##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 
 FORM
10-Q/A
 Amendment No. 1
 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
 OF THE SECURITIES EXCHANGE ACT OF 1934
 For
the quarterly period ended: July 1, 2006  Commission file number: 1-10827
 PAR PHARMACEUTICAL COMPANIES, INC.
  Delaware
(State or other jurisdiction of 
incorporation or organization)
    
    22-3122182
(I.R.S. Employer
Identification No.)
 300 Tice Boulevard, Woodcliff Lake, New Jersey 07677
 o þ
  þ o o
 o þ




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##### 



PAGEPART I
    
    FINANCIAL INFORMATIONExplanatory Note
    
    
    3Item 1.
    
    Condensed Consolidated Financial Statements (unaudited)Condensed Consolidated Balance Sheets as of July 1, 2006 and December 31, 2005
    
    
    4Condensed Consolidated Statements of Operations for the three months and six months ended July 1, 2006 and July 2, 2005 (Restated)
    
    
    5Condensed Consolidated Statements of Cash Flows for the six months ended July 1, 2006 and July 2, 2005 (Restated)
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    8Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    37Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    46Item 4.
    
    Controls and Procedures
    
    
    48PART II
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    49Item 1A.
    
    Risk Factors
    
    
    55Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    55Item 6.
    
    Exhibits
    
    
    56SIGNATURES
    
    
    
    
    57Certification by the President and Chief Executive OfficerCertification by the Chief Financial OfficerCertification by the President and Chief Executive Officer, pursuant to Section 906Certification by the Chief Financial Officer, pursuant to Section 906
  2




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##### Table of Contents



Explanatory Note
   The
information that has been previously filed or otherwise reported for these periods is superseded by
the information in the previously filed Form 10-K/A and this 10-Q/A. Accordingly, the
consolidated financial statements and related financial information contained in those previously
filed reports should no longer be relied upon
 3




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 PAR PHARMACEUTICAL COMPANIES, INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
   July 1,
    
    
    December 31,2006
    
    
    2005ASSETSCurrent assets:Cash and cash equivalents
    
    $
    65,024
    
    
    $
    93,477Available for sale debt and marketable equity securities
    
    
    98,121
    
    
    
    103,066Accounts receivable, net
    
    
    125,924
    
    
    
    62,362Inventories
    
    
    109,305
    
    
    
    96,393Prepaid expenses and other current assets
    
    
    12,016
    
    
    
    18,759Deferred income tax assets
    
    
    75,678
    
    
    
    69,256Income taxes receivable
    
    
    18,859
    
    
    
    18,859Assets held for sale
    
    
    
    
    
    
    1,944Total current assets
    
    
    504,927
    
    
    
    464,116Property, plant and equipment, at cost less
accumulated depreciation and amortization
    
    
    89,419
    
    
    
    87,570Available for sale debt and marketable equity securities
    
    
    4,151
    
    
    
    3,741Investment in joint venture
    
    
    4,224
    
    
    
    4,153Other investments
    
    
    19,558
    
    
    
    21,741Intangible assets, net
    
    
    42,443
    
    
    
    36,235Goodwill
    
    
    58,729
    
    
    
    58,729Deferred charges and other assets
    
    
    16,324
    
    
    
    8,828Non-current deferred income taxes, net
    
    
    50,507
    
    
    
    50,917Total assets
    
    $
    790,282
    
    
    $
    736,030LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Short-term and current portion of long-term debt
    
    $
    833
    
    
    $
    3,011Accounts payable
    
    
    45,740
    
    
    
    56,412Payables due to distribution agreement partners
    
    
    103,935
    
    
    
    46,937Accrued salaries and employee benefits
    
    
    10,378
    
    
    
    12,780Accrued expenses and other current liabilities
    
    
    17,058
    
    
    
    25,739Income taxes payable
    
    
    15,057
    
    
    
    9,683Liabilities held for sale
    
    
    
    
    
    
    1,944Total current liabilities
    
    
    193,001
    
    
    
    156,506Long-term debt, less current portion
    
    
    201,908
    
    
    
    202,001Other long-term liabilities
    
    
    345
    
    
    
    335Stockholders equity:Preferred Stock, par value $.0001 per share, authorized
6,000,000 shares; none issued and outstanding
    
    
    
    
    
    
    Common Stock, par value $.01 per share, authorized
90,000,000 shares, issued 35,903,728 and 35,114,026 shares
    
    
    359
    
    
    
    351Additional paid-in-capital
    
    
    237,412
    
    
    
    217,403Retained earnings
    
    
    190,824
    
    
    
    193,515Accumulated other comprehensive loss
    
    
    (822
    )
    
    
    (1,903
    )Treasury stock, at cost 869,845 and 848,588 shares
    
    
    (32,745
    )
    
    
    (32,178
    )Total stockholders equity
    
    
    395,028
    
    
    
    377,188Total liabilities and stockholders equity
    
    $
    790,282
    
    
    $
    736,030
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PAR PHARMACEUTICAL COMPANIES, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
   Three months ended
    
    
    Six months endedJuly 1,
    
    
    July 2,
    
    
    July 1,
    
    
    July 2,2006
    
    
    2005
    
    
    2006
    
    
    2005(Restated
    
    
    
    
    
    
    (Restatedsee Note 2)
    
    
    
    
    
    
    see Note 2)Revenues:Net product sales
    
    $
    190,583
    
    
    $
    127,473
    
    
    $
    359,620
    
    
    $
    220,802Other product related revenues
    
    
    4,655
    
    
    
    4,127
    
    
    
    7,937
    
    
    
    13,772Total revenues
    
    
    195,238
    
    
    
    131,600
    
    
    
    367,557
    
    
    
    234,574Cost of goods sold
    
    
    140,471
    
    
    
    67,886
    
    
    
    263,621
    
    
    
    133,565Gross margin
    
    
    54,767
    
    
    
    63,714
    
    
    
    103,936
    
    
    
    101,009Operating expenses:Research and development
    
    
    17,557
    
    
    
    18,032
    
    
    
    31,409
    
    
    
    33,416Selling, general and administrative
    
    
    42,941
    
    
    
    24,946
    
    
    
    71,283
    
    
    
    45,323Total operating expenses
    
    
    60,498
    
    
    
    42,978
    
    
    
    102,692
    
    
    
    78,739Operating (loss) income
    
    
    (5,731
    )
    
    
    20,736
    
    
    
    1,244
    
    
    
    22,270Other expense, net
    
    
    (1,108
    )
    
    
    (181
    )
    
    
    (1,146
    )
    
    
    (207
    )Equity loss from joint venture
    
    
    (225
    )
    
    
    (106
    )
    
    
    (479
    )
    
    
    (142
    )Net investment loss
    
    
    (3,773
    )
    
    
    (6,477
    )
    
    
    (3,773
    )
    
    
    (5,124
    )Interest income
    
    
    1,973
    
    
    
    1,110
    
    
    
    3,956
    
    
    
    2,441Interest expense
    
    
    (1,693
    )
    
    
    (1,719
    )
    
    
    (3,388
    )
    
    
    (3,434
    )(Loss) income from continuing operations before
(benefit) provision for income taxes
    
    
    (10,557
    )
    
    
    13,363
    
    
    
    (3,586
    )
    
    
    15,804(Benefit) provision for income taxes
    
    
    (3,352
    )
    
    
    5,311
    
    
    
    (896
    )
    
    
    6,096(Loss) income from continuing operations
    
    
    (7,205
    )
    
    
    8,052
    
    
    
    (2,690
    )
    
    
    9,708Discontinued operations:Loss from discontinued operations
    
    
    
    
    
    
    (1,338
    )
    
    
    
    
    
    
    (2,494
    )Benefit for income taxes
    
    
    
    
    
    
    (508
    )
    
    
    
    
    
    
    (947
    )Loss from discontinued operations
    
    
    
    
    
    
    (830
    )
    
    
    
    
    
    
    (1,547
    )Net (loss) income
    
    $
    (7,205
    )
    
    $
    7,222
    
    
    $
    (2,690
    )
    
    $
    8,161Basic earnings (loss) per share of common stock:(Loss) income from continuing operations
    
    $
    (0.21
    )
    
    $
    0.24
    
    
    $
    (0.08
    )
    
    $
    0.28Loss from discontinued operations
    
    
    
    
    
    
    (0.03
    )
    
    
    
    
    
    
    (0.04
    )Net (loss) income
    
    $
    (0.21
    )
    
    $
    0.21
    
    
    $
    (0.08
    )
    
    $
    0.24Diluted earnings (loss) per share of common
stock:(Loss) income from continuing operations
    
    $
    (0.21
    )
    
    $
    0.23
    
    
    $
    (0.08
    )
    
    $
    0.28Loss from discontinued operations
    
    
    
    
    
