-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MU63jiElcJ0mP/pcsSPzhvC10wTHac+4hRZdVt2F3Wcj+EN99kRi28v30U2p0zwM KWKIRy1G1wGD7Ymx3pCIqw== 0000950130-99-006680.txt : 19991123 0000950130-99-006680.hdr.sgml : 19991123 ACCESSION NUMBER: 0000950130-99-006680 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19991122 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ROBERTS PHARMACEUTICAL CORP CENTRAL INDEX KEY: 0000853022 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 222429994 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 001-10432 FILM NUMBER: 99762147 BUSINESS ADDRESS: STREET 1: MERIDIAN CENTER II STREET 2: 4 INDUSTRIAL WAY W CITY: EATONTOWN STATE: NJ ZIP: 07724 BUSINESS PHONE: 7326761200 MAIL ADDRESS: STREET 1: 4 INDUSTRIAL WAY WEST STREET 2: 4 INDUSTRIAL WAY WEST CITY: EATONTOWN STATE: NJ ZIP: 07755 10-K/A 1 FORM 10-K/A UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K/A AMENDMENT NO. 1 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, 1998 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 1-10432 ------- ROBERTS PHARMACEUTICAL CORPORATION ---------------------------------- (Exact name of registrant as specified in its charter) New Jersey 22-2429994 ----------------------------------- ------------------- (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) Meridian Center II 4 Industrial Way West Eatontown, New Jersey 07724 ----------------------------------- ---------------------- (Address of principal (Zip Code) executive offices) Registrant's telephone number, including area code: (732) 676-1200 -------------- Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered - ------------------- ---------------------- Common Stock $.01 par value per share American Stock Exchange Rights American Stock Exchange Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value per share None - -------------------------------------------------------------------------------- (Title of class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ___ ------ Indicate by check mark 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 the 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. [ ] The aggregate market value of the common stock, $.01 par value per share (the "Common Stock"), of the Registrant held by non-affiliates of the Registrant, as determined by reference to the last sale price of the Common Stock as reported by the American Stock Exchange as of October 15, 1999 was $999,907,593.80. As of October 15, 1999, the number of outstanding shares of Common Stock was 31,997,043.
Documents incorporated by Part of Form 10-K into which reference into this report document is incorporated -------------------------- ----------------------------- Proxy Statement for the Annual Meeting of Part III Shareholders to be held in May 1999.
Forward Looking Statements Certain statements included in (i) Item 1(c) Description of Business with respect to the Registrant's development of its proprietary pipeline products and with respect to the Registrant's newly acquired manufacturing and distribution facilities and with respect to certain discontinued operations of the Registrant; (ii) Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations; and (iii) the notes to the Registrant's consolidated financial statements herein, are intended to be, and are hereby identified as, forward looking statements for purposes of the safe harbor provided by Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. The Registrant cautions readers that forward looking statements, including, without limitation, those relating to the Registrant's future business prospects, revenues, cost of sales, intangible dispositions and write-offs, continuing operations and discontinued operations, and liquidity and capital resources, are subject to certain risks and uncertainties, including, without limitation, the ability of the Registrant to secure regulatory approval in the United States and in foreign jurisdictions for the Registrant's developmental pipeline drugs, the efforts of the Registrant's competitors and the introduction of rival pharmaceutical products which may prove to be more effective than the Registrant's products, general market conditions, the availability of capital, and the uncertainty over the future direction of the healthcare industry, that could cause actual results to differ materially from those indicated in the forward looking statements. -2- Item 6. Selected Financial Data The selected consolidated financial data for the Company should be read in conjunction with "Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations" and with the Company's consolidated financial statements and related notes appearing elsewhere in this report. Operating Statement Data:
Years Ended December 31, - -------------------------------------------------------------------------------------------------------------------- 1994 1995 1996 1997 1998 ---- ---- ---- ---- ---- (in thousands, except per share data) Total Revenue $89,020 $113,427 $ 98,111 $122,508 $175,445 Operating Income (Loss) from Continuing Operations 25,802 6,873 (50,195)/(1)/ (762) 27,378 Net Income (Loss) from Continuing Operations 20,618 2,703 (34,275) 2,517 16,787 Net (Loss) Income from Discontinuing Operations (1,206) (27,045) 556 --- --- Net Income (Loss) 19,412 (24,342) (33,719) 2,517 16,787 Earnings (Loss) Per Share or Common Stock from Continuing Operations - Basic 1.12 .15 (2.47)/(2)/ .06 .54 (Loss) Earnings Per Share of Common Stock from Discontinued Operations - Basic (.06) (1.46) .03 --- --- Earnings (Loss) Per Share of Common Stock - Basic 1.06 (1.31) (2.44) .06 .54 Average Number of Common Shares - Basic Outstanding 18,400 18,536 19,133 29,414 31,049 Earnings (Loss ) Per Share of Common Stock from Continuing Operations - Diluted 1.10 .15 (2.47)/(2)/ .06 .53 (Loss) Earnings Per Share of Common Stock from Discontinued Operations - Diluted (.06) (1.45) .03 --- --- Earnings (Loss) Per Share
-3- of Common Stock - Diluted 1.04 (1.30) (2.44) .06 .53 Average Number of Common Shares - Diluted Outstanding 18,708 18,623 19,133 29,497 31,460
(1) Intangible Dispositions and Write-Offs. During the fourth quarter of 1996, -------------------------------------- the Company completed the sale of the majority of its non-core nonprescription products along with the NUCOFED and QUIBRON brands in two independent sales transactions. These sales, net of proceeds, resulted in a one time, non-cash write off of $11.9 million, which amounted to $7.6 million net of taxes. Also, during the fourth quarter of 1996, the Company expenses certain purchased development products and recorded an impairment loss of long-lived intangible assets totalling $25.4 million, which amounts to $17.8 million net of taxes. Operating income and net loss were negatively affected by the purchase of development products and the sale and write down of the intangible assets in the amounts of $37.3 million for operating income and $25.4 million for net loss. In the event that these transactions had not occurred, the operating loss would have been $12.9 million and net loss would have been $8.3 million. (2) Pursuant to a position taken by the SEC staff (the "Staff"), effective March 13, 1997, on accounting for preferred stock which is convertible at a discount to market, the Company recorded a charge of $11.6 million, which for Earnings Per Share purposes amounted to $.61 per share. This charge to Earnings Per Share is consistent with the Staff's position that the 10% discount available to holders of the Company's 5% Convertible Preferred Stock ("5% Preferred Stock") should be amortized between the issuance date and the first date that conversion could occur which is the earlier of the date on which the Registration Statement for the preferred stock was declared effective on the close of business on the 91st day following the original issuance of the 5% Convertible Preferred Stock. To clarify the adjustments indicated above, a reconciliation of dilutive Earnings Per Share for the twelve months ended December 31, 1996 is composed of the following elements: Net (loss) from continuing operations before the consideration of Purchased research and development, write-off and the sale of intangible assets, the recognition of the discount upon the issuance of 5% Preferred Stock or preferred dividends $ (.47) Purchased research and development and the write-off and sale of Intangible assets (1.33) 5% Preferred Stock dividends (.06) Issuance of 5% Preferred Stock at a 10% discount to (.61) (.67) market ----- ------- Net (loss) from continuing operations (2.47) Income from discontinued operations .03 ------- (Loss) attributable to common stock $(2.44) =======
-4- Balance Sheet Data:
As of December 31 - --------------------------------------------------------------------------------------------------------------- 1994 1995 1996 1997 1998 ---- ---- ---- ---- ---- (in thousands) Total Assets $336,192 $340,290 $372,225 $367,855 $526,236 Long-Term Debt and Redeemable Preferred Stock (excluding current portion) 2,411 16,183 10,639 10,327 126,739 Shareholders' Equity 259,129 235,467 309,759 317,303 341,810
-5- Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Years Ended December 31, 1997 and 1998 Corporate Revenues. For the year ended December 31, 1998, total revenue ------------------ increased $52.9 million from $122.5 to $175.4 million. This increase was primarily the result of an increase in product sales. Product Sales. For the year ended December 31, 1998, U.S. product sales ------------- increased $47.7 million from $91.6 to $139.3 million. The most significant contributor to the increase was PENTASA with sales of $33.3 million, acquired by the Company in the second quarter 1998. Also, increasing sales of AGRYLIN and PROAMATINE contributed $9.2 million and $9.0 million, respectively, of the increase over 1997 sales levels. For the year ended December 31, 1998, sales of the Company's United Kingdom subsidiary, Monmouth Pharmaceuticals, Ltd., increased $3.6 million from $17.5 million to $21.1 million. The increased sales of MEPTID of $1.5 million were the primary reason for the increase. Product sales of the Company's Canadian subsidiary, Roberts Pharmaceutical Canada, Inc., increased $0.8 million from $12.5 million to $13.3 million. Cost of Sales. For the year ended December 31, 1998, cost of sales ------------- amounted to 38% of product sales as compared to 42% in 1997. This decrease in cost of sales percentage and corresponding increase in gross profit percentage is primarily the result of the addition of PENTASA and its higher gross margin to the product mix. Research and Development. Research and development expenses decreased $1.3 ------------------------ million from $13.1 million in 1997 to $11.8 million in 1998. Approximately $1.6 million of the 1997 expense was due to the purchase of development-stage products. The cost of acquisition of development-stage products is charged immediately to research and development expense. The decrease is primarily due to increased new program spending in 1998 of $3.8 million offset by a decrease in license fees of $4.7 million as 1997 expenses included the cost of the purchase of development stage products. Marketing and Administrative Expenses. Marketing and administrative ------------------------------------- expenses increased $11.3 million from $58.7 million in 1997 to $70.0 million in 1998. Marketing expenses increased $0.1 million. Administrative expenses increased $11.2 million from $22.5 million in 1997 to $33.7 million in 1998. The primary components of the change were a $3.3 million increase in product intangible amortization expense due to the addition of PENTASA and a $6.8 million increase related to salaries and benefits, particularly the stock appreciation rights (SARs) and the Supplemental Executive Retirement Plan (SERP) which was established in the second quarter 1998. The 1998 SERP expense