##### 



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: September 30, 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 September 30, 2006 and
December 31, 2005
    
    
    4Condensed Consolidated Statements of Operations for the three months and
nine months ended September 30, 2006 and October 1, 2005 (Restated)
    
    
    5Condensed Consolidated Statements of Cash Flows for the nine months
ended September 30, 2006 and October 1, 2005 (Restated)
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    8Item 2.
    
    Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    39Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    49Item 4.
    
    Controls and Procedures
    
    
    50PART II
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    51Item 1A.
    
    Risk Factors
    
    
    57Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    58Item 6.
    
    Exhibits
    
    
    58SIGNATURES
    
    
    59
 2




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##### 



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is superseded by the information in the previously filed Form 10-K/A and this 10-Q/A.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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##### 



PART I  FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
 PAR PHARMACEUTICAL COMPANIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
 September 30,
    
    
    December 31,2006
    
    
    2005ASSETSCurrent assets:Cash and cash equivalents
    
    $
    96,679
    
    
    $
    93,477Available for sale debt and marketable equity securities
    
    
    95,750
    
    
    
    103,066Accounts receivable, net
    
    
    102,721
    
    
    
    62,362Inventories
    
    
    111,124
    
    
    
    96,393Prepaid expenses and other current assets
    
    
    11,668
    
    
    
    18,759Deferred income tax assets
    
    
    75,678
    
    
    
    69,256Income taxes receivable
    
    
    18,859
    
    
    
    18,859Assets held for sale
    
    
    
    
    
    
    1,944Total current assets
    
    
    512,479
    
    
    
    464,116Property, plant and equipment, at cost less
accumulated depreciation and amortization
    
    
    90,875
    
    
    
    87,570Available for sale debt and marketable equity securities
    
    
    7,659
    
    
    
    3,741Investment in joint venture
    
    
    4,205
    
    
    
    4,153Other investments
    
    
    22,588
    
    
    
    21,741Intangible assets, net
    
    
    45,965
    
    
    
    36,235Goodwill
    
    
    58,729
    
    
    
    58,729Deferred charges and other assets
    
    
    16,239
    
    
    
    8,828Non-current deferred income taxes, net
    
    
    48,942
    
    
    
    50,917Total assets
    
    $
    807,681
    
    
    $
    736,030LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Short-term and current portion of long-term debt
    
    $
    2,312
    
    
    $
    3,011Accounts payable
    
    
    43,456
    
    
    
    56,412Payables due to distribution agreement partners
    
    
    100,549
    
    
    
    46,937Accrued salaries and employee benefits
    
    
    13,766
    
    
    
    12,780Accrued expenses and other current liabilities
    
    
    18,603
    
    
    
    25,739Income taxes payable
    
    
    12,961
    
    
    
    9,683Liabilities held for sale
    
    
    
    
    
    
    1,944Total current liabilities
    
    
    191,647
    
    
    
    156,506Long-term debt, less current portion
    
    
    201,895
    
    
    
    202,001Other long-term liabilities
    
    
    345
    
    
    
    335Stockholders equity:Preferred Stock, par value $0.0001 per share, authorized
6,000,000 shares; none issued and outstanding
    
    
    
    
    
    
    Common Stock, par value $0.01 per share, authorized
90,000,000 shares; issued 35,880,817 and
35,114,026 shares
    
    
    359
    
    
    
    351Additional paid-in-capital
    
    
    249,417
    
    
    
    217,403Retained earnings
    
    
    195,211
    
    
    
    193,515Accumulated
other comprehensive income (loss)
    
    
    1,626
    
    
    
    (1,903
    )Treasury stock, at cost 871,738 and 848,588 shares
    
    
    (32,819
    )
    
    
    (32,178
    )Total stockholders equity
    
    
    413,794
    
    
    
    377,188Total liabilities and stockholders equity
    
    $
    807,681
    
    
    $
    736,030
  4




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##### 



PAR PHARMACEUTICAL COMPANIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    October 1,
    
    
    September 30,
    
    
    October 1,2006
    
    
    2005
    
    
    2006
    
    
    2005(Restated
    
    
    
    
    
    
    (Restatedsee Note 2)
    
    
    
    
    
    
    see Note 2)Revenues:Net product sales
    
    $
    168,951
    
    
    $
    96,987
    
    
    $
    528,571
    
    
    $
    317,788Other product related revenues
    
    
    5,028
    
    
    
    2,617
    
    
    
    12,964
    
    
    
    16,390Total revenues
    
    
    173,979
    
    
    
    99,604
    
    
    
    541,535
    
    
    
    334,178Cost of goods sold
    
    
    118,919
    
    
    
    66,432
    
    
    
    382,540
    
    
    
    199,997Gross margin
    
    
    55,060
    
    
    
    33,172
    
    
    
    158,995
    
    
    
    134,181Operating expenses:Research and development
    
    
    12,574
    
    
    
    14,512
    
    
    
    43,983
    
    
    
    47,928Selling, general and administrative
    
    
    40,053
    
    
    
    22,656
    
    
    
    111,337
    
    
    
    67,979Intangible assets impairment
    
    
    
    
    
    
    6,999
    
    
    
    
    
    
    
    6,999Total operating expenses
    
    
    52,627
    
    
    
    44,167
    
    
    
    155,320
    
    
    
    122,906Operating income (loss)
    
    
    2,433
    
    
    
    (10,995
    )
    
    
    3,675
    
    
    
    11,275Other income (expense), net
    
    
    3,016
    
    
    
    17
    
    
    
    1,870
    
    
    
    (190
    )Equity loss from joint venture
    
    
    (18
    )
    
    
    (271
    )
    
    
    (497
    )
    
    
    (413
    )Net investment gain (loss)
    
    
    
    
    
    
    21,137
    
    
    
    (3,773
    )
    
    
    16,013Interest income
    
    
    2,098
    
    
    
    1,396
    
    
    
    6,055
    
    
    
    3,837Interest expense
    
    
    (1,681
    )
    
    
    (1,806
    )
    
    
    (5,069
    )
    
    
    (5,240
    )Income from continuing operations before
provision (benefit) for income taxes
    
    
    5,848
    
    
    
    9,478
    
    
    
    2,261
    
    
    
    25,282Provision (benefit) for income taxes
    
    
    1,461
    
    
    
    (3,331
    )
    
    
    565
    
    
    
    2,765Income from continuing operations
    
    
    4,387
    
    
    
    12,809
    
    
    
    1,696
    
    
    
    22,517Discontinued operations:Loss from discontinued operations
    
    
    
    
    
    
    (915
    )
    
    
    
    
    
    
    (3,409
    )Benefit for income taxes
    
    
    
    
    
    
    (349
    )
    
    
    
    
    
    
    (1,296
    )Loss from discontinued operations
    
    
    
    
    
    
    (566
    )
    
    
    
    
    
    
    (2,113
    )Net income
    
    $
    4,387
    
    
    $
    12,243
    
    
    $
    1,696
    
    
    $
    20,404Basic earnings (loss) per share of common stock:Income from continuing operations
    
    $
    0.13
    
    
    $
    0.37
    
    
    $
    0.05
    
    
    $
    0.66Loss from discontinued operations
    
    
    
    
    
    
    (0.01
    )
    
    
    
    
    
    
    (0.06
    )Net income
    
    $
    0.13
    
    
    $
    0.36
    
    
    $
    0.05
    
    
    $
    0.60Diluted earnings (loss) per share of common
stock:Income from continuing operations
    
    $
    0.13
    
    
    $
    0.37
    
    
    $
    0.05
    
    
    $
    0.65Loss from discontinued operations
    
    
    
    
    
    
    (0.01
    )
    
    
    
    
    
    
    (0.06
    )Net income
    
    $
    0.13
    
    
    $
    0.36
    
    
    $
    0.05
    
    
    $
    0.59Weighted average number of
common shares outstanding:Basic
    
    
    34,468
    
    
    
    34,205
    
    
    
    34,401
    
    
    
    34,119Diluted
    
    
    34,566
    
    
    
    34,391
    
    
    
    34,636
    
    
    
