability by filing a suit for patent infringement within 45 days of the patent holder's receipt of such ce rtification . If the patent holder files suit , the FDA can review and approve the AMDA, but is prevented from granting final marketing approval of the product until a final judgment in the action has been rendered, or 30 months from the date the ce rt ification was received, whichever is sooner . should a patent holder com mence a lawsuit with respect to an alleged patent infringement by us, the uncertainties inherent in patent litigation wake the outcome of such litigation difficult to predict . The delay in obtaining FDA approval to market our product candidates as a result of litigation , as well as the expense of such litigation , whether or not we are successful , could have a material adverse effect on our results of operations and financial position . In addition, there can be no assurance that any patent litigation will be resolved prior to the 30-month period . As a result , even if the FDA were to approve a product upon expiration of the 30-month period, we may not commence, marketing that product if patent litigation is still pending .
Lawsuits have been filed against us in connection with fourteen of our Paragraph IV filings . The outcome of such litigation is difficult to predict because of the uncertainti es inherent in patent litigation .
ASTRAZI RCA AR BT AL . V . IMPAXs THE OMRPRAZOLI CARE R
In May 1000 , Astrafeneca AS and four of its related companies filed suit against IMPAX in the U .B . District Court in Wilmington, Delaware claiming that IMPAX's submission of an AM for Qaeprasole Delayed Release Capsul es, 10 mg and 20 y, constitutes infringement of six U .B . patents relating to Astraseneca ' s Prilosec product . The action seeks an order enjoining IMPAX from marketing Ceaprazole Delayed Release Capsules , 10 as and 20 as until Februa ry 4, 301 4, and awarding costs and attorney fees . There is no claim for damages .
In February 2001 , Astrafenecs and the same related companies filed the some suit against IMPAR in the aau federal cou rt in Delaware for Infringement , based upon IMPAX ' s amendment to its AMDA adding 40 as strength Dseprazole Delayed Release Capsules .
Astraieneca filed essentially the saw lawsuits against nine other generic pharmaceutical companies (Andrx , Qenpharm , Cheminor, Kreaers . LZK, ton , Nylon, Apotex, and Zenith) . Due to the numbe r of these cases, a nultidlatrict litigation proceeding , In re Oeeprasole 10 mg . 20 wag, and 40 mg Delayed Released Capsules Patent Litigation, MDL-1391 , has b een established to coordinate pro-trial proceedings . Roth lawsuits filed by Astrateneca against IMPAX have been transferred to the sultidistrict litigation .
Early in the multidistrict litigation , the trial court ruled that one of the six patent s- in- suit was not infringed by the sale of a generic oaieprasole product and that certain other patents were invalid . These rulings effectively eliminated four patents from the trial of these infringement cases, although Astrateneca may appeal these rulings ae part of the overall appeal process in the case .
On October 11, 2002, after a trial involving Andrx , uenphar. . Cheainor, and Rresers, the trial judge handling the aultidistrict litigation ruled on Astrateneca ' s complaints that three of these four defendants (First wave Defendants) infringed the remaining patents- in-suit . The trial judge ruled that three of the First Wave defendants , Andrx . Oenphar m , and Chemins, infringed the remaining two patents a sserted by Astrazeneca in its complaints , and that those patents are valid until 2007 . In the same ruling , the trial court ruled that the remaining First Wave Defendant , Krewers , did not infringe either of th e remaining two patents . This defendant's formulation differed from the formulation used by the other First Wave Defendants in several respects . In mid-December 2003 , the U .S . Court of Appeals for the Federal Circuit affirmed the October 3002 ruling in all respects . Subsequent petitions for rehearing have been denied .
The formulation that IMPAX would employ in manufacturing its generic equivalent of o.eprasole has not been publicly announced . IMPAX ' ■ formulation has elements that res emble those of other First Nave Defendants , but It also has elements that differ . Although the ruling by the trial court in the multidistrict litigation has a significant effect on the course of Aatraseneca ' e litigation against IMPAX , application of the trial court ' s opinion is not certain . IMPAX believes that it has defenses to Astrafeneca's claims of infringement , but the opinion rendered by the trial court in the First Wave cases makes the outcome of AstraZeneca ' s litigation against IMPAX uncertain .
Two of the remaining six defendants ( Second Wave Defendants ) filed Notions for Summary Judgment of Non - Infringement , based upon the October 2002 ruling . The trial court has deferred ruling on those motions until discove ry is completed .