was $2.1 million. In order to mitigate the potential future compensation expense to the Company related to SARs, during 1998 the Company accelerated the vesting of all SARs not yet vested, and the executive officers holding such SARs agreed to voluntarily exercise the outstanding SARs, thereby terminating any potential benefit from the SARs which such officers may have realized in the future. The exercise of all outstanding SARs during the current period resulted in a one time charge of $3.3 million, of which $0.7 million relates to accelerated vesting. In connection with the acceleration of vesting and the exercise of all outstanding SARs, the executive officers who exercised the SARs received options to purchase one share of the Company's Common Stock for each two SARs exercised. -6- Interest Income and Expense. For the year ended December 31, 1998, --------------------------- interest income decreased $1.1 million from $5.2 million to $4.1 million as the result of a decreased cash balance due to the use of funds for capital improvement projects and the cash portion of the purchase of PENTASA. Interest expense increased from $0.8 million in 1997 to $6.2 million in 1998 as a result of interest costs from the financing of the PENTASA acquisition. Income Taxes. For the year ended December 31, 1998, income taxes from ------------ continuing operations increased $9.3 million from a benefit of $1.1 million to a provision of $8.2 million, primarily as a result of improved 1998 operations versus 1997. The Company's effective tax rate was 32.9% for the year ended December 31, 1998. The Company has recorded net deferred tax assets of approximately $8.6 million. Realization is dependent upon generating sufficient taxable income to utilize such assets. Although realization on these tax assets is not assured, a valuation allowance has not been provided because management believes it is more likely than not that the deferred tax assets will be realized. Years Ended December 31, 1996 and 1997 Corporate Revenues. For the year ended December 31, 1997, total revenue ------------------ increased $24.4 million from $98.1 to $122.5 million. This increase was the result of an increase in product sales. Product Sales. For the year ended December 31, 1997, product sales ------------- increased $23.5 million from $98.1 to $121.6 million. This increase is primarily the result of sales in the United States of AGRYLIN and PROAMATINE. AGRYLIN was launched in the first quarter of 1997 and PROAMATINE was launched in the fourth quarter of 1996. The COLACE line also contributed significant increases. For the year ended December 31, 1997, sales of the Company's United Kingdom subsidiary, Monmouth Pharmaceuticals, Ltd., increased $5.5 million from $12.0 million to $17.5 million. Increased sales of LODINE, launched in the fourth quarter of 1996, are the primary reason for this increase. Product sales of the Company's Canadian subsidiary, Roberts Pharmaceutical Canada, Inc., increased $0.8 million from $11.7 million to $12.5 million. Cost of Sales. For the year ended December 31, 1997, cost of sales ------------- amounted to 42% of product sales as compared to 51% in 1996. This decrease in cost of sales percentage and corresponding increase in gross profit percentage is primarily the result of the addition of AGRYLIN to the product mix. AGRYLIN has a higher gross profit percentage as it is a product the development of which was completed internally. Research and Development. Research and development expenses increased $5.7 ------------------------ million from $7.4 million in 1996 to $13.1 million in 1997. The increase is due to a post-launch study for PROAMATINE, the continued development of DIRAME, STANATE and the purchased compounds, and increases in registration, and user and license fees. Marketing and Administrative Expenses. Marketing and administrative ------------------------------------- expenses increased $1.5 million from $57.2 million in 1996 to $58.7 million in 1997. Marketing expenses increased $0.5 million primarily as a result of increased sampling, market research, the introduction of AGRYLIN, and fleet expenses offset by decreases in outside services and travel and meetings. Administrative expenses increased $1.0 million during 1997 as compared to 1996 in large part due to increases in salaries and benefits offset by decreases in audit and legal fees. Legal fees in 1997 were substantially lower than in -7- 1996 due to the proposed settlement of the shareholders' class action lawsuit reached in third quarter 1997 and subsequently finalized in January 1998. Intangible Dispositions and Impairment Charge. During the fourth quarter --------------------------------------------- of 1996, the Company completed the sale of the majority of its non-core nonprescription brands along with the NUCOFED and QUIBRON brands in two independent sales agreements. These sales, net of proceeds, resulted in a one time, non-cash write off of $11.9 million, which amounted to $7.6 million net of taxes. Also, in the fourth quarter of 1996, as a result of an ongoing review of recoverability of all of the intangible product rights, six products indicated an impairment. The impairment related to the following products: Cheracol, Comhist, Eltroxin, Nitrodisc, Norethin and Saluron. The impairment was identified as a result of an undiscounted cash flow analysis, which indicated that estimated future cash flows from these products was less than the carrying amount of the respective intangible asset. The amount of the impairment was determined using the present value of estimated future cash flows using an appropriate discount rate given the risks associated with these products. The impairment loss recorded totaled $25.4 million ($17.8 million net of taxes). Operating income and net loss for 1996 were negatively affected by the purchase of development products, and the sale and write down of the intangible assets in the amounts of $37.3 million for operating income and $25.4 million for net loss. The operating loss would have amounted to $12.9 million and net loss would have been $8.3 million if such transactions had not occurred. Interest Income and Expense. For the year ended December 31, 1997, --------------------------- interest income increased $2.3 million from $2.9 million to $5.2 million as the result of an increased cash balance due to the private placements that were completed during 1996. Interest expense decreased from $1.8 million in 1996 to $0.8 million in 1997 as a result of a decrease in long-term debt related to product acquisitions. Income Taxes. For the year ended December 31, 1997, income taxes from ------------ continuing operations increased $13.5 million from a benefit of $14.6 million to a benefit of $1.1 million, primarily as a result of improved 1997 operations versus 1996 and a 1996 write off and disposition of certain intangible assets. The Company's effective tax benefit of 77% was higher than the normal statutory rate primarily as a result of the elimination of certain reserves for taxes due to the closure of years 1991 through 1993 after an IRS audit. The Company has recorded net deferred tax assets of approximately $17.3 million. Realization is dependent upon generating sufficient taxable income to utilize such assets. Although realization is not assured, management believes it is more likely than not that the deferred tax assets for which a valuation allowance has not been provided will be realized. Discontinued Operations. See "Notes to Consolidated Financial Statements - ----------------------- Note 15" for a discussion of discontinued operations. Liquidity and Capital Resources - ------------------------------- For the year ended December 31, 1998, operating cash inflows amounted to $32.4 million as a result of the Company's net income adjusted by an increase in accounts payable, a decrease in accounts receivable, and an increase in non-cash charges, primarily depreciation and amortization. As of December 31, 1998, the Company had cash, cash equivalents and marketable securities of $75.3 million. The Company's funding requirements depend on a number of factors, including the Company's product development programs, product acquisitions, the level of resources required for the expansion of -8- marketing capabilities as the product base expands, increased investment in accounts receivable and inventory which may arise from increased sales levels, competitive and technological developments, the timing and cost of obtaining required regulatory approvals for new products, relationships with parties to collaborative agreements, the success of acquisition activities and the continuing revenues generated from sales of PROAMATINE, AGRYLIN and PENTASA. The Company financed the majority of its purchase of PENTASA with a note for $125 million. The remainder of the purchase price was paid in cash. In connection with the $125 million note, the Company is subject to certain affirmative and negative covenants. See Note 7 to the consolidated financial statements. Existing cash and securities balances and cash generated from operations are expected to be sufficient to fund operating activities for the foreseeable future, as well as support near and long term debt obligations, completion of the capital improvements to the manufacturing facility, development of the existing pipeline compounds and to fund future acquisitions of products. Cash equivalents and marketable securities currently consist of immediately available money market fund balances and investment grade securities. Capital Expenditures. Capital Expenditures in 1998 of approximately $11 -------------------- million relate primarily to the upgrades to the manufacturing facility in Canada and significant investments in new computer hardware and software. As these projects are nearing completion, the Company expects a lower level of cash expenditures for capital improvements in 1999. Foreign Currency Fluctuations. The Company has subsidiary operations ----------------------------- outside the United States. As a result, the Company is subject to fluctuations in subsidiary revenues and costs reported in United States dollars as a consequence of currency exchange rate fluctuations, especially rates for the British pound and Canadian dollar. Fluctuations were not material for the British pound. Due to the weakening of the Canadian dollar in 1998, the cumulative foreign currency translation balance increased by $1.4 million in 1998. These amounts are accumulated and reported separately in shareholder's equity. Concentration of Credit Risk. Financial instruments that potentially ---------------------------- expose the Company to concentrations of credit risk consist primarily of short term cash investments and trade accounts receivable. The Company places its temporary excess cash investments in short term money market instruments. At times, such investments may be in excess of the FDIC insurance limit. The Company markets its products primarily to wholesale drug distributors, retail pharmacies and physicians in the United States and abroad. The Company performs certain credit evaluation procedures and does not require collateral. Reserves are maintained for estimated credit losses. Inflation. Although at reduced levels in recent years, inflation continues --------- to apply upward pressure on the cost of goods and services used by the Company. However, the Company believes that the net effect of inflation on its operations has been minimal during the past three years. New Accounting Pronouncements - ----------------------------- In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". This Statement requires that all derivatives be recorded in the balance sheet as either an asset or liability measured at its fair value and that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. This statement is effective for fiscal years