    34,404
  5




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##### 



PAR PHARMACEUTICAL COMPANIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 Nine Months EndedSeptember 30,
    
    
    October 1,2006
    
    
    2005(Restatedsee Note 2)Cash flows from operating activities:Net income
    
    $
    1,696
    
    
    $
    20,404Deduct: Loss from discontinued operations, net of tax
    
    
    
    
    
    
    (2,113
    )Income from continuing operations
    
    
    1,696
    
    
    
    22,517Adjustments to reconcile net income to net cash provided by operating activities:Deferred income taxes
    
    
    (6,720
    )
    
    
    12,666Depreciation and amortization
    
    
    15,986
    
    
    
    9,734Investment impairment
    
    
    3,773
    
    
    
    8,280Intangible assets impairment
    
    
    
    
    
    
    6,999Equity loss from joint venture
    
    
    497
    
    
    
    413Resolution of tax contingency
    
    
    
    
    
    
    (7,218
    )Allowances against accounts receivable
    
    
    34,583
    
    
    
    (20,770
    )Share-based compensation expense
    
    
    18,750
    
    
    
    2,575Gain on disposal of fixed assets
    
    
    220
    
    
    
    Gain on investments
    
    
    
    
    
    
    (24,293
    )Tax benefit on exercise of nonqualified stock options
    
    
    694
    
    
    
    488Excess tax benefit on exercise of nonqualified stock options
    
    
    (679
    )
    
    
    Other
    
    
    123
    
    
    
    Changes in assets and liabilities, net of the effects of divestitures:Increase in accounts receivable
    
    
    (74,943
    )
    
    
    (26,969
    )Increase in inventories
    
    
    (14,731
    )
    
    
    (6,267
    )Decrease in prepaid expenses and other assets
    
    
    8,680
    
    
    
    5,332Decrease in accounts payable
    
    
    (13,045
    )
    
    
    (21,645
    )Increase in payables due to distribution agreement partners
    
    
    53,612
    
    
    
    7,777(Decrease) increase in accrued expenses and other liabilities
    
    
    (3,648
    )
    
    
    17,331Increase (decrease) in income taxes payable/receivable
    
    
    6,831
    
    
    
    (4,484
    )Net cash provided by (used in) operating activities
    
    
    31,679
    
    
    
    (17,534
    )Net cash used in operating activities from discontinued operations
    
    
    
    
    
    
    (3,947
    )Cash flows from investing activities:Capital expenditures
    
    
    (15,006
    )
    
    
    (19,997
    )Purchases of intangibles
    
    
    (14,137
    )
    
    
    (5,000
    )Acquisition of subsidiary, net of cash acquired
    
    
    
    
    
    
    98Purchases of long-term investments
    
    
    
    
    
    
    (12,000
    )Purchases of available for sale debt and marketable equity securities
    
    
    (419
    )
    
    
    (36,715
    )Proceeds from sale of available for sale debt and marketable equity securities
    
    
    5,000
    
    
    
    92,689Proceeds from sale of other investments
    
    
    
    
    
    
    31,299Acquisition of subsidiary, contingent payment
    
    
    (2,500
    )
    
    
    (2,500
    )Capital contributions to joint venture
    
    
    (550
    )
    
    
    (1,901
    )Advance for product rights
    
    
    (9,000
    )
    
    
    Net cash (used in) provided by investing activities
    
    
    (36,612
    )
    
    
    45,973Net cash used in investing activities from discontinued operations
    
    
    
    
    
    
    (250
    )Cash flows from financing activities:Proceeds from issuances of common stock upon exercise of stock options
    
    
    8,902
    
    
    
    2,134Excess tax benefits on exercise of nonqualified stock options
    
    
    679
    
    
    
    Purchase of treasury stock
    
    
    (641
    )
    
    
    (152
    )Payments of short-term debt related to financed insurance premiums
    
    
    (2,889
    )
    
    
    (4,446
    )Borrowings related to financed insurance premium liabilities
    
    
    2,274
    
    
    
    1,597Principal payments under long-term and other borrowings
    
    
    (190
    )
    
    
    (224
    )Net cash provided by (used in) financing activities
    
    
    8,135
    
    
    
    (1,091
    )
 6




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##### 



Nine Months EndedSeptember 30,
    
    
    October 1,2006
    
    
    2005Net increase in cash and cash equivalents
    
    
    3,202
    
    
    
    23,151Cash and cash equivalents at beginning of period
    
    
    93,477
    
    
    
    36,682Cash and cash equivalents at end of period
    
    $
    96,679
    
    
    $
    59,833Supplemental disclosure of cash flow information:Cash paid during the period for:Income taxes
    
    $
    890
    
    
    $
    2,421Interest
    
    $
    5,811
    
    
    $
    5,846Non-cash transactions:Increase (decrease) in fair value of available for sale debt and marketable
equity securities
    
    $
    5,802
    
    
    $
    (1,016
    )Acquired intangibles not yet paid
    
    $
    6,000
    
    
    $
    Capital expenditures incurred but not yet paid
    
    $
    670
    
    
    $
    2,622
  7




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##### 



PAR PHARMACEUTICAL COMPANIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 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
  Sales Cut-Off
  9




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##### 



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 ninemonths ended
    
    
    months endedOctober 1,
    
    
    October 1,(Amounts in thousands)
    
    2005
    
    
    2005Net income  as previously reported
    
    $
    25,280
    
    
    $
    26,636Pre-tax restatement adjustments:Accounts receivable reservesIncrease in chargebacks
    
    
    (23,338
    )
    
    
    (20,875
    )Increase in rebates
    
    
    (2,104
    )
    
    
    (388
    )Decrease in product returns
    
    
    5,968
    
    
    
    10,797Decrease (increase) in cash discounts and other
    
    
    286
    
    
    
    (134
    )Total Accounts Receivable Reserves
    
    
    (19,188
    )
    
    
    (10,600
    )Inventory Valuation and Existence
    
    
    (2,083
    )
    
    
    (3,160
    )Investment in Joint Venture
    
    
    (197
    )
    
    
    (225
    )Accounting for a Lease Acquired in a Business Combination
    
    
    126
    
    
    
    377Other ErrorsSales cut-off
    
    
    
    
    
    
    1,380Accounts payable error
    
    
    
    
    
    
    (825
    )Other
    
    
    (34
    )
    
    
    2,834Total pre-tax restatement adjustments
    
    
    (21,376
    )
    
    
    (10,219
    )Tax effect of restatement adjustments
    
    
    (8,339
    )
    
    
    (3,987
    )After tax effect of restatement adjustments
    
    
    (13,037
    )
    
    
    (6,232
    )Net income  as restated
    
    $
    12,243
    
    
    $
    20,404
 11




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##### 



DiscontinuedAs
    
    operationspreviously
    
    reclassification
    
    Restatement
    
    As(Amounts in thousands, except per share amounts)
    
    reported
    
    adjustments
    
    adjustments
    
    restated(1)Revenues:Net product sales
    
    $
    118,257
    
    
    $
    (6
    )
    
    $
    (21,264
    )
    
    $
    96,987Other product related revenues
    
    
    417
    
    
    
    
    
    
    
    2,200
    
    
    
    2,617Total revenues
    
    
    118,674
    
    
    
    (6
    )
    
    
    (19,064
    )
    
    
    99,604Cost of goods sold
    
    
    64,810
    
    
    
    (490
    )
    
    
    2,112
    
    
    
    66,432Gross margin
    
    
    53,864
    
    
    
    484
    
    
    
    (21,176
    )
    
    
    33,172Operating expenses:Research and development
    
    
    14,987
    
    
    
    (300
    )
    
    
    (175
    )
    
    
    14,512Selling, general and administrative
    
    
    22,936
    
    
    
    (174
    )
    
    
    (106
    )
    
    
    22,656Total operating expenses
    
    
    44,922
    
    
    
    (474
    )
    
    
    (281
    )
    
    
    44,167Operating income (loss)
    
    
    8,942
    
    
    
    958
    
    
    
    (20,895
    )
    
    
    (10,995
    )Other (expense) income, net
    
    
    (5
    )
    
    
    
    
    
    
    22
    
    
    