In December 3003 , the trial court entered a new scheduling order gove rn ing pre-trial proceedings relating to the Second Wave Defendants, including IMPAX . The schedule for completion of the litigation in the Second Wave, Including Astraseneca ' s litigation against IMPAX, now provides that all fact discove ry (with certain exceptions ) is complete . Astraseneca ' a expert reports on issues as to which it bears the burden of proof , including issues of alleged infringeme nt, were produced on Februa ry 17 , 2004 . IMPAX ' ■ responsive expert reports will be completed by July 12 , 3004 . Any rebuttal report s by Astrazeneca will be required to be produced by August i, 2004 . The parties have not submitted their joint schedule for expert depositions to the Special Master and the Special Master has not iss ued an order reg arding expert depositions . Depositions of the pa rt ies' expe rt s are expected to occur thereafter and to be completed by aid-December 2004 . Notions for Summary Judgment and responses must be filed and fully briefed by November 1 6 , 2004 . given the delays which have thus far occurred in the litigation and the number of experts already designated by the parties, it is unce rtain whether the expe rt depositions can be completed in the time allotted by the present schedule .
Under the scheduling order, any further notions for summary Judgment must be filed by early fall, and they will be heard by the trial court after briefing is completed in November 2004 . IMPAX may file Motions for Summa ry Judgment, includi ng a Motion tome Summary Judgment of Non - Infringement , following the close of all discovery. If the cue is not resolved by summary judgment, the cam e involving IMPAX will be returned to the U .S . District Court in Delaware for trial . It is likely, given the proceedings in the First Wave eases , that the case against IMPAX will be transferred back to New York for a consolidated trial before the same judge who decided the First Wave cues . Trial will commence as soon as practicable thereafter . If IMPAX does not file a Notion for Summary Judgment , or if such a Motion is denied , the court will schedule a date for trial . IMPAX intends to vigorously defend the action brought by Astraseneca .
In August 2003 , the court issued an order dismissing four of the patents - in-suit, thr ee with prejudice . 00 September 30, 2003, as a result of the court ' s dismissal , Astraseneca served each of the second Wave Defendants, including IMPAX , with an a mended complaint . In October 2003, IMPAX filed an ans wer to the amended complaint in which we asserted a now counterclaim with antitrust all egations . The counterclaim will be severed , and proceedings relating to it will be stayed until after trial of the patent infringement case .
GLAXOSMITNKLINR (0X.AXO) V . IMPAXI TNN SUPROPIOI CASKS
Glaze filed a Complaint (Case No . 00-04403) against IMPAX in the U .S . District Court for the Northern District of California on November 3, 2000 alleging infringement of U .S . Patent No . 5,427 , 796 covering Wellbutrin OR and Zyban . On November 7 , 2000, INPAX filed its Answe r to the Complaint which included defenses to the infringement claim, and counterclaimed for patent invalidity . Glaze has filed suit against Andre , Watson, Ron (only with regard to Nellbutrin SR) and excel for similar ANDA filings .
IMPAX filed a summary Judgment Motion , based upon prosecution history estoppel grounds . The parties completed the briefing on this issue and oral argument was held on November 19, 2001 . At the request of the court . In July 2002 . both sides submitted briefs on the i mpact of the recent Supreme Court decision in Pesto v . Shoketeu Kinsoku Rogyo Rabuahi Co ., at al . (which we refer to as the Pesto decision ) to the pending notion for Summary Judgment . IMPAX brought an additional Notion for Summa ry Judgment in earl y August 2002 , requesting that the court apply another court ' s decision which limited the scope of the Olaso .79s patent .
On August 21, 2002, IMPAR ' s Motions for Summa ry Judgment were granted . Olexo has appealed this decision to the Court of Appeals for the Federal Circuit and that appeal was fully briefed on January 23, 2003 . Oral argument was heard on June 2 . 2003 and the District Court ' s decision in favor of IMPAX w as affirmed by the Court of Appeals on Janua ry 29, 2004 . Olaxo has filed a request for rehearing or rehearing an bane . Previously, Olaxo had decided to settle its eupropion Hydrochloride 100 mg and I50 mg Rxtended Release Tablets litigation with Watson Pha rmaceuticals on terms that are confidential .
