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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER: 39040
ENDO PHARMACEUTICALS HOLDINGS INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-4022871
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
223 WILMINGTON-WEST CHESTER PIKE
CHADDS FORD, PENNSYLVANIA 19317
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE): (610) 558-9800
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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COMMON STOCK NASDAQ
CLASS A TRANSFERABLE WARRANTS TO PURCHASE
COMMON STOCK AT $.01 PER SHARE IN
CERTAIN CIRCUMSTANCES NASDAQ
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: N/A
Indicate by check X whether the registrant: (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check X if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Aggregate market value, as of March 23, 2001, of Common Stock held by
non-affiliates of the registrant: $80,029,000 based on the last reported sale
price on the Nasdaq.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of March 23, 2001: 89,138,950.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Information Statement relating to its Annual
Meeting and written consent in lieu thereof are incorporated by reference in
Part III of this Report. In addition, the Company's Registration Statement on
Form S-4 filed with the Securities and Exchange Commission on June 9, 2000, as
amended, is incorporated by reference into this Report.
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ENDO PHARMACEUTICALS HOLDINGS INC.
INDEX TO FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2000
PART I
Item 1 Business.................................................... 3
Item 2 Properties.................................................. 14
Item 3 Legal....................................................... 15
Item 4 Submission of Matters to a Vote of Security Holders......... 15
Item 4A Executive Officers of the Registrant........................ 16
PART II
Item 5 Market for Registrant's Common Equity and Related 17
Stockholder Matters.........................................
Item 6 Selected Financial Data..................................... 17
Item 7 Management's Discussion and Analysis of Financial Condition 19
and Results of Operations...................................
Item 7A Quantitative and Qualitative Disclosures about Market 25
Risk........................................................
Item 8 Financial Statements and Supplementary Data................. 26
Item 9 Changes in and Disagreements with Accountants on Accounting 26
and Financial Disclosure....................................
PART III
Item 10 Directors and Executive Officers of the Registrant.......... 26
Item 11 Executive Compensation...................................... 26
Item 12 Security Ownership of Certain Beneficial Owners and 27
Management..................................................
Item 13 Certain Relationships and Related Transaction............... 27
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 27
8-K.........................................................
Signatures........................................................... 32
Exhibit Index
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FORWARD LOOKING STATEMENTS
This Report contains forward-looking statements, within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, as amended, that are based on management's beliefs and
assumptions, current expectations, estimates and projections. Statements that
are not historical facts, including statements which are preceded by, followed
by, or that include, the words "believes," "anticipates," "plans," "expects" or
similar expressions and statements. Endo's estimated or anticipated future
results, product performance or other non-historical facts are forward-looking
and reflect Endo's current perspective on existing trends and information. Many
of the factors that will determine the Company's future results are beyond the
ability of the Company to control or predict. These statements are subject to
risks and uncertainties and, therefore, actual results may differ materially
from those expressed or implied by these forward-looking statements. The reader
should not rely on any forward-looking statement. The Company undertakes no
obligations to update any forward-looking statements whether as a result of new
information, future events or otherwise. Several important factors, in addition
to the specific factors discussed in connection with these forward-looking
statements individually, could affect the future results of the Endo and could
cause those results to differ materially from those expressed in the
forward-looking statements contained herein. Important factors that may affect
future results include, but are not limited to: market acceptance of the
Company's products and the impact of competitive products and pricing;
dependence on sole source suppliers; the success of the Company's product
development activities and the timeliness with which regulatory authorizations
and product launches may be achieved; successful compliance with extensive,
costly, complex and evolving governmental regulations and restrictions; the
availability on commercially reasonable terms of raw materials and other third
party manufactured products; exposure to product liability and other lawsuits
and contingencies; the ability to timely and cost effectively integrate
acquisitions; uncertainty associated with pre-clinical studies and clinical
trials and regulatory approval; uncertainty of market acceptance of new
products; the difficulty of predicting FDA approvals; risks with respect to
technology and product development; the effect of competing products and prices;
uncertainties regarding intellectual property protection; uncertainties as to
the outcome of litigation; changes in operating results; impact of competitive
products and pricing; product development; changes in laws and regulations;
customer demand; possible future litigation; availability of future financing
and reimbursement policies of government and private health insurers and others;
and other risks and uncertainties detailed in Endo's Registration Statement on
Form S-4 filed with the Securities and Exchange Commission on June 9, 2000, as
amended. Readers should evaluate any statement in light of these important
factors.
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PART I
ITEM 1. BUSINESS
Endo Pharmaceuticals Holdings Inc. ("Endo" or the "Company"), through its
wholly owned subsidiaries, Endo Pharmaceuticals Inc. ("Endo Pharmaceuticals")
and Endo Inc., is engaged in the research, development, sales and marketing of
branded and generic prescription pharmaceuticals used primarily for the
treatment and management of pain. Branded products comprised approximately 68%
and 76% of net sales for fiscal years 1999 and 2000, respectively.
Endo was incorporated on November 18, 1997 under the laws of the state of
Delaware and has its principal executive offices at 223 Wilmington West Chester
Pike, Chadds Ford, Pennsylvania 19317 (telephone number: (610) 558-9800).
Through a national dedicated contract sales force of approximately 230
full-time sales representatives, Endo markets branded pharmaceutical products to
doctors, drug wholesalers and other healthcare professionals. Endo markets its
generics through sales and marketing activities as well as customer service
activities directly with wholesale drug distributors and chain and independent
retail pharmacists. Endo's portfolio of branded products includes recognized
brand names such as Percocet(R), Percodan(R), Zydone(R) and Lidoderm(R). Endo's
portfolio of generic products includes products for various indications, most of
which are focused on pain management. Endo seeks to continually expand its
product portfolio through on-going investment in research and development and
product acquisitions.
All of Endo's products are manufactured by third parties. Currently, Endo's
primary suppliers of contract manufacturing services are DuPont Pharmaceuticals,
Merck & Co. and Teikoku Seiyaku Pharmaceuticals.
ALGOS MERGER
On July 17, 2000, the Company completed its acquisition of Algos
Pharmaceutical Corporation, now named Endo Inc. Endo Inc. develops proprietary
pain management products, combining existing analgesics, drugs designed to
reduce or eliminate pain, with NMDA-receptor antagonist drugs, drugs that block
a specific type of pain receptor in human cells, in an attempt to improve the
pain relief efficacy of existing drugs such as morphine. The description of Endo
in this Form 10-K Annual Report is of the combined business.
In the merger, the Company issued to the former Algos stockholders, in the
aggregate, 17,810,526 shares of Company common stock and 17,810,526 Class A
Transferable Warrants and Class B Non-Transferable Warrants to purchase in the
aggregate up to 20,575,507 additional shares of Company common stock in certain
circumstances. These warrants are more fully described in the Company's
Registration Statement on Form S-4 filed with the Securities and Exchange
Commission on June 9, 2000, as amended.
Endo's Cash Gross Profit (defined in the merger agreement with Algos as
equal to gross profit as determined by generally accepted accounting principles
excluding non-cash charges) for the year ended December 31, 2000 was equal to
$153.1 million. Pursuant to the merger agreement with Algos, in the event that
Endo (excluding Algos-related revenues and expenses) did not meet or exceed the
defined cash gross profit target of $147.4 million for the year ended December
31, 2000, then a certain number of shares of the Company held by the pre-merger
Endo stockholders would have had to have been returned to the treasury of the
Company thereby increasing the relative percentage ownership of the other
company stockholders.
As a result of the Cash Gross Profit target having been achieved, Endo
Pharma LLC, the holding company of substantially all of the shares of the
pre-merger Endo stockholders, will not be required to return a portion of its
shares in the Company to the Company's treasury so that the percentage ownership
of the stockholders will remain unchanged. In addition, all references to such
an "Adjustment Event" occurring in the Class A Transferable Warrants and the
Class B Non-Transferable Warrants issued to the former Algos stockholders in the
merger will no longer be applicable.
The Class A Transferable Warrants and Class B Non-Transferable Warrants
issued to the Algos stockholders in this merger are exercisable at an exercise
price of $.01 per share into a specified number of
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shares of Common Stock depending on the timing of the FDA's approval of
MorphiDex(R) for one or more pain indications. These warrants become exercisable
on the fifth business day following the date on which the Company receives
approval from the FDA with respect to MorphiDex(R) for the treatment of one or
more pain indications. These warrants will remain exercisable for a period of
six months after the exercisability date, at which time they will expire. If the
FDA does not approve MorphiDex(R) by March 31, 2003, each of these warrants
expires without any payment therefor.
Specifically, if the FDA approves MorphiDex(R) on or before March 31, 2002,
each such warrant will be exercisable into 1.153846 shares of Endo common stock
(representing an aggregate of 20,575,507 additional shares). If the FDA approves
MorphiDex(R) after March 31, 2002 and on or prior to September 30, 2002, each
such warrant will be exercisable into 0.633803 shares of Endo common stock
(representing an aggregate of 11,302,039 additional shares). If the FDA approves
MorphiDex(R) after September 30, 2002 and prior to March 31, 2003, then each
such warrant will be exercisable into 0.263158 shares of Endo common stock
(representing an aggregate of 4,692,659 additional shares). If the FDA does not
approve MorphiDex(R) before March 31, 2003, each of these warrants will become
void and all rights in respect of these warrants will cease. Finally, if the FDA
does not approve MorphiDex(R) before December 31, 2002, certain warrants held by
pre-merger Endo stockholders will each become exercisable into 0.416667 shares
of Endo common stock (representing an aggregate of 29,720,177 additional
shares).
STRATEGY
Endo's business strategy is to continue to strengthen its leading position
in pain management by:
- leveraging the established Endo brand names through focused marketing and
promotion;
- developing product line extensions for existing Endo brands through new
formulations, dosages or indications;
- developing novel products for the treatment of pain;
- pursuing acquisitions and licensing of molecules and compounds in the
late stages of pre-clinical and the early stages of clinical development
and furthering the development through commercialization; and
- pursuing strategic acquisitions and alliances that provide complementary
product lines or technologies in the area of pain.
INDUSTRY
According to IMS, sales of pharmaceutical products in the United States
were estimated to be in excess of $138 billion in 2000. Growth in the
pharmaceutical industry, and the pain management sector in particular, is being
driven primarily by:
- the aging population;
- managed care's preference for drug therapy over surgery since drug
therapy is generally less costly;
- the medical community's increasing treatment of pain; and
- technological breakthroughs that have increased the number of ailments
which are treatable with drugs.
COMPETITIVE STRENGTHS
Endo believes that its competitive position is attributable to a number of
key strengths, including the following:
Portfolio of Established Branded Products. Endo has a broad portfolio of
established branded pharmaceutical products, including many proprietary
analgesic compounds, which are used primarily for the
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treatment and management of pain. These products include Percocet(R),
Percodan(R), Lidoderm(R) and Zydone(R). Endo also maintains approximately ten
other off-patent brand products in various therapeutic categories.
Selective Focus on Generic Products. Endo's generic product portfolio
includes products for various indications, most of which are focused on pain
management. Endo's strategy is to selectively develop and market generic
products that are generally in its therapeutic niche, pain, and that involve
barriers to entry such as complex formulation or development characteristics,
regulatory or legal challenges or difficulty in raw material sourcing. Endo
believes products with these barriers will face limited competition and
therefore provide longer product life cycles and/or higher profitability than
commodity generic products.
Outsourced Manufacturing. Endo contracts with leading pharmaceutical
companies for the manufacture of its finished goods. Companies currently
providing Endo with contract manufacturing services include DuPont
Pharmaceuticals, Merck & Co. and Teikoku Seiyaku Pharmaceuticals. Endo believes
that by outsourcing manufacturing to these companies, the company benefits from
their substantial manufacturing expertise and reduced capital investment.
Currently, DuPont Pharmaceuticals is Endo's largest provider of contract
manufacturing services. Through its agreement with DuPont, Endo has two FDA- and
DEA-approved and compliant facilities available for the manufacture of its
products. Endo is continually in the process of identifying alternative
third-party manufacturers.
National Sales and Marketing Infrastructure. Endo's products are marketed
directly to physicians through a dedicated contract sales force of approximately
230 full-time sales representatives. These sales representatives are provided
under an exclusive arrangement with Ventiv Healthcare and market Endo's brands
by focusing on those physicians who are high prescribers of pain management
products.
The strategy employed by the sales representatives to increase the sales of
Endo's branded products includes one-on-one meetings with physicians, known as
"detailing," and promotional efforts including sampling, advertising and direct
mail. Endo believes that this focused marketing approach enables it to develop
highly knowledgeable and dedicated sales representatives and foster close
professional relationships with physicians. Endo markets its branded products
under the label Endo Laboratories and its generic products under the label Endo
Generic Products.
Research and Development Expertise. Endo seeks to continually expand its
product portfolio through ongoing investment in research and development. Endo
believes that it has a balanced research and development portfolio, including
patent-protected new chemical entities as well as new formulations, strengths
and delivery forms of its existing proprietary brand products and generic
pharmaceuticals.
Endo devotes significant resources to its pipeline and incurred research
and development expenses of $5.9 million, $9.4 million and $26.0 million for
fiscal years 1998, 1999 and 2000, respectively. Endo maintains its research and
development facilities in Garden City, New York.
Experienced and Dedicated Management Team. Endo has an experienced and
dedicated management team with an average of approximately 17 years of
experience in the pharmaceutical industry.
PRODUCT OVERVIEW
Branded Products
The following table provides an overview of a portion of Endo's branded
pain management product line.
PRODUCT INDICATION
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Percocet(R) 2.5/325, Percocet(R) 5.0/325, Percocet(R)
7.5/500 and Percocet(R) 10.0/650 (oxycodone and
acetaminophen)......................................... Relief of moderate-to-severe pain
Percodan(R) (oxycodone and aspirin)...................... Relief of moderate-to-severe pain
Lidoderm(R) (lidocaine 5%)............................... For the pain of post-herpetic neuralgia
Zydone(R) (hydrocodone and acetaminophen)................ Relief of moderate-to-moderately-
severe pain
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Except for Lidoderm(R), patients generally use the above products on a
short-term basis to relieve various degrees of pain, from moderate to severe.
Despite generic competition, Endo maintains a leading position in the pain
management segment due to its broad portfolio of well-known products. Launched
in September 1999, Lidoderm(R) is used to treat the pain of post-herpetic
neuralgia.
Two of Endo's brands, Percocet(R) and Percodan(R), are considered "gold
standards" of the pain management segment. Although Percocet(R) has been off
patent for more than fifteen years, in 2000, according to IMS National
Prescription Audit, approximately 11 million prescriptions for this combination
of oxycodone HCL and acetaminophen were written for the brand name Percocet(R),
of which, due to generic substitution, only approximately 19% were filled by
pharmacists with the brand Percocet(R). Similarly, in 2000, according to IMS
National Prescription Audit, approximately 489,000 prescriptions for oxycodone
hydrochloride and oxycodone terephthalate in combination with aspirin were
written for the brand name Percodan(R), of which, due to generic substitution,
only approximately 32% were filled by pharmacists with the brand Percodan(R).
Because Percocet(R) and Percodan(R) have been off patent for over fifteen years,
generic penetration in their markets has generally stabilized, and the potential
of new generic competitors is minimal.
During the fourth quarter of 1999, Endo introduced three new strengths of
Percocet(R): Percocet(R) 2.5/325, Percocet(R) 7.5/500 and Percocet(R) 10.0/650,
complementing the existing Percocet(R) 5.0/325. Physician prescribing practices
indicate that over 80% of current prescriptions are written for amounts other
than the label amount. As an example, the current prescription information for
Percocet(R) 5.0/325 calls for one tablet every six hours. Approximately 30% of
prescriptions written direct patients to take two tablets every four hours,
translating into a dosage of 10mg every four hours. By creating new prescription
strengths, physicians will be able to prescribe one tablet of the proper dose
for their patients, facilitating greater ease and compliance. On January 3,
2000, Watson Pharmaceuticals, Inc. announced that the Food and Drug
Administration had approved Watson's abbreviated new drug application (ANDA) for
a generic equivalent to Percocet(R) 7.5/500 and Percocet(R) 10.0/650.
Endo launched Zydone(R) tablets in February 1999, a branded
hydrocodone/acetaminophen product offering for the relief of moderate to severe
pain. Zydone is available in three strengths, 5.0mg, 7.5mg and 10.0mg each in
combination with 400mg acetaminophen. Although not patent protected, these three
products have no generic competition because there is no bioequivalent form of
the product approved by the FDA. Zydone(R) competes in the $1 billion dollar
(branded dollars) hydrocodone/acetaminophen market for the relief of
moderate-to-moderately-severe pain.
Endo launched Lidoderm(R) in September 1999. Lidoderm(R), a patch product
containing lidocaine, is the first and only FDA approved product for the relief
of the pain of post-herpetic neuralgia, which is the chronic painful condition
that often follows an attack of shingles. There are approximately 200,000
patients per year that suffer from post-herpetic neuralgia in the U.S., the
majority of whom are elderly. The FDA has granted Lidoderm(R) orphan status.
Orphan status in this context means that no other lidocaine-containing patch
product can be approved for post-herpetic neuralgia for a period of seven years
or until March 2006.
GENERIC PRODUCTS
When a branded pharmaceutical product is no longer protected by the
relevant patents (normally as a result of a patent's expiration), third parties
have an opportunity to introduce generic counterparts to such branded product.
Such generic pharmaceutical products are therapeutically equivalent to their
brand-name counterparts and are generally sold at prices significantly less than
the branded product. Accordingly, generic pharmaceuticals may provide a safe,
effective and cost-effective alternative to users of branded products.
Endo's generic portfolio is currently comprised of products that cover a
broad range of indications, most of which are focused in pain management. Endo
principally pursues the development and marketing of generic pharmaceuticals
that have one or more barriers to entry. The characteristics of the products
that Endo may target for generic development may include:
- complex formulation or development characteristics;
- regulatory or legal challenges; or
- difficulty in raw material sourcing.
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Endo believes products with these barriers will face limited competition,
and, therefore provide longer product life cycles and/or higher profitability
than commodity generic products.
COMPETITION
The pharmaceutical industry is highly competitive and regulated. Endo's
competitors vary depending upon therapeutic and product categories. Competitors
include the major brand name and generic manufacturers of pharmaceuticals,
especially those doing business in the United States. Many competitors have been
in business for a longer period of time than Endo, have a greater number of
products on the market and have greater financial and other resources. If Endo
competes directly with larger pharmaceutical companies for the same markets or
products, their financial strength may prevent Endo from capturing a profitable
share of those markets.
Endo competes principally through its targeted product development
strategies. In addition to product development, other competitive factors in the
pharmaceutical industry include product quality and price, reputation and access
to technical information.
The competitive environment of the branded product business requires Endo
to continually seek out technological innovations and to market its products
effectively, including by capitalizing on the brand equity and name recognition
of certain of its products.
Newly introduced generic products with limited or no other generic
competition are typically sold at higher selling prices. As competition from
generic companies increases, selling prices of the generic products typically
decline. Consequently, the maintenance of profitable operations in generic
pharmaceuticals depends, in part, on Endo's ability to select, develop and
launch new generic products in a timely and cost efficient manner and to
maintain efficient, high quality manufacturing relationships.
Net sales and gross profits derived from generics tend to follow a pattern
based on certain regulatory and competitive factors. As patents for brand name
products expire, the first generic company to receive regulatory approval is
generally able to achieve a relatively high market share. As competing generic
companies receive regulatory approval on similar products, market share, net
sales and gross profit typically decline. Accordingly, the level of market
share, net sales and gross profit from generic products typically relate to the
number of competitors and the timing of the product launch in relation to the
competition.
There are, however, a number of factors that enable products to remain
profitable once patent protection has ceased. These factors include the
establishment of a strong brand image with the prescriber or consumer, supported
by the development of a broader range of alternative formulations than the
manufacturers of generic products typically supply.
Endo has witnessed a consolidation of its customers as chain drug stores
and wholesalers merge or consolidate. In addition, a number of Endo's customers
have instituted source and bundling programs that enhance the access suppliers
who participate in such source programs have to the customers of the wholesaler.
Consequently, there is heightened competition among generic drug companies for
the business of this smaller and more selective customer base of large
wholesalers.
SEASONALITY
Although Endo's business is affected by the purchasing patterns and
concentration of its customers (as discussed below), Endo's business is not
materially impacted by seasonality.
CUSTOMERS
Endo sells its products through wholesale drug distributors who, in turn,
supply products to pharmacies, hospitals, governmental agencies and physicians.
Four customers individually accounted for 26%, 16%, 12% and 10% of net sales in
2000. Three customers individually accounted for 27%, 20% and 13% of net sales
in 1999, and 26%, 21%, and 14% of net sales in 1998. Endo's business is affected
by the purchasing patterns and
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concentration of its customers. Generally, the fourth fiscal quarter has
relatively higher net sales than each of the first three fiscal quarters.
PATENTS, TRADEMARKS, LICENSES AND PROPRIETARY PROPERTY
With respect to its products, Endo currently holds ten U.S. issued patents
and four foreign issued patents, three U.S. patent applications pending and
57 foreign patent applications pending. Endo has exclusive licenses for 31 U.S.
issued patents, 2 U.S. patent applications pending, 66 foreign issued patents
and 26 foreign patent applications pending. The effect of these issued patents
is that they provide Endo patent protection for the claims covered by the
patents.