    17Equity loss from joint venture
    
    
    
    
    
    
    
    
    
    
    (271
    )
    
    
    (271
    )Interest income
    
    
    
    
    
    
    
    
    
    
    1,396
    
    
    
    1,396Interest expense
    
    
    
    
    
    
    
    
    
    
    (1,806
    )
    
    
    (1,806
    )Interest expense, net
    
    
    (135
    )
    
    
    (43
    )
    
    
    178
    
    
    
    Income from
continuing operations before provision (benefit) for income taxes
    
    
    29,939
    
    
    
    915
    
    
    
    (21,376
    )
    
    
    9,478Provision (benefit) for income taxes
    
    
    4,659
    
    
    
    349
    
    
    
    (8,339
    )
    
    
    (3,331
    )Income from continuing operations
    
    
    25,280
    
    
    
    566
    
    
    
    (13,037
    )
    
    
    12,809Loss from discontinued operations
    
    
    
    
    
    
    (915
    )
    
    
    
    
    
    
    (915
    )Benefit for income taxes
    
    
    
    
    
    
    (349
    )
    
    
    
    
    
    
    (349
    )Loss from discontinued operations
    
    
    
    
    
    
    (566
    )
    
    
    
    
    
    
    (566
    )Net income
    
    $
    25,280
    
    
    $
    
    
    
    $
    (13,037
    )
    
    $
    12,243Basic earnings (loss) per share of common stock:Income from continuing operations
    
    $
    0.74
    
    
    $
    0.01
    
    
    $
    (0.38
    )
    
    $
    0.37Loss from discontinued operations
    
    
    
    
    
    
    (0.01
    )
    
    
    
    
    
    
    (0.01
    )Net income
    
    $
    0.74
    
    
    $
    
    
    
    $
    (0.38
    )
    
    $
    0.36Diluted earnings (loss) per share of common stock:Income from continuing operations
    
    $
    0.74
    
    
    $
    0.01
    
    
    $
    (0.38
    )
    
    $
    0.37Loss from discontinued operations
    
    
    
    
    
    
    (0.01
    )
    
    
    
    
    
    
    (0.01
    )Net income
    
    $
    0.74
    
    
    $
    
    
    
    $
    (0.38
    )
    
    $
    0.36
 
 
 (1)
    
      Refer to Note 14  Discontinued Operations  Related Party Transaction 12




---



##### 



DiscontinuedoperationsAs previously
    
    reclassification
    
    Restatement(Amounts in thousands, except per share amounts)
    
    reported
    
    adjustments
    
    adjustments
    
    As restated(1)Revenues:Net product sales
    
    $
    326,072
    
    
    $
    (59
    )
    
    $
    (8,225
    )
    
    $
    317,788Other product related revenues
    
    
    7,143
    
    
    
    
    
    
    
    9,247
    
    
    
    16,390Total revenues
    
    
    333,215
    
    
    
    (59
    )
    
    
    1,022
    
    
    
    334,178Cost of goods sold
    
    
    191,362
    
    
    
    (1,731
    )
    
    
    10,366
    
    
    
    199,997Gross margin
    
    
    141,853
    
    
    
    1,672
    
    
    
    (9,344
    )
    
    
    134,181Operating expenses:Research and development
    
    
    48,374
    
    
    
    (1,152
    )
    
    
    706
    
    
    
    47,928Selling, general and administrative
    
    
    69,442
    
    
    
    (645
    )
    
    
    (818
    )
    
    
    67,979Total operating expenses
    
    
    124,815
    
    
    
    (1,797
    )
    
    
    (112
    )
    
    
    122,906Operating income
    
    
    17,038
    
    
    
    3,469
    
    
    
    (9,232
    )
    
    
    11,275Other (expense), net
    
    
    (310
    )
    
    
    
    
    
    
    120
    
    
    
    (190
    )Equity loss from joint venture
    
    
    
    
    
    
    
    
    
    
    (413
    )
    
    
    (413
    )Interest income
    
    
    
    
    
    
    
    
    
    
    3,837
    
    
    
    3,837Interest expense
    
    
    
    
    
    
    
    
    
    
    (5,240
    )
    
    
    (5,240
    )Interest expense, net
    
    
    (649
    )
    
    
    (60
    )
    
    
    709
    
    
    
    Income from continuing operations before
provision for income taxes
    
    
    32,092
    
    
    
    3,409
    
    
    
    (10,219
    )
    
    
    25,282Provision for income taxes
    
    
    5,456
    
    
    
    1,296
    
    
    
    (3,987
    )
    
    
    2,765Income from continuing operations
    
    
    26,636
    
    
    
    2,113
    
    
    
    (6,232
    )
    
    
    22,517Loss from discontinued operations
    
    
    
    
    
    
    (3,409
    )
    
    
    
    
    
    
    (3,409
    )Benefit for income taxes
    
    
    
    
    
    
    (1,296
    )
    
    
    
    
    
    
    (1,296
    )Loss from discontinued operations
    
    
    
    
    
    
    (2,113
    )
    
    
    
    
    
    
    (2,113
    )Net income
    
    $
    26,636
    
    
    $
    
    
    
    $
    (6,232
    )
    
    $
    20,404Basic earnings (loss) per share of common
stock:Income from continuing operations
    
    $
    0.78
    
    
    $
    0.06
    
    
    $
    (0.18
    )
    
    $
    0.66Loss from discontinued operations
    
    
    
    
    
    
    (0.06
    )
    
    
    
    
    
    
    (0.06
    )Net income
    
    $
    0.78
    
    
    $
    
    
    
    $
    (0.18
    )
    
    $
    0.60Diluted earnings (loss) per share of common
stock:Income from continuing operations
    
    $
    0.77
    
    
    $
    0.06
    
    
    $
    (0.18
    )
    
    $
    0.65Loss from discontinued operations
    
    
    
    
    
    
    (0.06
    )
    
    
    
    
    
    
    (0.06
    )Net income
    
    $
    0.77
    
    
    $
    
    
    
    $
    (0.18
    )
    
    $
    0.59
 
 (1)
    
      Refer to Note 14  Discontinued Operations  Related Party Transaction 13




---



##### 



DiscontinuedoperationsAs previously
    
    reclassification
    
    Restatement(Amounts in thousands)
    
    reported
    
    adjustments
    
    adjustments
    
    As restated(1)Cash flows from operating activities:Net income
    
    $
    26,636
    
    
    
    
    
    
    $
    (6,232
    )
    
    $
    20,404Loss from discontinued operations, net of tax
    
    
    
    
    
    
    (2,113
    )
    
    
    
    
    
    
    (2,113
    )Income from continuing operations
    
    
    26,636
    
    
    
    2,113
    
    
    
    (6,232
    )
    
    
    22,517Deferred income taxes
    
    
    19,832
    
    
    
    2,310
    
    
    
    (9,476
    )
    
    
    12,666Depreciation and amortization
    
    
    11,314
    
    
    
    (1,048
    )
    
    
    (532
    )
    
    
    9,734Equity in net loss of joint venture
    
    
    
    
    
    
    
    
    
    
    413
    
    
    
    413Inventory reserves
    
    
    3,948
    
    
    
    
    
    
    
    (3,948
    )
    
    
    Resolution of tax contingency
    
    
    (7,214
    )
    
    
    
    
    
    
    (4
    )
    
    
    (7,218
    )Allowances against accounts receivable
    
    
    (11,919
    )
    
    
    
    
    
    
    (8,851
    )
    
    
    (20,770
    )Gain on investments
    
    
    (23,984
    )
    
    
    
    
    
    
    (309
    )
    
    
    (24,293
    )Tax benefit on exercise of nonqualified stock
options
    
    
    
    
    
    
    
    
    
    
    488
    
    
    
    488Stock compensation expense
    
    
    2,574
    
    
    
    
    
    
    
    1
    
    
    
    2,575Other
    
    
    (79
    )
    
    
    6
    
    
    
    73
    
    
    
    Changes in assets and liabilities:Increase in accounts receivable
    
    
    (35,688
    )
    
    
    
    
    
    
    8,719
    
    
    
    (26,969
    )Increase in inventories
    
    
    (16,925
    )
    