AVRNTIS PHARMACSTfICALS INC ., IT AL . V . IMPAX , THS PBXOFINADINt CASES
On March 25, 2002 , Ave ntis Pharmaceuticals Inc ., Morrell Pharmaceuticals Inc ., and Carder . Capital L .P . (collectively referred to as Aventis) sued IMPAX in the U .S . District Court for the District of Nov Jersey (Civil Action No . 02-CV-1322) alleging that IMPAR ' a proposed foxofenedine and pseudoephsdrine hydrochloride tablets , containing 60 mg of fexofenadine and 120 mg of pseudoephedrine hydrochloride, infringe U .S . Patent Nos . 6,039,9741 6 . 037 353, 5,735,6727 6,117,791, 5,699,912, and 6,113 , 562 . On November 7, 2002 , Aventls filed an amended complaint , which added an allegation that IMPAR T Pexotenadine and Pseudoephedrine Hydrochloride 60 p/120 6g Extended Release Tablet product infringes U .S . Patent No . 6,399 , 632 . Aventis seeks an injunction preventing IMPAX from marketing its haofenadine and Paeudoephedrine Hydrochloride 60 mg/120 mg Extended Release Tablet product until the patents - in-suit have expired . and an award of damages for any commercial manufacture , use, or sale of INPAX ' 5 rexofenadine and Pseudoephedrine Hydrochloride 60 mg/120 mg Extended Release Tablet product , together with costs and attorneys' fees .
Pact discovery in this action is scheduled to close on October 29, 2004 . IMPAX believes that it has defenses to the claims made by Aveatis based on noninfringesrnt and invalidity . No trial date has been set .
Aventia has also filed a suit against Barr Laboratori es, Inc ., Mylan Pharmaceuticals , Inc ., Or . Reddy ' s Pharmaceuticals and Teva Pharmaceuticals USA, Inc . in Now Jersey asserting the same patent infringement against these exofenadine and Pseudoephedrine or Pexofenadine products . defendants ' proposed ► The IMPAX came has been consolidated for trial with the Barr , Mylan, Dr . Reddy and Teva cases .
On July 23, 2003 , IMPAX filed Su mm a ry Judgment motions for non-infringement of U .S . Patent Nos . 6,039,974, 6,113 , 942, and S .555 .9121 and for non-infringement and Invalidity of U .S . Patent No . 5,730 , 672 . Opposition papers were filed on August 11 , 2003 . Reply papers we re filed on September 24 , 2003 . On October 2 4 , 2003 . IMPAX filed a brief discussing the impact of the recent Pasta decision on their Motions for Summary Judgment of non-infringement . Oral argument for the summary Judgme nt Motion regarding the '912 , - 942, and - 974 patents was heard on November 3, 2003 . Oral argument for the Summa ry Judgme nt Notion regarding the 872 patent was heard on December e, 2003 . IMPAX is currently awaiting a decision on these motions .
POROUS PHARMA L .P . BY AL . V IMPAX , THE OXYC0D0NS CASES
On April 11 , 2002 , Purdue Pharma and related companies filed a complaint in the U .B . District Court for the Southern District of New York alleging that IMPAX' ■ submission of ANDA No . 76-318 for 60 mg OxyContin Tablets infringes three patent s owned by Purdue . The Purdue patents are U .S . Patent Nos . 4,$6l,S95, 4,970 , 075 and 5 , 266,331, all directed to controlled release opioid formulations . On September 19, 2002 , Purdue filed a second Infringement Complaint regarding INPAX' s 40 mg OxyContin generic product . On October 9, 2002 , Purdue filed a third infringement Complaint regarding IMPAX' s 10 mg and 20 mg Oxycontin generic products . IMPAX filed its waver and counterclaims in each case on October 3 . 2003 . On November 25, 2003 , Purdue submitted their reply to our counterclaim . Purdue is seeking, among other things , a court order preventing IMPAX from manufacturing , using or selling any drug product that infringes the subject Purdue patents . IMPAX had disputed jurisdiction of the Now York cou rts and brought an action for a Declaratory Judgment of Patent Invalidity in Delaware . The Now York court denied IMPAR ' a Notion to Dismiss and the Delaware action was dismissed .