Endo believes that its patents, the protection of discoveries in connection
with its development activities, its proprietary products, technologies,
processes and know-how and all of its intellectual property are important to its
business. All of Endo's brand products and certain generic products are sold
under trademarks. To achieve a competitive position, Endo relies on trade
secrets, non-patented proprietary know-how and continuing technological
innovation, where patent protection is not believed to be appropriate or
attainable. In addition, Endo has a number of patent licenses from third
parties. See "-- Summary of Recent Transactions." There can be no assurance that
any of Endo's patents, licenses or other intellectual property will afford Endo
any protection from competition.
Endo relies on confidentiality agreements with its employees, consultants
and other parties to protect, in part, trade secrets and other proprietary
technology. There can be no assurance that these agreements will not be
breached, that Endo will have adequate remedies for any breach, or that others
will not independently develop equivalent proprietary information or other third
parties will not otherwise gain access to its trade secrets and other
intellectual property.
Endo may find it necessary to initiate litigation to enforce its patent
rights, to protect its intellectual property and to determine the scope and
validity of the proprietary rights of others. Litigation is costly and
time-consuming, and there can be no assurance that Endo's litigation expenses
will not be significant in the future or that Endo will prevail in any such
litigation. See "Item 3. Legal Proceedings."
GOVERNMENTAL REGULATION
The manufacture, testing, packaging, labeling, distribution, sales and
marketing of Endo's products and its ongoing product development activities are
subject to extensive and rigorous regulation at both the federal and state
levels. The Federal Food, Drug and Cosmetic Act and other federal statutes and
regulations govern or influence the testing, manufacture, safety, packaging,
labeling, storage, record keeping, approval, advertising, promotion, sale and
distribution of pharmaceutical products. Noncompliance with applicable
requirements can result in fines, recall or seizure of products, total or
partial suspension of production and/or distribution, refusal of the government
to enter into supply contracts or to approve New Drug Applications and
Abbreviated New Drug Applications, civil sanctions and criminal prosecution. The
FDA also has the authority to revoke previously granted drug approvals. From
time to time, the FDA issues notices and warning letters to pharmaceutical
companies that request or require the Company to modify certain activities.
The FDA's current good manufacturing practices standards have become more
complex in recent years. The Abbreviated New Drug Application development and
approval process now averages approximately two to five years. FDA approval is
required before each dosage form of any new drug can be marketed. Applications
for FDA approval must contain information relating to bioequivalency, product
formulation, raw material suppliers, stability, manufacturing processes,
packaging, labeling and quality control. FDA procedures require full-scale
manufacturing equipment to be used to produce test batches for FDA approval.
Validation of manufacturing processes by the FDA also is required before a
company can market new products. The FDA conducts pre-approval and post-approval
reviews and plant inspections to enforce these rules. Supplemental filings with
the FDA are required for approval to transfer products from one manufacturing
site to another and may be under review for over a year or more. In addition,
certain products may only be approved for transfer once new bioequivalency
studies are conducted.
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The evolving and complex nature of regulatory requirements, the broad
authority and discretion of the FDA and the generally high level of regulatory
oversight results in a continuing possibility that from time to time Endo will
be adversely affected by regulatory actions despite ongoing efforts and
commitment to achieve and maintain full compliance with all regulatory
requirements.
Endo also sells products that are "controlled substances" as defined in the
Controlled Substances Act, which establishes certain security and record keeping
requirements administered by the Drug Enforcement Agency (DEA), a division of
the Department of Justice. The DEA has a dual mission, law enforcement and
regulation. The DEA's regulatory responsibilities are concerned with the control
of licensed handlers of controlled substances, and with the substances
themselves, equipment and raw materials used in their manufacture and packaging,
in order to prevent such articles from being diverted into illicit channels of
commerce. Endo has not experienced restrictions or fines for non-compliance with
the foregoing regulations but Endo cannot provide assurance that restrictions or
fines that could have a material adverse effect upon its business, financial
condition and results of operations will not be imposed upon the Company in the
future.
Product development and approval within this regulatory framework requires
a number of years and involves the expenditure of substantial resources. Endo
cannot determine what effect changes in regulations or legal interpretations,
when and if promulgated, may have on its business in the future. Changes could,
among other things, require expanded or different labeling, the recall or
discontinuance of certain products, additional record keeping and expanded
documentation of the properties of certain products and scientific
substantiation. Such changes, or new legislation, could have a material adverse
effect on Endo's business, financial condition and results of operations.
Endo believes that it and/or its contract manufacturers and other third
parties with which it interacts have the proper FDA, DEA or other regulatory
approval and authority for its drugs.
The Hatch-Waxman Act of 1984 extended the established Abbreviated New Drug
Application forms of brand-name drugs, which were originally marketed before
1962 or whose market exclusivity has expired. The Hatch-Waxman Act also provides
market exclusivity provisions that could preclude the submission or delay the
approval of a competing Abbreviated New Drug Application. One such provision
allows a five-year market exclusivity period for New Drug Applications involving
new chemical compounds and a three-year market exclusivity period for New Drug
Applications, including different dosage forms, containing new clinical
investigations essential to the approval of the application. The market
exclusivity provisions apply equally to patented and non-patented products.
Medicaid, Medicare and other reimbursement legislation or programs govern
reimbursement levels, including requiring that all pharmaceutical companies
rebate to individual states a percentage of their net sales arising from
Medicaid-reimbursed products. The federal and/or state governments may continue
to enact measures in the future aimed at reducing the cost of prescription
pharmaceuticals to the public. Endo cannot predict the nature of such measures
or their impact on its profitability.
SERVICE AGREEMENTS
Endo contracts with various third parties to provide certain critical
services including manufacturing, its sales representatives, warehousing,
distribution, customer service, certain financial functions, certain research
and development activities and medical affairs.
Third Party Manufacturing/Supply Agreements
Endo contracts with various third party manufacturers to provide it with
its finished goods including, among others, DuPont Pharmaceuticals, Merck & Co.
and Teikoku Seiyaku Pharmaceuticals. While Endo has generally not had difficulty
obtaining finished goods, raw materials and components from suppliers in the
past, there can be no assurance that these necessary finished goods, raw
materials and components will continue to be available on commercially
acceptable terms in the future. Although Endo has no reason to believe it will
be unable to procure adequate supply of finished goods, raw materials and
components on a timely basis, if for any reason it is unable to obtain
sufficient quantities of any of the finished goods or raw
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materials or components required for its products, it may have a materially
adverse effect on its business, financial condition and results of operations. A
description of the material terms of the material third party
manufacturing/supply contracts follows:
DuPont Pharmaceuticals -- Manufacture and Supply Agreement. Under the terms
of this agreement, DuPont Pharmaceuticals currently manufactures the majority of
Endo's brand and generic pharmaceutical products. DuPont Pharmaceuticals
manufactures both the products that Endo purchased from DuPont Pharmaceuticals
as a result of the August 1997 acquisition of Endo from DuPont Pharmaceuticals,
as well as some new products. The products are manufactured at either the DuPont
facility in Garden City, New York or the DuPont facility in Manati, Puerto Rico.
Both of these facilities are FDA- and DEA-approved. Under the terms of this
agreement, Endo is able to introduce the manufacture of new products that Endo
has developed in those plants. For these manufacturing services, Endo currently
pays DuPont Pharmaceuticals compensation in the form of (1) a fixed amount to
cover DuPont's fixed manufacturing costs for both manufacturing facilities, (2)
an amount, adjusted on an annual basis, to cover DuPont's variable manufacturing
costs for Endo's products in both facilities and (3) an additional fee, paid
annually, based upon a pre-determined formula.
In addition to manufacturing services, DuPont Pharmaceuticals currently
provides other ancillary services to Endo in connection with the manufacture of
Endo's products such as raw material procurement, product development, inventory
management and quality control services. Compensation for these services is
included in the compensation for manufacturing services. The initial term of
this agreement is five years, expiring on August 26, 2002, and is renewable, at
Endo's option, for a period of time not to exceed five years (i.e., through
August 2007). Upon a change in control of DuPont Pharmaceuticals, DuPont may
assign this agreement, provided that Endo consents to such assignment, which
consent may not be unreasonably withheld. If Dupont determines to sell or
otherwise transfer either the Garden City plant facility or the Manati plant
facility and Endo determines that the acquirer of such facility would not be an
acceptable manufacturer of Endo's products, DuPont shall implement, at its cost,
appropriate arrangements for the manufacture and supply of the products
elsewhere.
Teikoku Seiyaku Co., Ltd. Under the terms of this agreement, Teikoku, a
Japanese manufacturer, manufactures at its Japanese facility a transdermal
analgesic pharmaceutical patch product for commercial sale by Endo in the United
States. Endo is required to purchase, on an annual basis, a minimum amount of
product from Teikoku. The purchase price for the product is equal to a
pre-determined amount per unit of product. The term of this agreement is
November 23, 1998 until the shorter of thirteen years from the date of FDA
approval of the product or the expiration of the last to expire patent that is
licensed to Endo under a related agreement. This agreement may be terminated for
material breach by either party and by Endo if the related license agreement is
terminated.
Mallinckrodt Inc. Under the terms of this agreement, Mallinckrodt will
manufacture and supply to Endo narcotic active drug substances, in bulk form,
and upon the expiration of Mallinckrodt's existing supply agreement with DuPont,
raw materials for inclusion in Endo's controlled substance pharmaceutical
products. Endo is required to purchase a fixed percentage of its annual
requirements of each narcotic active drug substance from Mallinckrodt. The
purchase price for these substances is equal to a fixed amount, adjusted on an
annual basis. The initial term of this agreement is July 1, 1998 until June 30,
2013, with an automatic renewal provision for unlimited successive one-year
periods. Either party may terminate this agreement for a material breach.
In addition, under a separate agreement, Mallinckrodt exclusively
manufactures and supplies to Endo a narcotic active drug substance that is not
covered under the previously discussed Mallinckrodt agreement. Endo is required
to purchase a fixed percentage of its annual requirements of this narcotic
active drug substance from Mallinckrodt. The purchase price of the substance is
a fixed amount that may be adjusted annually in the event of Mallinckrodt
product cost increases. The term of this agreement is April 1, 1998 until June
30, 2004, as extended pursuant to an amendment, dated as of May 8, 2000, with an
automatic renewal provision for unlimited successive one-year periods. This
agreement may also be terminated for material breach by either party.
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Other Service Agreements
In addition to the long-term manufacturing agreement with DuPont, Endo has
agreements with (1) Livingston Healthcare Services, Inc. for customer service
support, warehouse and distribution services and certain financial functions and
(2) Kunitz and Associates Inc. for medical affairs. Endo also has an arrangement
with Ventiv Healthcare for sales as well as agreements and arrangements with
various clinical research organizations for its clinical studies. Although Endo
has no reason to believe that these agreements will not be honored, failure by
any of these third parties to honor their contractual obligations would have a
materially adverse effect on Endo's business, financial condition and results of
operations.
A description of the material terms of these agreements follows:
Livingston Healthcare Services Inc. Under the terms of this agreement,
Endo Pharmaceuticals appointed Livingston to provide customer service support,
chargeback processing, accounts receivables management, warehouse and
distribution services for Endo Pharmaceuticals' products in the United States.
During the term of the agreement, the Livingston personnel responsible for
providing to Endo Pharmaceuticals customer service, chargeback processing and
accounts receivables management services may not provide these services to any
third party for any third party products which directly compete with Endo
Pharmaceuticals products covered under the agreement. Endo Pharmaceuticals pays
Livingston a (1) start-up fee, payable in three installments, (2) a fixed
monthly fee for all services and (3) certain miscellaneous out-of-pocket
expenses, which, in the aggregate, may, depending on the facts and circumstances
at the time, represent material costs to Endo. For the year ended December 31,
2000, these fees and expenses were approximately $4.0 million. The term of the
agreement for customer service support and chargeback processing services is
February 1, 2000 to January 31, 2003; for accounts receivables services,
February 1, 2000 to January 31, 2002; and for warehouse and distribution
services, February 1, 2000 to February 28, 2005. The agreement may be renewed
upon mutual agreement of the parties. The agreement may be terminated for
material breach; by Endo Pharmaceuticals, for Livingston's failure to obtain all
government permits and licenses necessary to perform its obligations under this
agreement; by Endo Pharmaceuticals, with prior notice, for a sale of Endo
Pharmaceuticals or a sale of substantially all of Endo Pharmaceuticals' business
by its parent company; by Endo Pharmaceuticals, with prior notice, for a change
in Endo Pharmaceuticals' or its parent company's stock ownership or company
control; by Endo Pharmaceuticals, with prior notice, if Endo Pharmaceuticals
decides to provide these services in-house or by an affiliate; by Endo
Pharmaceuticals, with prior notice, if Livingston fails to provide additional
storage space for Endo Pharmaceuticals products upon request. In the event of
termination under certain circumstances, Endo Pharmaceuticals is required to pay
Livingston for certain capital investments and wind-down expenses.
Kunitz and Associates Inc. Under the terms of this agreement, Endo
Pharmaceuticals appointed Kunitz as its exclusive provider for all Endo
Pharmaceuticals products in the United States of pharmacovigilance, medical
communications, product information support, adverse drug experience
surveillance, medical literature search support and pharmaceutical regulatory
services. During the term of this agreement, Kunitz may not provide identical or
similar services to or for any third party whose products directly compete with
Endo Pharmaceuticals products in the prescription pain management therapeutic
category. For these services, Endo Pharmaceuticals pays Kunitz a fixed amount,
in equal monthly installments. The term of this agreement is June 1, 1999 until
July 31, 2002, with an option, at Endo Pharmaceuticals' discretion, to renew the
agreement for up to two successive one-year periods through July 31, 2004. The
agreement may be terminated by either party for material breach or by Endo
Pharmaceuticals, with notice, for no reason.
Ventiv Healthcare. Endo has an arrangement with Ventiv Healthcare whereby
a team of Ventiv's professional sales representatives, under Endo management
direction, exclusively promotes certain Endo products to healthcare
professionals in the United States. Endo is currently in negotiations with
Ventiv to enter into a multi-year agreement beginning in fiscal 2001.
ENVIRONMENTAL MATTERS
Endo's operations are subject to substantial and evolving federal, state
and local environmental laws and regulations concerning, among other matters,
the generation, handling, storage, transportation, treatment and
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disposal of toxic and hazardous substances. Endo believes that its facilities
and the facilities of its third party service providers are in substantial
compliance with all provisions of federal, state and local laws concerning the
environment and does not believe that future compliance with these provisions
will have a material adverse effect on its financial condition or results of
operations.
SUMMARY OF RECENT TRANSACTIONS
On August 26, 1997, Endo Pharmaceuticals commenced operations by acquiring
pharmaceutical products, related rights and assets of The DuPont Merck
Pharmaceutical Company, which subsequently became the DuPont Pharmaceuticals
Company. Endo, a Delaware corporation, was incorporated on November 18, 1997 and
Endo Pharmaceuticals, a Delaware corporation, was incorporated on April 2, 1997.
Under the terms of its August 26, 1997 purchase agreement, Endo
Pharmaceuticals purchased assets related to the worldwide DuPont generic and
multi-source pharmaceutical business (excluding certain territories). This
agreement may not be assigned by either party without the other party's consent
except to an affiliate or successor or Endo Pharmaceuticals' financial lenders.
On September 17, 1997, Endo Pharmaceuticals entered into a collaboration
agreement with Penwest Pharmaceuticals to exclusively co-develop opioid
analgesic products for pain management, using Penwest's patent-protected
proprietary technology, for commercial sale worldwide. Under the terms of this
agreement, the parties are currently developing an opioid product for the
treatment of pain. The parties share on a fifty/fifty basis the costs and
profits of products developed under this agreement. At this point in time, Endo
cannot predict the cost of this agreement. Endo Pharmaceuticals has exclusive
U.S. marketing rights with respect to products developed under this
collaboration.
On November 23, 1998, Endo Pharmaceuticals entered into a license agreement
with Hind Healthcare Inc. for the sole and exclusive right to develop, use,
market, promote and sell Lidoderm(R) (Lidocaine Patch 5%), a transdermal
pharmaceutical patch product for the treatment of post-herpetic neuralgia, in
the United States. Endo Pharmaceuticals also has an option to extend this
license agreement to other territories within a defined period of time. Endo
Pharmaceuticals paid to Hind up-front fees and milestone payments on the
occurrence of certain events. Beginning on March 19, 2001 and until the shorter
of (1) the life of the last-to-expire patent license pursuant to this license
agreement and (2) November 20, 2011, Endo Pharmaceuticals will pay Hind
non-refundable royalties, including a minimum annual royalty of at least
$500,000 per year, on net sales of the product in the future. Because these
royalty payments are based on the net sales of the product, the maximum cost of
these royalty payments is uncertain at this time, and, accordingly, Endo cannot
currently assess whether payments under this license agreement will be material.
In addition, Endo Pharmaceuticals obtained an option for the sole and exclusive
license to another format of the licensed product. Endo Pharmaceuticals is
required to evaluate this product within six months from the launch of
Lidoderm(R) in the United States. Endo Pharmaceuticals must then exercise its
option within one month of the completion of its evaluation of the product.
Either party may terminate this agreement for material breach. In September
1999, Endo Pharmaceuticals launched Lidoderm(R), the first and only FDA-approved
product for the treatment of the pain of post-herpetic neuralgia. In addition to
its approval, the FDA granted Lidoderm(R) orphan status, which means seven years
of exclusive marketing approval. In other words, for seven years, the FDA will
not approve a lidocaine-containing patch product for the indication of the
relief of the pain associated with post-herpetic neuralgia.
In November 1999, Endo Pharmaceuticals entered into a collaboration
agreement with Lavipharm Laboratories Inc. pursuant to which Endo
Pharmaceuticals obtained exclusive, worldwide rights to Lavipharm's existing
drug delivery technology platforms, including, but not limited to, Lavipharm's
Quick-Dis and transdermal technologies for use in the field of pain management.
Under the terms of the collaboration agreement, Endo Pharmaceuticals and
Lavipharm will work jointly on the formulation and development of pain
management products using Lavipharm's technology platforms. In addition, if
Lavipharm acquires and/or develops additional drug delivery technology, such
technology will be made available for Endo Pharmaceuticals' use under the
collaboration agreement, provided that there are no contrary encumbrances with
respect to such acquired technology. Lavipharm will manufacture products that
are jointly developed
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while Endo Pharmaceuticals will exclusively market and sell these products on a
worldwide basis. The collaboration agreement involves the payment by Endo
Pharmaceuticals to Lavipharm of up-front and milestone fees, reimbursement of
Lavipharm's development cost associated with the products, manufacturing charges
and a royalty on sales of jointly developed marketed products by Endo
Pharmaceuticals. The amounts payable to Lavipharm under this collaboration
agreement are uncertain at this time because these amounts will be based on Endo
achieving certain milestones. Currently, Endo cannot predict the likelihood of
achieving these milestones nor assess whether the payments under this
collaboration agreement will be material. The collaboration agreement may be
terminated for material breach by either party, or by either party, if within
one hundred eighty days of the effective date of the agreement, the parties have
not decided to proceed with product development.
On February 1, 2000, Endo Pharmaceuticals and Livingston Healthcare
Services Inc. entered into an agreement pursuant to which Livingston agreed to
provide customer service support, chargeback processing, accounts receivables
management, warehouse and distribution services for Endo Pharmaceuticals'
products in the United States. See "-- Service Agreements -- Other Service
Agreements -- Livingston Healthcare Services Inc."
On May 5, 2000, Endo Pharmaceuticals entered into a lease and other related
agreements with Painters' Crossing One Associates, L.P. This lease will commence
on August 1, 2001 for a ten-year term. See "Item 2. Properties."
On May 8, 2000, Endo Pharmaceuticals entered into an amendment to its
manufacture and supply agreement with Mallinckrodt Inc. See "-- Service
Agreements -- Third Party Manufacturing/Supply Agreements -- Mallinckrodt Inc."
The amendment, which was effective as of December 16, 1999, extended the term of
this agreement to June 30, 2004.
On July 17, 2000, the Company completed its acquisition of Algos
Pharmaceutical Corporation, now named Endo Inc. Endo Inc. develops proprietary
pain management products, combining existing analgesics, drugs designed to
reduce or eliminate pain, with NMDA-receptor antagonist drugs, drugs that block
a specific type of pain receptor in human cells, in an attempt to improve the
pain relief efficacy of existing drugs such as morphine.
On December 31, 2000, Endo Pharmaceuticals terminated its co-promotion
agreement with Elan Pharmaceuticals, Inc. for the promotion of Lidoderm(R) in
accordance with its terms.
For the year ended December 31, 2000, Endo's Cash Gross Profit (defined in
the merger agreement with Algos as equal to gross profit as determined by
generally accepted accounting principles excluding non-cash charges) was equal
to $153.1 million. Pursuant to the merger agreement with Algos, in the event
that Endo (excluding Algos-related revenues and expenses) did not meet or exceed
the defined cash gross profit target of $147.4 million for the year ended
December 31, 2000, then a certain number of shares of the Company held by the
pre-merger Endo stockholders would have had to have been returned to the
treasury of the Company thereby increasing the relative percentage ownership of
the other shareholders. As a result of the Cash Gross Profit target having been
achieved, Endo Pharma LLC, the holding company of substantially all of the
shares of the pre-merger Endo stockholders, will not be required to return a
portion of its shares in the Company to the Company's treasury so that the
percentage ownership of the stockholders will remain unchanged. Accordingly, all
references to such an "Adjustment Event" in the warrants issued in the merger
with Algos will no longer be applicable. See Note 12 to the accompanying
Consolidated Financial Statements for a description of the warrants.