    
    (0.02
    )
    
    
    
    
    
    
    (0.04
    )Net (loss) income
    
    $
    (0.21
    )
    
    $
    0.21
    
    
    $
    (0.08
    )
    
    $
    0.24Weighted average number of
common shares outstanding:Basic
    
    
    34,454
    
    
    
    34,186
    
    
    
    34,368
    
    
    
    34,081Diluted
    
    
    34,454
    
    
    
    34,467
    
    
    
    34,368
    
    
    
    34,487
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PAR PHARMACEUTICAL COMPANIES, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
   Six Months EndedJuly 2, 2005July 1, 2006
    
    (Restated see Note 2)Cash flows from operating activities:Net (loss) income
    
    $
    (2,690
    )
    
    $
    8,161Deduct: (Loss) from discontinued operations, net of tax
    
    
    
    
    
    
    (1,547
    )(Loss) income from continuing operations
    
    
    (2,690
    )
    
    
    9,708Adjustments to reconcile net income to net cash provided by operating activities:Deferred income taxes
    
    
    (6,720
    )
    
    
    17,053Depreciation and amortization
    
    
    10,777
    
    
    
    6,050Investment impairment
    
    
    3,773
    
    
    
    8,280Equity in net loss of joint venture
    
    
    479
    
    
    
    142Allowances against accounts receivable
    
    
    37,893
    
    
    
    (65,410
    )Share-based compensation expense
    
    
    10,453
    
    
    
    1,788Loss on disposal of fixed assets
    
    
    220
    
    
    
    Gain on sale of investments
    
    
    
    
    
    
    (3,156
    )Tax benefit on exercise of nonqualified stock options
    
    
    691
    
    
    
    398Excess tax benefit on exercise of nonqualified stock options
    
    
    (676
    )
    
    
    Other
    
    
    (25
    )
    
    
    (2
    )Changes in assets and liabilities, net of the effects of divestitures:(Increase) decrease in accounts receivable
    
    
    (101,455
    )
    
    
    6,186Increase in inventories
    
    
    (12,912
    )
    
    
    (10,388
    )Decrease in prepaid expenses and other assets
    
    
    8,247
    
    
    
    5,619Decrease in accounts payable
    
    
    (4,316
    )
    
    
    (5,181
    )Increase in payables due to distribution agreement partners
    
    
    56,999
    
    
    
    2,194(Decrease) increase in accrued expenses and other liabilities
    
    
    (8,611
    )
    
    
    9,818Increase (decrease) in income taxes payable/receivable
    
    
    5,374
    
    
    
    (12,174
    )Net cash used in operating activities
    
    
    (2,499
    )
    
    
    (29,075
    )Net cash used in operating activities from discontinued operations
    
    
    
    
    
    
    (3,747
    )Cash flows from investing activities:Capital expenditures
    
    
    (11,235
    )
    
    
    (12,384
    )Purchases of intangibles
    
    
    (14,137
    )
    
    
    Acquisition of subsidiary, net of cash acquired
    
    
    
    
    
    
    98Purchases of long-term investments
    
    
    
    
    
    
    (12,000
    )Purchases of available for sale debt and marketable equity securities
    
    
    (268
    )
    
    
    (36,087
    )Proceeds from sale of available for sale debt and marketable equity securities
    
    
    5,000
    
    
    
    90,189Proceeds from sale of long-term investments
    
    
    
    
    
    
    4,310Acquisition of subsidiary, contingent payment
    
    
    (2,500
    )
    
    
    (2,500
    )Capital contributions to joint venture
    
    
    (550
    )
    
    
    (1,370
    )Advance for product rights
    
    
    (9,000
    )
    
    
    Other
    
    
    
    
    
    
    2Net cash (used in) provided by investing activities
    
    
    (32,690
    )
    
    
    30,258Net cash used in investing activities from discontinued operations
    
    
    
    
    
    
    (298
    )Cash flows from financing activities:Proceeds from issuances of common stock upon exercise of stock options
    
    
    8,898
    
    
    
    1,925Excess tax benefits on exercise of nonqualified stock options
    
    
    676
    
    
    
    Borrowings related to financed insurance premium liabilities
    
    
    
    
    
    
    43Purchase of treasury stock
    
    
    (567
    )
    
    
    (152
    )Payments of short-term debt related to financed insurance premiums
    
    
    (2,118
    )
    
    
    (3,394
    )Principal payments under long-term and other borrowings
    
    
    (153
    )
    
    
    (149
    )Net cash provided by (used in) financing activities
    
    
    6,736
    
    
    
    (1,727
    )
 6




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Six Months EndedJuly 2, 2005July 1, 2006
    
    
    (Restated see Note 2)Net decrease in cash and cash equivalents
    
    
    (28,453
    )
    
    
    (4,589
    )Cash and cash equivalents at beginning of period
    
    
    93,477
    
    
    
    36,682Cash and cash equivalents at end of period
    
    $
    65,024
    
    
    $
    32,093Supplemental disclosure of cash flow information:Cash paid during the period for:Income taxes
    
    $
    890
    
    
    $
    2,079Interest
    
    $
    2,927
    
    
    $
    2,944Non-cash transactions:Increase in fair value of available for sale debt and marketable equity securities
    
    $
    1,788
    
    
    $
    15,942Capital expenditures incurred but not yet paid
    
    $
    254
    
    
    $
    1,460
  7




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PAR PHARMACEUTICAL COMPANIES, INC.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 July 1, 2006
     Note 1 - Basis of Presentation:
    Share-Based Payment
 Note 2
 Restatement of Previously Issued Financial Statements:
  Accounts Receivable Reserves and Revenues
   8




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Inventory Valuation and Existence
  Investment in Joint Venture
  Accounting for a Lease Acquired in a Business Combination
  9




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Sales Cut-Off
  Accounts Payable Error
  Other Errors
  Presentation Restatement Items  Condensed Consolidated Statements of Operations
  Presentation Restatement Items  Condensed Consolidated Statements of Cash Flows
  Presentation Restatement Items  Notes to Condensed Consolidated Financial Statements
  10




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Impact of Restatement
  For the three
    
    
    For the sixmonths ended
    
    
    months ended(Amounts in thousands)
    
    July 2, 2005
    
    
    July 2, 2005Net (loss) income  as previously reported
    
    $
    (621
    )
    
    $
    1,356Pre-tax restatement adjustments:Accounts receivable reservesDecrease in chargebacks
    
    
    3,368
    
    
    
    2,463Decrease in rebates
    
    
    4,276
    
    
    
    1,716Decrease in product returns
    
    
    6,203
    
    
    
    4,829Decrease (increase) in cash discounts and other
    
    
    686
    
    
    
    (420
    )Total Accounts Receivable Reserves
    
    
    14,533
    
    
    
    8,588Inventory Valuation and Existence
    
    
    (854
    )
    
    
    (1,077
    )Investment in Joint Venture
    
    
    (32
    )
    
    
    (28
    )Accounting for a Lease Acquired in a Business Combination
    
    
    126
    
    
    
    251Other ErrorsSales cut-off
    
    
    
    
    
    
    1,380Accounts payable error
    
    
    (825
    )
    
    
    (825
    )Other
    
    
    (88
    )
    
    
    2,868Total pre-tax restatement adjustments
    
    
    12,860
    
    
    
    11,157Tax effect of restatement adjustments
    
    
    5,017
    
    
    
    4,352After tax effect of restatement adjustments
    
    
    7,843
    
    
    
    6,805Net income  as restated
    
    $
    7,222
    
    
    $
    8,161
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DiscontinuedoperationsAs previously
    
    reclassification
    
    Restatementreported
    
    adjustments
    
    adjustments
    
    As restated(Amounts in thousands, except per share amounts)
    
    
    
    
    
    (1)Revenues:Net product sales
    
    $
    116,727
    
    
    
    (2
    )
    
    $
    10,748
    
    
    $
    127,473Other product related revenues
    
    
    313
    
    
    
    
    
    
    
    3,814
    
    
    
    4,127Total revenues
    
    
    117,040
    
    
    
    (2
    )
    
    
    14,562
    
    
    
    131,600Cost of goods sold
    
    
    68,203
    
    
    
    (748
    )
    
    
    431
    
    
    
    67,886Gross margin
    
    
    48,837
    
    
    
    746
    
    
    
    14,131
    
    
    
    63,714Operating expenses:Research and development
    
    
    17,398
    
    
    
    (382
    )
    
    
    1,016
    
    
    
    18,032Selling, general and administrative
    
    
    25,154
    
    
    
    (221
    )
    
    
    13
    
    
    
    24,946Total operating expenses
    
    
    42,552
    
    
    
    (603
    )
    
    
    1,029
    
    
    
    42,978Operating income
    
    
    6,285
    
    
    
    1,349
    
    
    