Purdue previously sued Boehringer lagelbeie/Roxane, Undo and Teva on the same patents . One or more of these defendants may resolve the Invalidity issues surrounding the Purdue patents prior to IMPAX ' a ease goes to trial . The Soehringer Ingelheie / Roxane suit is stayed . The Sndo action was tried in June 2003 and post trial briefs have been filed . In January 200 4, the judge in the Soda action ruled that the three patents in suit , the Sane patents that Purdue had "sorted against IMPAX , are unenforceable because they were inequitably procured and enjoined their enforcement . There can be no assurances that such ruling will not be challenged or, if sustained upon challenge , that the rulings in IMPAX ' s cases will be consistent with such rulings .
IMPAX V . AVUNTIS PNARMRCSUTICALB , INC ., THE RILUZOLR CAS E
In June 2002 , IMPAX filed suit against Aventi ■ Pharmaceuticals, Inc . in the U .S . District Court in Wilmington , Delaware , seeking a declaration that the filing of an ANDA to engage in a commercial manufacture and/or sale of Rilusole 50 ey Tablets for treatment of patients with a .yotrophic lateral sclero ses (ALS) does not infringe claims of Aventis ' U .S . Patent No . 5,527 , 614 ('114 patent) and a declaration that this patent is invalid .
In response to IMPAX ' s complaint , Aventis filed counterclaims for direct infringement and inducement of infringement of the ' 114 patent . In December 2002, the district court granted Aventis ' Notion for Preliminary Injunction and enjoined IMPAX from infringing , contributory infringing, or inducing any other person to infringe Claims 1, 4 or S of the '814 patent by selling, offering for sale, distributing, marketing or exporting from the United States any pharmaceutical product or compound containing rilusole or salt thereof for the treatment of ALS .
The trial was completed on October 30, 2003, and post-trial briefing was completed in December 2003 . IMPAX is pursuing its assertions that claims of the '814 patent are invalid in view of prior art and are unenforceable in view of inequitable conduct committed during the prosecution of the patent before the United States Patent and Trademark Office (USPTO) .
On January 30, 2004, the court denied IMPAX's Motion for Summary Judgment on inequitable conduct and, on February 5, 2004, the court denied IMPAX's Motion for Summary Judgment on non-infringement of certain claims . The court has not issue its trial rulings and did not rule on the third pre-trial Motion for Summary Judgment based on invalidity of the patent-in-suit .
If IMPAX is not ultimately successful in proving invalidity or unenforceability, there is a substantial likelihood that the court will enter a Permanent Injunction enjoining IMPAX from marketing Riluzole 50 .ge Tablets for the treatment of ALE in the United States until the expiration of the -814 patent (June 18, 2013) . If IMPAX is ultimately successful in proving either defense, the Preliminary Injunction would be set aside and IMPAX would be permitted to market its Riluzole 50 mg Tablet product for the treatment of ALS in the United States .
ABBOTT LABORATORIES V . IMPAXs THE FBNOFIBRATB TABLET CASE S
In January 2003, Abbott Laboratories and Fournier Industrie at Santa and a related company filed suit against IMPAX in the U .S . District Court in Wilmington, Delaware claiming that IMPAX's submission of an ANDA for Fenofibrate Tablets, 160 e.g . constitutes infringement of two U .S . patents owned by Fournier and exclusively licensed to Abbott, relating Abbott's Tricor tablet product .
In March 2003, Abbott and Fournier filed a second action against IMPAX in the same court making the same claims against IMPAX's 54 mg Fenofibrate Tablets . These cases were consolidated in April 2003 .
In September 2003, Abbott and Fournier filed a third action against IMPAX in the U .S . District Court in Wilmington, Delaware, claiming that IMPAX's submission of its ANDA for 54 mg and 160 mg Fenofibrate Tablets constitutes infringement of a third patent recently issued to Fournier and exclusively licensed to Abbott . This action was also consolidated with the two previously consolidated actions in December 2003 . In January 2004, Abbott and Fournier filed a fourth action relating to IMPAR's 54 mg and 160 e.g Fenofibrate Tablets based upon a claim of infringement of a fourth patent . All four cases were consolidated in March 2004 . Discovery in the consolidated cases closes in June 2004 and the trial is currently set for June 2005 . IMPAX has responded to all four complaints by asserting that its proposed generic Fenofibrate Tablet products do not infringe the patents-in-suit and by asserting that the patents-in-suit are invalid .
All four actions seek an injunction preventing IMPAX from marketing its Fenofibrate Tablet products until the expiration of the patents (January 9, 2018) and an award of damages for any commercial manufacture, use, or sale of IMPAX's Fenofibrate Tablet product, together with costs and attorney fees .