    
    
    
    
    
    10,658
    
    
    
    (6,267
    )Decrease increase in prepaid expenses
and other assets
    
    
    5,589
    
    
    
    (218
    )
    
    
    (39
    )
    
    
    5,332Decrease in accounts payable
    
    
    (15,920
    )
    
    
    1,144
    
    
    
    (6,869
    )
    
    
    (21,645
    )Increase in payables due to distribution
agreement partners
    
    
    1,925
    
    
    
    
    
    
    
    5,852
    
    
    
    7,777Increase in accrued expenses and other
liabilities
    
    
    10,276
    
    
    
    (360
    )
    
    
    7,415
    
    
    
    17,331Decrease in
income taxes payable/receivable
    
    
    (9,383
    )
    
    
    
    
    
    
    4,899
    
    
    
    (4,484
    )Net cash used in operating activities
    
    $
    (23,739
    )
    
    $
    3,947
    
    
    $
    2,258
    
    
    $
    (17,534
    )Net cash used in discontinued operations
    
    $
    
    
    
    $
    (3,947
    )
    
    $
    
    
    
    $
    (3,947
    )Cash flows from investing activities:Capital expenditures
    
    
    (21,822
    )
    
    
    250
    
    
    
    1,575
    
    
    
    (19,997
    )Purchases of available for sale debt securities
    
    
    (37,136
    )
    
    
    
    
    
    
    421
    
    
    
    (36,715
    )Acquisition of subsidiary, contingent payment
    
    
    
    
    
    
    
    
    
    
    (2,500
    )
    
    
    (2,500
    )Capital contributions to joint venture
    
    
    
    
    
    
    
    
    
    
    (1,901
    )
    
    
    (1,901
    )Proceeds from sale of fixed assets
    
    
    2
    
    
    
    
    
    
    
    (2
    )
    
    
    Other
    
    
    98
    
    
    
    
    
    
    
    (98
    )
    
    
    Acquisition of subsidiary, net of cash acquired
    
    
    
    
    
    
    
    
    
    
    98
    
    
    
    98Net cash provided by investing activities
    
    $
    48,130
    
    
    $
    250
    
    
    $
    (2,407
    )
    
    $
    45,973Net cash used in discontinued operations
    
    $
    
    
    
    $
    (250
    )
    
    $
    
    
    
    $
    (250
    )Cash flows from financing activities:Issuance of debt
    
    
    1,555
    
    
    
    
    
    
    
    (1,555
    )
    
    
    Payments of short-term debt related to
financed insurance premiums
    
    
    
    
    
    
    
    
    
    
    (4,446
    )
    
    
    (4,446
    )Borrowings related to financed insurance
premium liabilities
    
    
    
    
    
    
    
    
    
    
    1,597
    
    
    
    1,597Payments from short-term notes
    
    
    
    
    
    
    
    
    
    
    (224
    )
    
    
    (224
    )Principal payments under long-term debt
and other borrowings
    
    
    (4,559
    )
    
    
    
    
    
    
    4,559
    
    
    
    Net cash used in financing activities
    
    $
    (1,022
    )
    
    $
    
    
    
    $
    (69
    )
    
    $
    (1,091
    )Net increase in cash and cash equivalents
    
    
    23,369
    
    
    
    
    
    
    
    (218
    )
    
    
    23,151Cash and cash equivalents at beginning of period
    
    $
    36,534
    
    
    $
    
    
    
    $
    148
    
    
    $
    36,682Cash and cash equivalents at end of period
    
    $
    59,903
    
    
    $
    
    
    
    $
    (70
    )
    
    $
    59,833
 14




---



##### 



DiscontinuedoperationsAs previously
    
    reclassification
    
    Restatement(Amounts in thousands)
    
    reported
    
    adjustments
    
    adjustments
    
    As restated(1)Supplemental disclosure of cash flow information:Cash paid during the period for:Income taxes
    
    $
    2,341
    
    
    $
    
    
    
    $
    80
    
    
    $
    2,421Interest
    
    $
    5,924
    
    
    $
    
    
    
    $
    (78
    )
    
    $
    5,846Non-cash transactions:Capital expenditures incurred but not yet paid
    
    $
    
    
    
    $
    
    
    
    $
    2,622
    
    
    $
    2,622Increase in fair value of available for sale
debt and marketable equity securities
    
    $
    (3,453
    )
    
    $
    
    
    
    $
    2,437
    
    
    $
    (1,016
    )
 
 (1)
    
     Refer to Note 14  Discontinued Operations  Related Party Transaction Note 3  Share-Based Compensation:
      15




---



##### 



Three Months
    
    
    Nine MonthsEnded
    
    
    EndedOctober 1,
    
    
    October 1,2005
    
    
    2005(Restated)
    
    
    (Restated)Net income
    
    $
    12,243
    
    
    $
    20,404Add: Stock-based employee compensation
expense included in reported net income, net
of related tax effects
    
    
    402
    
    
    
    1,235Deduct: Stock-based employee compensation
expense determined under the fair-value
based method, net of related taxes
    
    
    (7,002
    )
    
    
    (30,978
    )Pro forma net income (loss)
    
    $
    5,643
    
    
    $
    (9,339
    )Net income (loss) per share of common stock :As restated  basic
    
    $
    0.36
    
    
    $
    0.60As restated  diluted
    
    $
    0.36
    
    
    $
    0.59Pro forma  basic
    
    $
    0.17
    
    
    $
    (0.27
    )Pro forma  diluted
    
    $
    0.16
    
    
    $
    (0.27
    )
     16




---



##### 



Stock Options
  For the three
    
    For the three
    
    For the nine
    
    For the ninemonths ended
    
    months ended
    
    months ended
    
    months endedSeptember 30,
    
    October 1,
    
    September 30,
    
    October 1,2006
    
    2005
    
    2006
    
    2005Risk-free interest rate
    
    
    4.8
    %
    
    
    4.8
    %
    
    
    4.5
    %
    
    
    3.7
    %Expected life (in years)
    
    
    6.3
    
    
    
    5.0
    
    
    
    6.2
    
    
    
    5.0Expected Volatility
    
    
    57.0
    %
    
    
    58.9
    %
    
    
    58.0
    %
    
    
    58.6
    %Dividend
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
   Three Months
    
    
    Nine MonthsEnded
    
    
    EndedSeptember 30,
    
    
    September 30,2006
    
    
    2006Cost of sales
    
    $
    227
    
    
    $
    802Research and development
    
    
    568
    
    
    
    2,005Selling, general and administrative
    
    
    4,872
    
    
    
    10,254Total, pre-tax
    
    $
    5,667
    
    
    $
    13,061Tax benefit of share-based compensation
    
    
    (2,210
    )
    
    
    (5,094
    )Total, net of tax
    
    $
    3,457
    
    
    $
    7,967
  17




---



##### 



Weighted
    
    
    Weighted
    
    
    AggregateAverage
    
    
    Average
    
    
    IntrinsicShares
    
    
    Exercise Price
    
    
    Remaining Life
    
    
    ValueBalance at December 31, 2005
    
    
    5,134
    
    
    $
    37.86Granted
    
    
    1,186
    
    
    
    29.62Exercised
    
    
    (393
    )
    
    
    21.61Forfeited
    
    
    (513
    )
    
    
    46.83Balance at September 30, 2006
    
    
    5,414
    
    
    $
    36.40
    
    
    
    6.75
    
    
    $
    3,498Exercisable at September 30, 2006
    
    
    3,451
    
    
    $
    38.32
    
    
    
    5.56
    
    
    $
    3,052Vested and expected to vest at September 30, 2006
    
    
    5,232
    
    
    $
    35.87
    
    
    
    6.46
    
    
    $
    3,462
  Restricted Stock/Restricted Stock Units
   For the three months ended
    
    
    For the nine months endedSeptember 30,
    
    
    October 1,
    
    
    September 30,
    
    
    October 1,2006
    
    
    2005
    
    
    2006
    
    
    2005Cost of sales
    
    $
    59
    
    
    $
    51
    
    
    $
    262
    
    
    $
    157Research and development
    
    
    226
    
    
    