beginning after June 15, 1999. The provisions of this statement shall not be applied retroactively to financial statements of prior periods. The Company is in the process of evaluating this statement and has not yet determined the future impact on its consolidated financial statements. -9- Euro Conversion - --------------- On January 1, 1999, a majority of the European Union member countries converted to a common currency, the "Euro". The existing national currencies of the participating countries will continue to be acceptable until January 1, 2002 after which the Euro will be the sole legal tender for the participating countries. The Company is currently evaluating the economic and operational impact, including competition, pricing, contracts, taxation and foreign currency exchange rate risk, of the Euro conversion but does not expect it to have a material effect on its financial condition or results of operations. Year 2000 Conversion - -------------------- The year 2000 conversion problem arises from the inability of some information systems and other date-sensitive equipment with embedded chips or processors to properly recognize and process information after January 1, 2000. The Company's project to identify and remediate year 2000 issues is proceeding on schedule. The four main areas that have been or are being addressed are financial systems, non-financial systems, customers and suppliers readiness and other date-sensitive equipment. Over the past year, the Company has replaced or upgraded much of its software and systems in the normal course of business. The financial system was replaced with an Enterprise Reporting System which the developer states is 2000 compliant. The Company intends to obtain and review the developer's certification documentation. The system was implemented in the U.S. in April, 1998, due to the need for an integrated, more advanced system to link the Finance and Sales departments located at headquarters with the new distribution facility. The Canadian and U.K. subsidiary implementations were completed as of January 4, 1999. These upgrades are also due to the new integrated reporting system and not year 2000 compliance. Due to the completion of the implementation, the three financial locations are electronically linked, enabling more timely completion of financial requirements. Non-financial software and hardware were also replaced in the normal course of business as the previous systems were outdated. The manufacturing plant, located in Canada, which was purchased by the Company in 1997, required various upgrades to its operating systems. New hardware and upgraded software was installed. The hardware was installed to replace outdated processing equipment. The software was installed to ensure year 2000 compliance. The Company's investment in this software was approximately $225,000 U.S. dollars. One of the Company's customers requires the Company to meet certain electronic data interface (EDI) requirements related to year 2000 compliance in order for the customer to continue its relationship with the Company. The Company completed the testing and implementation of the compliant version in 1998 and is now listed on a national database of Y2K compliant trading partners in the healthcare pharmaceutical industry. The cost of meeting these EDI requirements was approximately $1,000. Approximately 50 to 60 percent of the Company's sales are currently made through EDI, through primarily one clearinghouse. This clearinghouse is year 2000 compliant and upgrades non-year 2000 compliant incoming transmissions to compliant transmissions. In the event that a non-compliant customer could not interface electronically, orders can be transmitted via phone, fax or mail, and therefore no disruption of sales would be expected. The Company is attempting to ascertain the compliance of other customers and suppliers, including the Company's toll manufacturers, through the means of a survey. This program is ongoing and assessments regarding additional work necessary will be made as responses are received. To assist in the effort, the Company is developing a tracking database to help monitor which business partners have taken part in the Company's survey, surveyed the Company or received a compliance letter from the Company. In the event that any of the Company's significant customers or suppliers do not achieve compliance on a -10- timely basis, the Company's business or operations could be adversely impacted if new customers or alternate suppliers can not be found. Other date-sensitive equipment includes primarily telephones and building systems such as heating and lighting systems. The telephone system at the U.S. headquarters was replaced in 1998 in the normal course of business as the lease on the former system expired. The new system is year 2000 compliant. The phone systems at the Canadian and U.K. locations have been replaced in order to be year 2000 compliant. The phone system at the distribution facility will be replaced by the second quarter of 1999 as it is not currently year 2000 compliant. The total cost of these new systems is approximately $70,000 U.S. dollars. The Company has received assurances that the building systems are compliant and will be obtaining documentation to that effect over the next several months. In accordance with the Company's fixed asset capitalization policy, the hardware, software and phone systems purchased are added to fixed assets and amortized over the appropriate useful life. The Company has not retained any consultants nor hired additional employees to assist in achieving compliance. Other IT projects have not been delayed by the Company's year 2000 readiness project. Based on the Company's progress to date and timeline to complete the work on the Year 2000 compliance issue, the Company does not foresee significant financial or operational risks associated with its compliance at this time. However, these expectations are subject to uncertainties. These include, but are not limited to the ability to assess suppliers and customers readiness, failure to identify all susceptible systems and the availability and cost of personnel necessary to remediate any unforeseen problems. -11- PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) 1. and 2. Financial Statements and Financial Statement Schedules. Reference is made to the Index of Financial Statements and Financial Statement Schedules hereinafter contained............................ F-1 3. Exhibits Reference is made to the Index of Exhibits hereinafter contained..... E-1 (b) Reports on Form 8-K During the fourth quarter ended December 31, 1998, the following reports on Form 8-K were filed by the Company with the Securities and Exchange Commission: Form 8-K (Item 5. Other Events), date of earliest event reported November 2, 1998 with respect to changes and improvements to the Company's internet website. Form 8-K (Item 5. Other Events), date of earliest event reported December 9, 1998 with respect to the resignation of PricewaterhouseCoopers LLP as independent accountants and the retention of Ernst & Young LLP as new audit firm. Form 8-K (Item 5. Other Events), date of earliest event reported December 22, 1998 with respect to amended labeling for AGRYLIN, clearing the drug for treatment of other disorders. -12- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ROBERTS PHARMACEUTICAL CORPORATION ---------------------------------- (Registrant) Date: November 15, 1999 By: /s/ John T. Spitznagel ---------------------- John T. Spitznagel, President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
Signature Title Date - --------- ----- ---- Chairman November __, 1999 - ---------------------- ROBERT A. VUKOVICH /s/ John T. Spitznagel President Chief Executive November 15, 1999 - ---------------------- Officer and Director JOHN T. SPITZNAGEL /s/ Peter M. Rogalin Vice President, Treasurer & Director November 15, 1999 - ---------------------- (Principal Financial PETER M. ROGALIN and Accounting Officer) /s/ Robert W. Loy Director November 12, 1999 - ---------------------- ROBERT W. LOY /s/ Joseph Smith Director November 15, 1999 - ---------------------- JOSEPH SMITH Director November __, 1999 - ---------------------- DIGBY W. BARRIOS /s/ Zola P. Horovitz Director November 15, 1999 - ---------------------- ZOLA P. HOROVITZ /s/ Joseph Noonburg Director November 16, 1999 - ---------------------- JOSEPH NOONBURG /s/ Marilyn Lloyd Director November 15, 1999 - ---------------------- MARILYN LLOYD /s/ Ronald M. Nordmann Director November 17, 1999 - ---------------------- RONALD M. NORDMANN
-13- INDEX TO CONSOLIDATED FINANCIAL STATEMENTS ROBERTS PHARMACEUTICAL CORPORATION
Page ---- Report of Ernst & Young LLP...................................................................... F-2 Report of PricewaterhouseCoopers LLP............................................................. F-3 Consolidated Balance Sheets as of December 31, 1997 and 1998..................................... F-4 Consolidated Statements of Operations for the years ended December 31, 1996, 1997 and 1998....... F-5 Consolidated Statements of Comprehensive Income for the years ended December 31, 1996, 1997, and 1998........................................................ F-6 Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1997 and 1998....... F-7 Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 1996, 1997 and 1998........................................................ F-8 Notes to Consolidated Financial Statements....................................................... F-9 Schedules* Schedule II, Valuation and Qualifying Accounts................................................... F-26
__________________________ * All other schedules under Article 12 of Regulation S-X have been omitted because of the absence of the conditions under which certain information is required and because certain information required is presented in the financial statements and the notes thereto. F-1 Report of Independent Auditors To the Board of Directors Roberts Pharmaceutical Corporation We have audited the accompanying consolidated balance sheet of Roberts Pharmaceutical Corporation (the "Company") as of December 31, 1998, and the related consolidated statement of operations, stockholders' equity and cash flow for the year ended December 31, 1998. Our audit also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statement based on our audit. We conducted our audit in accordance with generally accepted auditing standards. 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 audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company at December 31, 1998 and the consolidated results of their operations and their cash flow for the year ended December 31, 1998 in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole present fairly in all material respects, the information set forth therein for 1998. ERNST & YOUNG LLP MetroPark, New Jersey February 16, 1999 F-2 Report of Independent Accountants To the Board of Directors and Shareholders Roberts Pharmaceutical Corporation: We have audited the accompanying consolidated balance sheets of Roberts Pharmaceutical Corporation and Subsidiaries as of December 31, 1997, and the related consolidated statements of operations, cash flows and changes in shareholders' equity for each of the two years in the periods ended December 31, 1997 and 1996 and the financial statement schedules on pages F-27 and F-28 of this Form 10-K. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. 