    13,102
    
    
    
    20,736Other income (expense), net
    
    
    1,528
    
    
    
    
    
    
    
    (1,709
    )
    
    
    (181
    )Equity loss from joint venture
    
    
    
    
    
    
    
    
    
    
    (106
    )
    
    
    (106
    )Interest income
    
    
    
    
    
    
    
    
    
    
    1,110
    
    
    
    1,110Interest expense
    
    
    
    
    
    
    
    
    
    
    (1,719
    )
    
    
    (1,719
    )Interest expense, net
    
    
    (368
    )
    
    
    (11
    )
    
    
    379
    
    
    
    Investment impairment
    
    
    (8,280
    )
    
    
    
    
    
    
    8,280
    
    
    
    Net investment loss
    
    
    
    
    
    
    
    
    
    
    (6,477
    )
    
    
    (6,477
    )Income from continuing operations
before provision for income taxes
    
    
    (835
    )
    
    
    1,338
    
    
    
    12,860
    
    
    
    13,363Provision for income taxes
    
    
    (214
    )
    
    
    508
    
    
    
    5,017
    
    
    
    5,311Income from continuing operations
    
    
    (621
    )
    
    
    830
    
    
    
    7,843
    
    
    
    8,052Loss from discontinued operations
    
    
    
    
    
    
    (1,338
    )
    
    
    
    
    
    
    (1,338
    )Benefit for income taxes
    
    
    
    
    
    
    (508
    )
    
    
    
    
    
    
    (508
    )Loss from discontinued operations
    
    
    
    
    
    
    (830
    )
    
    
    
    
    
    
    (830
    )Net (loss) income
    
    $
    (621
    )
    
    
    
    
    
    $
    7,843
    
    
    $
    7,222Basic earnings (loss) per share of
common stock :Income from continuing operations
    
    $
    (0.02
    )
    
    $
    0.03
    
    
    $
    0.23
    
    
    $
    0.24Loss from discontinued operations
    
    
    
    
    
    $
    (0.03
    )
    
    
    
    
    
    $
    (0.03
    )Net income
    
    $
    (0.02
    )
    
    
    
    
    
    $
    0.23
    
    
    $
    0.21Diluted earnings (loss) per share of
common stock :Income from continuing operations
    
    $
    (0.02
    )
    
    $
    0.02
    
    
    $
    0.23
    
    
    $
    0.23Loss from discontinued operations
    
    
    
    
    
    $
    (0.02
    )
    
    
    
    
    
    $
    (0.02
    )Net income
    
    $
    (0.02
    )
    
    
    
    
    
    $
    0.23
    
    
    $
    0.21Weighted average number of common
shares outstanding
Diluted
    
    
    34,186
    
    
    
    
    
    
    
    281
    
    
    
    34,467
 
 (1)
    
     Refer to Note 14  Discontinued Operations  Related Party Transaction
 12




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##### Table of Contents



DiscontinuedoperationsAs previously
    
    reclassification
    
    Restatementreported
    
    adjustments
    
    adjustments
    
    As restated(Amounts in thousands, except per share amounts)
    
    
    
    
    
    (1)Revenues:Net product sales
    
    $
    207,815
    
    
    
    (53
    )
    
    $
    13,040
    
    
    $
    220,802Other product related revenues
    
    
    6,726
    
    
    
    
    
    
    
    7,046
    
    
    
    13,772Total revenues
    
    
    214,541
    
    
    
    (53
    )
    
    
    20,086
    
    
    
    234,574Cost of goods sold
    
    
    126,552
    
    
    
    (1,241
    )
    
    
    8,254
    
    
    
    133,565Gross margin
    
    
    87,989
    
    
    
    1,188
    
    
    
    11,832
    
    
    
    101,009Operating expenses:Research and development
    
    
    33,387
    
    
    
    (852
    )
    
    
    881
    
    
    
    33,416Selling, general and administrative
    
    
    46,506
    
    
    
    (471
    )
    
    
    (712
    )
    
    
    45,323Total operating expenses
    
    
    79,893
    
    
    
    (1,323
    )
    
    
    169
    
    
    
    78,739Operating income
    
    
    8,096
    
    
    
    2,511
    
    
    
    11,663
    
    
    
    22,270Other expense, net
    
    
    2,851
    
    
    
    
    
    
    
    (3,058
    )
    
    
    (207
    )Equity loss from joint venture
    
    
    
    
    
    
    
    
    
    
    (142
    )
    
    
    (142
    )Interest income
    
    
    
    
    
    
    
    
    
    
    2,441
    
    
    
    2,441Interest expense
    
    
    
    
    
    
    
    
    
    
    (3,434
    )
    
    
    (3,434
    )Interest expense, net
    
    
    (514
    )
    
    
    (17
    )
    
    
    531
    
    
    
    Investment impairment
    
    
    (8,280
    )
    
    
    
    
    
    
    8,280
    
    
    
    Net investment loss
    
    
    
    
    
    
    
    
    
    
    (5,124
    )
    
    
    (5,124
    )Income from continuing operations
before provision for income taxes
    
    
    2,153
    
    
    
    2,494
    
    
    
    11,157
    
    
    
    15,804Provision for income taxes
    
    
    797
    
    
    
    947
    
    
    
    4,352
    
    
    
    6,096Income from continuing operations
    
    
    1,356
    
    
    
    1,547
    
    
    
    6,805
    
    
    
    9,708Loss from discontinued operations
    
    
    
    
    
    
    (2,494
    )
    
    
    
    
    
    
    (2,494
    )Benefit for income taxes
    
    
    
    
    
    
    (947
    )
    
    
    
    
    
    
    (947
    )Loss from discontinued operations
    
    
    
    
    
    
    (1,547
    )
    
    
    
    
    
    
    (1,547
    )Net income
    
    $
    1,356
    
    
    
    
    
    
    $
    6,805
    
    
    $
    8,161Basic earnings (loss) per share of
common stock :Income from continuing operations
    
    $
    0.04
    
    
    $
    0.04
    
    
    $
    0.20
    
    
    $
    0.28Loss from discontinued operations
    
    
    
    
    
    $
    (0.04
    )
    
    
    
    
    
    $
    (0.04
    )Net income
    
    $
    0.04
    
    
    
    
    
    
    $
    0.20
    
    
    $
    0.24Diluted earnings (loss) per share of
common stock :Income from continuing operations
    
    $
    0.04
    
    
    $
    0.04
    
    
    $
    0.20
    
    
    $
    0.28Loss from discontinued operations
    
    
    
    
    
    $
    (0.04
    )
    
    
    
    
    
    $
    (0.04
    )Net income
    
    $
    0.04
    
    
    
    
    
    
    $
    0.20
    
    
    $
    0.24
 
 (1)
 13




---



##### Table of Contents



DiscontinuedAs
    
    operationspreviously
    
    reclassification
    
    Restatement
    
    Asreported
    
    adjustments
    
    adjustments
    
    restated(Amounts in thousands)
    
    
    
    
    
    (1)Cash flows from operating activities:Net income
    
    $
    1,356
    
    
    
    
    
    
    $
    6,805
    
    
    $
    8,161(Loss) from discontinued operations, net of tax
    
    
    
    
    
    
    (1,547
    )
    
    
    
    
    
    
    (1,547
    )Income from continuing operations
    
    
    
    
    
    
    1,547
    
    
    
    8,161
    
    
    
    9,708Deferred income taxes
    
    
    14,691
    
    
    
    2,310
    
    
    
    52
    
    
    
    17,053Depreciation and amortization
    
    
    7,120
    
    
    
    (693
    )
    
    
    (377
    )
    
    
    6,050Equity in net loss of joint venture
    
    
    
    
    
    
    
    
    
    
    142
    
    
    
    142Inventory reserves
    
    
    2,873
    
    
    
    
    
    
    
    (2,873
    )
    
    
    Allowances against accounts receivable
    
    
    (14,410
    )
    
    
    
    
    
    
    (51,000
    )
    
    
    (65,410
    )Tax benefit on exercise of nonqualified stock options
    
    
    
    
    
    
    
    
    
    
    398
    
    
    
    398Gain on sale of investments
    
    
    (2,841
    )
    
    
    
    
    
    
    (315
    )
    
    
    (3,156
    )Stock compensation expense
    
    
    1,785
    
    
    
    
    
    
    
    3
    
    
    
    1,788Other
    
    
    (58
    )
    
    
    
    
    
    
    56
    
    
    
    (2
    )Changes in assets and liabilities:
    
    
    
    
    
    
    Increase in accounts receivable
    
    
    (25,626
    )
    
    
    
    
    
    
    31,812
    
    
    
    6,186Increase in inventories
    
    
    (17,831
    )
    
    
    
    
    
    
    7,443
    
    
    