SOLVAY PHARMACEUTICALS V . IMPAX : THE CREON CAS E
On April 11, 2003, Solvay Pharmaceuticals, Inc ., manufacturer of the Croon line pancreatic enzyme products, brought suit against IMPAX in the U .S . District Court for the District of Minnesota claiming that IMPAX has engaged in false advertising, unfair competition, and unfair trade practices under federal and Minnesota law in connection with the Company's marketing and sale of its Lipram products . The suit seeks actual and consequential damages, including treble damages, attorneys' fees, injunctive relief and declaratory judgments that would prohibit the substitution of Lipram for prescriptions of Croon . On June 6, 2003, IMPAX filed a Motion for Dismissal of Plaintiff's Complaint, which seeks to dismiss each count of Solvay's complaint . Oral argument on that Motion was heard on November 7, 2003 . On January 9, 2004, the U .S . District Court issued a ruling on IMPAX's Motion for Dismissal, dismissing two of the counts set forth in the Complaint, including the count which sought a declaratory judgment that Lipram may not lawfully be substituted for prescriptions of Croon . On January 26, 2004, IMPAX filed its Answer to the Complaint and Counterclaim alleging that Solvay wrongfully interfered with IMPAX' ■ business relationships . On February 17, 2004, Solvay filed its Reply to IMPAX's Counterclaim . On February 24, 2004, the Rule 16 Scheduling Conference was held and, on February 25, 2004, the Court issued a Scheduling Order setting the deadline for discovery on January 14, 2005, and a trial data for July 1, 2005 . Fact discovery is currently ongoing in this case . IMPAX believes it has defenses to Solvay's allegations and intends to pursue these defenses vigorously .
23 ALZA CORPORATION V . IMPAX ; THE OXYBUTYNIN CASE
On September 4, 2003, Alas Corporation ("Alze") filed a lawsuit against IMPAX in the U .S . District Court for the Northern District of California alleging patent infringement of one patent related to IMPAX's filing of an ANDA for a generic version of Ditropan XL (Oxybutynin Chloride) Tablets, 5 mg, 10 mg, and 15 mg . Alta seeks an injunction, a declaration of infringement, attorney's fees and costs . On October 24, 2003, IMPAX filed its Answer to the Complaint, which included defenses to the infringement claim, and counterclaimed for patent non-infringement and invalidity .
On October 24, 2003, IMPAX filed a lawsuit against Alta in the U .S . District Court for the Northern District of California seeking a declaratory judgment that four Alta patents relating to IMPAX's filing of an ANDA for a generic version of Ditropan XL (Oxybutynin Chloride) Tablets, S mg, 10 mg, and 15 mg (the "Product") are invalid and/or not infringed by the commercial manufacture, use, offer for sale, sale, or importation of the IMPAX Product . On November 17, 2003, Also moved to dismiss the Company's complaint for lack of subject matter jurisdiction based on Alze's argument that there is no case or controversy between the parties with respect to these four patents . The U .S . District Court for the Northern District of California has ordered a mediation on June 20, 2004 .
SHIRE LABORATORIES INC . V IMPAX : THE ADDERALL CAS E
On December 29, 2003, Shire Laboratories, Inc ., a subsidiary of Shire Pharmaceuticals Group, PLC, filed a lawsuit against IMPAX in the U .S . District Court for the District of Delaware alleging patent infringement on U .S . Patent Nos . 6,322,919 and 6,605,300 related to filing of an AMA to market a generic version of Adderall 30 mg capsules . IMPAX filed its answer on January 20, 2004, denying infringement and contesting the validity of both patents . A tentative court date has been scheduled for October 11, 2005 .
OTHER LITIGATION
STATE OF CALIFORNIA V . IMPAX
On August 7 , 2003 , IMPAX received an Accusation from the Department of Justice, Bureau of Narcotic Enforcement , State of California (" BNE'), alleging that IMPAX failed to maintain adequate controls to safeguard precursors from theft or loss regarding our pseudoephedrine product in Janua ry 2003 . IMPAX contested the allegations in the Accusation and entered into discussions with the state of California , Department of Justice , to bring resolution to this matter . IMPAX has implemented a number of remedial measures aimed at improving the security and accountability of precursor substances used by IMPAX and regulated by the Califo rn ia Department of Justice, Bureau of Narcotic Enforcement . In March 2004, following a theft of pseudoephedrine from IMPAX's facilities , the SHE filed an Amended Accusation , again alleging that IMPAX failed to maintain adequate controls to safeguard precursors from theft or loss regarding our pseudoephedrins product . IMPAX is continuing its discussions with the State of California , Department of Justice , and hopes to resolve this matter without the need for a formal hearing .
