**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 
| **ý** | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|------------|----------------------------------------------------------------------------------------------|

 

**or**

 
| **o** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|-----------------------------------------------------------------------------------------------------|

 

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**Commission File Number 001-31333**

 

**For the quarterly period ended June 30, 2004**

 

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**Eon Labs, Inc.**

(Exact Name of Registrant as Specified in its Charter)

 
| **Delaware**                                               |   | **13-3653818**                           |
|------------------------------------------------------------|--------|------------------------------------------|
| (State  or Other Jurisdiction of Incorporation)            |   | (I.R.S.  Employer Identification Number) |
|                                                       |   |                                     |
| **227-15 North Conduit Avenue  Laurelton, New York**       |   | **11413**                                |
| (Address  of Principal Executive Offices)                  |   | (Zip  Code)                              |
|                                                       |   |                                     |
| **(718) 276-8600**                                         |
| (Registrant’s  Telephone Number, Including Area Code) |

 

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Indicate by check mark whetherthe Registrant (1) has filed all reports required by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the Registrant was required tofile such reports) and (2) has been subject to such filing requirementsfor the past 90 days: Yes ýNo o

 

Indicate by check mark whetherthe Registrant is an accelerated filer (as defined in Rule 12b-2 of theSecurities Exchange Act of 1934).  Yes ýNo o

 

As of August 4, 2004, therewere 88,733,996 shares of the Registrant’s Common Stock, $0.01 par value pershare, outstanding.

 

 

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**EonLabs, Inc. and SubsidiariesTable of Contents**

 
| PART I.             | FINANCIAL INFORMATION                                                                                                    |                                                                                                                         |
|---------------------|--------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------|
|                |                                                                                                                     |                                                                                                                         |
|                | ITEM 1.                                                                                                                  | Financial Statements  (unaudited)                                                                                            |   |
|                |                                                                                                                     |                                                                                                                         |   |
|                |                                                                                                                     | Condensed  Consolidated Balance Sheets as of June 30, 2004 (unaudited) and December 31,  2003                                |   |
|                |                                                                                                                     |                                                                                                                         |   |
|                |                                                                                                                     | Condensed  Consolidated Statements of Income (unaudited) for the Three and Six Months  Ended June 30, 2004 and June 30, 2003 |   |
|                |                                                                                                                     |                                                                                                                         |   |
|                |                                                                                                                     | Condensed  Consolidated Statements of Cash Flows (unaudited) for the Six Months Ended  June 30, 2004 and June 30, 2003       |   |
|                |                                                                                                                     |                                                                                                                         |   |
|                |                                                                                                                     | Notes  to Condensed Consolidated Financial Statements (unaudited)                                                            |   |
|                |                                                                                                                     |                                                                                                                         |   |
|                | ITEM 2.                                                                                                                  | Management’s Discussion and  Analysis of Financial Condition and Results of Operations                                  |   |
|                |                                                                                                                     |                                                                                                                         |   |
|                | ITEM 3.                                                                                                                  | Quantitative and Qualitative Disclosure about  Market Risk                                                                   |   |
|                |                                                                                                                     |                                                                                                                         |   |
|                | ITEM 4.                                                                                                                  | Controls and Procedures                                                                                                      |   |
|                |                                                                                                                     |                                                                                                                         |   |
| PART II.            | OTHER INFORMATION                                                                                                        |                                                                                                                         |
|                |                                                                                                                     |                                                                                                                         |
|                | ITEM 1.                                                                                                                  | Legal Proceedings                                                                                                            |   |
|                |                                                                                                                     |                                                                                                                         |   |
|                | ITEM 2.                                                                                                                  | Changes in Securities, Use of Proceeds  and Issuer Purchases of Equity Securities                                            |   |
|                |                                                                                                                     |                                                                                                                         |   |
|                | ITEM 4.                                                                                                                  | Submission of Matters to a Vote of Security  Holders                                                                         |   |
|                |                                                                                                                     |                                                                                                                         |   |
|                | ITEM 5.                                                                                                                  | Other Information                                                                                                            |   |
|                |                                                                                                                     |                                                                                                                         |   |
|                | ITEM 6.                                                                                                                  | Exhibits and Reports on Form 8-K                                                                                             |   |
|                |                                                                                                                     |                                                                                                                         |   |
| SIGNATURES          |                                                                                                                     |                                                                                                                         |
|                |                                                                                                                     |                                                                                                                         |   |
| EXHIBIT   31.1 | Certifications pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002                                                |                                                                                                                         |
|                |                                                                                                                     |                                                                                                                         |
| EXHIBIT   31.2 | Certifications pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002                                                |                                                                                                                         |
|                |                                                                                                                     |                                                                                                                         |
| EXHIBIT   32.1 | Certification Pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of  2002 |                                                                                                                         |
|                |                                                                                                                     |                                                                                                                         |
| EXHIBIT   32.2 | Certification Pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of  2002 |                                                                                                                         |
|                     |                                                                                                                          |                                                                                                                              |  |  |