    (10,388
    )Decrease (increase) in prepaid expenses and other
assets
    
    
    5,439
    
    
    
    48
    
    
    
    132
    
    
    
    5,619(Decrease) in accounts payable
    
    
    (248
    )
    
    
    888
    
    
    
    (5,821
    )
    
    
    (5,181
    )(Decrease) in payables due to distribution agreement
partners
    
    
    (3,141
    )
    
    
    
    
    
    
    5,335
    
    
    
    2,194Increase in accrued expenses and other liabilities
    
    
    2,862
    
    
    
    (353
    )
    
    
    7,309
    
    
    
    9,818(Decrease) in income taxes payable
    
    
    (15,898
    )
    
    
    
    
    
    
    3,724
    
    
    
    (12,174
    )Net cash used in operating activities
    
    $
    (35,647
    )
    
    $
    3,747
    
    
    $
    2,825
    
    
    $
    (29,075
    )Net cash used in operating activities from discontinued
operations
    
    $
    
    
    
    $
    (3,747
    )
    
    $
    
    
    
    $
    (3,747
    )Cash flows from investing activities:Capital expenditures
    
    
    (13,138
    )
    
    
    298
    
    
    
    456
    
    
    
    (12,384
    )Purchases of available for sale debt securities
    
    
    (36,577
    )
    
    
    
    
    
    
    490
    
    
    
    (36,087
    )Acquisition of subsidiary, contingent payment
    
    
    
    
    
    
    
    
    
    
    (2,500
    )
    
    
    (2,500
    )Capital contributions to joint venture
    
    
    
    
    
    
    
    
    
    
    (1,370
    )
    
    
    (1,370
    )Proceeds from sale of fixed assets
    
    
    2
    
    
    
    
    
    
    
    (2
    )
    
    
    Other
    
    
    98
    
    
    
    
    
    
    
    (96
    )
    
    
    2Acquisition of subsidiary, net of cash acquired
    
    
    
    
    
    
    
    
    
    
    98
    
    
    
    98Net cash provided by investing activities
    
    $
    32,884
    
    
    $
    298
    
    
    $
    (2,924
    )
    
    $
    30,258Net cash used in investing activities from discontinued
operations
    
    $
    
    
    
    $
    (298
    )
    
    $
    
    
    
    $
    (298
    )Cash flows from financing activities:Proceeds from issuances of common stock upon exercise
of stock options
    
    
    1,928
    
    
    
    
    
    
    
    (3
    )
    
    
    1,925Payments of short-term debt related to financed
insurance premiums
    
    
    
    
    
    
    
    
    
    
    (3,394
    )
    
    
    (3,394
    )Borrowings related to financed insurance premium
liabilities
    
    
    
    
    
    
    
    
    
    
    43
    
    
    
    43Principal payments under long-term debt and other
borrowings
    
    
    (3,454
    )
    
    
    
    
    
    
    3,305
    
    
    
    (149
    )Net cash used in financing activities
    
    $
    (1,678
    )
    
    $
    
    
    
    $
    (49
    )
    
    $
    (1,727
    )Net decrease in cash and cash equivalents
    
    
    (4,441
    )
    
    
    
    
    
    
    (148
    )
    
    
    (4,589
    )Cash and cash equivalents at beginning of period
    
    $
    36,534
    
    
    $
    
    
    
    $
    148
    
    
    $
    36,682
 14




---



##### Table of Contents



DiscontinuedAs
    
    operationspreviously
    
    reclassification
    
    Restatement
    
    Asreported
    
    adjustments
    
    adjustments
    
    restated(1)Supplemental disclosure of cash flow information:Cash paid during the period for:Income taxes
    
    $
    1,998
    
    
    $
    
    
    
    $
    81
    
    
    $
    2,079Interest
    
    $
    2,955
    
    
    $
    
    
    
    $
    (11
    )
    
    $
    2,944Non-cash transactions:Tax benefit from exercise of stock options
    
    $
    398
    
    
    $
    
    
    
    $
    (398
    )
    
    $
    Capital expenditures incurred but not yet paid
    
    $
    
    
    
    
    
    
    
    $
    1,460
    
    
    $
    1,460Increase in fair value of available for sale debt
and marketable equity securities
    
    $
    7,257
    
    
    $
    
    
    
    $
    8,685
    
    
    $
    15,942
 
 (1)
    
     Refer to Note 14  Discontinued Operations  Related Party Transaction
 Note 3  Share-Based Compensation:
      15




---



##### Table of Contents



Three Months
    
    
    Six MonthsEnded
    
    
    EndedJuly 2,
    
    
    July 2,2005
    
    
    2005(Restated)
    
    
    (Restated)Net income
    
    $
    7,222
    
    
    $
    8,161Add: Stock-based employee compensation
expense included in reported net income, net
of related tax effects
    
    
    450
    
    
    
    833Deduct: Stock-based employee compensation
expense determined under the fair-value based
method, net of related taxes
    
    
    (3,242
    )
    
    
    (23,976
    )Pro forma net income (loss)
    
    $
    4,430
    
    
    $
    (14,982
    )Net income (loss) per share of common stock :As restated  basic
    
    $
    0.21
    
    
    $
    0.24As restated  diluted
    
    $
    0.21
    
    
    $
    0.24Pro forma  basic
    
    $
    0.13
    
    
    $
    (0.44
    )Pro forma  diluted
    
    $
    0.13
    
    
    $
    (0.44
    )
   Stock Options
  For the three
    
    For the three
    
    For the six
    
    For the sixmonths ended
    
    months ended
    
    months ended
    
    months endedJuly 1,
    
    July 2,
    
    July 1,
    
    July 2,2006
    
    2005
    
    2006
    
    2005Risk-free interest rate
    
    
    5.0
    %
    
    
    4.0
    %
    
    
    4.4
    %
    
    
    3.7
    %Expected life (in years)
    
    
    6.2
    
    
    
    5.0
    
    
    
    6.2
    
    
    
    4.9Expected Volatility
    
    
    56.9
    %
    
    
    57.7
    %
    
    
    58.2
    %
    
    
    58.6
    %Dividend
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
 16




---



##### Table of Contents



Three Months
    
    
    Six MonthsEnded
    
    
    EndedJuly 1,
    
    
    July 1,2006
    
    
    2006Cost of sales
    
    $
    271
    
    
    $
    575Research and development
    
    
    678
    
    
    
    1,437Selling, general and administrative
    
    
    2,499
    
    
    
    5,382Total, pre-tax
    
    $
    3,448
    
    
    $
    7,394Tax benefit of share-based compensation
    
    
    (1,345
    )
    
    
    (2,884
    )Total, net of tax
    
    $
    2,103
    
    
    $
    4,510
   Weighted
    
    
    Weighted
    
    
    AggregateAverage
    
    
    Average
    
    
    IntrinsicShares
    
    
    Exercise Price
    
    
    Remaining Life
    
    
    ValueBalance at December 31, 2005
    
    
    5,134
    
    
    $
    37.86Granted
    
    
    1,019
    
    
    
    31.91Exercised
    
    
    (392
    )
    
    
    21.63Forfeited
    
    
    (355
    )
    
    
    33.71Balance at July 1, 2006
    
    
    5,406
    
    
    $
    37.32
    
    
    
    6.92
    
    
    $
    3,117Exercisable at July 1, 2006
    
    
    3,437
    
    
    $
    39.01
    
    
    
    5.78
    
    
    $
    3,117Vested and expected to vest at July 1, 2006
    
    
    5,117
    
    
    $
    36.82
    
    
    
    6.75
    
    
    $
    3,117
  17




---



##### Table of Contents



Restricted Stock/Restricted Stock Units
   For the three months ended
    
    
    For the six months endedJuly 1,
    
    
    July 2,
    
    
    July 1,
    
    
    July 2,2006
    
    
    2005
    
    
    2006
    
    
    2005Cost of sales
    
    $
    114
    
    
    $
    53
    
    
    $
    203
    
    
    $
    106Research and development
    
    
    285
    
    
    
    134
    
    
    
    813
    
    
    
    264Selling, general and administrative
    
    
    1,032
    
    
    
    481
    
    
    
    1,981
    
    
    
    952Total, pre-tax
    
    $
    1,431
    
    
    $
    668
    
    
    $
    2,997
    
    
    $
    1,322Tax benefit of stock-based compensation
    
    
    (558
    )
    
    
    (247
    )
    
    
    (1,169
    )
    
    
    (489
    )Total, net of tax
    
    $
    873
    
    
    $
    421
    
    
    $
    1,828
    
    
    $
    833
 :
 Weighted
    
    
    AggregateAverage
    
    
    IntrinsicShares
    
    
    Grant Price
    
    
    ValueNonvested balance at December 31, 2005
    
    
    256
    
    
    $
    40.03Granted
    
    
    411
    
    
    