Other than the legal proceedings described above, we are not aware of any other material pending or threatened legal actions, private or governmental , against us . However , as we file additional applications with the FDA that contain Paragraph IV Certifications and develop now products , it is likely we will become involved in additional litigation related to those filings or products .
INSURANCE As part of our patent litigation strategy, we had obtained two policies covering up to $ 7 million of patent infringement liability insurance from American International Specialty Line Company ("AISLIC "), an affiliate of AIO International . This litigation insurance covered us a gainst the costs associated with patent infringement claims made against us relating to seven of the ANDAs we filed under Paragraph IV of the Hatch - Waxman Amendments . Both policies had reached their limits of liability . While Teve has agreed to pay 45• to 50% of the attorneys ' fees and costs (in excess of the $ 7 million expected to be covered by our insurance policie s for six products ) related to the twelve products covered by our strategic alliance agreement with them, we will be responsible for the remaining expenses and costs for these products , and all of the costs associated with patent litigation for our other products and our future products .
However , we do not believe that this type of litigation insurance will be available to us on acceptable terms for our other current or future ANDA5 . In those cases, our policy in to record such expenses as incurred . Product liability claims by customers constitute a risk to all pharmaceutical manufacturers . we carry $20 million of product liability insurance for our own manufactured products . This insurance may not be adequate to cover any product liability claims to which we may become subject .
Wn ITEM 2 . CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES
1 .250% CONVERTIBLE SENIOR 8DSORDINAT1D DEBENTURES on April S, 2004, the Company issued and sold $95 .0 million in aggregate principal amount of its 1 .250% Convertible senior subordinated debentures due 2024 . The debentures were sold by the Company to Citigroup Global Markets Inc ., wachovia Capital Markets, LLC and First Albany Capital Inc ., as initial purchasers, in a private placement exempt from registration under the securities Act of 1933, as amended (the -Securities Act") . We have been advised by the initial purchasers that they have remold, and/or intend in the future to resell, the debentures to -qualified institutional buyers- (as defined in Rule 144A promulgated under the Securities Act) in transactions exempt from the registration requirements of the Securities Act in reliance on Rule 144A .
The issuance and sale of the debentures resulted in net proceeds to the Company of approximately $91,675,000 . Thew proceeds are being used for general corporate purposes, including working capital requirements, manufacturing of our products and research and development .
The debentures bear interest at the rate of 1 .250% per year . Interest on the debentures is payable on April 1 and October 1 of each year, beginning on October 1, 2004 . The debentures are convertible by holders into shares of our common stock at a conversion price of $24 .05 per share (which represented ■ 30% premium over our stock price at the time the debentures were issued) . The conversion price is subject to adjustment in certain events if, (1) the price of our common stock reaches a specific threshold ; (2) the trading price for the debentures falls below certain thresholds ; (3) the debentures have been called for redemption, or (4) certain corporate transactions occur .
The debentures mature on April 1, 2024, unless earlier redeemed, repurchased or converted . Before April 5, 2007, we may redeem some or all of the debentures if the price of our co mmon stock reaches a specific threshold, at a redemption price that includes an additional payment on the redeemed debentures equal to $230 .77 per $1,000 principal amount of debentures, less the amount of any interest actually paid or accrued and unpaid on the debentures . on and after April 5, 2007, the Company may redeem some or all of the debentures at certain specified redemption prices . The debentures are the Company's unsecured obligations and are subordinated in right of payment to all of the Company's existing and future senior indebtedness . On April 1, 2009, April 1, 2014, and April 1, 2019, and under certain circumstances, holders of the debentures will have the right to require us to repurchase all or any part of their debentures at a repurchase price equal to 100% of the principal amount of the debentures, plus accrued and unpaid interest and liquidated damages, if any, to, but excluding the repurchase date .
In connection with the offering of the debentures, we are required to file a shelf registration statement with the securities and Exchange Commission covering resales of the debentures and of the common stock issuable upon conversion of the debentures .