    128
    
    
    
    1,039
    
    
    
    392Selling, general and administrative
    
    
    2,345
    
    
    
    460
    
    
    
    4,326
    
    
    
    1,412Total, pre-tax
    
    $
    2,630
    
    
    $
    639
    
    
    $
    5,627
    
    
    $
    1,961Tax benefit of stock-based compensation
    
    
    (1,026
    )
    
    
    (236
    )
    
    
    (2,195
    )
    
    
    (725
    )Total, net of tax
    
    $
    1,604
    
    
    $
    403
    
    
    $
    3,432
    
    
    $
    1,236
  Weighted
    
    
    AggregateAverage
    
    
    IntrinsicShares
    
    
    Grant Price
    
    
    ValueNonvested balance at December 31, 2005
    
    
    256
    
    
    $
    40.03Granted
    
    
    429
    
    
    
    32.17Vested
    
    
    (77
    )
    
    
    40.21Forfeited
    
    
    (71
    )
    
    
    36.03Nonvested balance at September 30, 2006
    
    
    537
    
    
    $
    33.91
    
    
    $
    9,804
 18




---



##### 



Weighted
    
    
    AggregateAverage
    
    
    IntrinsicShares
    
    
    Grant Price
    
    
    ValueNonvested balance at December 31, 2005
    
    
    17
    
    
    $
    42.08Granted
    
    
    21
    
    
    
    30.67Vested
    
    
    (8
    )
    
    
    33.91Forfeited
    
    
    
    
    
    
    Nonvested balance at September 30, 2006
    
    
    30
    
    
    $
    36.20
    
    
    $
    547
  Employee Stock Purchase Program:
  Note 4  Available for Sale Debt and Marketable Equity Securities:
  EstimatedUnrealized
    
    
    FairCost
    
    
    Gain
    
    
    Loss
    
    
    ValueSecurities issued by U.S. government and agencies
    
    $
    75,791
    
    
    $
    
    
    
    $
    (654
    )
    
    
    75,137Debt securities issued by various state and local
municipalities and agencies
    
    
    13,945
    
    
    
    
    
    
    
    (196
    )
    
    
    13,749Other marketable debt securities
    
    
    14,849
    
    
    
    121
    
    
    
    (447
    )
    
    
    14,523Available for sale debt and marketable equity securities
    
    
    104,585
    
    
    
    121
    
    
    
    (1,297
    )
    
    
    103,409Marketable equity securities available for sale (see Note 5)
    
    
    1,720
    
    
    
    4,280
    
    
    
    
    
    
    
    6,000Total
    
    $
    106,305
    
    
    $
    4,401
    
    
    $
    (1,297
    )
    
    $
    109,409
 
  
 19




---



##### 



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 and marketable equity 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
  September 30, 2006EstimatedFairCost
    
    
    ValueLess than one year
    
    $
    34,555
    
    
    $
    34,449Due between 1-2 years
    
    
    27,435
    
    
    
    27,144Due between 2-5 years
    
    
    22,628
    
    
    
    22,266Due after 5 years
    
    
    10,197
    
    
    
    9,659Other
    
    
    9,770
    
    
    
    9,891Total
    
    $
    104,585
    
    
    $
    103,409
  
  
 Note 5  Other Investments:
 UnrealizedCost
    
    
    Gain
    
    
    Loss
    
    
    Fair ValueBalance at September 30, 2006Advancis Pharmaceutical Corporation
    
    $
    1,720
    
    
    $
    4,280
    
    
    $
    
    
    
    $
    6,000Abrika Pharmaceuticals, LLLP
    
    
    4,588
    
    
    
    
    
    
    
    
    
    
    
    4,588Optimer Pharmaceuticals, Inc.
    
    
    12,000
    
    
    
    
    
    
    
    
    
    
    
    12,000Total other investments
    
    $
    18,308
    
    
    $
    4,280
    
    
    $
    
    
    
    $
    22,588
 UnrealizedCost
    
    
    Gain
    
    
    Loss
    
    
    Fair ValueBalance at December 31, 2005Advancis 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




---



##### 



®
   Note 6 - Accounts Receivable:
  September 30,
    
    
    December 31,2006
    
    
    2005Gross trade accounts receivable
    
    $
    340,625
    
    
    $
    265,682Chargebacks
    
    
    (80,253
    )
    
    
    (102,256
    )Rebates and incentive programs
    
    
    (84,100
    )
    
    
    (50,991
    )Returns
    
    
    (48,828
    )
    
    
    (32,893
    )Cash discounts and other
    
    
    (14,265
    )
    
    
    (15,333
    )Doubtful accounts
    
    
    (10,458
    )
    
    
    (1,847
    )Accounts receivable, net
    
    $
    102,721
    
    
    $
    62,362
 21




---



##### 



Allowance for doubtful accounts
 For the nine month period endedSeptember 30, 2006
    
    
    October 1, 2005Balance at beginning of period
    
    $
    (1,847
    )
    
    $
    (1,847
    )Additions  charge to expense
    
    
    (10,442
    )(a)
    
    
    Adjustments and/or deductions
    
    
    1,831
    
    
    
    Balance at end of period
    
    $
    (10,458
    )
    
    $
    (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 $10.0 million of invalid customer deductions would
not be pursued for collection. Accordingly, the related $10.0 million was written off
in the second quarter of 2006.  For the nine months ended September 30, 2006(Provision)Provision recorded
    
    
    reversal recordedBeginning
    
    
    for current
    
    
    for prior period
    
    
    Credits
    
    
    Endingbalance
    
    
    period sales
    
    
    sales
    
    
    processed
    
    
    balanceAccounts receivable
reservesChargebacks
    
    $
    (102,256
    )
    
    $
    (268,630
    )
    
    $
    
    (1)
    
    $
    290,633
    
    
    $
    (80,253
    )Rebates and incentive
programs
    
    
    (50,991
    )
    
    
    (156,674
    )
    
    
    
    
    
    
    123,565
    
    
    
    (84,100
    )Returns
    
    
    (32,893
    )
    
    
    (29,757
    )
    
    
    (7,686
    )
    
    
    21,508
    
    
    
    (48,828
    )Cash discounts and other
    
    
    (15,333
    )
    
    
    (35,722
    )
    
    
    
    
    
    
    36,790
    
    
    
    (14,265
    )Total
    
    $
    (201,473
    )
    
    $
    (490,783
    )
    
    $
    (7,686
    )
    
    $
    472,496
    
    
    $
    (227,446
    )Accrued liabilitiesMedicaid rebates
    
    $
    (9,040
    )
    
    $
    (11,943
    )
    
    $
    85
    
    
    $
    11,858
    
    
    $
    (9,040
    )
 For the nine months ended October 1, 2005 (Restated)(Provision)Provision recorded
    
    
    reversal recordedBeginning
    
    
    for current
    
    
    for prior period
    
    
    Credits
    
    
    Endingbalance
    
    
    period sales
    
    
    sales
    
    
    processed
    
    
    balanceAccounts receivable
reservesChargebacks
    
    $
    (91,986
    )
    
    $
    (434,310
    )
    
    $
    
    (1)
    
    $
    427,185
    
    
    $
    (99,111
    )Rebates and incentive
programs
    
    
    (49,718
    )
    
    
    (86,383
    )
    
    
    1,489
    
    
    
    93,263
    
    
    
    (41,349
    )Returns
    
    
    (61,986
    )
    
    
    (19,944
    )
    
    
    (5,568
    )
    
    
    46,690
    
    
    
    (40,808
    )Cash discounts and other
    
    
    (13,287
    )
    
    
    (44,985
    )
    
    
    
    
    
    
    43,846
    
    
    
    (14,426
    )Total
    
    $
    (216,977
    )
    
    $
    (585,622
    )
    
    $
    (4,079
    )
    
    $
    610,984
    
    
    $
    (195,694
    )Accrued liabilitiesMedicaid rebates
    
    $
    (8,755
    )
    
    $
    (18,489
    )
    
    $
    
    
    
    $
    14,984
    
    
    $
    (12,260
    )
 
 (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 its chargeback estimates remain
reasonable. 22
              23