DESCRIPTION OF CREDIT AGREEMENT
Endo Pharmaceuticals entered into a credit agreement on August 26, 1997
with a number of lenders and The Chase Manhattan Bank, as administrative agent.
Under this credit agreement, Endo, as of December 31, 2000, had outstanding a
Tranche A Term Loan in the amount of $35.0 million and a Tranche B Term Loan in
the amount of $99.0 million. Under the credit agreement, Endo Pharmaceuticals
has the ability to borrow on a revolving basis up to $25 million, none of which
was outstanding as of December 31, 2000. The Tranche A
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Term Loan amortizes quarterly and has a final maturity date of December 31,
2002. The Tranche B Term Loan also amortizes quarterly and has a final maturity
date of June 30, 2004. The revolving loans may be borrowed, repaid and
reborrowed and have a final maturity of December 31, 2002.
These loans bear interest at an agreed-upon spread over the applicable base
rate (as defined in the credit agreement) or over the London Interbank Offered
Rate. The loans outstanding under the credit agreement are secured by a first
priority security interest in substantially all of the assets of Endo
Pharmaceuticals. These loans are subject to mandatory repayment in limited
circumstances. Voluntary prepayments of these loans and voluntary reductions of
the credit facility are permitted, in whole or in part, at the option of Endo
Pharmaceuticals in minimum principal amounts, without premium or penalty,
subject to reimbursement of the lenders' costs under specified circumstances.
The credit agreement contains representations and warranties, covenants,
events of default and other provisions customarily found in similar agreements.
EMPLOYEES
As of February 28, 2001, Endo had 140 employees, of which 44 are engaged in
research and development, 23 in sales and marketing, 16 in quality and
approximately 57 in general and administrative capacities. Employees are not
represented by unions and Endo believes its relations with its employees are
good.
DIVIDEND POLICY
Endo has never paid cash dividends on its common stock. Furthermore, the
payment of cash dividends from earnings is currently restricted by its credit
facility. Assuming removal of this restriction, the payment of cash dividends is
subject to the discretion of the Endo board of directors and will be dependent
on many factors, including Endo's earnings, capital needs and general financial
condition. Endo anticipates that, for the foreseeable future, it will retain its
earnings in order to finance the expansion of its business.
ITEM 2. PROPERTIES
Endo leases all of its properties. Of these, the most significant are its
research and development facility located in Garden City, New York and its
corporate headquarters in Chadds Ford, Pennsylvania. Through the acquisition of
Algos in July 2000, Endo also leases the former corporate headquarters of Algos
in Neptune, New Jersey. A description of the material terms of agreements
pertaining to these properties follows:
GARDEN CITY, NEW YORK
DuPont Pharmaceuticals Inc. Lease Agreement. Under this agreement, Endo
Pharmaceuticals leases a laboratory and office building from DuPont which is
located at DuPont's Garden City, New York manufacturing facility. Endo
Pharmaceuticals may use these facilities for the research and development of
Endo Pharmaceuticals pharmaceutical products. The lease is not assignable by
Endo Pharmaceuticals without the consent of DuPont. After August 26, 2000, the
lease may be terminated (1) by Endo Pharmaceuticals, if substantial premise
alteration charges are required in order to comply with government regulations,
(2) by DuPont, for tenant damage and destruction to the premises and (3) as a
result of arbitration between the parties. The term of the lease is five years,
expiring August 26, 2002 and is renewable at Endo Pharmaceuticals' option,
provided the related manufacturing and supply agreement between the parties has
been renewed, for an additional five-year period or successive one-year periods
through August 2007.
CHADDS FORD, PENNSYLVANIA
Route 202-Concord Partners (formerly Northstar) Lease Agreement. Under
this agreement, Endo Pharmaceuticals leases office space in Chadds Ford,
Pennsylvania for its headquarters and administrative functions. The lease
commenced on October 1, 1997, for an initial term of five years. The annual base
rent is adjusted annually by a fixed percentage. After the initial term, the
parties may extend this lease for another five-year term. The lease may be
assigned or the premises sublet with the landlord's written consent. Endo
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Pharmaceuticals and Northstar amended this lease on December 16, 1997, January
6, 1999, November 23, 1999 and November 8, 2000, in order for Endo
Pharmaceuticals to acquire additional office space in the same building for an
additional fee. The Company intends to allow this lease to lapse in accordance
with its terms and to move its headquarters in August 2001.
Painters' Crossing One Associates, L.P. Lease Agreement. On May 5, 2000,
Endo Pharmaceuticals and Painters' Crossing One Associates, L.P. entered into a
ten-year lease pursuant to which Painters' Crossing has agreed to lease a
building of approximately 47,756 square feet located in Chadds Ford,
Pennsylvania. By amendment dated February 26, 2001, this lease will commence on
August 1, 2001 and will end on August 31, 2010 for a period of ten years and one
month. However, Endo Pharmaceuticals, at its discretion, has the right to
terminate this lease at the end of the fifth year, by providing two years'
notice and paying a fixed termination fee to Painters' Crossing. During the term
of the lease, the annual rent is a fixed amount paid in equal monthly
installments that increases after the first five years of the lease.
NEPTUNE, NEW JERSEY
Commercial Realty & Resources Corp. Lease. Through the acquisition of
Algos in July 2000, Endo Inc., as successor to Algos, leases the former Algos
corporate headquarters in Neptune, New Jersey. Endo Inc. currently uses this
office space for administrative functions. The lease, which is for approximately
21,000 square feet, commenced in April 1998 for an initial term of ten years,
with an option to extend the lease for an additional five-year period. Endo Inc.
also has an option to purchase the premises during the fourth or fifth year of
the initial term of the lease. Additionally, the lease may be assigned or the
premises sublet with the landlord's written consent. At the date of the merger
with Algos, the Company's management decided that it no longer wished to utilize
this office space and accordingly notified the landlord of its desire to vacate
the premises. The landlord and Endo are currently negotiating the termination of
this lease and a full and final release of Endo from its future obligations
under the lease.
ITEM 3. LEGAL PROCEEDINGS
On October 20, 2000, The Purdue Frederick Company (and related companies)
filed suit against Endo and its subsidiary, Endo Pharmaceuticals Inc., in the
U.S. District Court for the Southern District of New York alleging that Endo's
bioequivalent version of Purdue Frederick's OxyContin(R), 40 mg strength,
infringes three of its patents. This suit arose from the United States Food and
Drug Administration (FDA) acceptance of Endo Pharmaceuticals Inc.'s Abbreviated
New Drug Application (ANDA) submission for a bioequivalent version of Purdue
Frederick's OxyContin(R), 40 mg strength. On March 13, 2001, Purdue Frederick
(and related companies) filed a second suit against Endo and Endo
Pharmaceuticals Inc. in the U.S. District Court for the Southern District of New
York alleging that Endo's bioequivalent versions of Purdue Frederick's
OxyContin(R), 10 mg and 20 mg strengths, infringe the same three patents. This
suit arose from Endo Pharmaceuticals having amended its earlier ANDA on February
9, 2001, to add bioequivalent versions of the 10 mg and 20 mg strengths of
OxyContin(R). For each of the 10 mg, 20 mg and 40 mg strengths of this product,
Endo Pharmaceuticals made the required Paragraph IV certification against the
patents listed in the FDA's Orange Book as covering these products. OxyContin(R)
is indicated for the treatment of moderate-to-severe pain. Although Endo
believes the patents asserted by Purdue Frederick are invalid and/or not
infringed by Endo's formulation of oxycodone hydrochloride extended-release
tablets, 10 mg, 20 mg and 40 mg strengths, no assurance can be given as to the
outcome of the patent challenge process.
In addition to the above, Endo is involved in, or has been involved in,
arbitrations or legal proceedings which arise from the normal course of its
business. Endo cannot predict the timing or outcome of these claims and
proceedings. Currently, Endo is not involved in any arbitration and/or legal
proceeding that Endo expects to have a material effect on its business,
financial condition or results of operations and cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the Company's fiscal year ended December 31, 2000.
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ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is information regarding each current executive officer of
Endo:
NAME AGE POSITION AND OFFICES
- ---- --- --------------------
Carol A. Ammon....................... 50 President, Chief Executive Officer and Director
Mariann T. MacDonald................. 53 Executive Vice President, Operations
Caroline E. Berry.................... 32 Senior Vice President, General Counsel & Secretary
Jeffrey R. Black..................... 36 Senior Vice President, Chief Financial Officer and
Treasurer
Peter A. Lankau...................... 48 Senior Vice President, U.S. Business
David A.H. Lee, M.D., Ph.D........... 51 Senior Vice President, Research & Development
CAROL A. AMMON, 50, is President, Chief Executive Officer and Director of
Endo. Prior to joining Endo, Ms. Ammon was the President of DuPont Merck's U.S.
Pharmaceuticals Division from 1996 through 1997, and from 1993 through 1995 she
was the President of Endo Laboratories, L.L.C. She also serves as a director on
the boards of the Christiana Care Health System, the St. Louis School of
Pharmacy in St. Louis, Missouri and the Pete DuPont Delaware Public Policy
Committee.
MARIANN T. MACDONALD, 52, is Executive Vice President, Operations of Endo.
Prior to joining Endo, Ms. MacDonald was Vice President of Business Information,
Training, Administration & Technology for the U.S. Pharmaceuticals Division of
DuPont Merck from 1996 to 1997 and Vice President of Operations for Endo
Laboratories, L.L.C. from 1995 to 1996. From 1993 to 1995, Ms. MacDonald held
various management positions in DuPont Merck.
CAROLINE E. BERRY, 32, is Senior Vice President, General Counsel and
Secretary of Endo. Prior to joining Endo, Ms. Berry was an Associate at the law
firm Skadden, Arps, Slate, Meagher & Flom LLP since 1995.
JEFFREY R. BLACK, 36, is Senior Vice President, Chief Financial Officer and
Treasurer of Endo. Prior to joining Endo, Mr. Black became a Partner in June
1997 with Deloitte & Touche LLP in the New York Merger and Acquisition Services
Group, after joining that firm in 1986.
PETER A. LANKAU, 48, is Senior Vice President, U.S. Business of Endo. Prior
to joining Endo in June 2000, Mr. Lankau was Vice President, Sales and Marketing
for Alpharma USPD, Inc. in Baltimore, Maryland. He was Vice President,
Sales -- U.S. Pharmaceuticals for Rhone Poulenc Rorer, Inc. from 1996 to 1999,
based in Collegeville, Pennsylvania. Prior to 1996, Mr. Lankau was Executive
Director, Strategy and Development for RPR from 1995 to 1996. Prior to 1995, he
held various management positions at RPR including business unit management, and
had responsibility for RPR's generics business as well as managed care.
DAVID A.H. LEE, M.D. Ph.D., 51, is Senior Vice President, Research &
Development and Regulatory Affairs of Endo. Prior to joining Endo in December of
1997, Dr. Lee was Executive Vice President, Research and Development for
CoCensys, Inc., an emerging pharmaceuticals company based in Irvine, California,
from 1992 through 1997. Prior to joining CoCensys, Dr. Lee held various
positions at Solvay Pharmaceuticals in the Netherlands, ranging from head of
global clinical development programs to his final position as V.P. Research and
Development. Dr. Lee received his M.D. and Ph.D. degrees from the University of
London and specialized in internal medicine and gastroenterology, prior to
joining the pharmaceutical industry.
The Company has employment agreements with each of the executive officers.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Endo's common stock has been traded on the Nasdaq under the symbol "ENDP"
since July 18, 2000. The following table sets forth the quarterly high and low
share price information for the periods indicated. The prices shown represent
quotations between dealers, without adjustment for retail markups, markdowns or
commissions, and may not represent actual transactions.
ENDO COMMON
STOCK
---------------
HIGH LOW
------ -----
Year Ending December 31, 2000
3rd Quarter (from July 18, 2000).......................... $14.50 $5.00
4th Quarter............................................... $10.13 $5.50
As of March 23, 2001, we estimate that there were approximately 133 record
holders of our common stock.
We have not declared or paid any cash dividends on our capital stock, and
do not anticipate paying any cash dividends in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
The following table contains selected financial data for the Company. The
consolidated balance sheet data as of December 31, 1997, 1998, 1999 and 2000 and
the consolidated statement of operations data for the period from August 26,
1997, the date of the acquisition of the Company from the then DuPont Merck
Pharmaceutical Company, to December 31, 1997, the years ended December 31, 1998,
1999 and 2000 have been derived from the consolidated financial statements
audited by Deloitte & Touche LLP independent auditors of the Company (except for
net income (loss) per share data) and the consolidated balance sheet data as of
August 26, 1997 and December 31, 1996 and the consolidated statement of
operations data for the periods then ended have been derived from the statements
of earnings and statement of assets to be sold audited by PricewaterhouseCoopers
LLP, independent accountants. You should read the following information together
with the consolidated financial statements and the related notes and "Item 7.
Management's
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Discussion and Analysis of Financial Condition and Results of Operations." The
information presented below is not necessarily indicative of the results of
Endo's future operations.
PREDECESSOR COMPANY(1) THE COMPANY
---------------------------- -------------------------------------------------
PERIOD FROM
AUGUST 26,
PERIOD FROM 1997
JANUARY 1, (DATE OF
YEAR ENDED 1997 TO ACQUISITION) TO YEAR ENDED DECEMBER 31,
DECEMBER 31, AUGUST 26, DECEMBER 31, -------------------------------
1996 1997 1997 1998 1999 2000
------------ ------------- --------------- -------- -------- ---------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Net sales......................... $102,325 $65,077 $ 39,431 $108,370 $138,546 $ 197,429
Cost of sales..................... 48,369 30,551 29,779 54,731 58,263 63,041
-------- ------- -------- -------- -------- ---------
Gross profit...................... 53,956 34,526 9,652 53,639 80,283 134,388
Selling, general and
administrative.................. 12,286 5,621 8,707 25,540 42,921 56,537
Research and development.......... 6,856 5,253 2,865 5,893 9,373 26,012
Depreciation and amortization..... -- -- 2,340 7,373 8,309 27,624
Compensation related to stock
options -- primarily selling,
general and administrative...... -- -- -- -- -- 15,300
Purchased in-process research and
development..................... -- -- 46,000 -- -- 133,200
Merger and other related costs.... -- -- -- -- -- 1,583
Separation benefits............... -- -- -- -- -- 22,034
-------- ------- -------- -------- -------- ---------
Operating income (loss)........... 34,814 23,652 (50,260) 14,833 19,680 (147,902)
Interest expense, net............. -- -- 5,352 14,451 14,347 15,119
-------- ------- -------- -------- -------- ---------
Income (loss) before income tax
(benefit)....................... 34,814 23,652 (55,612) 382 5,333 (163,021)
Income tax (benefit).............. -- -- (20,318) 181 2,073 (6,181)
-------- ------- -------- -------- -------- ---------
Net income (loss)................. $ 34,814 $23,652 $(35,294) $ 201 $ 3,260 $(156,840)
======== ======= ======== ======== ======== =========
Net income (loss) per share
Basic........................... N/A N/A $ (.50) $ 0.00 $ .05 $ (1.97)
Diluted......................... N/A N/A $ (.50) $ 0.00 $ .05 $ (1.97)
Shares used to compute net income
(loss) per share
Basic........................... N/A N/A 71,051 71,307 71,332 79,454
Diluted......................... N/A N/A 71,051 71,307 71,332 79,454
THE COMPANY
PREDECESSOR COMPANY(1) -------------------------------------------------
---------------------------- DECEMBER 31,
DECEMBER 31, AUGUST 26, -------------------------------------------------
1996 1997 1997 1998 1999 2000
------------ ------------- --------------- -------- -------- ---------
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents......... $ -- $ -- $ 14,521 $ 17,367 $ 22,028 $ 59,196
Working capital................... -- -- 17,659 37,676 49,541 72,759
Total assets...................... -- -- 275,496 287,618 329,436 467,840
Total debt........................ -- -- 167,472 170,544 191,203 198,525
Other long-term obligations....... -- -- 5,852 6,352 6,745 7,218
Stockholders' equity.............. -- -- 74,706 75,358 78,587 198,173
- ---------------
(1) On August 26, 1997, Endo commenced operations by acquiring certain branded
and generic pharmaceutical products, related rights and certain assets of
DuPont Pharmaceuticals Company, or the predecessor company. The financial
information for the predecessor company is not comparable to Endo's
financial information as the business was operated within a division of the
predecessor company and historical
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financial statements were not prepared for the Endo business. These products
represented less than 10% of the revenues of DuPont Pharmaceuticals Company.
Consolidated balance sheet data of the predecessor company related to these
products have been omitted from the table above. It is our understanding
that because of the manner in which certain transactions were historically
processed, recorded and accumulated, it was not, and is not practicable to
prepare complete financial statements. The financial information for the
predecessor company includes estimates and allocations that may not
necessarily be indicative of the costs that would have resulted if the
business had been operated as a separate entity. The consolidated statement
of operations data include those net sales, other operating revenue, costs
and expenses directly related to the manufacture and distribution of the
products acquired including the allocation of certain manufacturing and
distribution overhead costs. The consolidated statement of operations data
also include direct and allocated expenses for marketing and selling,
general and administrative and research and development. In connection with
the original formation of the predecessor company, no indebtedness was
assumed nor any material indebtedness incurred subsequent to formation.
Accordingly, no interest expense has been charged in the consolidated
statement of operations data. In addition, although depreciation and
amortization expense is included in the allocation of expenses to the
acquired products, such amount is not compatible to depreciation and
amortization expense of Endo.
Endo has been informed that it is not practical for the predecessor company
to prepare a balance sheet or statement of cash flows related to the
products acquired by Endo for any period prior to August 26, 1997. The
predecessor company's systems for processing, recording and accumulating
transactions were designed to support the management and reporting
requirements of the predecessor business as a whole and not designed to
support reporting related only to the products acquired by Endo. At the time
of the August 26, 1997 acquisition, the products were managed as an
integrated part of the predecessor company. Consequently, it is not
practical to provide operating cash flow information of the predecessor
company related to Endo products before August 26, 1997.
In addition, the predecessor company's sales, manufacturing, research and
development and corporate activities were integrated for all products of the
predecessor company, not only those products of Endo. Endo did not acquire
the physical assets used to produce the products and these products continue
to be manufactured by the predecessor company. Consequently, Endo
understands that there has not been a segregation of production assets
associated with the products by the predecessor company and accordingly, it
is not practical to provide financing or investing cash flow information,
such as capital expenditures or depreciation, related to Endo products
before August 26, 1997. The omitted predecessor company financial
information would not be comparable or meaningful. Consequently,
depreciation and amortization expense of the predecessor company is not
comparable to depreciation and amortization expense of Endo.
Due to the August 26, 1997 acquisition, a new basis of accounting has been
recorded for the purchase. The predecessor company did not charge to the
business interest expense and income taxes, although income tax expense, on
a pro forma basis, has been reflected on the face of the predecessor
financial statements of $13,926 and $9,461 for the year ended December 31,
1996 and the period ended August 26, 1997, respectively.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Except for the historical information contained in this Form 10-K Annual
Report, this Report, including the following discussion, contains
forward-looking statements that involve risks and uncertainties.
OVERVIEW
The Company, through its wholly owned subsidiaries, Endo Pharmaceuticals
Inc. and Endo Inc., is engaged in the research, development, sales and marketing
of branded and generic prescription pharmaceuticals used primarily for the
treatment and management of pain. Branded products comprised approximately 69%,
68% and 76% of net sales for the years ended December 31, 1998, 1999 and 2000,
respectively. On
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August 26, 1997, an affiliate of Kelso & Company and then members of management
entered into an asset purchase agreement with the then DuPont Merck
Pharmaceutical Company to acquire certain branded and generic pharmaceutical
products and exclusive worldwide rights to a number of new chemical entities in
the DuPont research and development pipeline from DuPont Merck through the
newly-formed Endo Pharmaceuticals. On November 19, 1999, the Company formed Endo
Inc. as a wholly owned subsidiary to effect the acquisition of Algos
Pharmaceutical Corporation ("Algos"). The stock of Endo Pharmaceuticals Inc. and
the stock of Endo Inc. are the only assets of the Company, and the Company has
no other operations or business. The Company was formed as a holding company and
incorporated on November 18, 1997 under the laws of the state of Delaware and
has its principal executive offices at 223 Wilmington-West Chester Pike, Chadds
Ford, Pennsylvania 19317 (telephone number: (610) 558-9800).
On July 17, 2000, the Company completed its merger with Algos. In the
merger, the Company issued to the former Algos stockholders, in the aggregate,
17,810,526 shares of Company common stock and 17,810,526 warrants to purchase in
the aggregate up to 20,575,507 additional shares of Company common stock in
certain circumstances as more fully described in the Company's Registration
Statement on Form S-4 filed with the Securities and Exchange Commission on June
9, 2000, as amended. In the merger, the Company also issued to the pre-merger
Endo stockholders, in the aggregate, 71,328,424 warrants to purchase in the
aggregate up to 29,720,177 additional shares of common stock in certain other
circumstances as more fully described in the Company's Registration Statement on
Form S-4 filed with the Securities and Exchange Commission on June 9, 2000, as
amended.
The merger has been accounted for by the Company using the purchase method
of accounting. The assets acquired and liabilities assumed of Algos have been
recorded at their fair values based on an independent appraisal.
The assets acquired and liabilities assumed, results of operations and cash
flows of Algos have been included in the Company's financial statements and
Management's Discussion and Analysis of Financial Conditions and Results of
Operations prospectively for reporting periods beginning July 17, 2000.