    32.88Vested
    
    
    (71
    )
    
    
    41.38Forfeited
    
    
    (30
    )
    
    
    35.13Nonvested balance at July 1, 2006
    
    
    566
    
    
    $
    34.93
    
    
    $
    10,461
 :
 Weighted
    
    
    AggregateAverage
    
    
    IntrinsicShares
    
    
    Grant Price
    
    
    ValueNonvested balance at December 31, 2005
    
    
    17
    
    
    $
    42.08Granted
    
    
    20
    
    
    
    31.77Vested
    
    
    (7
    )
    
    
    38.16Forfeited
    
    
    
    
    
    
    Nonvested balance at July 1, 2006
    
    
    30
    
    
    $
    36.20
    
    
    $
    554
  Employee Stock Purchase Program:
  18




---



##### Table of Contents



Note 4  Available for Sale Debt and Marketable Equity Securities:
  EstimatedUnrealized
    
    
    FairCost
    
    
    Gain
    
    
    Loss
    
    
    ValueSecurities issued by U.S. government and agencies
    
    $
    75,790
    
    
    $
    
    
    
    $
    (1,021
    )
    
    $
    74,769Debt securities issued by various state and local
municipalities and agencies
    
    
    13,945
    
    
    
    
    
    
    
    (277
    )
    
    
    13,668Other marketable debt securities
    
    
    14,697
    
    
    
    
    
    
    
    (862
    )
    
    
    13,835Available for sale debt securities
    
    
    104,432
    
    
    
    
    
    
    
    (2,160
    )
    
    
    102,272Marketable equity securities available for sale (see Note 5)
    
    
    1,720
    
    
    
    1,250
    
    
    
    
    
    
    
    2,970Total
    
    $
    106,152
    
    
    $
    1,250
    
    
    $
    (2,160
    )
    
    $
    105,242
  EstimatedUnrealized
    
    
    FairCost
    
    
    Gain
    
    
    Loss
    
    
    ValueSecurities issued by U.S. government and agencies
    
    $
    80,778
    
    
    $
    
    
    
    $
    (892
    )
    
    $
    79,886Debt securities issued by various state and local
municipalities and agencies
    
    
    13,947
    
    
    
    
    
    
    
    (226
    )
    
    
    13,721Other marketable debt securities
    
    
    14,440
    
    
    
    
    
    
    
    (1,240
    )
    
    
    13,200Available for sale debt securities
    
    
    109,165
    
    
    
    
    
    
    
    (2,358
    )
    
    
    106,807Marketable equity securities available for sale (see Note 5)
    
    
    1,720
    
    
    
    
    
    
    
    (340
    )
    
    
    1,380Total
    
    $
    110,885
    
    
    $
    
    
    
    $
    (2,698
    )
    
    $
    108,187
   July 1, 2006EstimatedFairCost
    
    
    ValueLess than one year
    
    $
    34,555
    
    
    $
    34,278Due between 1-2 years
    
    
    23,628
    
    
    
    23,244Due between 2-5 years
    
    
    26,430
    
    
    
    25,891Due after 5 years
    
    
    10,203
    
    
    
    9,173Other
    
    
    9,616
    
    
    
    9,686Total
    
    $
    104,432
    
    
    $
    102,272
  19




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##### Table of Contents



Note 5 - Other Investments:
 UnrealizedBalance at July 1, 2006
    
    Cost
    
    
    Gain
    
    
    Loss
    
    
    Fair ValueAdvancis Pharmaceutical Corporation
    
    $
    1,720
    
    
    $
    1,250
    
    
    $
    
    
    
    $
    2,970Abrika Pharmaceuticals, LLLP
    
    
    4,588
    
    
    
    
    
    
    
    
    
    
    
    4,588Optimer Pharmaceuticals, Inc.
    
    
    12,000
    
    
    
    
    
    
    
    
    
    
    
    12,000Total other investments
    
    $
    18,308
    
    
    $
    1,250
    
    
    $
    
    
    
    $
    19,558
 UnrealizedBalance at December 31, 2005
    
    Cost
    
    
    Gain
    
    
    Loss
    
    
    Fair ValueAdvancis Pharmaceutical Corporation
    
    $
    1,720
    
    
    $
    
    
    
    $
    (340
    )
    
    $
    1,380Abrika Pharmaceuticals, LLLP
    
    
    8,361
    
    
    
    
    
    
    
    
    
    
    
    8,361Optimer Pharmaceuticals, Inc.
    
    
    12,000
    
    
    
    
    
    
    
    
    
    
    
    12,000Total other investments
    
    $
    22,081
    
    
    $
    
    
    
    $
    (340
    )
    
    $
    21,741
   ®
  20




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##### Table of Contents



Note 6 - Accounts Receivable:
  July 1,
    
    
    December 31,2006
    
    
    2005Gross trade accounts receivable
    
    $
    367,137
    
    
    $
    265,682Chargebacks
    
    
    (87,949
    )
    
    
    (102,256
    )Rebates and incentive programs
    
    
    (83,843
    )
    
    
    (50,991
    )Returns
    
    
    (43,395
    )
    
    
    (32,893
    )Cash discounts and other
    
    
    (15,425
    )
    
    
    (15,333
    )Doubtful accounts
    
    
    (10,601
    )
    
    
    (1,847
    )Accounts receivable, net
    
    $
    125,924
    
    
    $
    62,362
 Allowance for doubtful accounts
 For the six month period endedJuly 1, 2006
    
    
    July 2, 2005Balance at beginning of period
    
    $
    (1,847
    )
    
    $
    (1,847
    )Additions  charge to expense
    
    
    (10,442
    )(a)
    
    
    Adjustments and/or deductions
    
    
    1,688
    
    
    
    Balance at end of period
    
    $
    (10,601
    )
    
    $
    (1,847
    )
 
 (a)
    
    The Company records estimated customer credits for chargebacks, rebates, product
returns, cash discounts and other credits at the time of sale. Customers often take
deductions for these items from their payment of invoices. The Company validates the
customer deductions and for valid deductions a credit is issued. For invalid deductions
the Company pursues collection from its customers. In the second quarter of 2006, the
Company determined that approximately $10 million of invalid customer deductions would
not be pursued for collection. Accordingly, the related $10 million was written off in
the second quarter of 2006.  For the six months ended July 1, 2006Provision
    
    
    (Provision)recorded
    
    
    reversal recordedBeginning
    
    
    for current
    
    
    for prior period
    
    
    Credits
    
    
    EndingAccounts receivable reserves
    
    balance
    
    
    period sales
    
    
    sales
    
    
    processed
    
    
    balanceChargebacks
    
    $
    (102,256
    )
    
    $
    (191,301
    )
    
    $
    
    (1)
    
    $
    205,608
    
    
    $
    (87,949
    )Rebates and incentive
programs
    
    
    (50,991
    )
    
    
    (111,987
    )
    
    
    
    
    
    
    79,135
    
    
    
    (83,843
    )Returns
    
    
    (32,893
    )
    
    
    (17,959
    )
    
    
    (7,686
    )
    
    
    15,143
    
    
    
    (43,395
    )Cash discounts and other
    
    
    (15,333
    )
    
    
    (24,566
    )
    
    
    
    
    
    
    24,474
    
    
    
    (15,425
    )Total
    
    $
    (201,473
    )
    
    $
    (345,813
    )
    
    $
    (7,686
    )
    
    $
    324,360
    
    
    $
    (230,612
    )Accrued liabilitiesMedicaid rebates
    
    $
    (9,040
    )
    
    $
    (8,934
    )
    
    $
    85
    
    
    $
    11,328
    
    
    $
    (6,561
    )
 21




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##### Table of Contents



For the six months ended July 2, 2005 (Restated)Provision
    
    
    (Provision)recorded
    
    
    reversal recordedBeginning
    
    
    for current
    
    
    for prior period
    
    
    Credits
    
    
    EndingAccounts receivable reserves
    
    balance
    
    
    period sales
    
    
    sales
    
    
    processed
    
    
    balanceChargebacks
    
    $
    (91,986
    )
    
    $
    (270,047
    )
    
    $
    
    (1)
    
    $
    299,551
    
    
    $
    (62,482
    )Rebates and incentive
programs
    
    
    (49,718
    )
    
    
    (51,725
    )
    
    
    1,489
    
    
    
    66,775
    
    
    
    (33,179
    )Returns
    
    
    (61,986
    )
    
    
    (13,283
    )
    
    
    (5,568
    )
    
    
    33,867
    
    
    
    (46,970
    )Cash discounts and other
    
    
    (13,287
    )
    
    
    (26,736
    )
    
    
    
    
    
    
    26,561
    
    
    
    (13,462
    )Total
    
    $
    (216,977
    )
    
    $
    (361,791
    )
    
    $
    (4,079
    )
    