 

2

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**Eon Labs, Inc. and SubsidiariesCondensed Consolidated BalanceSheets**(dollars in thousands, except per share amounts)

 
|                                                                                                                                                                                                                 |   | **June 30,  2004** |    | **December  31,  2003** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|---------|-------------------------|--------|
|                                                                                                                                                                                                                 |   | **(Unaudited)**    |    |                    |   |
| **Assets**                                                                                                                                                                                                           |   |               |    |                    |   |
|                                                                                                                                                                                                                 |   |               |    |                    |   |
| **Current assets**                                                                                                                                                                                                   |   |               |    |                    |   |
| Cash and cash equivalents                                                                                                                                                                                            |   | $                  | 101,099 |                    | $      | 43,852 |   |
| Investments                                                                                                                                                                                                          |   | 73,111             |    | 115,281                 |   |
| Accounts receivable, net                                                                                                                                                                                             |   | 59,443             |    | 35,678                  |   |
| Inventories                                                                                                                                                                                                          |   | 74,146             |    | 56,441                  |   |
| Deferred tax assets, net                                                                                                                                                                                             |   | 55,468             |    | 56,439                  |   |
| Prepaid expenses and other current assets                                                                                                                                                                            |   | 6,136              |    | 8,096                   |   |
|                                                                                                                                                                                                                 |   |               |    |                    |   |
| **Total current assets**                                                                                                                                                                                             |   | 369,403            |    | 315,787                 |   |
|                                                                                                                                                                                                                 |   |               |    |                    |   |
| Property, plant and equipment, net                                                                                                                                                                                   |   | 50,994             |    | 50,409                  |   |
| Goodwill                                                                                                                                                                                                             |   | 46,934             |    | 46,934                  |   |
| Other intangible assets, net                                                                                                                                                                                         |   | 24,127             |    | 26,007                  |   |
| Other assets                                                                                                                                                                                                         |   | 4,004              |    | 2,408                   |   |
|                                                                                                                                                                                                                 |   |               |    |                    |   |
| **Total assets**                                                                                                                                                                                                     |   | $                  | 495,462 |                    | $      | 441,545 |   |
|                                                                                                                                                                                                                 |   |               |    |                    |   |
| **Liabilities and Stockholders’ Equity**                                                                                                                                                                        |   |               |    |                    |   |
|                                                                                                                                                                                                                 |   |               |    |                    |   |
| **Current liabilities**                                                                                                                                                                                              |   |               |    |                    |   |
| Accounts payable                                                                                                                                                                                                     |   | $                  | 14,683  |                    | $      | 13,612 |   |
| Accrued liabilities                                                                                                                                                                                                  |   | 87,135             |    | 89,226                  |   |
|                                                                                                                                                                                                                 |   |               |    |                    |   |
| **Total current liabilities**                                                                                                                                                                                        |   | 101,818            |    | 102,838                 |   |
|                                                                                                                                                                                                                 |   |               |    |                    |   |
| **Long-term liabilities**                                                                                                                                                                                            |   |               |    |                    |   |
| Deferred tax liabilities, net                                                                                                                                                                                        |   | 9,136              |    | 9,136                   |   |
| Deferred revenue                                                                                                                                                                                                     |   | 85                 |    | 200                     |   |
| Other                                                                                                                                                                                                                |   | 591                |    | 591                     |   |
|                                                                                                                                                                                                                 |   |               |    |                    |   |
| **Total liabilities**                                                                                                                                                                                                |   | 111,630            |    | 112,765                 |   |
|                                                                                                                                                                                                                 |   |               |    |                    |   |
| Contingencies (Notes 8 and 9)                                                                                                                                                                                        |   |               |    |                    |   |
|                                                                                                                                                                                                                 |   |               |    |                    |   |
| **Stockholders’ equity**                                                                                                                                                                                        |   |               |    |                    |   |
| Common stock, par value $.01 per share;  100,000,000 shares authorized; 88,982,924 and 88,723,824 shares issued;  88,740,064 and 88,599,624 shares outstanding at June 30, 2004 and December  31, 2003, respectively |   | 890                |    | 888                     |   |
| Preferred stock, par value $.01 per share;  5,000,000 shares authorized; none issued                                                                                                                                 |   | —             |    | —                  |   |
| Additional paid-in capital                                                                                                                                                                                           |   | 194,413            |    | 194,507                 |   |
| Retained earnings                                                                                                                                                                                                    |   | 196,879            |    | 135,774                 |   |
| Accumulated other comprehensive (loss)  income                                                                                                                                                                       |   | (275               | )       | 5                       |   |
|                                                                                                                                                                                                                 |   | 391,907            |    | 331,174                 |   |
| Less:   Unearned deferred  stock-based compensation                                                                                                                                                   |   | (92                | )       | (184                    | )      |
| Treasury stock, at cost, 242,860 and  124,200 shares at June 30, 2004 and December 31, 2003, respectively                                                                                                            |   | (7,983             | )       | (2,210                  | )      |
| **Total stockholders’ equity**                                                                                                                                                                                  |   | 383,832            |    | 328,780                 |   |
| **Total liabilities and stockholders’ equity**                                                                                                                                                                  |   | $                  | 495,462 |                    | $      | 441,545 |   |