The merger included various on-going projects to research and develop
innovative new products for pain management. As a result, the preliminary
allocation of the fair value of the assets acquired and liabilities assumed
includes an allocation to purchased in-process research and development ("IPRD")
of $133.2 million which was immediately expensed in the consolidated statement
of operations on the acquisition date. The methodology used by the Company on
the acquisition date in determining the value of IPRD was to: 1) identify the
various on-going projects that the Company will prioritize and continue; 2)
project net future cash flows of the identified projects based on current demand
and pricing assumptions, less the anticipated expenses to complete the
development program, drug application, and launch the products (significant net
cash inflows from MorphiDex(R) were projected in 2003); 3) discount these cash
flows based on a risk-adjusted discount rates ranging from 25% to 33% (weighted
average discount rate of 27%); and 4) apply the estimated percentage of
completion to the discounted cash flow for each individual project ranging from
4% to 81%. The discount rate was determined after considering various
uncertainties at the time of the merger, primarily the stage of project
completion.
The Company allocated fair value to the three opioid analgesic projects of
Algos: MorphiDex(R), HydrocoDex(TM) and OxycoDex(TM). The development program
for a new pharmaceutical substance involves several different phases prior to
drug application. Drug application must be approved prior to marketing a new
drug. Despite the Company's commitment to completion of the research and
development projects, many factors may arise that could cause a project to be
withdrawn or delayed, including the inability to prove the safety and efficacy
of a drug during the development process. Upon withdrawal, it is unlikely that
the development activities will have alternative use. If these projects are not
successfully developed, the Company's results of operations and financial
position in a future period could be negatively impacted.
The Company's quarterly results have fluctuated in the past, and may
continue to fluctuate. These fluctuations are primarily due to the timing of new
product launches, purchasing patterns of the Company's customers, market
acceptance of the Company's products and the impact of competitive products and
pricing.
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RESULTS OF OPERATIONS
General
Goodwill and other intangibles represent a significant portion of the
assets and stockholders' equity of the Company. As of December 31, 2000,
goodwill and other intangibles comprised approximately 61% of total assets and
144% of stockholders' equity. The Company assesses the recoverability and the
amortization period of goodwill by determining whether the amount can be
recovered through undiscounted net cash flows of the businesses acquired over
the remaining amortization period. The Company reviews for the impairment of
long-lived assets whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable, such as in the event of a
significant adverse change in business conditions or a significant change in the
intended use of an asset. An impairment loss would be recognized when estimated
undiscounted future cash flows expected to result from the use of the asset are
less than its carrying amount. Assets are grouped at the lowest level for which
there are identifiable cash flows that are largely independent from other asset
groups. The Company uses the discounted future expected net cash flows, as its
estimate of fair value, to determine the amount of impairment loss. As a result
of the significance of goodwill and other intangibles, amortization of goodwill
and other intangibles will significantly impact the results of operations of the
Company. In addition, the Company's results of operations and financial position
in a future period could be negatively impacted should an impairment of goodwill
and other intangible assets occur.
Fiscal Year Ended December 31, 2000 Compared to Fiscal Year Ended December 31,
1999
Net sales for the year ended December 31, 2000 increased by 43% to $197.4
million from $138.5 million in the comparable 1999 period. This increase in net
sales was primarily due to the increase in net sales from several recently
launched new products. In November 1999, the Company launched Percocet(R)
2.5/325, Percocet(R) 7.5/500 and Percocet(R) 10.0/650 to complement the existing
Percocet(R) 5.0/325 for the relief of moderate-to-severe pain. In September
1999, the Company launched Lidoderm(R), the first and only FDA-approved product
for the treatment of the pain of post-herpetic neuralgia. In November 1998, the
Company launched Morphine Sulfate Extended Release Tablets, the therapeutic
equivalent version of MS Contin(R), for moderate-to-severe pain.
Gross profit for the year ended December 31, 2000 increased by 67% to
$134.4 million from $80.3 million in the comparable 1999 period. Gross profit
margins increased to 68% from 58% due to the Company's continued focus on a more
favorable mix of higher margin products both through product launches as
discussed above, and the discontinuation of some lower margin non-core products.
In addition, the increase in gross profit margins was also due to the existing
fixed cost nature of the Company's manufacturing relationship with DuPont
Pharmaceuticals, currently the Company's most significant contract manufacturing
relationship. If the Company achieves its forecast for revenue and product mix,
the Company's management expects the increase in gross profits to continue.
Selling, general and administrative expenses for the year ended December
31, 2000 increased by 32% to $56.5 million from $42.9 million in the comparable
1999 period. This increase was due to a $8.1 million increase in sales,
marketing and promotional efforts in 2000 over the comparable 1999 period to
support the recent launch of Lidoderm(R) and the launches of Percocet(R)
2.5/325, Percocet(R) 7.5/500 and Percocet(R) 10.0/650 to complement the existing
Percocet(R) 5.0/325. In addition, the Company experienced an increase in
personnel-related costs in the general and administrative functions in order to
support its growth.
Research and development expenses for the year ended December 31, 2000
increased by 177% to $26.0 million from $9.4 million in the comparable 1999
period. This increase was due to the Company's increased spending on products
under development that are focused in pain management including the products
under development in the former Algos pipeline.
Depreciation and amortization for the year ended December 31, 2000
increased to $27.6 million from $8.3 million in the comparable 1999 period. This
increase was substantially due to the increase in amortization of goodwill and
other intangibles resulting from the intangible assets acquired as a result of
the merger with Algos.
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Compensation related to stock options -- primarily selling, general and
administrative of $15.3 million reflects the charge arising from the vesting of
performance-based stock options granted pursuant to the Endo Pharma LLC Amended
and Restated 1997 Stock Option Plans. The amount represents the estimated
difference in the market price and the exercise price of the vested stock
options. To the extent that additional performance-based stock options vest
pursuant to the Endo Pharma LLC Amended and Restated 1997 Stock Option Plans,
significant charges may occur in the future. The exercise of stock options
pursuant to the Endo Pharma LLC Amended and Restated 1997 Stock Option Plans
does not result in the issuance of additional shares in the Company.
Purchased in-process research and development for the year ended December
31, 2000 of $133.2 million resulted from the estimated fair value of the
products under development acquired by the Company in the merger with Algos.
Merger and other related costs for the year ended December 31, 2000 of $1.6
million resulted from fees incurred as a result of the merger with Algos that
were not considered direct costs of the acquisition.
Separation benefits of $22.0 million for the year ended December 31, 2000
resulted from a $20.8 million charge related to the acceleration of vesting of
stock options held by two former executives and a $1.2 million charge from
compensation and other benefits pursuant to two separation and release
agreements entered into by the Company. The stock compensation charge reflects
the estimated difference in the fair value and the exercise price of such stock
options on the effective date of the separation and release agreements.
Interest expense, net for the year ended December 31, 2000 increased by 6%
to $15.1 million from $14.3 million in the comparable 1999 period. The increase
was due to an increase in interest expense of $1.2 million due to an increase in
long-term debt outstanding and an increase in interest expense of $1.2 million
due to an increase in interest rates. These increases are offset by an increase
in interest income of $1.6 million due to an increase in the average cash
balance for the year ended December 31, 2000 compared to the comparable 1999
period. The increase in the average cash balance was primarily the result of
acquiring $19.6 million in net cash and cash equivalents in the merger with
Algos.
Income tax benefit for the year ended December 31, 2000 was $6.2 million.
In the year ended December 31, 2000, the Company recorded a valuation allowance
on its existing deferred tax assets due to the uncertainty of the utilization of
such amounts in the foreseeable future.
Fiscal Year Ended December 31, 1999 Compared to Fiscal Year Ended December 31,
1998
Net sales for the year ended December 31, 1999 increased by 28% to $138.5
million from $108.4 million in the comparable 1998 period. This increase in net
sales was primarily due to the launch of several new products. In April 1998,
the Company terminated a promotional agreement with a third party regarding
Moban(R) tablets and liquid, and began its own promotion of the product for the
management of psychotic disorders. In November 1998, the Company launched
Morphine Sulfate Extended Release Tablets, the therapeutic equivalent version of
MS Contin(R), for moderate-to-severe pain. In February 1999, the Company
launched Zydone(R) tablets, a hydrocodone/acetaminophen offering for
moderate-to-moderately-severe pain. In September 1999, the Company launched
Lidoderm(R), the first and only FDA approved product for the treatment of the
pain of post-herpetic neuralgia. In November 1999, the Company launched
Percocet(R) 2.5/325, Percocet(R) 7.5/500 and Percocet(R) 10.0/650 to complement
the existing Percocet(R) 5.0/325.
Gross profit for the year ended December 31, 1999 increased by 50% to $80.3
million from $53.6 million in the comparable 1998 period. Gross profit margins
increased to 58% from 49% substantially due to the existing fixed cost nature of
the Company's manufacturing relationship with DuPont Pharmaceuticals, currently
the Company's most significant contract manufacturing relationship. In addition,
the increase in gross profit margins is due to the Company's continued focus
since the asset purchase transaction in August 1997 on a more favorable mix of
higher margin products both through product launches, as discussed above, as
well as discontinuation of some lower margin non-core products. If the Company
achieves its forecast for revenue and product mix, the Company's management
expects the increase in gross profit margins to continue.
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Selling, general and administrative expenses for the year ended December
31, 1999 increased by 68% to $42.9 million from $25.5 million in the comparable
1998 period. This increase was substantially due to the increased sales and
promotional efforts to support the launches of Zydone(R), Lidoderm(R), and the
launches of Percocet(R) 2.5/325, Percocet(R) 7.5/500 and Percocet(R) 10.0/650 to
complement the existing Percocet(R) 5.0/325. In February 1999, the Company
deployed a dedicated contract field force of approximately 300 part-time sales
representatives to promote these new products, which was an increase from the
prior field force of approximately 100 sales representatives.
Research and development expenses for the year ended December 31, 1999
increased by 59% to $9.4 million from $5.9 million in the comparable 1998
period. This increase was due to increased spending on products under
development focused in pain management.
Depreciation and amortization for the year ended December 31, 1999
increased by 13% to $8.3 million from $7.4 million in the comparable 1998
period. This increase was primarily due to the increase in capital spending
required since the Company's inception in August 1997.
Interest expense, net for the year ended December 31, 1999 decreased by 1%
to $14.3 million from $14.5 million in the comparable 1998 period. The decrease
in interest expense of $1.0 million due to lower interest rates applicable to
long-term debt was substantially offset by an increase in interest expense of
$1.0 million due to an increase in long-term debt during 1999. In addition,
interest income increased by $.2 million due to a higher average cash balance.
Income taxes for the year ended December 31, 1999 increased to $2.1 million
from $.2 million for the comparable 1998 period.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities increased by $21.3 million to
$35.1 million for the year ended December 31, 2000 from $13.8 million for the
comparable 1999 period. This increase was substantially due to the cash provided
by the increase in net sales and gross profit for the year ended December 31,
2000 compared to the year ended December 31, 1999 offset by an increase in
selling, general and administrative expenses and research and development
expenses for the year ended December 31, 2000 compared to the year ended
December 31, 1999.
Net cash provided by investing activities increased by $27.2 million to
$18.1 million for the year ended December 31, 2000 from $9.1 million of net cash
utilized in investing activities for the comparable 1999 period. This increase
in net cash was substantially due to the net cash acquired in the merger with
Algos of $19.6 million. In addition, this increase in net cash was due to a $6.0
million decrease in license fees paid by the Company due to the Company's
payment for its license of Lidoderm(R) and the Company's $1.0 million payment
for its exclusive license of technologies for pain management from Lavipharm
Laboratories, Inc. both made in 1999. The remaining increase in cash provided by
investing activities is due to a $.6 million decrease in capital expenditures
due to the completion of an enterprise software system implementation during
1999.
Net cash utilized in financing activities increased by $16.0 million due to
repayments made on Endo Pharmaceuticals' credit facility.
Net cash provided by operating activities decreased to $13.8 million for
the year ended December 31, 1999 from $20.9 million for the year ended December
31, 1998. This decrease was primarily due to an increase in accounts receivable
due to increased net sales and the build up of inventories to support the
launches of Lidoderm(R), Percocet(R) 2.5/325, Percocet(R) 7.5/500 and
Percocet(R) 10.0/650.
Net cash utilized in investing activities increased to $9.1 million for the
year ended December 31, 1999 from $3.5 million for the year ended December 31,
1998. In addition, this increase in net cash was due to a $6.0 million decrease
in license fees paid by the Company due to the Company's payment for its license
of Lidoderm(R) and the Company's $1.0 million payment for its exclusive license
of technologies for pain management from Lavipharm Laboratories, Inc. both made
in 1999.
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No significant net cash was utilized for financing activities in the year
ended December 31, 1999. Net cash utilized for financing activities was $14.5
million during the year ended December 31, 1998 substantially due to a $15
million voluntary prepayment in 1998 of the credit facility.
The Company's cash and cash equivalents totaled $59.2 million at December
31, 2000. The Company believes that its (a) cash and cash equivalents, (b) cash
flow from operations and (c) existing credit facility (which has an available
unused line of credit of $25 million) will be sufficient to meet its normal
operating, investing and financing requirements in the foreseeable future. In
the event that the Company makes any significant acquisitions or other strategic
investments, it may be required to raise additional funds, through the issuance
of additional debt or equity securities.
The Company's quarterly results have fluctuated in the past, and may
continue to fluctuate. These fluctuations are primarily due to the timing of new
product launches, purchasing patterns of our customers, market acceptance of the
Company's products and the impact of competitive products and pricing. A
substantial portion of the Company's net sales are through wholesale drug
distributors who in turn supply Endo's products to pharmacies, hospitals and
physicians. Accordingly, the Company is potentially subject to a concentration
of credit risk with respect to its trade receivables.
The Company continues to evaluate growth opportunities including strategic
investments, licensing arrangements and acquisitions of product rights or
technologies, which could require significant capital resources.
The Company currently has no operations outside of the United States. As a
result, fluctuations in foreign currency exchange rates do not have a material
effect on the financial statements.
The Company does not believe that inflation had a material adverse effect
on the financial statements for the periods presented.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for
Derivative Instruments and Hedging Activities, which is effective for all fiscal
years beginning after June 15, 1999. SFAS 133, as amended by SFAS 137 and SFAS
138, establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. All derivatives, whether designated in hedging relationships
or not, will be required to be recorded on the balance sheet at fair value. If
the derivative is designated in a fair value hedge, the changes in the fair
value of the derivative and the hedged item will be recognized in earnings. If
the derivative is designated as a cash flow hedge, changes in the fair value of
the derivative will be recorded in other comprehensive income (OCI) and will be
recognized in the income statement when the hedged item affects earnings. SFAS
133 defines new requirements for designation and documentation of hedging
relationships as well as on going effectiveness assessments in order to use
hedge accounting. A derivative that does not qualify as a hedge will be marked
to fair value through earnings.
Effective January 1, 2001, the Company recorded $228,000 as an accumulated
transition adjustment as a reduction to earnings relating to fair value hedges.
In December 1999, the SEC issued Staff Accounting Bulletin, SAB 101,
entitled "Revenue Recognition in Financial Statements" as amended, effective as
of October 1, 2000, which summarizes the SEC's views in applying generally
accepted accounting principles to revenue recognition. The adoption of this
guideline had no effect on the Company's financial statements.
In March 2000, the FASB issued Financial Accounting Series Interpretation
No. 44 entitled "Accounting for Certain Transactions involving Stock
Compensation," which provides clarification to Accounting Principles Board
Opinion No. 25 (APB No. 25), "Accounting for Stock Issued to Employees." The
adoption of this interpretation had no effect on the Company's financial
statements.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary market risk exposure is to changes in interest rates
(LIBOR) on its variable rate borrowings. The Company does not utilize derivative
financial instruments for trading purposes and holds no derivative financial
instruments that could expose the Company to significant market risk. The
Company monitors interest rates and enters into interest rate agreements as
considered appropriate. To manage a portion of its exposure to fluctuations in
interest rates, the Company has entered into an interest rate cap agreement with
a notional amount of $70.0 million. The interest rate cap agreement sets a
maximum LIBOR rate of 8% that the Company will pay on the related notional
amounts.
To the extent that the Company's financial instruments exposes it to
interest rate risk, they are presented in the table below. The table presents
principal cash flows and related interest rates by year of maturity for the
Company's term loans, notes payable and interest rate cap as of December 31,
2000 and December 31, 1999. You should read Notes 6 and 7 to the Company's
consolidated financial statements for the year ended December 31, 2000, together
with the tables below.
SCHEDULE OF INTEREST RATE SENSITIVE ASSETS AND LIABILITIES AT DECEMBER 31, 2000
(DOLLARS IN THOUSANDS)
YEAR OF MATURITY
-------------------------------------------------- TOTAL DUE FAIR VALUE
2001 2002 2003 2004 THEREAFTER AT MATURITY AT 12/31/00
------- ------- ------- ------- ---------- ----------- -----------
INTEREST RATE SENSITIVE
LIABILITIES:
SHORT-TERM AND VARIABLE RATE
BORROWINGS
Tranche A term loan................ $18,821 $16,140 $ 34,961 $ 34,961
Average interest rate............ 7.75% 7.75% 7.75%
Tranche B term loan................ 17,550 807 $37,121 $43,576 99,054 99,054
Average interest rate............ 8.75% 8.75% 8.75% 8.75% 8.75%
------- ------- ------- ------- -------- --------
Total.............................. 36,371 16,947 37,121 43,576 134,015 134,015
FIXED-RATE BORROWINGS
Acquisition Note Payable........... 3,889 3,889 3,308
Average interest rate............ 9.75% 9.75%
Other Notes Payable................ 69,000 69,000 61,202
Average interest rate............ 7.23% 7.23%
------- ------- ------- ------- -------- --------
Total interest rate sensitive
liabilities...................... $36,371 $89,836 $37,121 $43,576 $206,904 $198,525
======= ======= ======= ======= ======== ========
Weighted average interest rate..... 8.23% 7.45% 8.75% 8.75% 8.09%
======= ======= ======= ======= ========
INTEREST RATE INSTRUMENTS:
Interest rate cap................ $ 311
=======
Cap rate......................... 8.00%
=======
25
27
SCHEDULE OF INTEREST RATE SENSITIVE ASSETS AND LIABILITIES AT DECEMBER 31, 1999
(DOLLARS IN THOUSANDS)
YEAR OF MATURITY
-------------------------------------------------- TOTAL DUE FAIR VALUE
2000 2001 2002 2003 THEREAFTER AT MATURITY AT 12/31/99
------- ------- ------- ------- ---------- ----------- -----------
INTEREST RATE SENSITIVE
LIABILITIES:
SHORT-TERM AND VARIABLE RATE
BORROWINGS
Tranche A term loan................ $12,040 $15,538 $19,422 $ 47,000 $ 47,000
Average interest rate............ 8.40% 8.40% 8.40% 8.40%
Tranche B term loan................ 3,945 971 971 $44,672 $52,441 103,000 103,000
Average interest rate............ 8.90% 8.90% 8.90% 8.90% 8.90% 8.90%
------- ------- ------- ------- ------- -------- --------
Total.............................. 15,985 16,509 20,393 44,672 52,441 150,000 150,000
FIXED-RATE BORROWINGS
Acquisition Note Payable........... 3,889 3,889 3,002
Average interest rate............ 9.75% 9.75%
Other Notes Payable................ 46,000 46,000 38,201
Average interest rate............ 7.00% 7.00%
------- ------- ------- ------- ------- -------- --------
Total interest rate sensitive
liabilities...................... $15,985 $16,509 $70,282 $44,672 $52,441 $199,889 $191,203
======= ======= ======= ======= ======= ======== ========
INTEREST RATE INSTRUMENTS:
Interest rate cap................ $ 50
=======
Cap rate......................... 8.00%
=======
The most significant changes to interest rate sensitive assets and
liabilities were increases in interest rates from 1999 to 2000, and additional
notes issued during 2000.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is contained in the financial
statements set forth in Item 14(a) under the caption "Consolidated Financial
Statements" as part of this Form 10-K Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
The information concerning directors of the Company required under this
Item is incorporated by reference from the Company's definitive information
statement, filed pursuant to Regulation 14C relating to its Annual Meeting and
written consent in lieu thereof (the "2001 Information Statement").
EXECUTIVE OFFICERS
The information concerning executive officers of the Company required under
this item is provided under Item 4A of this Form 10-K Annual Report.
ITEM 11. EXECUTIVE COMPENSATION
The information required under this Item is incorporated herein by
reference from the Company's 2001 Information Statement.
26
28
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required under this Item is incorporated herein by
reference from the Company's 2001 Information Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required under this Item is incorporated herein by
reference from the Company's 2001 Information Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Annual Report on Form 10-K
1. Consolidated Financial Statements: (See accompanying Index to
Consolidated Financial Statements).
2. Consolidated Financial Statement Schedule:
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(DOLLARS IN THOUSANDS)
BALANCE AT BALANCE
BEGINNING OF AT END OF
PERIOD ADDITIONS DEDUCTIONS(1) OTHER PERIOD
------------ --------- -------------- ----- ---------
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Year Ended December 31, 1998.................. $181 $ 141 $ (7) -- $315
==== ====== ======= == ====
Year Ended December 31, 1999.................. $315 $ 150 $ (21) -- $444
==== ====== ======= == ====
Year Ended December 31, 2000.................. $444 $1,128 $(1,057) -- $515
==== ====== ======= == ====
- ---------------
(1) Accounts written-off.