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, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Roberts Pharmaceutical Corporation and Subsidiaries as of December 31, 1997, and the consolidated results of their operations and their cash flows for each of the two years in the periods ended December 31, 1997 and 1996, in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein. Princeton, New Jersey PricewaterhouseCoopers LLP February 5, 1998, except for the restated segment information in note 14, as to which the date is March 23, 1999 F-3 ROBERTS PHARMACEUTICAL CORPORATION CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share data)
December 31, December 31, ASSETS 1997 1998 - -------- ------------ ------------ Current assets: Cash and cash equivalents $ 42,950 $ 39,280 Marketable securities 39,887 36,062 Accounts and Notes Receivable: Trade, net 24,730 40,412 Other 225 9,426 Inventory 19,826 23,573 Deferred tax assets 4,962 5,222 Net assets held for sale 3,760 - Other current assets 1,647 3,259 ------------ ------------ Total current assets 137,987 157,234 Fixed assets, net 25,913 34,911 Intangible assets, net 190,724 315,865 Notes receivable 729 2,369 Deferred tax asset 12,332 3,392 Other assets 170 12,465 ------------ ------------ Total assets $ 367,855 $ 526,236 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current installments of long-term debt $ 8,037 $ 11,178 Accounts payable 13,188 21,897 Other current liabilities 18,756 24,612 ------------ ------------ Total current liabilities 39,981 57,687 Long-term debt, excluding current installments 10,327 126,739 Other liabilities 244 - Commitments and contingent liabilities Shareholders' equity: Class B 5% Convertible Preferred stock, $.10 par value 10,000,000 shares authorized, 4,440,225 issued, 475,654 outstanding 48 - Common stock, $.01 par value, 100,000,000 shares authorized, 29,414,440 and 31,507,442 outstanding 299 320 Additional paid-in capital 372,384 381,631 Cumulative translation adjustments (1,250) (2,716) Deficit (53,941) (37,188) Treasury Stock, 387,594 shares of common stock, at cost (237) (237) ------------ ------------ Total shareholders' equity 317,303 341,810 ------------ ------------ Total liabilities and shareholders' equity $ 367,855 $ 526,236 ============ ============
The accompanying notes are an integral part of these financial statements. F-4 ROBERTS PHARMACEUTICAL CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except share and per share data)
Years Ended December 31, December 31, December 31, 1996 1997 1998 ------------- ------------ ------------ Sales and revenue: Sales $ 98,075 $ 121,612 $ 173,764 Other revenue 36 896 1,681 ----------- ----------- ----------- Total sales and revenue 98,111 122,508 175,445 Operating costs and expenses: Cost of sales 49,753 51,386 66,530 Research & development 7,408 (2) 13,146 11,751 Marketing & administration 57,239 58,738 70,006 Intangible write-offs and loss (gain) on dispositions 33,906 (2) - (220) ----------- ----------- ----------- Total operating costs & expenses 148,306 123,270 148,067 ----------- ----------- ----------- Operating (loss) income ( 50,195) (762) 27,378 ----------- ----------- ----------- Other income (expense): Interest income 2,907 5,212 4,108 Interest expense (1,750) (755) (6,157) Other, net 188 (2,279) (318) ------------ ----------- ----------- Total other income (expense) 1,345 2,178 (2,367) ----------- ----------- ----------- (Loss) income from continuing operations before income taxes (48,850) 1,416 25,011 Benefit (provision) for income taxes 14,575 1,101 (8,224) ----------- ----------- ----------- (Loss) income from continuing operations (34,275) 2,517 16,787 ----------- ----------- ----------- Income from discontinued operations, net of tax 556 - - - - - - ----------- ----------- ----------- Net (loss) income (33,719) 2,517 16,787 ----------- ----------- ----------- Preferred dividends (1,155) (859) (34) Discount on 5% Preferred Stock (11,670) (1) - - ----------- ----------- ----------- Income (Loss) available to common shareholders $ (46,544) $ 1,658 $ 16,753 =========== =========== =========== Per share of common stock, basic: Net (loss) income from continuing operations $ (2.47) (1)(2) $ 0.06 $ 0.54 Net income from discontinued operations 0.03 - - ----------- ----------- ----------- Net (loss) income $ (2.44) (1)(2) $ 0.06 $ 0.54 =========== =========== =========== Per share of common stock, fully diluted: Net (loss) income from continuing operations $ (2.47) (1)(2) $ 0.06 $ 0.53 Net income from discontinued operations 0.03 - - ----------- ----------- ----------- Net (loss) income $ (2.44) (1)(2) $ 0.06 $ 0.53 =========== =========== =========== Weighted average number of common shares outstanding: Basic 19,132,863 29,414,440 31,048,808 Fully Diluted 19,132,863 29,496,767 31,460,129
------------------------ (1) Includes a $.61 per share charge pursuant to a new position taken by the SEC staff, effective March 13, 1997, on accounting for preferred stock which is convertible at a discount to market. See Note 1. (2) Includes a $1.33 per share charge for the sale and write-off of certain intangible assets. See Note 4. The accompanying notes are an integral part of these financial statements. F-5 ROBERTS PHARMACEUTICAL CORPORATION CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (In thousands)
Years Ended December 31, December 31, December 31, 1996 1997 1998 ------------ ------------ ------------ Net (loss) income $(33,719) $2,517 $ 16,787 ------------ ------------ ------------ Foreign currency translation adjustment (4) (949) (1,466) ------------ ------------ ------------ Comprehensive (loss) income $(33,723) $1,568 $ 15,321 ============ ============ ============
The accompanying notes are an integral part of these financial statements. F-6 ROBERTS PHARMACEUTICAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Years Ended December 31, December 31, December 31, 1996 1997 1998 ------------- ------------- ------------- Cash flows from operating activities: Net (loss) income $ (33,719) $ 2,517 $ 16,787 Adjustments to reconcile net (loss) income to net cash flows from operating activities: Depreciation and amortization 7,531 6,940 11,080 Provision for losses on receivables --- 120 432 Provision for product sales returns 6,041 5,994 6,191 Deferred tax provision (benefit) 8,680 (14,575) 2,954 Write down of intangible assets 14,364 --- --- Loss on sale of intangible assets 7,621 --- --- Loss on abandonment of leasehold improvements 71 --- --- Income from discontinued operations (556) --- --- Foreign currency gains 387 --- --- Change in accounts receivable, unbilled revenue and advance billings (2,544) 6,595 (16,359) Change in other assets (483) (60) 5,902 Change in inventory 3,984 (3,495) (4,256) Change in accounts payable and other liabilities (12,017) 145 9,695 Impact of discontinued operations (2,582) (629) --- --------- --------- ---------- Total adjustments 30,497 1,035 15,639 --------- --------- ---------- Net cash (used in) provided by operating activities (3,222) 3,552 32,426 --------- --------- ---------- Cash flows from investing activities: Redemption of (investment in) marketable securities 5,856 (32,094) 3,825 Purchase of long term investment --- --- (10,000) Purchases of intangible assets (4,762) (9,058) (141,156) Proceeds from sale of intangible assets 1,600 --- 600 Purchases of fixed assets (168) (11,986) (11,080) Collection on notes receivable --- 6,738 1,751 --------- --------- ---------- Net cash provided by (used in) investing activities 2,526 (46,400) (156,060) --------- --------- ---------- Cash flows from financing activities: Long term debt issued in connection with product acquisition --- --- 125,000 Payments on notes payable and long term debt (36,773) (6,588) (11,586) Payment of debt issuance costs --- --- (2,528) Net proceeds from issuance of common stock 9,923 1,075 4,725 Net proceeds from issuance of preferred stock 99,247 6,000 4,494 Cash dividends paid (476) (1,629) (150) Impact of discontinued operations (397) --- --- --------- --------- ---------- Net cash provided by (used in) financing activities 71,524 (1,142) 119,955 --------- --------- ---------- Effect of exchange rate changes on cash and cash equivalents (60) (185) 9 --------- --------- ---------- Change in cash and cash equivalents 70,768 (44,175) (3,670) Beginning cash and cash equivalents 16,357 87,125 42,950 ---------- --------- ---------- Ending cash and cash equivalents $ 87,125 $ 42,950 $ 39,280 ---------- --------- ---------- Supplemental cash flow information: Interest paid $ 2,396 $ 823 $ 3,712 Income taxes paid 233 29 11 Non cash activities: Notes issued in connection with product acquisitions --- $ 7,250 --- Notes received for sale of Pronetics subsidiaries and product rights $ 8,193 --- $ 218
The accompanying notes are an integral part of these financial statements. F-7 ROBERTS PHARMACEUTICAL CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (In thousands, except share data)
Additional Retained Cumulative 5% Preferred Stock Common Stock Paid-In Earnings Translation ------------------ ------------ Shares Amount Shares Amount Capital (Deficit) Adjustment ---------- ---------- ---------- ---------- ---------- --------- -------------- Balance, December 31, 1995 18,801,977 189 256,296 (20,484) (297) Issuance of preferred shares 4,200,000 $ 420 - - - - - - 98,827 - - - - - - Issuance of common stock - - - - - - 651,058 7 9,916 - - - - - - Cumulative translation adjustment - - - - - - - - - - - - - - - - - - (4) Year ended December 31, 1996 net loss - - - - - - - - - - - - - - - (33,719) - - - 5% Preferred dividends - - - - - - - - - - - - - - - (1,155) - - - 5% Preferred stock converted to common stock (1,478,970) (148) 3,774,059 37 111 - - - - - - --------- --------- ---------- ---------- ---------- --------- --------- Balance, December 31, 1996 2,721,030 272 23,227,094 233 365,150 (55,358) (301) Issuance of preferred shares 240,225 25 - - - 5,976 - - - - - - Issuance of common stock - - - - - - 97,245 1 1,074 - - - - - - Cumulative translation adjustment - - - - - - - - - - - - - - - - - - (949) Year ended December 31, 1997 net income - - - - - - - - - - - - - - - 2,517 - - - 5% Preferred dividends - - - - - - - - - - - - - - - (1,100) - - - 5% Preferred stock converted to common stock (2,485,601) (249) 6,477,695 65 184 - - - - - - --------- --------- ---------- ---------- ---------- --------- --------- Balance, December 31, 1997 475,654 48 29,802,034 299 372,384 (53,941) (1,250) Issuance of preferred shares 179,775 18 - - - - - - 4,476 - - - - - - Issuance of common stock - - - - - 419,630 4 4,722 - - - - - - Cumulative translation adjustment - - - - - - - - - - - - - - - - - (1,466) Year ended December 31, 1998 net income - - - - - - - - - - - - - - 16,787 - - - 5% Preferred dividends - - - - - - - - - - - - - - (34) - - - 5% Preferred stock converted to common stock (655,429) (66) 1,673,372 17 49 - - - - - - --------- --------- ---------- ---------- ---------- --------- --------- Balance, December 31, 1998 - $ - 31,895,036 $ 320 $ 381,632 $(37,188) $ (2,716) ========= ========= ========== ========== ========== ========= ========= Total Treasury Shareholders' Stock Equity --------- ------------ Balance, December 31, 1995 (237) 235,467 Issuance of preferred shares - - - 99,247 Issuance of common stock - - - 9,923 Cumulative translation adjustment - - - (4) Year ended December 31, 1996 net loss - - - (33,719) 5% Preferred dividends - - - (1,155) 5% Preferred stock converted to common stock - - - - --------- ---------- Balance, December 31, 1996 (237) 309,759 Issuance of preferred shares - - - 6,001 Issuance of common stock - - - 1,075 Cumulative translation adjustment - - - (949) Year ended December 31, 1997 net income - - - 2,517 5% Preferred dividends - - - (1,100) 5% Preferred stock converted to common stock - - - - - - --------- ---------- Balance, December 31, 1997 (237) 317,303 Issuance of preferred shares - - - 4,494 Issuance of common stock - - - 4,726 Cumulative translation adjustment - - - (1,466) Year ended December 31, 1998 net income - - - 16,787 5% Preferred dividends - - - (34) 5% Preferred stock converted to common stock - - - - --------- ---------- Balance, December 31, 1998 $ (237) $ 341,810 ========= ==========