    $
    426,754
    
    
    $
    (156,093
    )Accrued liabilitiesMedicaid rebates
    
    $
    (8,755
    )
    
    $
    (11,914
    )
    
    $
    
    
    
    $
    11,165
    
    
    $
    (9,504
    )
 
 (1)
    
    The amount of provision or reversal of reserves related to prior periods for
chargebacks is not determinable on a product or customer specific basis; however, based upon
analysis of activity in subsequent periods, the Company has determined that its chargeback
estimates remain reasonable.     22




---



##### Table of Contents



Use of Estimates in Reserves
  Change in Accounting Estimate
  Major Customers
  23




---



##### Table of Contents



Note 7 - Inventories:
 July l,
    
    
    December 31,2006
    
    
    2005Raw materials and supplies
    
    $
    38,419
    
    
    $
    35,190Work-in-process
    
    
    7,278
    
    
    
    8,830Finished goods
    
    
    63,608
    
    
    
    52,373$
    109,305
    
    
    $
    96,393
 Note 8  Property, Plant and Equipment, net
 July 1,
    
    
    December 31,2006
    
    
    2005Land
    
    $
    2,434
    
    
    $
    2,434Buildings
    
    
    31,895
    
    
    
    33,938Machinery and equipment
    
    
    52,417
    
    
    
    50,318Office equipment, furniture and fixtures
    
    
    6,389
    
    
    
    7,027Computer software and hardware
    
    
    27,060
    
    
    
    24,690Leasehold improvements
    
    
    11,420
    
    
    
    7,486131,615
    
    
    
    125,893Less accumulated depreciation and amortization
    
    
    42,196
    
    
    
    38,323$
    89,419
    
    
    $
    87,570
  Note 9 - Intangible Assets, net:
 July 1,
    
    
    December 31,2006
    
    
    2005Teva Pharmaceutical Industries, Inc. Asset Purchase Agreement,
net of accumulated amortization of $804 and $0
    
    $
    7,683
    
    
    $
    Ivax License Agreement, net of accumulated amortization
of $1,104 and $132
    
    
    6,895
    
    
    
    7,868FSC Laboratories Agreement, net of accumulated amortization
of $2,449 and $2,143
    
    
    3,373
    
    
    
    3,679Trademark licensed from Bristol-Myers Squibb Company,
net of accumulated amortization of $517 and $115
    
    
    9,482
    
    
    
    9,885Bristol-Myers Squibb Company Asset Purchase Agreement,
net of accumulated amortization of $7,243 and $6,407
    
    
    4,457
    
    
    
    5,293Product license fees, net of accumulated amortization
of $5,207 and $4,172
    
    
    801
    
    
    
    1,834Genpharm, Inc. Distribution Agreement, net of accumulated amortization
of $5,777 and $5,416
    
    
    5,056
    
    
    
    5,417Intellectual property, net of accumulated amortization of $531 and $431
    
    
    2,159
    
    
    
    2,259Other intangible assets, net of accumulated amortization of $1,113 and $0
    
    
    2,537
    
    
    
    $
    42,443
    
    
    $
    36,235
 ®
  24




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##### Table of Contents



Note 10 - Income Taxes:
  Note 11 - Changes in Stockholders Equity:
  AccumulatedAdditional
    
    
    OtherCommon Stock
    
    
    Paid-In
    
    
    ComprehensiveShares
    
    
    Amount
    
    
    Capital
    
    
    Income (loss)Balance, December 31, 2005
    
    
    35,114
    
    
    $
    351
    
    
    $
    217,403
    
    
    $
    (1,903
    )Unrealized gains on marketable securities, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,081Exercise of stock options
    
    
    393
    
    
    
    4
    
    
    
    8,502
    
    
    
    Tax benefit from exercise of stock options
    
    
    
    
    
    
    
    
    
    
    691
    
    
    
    Forfeitures of restricted stock
    
    
    (30
    )
    
    
    
    
    
    
    
    
    
    
    Issuances of restricted stock
    
    
    412
    
    
    
    4
    
    
    
    
    
    
    
    Employee stock purchase program
    
    
    15
    
    
    
    
    
    
    
    392
    
    
    
    Compensatory arrangements
    
    
    
    
    
    
    
    
    
    
    10,449
    
    
    
    Other
    
    
    
    
    
    
    
    
    
    
    (25
    )
    
    
    Balance, July 1, 2006
    
    
    35,904
    
    
    $
    359
    
    
    $
    237,412
    
    
    $
    (822
    )
 Three months ended
    
    
    Six months endedJuly 1,
    
    
    July 2,
    
    
    July 1,
    
    
    July 2,2006
    
    
    2005
    
    
    2006
    
    
    2005(Restated)
    
    
    
    
    
    
    (Restated)Comprehensive Income:Net (loss) income
    
    $
    (7,205
    )
    
    $
    7,222
    
    
    $
    (2,690
    )
    
    $
    8,161Other comprehensive income:Unrealized (loss) gain on marketable securities, net of tax
    
    
    (316
    )
    
    
    4,975
    
    
    
    1,081
    
    
    
    9,725Comprehensive income
    
    $
    (7,521
    )
    
    $
    12,197
    
    
    $
    (1,609
    )
    
    $
    17,886
  25




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##### Table of Contents



Note 12 - Earnings Per Share:
  Three months ended
    
    
    Six months endedJuly 1, 2006
    
    
    July 2, 2005
    
    
    July 1, 2006
    
    
    July 2, 2005(Restated)
    
    
    
    
    
    
    (Restated)(Loss) income from continuing operations
    
    $
    (7,205
    )
    
    $
    8,052
    
    
    $
    (2,690
    )
    
    $
    9,708Loss from discontinued operations
    
    
    
    
    
    
    (830
    )
    
    
    
    
    
    
    (1,547
    )Net (loss) income
    
    $
    (7,205
    )
    
    $
    7,222
    
    
    $
    (2,690
    )
    
    $
    8,161Basic:Weighted average number of common shares
outstanding
    
    
    34,454
    
    
    
    34,186
    
    
    
    34,368
    
    
    
    34,081Income from continuing operations
    
    $
    (0.21
    )
    
    $
    0.24
    
    
    $
    (0.08
    )
    
    $
    0.28Loss from discontinued operations
    
    
    
    
    
    
    (0.03
    )
    
    
    
    
    
    
    (0.04
    )Net (loss) income per share of common stock
    
    $
    (0.21
    )
    
    $
    0.21
    
    
    $
    (0.08
    )
    
    $
    0.24Assuming dilution:Weighted average number of common shares
outstanding
    
    
    34,454
    
    
    
    34,186
    
    
    
    34,368
    
    
    
    34,081Effect of dilutive securities
    
    
    
    
    
    
    281
    
    
    
    
    
    
    
    406Weighted average number of common shares
outstanding
    
    
    34,454
    
    
    
    34,467
    
    
    
    34,368
    
    
    
    34,487Income from continuing operations
    
    $
    (0.21
    )
    
    $
    0.23
    
    
    $
    (0.08
    )
    
    $
    0.28Loss from discontinued operations
    
    
    
    
    
    
    (0.02
    )
    
    
    
    
    
    
    (0.04
    )Net (loss) income per share of common stock
    
    $
    (0.21
    )
    
    $
    0.21
    
    
    $
    (0.08
    )
    
    $
    0.24
  Note 13 - Commitments, Contingencies and Other Matters:
 Pension Plan:
    26




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##### Table of Contents



Legal Proceedings:
      27




---



##### Table of Contents



Contractual Matters
 Ò
  Patent Related Matters
  Roxane Roxane Roxane Roxane. Roxane
  28




---



##### Table of Contents



® ® ®
 Roxane Roxane
 CIMA Labs, Inc. et al. v. Par Pharmaceutical Companies,
 29




---



##### Table of Contents



Inc. et al. CIMA Labs, Inc. et al. v. Actavis Group hf et al.
    Reliant Pharmaceuticals,
Inc. v. Par Pharmaceutical Inc.
  Industry Related Matters
  30




---



##### Table of Contents



31




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##### Table of Contents



32




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##### Table of Contents



Note 14- Discontinued Operations  Related Party Transaction:
   For the three months ended
    
    For the six months endedJuly 2, 2005
    
    July 2, 2005Revenues
    
    $
    2
    
    
    $
    53Pre-tax loss from operations
    
    $
    (1,338
    )
    
    $
    (2,494
    )
  December 31,2005Inventory
    
    $
    838Other current assets
    
    
    134Property, plant and equipment, net
    
    
    972Total assets held for sale
    
    
    1,944Accounts payable
    
    
    1,381Accrued expenses
    
    
    563Total liabilities
    
    
    1,944Net assets held for sale
    
    $
    
 Note 15  Investment in Joint Venture:
 the Equity
Method of Accounting for Investments in Common Stock
 Note 16  Subsequent Events:
   33