---



##### 



Use of Estimates in Reserves
  Major Customers
  Note 7  Inventories:
 September 30,
    
    
    December 31,2006
    
    
    2005Raw materials and supplies
    
    $
    34,100
    
    
    $
    35,190Work-in-process
    
    
    7,329
    
    
    
    8,830Finished goods
    
    
    69,695
    
    
    
    52,373$
    111,124
    
    
    $
    96,393
 Note 8  Property, Plant and Equipment, net
 September 30,
    
    
    December 31,2006
    
    
    2005Land
    
    $
    2,434
    
    
    $
    2,434Buildings
    
    
    29,375
    
    
    
    33,938Machinery and equipment
    
    
    53,703
    
    
    
    50,318Office equipment, furniture and fixtures
    
    
    6,558
    
    
    
    7,027Computer software and hardware
    
    
    28,267
    
    
    
    24,690Leasehold improvements
    
    
    14,989
    
    
    
    7,486135,326
    
    
    
    125,893Less accumulated depreciation and amortization
    
    
    44,451
    
    
    
    38,323$
    90,875
    
    
    $
    87,570
  24




---



##### 



Note 9  Intangible Assets, net:
 September 30,
    
    
    December 31,2006
    
    
    2005Teva Pharmaceutical Industries, Inc. Asset Purchase Agreement,
net of accumulated amortization of $1,088 and $0
    
    $
    7,399
    
    
    $
    Ivax License Agreement, net of accumulated amortization
of $1,509 and $132
    
    
    6,491
    
    
    
    7,868FSC Laboratories Agreement, net of accumulated amortization
of $2,602 and $2,143
    
    
    3,220
    
    
    
    3,679Trademark licensed from Bristol-Myers Squibb Company,
net of accumulated amortization of $718 and $115
    
    
    9,281
    
    
    
    9,885Bristol-Myers Squibb Company Asset Purchase Agreement,
net of accumulated amortization of $7,661 and $6,407
    
    
    4,039
    
    
    
    5,293Product license fees, net of accumulated amortization
of $5,437 and $4,172
    
    
    572
    
    
    
    1,834Paddock Laboratories, Inc. Purchase Agreement, net of accumulated
of $0 and $0
    
    
    6,000
    
    
    
    Genpharm, Inc. Distribution Agreement, net of accumulated amortization
of $5,958 and $5,416
    
    
    4,875
    
    
    
    5,417Intellectual property, net of accumulated amortization of $599 and $431
    
    
    2,091
    
    
    
    2,259Other intangible assets, net of accumulated amortization of $1,651 and $0
    
    
    1,997
    
    
    
    $
    45,965
    
    
    $
    36,235
 ®
 ® ® ®
  Note 10 - Income Taxes:
  25




---



##### 



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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,529Exercise of stock options
    
    
    394
    
    
    
    4
    
    
    
    8,507
    
    
    
    Tax benefit from exercise of stock options
    
    
    
    
    
    
    
    
    
    
    694
    
    
    
    Forfeitures of restricted stock
    
    
    (72
    )
    
    
    
    
    
    
    
    
    
    
    Issuances of restricted stock
    
    
    430
    
    
    
    4
    
    
    
    
    
    
    
    Employee stock purchase program
    
    
    15
    
    
    
    
    
    
    
    392
    
    
    
    Compensatory arrangements
    
    
    
    
    
    
    
    
    
    
    18,746
    
    
    
    Resolution of tax contingency
    
    
    
    
    
    
    
    
    
    
    3,553Other
    
    
    
    
    
    
    
    
    
    
    122
    
    
    
    Balance, September 30, 2006
    
    
    35,881
    
    
    $
    359
    
    
    $
    249,417
    
    
    $
    1,626
 Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    October 1,
    
    
    September 30,
    
    
    October 1,2006
    
    
    2005
    
    
    2006
    
    
    2005(Restated)
    
    
    
    
    
    
    (Restated)Comprehensive Income:Net income
    
    $
    4,387
    
    
    $
    12,243
    
    
    $
    1,696
    
    
    $
    20,404Other comprehensive income:Unrealized (loss) gain on
marketable securities, net of tax
    
    
    2,448
    
    
    
    (10,345
    )
    
    
    3,529
    
    
    
    (620
    )Comprehensive income
    
    $
    6,835
    
    
    $
    1,898
    
    
    $
    5,225
    
    
    $
    19,784
  26




---



##### 



Note 12 - Earnings Per Share:
  Three months ended
    
    
    Nine months endedSeptember 30, 2006
    
    
    October 1, 2005
    
    
    September 30, 2006
    
    
    October 1, 2005(Restated)
    
    
    
    
    
    
    (Restated)Income from continuing operations
    
    $
    4,387
    
    
    $
    12,809
    
    
    $
    1,696
    
    
    $
    22,517Loss from discontinued operations
    
    
    
    
    
    
    (915
    )
    
    
    
    
    
    
    (3,409
    )Benefit for income taxes
    
    
    
    
    
    
    (349
    )
    
    
    
    
    
    
    (1,296
    )Net income
    
    $
    4,387
    
    
    $
    12,243
    
    
    $
    1,696
    
    
    $
    20,404Basic:Weighted average number of common
shares outstanding
    
    
    34,468
    
    
    
    34,205
    
    
    
    34,401
    
    
    
    34,119Income from continuing operations
    
    $
    0.13
    
    
    $
    0.37
    
    
    $
    0.05
    
    
    $
    0.66Loss from discontinued operations
    
    
    
    
    
    
    (0.01
    )
    
    
    
    
    
    
    (0.06
    )Net income per share of common stock
    
    $
    0.13
    
    
    $
    0.36
    
    
    $
    0.05
    
    
    $
    0.60Assuming dilution:Weighted average number of common
shares outstanding
    
    
    34,468
    
    
    
    34,205
    
    
    
    34,401
    
    
    
    34,119Effect of dilutive securities
    
    
    98
    
    
    
    186
    
    
    
    235
    
    
    
    285Weighted average number of common
shares outstanding
    
    
    34,566
    
    
    
    34,391
    
    
    
    34,636
    
    
    
    34,404Income from continuing operations
    
    $
    0.13
    
    
    $
    0.37
    
    
    $
    0.05
    
    
    $
    0.65Loss from discontinued operations
    
    
    
    
    
    
    (0.01
    )
    
    
    
    
    
    
    (0.06
    )Net income per share of common stock
    
    $
    0.13
    
    
    $
    0.36
    
    
    $
    0.05
    
    
    $
    0.59
  Note 13 - Commitments, Contingencies and Other Matters:
 Pension Plan:
    27




---



##### 



Legal Proceedings:
 
 Corporate Litigation
 
  
  
 
  
   28




---



##### 



Contractual Matters
 Ò
   Patent Related Matters
  29




---



##### 



Roxane Roxane Roxane Roxane. Roxane
   ®
 30




---



##### 



® ®
 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.
    31




---



##### 



Reliant Pharmaceuticals,
Inc. v. Par Pharmaceutical Inc.
  Industry Related Matters
   32




---



##### 



33




---



##### 



Note 14  Discontinued Operations  Related Party Transaction:
   For the three
    
    For the nine monthsmonths ended
    
    endedOctober 1, 2005
    
    October 1, 2005Revenues
    
    $
    6
    
    
    $
    59Pre-tax loss from operations
    
    $
    (915
    )
    
    $
    (3,409
    )
  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
 34




---



##### 



Note 16  Subsequent Events:
    Accounting for Costs Associated with Exit or Disposal Activities
  
  
  ®
 Note 17  Segment Information:
  35




---



##### 



Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    October 1,
    
    
    September 30,
    
    
    October 1,2006
    
    
    2005
    
    
    2006
    
    
    2005(Restated)
    
    
    
    
    
    
    (Restated)Revenues:Generic
    
    $
    159,727
    
    
    $
    90,952
    
    
    $
    509,554
    
    
    $
    325,526Brand
    
    
    14,252
    
    
    
    8,652
    
    
    
    31,981
    
    
    