STRATEGIC ALLIANCE AGREEMENT WITH TCVA
As part of the strategic alliance agreement that we entered into with a subsidiary of Teva Pharmaceutical Industries Ltd . (Teve) in June 2001, we received $22 .0 million from Teve which assisted in the construction and improvement of our Hayward, California facilities and the development of the twelve products specified In our strategic alliance agreement . The $22 .0 million was reflected on the balance sheet as a refundable deposit . The refundable deposit was provided in the form of a loan . Pursuant to the agreement, accrued and future interest on the refundable deposit was forgiven during 2002 as a result of our receipt of tentative or final approvals for at least three of our products . In addition, Teva forgave portions of this loon as we achieved certain milestones relating to the development and launch dates of the products described in our strategic alliance agreement . In addition, by requiring us to repay only 50% of the portion of the loan related to certain missed milestones, Teva chose to continue to have exclusive marketing rights for those products . At our option, we could repay Teve any amounts we owed it as part of the loan in cash or in shares of our common stock . The price of the common stock for purposes of repaying any amounts owed under the loan was the average closing sale price of our common stock measured over a ten-trading-day period ending two days prior to repayment .
In September 2003, we issued 515,916 shares of common stock to Tevs, paying . In December $13 .5 million of the original $22 .0 million refundable deposit 3003, Teva exercised its option to retain marketing exclusivity for certain .5 million to products and, accordingly . reduced the refundable deposit by $3 $9 .0 million . In January 2004, Teva's exercise of the marketing exclusivity option for certain products reduced the refundable deposit to $2 .5 million . On January 15, 2004, we satisfied the remaining $2 .5 million refundable deposit obligation to Teva by issuing 260,151 shares of our common stock to Teva . These shares were issued to Teva without registration under the Securities Act of 1933, as amended, in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act of 1933 . ITEM 6 . EXHIBITS AND REPORTS ON FORM 8- K (a) Exhibits
o 4 .1 - Registration Rights Agreement between Impax Laboratories, Inc ., as Issuer, and Citigroup Global Markets Inc ., as representative of the Initial Purchasers, dated as of April 5, 2004 .
o 4 .2 - Indenture, between Impax Laboratories, Inc . and Nachovie Bank, National Association, as Trustee, dated as of April 5, 2004 .
o 10 .1 - Purchase Agreement between Impax Laboratories, Inc ., Citigroup Global Markets, Inc ., Wachovia Capital Markets, LLC and First Albany Capital Inc . (the "Initial Purchasers") dated March 30, 2004 .
o 31 .1 - Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 .
o 31 .2 - Certification of Chief Financial Officer pursuan t to Section 302 of the Sarbanes-Oxley Act of 2002 .
o 32 .1 - Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 .
(b) Reports o On January 6, 2004, the Company filed a report on Form 8-K (Item 9) announcing that Chairman Charles Hsiao, Ph .D ., will be leading a new venture ; Impex Technologies . Dr . Hsiao is relinquishing his position of Co-CE O but will remain as Chairman . Barry R . Edwards has been elected as sole Chief Executive Officer effective January 1, 2004 . o On January 28, 2004, the Company filed a report on Form 8-K (Item 9) announcing that the U .S . Food and Drug Administration (FDA) has granted final approval to the Company's ANDA for its generic version of Wellbutrin SR 100 mg Controlled Release Tablets .
o On January 29, 2004, the Company filed a report on Form 8-K (Item 9) announcing that the Court of Appeals for the Federal Circuit in Washington, D .C . upheld a lower court decision that ruled against certain claims by GlaxoSmithKline in regards to the Company's ANDA5 for Wellbutrin SR 100 mg and 150 mg, and for Zyban 150 mg .
o On February 17, 2004, the Company filed a report o n Form 8-K (Items 9 and 12) announcing earnings for the quarter and the year ended December 31, 2003 .
o On March 5, 2004, the Company filed a report on Form 8-K (Item 9) announcing that the FDA had granted final approval to the Company's ANDA for its generic version of Claritin(R)-D 24-Hour Extended Release Tablets .
o On March 22, 2004, the Company filed a report on Form 8-K (Item 9) announcing that the FDA had granted final marketing approval to the Company's ANDA for its generic version of Wellbutrin(R) SR 150 mg Controlled Release Tablets . o On March 23, 2004, the Company filed a report on Form 0-K (Item 9) announcing that the FDA had granted final marketing approval to the Company's ANDA for its generic version of Declomycin(R) 150 and 300 mg Tablets .