 

The accompanying notes are an integral part of these condensedconsolidated financial statements.

 

3

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**Eon Labs, Inc. and SubsidiariesCondensed Consolidated Statementsof Income**(dollars in thousands, except per share amounts)(unaudited)

 
|                                       |   | **For the  three months ended  June 30,** |    | **For the  six months ended  June 30,** |   |
|--------------------------------------------|--------|-------------------------------------------|---------|-----------------------------------------|--------|
|                                       |   | **2004**                                  |    | **2003**                                |   | **2004** |   | **2003** |   |
| Net sales                                  |   | $                                         | 106,962 |                                    | $      | 78,681 |   | $ | 211,191 |   | $ | 149,538 |   |
| Cost of sales                              |   | 43,096                                    |    | 37,081                                  |   | 85,077 |   | 69,526 |   |
|                                       |   |                                      |    |                                    |   |   |   |   |   |
| **Gross profit**                           |   | 63,866                                    |    | 41,600                                  |   | 126,114 |   | 80,012 |   |
|                                       |   |                                      |    |                                    |   |   |   |   |   |
| Operating expenses                         |   |                                      |    |                                    |   |   |   |   |   |
| Selling, general and administrative        |   |                                      |    |                                    |   |   |   |   |   |
| Amortization of other intangible assets    |   | 940                                       |    | 940                                     |   | 1,880 |   | 1,880 |   |
| Other selling, general and administrative  |   | 12,368                                    |    | 5,316                                   |   | 25,351 |   | 14,053 |   |
| Research and development                   |   | 6,689                                     |    | 5,680                                   |   | 12,259 |   | 9,322 |   |
|                                       |   |                                      |    |                                    |   |   |   |   |   |
| **Total operating expenses**               |   | 19,997                                    |    | 11,936                                  |   | 39,490 |   | 25,255 |   |
|                                       |   |                                      |    |                                    |   |   |   |   |   |
| **Operating income**                       |   | 43,869                                    |    | 29,664                                  |   | 86,624 |   | 54,757 |   |
|                                       |   |                                      |    |                                    |   |   |   |   |   |
| Other income (expense), net                |   |                                      |    |                                    |   |   |   |   |   |
| Interest income                            |   | 485                                       |    | 333                                     |   | 933 |   | 664 |   |
| Interest expense                           |   | —                                    |    | (16                                     | )      | — |   | (300 | ) |
| Other income, net                          |   | 3,024                                     |    | 74                                      |   | 13,046 |   | 111 |   |
|                                       |   |                                      |    |                                    |   |   |   |   |   |
| **Total other income, net**                |   | 3,509                                     |    | 391                                     |   | 13,979 |   | 475 |   |
|                                       |   |                                      |    |                                    |   |   |   |   |   |
| Income before income taxes                 |   | 47,378                                    |    | 30,055                                  |   | 100,603 |   | 55,232 |   |
|                                       |   |                                      |    |                                    |   |   |   |   |   |
| Provision for income taxes                 |   | (18,590                                   | )       | (12,023                                 | )      | (39,498 | ) | (22,093 | ) |
|                                       |   |                                      |    |                                    |   |   |   |   |   |
| **Net income**                             |   | $                                         | 28,788  |                                    | $      | 18,032 |   | $ | 61,105 |   | $ | 33,139 |   |
|                                       |   |                                      |    |                                    |   |   |   |   |   |
| Net income per common share                |   |                                      |    |                                    |   |   |   |   |   |
| Basic                                      |   | $                                         | 0.32    |                                    | $      | 0.20 |   | $ | 0.69 |   | $ | 0.38 |   |
| Diluted                                    |   | $                                         | 0.32    |                                    | $      | 0.20 |   | $ | 0.67 |   | $ | 0.37 |   |
|                                       |   |                                      |    |                                    |   |   |   |   |   |
| Weighted average common shares outstanding |   |                                      |    |                                    |   |   |   |   |   |
| Basic                                      |   | 88,770,483                                |    | 88,491,194                              |   | 88,740,629 |   | 88,359,842 |   |
| Diluted                                    |   | 90,828,829                                |    | 90,510,290                              |   | 90,803,618 |   | 90,470,086 |   |