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##### Table of Contents



® ®
   Accounting for Costs Associated with Exit or Disposal Activities
    ®
 Note 17 - Segment Information:
   34




---



##### Table of Contents



Three months ended
    
    
    Six months endedJuly 1,
    
    
    July 2,
    
    
    July 1,
    
    
    July 2,2006
    
    
    2005
    
    
    2006
    
    
    2005(Restated)
    
    
    
    
    
    
    (Restated)Revenues:Generic
    
    $
    185,711
    
    
    $
    131,600
    
    
    $
    349,827
    
    
    $
    234,574Brand
    
    
    9,527
    
    
    
    
    
    
    
    17,730
    
    
    
    Total revenues
    
    $
    195,238
    
    
    $
    131,600
    
    
    $
    367,557
    
    
    $
    234,574Gross margin:Generic
    
    $
    47,950
    
    
    $
    63,714
    
    
    $
    91,074
    
    
    $
    101,009Brand
    
    
    6,817
    
    
    
    
    
    
    
    12,862
    
    
    
    Total gross margin
    
    $
    54,767
    
    
    $
    63,714
    
    
    $
    103,936
    
    
    $
    101,009Operating income (loss):Generic
    
    $
    5,083
    
    
    $
    37,947
    
    
    $
    21,296
    
    
    $
    48,891Brand
    
    
    (10,814
    )
    
    
    (17,211
    )
    
    
    (20,052
    )
    
    
    (26,621
    )Total operating (loss) income
    
    $
    (5,731
    )
    
    $
    20,736
    
    
    $
    1,244
    
    
    $
    22,270Other (expense) income, net
    
    
    (1,108
    )
    
    
    (181
    )
    
    
    (1,146
    )
    
    
    (207
    )Equity loss from joint venture
    
    
    (225
    )
    
    
    (106
    )
    
    
    (479
    )
    
    
    (142
    )Net investment loss
    
    
    (3,773
    )
    
    
    (6,477
    )
    
    
    (3,773
    )
    
    
    (5,124
    )Interest income
    
    
    1,973
    
    
    
    1,110
    
    
    
    3,956
    
    
    
    2,441Interest expense
    
    
    (1,693
    )
    
    
    (1,719
    )
    
    
    (3,388
    )
    
    
    (3,434
    )(Benefit) provision for income taxes
    
    
    (3,352
    )
    
    
    5,311
    
    
    
    (896
    )
    
    
    6,096Income from continuing operations
    
    $
    (7,205
    )
    
    $
    8,052
    
    
    $
    (2,690
    )
    
    $
    9,708
  For the three
    
    
    For the three
    
    
    For the six
    
    
    For the sixmonths ended
    
    
    months ended
    
    
    months ended
    
    
    months endedProduct
    
    July 1, 2006
    
    
    July 2, 2005
    
    
    July 1, 2006
    
    
    July 2, 2005GenericFluticasone (Flonase® )
    
    $
    77,244
    
    
    $
    
    
    
    $
    133,508
    
    
    $
    Cabergoline (Dostinex®)
    
    
    11,859
    
    
    
    
    
    
    
    14,410
    
    
    
    Various amoxicillin products (Amoxil®)
    
    
    8,255
    
    
    
    
    
    
    
    25,901
    
    
    
    Fluoxetine (Prozac®)
    
    
    5,080
    
    
    
    7,629
    
    
    
    9,198
    
    
    
    14,054Megestrol acetate oral suspension
( Megace®)
    
    
    5,027
    
    
    
    8,059
    
    
    
    8,131
    
    
    
    16,188Ibuprofen Rx (Advil®, Nuprin®,
Motrin®)
    
    
    4,791
    
    
    
    5,431
    
    
    
    8,658
    
    
    
    9,350Lovastatin (Mevacor®)
    
    
    4,383
    
    
    
    7,886
    
    
    
    8,178
    
    
    
    10,704Quinapril (Accupril®)
    
    
    4,275
    
    
    
    2,604
    
    
    
    9,425
    
    
    
    7,077Tramadol HCl and acetaminophen
tablets (Ultracet®)
    
    
    3,838
    
    
    
    34,557
    
    
    
    12,789
    
    
    
    34,557Mercaptopurine (Purinethol®)
    
    
    2,962
    
    
    
    5,597
    
    
    
    5,104
    
    
    
    9,560Cefprozil (Cefzil®)
    
    
    2,793
    
    
    
    
    
    
    
    7,884
    
    
    
    Minocycline (Minocin®)
    
    
    2,325
    
    
    
    1,602
    
    
    
    4,287
    
    
    
    7,669Paroxetine (Paxil®)
    
    
    709
    
    
    
    11,276
    
    
    
    6,562
    
    
    
    22,290Other product related revenues (2)
    
    
    4,655
    
    
    
    4,127
    
    
    
    7,937
    
    
    
    13,772Other (1)
    
    
    47,515
    
    
    
    42,832
    
    
    
    87,855
    
    
    
    89,353Total generic revenues
    
    $
    185,711
    
    
    $
    131,600
    
    
    $
    349,827
    
    
    $
    234,574BrandedMegace® ES
    
    $
    8,543
    
    
    $
    
    
    
    $
    16,325
    
    
    $
    Other
    
    
    984
    
    
    
    
    
    
    
    1,405
    
    
    
    Total Branded Revenues
    
    $
    9,527
    
    
    $
    
    
    
    $
    17,730
    
    
    $
    
 35




---



##### Table of Contents



(1)
    
    The further detailing of revenues of the Companys other approximately 100
generic products is impracticable due to the low volume of revenues associated
with each of these generic products. No single product in the other category
is in excess of 3% of total generic revenues for the three-month or six-month
periods ended July 1, 2006 or July 2, 2005.(2)
    
    Other product related revenues represent licensing and royalty related
revenues from profit sharing agreements related to products such as doxycycline
monohydrate, the generic version of Adoxa® and omeprazole, the generic version
of PrilosecÒ. For the six-month period ended July 2, 2005, other product
related revenues also included a $6,000 payment from a business partner to
compensate the Company for lost revenue on a terminated product manufacturing
and supply agreement. Note 18 - Recent Accounting Pronouncements:
 The Fair Value Option for Financial Assets and
Financial Liabilities  Including an Amendment of FASB Statement No. 115
 Employers Accounting for Defined Benefit
Pension and Other Postretirement Plans Employers Accounting
for Pension Employers Accounting for Settlements and Curtailments of Defined
Benefit Plans and for Benefits and for Termination Benefits Employers Disclosures about Pensions and Other Postretirement Benefits
 Fair Value Measurements
 Considering the Effects of
Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (SAB
108)
 Accounting for Uncertainty in Income
Taxes  an interpretation of FASB Statement No. 109 Accounting for Income Taxes
 36




---



##### Table of Contents



ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
  The financial data contained in this section is in thousands or as otherwise noted.
  OVERVIEW
   ® ® ® ®
 37




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##### Table of Contents



Three months ended
    
    
    Six months endedJuly 1,
    
    
    July 2,
    
    
    July 1,
    
    
    July 2,2006
    
    
    2005
    
    
    2006
    
    
    2005(Restated)
    
    
    
    
    
    
    (Restated)Revenues:Generic
    
    $
    185,711
    
    
    $
    131,600
    
    
    $
    349,827
    
    
    $
    234,574Brand
    
    
    9,527
    
    
    
    
    
    
    
    17,730
    
    
    
    Total revenues
    
    $
    195,238
    
    
    $
    131,600
    
    
    $
    367,557
    
    
    $
    234,574Gross margin:Generic
    
    $
    47,950
    
    
    $
    63,714
    
    
    $
    91,074
    
    
    $
    101,009Brand
    
    
    6,817
    
    
    
    
    
    
    
    12,862
    
    
    
    Total gross margin
    
    $
    54,767
    
    
    $
    63,714
    
    
    $
    103,936
    
    
    $
    101,009Operating income (loss):Generic
    
    $
    5,083
    
    
    $
    37,947
    
    
    $
    21,296
    
    
    $
    48,891Brand
    
    
    (10,814
    )
    
    
    (17,211
    )
    
    
    (20,052
    )
    
    
    (26,621
    )Total operating (loss) income
    
    $
    (5,731
    )
    
    $
    20,736
    
    
    $
    1,244
    
    
    $
    22,270
 38




---



##### Table of Contents



®
 ®
  ®
 RESULTS OF OPERATIONS
 Revenues
 ®
 39




---



##### Table of Contents



Revenues  Six Months Ended July 1, 2006
 ®
  ®
   40




---



##### Table of Contents



For the six months ended July 1, 2006Provision
    
    
    (Provision)recorded
    
    
    reversal recordedBeginning
    
    
    for current
    
    
    for prior period
    
    
    Credits
    
    
    Endingbalance
    
    
    period sales
    
    
    sales
    
    
    processed
    
    
    balanceAccounts receivable reservesChargebacks
    
    $
    (102,256
    )
    