The accompanying notes are an integral part of these financial statements. F-8 ROBERTS PHARMACEUTICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation - --------------------- Roberts Pharmaceutical Corporation is an international pharmaceutical company which licenses, acquires, develops and commercializes post-discovery drugs in selected therapeutic categories. The Company currently markets approved pharmaceutical products in the United States, Canada, the United Kingdom and several other European countries. The consolidated financial statements include the accounts of Roberts Pharmaceutical Corporation and its wholly owned subsidiaries. All significant intercompany transactions are eliminated. All dollar amounts are presented in thousands, except for earnings per share. Revenue Recognition - ------------------- Product sales, net of estimated future returns, are recorded as the products are shipped against customer orders. Roberts accepts returns on its products primarily for expired product and in-dated damaged product and calculates a return reserve on a product basis by utilizing a historical return rate. Licensing revenues are recorded as earned under the terms of each underlying agreement and are included in other revenue when the company has no further performance obligations. Cash Equivalents and Marketable Securities - ------------------------------------------ Cash equivalents include all money market investments with original maturities of three months or less. Marketable securities classified as available for sale consist primarily of U.S. Government obligations and corporate debt instruments with maturities of more than three months and are stated at cost plus accrued interest, which approximates fair value. Inventories - ----------- Inventories, consisting primarily of finished goods, are stated at the lower of first-in, first-out cost or market. Use of Estimates - ---------------- The preparation of 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 revenues and expenses during the period reported. Actual results could differ from those estimates. Estimates include accounting for allowance for doubtful accounts, inventory obsolescence, future product returns, depreciation and amortization, value of intangibles, employee benefit plans, income taxes and contingencies. F-9 ROBERTS PHARMACEUTICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Fixed Assets and Depreciation - ----------------------------- Fixed assets are stated at cost less accumulated depreciation. Depreciation is determined using the straight-line method over the estimated useful lives of the related assets ranging from five to fifty years. Gains and losses on disposals are recognized in the year of the disposal. Expenditures for maintenance and repairs are expensed as incurred; significant renewals and betterments are capitalized. Intangible Assets - ----------------- Intangible assets are stated at cost less accumulated amortization. Amortization is determined using the straight-line method over the estimated useful lives of the related assets which are estimated to range from five to forty years. The weighted average life of all intangible assets are 28 years for 1996, 31 years for 1997, and 33 years for 1998. It is the Company's policy to review periodically and evaluate whether there has been an impairment in the value of intangibles. Costs relating to compounds in development including milestone payments are expensed as incurred. Costs relating to the purchase of products already approved by the Food and Drug Administration are capitalized and amortized over the economic useful life of the product. Royalty payments on approved products are expensed when incurred. In the fourth quarter of 1996, the Company recorded a charge to earnings for an impairment of intangible assets and to expense certain purchased development products totaling $25.4 million. Long-Lived Assets - ----------------- Long-lived assets are recorded at the lower of amortized cost or fair value. As part of an ongoing review of the valuation of long-lived assets, management assesses the carrying value of such assets if facts and circumstances suggest they may be impaired. If this review indicates that the carrying value of these assets may not be recoverable, as determined by a nondiscounted cash flow analysis over the remaining useful life, the carrying value would be reduced to its estimated fair value. Foreign Currency Translation - ---------------------------- Effective January 1, 1997, the functional currency of the United Kingdom subsidiary, Monmouth Pharmaceutical, Ltd., was changed from the U.S. dollar to the British pound as a result of a change in circumstance. Monmouth's translation gains and losses are accumulated as a separate component of Shareholders' Equity and are included in the determination of comprehensive income. Prior to 1997, Monmouth's accounts were remeasured in dollars and translation gains and losses were included in income. The functional currency of the Company's Canadian subsidiary is the Canadian dollar. Translation gains and losses of the Company's Canadian subsidiary are accumulated as a separate component of Shareholders' Equity and are included in the determination of comprehensive income. Advertising Expense - ------------------- The Company expenses the cost of advertising as incurred. Advertising costs amounted to $8,806, $4,640 and $5,135 for the years ended December 31, 1996, 1997 and 1998, respectively. F-10 ROBERTS PHARMACEUTICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Concentration of Credit Risk - ---------------------------- The Company markets prescription and nonprescription pharmaceuticals primarily to wholesale drug distributors, retail pharmacies and physicians in the United States and abroad. The Company performs certain credit evaluation procedures and does not require collateral. The Company maintains reserves for estimated credit losses; at December 31, 1997 and 1998, the reserve for uncollectible accounts amounted to $440 and $538, respectively. At December 31, 1998, cash equivalents and marketable securities consisted of immediately available money market fund balances and investment grade debt and preferred stock securities with maturities of less than one year. The fair value of investment securities classified as available for sale, totaled $58,517 at December 31, 1998. These investment securities mature within one year. At December 31, 1998, the Company had an investment in the non-voting convertible preferred stock of Ribogene Inc. (see Note 5.) carried under the cost method at $10 million. The Company routinely assesses the financial strength of Ribogene, and does not expect that Ribogene will fail to meet its obligations to the Company. As such, the Company considers the risks associated with this investment to be mitigated. In the event of non-performance by Ribogene under its obligations to Roberts, the Company would realize a material loss. Earnings (loss) Per Share - ------------------------- In December 1997, the Company adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share", which specifies the computation, presentation and disclosure requirements for earnings per share for entities with publicly held common stock or potential common stock. For all periods, per-share data has been restated to conform to the SFAS No. 128 requirements. Net (loss) income from continuing operations used in the calculation of earnings per share was calculated as follows:
December 31, -------------------------------------------------------- 1996 1997 1998 --------------- ---------------- ------------- Net (loss) income from continuing operations $(34,275) $2,517 $16,787 Preferred dividends (1,155) (859) (34) Discount on 5% Preferred Stock (11,670) --- --- -------- ------ ------ Net (loss) income from continuing operations for computation of earnings per share $(47,100) $1,658 $16,753 ======== ====== =======
Total common stock and potentially dilutive common stock for the calculation of diluted earnings per share were calculated as follows: F-11 ROBERTS PHARMACEUTICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, ---------------------------------------------------- 1996 1997 1998 ---------- -------------- ------------ Weighted average common shares outstanding 19,132,863 29,414,440 31,048,808 Dilutive effect of: Preferred Stock Warrants --- 82,246 --- Common Stock Warrants --- --- 11 Stock Options --- 81 411,310 ---------- ---------- ---------- Total shares for computation of EPS 19,132,863 29,496,767 31,460,129 ========== ========== ==========
The effect of conversion of the original shares of Preferred Stock for the year ended December 31, 1996 is not included in the calculation of earnings per share because inclusion would be antidilutive. The remaining original 5% Preferred Stock shares were convertible into 1,332,322 shares of Common Stock at December 31, 1997. All 5% Preferred Stock was converted to Common in 1998. See Note 8., Shareholders' Equity, for further discussion of these securities. Pursuant to a position taken by the SEC staff (the "Staff"), effective March 13, 1997, on accounting for preferred stock which is convertible at a discount to market, the Company recorded a charge for Earning Per Share purposes of $.61 per share. This charge to Earnings Per Share is consistent with the Staff's position that the 10% discount available to holders of the Company's 5% Convertible Preferred Stock ("5% Preferred Stock") should be amortized between the issuance date, August 25, 1996, and the first date that conversion could occur. To clarify the adjustments indicated above, a reconciliation of Earnings Per Share for the twelve months ended December 31, 1996 is composed of the following elements: Net (Loss) from continuing operations before the consideration $ (.47) of purchased research and development and write-off and the sale of intangible assets, the recognition of the discount upon the issuance of 5% Preferred Stock or preferred dividends Purchased research and development and write-off and sale of (1.33) intangible assets 5% Preferred Stock dividends (.06) Issuance of 5% Preferred Stock at a 10% discount to market (.61) (.67) ---- ------ Net (Loss) from Continuing Operations (2.47) Income from Discontinued Operations .03 ------ (Loss) attributable to Common Stock $(2.44) ======
New Accounting Pronouncements - ----------------------------- Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS No. 130), establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains, and losses) in a full set of general-purpose financial statements. This Statement requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. This Statement requires that a company (a) classify items of other comprehensive income by their nature in a financial statement and (b) display the accumulated F-12 ROBERTS PHARMACEUTICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. Reclassification of financial statements for earlier periods provided for comparative purposes is required. The Company has adopted the provisions of SFAS No. 130, effective January 1, 1998. Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise Related Information" (SFAS No. 131), establishes standards for the way that public business companies report information about operating segments in annual financial statements and requires that those companies report selected information about operating segments in annual financial statements and requires that those companies report selected information about operating segments in interim financial reports issued to stockholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. This Statement supersedes SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise", but retains the requirement to report information about major customers. In the initial year of application, comparative information for earlier years is to be restated. The Company has adopted the provisions of SFAS No. 131, effective January 1, 1998. There was no impact on the Company's consolidated results of operation, financial position or cash flow as a result of the adoption of these statements. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". This Statement requires that all derivatives be recorded in the balance sheet as either an asset or liability measured at its fair value and that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. This statement is effective for fiscal years beginning after June 15, 1999. The provisions of this statement shall not be applied retroactively to financial statements of prior periods. The Company is in the process of evaluating this statement and has not yet determined the future impact on its consolidated financial statements. 2. INVENTORY ----------- Inventory consists of:
December 31, ----------------------------------------- 1997 1998 ----------------- ----------------- Raw materials $ 2,487 $ 6,249 Work-in-process 451 1,456 Finished goods 16,888 15,868 ------- ------- $19,826 $23,573 ======= =======
3. FIXED ASSETS, NET ----------------- Fixed assets consist of:
December 31, ----------------------------------------- 1997 1998 ----------------- ----------------- Land and buildings $23,440 $28,997 Office furniture and equipment 4,305 5,682 Machinery and equipment 1,162 3,659 ------- ------- 28,906 38,338 Less: Accumulated depreciation 2,993 3,427 ------- ------- $25,913 $34,911 ======= =======
F-13 ROBERTS PHARMACEUTICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Depreciation expense for the years ended December 31, 1996, 1997 and 1998 was $449, $781, and $1,265, respectively. 4. INTANGIBLE ASSETS ------------------- Intangible assets consist of:
December 31, ----------------------------------------- 1997 1998 ------------------- -------------------- Product rights acquired $217,919 $349,282 Less: Accumulated amortization 27,195 33,417 -------- -------- $190,724 $315,865 ======== ========
Amortization expense for the years ended December 31, 1996, 1997 and 1998 was $6,692, $6,159, and $9,815, respectively. Intangible Dispositions and Write-Offs. - ----------------------------------------- During the fourth quarter of 1996, the Company completed the sale of the majority of its non-core nonprescription brands along with the NUCOFED and QUIBRON brands in two independent sales agreements. These sales, net of proceeds, resulted in a one time, non-cash write off of $11.9 million, which amounted to $7.6 million net of taxes. Also, during the fourth quarter of 1996, the Company expensed certain purchased development products in the amount of ($4 million) and recorded an impairment loss of long-lived intangible assets totaling ($21.4 million). As a result of an on-going review of recoverability of all the intangible product rights, six products indicated impairment. The impairment related primarily to Norethin and Nitrodisc, which continued to be marketed, and which was discontinued in the fourth quarter of 1996. The impairment was identified as a result of an undiscounted cash flow analysis, which indicated that estimated future cash flows from these products was less than the carrying amount of the respective intangible asset. The amount of the impairment was determined using the present value of estimated future cash flows with a discount rate of 10%. The total amount recorded for purchased development products and impairment of long-lived intangible assets was $25.4 million ($17.8 million net of taxes). Operating income and net loss for 1996 were negatively affected by the purchase of development products, and the sale and write down of the intangible assets in the amounts of $37.3 million for operating income and $25.4 million for net loss. The operating loss would have amounted to $12.9 million and net loss would have been $8.3 million if such transactions had not occurred. 5. OTHER ASSETS ------------ Other assets consist primarily of the Company's $10 million investment in the convertible preferred stock of RiboGene, Inc., a drug discovery company targeting infectious diseases. The shares have no voting rights. The investment is carried under the cost method, and the operating results of RiboGene are not and will not be included in Roberts' operating results. One- third of the preferred stock is convertible at the option of the Company to common stock of RiboGene at each of the first three anniversary dates of the investment. The investment is classified as held-to-maturity. The Company also entered into an arrangement whereby the Company will develop a new delivery formulation for RiboGene's product, EMITASOL. Under the terms of the agreement, RiboGene F-14 ROBERTS PHARMACEUTICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS will provide up to $7 million in funding from the development of EMITASOL through completion of Phase III trials and the submission of a New Drug Application ("NDA") with the balance, if any, provided by Roberts. Upon approval of the NDA, Roberts can exercise its option to market EMITASOL in the United States, Canada and Mexico under the RiboGene patents by making a milestone payment at that time plus subsequent royalties on product sales. 6. OTHER CURRENT LIABILITIES --------------------------- Other current liabilities consist of:
December 31, -------------------------------- 1997 1998 --------------- --------------- Accrued estimated future product returns $ 9,364 $ 8,509 Accrued estimated Medicaid rebates 1,150 2,489 Income taxes payable 3,022 3,025 Other accrued liabilities 5,220 10,589 ------- ------- $18,756 $24,612 ======= =======
Product return reserves of $401 and $401 have been offset against accounts receivable for 1997 and 1998, respectively. 7. LONG-TERM DEBT ---------------- Long-term debt consists of:
December 31, --------------------------------- 1997 1998 ---------------- --------------- Notes payable on product acquisitions at an imputed $18,364 $137,917 weighted average interest rate of 6.0% and 8.0% Less: Current installments 8,037 11,178 ------- -------- $10,327 $126,739 ======= ========
On June 24, 1998, the Company entered into a syndicated loan in the amount of $125 million to finance the purchase of PENTASA. The loan bears interest at a variable, tiered margin rate. Principal payments in the amount of 1% of the balance are due annually for the first four years, with a balloon payment due for the balance in year five. Principal payments in each of the next five years on long-term debt outstanding at December 31, 1998 amount to: 1999............................ 11,178 2000............................ 4,552 2001............................ 1,250 2002............................ 1,250 2003............................ 119,687 -------- $137,917 ========
Notes payable are collateralized by acquired product rights. The fair value of long term debt at December 31, 1998 is $137,784, and is estimated based on the discounted future cash flows using currently available interest rates. F-15 ROBERTS PHARMACEUTICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8. SHAREHOLDERS' EQUITY -------------------- The Company has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation", but applies Accounting Principles Board Opinion No. 25 and related interpretations in accounting for its plans. If the Company had elected to recognize compensation cost based on the fair value at the grant dates for awards in 1996, 1997 and 1998, consistent with the provisions of SFAS No. 123, the Company's net (loss) income and per share data would have been changed to the pro forma amounts indicated below:
Years Ended December 31, ---------------------------------------------- 1996 1997 1998 -------------- ------------ ------------ Net (Loss) Income As reported $(33,719) $ 2,517 $16,787 Pro forma (36,925) (4,620) 11,367 --------- (Loss) Income per share As reported-Basic $ (2.44) $ 0.06 $ 0.54 As reported-Diluted (2.44) 0.06 0.53 Pro forma - Basic (2.61) (0.19) 0.37 --------- Pro forma - Diluted (2.61) (0.19) 0.36 ---------
The fair value of stock options used to compute pro forma net (loss) income and per share disclosures is the estimated present value at grant date using the Black-Scholes option-pricing model with the following weighted average assumptions: dividend yield of 0%; expected volatility of 54%; a risk free interest rate of 6%; and a general expectation that employees will exercise options when they become vested. The weighted average fair value of stock options, calculated using the Black-Scholes option-pricing model, granted during the years ended December 31, 1996, 1997 and 1998 was $7.17, $8.48 and $10.32, respectively. On July 17, 1996, the Company issued and sold in a private placement to certain investment funds 600,000 shares of the Company's Common Stock at an issue price of $16.65 per share resulting in gross proceeds to the Company of $9.9 million. In addition to receiving cash consideration equal to 5% of the gross proceeds and the reimbursement of certain expenses, the Placement Agent received Common Stock Warrants to acquire an aggregate of 15,000 shares of Common Stock for a purchase price of $16.65 per share. Substantially all of these warrants were exercised in 1998. The remaining 150 warrants expire in July of 1999. On August 29, 1996, the Company issued and sold in a private placement to approximately eighty accredited investors for $25 per share an aggregate of 4,200,000 shares of cumulative 5% Preferred Stock resulting in gross proceeds of $105 million. In addition to receiving cash consideration equal to 5% of the gross proceeds and the reimbursement of certain expenses the Placement Agent received Preferred Stock Warrants to acquire 420,000 shares of 5% Preferred Stock for a purchase price of $25 per share. In 1997, 240,225 of these warrants were exercised, resulting in gross proceeds of $6 million. The remaining 179,775 warrants were exercised in 1998, providing additional proceeds of $4.5 million. A total of 4,620,000 shares of the 5% Preferred Stock were issued. The 655,429 shares outstanding at December 31, 1997, or issued during 1998 were converted in 1998. No 5% Preferred Stock remained outstanding at December 31, 1998. F-16 ROBERTS PHARMACEUTICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Stock Compensation Plans - ------------------------ During 1996 and in prior years, executives and key employees of the Company were granted stock option awards under the Incentive Stock Option Plan. At December 31, 1998, 481,488 shares remain exercisable under the Incentive Plan. In May of 1996, the Company's shareholders approved the Equity Incentive Plan which became effective May 22, 1996. The Company's Incentive Stock Option Plan was discontinued on the same date. The Equity Incentive Plan provides for the grant of incentive and nonqualified stock options, stock appreciation rights, deferred stock awards, restricted stock grants and other stock based awards to executives and key employees. The total number of shares of Common Stock authorized for grant under the Equity Incentive Plan is 3,000,000. Options to purchase Common Stock may be granted either alone or in addition to other awards. The term of each option will be fixed by the Compensation Committee (the "Committee") of the Company's Board of Directors, provided that no incentive stock option, as defined in the Internal Revenue Code, will be exercisable after the expiration of ten years from the date the option is granted. Options will be exercisable at such time or times as determined by the Committee at or subsequent to grant. Stock Appreciation Rights ("SARS") may be granted to participants either alone or in addition to stock options and may, but need not be, related to a specific option. The provisions of SARs need not be the same with respect to each recipient. The following table summarizes the status of the Company's stock options, outstanding and exercisable at December 31, 1998.