3. Exhibits:
EXHIBIT
NO. TITLE
- ------- -----
2.1 Amended and Restated Agreement and Plan of Merger, dated as
of March 3, 2000 (the "Merger Agreement"), by and among Endo
Pharmaceuticals Holdings Inc. ("Endo"), Endo Inc. and Algos
Pharmaceutical Corporation ("Algos") (incorporated herein by
reference to Exhibit 2.1 of the Registration Statement on
Form S-4 of the Registrant (Registration No. 333-39040) (the
"Registration Statement"), filed with the Securities and
Exchange Commission (the "Commission") on June 9, 2000)
2.2 Amendment, dated as of April 17, 2000, to the Merger
Agreement, by and between Endo, Endo Inc. and Algos
(incorporated herein by reference to Exhibit 2.2 of the
Registration Statement filed with the Commission on June 9,
2000)
2.3 Asset Purchase Agreement, dated as of August 27, 1997, by
and between Endo Pharmaceuticals Inc. ("Endo
Pharmaceuticals") and The DuPont Merck Pharmaceutical
Company ("DuPont Merck Pharmaceutical") (incorporated herein
by reference to Exhibit 2.3 of the Registration Statement
filed with the Commission on June 9, 2000)
3.1 Amended and Restated Certificate of Incorporation of Endo
(incorporated herein by reference to Exhibit 3.1 of the Form
10-Q for the Quarter ended June 30, 2000 filed with the
Commission on August 15, 2000)
27
29
EXHIBIT
NO. TITLE
- ------- -----
3.2 Amended and Restated By-laws of Endo (incorporated herein by
reference to Exhibit 3.2 of the Form 10-Q for the Quarter
ended June 30, 2000 filed with the Commission on August 15,
2000)
4.1 Amended and Restated Executive Stockholders Agreement, dated
as of July 14, 2000, by and among Endo, Endo Pharma LLC
("Endo LLC"), Kelso Investment Associates V, L.P. ("KIA V"),
Kelso Equity Partners V, L.P. ("KEP V") and the Management
Stockholders (as defined therein) (incorporated herein by
reference to Exhibit 4.1 of the Form 10-Q for the Quarter
ended June 30, 2000 filed with the Commission on August 15,
2000)
4.2 Amended and Restated Employee Stockholders Agreement, dated
as of July 14, 2000, by and among Endo, Endo LLC, KIA V, KEP
V and the Employee Stockholders (as defined therein)
(incorporated herein by reference to Exhibit 4.2 of the Form
10-Q for the Quarter ended June 30, 2000 filed with the
Commission on August 15, 2000)
4.3 Form of Stock Certificate of Endo Common Stock (incorporated
herein by reference to Exhibit 4.3 of the Form 10-Q for the
Quarter ended June 30, 2000 filed with the Commission on
August 15, 2000)
4.4 Registration Rights Agreement, dated as of July 17, 2000, by
and between Endo and Endo LLC (incorporated herein by
reference to Exhibit 4.4 of the Form 10-Q for the Quarter
ended June 30, 2000 filed with the Commission on August 15,
2000)
10.1 Endo Warrant Agreement, dated as of July 17, 2000, by and
between Endo and United States Trust Company of New York
(incorporated herein by reference to Exhibit 10.1 of the
Form 10-Q for the Quarter ended June 30, 2000 filed with the
Commission on August 15, 2000)
10.2 Algos Warrant Agreement, dated as of July 17, 2000, by and
between Endo and United States Trust Company of New York
(incorporated herein by reference to Exhibit 10.2 of the
Form 10-Q for the Quarter ended June 30, 2000 filed with the
Commission on August 15, 2000)
10.3 Form of Series A Warrant to Purchase Shares of Common Stock
and Warrants of Endo (incorporated herein by reference to
Exhibit 10.3 of the Registration Statement filed with the
Commission on June 9, 2000)
10.4 Letter Agreement, dated as of November 26, 1999, by and
among Algos, Endo, KIA V and KEP V (incorporated herein by
reference to Exhibit 10.4 of the Registration Statement
filed with the Commission on June 9, 2000)
10.5 Tax Sharing Agreement, dated as of July 17, 2000, by and
among Endo, Endo Inc. and Endo LLC (incorporated herein by
reference to Exhibit 10.5 of the Form 10-Q for the Quarter
ended June 30, 2000 filed with the Commission on August 15,
2000)
10.6 Agreement, dated as of July 17, 2000, by and between Endo
and Endo LLC (incorporated herein by reference to Exhibit
10.6 of the Form 10-Q for the Quarter ended June 30, 2000
filed with the Commission on August 15, 2000)
10.7 Credit Agreement, dated as of August 26, 1997, by and
between Endo Pharmaceuticals and The Chase Manhattan Bank
(incorporated herein by reference to Exhibit 10.7 of the
Registration Statement filed with the Commission on June 9,
2000)
10.8 [Intentionally Omitted.]
10.9 [Intentionally Omitted.]
10.10 Sole and Exclusive License Agreement, dated as of November
23, 1998, by and between Endo Pharmaceuticals and Hind
Health Care, Inc. (incorporated herein by reference to
Exhibit 10.10 of the Registration Statement filed with the
Commission on June 9, 2000)
10.11 Analgesic License Agreement, dated as of October 27, 1997,
by and among Endo Pharmaceuticals, Endo Laboratories, LLC
and DuPont Merck Pharmaceutical (incorporated herein by
reference to Exhibit 10.11 of the Registration Statement
filed with the Commission on June 9, 2000)
28
30
EXHIBIT
NO. TITLE
- ------- -----
10.12 Anti-Epileptic License Agreement, dated as of October 27,
1997, by and among Endo Pharmaceuticals, Endo Laboratories,
LLC and DuPont Merck Pharmaceutical (incorporated herein by
reference to Exhibit 10.12 of the Registration Statement
filed with the Commission on June 9, 2000)
10.13 Product Development, Manufacturing and Supply Agreement,
dated as of October 29, 1999, by and between Endo
Pharmaceuticals and Lavipharm Laboratories Inc.
(incorporated herein by reference to Exhibit 10.13 of the
Registration Statement filed with the Commission on June 9,
2000)
10.14 Supply and Manufacturing Agreement, dated as of November 23,
1998, by and between Endo Pharmaceuticals and Teikoku
Seiyaku Co., Ltd (incorporated herein by reference to
Exhibit 10.14 of the Registration Statement filed with the
Commission on June 9, 2000)
10.15 Supply Agreement, dated as of July 1, 1998, by and between
Endo Pharmaceuticals and Mallinckrodt Inc. ("Mallinckrodt")
(incorporated herein by reference to Exhibit 10.15 of the
Registration Statement filed with the Commission on June 9,
2000)
10.16 Supply Agreement for Bulk Narcotics Raw Materials, dated as
of July 1, 1998, by and between Endo Pharmaceuticals and
Mallinckrodt (incorporated herein by reference to Exhibit
10.16 of the Registration Statement filed with the
Commission on June 9, 2000)
10.17 Manufacture and Supply Agreement, dated as of August 26,
1997, by and among Endo Pharmaceuticals, DuPont Merck
Pharmaceutical and DuPont Merck Pharma (incorporated herein
by reference to Exhibit 10.17 of the Registration Statement
filed with the Commission on June 9, 2000)
10.18 Strategic Alliance Agreement, dated as of September 17,
1997, by and between Endo Pharmaceuticals and Penwest
Pharmaceuticals Group (incorporated herein by reference to
Exhibit 10.18 of the Registration Statement filed with the
Commission on June 9, 2000)
10.19 Agreement, dated as of February 1, 2000, by and between Endo
Pharmaceuticals and Livingston Healthcare Services Inc.
(incorporated herein by reference to Exhibit 10.19 of the
Registration Statement filed with the Commission on June 9,
2000)
10.20 Medical Affairs Support Services Agreement, dated as of June
1, 1999, by and between Endo Pharmaceuticals and Kunitz and
Associates, Inc. (incorporated herein by reference to
Exhibit 10.20 of the Registration Statement filed with the
Commission on June 9, 2000)
*10.21 Endo Pharmaceuticals Holdings Inc. 2000 Stock Incentive Plan
(incorporated herein by reference to Exhibit 10.21 of the
Quarterly Report on Form 10-Q for the Quarter Ended
September 30, 2000)
*10.22 Endo LLC Amended and Restated 1997 Employee Stock Option
Plan (incorporated herein by reference to Exhibit 10.22 of
the Quarterly Report on Form 10-Q for the Quarter Ended
September 30, 2000)
*10.23 Endo LLC Amended and Restated 1997 Executive Stock Option
Plan (incorporated herein by reference to Exhibit 10.23 of
the Quarterly Report on Form 10-Q for the Quarter Ended
September 30, 2000)
*10.24 Endo LLC 2000 Amended and Restated Supplemental Employee
Stock Option Plan (incorporated herein by reference to
Exhibit 10.24 of the Quarterly Report on Form 10-Q for the
Quarter Ended September 30, 2000)
*10.25 Endo LLC 2000 Amended and Restated Supplemental Executive
Stock Option Plan (incorporated herein by reference to
Exhibit 10.25 of the Quarterly Report on Form 10-Q for the
Quarter Ended September 30, 2000)
29
31
EXHIBIT
NO. TITLE
- ------- -----
*10.26 Employment Agreement, dated as of July 17, 2000, by and
between Endo and John W. Lyle (incorporated herein by
reference to Exhibit 10.26 of the Form 10-Q for the Quarter
ended June 30, 2000)
*10.27 Amended and Restated Employment Agreement, dated as of April
26, 2000, by and between Endo Pharmaceuticals and Carol A.
Ammon (incorporated herein by reference to Exhibit 10.27 of
the Quarterly Report on Form 10-Q for the Quarter Ended
September 30, 2000)
*10.28 Amended and Restated Employment Agreement, dated as of April
26, 2000, by and between Endo Pharmaceuticals and Jeffrey R.
Black (incorporated herein by reference to Exhibit 10.28 of
the Quarterly Report on Form 10-Q for the Quarter Ended
September 30, 2000)
*10.29 Amended and Restated Employment Agreement, dated as of April
26, 2000, by and between Endo Pharmaceuticals and David
Allen Harvey Lee, MD, Ph.D. (incorporated herein by
reference to Exhibit 10.29 of the Quarterly Report on Form
10-Q for the Quarter Ended September 30, 2000)
*10.30 Amended and Restated Employment Agreement, dated as April
26, 2000, by and between Endo Pharmaceuticals and Mariann T.
MacDonald (incorporated herein by reference to Exhibit 10.30
of the Quarterly Report on Form 10-Q for the Quarter Ended
September 30, 2000)
10.31 Separation and Release Agreement, dated as of March 22,
2000, by and between Endo Pharmaceuticals, Endo and Osagie
O. Imasogie (incorporated herein by reference to Exhibit
10.31 of the Registration Statement filed with the
Commission on June 9, 2000)
10.32 Separation and Release Agreement, dated as of April 20,
2000, by and between Endo Pharmaceuticals, Endo and Louis J.
Vollmer (incorporated herein by reference to Exhibit 10.32
of the Registration Statement filed with the Commission on
June 9, 2000)
10.33 Office Lease, dated as of August 26, 1997, by and between
Endo Pharmaceuticals and Northstar Development Company
(incorporated herein by reference to Exhibit 10.33 of the
Registration Statement filed with the Commission on June 9,
2000)
10.34 Lease Agreement, dated as of May 5, 2000, by and between
Endo Pharmaceuticals and Painters' Crossing One Associates,
L.P. (incorporated herein by reference to Exhibit 10.34 of
the Registration Statement filed with the Commission on June
9, 2000)
*10.35 Employment Agreement, dated as of September 5, 2000, by and
between Endo and Caroline E. Berry (incorporated herein by
reference to Exhibit 10.35 of the Quarterly Report on Form
10-Q for the Quarter Ended September 30, 2000)
*10.36 Employment Agreement, dated as of August 11, 2000, by and
between Endo and Peter A. Lankau (incorporated herein by
reference to Exhibit 10.36 of the Quarterly Report on Form
10-Q for the Quarter Ended September 30, 2000)
10.37 License Agreement, dated as of August 16, 1993, by and
between Endo Inc. (f/k/a Algos Pharmaceutical Corporation)
and The Medical College of Virginia (incorporated herein by
reference to Exhibit 10.4.1 of the registration statement on
Form S-1 of Algos Pharmaceutical Corporation declared
effective on September 25, 1996)
10.38 Lease Agreement, dated as of March 27, 1997, by and between
Endo Inc. (f/k/a Algos Pharmaceutical Corporation) and
Commercial Realty & Resources Corp. (incorporated herein by
reference to Exhibit 10.5 of the Quarterly Report of Algos
Pharmaceutical Corporation on Form 10-Q for the Quarter
Ended March 31, 1997)
30
32
EXHIBIT
NO. TITLE
- ------- -----
21 Subsidiaries of the Company
24 Power of Attorney
- ---------------
* A management contract or compensatory plan or arrangement required to be filed
as an Exhibit pursuant to Item 14(c) of Form 10-K.
(b) Reports on Form 8-K.
On October 11, 2000 and October 25, 2000, the Company filed Forms 8-K with
respect to press releases that the Company issued. No financial statements were
filed in connection with either such Form 8-K.
31
33
SIGNATURES
Pursuant to the requirements of the Securities Exchange of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ENDO PHARMACEUTICALS HOLDINGS INC.
(Registrant)
/s/ CAROL A. AMMON
--------------------------------------
Name: Carol A. Ammon
Title: President and Chief Executive
Officer
/s/ JEFFREY R. BLACK
--------------------------------------
Name: Jeffrey R. Black
Title:Senior Vice President and Chief
Financial Officer
Date: March 29, 2001
32
34
POWER OF ATTORNEY
Each of the undersigned, hereby constitutes and appoints each of Carol A.
Ammon, James J. Connors, II, Jeffrey R. Black and Stanley de J. Osborne to be
his or her true and lawful attorneys-in-fact and agents, with full power of each
to act alone, and to sign for the undersigned and in each of their respective
names in any and all capacities stated below, this Annual Report on Form 10-K
(and any amendments hereto) and to file the same, with exhibits hereto and
thereto and other documents in connection herewith and therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact, or his or her substitute or substitutes, may do
or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report and Power of Attorney have been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ CAROL A. AMMON Chief Executive Officer, March 29, 2001
- --------------------------------------------------- President and Director
Carol A. Ammon
* Director March 29, 2001
- ---------------------------------------------------
Michael B. Goldberg
* Director March 29, 2001
- ---------------------------------------------------
Michael Hyatt
* Director March 29, 2001
- ---------------------------------------------------
Roger H. Kimmel
* Director March 29, 2001
- ---------------------------------------------------
Frank J. Loverro
* Director March 29, 2001
- ---------------------------------------------------
John W. Lyle
* Director March 29, 2001
- ---------------------------------------------------
Michael W. Mitchell
* Director March 29, 2001
- ---------------------------------------------------
Joseph T. O'Donnell, Jr.
* Director March 29, 2001
- ---------------------------------------------------
David I. Wahrhaftig
*By: /s/ JEFFREY R. BLACK Attorney-in-fact
---------------------------------------------
Jeffrey R. Black
33
35
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets as of December 31, 2000 and
1999...................................................... F-3
Consolidated Statements of Operations for the Years Ended
December 31, 2000, 1999 and 1998.......................... F-4
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 2000, 1999 and 1998.............. F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2000, 1999 and 1998.......................... F-6
Notes to Consolidated Financial Statements for the Years
Ended December 31, 2000, 1999 and 1998.................... F-7
F-1
36
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Endo Pharmaceuticals Holdings Inc.
We have audited the accompanying consolidated balance sheets of Endo
Pharmaceuticals Holdings Inc. and subsidiaries as of December 31, 2000 and 1999,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended December 31, 2000.
Our audits also included the financial statement schedule listed in Item 14(a)2.
These financial statements and the financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and the financial statement schedule based
on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Endo Pharmaceuticals Holdings
Inc. and subsidiaries as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000 in conformity with accounting principles generally accepted in
the United States of America. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Philadelphia, Pennsylvania
February 23, 2001
F-2
37
ENDO PHARMACEUTICALS HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
(IN THOUSANDS, EXCEPT SHARE DATA)
2000 1999
--------- --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 59,196 $ 22,028
Accounts receivable, net of allowance of $515 and $444 at
December 31, 2000 and 1999, respectively............... 78,312 62,254
Inventories............................................... 29,746 21,269
Prepaid expenses.......................................... 3,496 3,356
Deferred income taxes..................................... 2,304 9,520
--------- --------
Total current assets.............................. 173,054 118,427
--------- --------
PROPERTY AND EQUIPMENT, Net................................. 5,742 5,712
GOODWILL AND OTHER INTANGIBLES, Net of amortization of
$41,468 and $15,625 at December 31, 2000 and 1999,
respectively.............................................. 284,560 192,081
DEFERRED INCOME TAXES....................................... 736 8,636
RESTRICTED CASH............................................. 150
OTHER ASSETS................................................ 3,598 4,580
--------- --------
TOTAL ASSETS................................................ $ 467,840 $329,436
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 15,855 $ 19,185
Accrued expenses.......................................... 45,520 33,641
Income taxes payable...................................... 2,549 75
Current portion of long-term debt......................... 36,371 15,985
--------- --------
Total current liabilities......................... 100,295 68,886
--------- --------
LONG-TERM DEBT, Less current portion........................ 162,154 175,218
OTHER LIABILITIES........................................... 7,218 6,745
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 par value; 40,000,000 shares
authorized; none issued
Common Stock, $.01 par value; 175,000,000 shares
authorized; 89,138,950
and 71,323,644 shares issued in 2000 and 1999,
respectively.......................................... 891 713
Additional paid-in capital................................ 385,955 109,707
Accumulated deficit....................................... (188,673) (31,833)
--------- --------
Total Stockholders' Equity........................ 198,173 78,587
--------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $ 467,840 $329,436
========= ========
See notes to consolidated financial statements.
F-3
38
ENDO PHARMACEUTICALS HOLDINGS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2000 1999 1998
---------- ---------- ----------
NET SALES.............................................. $ 197,429 $ 138,546 $ 108,370
COST OF SALES.......................................... 63,041 58,263 54,731
---------- ---------- ----------
GROSS PROFIT........................................... 134,388 80,283 53,639
---------- ---------- ----------
COSTS AND EXPENSES:
Selling, general and administrative.................. 56,537 42,921 25,540
Research and development............................. 26,012 9,373 5,893
Depreciation and amortization........................ 27,624 8,309 7,373
Compensation related to stock options -- primarily
selling, general and administrative............... 15,300
Purchased in-process research and development........ 133,200
Merger and other related costs....................... 1,583
Separation benefits.................................. 22,034
---------- ---------- ----------
OPERATING (LOSS) INCOME................................ (147,902) 19,680 14,833
---------- ---------- ----------
INTEREST EXPENSE, Net of interest income of $2,700,
$1,065 and $838, respectively........................ 15,119 14,347 14,451
---------- ---------- ----------
(LOSS) INCOME BEFORE INCOME TAX (BENEFIT).............. (163,021) 5,333 382
---------- ---------- ----------
INCOME TAX (BENEFIT)................................... (6,181) 2,073 181
---------- ---------- ----------
NET (LOSS) INCOME...................................... $ (156,840) $ 3,260 $ 201
========== ========== ==========
NET (LOSS) INCOME PER SHARE
Basic and Diluted.................................... $ (1.97) $ .05 $ 0.00
========== ========== ==========
Weighted average shares (Basic and Diluted).......... 79,454,223 71,332,266 71,307,302
========== ========== ==========
See notes to consolidated financial statements.
F-4
39
ENDO PHARMACEUTICALS HOLDINGS INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(IN THOUSANDS, EXCEPT SHARE DATA)
COMMON ADDITIONAL TOTAL
NUMBER STOCK AT PAID-IN ACCUMULATED STOCKHOLDERS'
OF SHARES PAR VALUE CAPITAL DEFICIT EQUITY
---------- --------- ---------- ----------- -------------
BALANCE, DECEMBER 31, 1997.............. 71,051,066 $710 $109,290 $ (35,294) $ 74,706
Issuance of Common Stock................ 291,310 3 448 451
Net Income.............................. 201 201
---------- ---- -------- --------- ---------
BALANCE, DECEMBER 31, 1998.............. 71,342,376 713 109,738 (35,093) 75,358
Repurchase of Common Stock -- at cost... (18,732) (31) (31)
Net income.............................. 3,260 3,260
---------- ---- -------- --------- ---------
BALANCE, DECEMBER 31, 1999.............. 71,323,644 713 109,707 (31,833) 78,587
Exercise of stock options............... 4,780 7 7
Compensation related to stock options --
separation benefits................... 20,782 20,782
Issuance of Common Stock................ 17,810,526 178 240,159 240,337
Compensation related to stock options... 15,300 15,300
Net loss................................ (156,840) (156,840)
---------- ---- -------- --------- ---------
BALANCE, DECEMBER 31, 2000.............. 89,138,950 $891 $385,955 $(188,673) $ 198,173
========== ==== ======== ========= =========
See notes to consolidated financial statements.