    8,652Total revenues
    
    $
    173,979
    
    
    $
    99,604
    
    
    $
    541,535
    
    
    $
    334,178Gross margin:Generic
    
    $
    45,331
    
    
    $
    26,671
    
    
    $
    136,404
    
    
    $
    127,680Brand
    
    
    9,729
    
    
    
    6,501
    
    
    
    22,591
    
    
    
    6,501Total gross margin
    
    $
    55,060
    
    
    $
    33,172
    
    
    $
    158,995
    
    
    $
    134,181Operating income (loss):Generic
    
    $
    8,500
    
    
    $
    (643
    )
    
    $
    29,795
    
    
    $
    48,248Brand
    
    
    (6,067
    )
    
    
    (10,352
    )
    
    
    (26,120
    )
    
    
    (36,973
    )Total
operating income (loss)
    
    $
    2,433
    
    
    $
    (10,995
    )
    
    $
    3,675
    
    
    $
    11,275Other income (expense), net
    
    
    3,016
    
    
    
    17
    
    
    
    1,870
    
    
    
    (190
    )Equity loss from joint venture
    
    
    (18
    )
    
    
    (271
    )
    
    
    (497
    )
    
    
    (413
    )Net investment gain
    
    
    
    
    
    
    21,137
    
    
    
    (3,773
    )
    
    
    16,013Interest income
    
    
    2,098
    
    
    
    1,396
    
    
    
    6,055
    
    
    
    3,837Interest expense
    
    
    (1,681
    )
    
    
    (1,806
    )
    
    
    (5,069
    )
    
    
    (5,240
    )Provision (benefit) for income taxes
    
    
    1,461
    
    
    
    (3,331
    )
    
    
    565
    
    
    
    2,765Income from continuing operations
    
    $
    4,387
    
    
    $
    12,809
    
    
    $
    1,696
    
    
    $
    22,517
 
  36




---



##### 



For the three
    
    
    For the three
    
    
    For the nine months
    
    
    For the nine monthsmonths ended
    
    
    months ended
    
    
    ended September 30,
    
    
    ended October 1,Product
    
    September 30, 2006
    
    
    October 1, 2005
    
    
    2006
    
    
    2005GenericFluticasone (Flonase®)
    
    $
    48,064
    
    
    $
    
    
    
    $
    181,572
    
    
    $
    Various amoxicillin products (Amoxil®)
    
    
    15,487
    
    
    
    
    
    
    
    41,388
    
    
    
    Doxycycline Monohydrate (Adoxa®)
    
    
    6,289
    
    
    
    471
    
    
    
    10,991
    
    
    
    3,734Cabergoline (Dostinex®)
    
    
    9,651
    
    
    
    
    
    
    
    24,061
    
    
    
    Quinapril (Accupril®)
    
    
    5,456
    
    
    
    3,599
    
    
    
    14,881
    
    
    
    10,675Megestrol acetate oral suspension
(Megace®)
    
    
    5,198
    
    
    
    4,393
    
    
    
    13,329
    
    
    
    20,581Fluoxetine (Prozac®)
    
    
    5,079
    
    
    
    5,388
    
    
    
    14,277
    
    
    
    19,442Tramadol HCl and acetaminophen
tablets
(Ultracet®)
    
    
    4,876
    
    
    
    20,266
    
    
    
    17,666
    
    
    
    54,823Ibuprofen Rx (Advil®, Nuprin®,
Motrin®)
    
    
    3,732
    
    
    
    4,687
    
    
    
    12,391
    
    
    
    14,037Lovastatin (Mevacor®)
    
    
    3,581
    
    
    
    2,815
    
    
    
    11,759
    
    
    
    13,519Mercaptopurine (Purinethol®)
    
    
    3,193
    
    
    
    3,142
    
    
    
    8,297
    
    
    
    12,702Minocycline (Minocin®)
    
    
    2,997
    
    
    
    1,475
    
    
    
    7,284
    
    
    
    9,144Paroxetine (Paxil®)
    
    
    2,798
    
    
    
    7,296
    
    
    
    9,360
    
    
    
    29,586Cefprozil (Cefzil®)
    
    
    900
    
    
    
    
    
    
    
    8,784
    
    
    
    Other product related revenues (2)
    
    
    5,028
    
    
    
    2,617
    
    
    
    12,964
    
    
    
    16,390Other (1)
    
    
    37,398
    
    
    
    34,803
    
    
    
    120,550
    
    
    
    120,893Total generic revenues
    
    $
    159,727
    
    
    $
    90,952
    
    
    $
    509,554
    
    
    $
    325,526BrandedMegace® ES
    
    $
    12,664
    
    
    $
    8,652
    
    
    $
    28,990
    
    
    $
    8,652Other
    
    
    1,588
    
    
    
    
    
    
    
    2,991
    
    
    
    Total branded revenues
    
    $
    14,252
    
    
    $
    8,652
    
    
    $
    31,981
    
    
    $
    8,652
 
 (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 nine-month periods ended September 30, 2006 or October 1,
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 nine-month period
ended October 1, 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
 37




---



##### 



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
 38




---



##### 



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
   ® ® ® ®
 39




---



##### 



®
     40




---



##### 



Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    October 1,
    
    
    September 30,
    
    
    October 1,2006
    
    
    2005
    
    
    2006
    
    
    2005(Restated)
    
    
    
    
    
    
    (Restated)Revenues:Generic
    
    $
    159,727
    
    
    $
    90,952
    
    
    $
    509,554
    
    
    $
    325,526Brand
    
    
    14,252
    
    
    
    8,652
    
    
    
    31,981
    
    
    
    8,652Total revenues
    
    $
    173,979
    
    
    $
    99,604
    
    
    $
    541,535
    
    
    $
    334,178Gross margin:Generic
    
    $
    45,331
    
    
    $
    26,671
    
    
    $
    136,404
    
    
    $
    127,680Brand
    
    
    9,729
    
    
    
    6,501
    
    
    
    22,591
    
    
    
    6,501Total gross margin
    
    $
    55,060
    
    
    $
    33,172
    
    
    $
    158,995
    
    
    $
    134,181Operating income (loss):Generic
    
    $
    8,500
    
    
    $
    (643
    )
    
    $
    29,795
    
    
    $
    48,248Brand
    
    
    (6,067
    )
    
    
    (10,352
    )
    
    
    (26,120
    )
    
    
    (36,973
    )Total operating income (loss)
    
    $
    2,433
    
    
    $
    (10,995
    )
    
    $
    3,675
    
    
    $
    11,275
 ®
 ®
   41




---



##### 



®
 RESULTS OF OPERATIONS
 Revenues  Three Months Ended September 30, 2006
 ®
 Revenues  Nine Months Ended September 30, 2006
 ®
   42




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##### 



For the nine months ended September 30, 2006Provision
    
    
    (Provision)recorded
    
    
    reversalfor current
    
    
    recordedBeginning
    
    
    period
    
    
    for prior
    
    
    Credits
    
    
    EndingAccounts receivable reserves
    
    balance
    
    
    sales
    
    
    period sales
    
    
    processed
    
    
    balanceChargebacks
    
    $
    (102,256
    )
    
    $
    (268,630
    )
    
    $
    
    (1)
    
    $
    290,633
    
    
    $
    (80,253
    )Rebates and incentive
programs
    
    
    (50,991
    )
    
    
    (156,674
    )
    
    
    
    
    
    
    123,565
    
    
    
    (84,100
    )Returns
    
    
    (32,893
    )
    
    
    (29,757
    )
    
    
    (7,686
    )
    
    
    21,508
    
    
    
    (48,828
    )Cash discounts and other
    
    
    (15,333
    )
    
    
    (35,722
    )
    
    
    
    
    
    
    36,790
    
    
    
    (14,265
    )Total
    
    $
    (201,473
    )
    
    $
    (490,783
    )
    
    $
    (7,686
    )
    
    $
    472,496
    
    
    $
    (227,446
    )Accrued liabilitiesMedicaid rebates
    
    $
    (9,040
    )
    
    $
    (11,943
    )
    
    $
    85
    
    
    $
    11,858
    
    
    $
    (9,040
    )
 For the nine months ended October 1, 2005 (Restated)Provision
    