 

The accompanying notes are an integral part of these condensedconsolidated financial statements.

 

4

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**Eon Labs, Inc. and SubsidiariesCondensed Consolidated Statementsof Cash Flows**(dollars in thousands) (unaudited)

 
|                                                                               |   | **For the  six months ended  June 30,** |    |
|------------------------------------------------------------------------------------|--------|-----------------------------------------|---------|
|                                                                               |   | **2004**                                |    | **2003** |   |
| **Cash flows from operating activities**                                           |   |                                    |    |   |   |
| Net income                                                                         |   | $                                       | 61,105  |   | $ | 33,139 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |   |                                    |    |   |   |
| Provision for accounts receivable  allowances                                      |   | 17,288                                  |    | 41,847 |   |
| Depreciation and amortization                                                      |   | 5,148                                   |    | 4,327 |   |
| Deferred income taxes                                                              |   | 971                                     |    | — |   |
| Amortization of unearned deferred  stock-based compensation                        |   | 92                                      |    | 224 |   |
| Amortization of deferred revenue                                                   |   | (115                                    | )       | (115 | ) |
| Amortization of discount on note payable                                           |   | —                                  |    | 269 |   |
| Tax benefit from exercises of stock options                                        |   | 4,627                                   |    | 2,454 |   |
| Changes in assets and liabilities:                                                 |   |                                    |    |   |   |
| Accounts receivable                                                                |   | (41,053                                 | )       | (40,916 | ) |
| Inventories                                                                        |   | (17,705                                 | )       | (8,483 | ) |
| Prepaid expenses and other current assets                                          |   | 1,895                                   |    | (2,184 | ) |
| Other assets                                                                       |   | (1,596                                  | )       | 751 |   |
| Accounts payable                                                                   |   | 1,071                                   |    | (510 | ) |
| Accrued liabilities                                                                |   | (1,936                                  | )       | 5,040 |   |
| **Net cash provided by operating activities**                                      |   | 29,792                                  |    | 35,843 |   |
|                                                                               |   |                                    |    |   |   |
| **Cash flows from investing activities**                                           |   |                                    |    |   |   |
| Capital expenditures                                                               |   | (3,853                                  | )       | (5,763 | ) |
| Net sales (purchases) of short-term  investments                                   |   | 41,772                                  |    | (49,330 | ) |
| **Net cash provided by (used in) investing  activities**                           |   | 37,919                                  |    | (55,093 | ) |
|                                                                               |   |                                    |    |   |   |
| **Cash flows from financing activities**                                           |   |                                    |    |   |   |
| Payment on seller note                                                             |   | —                                  |    | (4,799 | ) |
| Decrease in restricted cash                                                        |   | 65                                      |    | 61 |   |
| Proceeds from exercises of stock options                                           |   | 699                                     |    | 258 |   |
| Purchase of treasury shares                                                        |   | (11,191                                 | )       | — |   |
| **Net cash used in financing activities**                                          |   | (10,427                                 | )       | (4,480 | ) |
| Effect of exchange rate changes on cash and  cash equivalents                      |   | (37                                     | )       | — |   |
|                                                                               |   |                                    |    |   |   |
| **Net increase (decrease) in cash and cash  equivalents**                          |   | 57,247                                  |    | (23,730 | ) |
|                                                                               |   |                                    |    |   |   |
| Cash and cash equivalents at beginning of  period                                  |   | 43,852                                  |    | 62,323 |   |
|                                                                               |   |                                    |    |   |   |
| Cash and cash equivalents at end of period                                         |   | $                                       | 101,099 |   | $ | 38,593 |   |