F-5
40
ENDO PHARMACEUTICALS HOLDINGS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(IN THOUSANDS)
2000 1999 1998
--------- -------- --------
OPERATING ACTIVITIES:
Net (loss) income....................................... $(156,840) $ 3,260 $ 201
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation and amortization........................ 27,624 8,309 7,373
Purchased in-process research and development........ 133,200
Accretion of promissory notes........................ 3,579 2,001 675
Deferred income taxes................................ (8,732) 1,998 164
Amortization of deferred financing costs............. 1,234 1,199 1,283
Non-cash portion of separation benefits.............. 20,782
Compensation related to stock options................ 15,300
Other noncash charges................................ 133
Changes in assets and liabilities which provided (used)
cash:
Accounts receivable.................................. (15,960) (29,245) (11,886)
Inventories.......................................... (8,477) (6,808) (1,368)
Other assets......................................... (238) (3,533)
Accounts payable..................................... (6,792) 7,234 5,099
Accrued expenses..................................... 27,367 28,958 18,758
Income taxes payable................................. 2,549
Other liabilities.................................... 473 393 500
--------- -------- --------
Net cash provided by operating activities.......... 35,069 13,766 20,932
--------- -------- --------
INVESTING ACTIVITIES:
Purchase of property and equipment...................... (1,534) (2,124) (1,487)
Acquisition of licensing rights......................... (6,950) (2,050)
Net cash acquired in the Merger......................... 19,611
--------- -------- --------
Net cash provided by (used in) investing
activities...................................... 18,077 (9,074) (3,537)
--------- -------- --------
FINANCING ACTIVITIES:
Issuance of Common Stock................................ 451
Exercise of stock options............................... 7
Repurchase of Common Stock.............................. (31)
Repayments of long-term debt............................ (15,985) (15,000)
--------- -------- --------
Net cash used in financing activities.............. (15,978) (31) (14,549)
--------- -------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS................. 37,168 4,661 2,846
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD............ 22,028 17,367 14,521
--------- -------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................. $ 59,196 $ 22,028 $ 17,367
--------- -------- --------
SUPPLEMENTAL INFORMATION:
Interest paid........................................... $ 13,205 $ 12,194 $ 14,401
--------- -------- --------
Income taxes paid....................................... $ 75 $ 17
--------- --------
SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Promissory note issued under Manufacturing and Supply
Agreement............................................ $ 19,727 $ 18,655 $ 17,397
--------- -------- --------
Fair value of net assets acquired in the Merger, net of
cash................................................. $ 228,941
---------
See notes to consolidated financial statements.
F-6
41
ENDO PHARMACEUTICALS HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
1. ORGANIZATION AND ACQUISITIONS
Endo Pharmaceuticals Holdings Inc. (the "Company"), through its wholly
owned subsidiaries, Endo Pharmaceuticals Inc. ("Endo") and Endo Inc., is engaged
in the sales, marketing, research and development of branded and generic
pharmaceutical products primarily in the United States.
On August 26, 1997, Endo commenced operations by acquiring certain branded
and generic pharmaceutical products, related rights and certain assets of Dupont
Pharmaceuticals Company ("Dupont", formerly The Dupont Merck Pharmaceutical
Company, Dupont Merck Pharma and Endo Laboratories, L.L.C.) (the "Acquisition").
The purchase price for the Acquisition of approximately $277 million (including
approximately $15 million in transaction fees) was financed with approximately
$275 million in cash from (i) borrowings of $165 million under a credit facility
with a group of banks and (ii) the issuance of $110 million of Common Stock and
Class A Common Stock of Endo for cash to certain affiliates and designees of
Kelso & Company, Inc. ("Kelso"), management and certain other investors; and
(iii) the issuance of a promissory note to Dupont of approximately $2 million.
The Acquisition was accounted for using the purchase method of accounting.
In accordance with the purchase method of accounting, the purchase price was
allocated to the underlying assets of the business acquired based on their
estimated fair values at the date of acquisition. The final value of acquired
in-process research and development was $46 million and charged to expense at
the date of the Acquisition. The excess of the purchase price over the tangible
and identifiable intangible assets was allocated to goodwill. In consideration
of services provided by an individual prior to the Acquisition, such individual
was granted contingent consideration of $2 million only upon the occurrence of
certain events. This amount will be expensed in the period the contingency is
resolved.
The final allocation of the purchase price was as follows (in thousands):
Inventories................................................. $ 23,642
Property and equipment...................................... 3,423
Acquired in-process research and development................ 46,000
Goodwill.................................................... 196,706
Debt issuance costs......................................... 7,190
--------
Total purchase price........................................ $276,961
========
The Acquisition included various on-going projects to research and develop
innovative new products primarily for pain management. As a result, a portion of
the total purchase price for the Acquisition was allocated to these acquired
in-process research and development projects ("IPRD"). At the time of the
Acquisition, the total number of projects acquired and in various phases of
development was 15. The development program for a new pharmaceutical substance
involves several different phases prior to drug application. Generic and branded
Phase II projects ranged from 20% to 50% completed at the time of the
Acquisition. Branded Phase III projects were approximately 90% completed at the
time of the Acquisition. Drug application must be approved prior to marketing a
new drug. Despite the Company's commitment to completion of the research and
development projects, many factors may arise which could cause a project to be
withdrawn, including a drug being shown as ineffective during the development
process. Upon withdrawal, it is unlikely that the development activities will
have alternative use.
The methodology used by the Company in determining the value of IPRD was:
1) identify the various on-going projects that the Company will prioritize and
continue; 2) project net future cash flows of the identified projects based on
current demand and pricing assumptions, less the anticipated expenses to
complete the development program, drug application, and launch the product
(significant net cash inflows
F-7
42
ENDO PHARMACEUTICALS HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
were projected to commence in 1999); 3) discount these cash flows based on a
risk-adjusted discount rate (17%); and 4) apply the estimated percentage of
completion to the discounted cash flow for each individual project. The discount
rate was determined after considering various uncertainties at the time of the
Acquisition, primarily the stage of project completion.
A summary of the various projects included in IPRD follows (dollars in
thousands). Projects included as IPRD and reflected in the below schedule
include Percocet(R) 2.5/325, Percocet(R) 7.5/500, Percocet(R) 10.0/650,
Zydone(R) and Morphine Sulfate Extended Release Tablets, all of which have been
subsequently completed and commercially launched by the Company. There can be no
assurance that other projects acquired and included in IPRD will prove
successful.
NUMBER OF ESTIMATED
PROJECTS VALUE
--------- ---------
Generic projects -- Phase II........................... 9 $13,000
Branded projects -- Phase II........................... 4 21,000
Branded projects -- Phase III.......................... 2 12,000
-- -------
15 $46,000
== =======
On November 18, 1997, the Company, a Delaware corporation, was established
for the sole purpose of holding all of the shares of capital stock of Endo. As
of December 1, 1998, the stockholders of Endo became the stockholders of the
Company, owning the same interests in the Company that they formerly owned in
Endo.
On November 19, 1999, the Company formed Endo Inc. as a wholly owned
subsidiary to effect the acquisition of Algos Pharmaceutical Corporation
("Algos"). The stock of Endo and the stock of Endo Inc. are the only assets of
the Company, and the Company has no other operations or business.
On July 14, 2000, Endo Pharma LLC was formed to ensure that the stock
options granted pursuant to the 1997 Employee Stock Option Plan and the 1997
Executive Stock Option Plan (collectively, as amended and restated, the "Endo
Pharma LLC 1997 Stock Option Plans") diluted only the pre-Merger holders of Endo
Common Stock (see Note 12). Subsequent to the Merger, only currently outstanding
shares of Common Stock of the Company held by Endo Pharma LLC will be issued
upon the exercise of these stock options. Because Endo Pharma LLC, and not the
Company, will provide the shares issued upon the exercise of the options, the
Company has entered into a tax sharing agreement with Endo Pharma LLC under
which the Company will pay to Endo Pharma LLC the amount of the tax benefits it
receives as a result of the exercise of these stock options into shares of
Common Stock held by Endo Pharma LLC for the years in which these tax benefits
arise. No payments have been made or accrued for the year ended December 31,
2000.
On November 29, 1999, the Company and Algos Pharmaceutical Corporation
("Algos") announced that they had entered into a definitive merger agreement
providing for the merger (the "Merger") of Algos into Endo Inc., a newly formed,
wholly owned subsidiary of the Company. The Merger, which was completed on July
17, 2000, has been accounted for by the Company using the purchase method of
accounting. The assets acquired and liabilities assumed of Algos were recorded
at their fair values at the date of acquisition based on an independent
appraisal. The assets acquired and liabilities assumed, results of operations
and cash flows of Algos have been included in the Company's financial statements
prospectively for reporting periods beginning July 17, 2000.
The total purchase price of $248.6 million (including approximately $7.0
million in transaction fees) was determined using an average closing price of
the Algos common stock for a reasonable period of time before and after the
April 17, 2000 measurement date of $13.54 and the 17,832,106 common shares and
common share equivalents outstanding at the date of the Merger (including 21,580
outstanding Series A Warrants). The allocation of the fair value of the assets
acquired and liabilities assumed includes an allocation to
F-8
43
ENDO PHARMACEUTICALS HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
workforce in place of $11.9 million which will be amortized over its estimated
useful life of two years, patents of $3.2 million which will be amortized over
their estimated useful lives of 17 years and goodwill of $104.8 million which
will be amortized over its estimated useful life of three years. In addition,
the Company recorded estimated liabilities for exit costs of $3.1 million
related to non-cancelable lease payments and $1.1 million for employee
relocation costs. The balance of the estimated liabilities for exit costs is
unchanged as of December 31, 2000. Also, as a result of the Merger, it was
determined that the utilization of the Company's federal deferred tax assets is
uncertain. Accordingly, a valuation allowance has been recorded to fully reserve
its federal deferred tax assets.
The Merger included various on-going projects to research and develop
innovative new products for pain management. As a result, the allocation of the
fair value of the assets acquired and liabilities assumed includes an allocation
to purchased in-process research and development ("IPRD") of $133.2 million
which was immediately expensed in the consolidated statement of operations on
the acquisition date. The methodology used by the Company on the acquisition
date in determining the value of IPRD was to: 1) identify the various on-going
projects that the Company will prioritize and continue; 2) project net future
cash flows of the identified projects based on current demand and pricing
assumptions, less the anticipated expenses to complete the development program,
drug application, and launch the products (significant net cash inflows from
MorphiDex(R) were projected in 2003); 3) discount these cash flows based on a
risk-adjusted discount rates ranging from 25% to 33% (weighted average discount
rate of 27%); and 4) apply the estimated percentage of completion to the
discounted cash flow for each individual project ranging from 4% to 81%. The
discount rate was determined after considering various uncertainties at the time
of the Merger, primarily the stage of project completion.
The Company allocated fair value to the three opioid analgesic projects of
Algos: MorphiDex(R), HydrocoDex(TM) and OxycoDex(TM). The development program
for a new pharmaceutical substance involves several different phases prior to
drug application. Drug application must be approved prior to marketing a new
drug. Despite the Company's commitment to completion of the research and
development projects, many factors may arise that could cause a project to be
withdrawn or delayed, including the inability to prove the safety and efficacy
of a drug during the development process. Upon withdrawal, it is unlikely that
the development activities will have alternative use. If these projects are not
successfully developed, the Company's results of operations and financial
position in a future period could be negatively impacted.
The following unaudited pro forma summary presents the net sales, net loss
and net loss per share as if the Merger occurred as of January 1, 1999. This
unaudited pro forma summary has been prepared for comparative purposes only and
is not necessarily indicative of the operating results that the Company would
have achieved had the Merger been completed as of January 1, 1999, or the
operating results that the Company may achieve in the future.
(UNAUDITED)
-------------------------
2000 1999
---------- -----------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
Net sales............................................. $197,429 $ 138,546
Net loss.............................................. $(57,836) $(188,540)
Net loss per share (basic and diluted)................ $ (.65) $ (2.12)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation -- The consolidated financial statements
include the accounts of Endo Pharmaceuticals Holdings Inc. (the "Company") and
subsidiaries. All significant intercompany balances and transactions have been
eliminated.
F-9
44
ENDO PHARMACEUTICALS HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Nature of Operations and Customer and Supplier Concentration -- The
Company, through its wholly owned subsidiaries, is engaged in the marketing and
sales of pharmaceuticals. The Company's sales are substantially through
wholesale drug distributors who in turn supply products to pharmacies, hospitals
and physicians. The Company is potentially subject to a concentration of credit
risk with respect to its trade receivables. Four customers individually
accounted for 26%, 16%, 12% and 10% of net sales in 2000. Three customers
individually accounted for 27%, 20% and 13% of net sales in 1999, and 26%, 21%,
and 14% of net sales in 1998. The Company performs ongoing credit evaluations of
its customers and maintains sufficient allowances for estimated uncollectible
accounts. Generally, the Company does not require collateral from its customers.
The Company has an agreement with DuPont for the manufacture and supply of
substantially all of its existing and new pharmaceutical products (see Note 9).
In the event of any interruption in the manufacture and supply of these products
due to regulatory or other causes, there can be no assurance that the Company
could make alternative arrangements on a timely basis, if at all. Such
interruption could have a material adverse effect on the Company's business,
financial condition and results of operations.
Revenue Recognition -- Revenues are recognized when products are shipped.
Revenues are recorded net of reserves for estimated chargebacks, sales
allowances, returns and losses. The Company's revenue recognition policies are
in accordance with Staff Accounting Bulletin No. 101 ("SAB 101").
Research and Development -- Expenditures for research and development are
expensed as incurred.
Cash and Cash Equivalents -- The Company considers all highly liquid
investments with an original maturity date of three months or less to be cash
equivalents. A bank certificate of deposit that serves as collateral for an
irrevocable letter of credit required by the terms of one of the Company's lease
agreements is included in restricted cash.
Derivative Financial Instruments -- The Company uses an interest rate cap
agreement ("Cap"), to manage its exposure to fluctuations in interest rates.
This Cap is matched with debt and periodic cash payments and is accrued on a net
basis as an adjustment to interest expense. Any fee associated with this
instrument is amortized over its term. (see Recent Accounting Pronouncements).
Inventories -- Inventories are stated at the lower of cost or market. Cost
is determined by the first-in, first-out method. Inventories are comprised
entirely of finished goods.
Property and Equipment -- Property and equipment are stated at cost less
accumulated depreciation. Depreciation is computed over the estimated useful
lives of the related assets on a straight-line basis. Machinery and equipment
are depreciated over three to ten years, computer equipment over three to five
years, and furniture and fixtures over three to seven years. Computer software
and related third-party design, development and implementation fees that benefit
future periods are capitalized and amortized using the straight-line method over
a useful life of three to five years.
License Fees -- The cost of license fees is capitalized and amortized on a
straight-line basis over their estimated useful life of twenty years.
Workforce in Place -- The cost of workforce in place acquired in the Merger
is capitalized and amortized on a straight-line basis over their estimated
useful life of two years.
Patents -- The cost of patents acquired in the Merger is capitalized and
amortized on a straight-line basis over their estimated useful life of seventeen
years.
Goodwill -- Goodwill, which represents the excess of purchase price over
the fair value of net assets acquired, is amortized on a straight-line basis
over its estimated useful life ranging from three to thirty years. The Company
assesses the recoverability and the amortization period of the goodwill by
determining whether the amount can be recovered through undiscounted net cash
flows of the business acquired over the remaining amortization period.
F-10
45
ENDO PHARMACEUTICALS HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Long-Lived Assets -- The Company reviews for the impairment of long-lived
assets whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. An impairment loss would be
recognized when estimated undiscounted future cash flows expected to result from
the use of the asset are less than its carrying amount. Assets are grouped at
the lowest level for which they are identifiable cash flows that are largely
independent from other asset groups. The Company uses the discounted future
expected net cash flows, as its estimate of fair value, to determine the amount
of impairment loss. The Company has not identified any such impairment losses
with respect to long-lived assets for all periods presented.
Marketing Costs -- Marketing costs, including advertising costs, are
expensed as incurred. Such costs were $8.1 million, $9.0 million and $2.6
million for the years ended December 31, 2000, 1999 and 1998.
Deferred Financing Costs -- Costs incurred in connection with the issuance
of debt are deferred and amortized as a component of interest expense over the
term of the related debt using the straight-line method.
Income Taxes -- The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 109, Accounting for
Income Taxes.
Use of Estimates -- The preparation of the Company's financial statements
in conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Segment Information -- The Company reports segment information in
accordance with SFAS No. 131, Disclosures about Segments of an Enterprise and
Related Information. The Company has one reportable segment, pharmaceutical
products.
Recent Accounting Pronouncements -- In June 1998, the Financial Accounting
Standards Board (FASB) issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which is effective for all fiscal years
beginning after June 15, 1999. SFAS 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities. All derivatives, whether
designated in hedging relationships or not, will be required to be recorded on
the balance sheet at fair value. If the derivative is designated in a fair value
hedge, the changes in the fair value of the derivative and the hedged item will
be recognized in earnings. If the derivative is designated as a cash flow hedge,
changes in the fair value of the derivative will be recorded in other
comprehensive income (OCI) and will be recognized in the income statement when
the hedged item affects earnings. SFAS 133 defines new requirements for
designation and documentation of hedging relationships as well as on going
effectiveness assessments in order to use hedge accounting. A derivative that
does not qualify as a hedge will be marked to fair value through earnings.
Effective January 1, 2001, the Company recorded $228,000 as an accumulated
transition adjustment as a reduction to earnings relating to derivative
instruments that do not qualify for hedge accounting under SFAS 133.
In December 1999, the SEC issued SAB 101, entitled "Revenue Recognition in
Financial Statements" as amended, effective as of October 1, 2000, which
summarizes the SEC's views in applying generally accepted accounting principles
to revenue recognition. The adoption of this guideline had no effect on the
Company's financial statements.
In March 2000, the FASB issued Financial Accounting Series Interpretation
No. 44 entitled "Accounting for Certain Transactions involving Stock
Compensation," which provides clarification to Accounting Principles Board
Opinion No. 25 (APB No. 25), "Accounting for Stock Issued to Employees," The
adoption of this interpretation had no effect on the Company's financial
statements.
F-11
46
ENDO PHARMACEUTICALS HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Reclassifications -- Certain reclassifications have been made to the prior
year's financial statements to conform to classifications used in 2000.
3. LICENSE AND COLLABORATION AGREEMENTS
In November 1998, the Company entered into a license agreement (the
"License Agreement") with Hind Healthcare Inc. ("Hind") for the sole and
exclusive right to develop, use, market, promote and sell Lidoderm(R) in the
United States. Under the terms of the License Agreement, the Company is required
to pay Hind approximately $10 million (the "License Fee") based upon the
achievement of certain milestones. During 2000, 1999 and 1998, the Company paid
Hind approximately $2 million, $6 million and $2 million, respectively, in
accordance with the terms of the License Agreement. Costs related to the License
Agreement are included in Goodwill and Other Intangible Assets at December 31,
2000. In addition, beginning on March 19, 2001, the Company will pay Hind
royalties based on net sales of the product.
In November 1999, the Company entered into a collaboration agreement with
Lavipharm Laboratories, Inc. pursuant to which the Company obtained exclusive
worldwide rights to Lavipharm's existing drug delivery technology platforms.
Under the terms of this collaboration agreement, the Company paid an upfront
license fee of $1 million.
The Company has licensed from a university certain patents and pending
patent applications in the field of pain management. The Company is required to
pay royalties equal to 4% of sales of licensed products. In addition, the
Company will pay the university 50% of royalty payments received from any
sublicensees until such payments total $500,000 for a given year, 33% until the
payments total an additional $500,000 for such year and 25% thereafter.
4. PROPERTY AND EQUIPMENT
Property and equipment is comprised of the following at December 31 (in
thousands):
2000 1999
------- -------
Machinery and equipment.................................. $ 4,202 $ 3,993
Computer equipment and software.......................... 4,687 3,475
Furniture and fixtures................................... 845 489
------- -------
9,734 7,957
Less accumulated depreciation............................ (3,992) (2,245)
------- -------
Total.......................................... $ 5,742 $ 5,712
======= =======
5. GOODWILL AND OTHER INTANGIBLES
Goodwill and other intangible assets consist of the following at December
31 (in thousands):
2000 1999
-------- --------
Goodwill............................................... $299,928 $196,706
Licenses............................................... 11,000 11,000
Workforce in Place..................................... 11,900
Patents................................................ 3,200
-------- --------
326,028 207,706
Less accumulated amortization.......................... (41,468) (15,625)
-------- --------
Total........................................ $284,560 $192,081
======== ========
F-12
47
ENDO PHARMACEUTICALS HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. LONG-TERM DEBT
Long-term debt consists of the following at December 31 (in thousands):
2000 1999
-------- --------
Tranche A Term Loan.................................... $ 34,961 $ 47,000
Tranche B Term Loan.................................... 99,054 103,000
Notes payable.......................................... 64,510 41,203
-------- --------
198,525 191,203
Less current portion................................... (36,371) (15,985)
-------- --------
$162,154 $175,218
======== ========
On August 26, 1997, Endo entered into a revolving credit and term loan
agreement (the "Credit Agreement") with a group of banks to provide funds for
the Acquisition, working capital and general corporate purposes. The Credit
Agreement is secured by substantially all of the assets of Endo. The Credit
Agreement provided a term loan facility of $165 million and a revolving
commitment of $25 million. The term loans are segregated into two tranches,
Tranche A Term Loan and Tranche B Term Loan. The Tranche A Term Loan is due in
quarterly installments ranging from $2 million to $5 million beginning December
31, 1998, with a final payment due December 31, 2002. On June 3, 1998, Endo made
an optional prepayment of the Tranche A Term Loan in the amount of $13 million.