    
    (Provision)recorded
    
    
    reversalfor current
    
    
    recordedBeginning
    
    
    period
    
    
    for prior
    
    
    Credits
    
    
    EndingAccounts receivable reserves
    
    balance
    
    
    sales
    
    
    period sales
    
    
    processed
    
    
    balanceChargebacks
    
    $
    (91,986
    )
    
    $
    (434,310
    )
    
    $
    
    (1)
    
    $
    427,185
    
    
    $
    (99,111
    )Rebates and incentive
programs
    
    
    (49,718
    )
    
    
    (86,383
    )
    
    
    1,489
    
    
    
    93,263
    
    
    
    (41,349
    )Returns
    
    
    (61,986
    )
    
    
    (19,944
    )
    
    
    (5,568
    )
    
    
    46,690
    
    
    
    (40,808
    )Cash discounts and other
    
    
    (13,287
    )
    
    
    (44,985
    )
    
    
    
    
    
    
    43,846
    
    
    
    (14,426
    )Total
    
    $
    (216,977
    )
    
    $
    (585,622
    )
    
    $
    (4,079
    )
    
    $
    610,984
    
    
    $
    (195,694
    )Accrued liabilitiesMedicaid rebates
    
    $
    (8,755
    )
    
    $
    (18,489
    )
    
    $
    
    
    
    $
    14,984
    
    
    $
    (12,260
    )
 
 (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 its chargeback estimates remain
reasonable. Use of Estimates in Reserves
  43




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##### 



Gross Margin  Three Months Ended September 30, 2006
 ® ®
 Gross Margin  Nine Months Ended September 30, 2006
 ®
 Operating Expenses
 Research and Development  Three months ended September 30, 2006
 ®
 Research and Development  Nine months ended September 30, 2006
   44




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##### 



Selling, General and Administrative Expenses  Three months ended September 30, 2006
 ®
 Selling, General and Administrative Expenses  Nine months ended September 30, 2006
 ®
  Intangible Assets Impairment
  Other Income (Expense), net
  Net Investment (Loss)/Gain
   45




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##### 



Equity Loss from Joint Venture
  Interest Income
  Interest Expense
  Income Taxes
  Discontinued Operations
  FINANCIAL CONDITION
 Liquidity and Capital Resources
 
  
 46




---



##### 



Financing
  47




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##### 



Critical Accounting Policies and Use of Estimates
  Subsequent Events
     Accounting for Costs Associated with Exit or Disposal Activities
    ®
 48




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##### 



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
   September 30,
    
    
    Dec. 31,2006
    
    
    2005Securities issued by U.S. government and agencies
    
    $
    75,137
    
    
    $
    79,886Debt securities issued by various state and local municipalities and agencies
    
    
    13,749
    
    
    
    13,721Other marketable debt securities
    
    
    14,523
    
    
    
    13,200Total
    
    $
    103,409
    
    
    $
    106,807
 Available for Sale Securities and Other Investments:
    ®
 49




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##### 



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.
 50




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##### 




    
    Increased the level of interdepartmental communication in a way
that will foster information sharing between the Companys finance
staff and operational personnel.
  PART II. OTHER INFORMATION
 ITEM 1. LEGAL PROCEEDINGS
 
 Corporate
Litigation
 
  
  
 
  
  51




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##### 



Contractual Matters
 Ò
   52




---



##### 



Patent Related Matters
  Roxane Roxane Roxane Roxane. Roxane
   53




---



##### 



® ® ®
 Roxane Roxane
 CIMA Labs, Inc. et al. v. Par Pharmaceutical Companies, Inc. et al.
 54




---



##### 



CIMA Labs, Inc. et
al. v. Actavis Group hf et al.
    Reliant Pharmaceuticals,
Inc. v. Par Pharmaceutical Inc.
  Industry Related Matters
  55




---



##### 



56




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##### 



ITEM 1A. RISK FACTORS
  57




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##### 



ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 Issuer Purchases of Equity Securities(1)  Quarter Ending September 30, 2006
 Maximum Number ofTotal Number of
    
    Shares of CommonShares of Common
    
    Stock that May YetTotal Number of
    
    
    
    Stock Purchased as
    
    Be Purchased UnderShares of Common
    
    Average Price Paid
    
    Part of Publicly
    
    the Plans orStock Purchased
    
    per Share of Common
    
    Announced Plans or
    
    ProgramsPeriod
    
    (3)
    
    Stock
    
    Programs
    
    (2)July 2, 2006
through July 29,
2006
    
    
    
    N/A
    
    
    
    977,083July 30, 2006
through August 26,
2006
    
    
    
    N/A
    
    
    
    977,083August 27, 2006
through September
30, 2006
    
    1,893
    
    N/A
    
    
    
    977,083Total
    
    1,893
    
    N/A
    
    
 
 (1)
    
    In April 2004, the Board authorized the repurchase of up to $50,000 of the Company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
$18.24 at September 29, 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. ITEM 6. EXHIBITS
 10.1
    
    Employment agreement by and between Par Pharmaceutical Companies,
Inc. and Patrick LePore, dated as of November 10, 2006.
Incorporated by reference to Exhibit 10.1 of the Companys Quarterly
Report of Form 10-Q, originally filed for the quarter ended September
30, 2006 on December 21, 2006.10.2
    
    Separation agreement by and between Par Pharmaceutical Companies,
Inc. and Mark Auerbach, dated as of December 1, 2006. Incorporated
by reference to Exhibit 10.2 of the Companys Quarterly Report of
Form 10-Q, originally filed for the quarter ended September 30, 2006
on December 21, 2006.10.3
    
    Separation agreement by and between Par Pharmaceutical Companies,
Inc. and Michael Graves, dated as of November 10, 2006. Incorporated
by reference to Exhibit 10.3 of the Companys Quarterly Report of
Form 10-Q, originally filed for the quarter ended September 30, 2006
on December 21, 2006.10.4
    
    Separation agreement by and between Par Pharmaceutical Companies,
Inc. and Shankar Hariharan, dated as of November 29, 2006.
Incorporated by reference to Exhibit 10.4 of the Companys Quarterly
Report of Form 10-Q, originally filed for the quarter ended September
30, 2006 on December 21, 2006.31.1
    
    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




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##### 



SIGNATURES
  PAR PHARMACEUTICAL COMPANIES, INC.
(Registrant)July 30, 2007
    /s/ Patrick G. LePorePatrick G. LePorePresident and Chief Executive Officer July 30, 2007
    /s/ Gerard A. MartinoGerard A. MartinoExecutive Vice President and Chief Operating Officer July 30, 2007
    /s/ Veronica A. LubatkinVeronica A. LubatkinExecutive Vice President and Chief Financial Officer 59




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##### 



EXHIBIT INDEX
 Exhibit Number
    
    Description10.1
    
    Employment agreement by and between Par Pharmaceutical Companies,
Inc. and Patrick LePore, dated as of November 10, 2006.
Incorporated by reference to Exhibit 10.1 of the Companys Quarterly
Report of Form 10-Q, originally filed for the quarter ended September
30, 2006 on December 21, 2006.10.2
    
    Separation agreement by and between Par Pharmaceutical Companies,
Inc. and Mark Auerbach, dated as of December 1, 2006. Incorporated
by reference to Exhibit 10.2 of the Companys Quarterly Report of
Form 10-Q, originally filed for the quarter ended September 30, 2006
on December 21, 2006.10.3
    
    Separation agreement by and between Par Pharmaceutical Companies,
Inc. and Michael Graves, dated as of November 10, 2006. Incorporated
by reference to Exhibit 10.3 of the Companys Quarterly Report of
Form 10-Q, originally filed for the quarter ended September 30, 2006
on December 21, 2006.10.4
    
    Separation agreement by and between Par Pharmaceutical Companies,
Inc. and Shankar Hariharan, dated as of November 29, 2006.
Incorporated by reference to Exhibit 10.4 of the Companys Quarterly
Report of Form 10-Q, originally filed for the quarter ended September
30, 2006 on December 21, 2006.31.1
    
    Certification by the President and Chief Executive Officer pursuant to Rule
13a-14(a) of the Exchange Act.31.3
    
    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.
 60