Stock Options Stock Options Outstanding Exercisable ----------------------------------------------- --------------------------- Weighted Weighted Weighted Average Average Average Remaining Exercise Exercise Range of Exercise Prices Shares Contractual Life Price Shares Price - -------------------------------- ---------- ------------------- -------------- ------------ ------------ $10.06 to $11.375 990,036 3 yrs, 2 mos $10.59 495,511 $11.17 $11.50 to $13.69 944,690 4 yrs, 1 mos $11.85 683,500 $11.83 $14.13 to $24.063 1,293,350 5 yrs, 6 mos $17.39 373,250 $17.13
Presented below is a summary of the status of the Company's stock options held by employees, and the related transactions for the years ended December 31, 1997 and December 31, 1998. F-17 ROBERTS PHARMACEUTICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year Ended December 31, 1996 Year Ended December 31, 1997 Year Ended December 31, 1998 ------------------------------ ------------------------------ ------------------------------- Weighted Weighted Weighted Average Average Average Stock Options Exercise Price Shares Exercise Price Shares Exercise Price Shares - ------------- ------------------ ---------- ----------------- ------------ ---------------- ------------- Outstanding January 1 $19.060 1,175,710 $11.803 2,108,415 $11.45 2,287,313 Granted $11.480 1,113,250 $ 10.78 549,848 $16.77 1,479,450 Exercised $11.910 (51,058) $11.375 (76,825) $11.35 (421,072) Forfeited/Expired $18,553 (129,487) $ 11.42 (294,125) $11.90 (117,615) Outstanding December 31 $11,803 2,108,415 $ 11.45 2,287,313 $13.77 3,228,076 Options available for grant - Equity Incentive Plan 127,802
9. INCOME TAXES ------------ The Company utilizes the asset and liability method for taxes, which requires that deferred income taxes be provided for the cumulative temporary differences between the financial and tax bases of the Company's assets and liabilities, using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The (provision) benefit for income taxes consists of:
Year Ended December 31, --------------------------------------------- 1996 1997 1998 ---------- --------- --------- Current Federal $ --- $ 4,055 $ 338 State and foreign --- --- 118 ---------- --------- --------- Total current $ --- $ 4,055 $ 456 ========== ========= ========= Deferred Federal 14,487 (3,148) (9,138) State and foreign 88 194 458 ---------- --------- --------- Total deferred $ 14,575 $ (2,954) $ (8,680) ========== ========= =========
A comparison of the provision for income taxes as reported, to a provision based on federal statutory rates and consolidated income before income taxes is as follows: F-18 ROBERTS PHARMACEUTICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year Ended December 31, 1996 1997 1998 ------------- -------------- ---------- (Provision) benefit at federal statutory rates $ 16,609 $ (478) $ (9,115) Non-deductible expense (530) (262) (611) State taxes net of federal effect --- --- --- Research and development credits (266) --- --- Foreign items (809) (523) 962 Other (429) (337) 540 Adjustment to prior year liabilities --- 2,701 --- ------------ ------------ -------- (Provision) benefit for income taxes $ 14,575 $ 1,101 $ (8,224) ============ ============ ========
The adjustment to prior year liabilities was a result of the elimination of certain reserves for taxes due to the closure of years 1991 through 1993 from an IRS audit. The tax effect of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at December 31, 1997 and December 31, 1998 are presented below:
December 31, 1997 December 31, 1998 -------------------------------- ----------------------------- Debits Credits Debits Credits ------------- -------------- -------------- ------------ Inventory................................ $ 340 $ --- $ 531 $ --- Allowance for bad debts.................. 181 --- 258 --- Accrued liabilities...................... 5,144 --- 4,966 --- Depreciation............................. --- 412 --- 590 Foreign items............................ 3,159 --- 3,637 --- Amortizable intangibles.................. --- 1,657 --- 6,499 Loss on Discontinuance................... --- 558 --- --- AMT credit............................... 449 --- 770 --- Other.................................... 138 --- 505 --- Net Operating Losses..................... 12,054 --- 6,600 --- State taxes.............................. 3,994 --- 4,096 --- ------------ ------------- ------------- ------------ Total.................................... 25,459 2,627 21,363 7,089 Valuation allowance - state and foreign................... (5,538) --- (5,660) --- ------------ ------------- ------------ ------------ $ 19,921 $ 2,627 $ 15,703 $ 7,089 ============ ============= ============ ============
At December 31, 1998, the Company has federal net operating loss carryforwards of approximately $19.4 million which expire in the year 2011 and 2012, foreign net operating loss carryforwards of approximately $11.1 million and net operating loss carryforwards for state tax purposes of approximately $78.2 million which expire at various dates through 2005. A valuation allowance was provided for certain foreign net operating losses and certain state deferred tax assets due to the uncertainty of realization of these assets. The Company has recorded net deferred tax assets of approximately $8.6 million. Realization is dependent upon generating sufficient taxable income to utilize such items. Although realization is not F-19 ROBERTS PHARMACEUTICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS assured, management believes it is more likely than not that the deferred tax assets for which a valuation allowance has not been provided, will be realized. The amount of the deferred tax assets considered realizable, however, could be reduced at any time if estimates of future taxable income are reduced. 10. LEASES AND OTHER COMMITMENTS ---------------------------- The Company leases office space and certain office equipment under operating leases. Minimum rental payments in each of the next five fiscal years required under leases which have initial or remaining lease terms in excess of one year are as follows:
December 31, 1998 ----------------- 1999....................................................................... 1,691 2000....................................................................... 1,445 2001....................................................................... 1,025 2002....................................................................... 70 2003....................................................................... 16
Facility rent expense for the years ended December 31, 1996, 1997, and 1998 was $177, $257, and $195 respectively. In accordance with several product acquisitions and licensing agreements and subject to certain cancellation rights reserved by the Company, the Company may be required to make minimum payments related to NOROXIN, SAMPATRILAT and the Lilly Compounds totaling $39.3 million and purchase PROAMATINE inventory in the amount of $75.1 million through 2003. The NOROXIN payments may be triggered if minimum sales levels are not met and the PROAMATINE payments may be triggered if minimum sales purchases are not made. The SAMPATRILAT and Lilly payments are milestone payments due upon reaching certain stages in the development of the compounds. The following schedule details the minimum payments which may be required in each of the next five fiscal years, assuming the previously discussed triggering events occur:
December 31, 1999 ----------------------- 1999....................................................................... $ 7,400 2000....................................................................... 10,700 2001....................................................................... 7,200 2002....................................................................... 2,000 2003....................................................................... 12,000 --------- $ 39,300
Upon successful completion of the development of these products, approval by the Food and Drug Administration, and subsequent marketing of these products, royalties will be in the range of 7% to 10% of product sales with a weighted average royalty of approximately 7%. The duration of these royalties is the earlier of 15 years or patent expiration. F-20 ROBERTS PHARMACEUTICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11. EMPLOYEE BENEFITS ----------------- The Company has employment agreements with six of its senior executives which provide them with continued salary for a period of three to four years in the event of their termination by the Company and provide additional payments on termination by the Company equal to three to four times their average incentive compensation. The total annual compensation level for these executives, including the total of their average bonus, is approximately $2,000,000. Through December 31, 1997 the Company maintained an employee savings plan available to all employees who met certain age and service requirements and made discretionary contributions to the plan based on employee compensation or employee contributions. The Company contributions for 1996 and 1997 were $258 and $255, respectively. Also through December 31, 1997, the Company had a money purchase pension plan available to all employees who met certain age and service requirements. The Company made discretionary contributions to the plan based on employee compensation. The Company contributions for 1996 and 1997 were $248 and $199, respectively. As of January 1, 1998, the two plans were merged into one employee savings plan. This plan is available to all employees who meet certain age and service requirements. The plan requires mandatory contributions based on employee contributions and makes discretionary contributions based on employee compensation. The mandatory contributions made to the plan in 1998 totalled $285. Estimated discretionary contributions of $226 were accrued in 1998 and will be disbursed in 1999. Employee Stock Purchase Plan - ---------------------------- The Company's Board of Directors approved the Employee Stock Purchase Plan (the "Plan"), which gives employees of the Company the opportunity to purchase shares of the Company's common stock through payroll deductions beginning on April 1, 1997. Employees can elect to participate in the Plan by designating from 1% to 10% of eligible compensation to be deducted from pay. On the date of exercise, which is the Friday before the 15th of the month following each quarter end, the per share purchase price will be 85% of the average high and low per-share trading price of Roberts common stock on the American Stock Exchange on that date. 500,000 shares of the Company's Common Stock have been reserved for issuance under the Employee Stock Purchase Plan. The total number of shares purchased under the plan in the years ended December 31, 1997 and 1998 was 4,045 and 10,444 with a total value of $39 and $141 respectively. Supplemental Executive Retirement Plan - -------------------------------------- The Company established a Supplemental Executive Retirement Plan (SERP) in 1998, which is a funded defined benefit plan for key employees of the Company. The projected benefit obligation was $5,315 and the 1998 expense for the plan was $2,146. Of this total, $65 was disbursed in 1998 and the remainder of the year's contribution will be funded in 1999. The service cost component was $1,470 and the interest cost component was $676. The discount rate utilized was 7.0%. 12. CONTINGENCY ----------- A shareholder class action suit was instituted in March, 1995, in the United States District Court for the District of New Jersey against the Company and certain of its officers and a former officer for alleged violations of certain federal securities laws. This suit was settled. The net expenses of this F-21 ROBERTS PHARMACEUTICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS settlement to the Company amounted to $2.3 million and were included in other expense for the quarter ended September 30, 1997. 13. ACQUISITIONS ------------ In 1996, 1997, and 1998, the Company acquired trademarks and other rights to several products from various pharmaceutical companies. The aggregate price of these acquisitions was $5.1 million, $15.3 million, and $135.1 million, respectively, consisting of cash and notes payable. 14. SEGMENT REPORTING ----------------- The Company adopted SFAS No. 131, Disclosures About Segments of and Enterprise and Related Information in 1998, which changes the way the Company reports information about its operating segments. Previous year's information has been restated. The Company has three segments, determined geographically and are made up of the operations of the U.S., Canada, and the U.K. Each of the divisions sell pharmaceutical products; the Canadian operations also includes a manufacturing plant. Manufacturing revenues were not material to the Canadian operations or to the consolidated operations. Each division has its own management team, markets to different countries and the results of each division are evaluated independently. The Company evaluates performance based on profit or loss from operations before income taxes, with intercompany sales eliminated. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies except that the results of the foreign operations are translated at the budgeted foreign exchange rate rather than the actual rate with the differences accumulated and shown separately as an adjustment to operating income. The accounting for the assets of each segment is the same as in consolidation with intercompany balances eliminated. Amortization of product intangibles is allocated from the U.S. segment to the foreign subsidiaries, however, the intangibles are maintained on the U.S. books.