o On March 30, 2004, the Company filed a report on Form 8-K (Item 9) announcing its intention to offer in a private placement, subject to market and other conditions, $75 million aggregate principal amount of convertible senior subordinated debentures, due 2024, to qualifie d institutional buyers pursuant to Rule 144A under the SEC Act of 1933, as amended . In addition, the Company granted initial purchasers an option to purchase up to a n additional $11,250,000 of the debentures .
o On March 31, 2004, the Company filed a report on Form 8-K (Item 9) announcing the pricing of its private offering of $82 million aggregate principal amount of 1 .2501 convertible senior subordinated debentures due 2024 .
Tj SIGNATURE S
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 .
IMPAX LABORATORIES, INC .
By : /s/ BARRY R . EDWARDS November , 2004 ------Chief Executive Office r (Principal Executive Officer )
By : /s/ CORNEL C . SPIEGLER November , 2004 ------Chief Financial Office r (Principal Financial and Accounting Officer )
27 CERTIFICATION OF CHIEF EXECUTIVE OFFICER
1, Harry R . Edwards, certify that :
1 . I have reviewed this quarterly report on Form to-Q/A for the three months ended March 31, 2004 of Impax Laboratories, Inc .
2 . Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact, or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading, with respect to the period covered by this quarterly report .
3 . Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present, in all material respects, the financial condition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this quarterly report .
4 . The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant, and we have :
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared ;
b) (intentionally omitted)
c) evaluated the effectiveness of the registrant's disclosure controls and procedures, and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation ;
d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant', internal control over financial reporting, and ;
The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the Audit Committee of registrant's Board of Directors (or persons performing the equivalent function) :
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize, and report financial data, and have identified for the registrant's auditors any material weaknesses in internal controls ; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls .
/s/ Barry R . Edwards ------R- . R Edwards Chief Executive Office r
November 15, 2004 ------CERTIFICATION OF CHIEF FINANCIAL OFFICER
1, Co rnel C . Spiegler , certify that :
1 . I have reviewed this quarterly report on Form 10- 0/A for the three months ended March 31, 2004 of Impax Laboratories, Inc .
2 . Based on my knowledge , this quarterly report does not contain any untrue statement of a material fact , or omit to state a material fact necessary to make the statements made , in light of the circumstances under which such statements were made , not misleading, with respect to the period covered by this quarterly report .
3 . Based on sty knowledge , the financial statements , and other financial information included in this quarterly report, fairly present, in all material respects , the financial condition, results of operations, and cash flows of the registrant as of, and for , the periods presented in this quarterly report .
4 . The registrant ' s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and lid-14) for the registrant, and we have .
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries , is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared ,
b) (intentionally omitted )
c) evaluated the effectiveness of the registrant's disclosure controls and procedures ; and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation ;
d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting, and ;
The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the Audit Committee of registrant's Board of Directors (or persona performing the equivalent function) :
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize, and report financial data, and have identified for the registrant's auditors any material weaknesses in internal controls ; and
b) any fraud, whether or not material, that involves management or other employees who have ■ significant role in the registrant's internal controls .
/s/ Cornel C . Spiegler ------Cornel C . Spiegler Chief Financial Officer
November 15, 2004 ------Exhibit 32 . 1
CERTIFICATION PURSUANT TO 18 U .S .C . SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THOE SARBANES -OXLEY ACT OF 200 2
Pursuant to 18 U .S .C . Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, with respect to the Quarterly Report of the Company on Form 10-Q/A for the quarter ended March 31, 2004, (the "Report"), each of the undersigned officers of Impax Laboratories, Inc . does hereby certify that :
1 . The Report fully complies with the requirements of the Section 13(a) or 15(d) of the Securities Exchange Act of 1934 ; and 2 . The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company .
/s/ Barry R . Edwards Chief Executive OfficerDate : November 15, 2004 ------Barry R . Edwards
/s/ Cornel C . Spiegler Chief Financial OfficerDate : November 15, 2004 ------Cornel C . Spiegle r
The foregoing certification is being furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Section 1350 of Chapter 63 of Title 18 of the U.S . Code) and is not being filed as part of the Report or as a separate disclosure document .
30