The Tranche B Term Loan is due in quarterly installments ranging from $250,000
to $27 million beginning December 31, 1998 with a final payment due June 30,
2004. On June 3, 1998, Endo made an optional prepayment of the Tranche B Term
Loan in the amount of $2 million. The prepayments made for both the Tranche A
Term Loan and Tranche B Term Loan were applied to the most current payments due
under the original payment schedules. The revolving commitment has availability
of $25 million and matures December 31, 2002. No borrowings have been made under
the revolving commitment.
Borrowings under the Tranche A Term Loan bear interest, which is payable at
least quarterly, at a rate equal to the bank's floating alternate base rate plus
a premium ranging from .25% to 1.25%, or at a rate equal to LIBOR plus a premium
ranging from 1.25% to 2.25%, depending on the type of borrowing and the
Company's performance against certain criteria. The effective borrowing rate was
7.8% and 8.4% as of December 31, 2000 and 1999, respectively.
Borrowings under the Tranche B Term Loan bear interest, which is payable at
least quarterly, at a rate equal to the bank's floating alternate base rate plus
a premium ranging from 1.25% to 1.75%, or at a rate equal to LIBOR plus a
premium ranging from 2.25% to 2.75%, depending on the type of borrowing and the
Company's performance against certain criteria. The effective borrowing rate was
8.8% and 8.9% as of December 31, 2000 and 1999, respectively.
Additionally, fees are charged on the average daily unused amount of the
revolving commitment at a rate ranging from .375% to .50% depending on Endo's
performance against certain criteria. This commitment fee is payable quarterly.
The Credit Agreement contains limitations and restrictions concerning,
among other things, additional indebtedness, acquisition or disposition of
assets, dividend payments and transactions with affiliates. In addition, the
Credit Agreement requires Endo to maintain certain ratios (as defined therein).
Endo financed a portion of the purchase price of the Acquisition through
the issuance of a promissory note to DuPont. The note has a face value of $3.9
million and is payable on August 26, 2002. The promissory note bears no interest
and therefore has been discounted in the accompanying financial statements using
F-13
48
ENDO PHARMACEUTICALS HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9.75% which approximated Endo's borrowing rate for similar instruments at the
time of borrowing. The promissory note has a balance of $3.3 million and $3.0
million at December 31, 2000 and 1999, respectively.
On August 26, 2000, 1999 and 1998, Endo issued promissory notes to Dupont
in consideration for manufacturing and supply services provided under the
Manufacturing and Supply Agreement (see Note 9). The notes have a face value of
$23 million and are payable on August 26, 2002. The promissory notes bear no
interest and therefore have been discounted in the accompanying financial
statements using 7.7%, 7.0% and 7.0%, respectively, which approximates Endo's
borrowing rate for similar instruments at the time of borrowing. The promissory
notes have a balance of $61.2 million and $38.2 million as of December 31, 2000
and 1999, respectively.
The aggregate annual maturities of long-term debt for the five years
subsequent to December 31, 2000 are as follows (in thousands):
2001............................................... $36,371
2002............................................... 89,836
2003............................................... 37,121
2004............................................... 43,576
Effective February 27, 1998, Endo entered into an interest rate cap
agreement with a notional amount of $82.5 million for the purpose of minimizing
its exposure to fluctuations in interest rates. The cost of this interest rate
cap of $154,000 was amortized as a component of interest expense over the term
of the agreement which expired August 27, 2000. The agreement set a maximum
LIBOR rate Endo will pay on the related notional amount of 8.0%.
Effective August 27, 2000, Endo entered into an interest rate cap agreement
with a notional amount of $70.0 million for the purpose of minimizing its
exposure to fluctuations in interest rates. Endo does not enter into such
transactions for trading or speculative purposes. The cost of this interest rate
cap of $350,000 is being amortized as a component of interest expense over the
term of the agreement which expires August 27, 2003. The agreement set a maximum
LIBOR rate Endo will pay on the related notional amount of 8.0%. The unamortized
cost for such agreement is included in other assets in the accompanying balance
sheet (see Note 2 Recent Accounting Pronouncements).
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instrument:
Cash and Cash Equivalents, Accounts Receivable, Accounts Payable and
Accrued Expenses -- The carrying amounts of these items are a reasonable
estimate of their fair values because of the current maturities of these
instruments.
Notes Payable -- The carrying amount of this item is a reasonable estimate
of its fair value. The carrying value and the estimate of fair value were
determined by discounting the future cash flows using rates currently available
to the Company for similar instruments.
Other Long-Term Debt Including Current Portion -- The carrying amounts
reported for other long-term debt approximate fair value because the interest
rates on these instruments are subject to changes with market interest rates.
Interest Rate Cap -- The fair value of this item is estimated to be $83,000
at December 31, 2000. The carrying amount of this item at December 31, 2000 was
$311,000. Effective January 1, 2001, the carrying value of this derivative
financial instrument will be marked to market for each reporting period with
changes in
F-14
49
ENDO PHARMACEUTICALS HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the fair value reflected as an adjustment to earnings for the period presented.
(see Note 2 Recent Accounting Pronouncements).
8. INCOME TAXES
Income tax (benefit) consists of the following for 2000, 1999 and 1998 (in
thousands):
2000 1999 1998
------- ------ ----
Current:
Federal................................................. $ 1,578
State................................................... 972 $ 75 $ 17
------- ------ ----
2,550 75 17
------- ------ ----
Deferred:
Federal................................................. (6,743) 1,673 119
State................................................... (1,988) 325 45
------- ------ ----
(8,731) 1,998 164
------- ------ ----
Total income tax (benefit)................................ $(6,181) $2,073 $181
======= ====== ====
A reconciliation of income tax (benefit) at the federal statutory income
tax rate to the total income tax provision (benefit) for 2000, 1999 and 1998 is
as follows (in thousands):
2000 1999 1998
-------- ------ ----
Federal income tax (benefit) at the statutory rate....... $(55,428) $1,813 $130
State income tax (benefit)............................... (192) 215 33
Research and development credit utilized................. (607)
Other.................................................... (210) 45 18
Effect of permanent items:
Purchased in-process research and development.......... 45,288
Goodwill............................................... 5,419
Other.................................................. (451)
-------- ------ ----
Total income tax (benefit)............................... $ (6,181) $2,073 $181
======== ====== ====
The tax effects of temporary differences that comprise the current and
non-current deferred income tax amounts shown on the balance sheets at December
31 are as follows (in thousands):
2000 1999
-------- -------
Deferred tax assets:
Accrued expenses.......................................... $ 25,931 $ 9,479
Purchased in-process research and development............. 13,250 14,734
Net operating loss carryforward........................... 16,789 1,398
Other..................................................... 2,228
-------- -------
Total gross deferred income tax assets............ 58,198 25,611
-------- -------
Deferred tax liabilities:
Depreciation and amortization............................. (13,797) (6,829)
Other..................................................... (569) (626)
-------- -------
Total gross deferred income tax liabilities....... (14,366) (7,455)
-------- -------
Net deferred income tax asset............................... 43,832 18,156
Valuation allowance......................................... (40,791)
-------- -------
$ 3,041 $18,156
======== =======
F-15
50
ENDO PHARMACEUTICALS HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has evaluated the available evidence about future taxable
income and other possible sources of realization of deferred tax assets and
believes that a valuation allowance in the amount of $40.8 million is required
at December 31, 2000. At December 31, 2000, the Company has $48.4 million in net
operating loss carryforwards for tax purposes which expire through 2019.
9. SERVICE AGREEMENTS
On August 26, 1997, the Company entered into various agreements with Dupont
to provide manufacturing and supply of products (the "Manufacture and Supply
Agreement"), warehousing and distribution (the "Warehousing and Distribution
Agreement"), research and development facilities (the "R&D Lease") and certain
administrative services (the "Administrative Services Agreement").
The Manufacture and Supply Agreement has an original term of five years
through August 26, 2002, with options to renew for up to five additional years
in the aggregate. The Manufacture and Supply Agreement currently covers
substantially all of the Company's existing and new pharmaceutical products.
The Warehousing and Distribution Agreement had an original term of two
years, with options to renew for up to two additional years in the aggregate.
The Warehousing and Distribution Agreement covered substantially all of the
Company's existing and new pharmaceutical products. During 1999, the Company
extended the Warehousing and Distribution Agreement through May 31, 2000. The
Warehousing and Distribution Agreement expired during 2000.
The R&D Lease has a term of five years, with options to renew for up to
five additional years in the aggregate provided the Manufacture and Supply
Agreement has been renewed.
The Administrative Services Agreement had a term of up to two years except
for those services that relate to the Manufacture and Supply Agreement and the
R&D Lease which then correspond to the terms of those respective agreements. The
Administrative Services Agreement covered various administrative functions
including customer service, certain accounting functions, medical affairs and
selected regulatory and research and development functions. The Administrative
Services Agreement expired during 1999.
Any interruption or failure by Dupont to meet its obligations under the
aforementioned agreements could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company has entered into various service agreements to provide customer
service support, warehouse and distribution services, certain financial
functions, medical affair services, sales promotion and clinical studies. These
agreements expire from 2001 through 2005. Although the Company has no reason to
believe that these agreements will not be honored, failure by any of these third
parties to honor their contractual obligations could have a material adverse
effect on the Company's business, financial condition and results of operations.
10. COMMITMENTS AND CONTINGENCIES
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with certain members of
management.
LICENSE AGREEMENTS
The Company has licensed from a university certain patents and pending
patent applications in the field of pain management. The Company is required to
pay royalties equal to 4% of sales of licensed products. In addition, the
Company will pay the university 50% of royalty payments received from any
sublicensees until such payments total $500,000 for a given year, 33% until the
payments total an additional $500,000 for such year and 25% thereafter.
F-16
51
ENDO PHARMACEUTICALS HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LEASES
The Company leases office and laboratory facilities under certain
noncancelable operating leases that expire through April 2008. These leases are
renewable at the Company's option. A summary of minimum future rental payments
required under operating leases as of December 31, 2000 is as follows (in
thousands):
2001............................................... $ 1,367
2002............................................... 1,691
2003............................................... 1,417
2004............................................... 1,419
2005............................................... 1,421
Thereafter......................................... 7,063
-------
Total.............................................. $14,378
=======
Rent expense incurred under operating leases was $747,000, $523,000 and
$452,000 for the years ended December 31, 2000, 1999 and 1998, respectively.
The Company has an option to purchase the office building located in
Neptune, N.J. which is exercisable between April 29, 2001 and April 28, 2003.
RESEARCH CONTRACTS
The Company routinely contracts with universities, medical centers,
contract research organizations and other institutions for the conduct of
research and clinical studies on the Company's behalf. These agreements are
generally for the duration of the contracted study and contain provisions that
allow the Company to terminate the study prior to its completion.
COLLABORATION AGREEMENTS
The Company has entered into certain collaboration agreements with third
parties for the development of pain management products. These agreements
require the Company to share in the development costs of such products and grant
marketing rights to the Company for such products.
CONTINGENCIES
The Company may be subject to various claims arising out of the normal
course of business with respect to commercial matters, including product
liabilities, patent infringement matters, governmental regulation and other
actions. In the opinion of management, the amount of ultimate liability with
respect to these actions will not materially affect the financial position,
results of operations or liquidity of the Company.
11. SAVINGS AND INVESTMENT PLAN
On September 1, 1997, the Company established a defined contribution
Savings and Investment Plan covering all employees. Employee contributions are
made on a pre-tax basis under section 401(k) of the Internal Revenue Code (the
"Code"). The Company matches up to six percent of the participants'
contributions subject to limitations under section 401(k) of the Code.
Participants are fully vested with respect to their own contributions. The
Company's contributions are generally fully vested after five years of
continuous service. Contributions by the Company amounted to $429,000, $329,000
and $264,000 for the years ended December 31, 2000, 1999 and 1998, respectively.
F-17
52
ENDO PHARMACEUTICALS HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. STOCKHOLDERS' EQUITY
RECAPITALIZATION
In connection with the Merger, the Company effected a recapitalization of
its Common Stock, Class A Common Stock and Preferred Stock (the
"Recapitalization"). The Recapitalization was effected on July 17, 2000 through
a stock dividend of approximately 64.59 shares of Common Stock for each share of
Common Stock and Class A Common Stock outstanding immediately prior to the
Merger. Immediately prior to the Merger, the Company amended and restated its
certificate of incorporation to effect the Recapitalization and to eliminate its
Class A Common Stock. The effect of the Recapitalization has been retroactively
reflected in the accompanying financial statements.
ADJUSTMENT EVENT
Cash Gross Profit for fiscal year ended December 31, 2000 was equal to
$153.1 million. Cash Gross Profit is defined in the merger agreement with Algos
as the difference between net sales (as reflected on the audited statement of
operations of Endo attributable to Endo products determined in accordance with
GAAP consistently applied for the fiscal year ended December 31, 2000) of $197.4
million and Cash Cost of Sales of $44.3 million for the fiscal year ended
December 31, 2000. Cash Cost of Sales is defined in the merger agreement with
Algos as Cost of Sales (determined in accordance with GAAP and consistent with
past practices as reflected on the audited statement of operations of Endo for
the fiscal year ended December 31, 2000 attributable to the Endo products) of
$63.0 million less all non-recurring charges and non-cash charges included in
Cost of Sales (including, but not limited to, depreciation, amortization and
other non-cash manufacturing charges). Non-cash charges included in Cost of
Sales for the fiscal year ended December 31, 2000 are comprised of $18.7 million
of non-cash manufacturing charges which reflect the charges to Cost of Sales for
the fiscal year ended December 31 2000 related to the present value of
non-interest bearing promissory notes issued to Dupont Pharmaceuticals over the
initial five-year term of the manufacturing and supply agreement.
As a result of the Cash Gross Profit target having been achieved, Endo
Pharma LLC, the holding company of substantially all of the shares of the
pre-Merger Endo stockholders, will not be required to return a portion of its
shares in the Company to the Company's treasury so that the percentage ownership
of the stockholders will remain unchanged. In addition, all references to such
an "Adjustment Event" occurring in the Class A Transferable Warrants and the
Class B Non-Transferable Warrants issued to the former Algos stockholders in the
Merger will no longer be applicable.
COMMON STOCK
Prior to July 17, 2000, the Company had Common Stock and Class A Common
Stock. Rights and privileges of holders of shares of Class A Common Stock were
identical to the rights and privileges of holders of shares of Common Stock,
except that the Class A Common Stock was non-voting and convertible into the
same number of shares of Common Stock upon or subsequent to any public offering.
Payment of dividends is restricted under terms of the Credit Agreement.
PREFERRED STOCK
The Board of Directors may, without further action by the stockholders,
issue a series of Preferred Stock and fix the rights and preferences of those
shares, including the dividend rights, dividend rates, conversion rights,
exchange rights, voting rights, terms of redemption, redemption price or prices,
liquidation preferences, the number of shares constituting any series and the
designation of such series. As of December 31, 2000, no shares of Preferred
Stock have been issued.
F-18
53
ENDO PHARMACEUTICALS HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CLASS A TRANSFERABLE WARRANTS AND CLASS B NON-TRANSFERABLE WARRANTS
The Class A Transferable Warrants and Class B Non-Transferable Warrants are
exercisable at an exercise price of $.01 per share into a specified number of
shares of Common Stock depending on the timing of the FDA's approval of
MorphiDex(R) for one or more pain indications. As of December 31, 2000, there
were outstanding 17,810,526 of these warrants. These warrants become exercisable
on the fifth business day following the date on which the Company receives
approval from the FDA with respect to MorphiDex(R) for the treatment of one or
more pain indications. These warrants will remain exercisable for a period of
six months after the exercisability date, at which time they will expire. If the
FDA does not approve MorphiDex(R) by March 31, 2003, each of these warrants
expires without any payment therefor.
If the FDA approves MorphiDex(R) on or before March 31, 2002, then upon
exercise of these warrants, each warrant will be exercisable into 1.153846
shares of Common Stock. If the FDA approves MorphiDex(R) after March 31, 2002
and on or prior to September 30, 2002, then upon exercise of these warrants,
each warrant will be exercisable into 0.633803 shares of Common Stock. If the
FDA approves MorphiDex(R) after September 30, 2002 and prior to March 31, 2003,
then upon exercise of these warrants, each warrant will be exercisable into
0.263158 shares of Common Stock. If the FDA does not approve MorphiDex(R) before
March 31, 2003, each of these warrants becomes void and all rights in respect of
these warrants will cease.
PRE-MERGER ENDO WARRANTS
The Pre-Merger Endo Warrants are exercisable at an exercise price of $.01
per share into a specified number of shares of Common Stock if the FDA does not
approve MorphiDex(R) for any pain indication prior to December 31, 2002. As of
December 31, 2000, there were outstanding 29,720,177 of these warrants. If the
FDA does not approve MorphiDex(R) before December 31, 2002, then these warrants
become exercisable and upon exercise, each warrant will be exercisable into
0.416667 shares of Common Stock.
SERIES A WARRANTS
The Series A Warrants are exercisable into (a) one share of Common Stock
and (b) one Class A Transferable Warrant or one Class B Non-Transferable
Warrant, at the election of the holder. The Series A Warrants have an exercise
price of $1.20 per share. As of December 31, 2000, there were outstanding Series
A Warrants to purchase 21,580 shares of Common Stock and 21,580 Class A
Transferable Warrants or Class B Non-Transferable Warrants, at the election of
the holder. These warrants expire on September 25, 2001.
ENDO PHARMA LLC 1997 EXECUTIVE AND EMPLOYEE STOCK OPTION PLANS
On November 25, 1997, the Company established the 1997 Employee Stock
Option Plan and the 1997 Executive Stock Option Plan (collectively, the "1997
Stock Option Plans"). Pursuant to the Recapitalization of the Company on July
17, 2000, the 1997 Stock Option Plans were amended and restated. The Endo Pharma
LLC Amended and Restated 1997 Employee Stock Option Plan and the Endo Pharma LLC
Amended and Restated 1997 Executive Stock Option Plan (collectively, the "Endo
Pharma LLC 1997 Stock Option Plans") reserve an aggregate of 25,615,339 shares
of Common Stock of the Company held by Endo Pharma LLC for issuance. Stock
options granted under the Endo Pharma LLC 1997 Stock Option Plans expire no
later than December 31, 2012 unless an initial public offering occurs, in which
case the stock options granted will expire on August 26, 2007. The effect of the
Recapitalization has been reflected in the accompanying financial statements.
Subsequent to the Merger, the exercise of stock options pursuant to the Endo
Pharma LLC 1997 Stock Option Plans does not result in the issuance of additional
shares in the Company.
F-19
54
ENDO PHARMACEUTICALS HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the activity under the Endo Pharma LLC 1997 Stock Option Plans
from December 31, 1997 through December 31, 2000 is as follows:
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
---------- --------
Outstanding, December 31, 1997........................ 17,366,958 $2.50
Granted............................................... 1,064,218 $2.51
Forfeited............................................. (51,452) $2.51
----------
Outstanding, December 31, 1998........................ 18,379,724 $2.50
Granted............................................... 416,062 $2.51
Forfeited............................................. (143,811) $2.51
----------
Outstanding, December 31, 1999........................ 18,651,975 $2.50
Granted............................................... 9,625,633 $3.00
Exercised............................................. (10,892) $2.42
Forfeited............................................. (2,998,055) $2.44
----------
Outstanding, December 31, 2000........................ 25,268,661 $2.70
==========
The following table summarizes information about stock options outstanding
under the Endo Pharma LLC Stock Option Plans at December 31, 2000:
OPTIONS OUTSTANDING
NUMBER WEIGHTED AVERAGE
OUTSTANDING REMAINING EXERCISE
AT 12/31/00 CONTRACTUAL LIFE PRICE
- ----------- ---------------- --------
14,257,036 12 years $2.42
9,565,151 12 years $3.00
1,446,474 12 years $3.42
- ----------
25,268,661
==========
Of the outstanding stock options as of December 31, 2000, 1,988,011 shares
have vested and are exercisable ratably over service periods of five years and
2,241,206 shares have vested and are exercisable at the end of nine years from
the date of grant. The vesting and exercisability of options may be accelerated
at the discretion of the Board of Directors or upon the occurrence of certain
defined events. The remaining 21,039,444 stock options vest in four discrete
tranches contingent upon (i) the Common Stock of the Company exceeding a defined
closing price threshold for ninety consecutive trading days, (ii) the closing
price of the Common Stock of the Company on the last trading day of such ninety
consecutive trading day period being greater than or equal to 85% of the defined
closing price and (iii) the holder being a director, officer or employee of the
Company or any of its subsidiaries on such date. These stock options are
exercisable, if vested, upon the earlier of (i) the occurrence of a sale,
disposition or transfer ("Transfer") of Common Stock, after which Kelso no
longer owns any shares of Common Stock or (ii) January 1, 2006. Stock options
exercisable pursuant to the Endo Pharma LLC 1997 Stock Option Plans as of
December 31, 2000 and 1999 were 2,890,260 and 767,200, respectively.
Effective for the year ended December 31, 2000, 5,880,713 stock options
vested upon achievement of the aforementioned conditions. The Company recorded a
$15.3 million compensation charge related to the vesting of these
performance-based stock options. The amount represents the estimated difference
in the market price
F-20
55
ENDO PHARMACEUTICALS HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and the exercise price of the vested stock options. To the extent that
additional performance-based stock options vest pursuant to the Endo Pharma LLC
1997 Stock Option Plans, significant charges may occur in the future. Subsequent
to the Merger, the exercise of stock options pursuant to the Endo Pharma LLC
1997 Stock Option Plans does not result in the issuance of additional shares in
the Company.
The shares of common stock that employees receive upon exercise of stock
options pursuant to the Endo Pharma LLC 1997 Stock Option Plans are currently
subject to significant restrictions that are set forth in stockholders
agreements.