1998 U.S. Canada U.K. Total ---- ------ ---- ---- Revenues 139,583 15,969 20,274 175,826 Segment profit 17,728 2,019 5,264 25,011 Amortization expense 7,453 624 1,738 9,815 Interest revenue 3,876 100 132 4,108 Interest expense 6,156 --- 1 6,157 Total assets 491,150 23,449 11,636 526,235 Long-lived assets 336,379 14,265 132 350,776 Reconciliation of segment revenue to consolidated revenue Segment revenues 139,583 15,969 20,274 175,826 Effect of actual vs. --- (1,254) 873 (381) budget rates ------------ ------------- ------------- ------------ Consolidated revenues 139,583 14,715 21,147 175,445 ============ ============= ============= ============ 1997 U.S. Canada U.K. Total ---- ------ ---- ----- Revenues 91,613 13,601 17,084 122,298 Segment profit (3,834) 2,401 2,849 1,416
F-22 ROBERTS PHARMACEUTICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Amortization expense 3,797 624 1,738 6,159 Interest revenue 5,104 61 48 5,213 Interest expense (755) --- --- (755) Total assets 336,783 24,465 6,607 367,855 Long-lived assets 209,805 6,758 74 216,637 Reconciliation of segment revenue to consolidated revenue Segment revenues 91,613 13,601 17,084 122,298 Effect of actual vs budget rates --- (204) 414 210 ------------ ------------- ------------- ------------ Consolidated revenues 91,613 13,397 17,498 122,508 ============ ============= ============= ============ 1996 U.S. Canada U.K. Total ---- ------ ---- ----- Revenues 74,422 11,665 12,086 98,173 Segment profit (51,176) 1,021 1,305 (48,850) Amortization expense 4,223 624 1,738 6,585 Interest revenue 2,878 1 30 2,909 Interest expense (1,750) --- --- (1,750) Total assets 357,646 8,821 5,758 372,225 Long-lived assets 198,385 62 72 198,519 Reconciliation of segment revenue to consolidated revenue Segment revenues 74,422 11,665 12,086 98,173 Effect of actual vs. budget rates --- 292 (354) (62) ------------ ------------- ------------- ------------ Consolidated revenues 74,422 11,957 11,732 98,111 ============ ============= ============= ============
The management reporting format used for this disclosure was not in effect prior to 1998. In order to present three years of data in the format prescribed by FAS 131, some estimates were made in calculating the 1996 and 1997 results as the data was not available. These estimates related to intercompany allocations and eliminations and did not effect the consolidated results. The 1996 U.S. segment results include the effects of the intangible asset dispositions and write-offs. See Note 4. 15. DISCONTINUED OPERATIONS ----------------------- In August 1995, the Company decided to seek a buyer for the assets of its Pronetics (Homecare) subsidiaries which were located in New York, New Jersey, North Carolina, and South Carolina. The sale of the Homecare division was expected to result in a loss at closing. Accordingly, the Company charged 1995 operations with the estimated loss on discontinuing the division. Sales of the Homecare subsidiaries were essentially completed in December 1996. The total realized from the sales was $2.7 million. The additional loss on sale was offset by a decrease in the assets held for sale and lower than expected losses from operations in 1996. There was no income statement effect from the final disposition of the Homecare division. In March 1996, the Company announced its plan to discontinue and divest VRG, a contract clinical research organization. The Company expected the sale of VRG to result in a loss at closing. Accordingly, the Company charged 1995 operations with the estimated loss on discontinuation of the subsidiary. F-23 ROBERTS PHARMACEUTICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In May 1998, the Company concluded a definitive acquisition agreement to sell VRG. The Company has received a promissory note from the purchaser calling for periodic payments to be made to the Company. With this sale, the Company completed its plans to divest non-strategic, non-pharmaceutical businesses. No gain or loss was recognized with respect to this transaction. 16. FAIR VALUE OF FINANCIAL INSTRUMENTS ----------------------------------- The carrying amount of cash and cash equivalents approximates fair value due to the short-term maturities of these instruments. The fair value of marketable securities was estimated based on quotes obtained from brokers.
1998 --------------------------------------------------------------------- Carrying Unrealized Unrealized Fair Amount Gains Losses Value ----------------- --------------- --------------- -------------- Cash and cash equivalents 39,280 48 --- 39,328 Marketable securities: US Government obligations 6,643 115 (1) 6,757 Corporate debt securities 29,419 27 (45) 29,401 ------ --- --- ------ 36,062 142 (46) 36,158 ====== === === ====== Held to maturity security: Convertible preferred stock 10,000 --- --- 10,000
1997 ------------------------------------------------------------------ Carrying Unrealized Unrealized Fair Amount Gains Losses Value --------------- ---------------- ---------------- -------------- Cash and cash equivalents 42,950 --- --- 42,950 Marketable securities: US Government obligations 31,952 216 (4) 32,164 Corporate debt securities 7,936 18 (32) 7,922 ------ --- ---- ------ 39,887 234 (35) 40,086 ====== === === ======
The carrying amounts in the table are included in the consolidated balance sheet under the indicated captions with the exception of the held-to-maturity security which is included in other assets. 17. QUARTERLY RESULTS OF OPERATIONS (Unaudited) --------------------------------------------- The following table presents summarized quarterly results for 1998 (in thousands, except per share data).
First Second Third Fourth ----- ------ ----- ------ Revenues $32,588 $43,796 $42,336 $55,044 Gross profit 20,244 28,706 27,615 32,350 Net income 2,145 3,386/(1)/ 4,677 6,579 Basic and diluted
F-24 ROBERTS PHARMACEUTICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS net income per Share $ 0.07 $ 0.11 $ 0.15 $ 0.21
The following table presents summarized quarterly results for 1997 (in thousands, except per share data).
First Second Third Fourth ----- ------ ----- ------ Revenues $26,330 $30,286 $28,357 $36,639 Gross profit 14,678 17,305 14,310 23,933 Net earnings 910/(2)/ 1,288 (2,995)/(3)/ 3,315/(4)/ Basic net earnings per share $ 0.03 $ 0.04 $ (0.11) $ 0.11 Diluted net earnings per share $ 0.02 $ 0.04 $ (0.11) $ 0.11
(1) Subsequent to the filing of the Company's quarterly report on Form 10-Q for the three months ended June 30, 1998, the Company reversed the gain recorded from the sale of the discontinued VRG division. The net of tax charge to earnings was $1,314, or $0.04 per share. (2) Subsequent to the filing of the Company's quarterly report on Form 10-Q for the three months ended March 31, 1997, the Company reclassified costs that had been capitalized as an intangible asset to research and development expense. The net of tax charge to earnings was $660,000, or $0.02 per share. (3) Includes a $2.3 million charge for the settlement of a lawsuit instituted against the Company for alleged violations of certain federal securities laws. (4) In fourth quarter 1997, management made several changes in the estimates of income tax reserves and allowances for returned goods. The reduction in income tax reserves resulted from the elimination of certain reserves due to the closure of years 1991 through 1993 after an IRS audit. The allowance for returned goods was revalued based upon a change in estimate of the economic benefit from the product returns. The impact of these revaluations was $2.7 million and $1.0 million respectively. F-25 SCHEDULE II ROBERTS PHARMACEUTICAL CORPORATION VALUATION AND QUALIFYING ACCOUNTS FOR THE YEAR ENDED DECEMBER 31, 1998
Additions ------------------------------------ Balance Balance Beginning Charged to Costs Charged to End of of Period and Expenses Other Accounts Deductions Period ----------- ----------------- -------------- ------------ ---------- Allowance for uncollectibles $ 440 432 --- (334)/(1)/ 538 Allowance for return goods $ 9,765 6,191 (345) (6,701)/(2)/ 8,910
ROBERTS PHARMACEUTICAL CORPORATION VALUATION AND QUALIFYING ACCOUNTS FOR THE YEAR ENDED DECEMBER 31, 1997
Balance Balance Beginning Charged to Costs Charged to End of of Period and Expenses Other Accounts Deductions Period ----------- ----------------- -------------- ------------ ---------- Allowance for uncollectibles $ 1,440 $ 120 $ --- $ (1,120)/(1)/ $ 440 Allowance for return goods $16,298 $5,667 $ (3,000)/(3)/ $ (9,200)/(2)/ $ 9,765
(1) Actual bad debts charged to the allowance. (2) Actual returns of goods charged to the allowance. (3) In 1995, the Corporation acquired the rights to the product Eminase for cash and assumption of liability for all future sales returns. At that time a reserve was established for returns based on historical information provided by the seller. In 1997, the Company determined that this reserve was overstated, and reversed the excess against the intangible asset. F-26 EXHIBIT INDEX Exhibit No. - ----------- 23.1 Consent of Ernst & Young L.L.P. 23.2 Consent of PricewaterhouseCoopers L.L.P. E-1 EX-23.1 2 CONSENT OF INDEPENDENT AUDITORS Exhibit 23.1 Consent of Independent Auditors We consent to the incorporation by reference in the Registration Statements Form S-8 No. 33-34767 pertaining to the Incentive Stock Option Plan; Form S-8 No. 33-61543 pertaining to the Incentive Stock Option Plan; Form S-8 No. 333- 09847 pertaining to the 1996 Equity Incentive Plan; Form S-8 No. 33-61543 pertaining to the 1996 Equity Incentive Plan; and Form S-8 No. 333-66705 pertaining to the Employees' Savings and Protection Plan of Roberts Pharmaceutical Corporation and in the Registration Statement S-3 No. 333-13729 of Roberts Pharmaceutical Corporation and in the related Prospectus of our reports dated February 16, 1999, with respect to the consolidated financial statements and schedule of Roberts Pharmaceutical Corporation included in the Annual Report (Form 10-K/A) for the year ended December 31, 1998. /s/ ERNST & YOUNG LLP MetroPark, New Jersey November 22, 1999 EX-23.2 3 CONSENT OF PRICEWATERHOUSE COOPERS LLP Exhibit 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statement of Roberts Pharmaceutical Corporation on (1) Form S-3 (File No. 333-13729) and (2) Form S-8 (File Nos. 33-34767, 33-61543, 333-09847 and 333-66705) of our report dated February 5, 1998, on our audits of the consolidated financial statements of Roberts Pharmaceutical Corporation and Subsidiaries as of December 31, 1997 and for each of the two years in the periods ended December 31, 1997 and 1996, which report is included in the Corporation's 1998 Annual Report on Form 10-K/A. /s/ PricewaterhouseCoopers LLP Florham Park, New Jersey November 22, 1999 -----END PRIVACY-ENHANCED MESSAGE-----