    $
    (191,301
    )
    
    $
    
    (1)
    
    $
    205,608
    
    
    $
    (87,949
    )Rebates and incentive
programs
    
    
    (50,991
    )
    
    
    (111,987
    )
    
    
    
    
    
    
    79,135
    
    
    
    (83,843
    )Returns
    
    
    (32,893
    )
    
    
    (17,959
    )
    
    
    (7,686
    )
    
    
    15,143
    
    
    
    (43,395
    )Cash discounts and other
    
    
    (15,333
    )
    
    
    (24,566
    )
    
    
    
    
    
    
    24,474
    
    
    
    (15,425
    )Total
    
    $
    (201,473
    )
    
    $
    (345,813
    )
    
    $
    (7,686
    )
    
    $
    324,360
    
    
    $
    (230,612
    )Accrued liabilitiesMedicaid rebates
    
    $
    (9,040
    )
    
    $
    (8,934
    )
    
    $
    85
    
    
    $
    11,328
    
    
    $
    (6,561
    )
 For the six months ended July 2, 2005 (Restated)Provision
    
    
    (Provision)recorded
    
    
    reversal recordedBeginning
    
    
    for current
    
    
    for prior period
    
    
    Credits
    
    
    Endingbalance
    
    
    period sales
    
    
    sales
    
    
    processed
    
    
    balanceAccounts receivable reservesChargebacks
    
    $
    (91,986
    )
    
    $
    (270,047
    )
    
    $
    
    (1)
    
    $
    299,551
    
    
    $
    (62,482
    )Rebates and incentive
programs
    
    
    (49,718
    )
    
    
    (51,725
    )
    
    
    1,489
    
    
    
    66,775
    
    
    
    (33,179
    )Returns
    
    
    (61,986
    )
    
    
    (13,283
    )
    
    
    (5,568
    )
    
    
    33,867
    
    
    
    (46,970
    )Cash discounts and other
    
    
    (13,287
    )
    
    
    (26,736
    )
    
    
    
    
    
    
    26,561
    
    
    
    (13,462
    )Total
    
    $
    (216,977
    )
    
    $
    (361,791
    )
    
    $
    (4,079
    )
    
    $
    426,754
    
    
    $
    (156,093
    )Accrued liabilitiesMedicaid rebates
    
    $
    (8,755
    )
    
    $
    (11,914
    )
    
    $
    
    
    
    $
    11,165
    
    
    $
    (9,504
    )
 
 (1)
    
    The amount of provision or reversal of reserves related to prior periods for
chargebacks is not determinable on a product or customer specific basis; however, based upon
analysis of activity in subsequent periods, the Company has determined that its chargeback
estimates remain reasonable. Use of Estimates in Reserves
  Change in Accounting Estimate
  41




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Gross Margin  Three Months Ended July 1, 2006
 ® ®
 Gross Margin  Six Months Ended July 1, 2006
 ® ®
 Operating Expenses
 Research and Development  Three months ended July 1, 2006
  Research and Development  Six months ended July 1, 2006
  Selling, General and Administrative Expenses  Three months ended July 1, 2006
 ®
 42




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Selling, General and Administrative Expenses  Six months ended July 1, 2006
 ®
  Other Expense, net
  Net Investment Loss
  Equity Loss in Joint Venture
  Interest Income
  Interest Expense
  Income Taxes
  43




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Discontinued Operations
  FINANCIAL CONDITION
 Liquidity and Capital Resources
        44




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Financing
  Critical Accounting Policies and Use of Estimates
  Subsequent Events
    45




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® ®
   Accounting for Costs Associated with Exit or Disposal Activities
    ®
 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
   July 1,
    
    
    Dec. 31,2006
    
    
    2005Securities issued by U.S. government and agencies
    
    $
    74,769
    
    
    $
    79,886Debt securities issued by various state and local municipalities and agencies
    
    
    13,668
    
    
    
    13,721Other marketable debt securities
    
    
    13,835
    
    
    
    13,200Total
    
    $
    102,272
    
    
    $
    106,807
 46




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Available for Sale Securities and Other Investments:
    ®
  47




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##### Table of Contents



ITEM 4. CONTROLS AND PROCEDURES
 Disclosure Controls and Procedures
  Changes in Internal Control over Financial Reporting
  Remediation of Material Weaknesses
  
    
    Increased the size, expertise and training of the finance and
accounting staff to include adequate resources for ensuring GAAP
compliance, particularly in the areas of accounts receivable
reserves, inventory valuation and existence and the accounting for
certain of the Companys non-routine transactions.
    
    Assigned individuals with significant industry experience and
increased the involvement of its senior finance team members in
the preparation and review of accounts receivable reserves and
inventory valuation and existence.
    
    Enhanced the accounting policies and procedures to provide
adequate, sufficient and useful guidance to its staff in the area
of accounts receivable reserves and inventory valuation and
existence.
    
    Corrected its methodologies with respect to estimating accounts
receivable reserves for chargebacks, rebates, and product
returns.
    
    Increased the level of interdepartmental communication in a way
that will foster information sharing between the Companys finance
staff and operational personnel.
  48




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PART II. OTHER INFORMATION
 
 ITEM 1 . LEGAL PROCEEDINGS
      49




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Contractual Matters
 Ò
  Patent Related Matters
   50




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Roxane Roxane Roxane Roxane. Roxane
   ® ® ®
 51




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##### Table of Contents



Roxane Roxane
 CIMA Labs, Inc. et al. v. Par Pharmaceutical Companies, Inc. et al. CIMA Labs, Inc. et
al. v. Actavis Group hf et al.
    Reliant Pharmaceuticals,
Inc. v. Par Pharmaceutical Inc.
 52




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##### Table of Contents



Industry Related Matters
     53




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54




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##### Table of Contents



ITEM 1A. RISK FACTORS
  
 ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 Issuer Purchases of Equity Securities(1)  Quarter Ending July 1, 2006
 Total Number ofShares ofAverage
    
    Common Stock
    
    Maximum Number ofTotal Number of
    
    Price Paid
    
    Purchased as Part
    
    Shares of CommonShares of
    
    per Share of
    
    of Publicly
    
    Stock that May Yet BeCommon Stock
    
    Common
    
    Announced Plans
    
    Purchased Under thePeriod
    
    Purchased(3)
    
    Stock
    
    or Programs
    
    Plans or Programs(2)April 2, 2006
through April 29,
2006
    
    
    
    
    
    
    N/A
    
    
    
    
    
    
    
    965,438April 30, 2006
through May 27,
2006
    
    
    
    
    
    
    N/A
    
    
    
    
    
    
    
    965,438May 28, 2006
through July 1,
2006
    
    
    3,803
    
    
    
    N/A
    
    
    
    
    
    
    
    965,438Total
    
    
    3,803
    
    
    
    N/A
    
    
    
    
 
 (1)
    
    In April 2004, the Board authorized the repurchase of up to $50,000 of the registrants
common stock. Repurchases are made, subject to compliance with applicable securities laws,
from time to time in the open market or in privately negotiated transactions, whenever it
appears prudent to do so. Shares of common stock acquired through the repurchase program are
available for reissuance for general corporate purposes. The authorized amount remaining for
stock repurchases under the repurchase program is $17.8 million. The repurchase program has no
expiration date.(2)
    
    Based on the closing price of the Companys common stock on The New York Stock Exchange of
$18.46 at June 30, 2006.(3)
    
    The total number of shares purchased represents shares surrendered to the Company to satisfy
tax withholding obligations in connection with the vesting of restricted stock issued to
employees. 55




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ITEM 6 . EXHIBITS
 31.1
    
    Certification of the Principal Executive Officer (filed herewith.)31.2
    
    Certification of the Principal Financial Officer (filed herewith.)32.1
    
    Certification by the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (attached hereto.)32.2
    
    Certification by the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (attached hereto.)
 56




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SIGNATURES
  PAR PHARMACEUTICAL COMPANIES, INC.
  (Registrant)July 10, 2007
    /s/ Patrick G. LePorePatrick G. LePorePresident and Chief Executive OfficerJuly 10, 2007
    /s/ Gerard A. MartinoGerard A. MartinoExecutive Vice President and Chief Operating OfficerJuly 10, 2007
    /s/ Veronica A. LubatkinVeronica A. LubatkinExecutive Vice President and Chief Financial Officer 57




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EXHIBIT INDEX
 Exhibit Number
    
    Description31.1
    
    Certification by the President and Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act.31.2
    
    Certification by the Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act.32.1
    
    Certification by the President and Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification by the Chief Financial Officer pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 58