ENDO PHARMA LLC 2000 SUPPLEMENTAL EXECUTIVE AND EMPLOYEE STOCK OPTION PLANS
Pursuant to the Merger and Recapitalization of the Company on July 17,
2000, the Endo Pharma LLC 2000 Supplemental Employee Stock Option Plan and the
Endo Pharma LLC 2000 Supplemental Executive Stock Option Plan (collectively, the
"Endo Pharma LLC 2000 Supplemental Stock Option Plans") were established. The
Endo Pharma LLC 2000 Supplemental Stock Option Plans reserve an aggregate of
10,672,314 shares of Common Stock of the Company held by Endo Pharma LLC for
issuance. The Endo Pharma LLC 2000 Supplemental Stock Option Plans are only
effective on January 1, 2003 in the event that the Company has not received the
approval from the U.S. Food and Drug Administration for MorphiDex(R) for the
treatment of pain. Stock options granted under the Endo Pharma LLC 2000
Supplemental Stock Option Plans expire no later than December 31, 2012 unless an
initial public offering occurs, in which case the stock options granted will
expire on August 26, 2007. The exercise of stock options pursuant to the Endo
Pharma LLC 2000 Supplemental Stock Option Plans does not result in the issuance
of additional shares in the Company. The Endo Pharma LLC 2000 Supplemental Stock
Option Plans are not currently effective, therefore no options have been
granted.
ENDO PHARMACEUTICALS HOLDINGS INC. 2000 STOCK INCENTIVE PLAN
On August 11, 2000, the Company established the 2000 Stock Incentive Plan
("2000 Stock Incentive Plan"). The 2000 Stock Incentive Plan reserves an
aggregate of 4,000,000 shares of Common Stock of the Company for issuance to
employees, officers, directors and consultants. The 2000 Stock Incentive Plan
provides for the issuance of stock options, restricted stock, stock bonus
awards, stock appreciation rights or performance awards. As of December 31,
2000, only stock options have been awarded. Stock options granted under the 2000
Stock Incentive Plan expire ten years from the date of grant.
A summary of the activity under the 2000 Stock Incentive Plan from December
31, 1999 through December 31, 2000 is as follows:
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
--------- --------
Outstanding, December 31, 1999.......................... 0
Granted................................................. 391,250 $7.20
Forfeited............................................... 0
-------
Outstanding, December 31, 2000.......................... 391,250 $7.20
=======
F-21
56
ENDO PHARMACEUTICALS HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about stock options outstanding
under the Company 2000 Stock Incentive Plan at December 31, 2000:
2000 STOCK INCENTIVE PLAN OPTIONS OUTSTANDING
NUMBER WEIGHTED AVERAGE
OUTSTANDING REMAINING WEIGHTED AVERAGE
AT 12/31/00 CONTRACTUAL LIFE EXERCISE PRICE
- ----------- ---------------- ----------------
391,250 9.8 years $7.20
The Company has adopted the disclosure-only provisions of SFAS No. 123,
Accounting for Stock-Based Compensation, while following APB No. 25, Accounting
for Stock Issued to Employees, and related interpretations in accounting for its
Stock Option Plans. Under APB No. 25, because the exercise price of the
Company's stock options equals at least the fair value of the underlying stock
at the date of grant or a measurement date has not yet been reached, no
compensation expense has been recognized. If the Company were to have adopted
the accounting provisions of SFAS No. 123, it would have been required to record
compensation expense based on the fair value of the stock options on the date of
grant.
Pro-forma information regarding net income is required as if the Company
has accounted for its stock options under the provisions of SFAS No. 123. The
Company estimated the fair value of its stock options, as of the respective date
of grant, using the Black-Scholes option-pricing model. The following
assumptions were used for such estimates: no dividend yield; expected volatility
of 60% in 2000 and no expected volatility in 1999 and 1998 as the Company's
stock was not publicly traded; risk-free interest rate of 6.0%, 6.5% and 5.1%
for 2000, 1999 and 1998, respectively; and a weighted average expected life of
the options of 5 years. Had the accounting provisions of SFAS No. 123 been
adopted, net loss for 2000 would have increased and net income for 1999 and 1998
would have decreased to the pro-forma amounts as follows (in thousands):
2000 1999 1998
--------- ------ -----
Net (loss) income as reported.......................... $(156,840) $3,260 $ 201
Net (loss) income, pro-forma........................... $(245,476) $3,112 $(249)
During 1999, the Company repurchased 18,732 shares of Common Stock from
former employees for an aggregate of $31,000.
13. EARNINGS PER SHARE
The following is a reconciliation of the numerator and denominator of basic
and diluted (loss) earnings per share (in thousands, except share and per share
data):
2000 1999 1998
----------- ----------- -----------
Numerator:
Net (loss) income available to common
stockholders.............................. $ (156,840) $ 3,260 $ 201
=========== =========== ===========
Denominator:
For basic per share data -- weighted average
shares.................................... 79,454,223 71,332,266 71,307,302
Effect of dilutive stock options............ -- -- --
For diluted per share data.................. 79,454,223 71,332,266 71,307,302
Basic (loss) earnings per share............. $ (1.97) $ .05 $ 0.00
=========== =========== ===========
Diluted (loss) earnings per share........... $ (1.97) $ .05 $ 0.00
=========== =========== ===========
F-22
57
ENDO PHARMACEUTICALS HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The dilutive effect of stock options outstanding excludes the effect of
stock options exercisable only upon satisfaction of certain defined events as
these events have not occurred. For loss periods, weighted average common shares
are used for calculating both basic and diluted loss per share as the use of
other dilutive securities would be anti-dilutive. Stock options exercisable
pursuant to the Endo Pharma LLC 1997 Stock Option Plans do not result in the
issuance of additional shares of the Company and are only excercisable, after
the achievement of various conditions, into Common Stock of the Company held by
Endo Pharma LLC.
14. SEPARATION BENEFITS
During the year ended December 31, 2000, the Company entered into
separation and release agreements with two executives. Severance and other
termination benefits provided by the agreements amounting to $1,252,000 were
recorded. The separation and release agreements provided that certain options
granted to the two executives under existing stock option plans became fully
vested on the effective dates of the agreements. The agreements also provided
that other stock options previously granted to the executives would terminate.
The agreements further provided terms and conditions for the exercise of the
vested options. Cost related to stock options resulting from the agreements
resulted in a charge of $20,782,000 during the year ended December 31, 2000.
15. RELATED PARTY TRANSACTIONS
Prior to July 17, 2000, Kelso & Company provided financial advisory
services to the Company for an annual fee of $347,000 plus the reimbursement of
expenses. Payment for these services and reimbursement of expenses totaled
$366,000, $349,000 and $353,000 for the years ended December 31, 2000, 1999 and
1998, respectively. In connection with the Merger, which was completed on July
17, 2000, the Company terminated this agreement by making a one-time payment to
Kelso of $1.5 million which is included in Merger and other related costs.
16. QUARTERLY FINANCIAL DATA (UNAUDITED)
The effect of the Recapitalization has been retroactively reflected in the
following quarterly financial data (see Note 12):
QUARTER ENDED
------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
--------- -------- ------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2000(1)
Net sales.................................... $ 27,000 $41,934 $ 50,902 $77,593
Gross profit................................. $ 14,938 $25,663 $ 35,648 $58,139
Operating (loss) income...................... $(24,348) $ 4,755 $(132,729) $ 4,420
Net (loss) income............................ $(17,594) $ 608 $(136,548) $(3,306)
Net (loss) income per share (basic and
diluted)................................... $ (.25) $ .01 $ (1.59) $ (.04)
Weighted average shares (basic and
diluted)................................... 71,325 71,328 85,848 89,139
F-23
58
ENDO PHARMACEUTICALS HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
QUARTER ENDED
------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
--------- -------- ------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1999
Net sales.................................... $28,561 $26,125 $32,610 $51,250
Gross profit................................. $15,121 $13,439 $17,932 $33,791
Operating income (loss)...................... $ 1,596 $ (898) $ 3,872 $15,110
Net (loss) income............................ $(1,079) $(2,638) $ 95 $ 6,882
Net (loss) income per share (basic and
diluted)................................... $ (.02) $ (.04) $ .00 $ .10
Weighted average shares (basic and
diluted)................................... 71,337 71,334 71,334 71,325
- ---------------
(1) Operating (loss) income and net (loss) income for the year ended December
31, 2000 include charges of $22.0 million in the quarter ended March 31,
2000 for separation benefits, $133.2 million in the quarter ended September
30, 2000 for purchased in-process research and development, $1.6 million in
the quarter ended September 30, 2000 for Merger and other related costs and
$15.3 million in the quarter ended December 31, 2000 for compensation
related to stock options. The number of weighted average shares outstanding
increased in the quarter ended September 30, 2000 due to the shares issued
in the Merger. For this reason, the sum of the quarterly net (loss) income
per share does not equal net (loss) income per share for the year.
F-24
59
EXHIBIT INDEX
EXHIBIT
NO. TITLE
- ------- -----
2.1 Amended and Restated Agreement and Plan of Merger, dated as
of March 3, 2000 (the "Merger Agreement"), by and among Endo
Pharmaceuticals Holdings Inc. ("Endo"), Endo Inc. and Algos
Pharmaceutical Corporation ("Algos") (incorporated herein by
reference to Exhibit 2.1 of the Registration Statement on
Form S-4 of the Registrant (Registration No. 333-39040) (the
"Registration Statement"), filed with the Securities and
Exchange Commission (the "Commission") on June 9, 2000)
2.2 Amendment, dated as of April 17, 2000, to the Merger
Agreement, by and between Endo, Endo Inc. and Algos
(incorporated herein by reference to Exhibit 2.2 of the
Registration Statement filed with the Commission on June 9,
2000)
2.3 Asset Purchase Agreement, dated as of August 27, 1997, by
and between Endo Pharmaceuticals Inc. ("Endo
Pharmaceuticals") and The DuPont Merck Pharmaceutical
Company ("DuPont Merck Pharmaceutical") (incorporated herein
by reference to Exhibit 2.3 of the Registration Statement
filed with the Commission on June 9, 2000)
3.1 Amended and Restated Certificate of Incorporation of Endo
(incorporated herein by reference to Exhibit 3.1 of the Form
10-Q for the Quarter ended June 30, 2000 filed with the
Commission on August 15, 2000)
3.2 Amended and Restated By-laws of Endo (incorporated herein by
reference to Exhibit 3.2 of the Form 10-Q for the Quarter
ended June 30, 2000 filed with the Commission on August 15,
2000)
4.1 Amended and Restated Executive Stockholders Agreement, dated
as of July 14, 2000, by and among Endo, Endo Pharma LLC
("Endo LLC"), Kelso Investment Associates V, L.P. ("KIA V"),
Kelso Equity Partners V, L.P. ("KEP V") and the Management
Stockholders (as defined therein) (incorporated herein by
reference to Exhibit 4.1 of the Form 10-Q for the Quarter
ended June 30, 2000 filed with the Commission on August 15,
2000)
4.2 Amended and Restated Employee Stockholders Agreement, dated
as of July 14, 2000, by and among Endo, Endo LLC, KIA V, KEP
V and the Employee Stockholders (as defined therein)
(incorporated herein by reference to Exhibit 4.2 of the Form
10-Q for the Quarter ended June 30, 2000 filed with the
Commission on August 15, 2000)
4.3 Form of Stock Certificate of Endo Common Stock (incorporated
herein by reference to Exhibit 4.3 of the Form 10-Q for the
Quarter ended June 30, 2000 filed with the Commission on
August 15, 2000)
4.4 Registration Rights Agreement, dated as of July 17, 2000, by
and between Endo and Endo LLC (incorporated herein by
reference to Exhibit 4.4 of the Form 10-Q for the Quarter
ended June 30, 2000 filed with the Commission on August 15,
2000)
10.1 Endo Warrant Agreement, dated as of July 17, 2000, by and
between Endo and United States Trust Company of New York
(incorporated herein by reference to Exhibit 10.1 of the
Form 10-Q for the Quarter ended June 30, 2000 filed with the
Commission on August 15, 2000)
10.2 Algos Warrant Agreement, dated as of July 17, 2000, by and
between Endo and United States Trust Company of New York
(incorporated herein by reference to Exhibit 10.2 of the
Form 10-Q for the Quarter ended June 30, 2000 filed with the
Commission on August 15, 2000)
10.3 Form of Series A Warrant to Purchase Shares of Common Stock
and Warrants of Endo (incorporated herein by reference to
Exhibit 10.3 of the Registration Statement filed with the
Commission on June 9, 2000)
10.4 Letter Agreement, dated as of November 26, 1999, by and
among Algos, Endo, KIA V and KEP V (incorporated herein by
reference to Exhibit 10.4 of the Registration Statement
filed with the Commission on June 9, 2000)
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10.5 Tax Sharing Agreement, dated as of July 17, 2000, by and
among Endo, Endo Inc. and Endo LLC (incorporated herein by
reference to Exhibit 10.5 of the Form 10-Q for the Quarter
ended June 30, 2000 filed with the Commission on August 15,
2000)
10.6 Agreement, dated as of July 17, 2000, by and between Endo
and Endo LLC (incorporated herein by reference to Exhibit
10.6 of the Form 10-Q for the Quarter ended June 30, 2000
filed with the Commission on August 15, 2000)
10.7 Credit Agreement, dated as of August 26, 1997, by and
between Endo Pharmaceuticals and The Chase Manhattan Bank
(incorporated herein by reference to Exhibit 10.7 of the
Registration Statement filed with the Commission on June 9,
2000)
10.8 [Intentionally Omitted.]
10.9 [Intentionally Omitted.]
10.10 Sole and Exclusive License Agreement, dated as of November
23, 1998, by and between Endo Pharmaceuticals and Hind
Health Care, Inc. (incorporated herein by reference to
Exhibit 10.10 of the Registration Statement filed with the
Commission on June 9, 2000)
10.11 Analgesic License Agreement, dated as of October 27, 1997,
by and among Endo Pharmaceuticals, Endo Laboratories, LLC
and DuPont Merck Pharmaceutical (incorporated herein by
reference to Exhibit 10.11 of the Registration Statement
filed with the Commission on June 9, 2000)
10.12 Anti-Epileptic License Agreement, dated as of October 27,
1997, by and among Endo Pharmaceuticals, Endo Laboratories,
LLC and DuPont Merck Pharmaceutical (incorporated herein by
reference to Exhibit 10.12 of the Registration Statement
filed with the Commission on June 9, 2000)
10.13 Product Development, Manufacturing and Supply Agreement,
dated as of October 29, 1999, by and between Endo
Pharmaceuticals and Lavipharm Laboratories Inc.
(incorporated herein by reference to Exhibit 10.13 of the
Registration Statement filed with the Commission on June 9,
2000)
10.14 Supply and Manufacturing Agreement, dated as of November 23,
1998, by and between Endo Pharmaceuticals and Teikoku
Seiyaku Co., Ltd (incorporated herein by reference to
Exhibit 10.14 of the Registration Statement filed with the
Commission on June 9, 2000)
10.15 Supply Agreement, dated as of July 1, 1998, by and between
Endo Pharmaceuticals and Mallinckrodt Inc. ("Mallinckrodt")
(incorporated herein by reference to Exhibit 10.15 of the
Registration Statement filed with the Commission on June 9,
2000)
10.16 Supply Agreement for Bulk Narcotics Raw Materials, dated as
of July 1, 1998, by and between Endo Pharmaceuticals and
Mallinckrodt (incorporated herein by reference to Exhibit
10.16 of the Registration Statement filed with the
Commission on June 9, 2000)
10.17 Manufacture and Supply Agreement, dated as of August 26,
1997, by and among Endo Pharmaceuticals, DuPont Merck
Pharmaceutical and DuPont Merck Pharma (incorporated herein
by reference to Exhibit 10.17 of the Registration Statement
filed with the Commission on June 9, 2000)
10.18 Strategic Alliance Agreement, dated as of September 17,
1997, by and between Endo Pharmaceuticals and Penwest
Pharmaceuticals Group (incorporated herein by reference to
Exhibit 10.18 of the Registration Statement filed with the
Commission on June 9, 2000)
10.19 Agreement, dated as of February 1, 2000, by and between Endo
Pharmaceuticals and Livingston Healthcare Services Inc.
(incorporated herein by reference to Exhibit 10.19 of the
Registration Statement filed with the Commission on June 9,
2000)
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10.20 Medical Affairs Support Services Agreement, dated as of June
1, 1999, by and between Endo Pharmaceuticals and Kunitz and
Associates, Inc. (incorporated herein by reference to
Exhibit 10.20 of the Registration Statement filed with the
Commission on June 9, 2000)
*10.21 Endo Pharmaceuticals Holdings Inc. 2000 Stock Incentive Plan
(incorporated herein by reference to Exhibit 10.21 of the
Quarterly Report on Form 10-Q for the Quarter Ended
September 30, 2000)
*10.22 Endo LLC Amended and Restated 1997 Employee Stock Option
Plan (incorporated herein by reference to Exhibit 10.22 of
the Quarterly Report on Form 10-Q for the Quarter Ended
September 30, 2000)
*10.23 Endo LLC Amended and Restated 1997 Executive Stock Option
Plan (incorporated herein by reference to Exhibit 10.23 of
the Quarterly Report on Form 10-Q for the Quarter Ended
September 30, 2000)
*10.24 Endo LLC 2000 Amended and Restated Supplemental Employee
Stock Option Plan (incorporated herein by reference to
Exhibit 10.24 of the Quarterly Report on Form 10-Q for the
Quarter Ended September 30, 2000)
*10.25 Endo LLC 2000 Amended and Restated Supplemental Executive
Stock Option Plan (incorporated herein by reference to
Exhibit 10.25 of the Quarterly Report on Form 10-Q for the
Quarter Ended September 30, 2000)
*10.26 Employment Agreement, dated as of July 17, 2000, by and
between Endo and John W. Lyle (incorporated herein by
reference to Exhibit 10.26 of the Form 10-Q for the Quarter
ended June 30, 2000)
*10.27 Amended and Restated Employment Agreement, dated as of April
26, 2000, by and between Endo Pharmaceuticals and Carol A.
Ammon (incorporated herein by reference to Exhibit 10.27 of
the Quarterly Report on Form 10-Q for the Quarter Ended
September 30, 2000)
*10.28 Amended and Restated Employment Agreement, dated as of April
26, 2000, by and between Endo Pharmaceuticals and Jeffrey R.
Black (incorporated herein by reference to Exhibit 10.28 of
the Quarterly Report on Form 10-Q for the Quarter Ended
September 30, 2000)
*10.29 Amended and Restated Employment Agreement, dated as of April
26, 2000, by and between Endo Pharmaceuticals and David
Allen Harvey Lee, MD, Ph.D. (incorporated herein by
reference to Exhibit 10.29 of the Quarterly Report on Form
10-Q for the Quarter Ended September 30, 2000)
*10.30 Amended and Restated Employment Agreement, dated as April
26, 2000, by and between Endo Pharmaceuticals and Mariann T.
MacDonald (incorporated herein by reference to Exhibit 10.30
of the Quarterly Report on Form 10-Q for the Quarter Ended
September 30, 2000)
10.31 Separation and Release Agreement, dated as of March 22,
2000, by and between Endo Pharmaceuticals, Endo and Osagie
O. Imasogie (incorporated herein by reference to Exhibit
10.31 of the Registration Statement filed with the
Commission on June 9, 2000)
10.32 Separation and Release Agreement, dated as of April 20,
2000, by and between Endo Pharmaceuticals, Endo and Louis J.
Vollmer (incorporated herein by reference to Exhibit 10.32
of the Registration Statement filed with the Commission on
June 9, 2000)
10.33 Office Lease, dated as of August 26, 1997, by and between
Endo Pharmaceuticals and Northstar Development Company
(incorporated herein by reference to Exhibit 10.33 of the
Registration Statement filed with the Commission on June 9,
2000)
10.34 Lease Agreement, dated as of May 5, 2000, by and between
Endo Pharmaceuticals and Painters' Crossing One Associates,
L.P. (incorporated herein by reference to Exhibit 10.34 of
the Registration Statement filed with the Commission on June
9, 2000)
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*10.35 Employment Agreement, dated as of September 5, 2000, by and
between Endo and Caroline E. Berry (incorporated herein by
reference to Exhibit 10.35 of the Quarterly Report on Form
10-Q for the Quarter Ended September 30, 2000)
*10.36 Employment Agreement, dated as of August 11, 2000, by and
between Endo and Peter A. Lankau (incorporated herein by
reference to Exhibit 10.36 of the Quarterly Report on Form
10-Q for the Quarter Ended September 30, 2000)
10.39 License Agreement, dated as of August 16, 1993, by and
between Endo Inc. (f/k/a Algos Pharmaceutical Corporation)
and The Medical College of Virginia (incorporated herein by
reference to Exhibit 10.4.1 of the registration statement on
Form S-1 of Algos Pharmaceutical Corporation declared
effective on September 25, 1996)
10.40 Lease Agreement, dated as of March 27, 1997, by and between
Endo Inc. (f/k/a Algos Pharmaceutical Corporation) and
Commercial Realty & Resources Corp. (incorporated herein by
reference to Exhibit 10.5 of the Quarterly Report of Algos
Pharmaceutical Corporation on Form 10-Q for the Quarter
Ended March 31, 1997)
21 Subsidiaries of the Company
24 Power of Attorney
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* A management contract or compensatory plan or arrangement required to be filed
as an Exhibit pursuant to Item 14(c) of Form 10-K.