 

The accompanying notes are an integral part of these condensedconsolidated financial statements.

 

5

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**Eon Labs, Inc. and SubsidiariesNotes to Condensed ConsolidatedFinancial Statements**(dollars in thousands, except per share amounts)(unaudited)

 

# **1.**     Basis of Presentation

 

The condensed consolidatedfinancial statements included herein have been prepared by Eon Labs, Inc. andits subsidiaries (the “Company”) without audit pursuant to the rules andregulations of the United States Securities and Exchange Commission.  Certain information and footnote disclosuresnormally included in financial statements prepared in accordance with generallyaccepted accounting principles have been condensed or omitted pursuant to suchrules and regulations.  In the opinionof management, the accompanying unaudited condensed consolidated financialstatements reflect all adjustments (consisting only of normal recurringaccruals) necessary for a fair presentation of the financial position as ofJune 30, 2004 and results of operations and cash flows for the periodspresented.  The consolidated balances asof December 31, 2003 were derived from audited financial statements but donot include all disclosures required by generally accepted accountingprinciples.  The accompanying condensedconsolidated financial statements have been prepared in accordance withaccounting standards for interim financial statements and should be read inconjunction with the Company’s audited consolidated financial statements andthe notes thereto for the year ended December 31, 2003.  The results of operations for the interimperiods are not necessarily indicative of the results of operations to beexpected for the year.

 

**RevenueRecognition**

 

Sales are recognized whenthe products are received by the customer, which represents the point when therisks and rewards of ownership are transferred to the customer.  Discounts, rebates and contract pricingadjustments are recorded as a reduction of sales based on agreed upon termswith the Company’s customers at the time of sale. The Company calculates areserve for discounts and rebates based upon actual sales under sucharrangements. Reserves for contract pricing adjustments represent thedifference between the prices wholesalers are billed by the Company and thecontract prices billed by wholesalers to their customers. In determining areserve for contract pricing adjustments, the Company takes into account anestimate of the percentage of product sales subject to such pricing adjustmentsbased on historical trends. Historical trends are adjusted for new productintroductions and changes in wholesaler or contract prices.

 

Accounts receivable is presented net of allowances for discounts,rebates, contract pricing adjustments and doubtful accounts, which were$111,944 and $94,656 at June 30, 2004 and December 31, 2003, respectively.

 

Shelf stock adjustments are provided following a reduction in the pricesof the Company’s products due to the competitive environment. Such adjustmentsare credited to the Company’s customers based on their on-hand inventoryquantities. Reserves are generally established when the Company reduces itsprices.

 

6

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Estimates for returns, which are recorded at the time of sale, relateprimarily to returns of expiring products. The Company utilizes historicaltrends to estimate the amount of products to be returned due to productexpiration.

 

Accrued liabilities include $71,092 and $73,086 for returns, promotionalincentives and Medicaid rebates at June 30, 2004 and December 31, 2003,respectively.

 

## ***Shipping and Handling Costs***

## *** ***

The Company classifiesshipping and handling costs as part of selling, general and administrativeexpenses.  Shipping and handling costswere $1,322 and $1,125 for the three months ended June 30, 2004 and 2003,respectively, and $2,637 and $2,215 for the six months ended June 30, 2004 and2003, respectively.

 

## ***Investments***

## *** ***

The Company invests inpublicly traded debt securities which are categorized as securitiesavailable-for-sale and are carried at fair value.  Unrealized gains and losses related to such securities, net oftaxes, are excluded from operating results and reported as accumulated othercomprehensive income/loss in the Stockholders’ Equity section of the balancesheet.  The Company periodicallyevaluates declines in the value of its investments to determine if suchdeclines are other-than-temporary and thus the investment is impaired.  A variety of factors are considered whendetermining whether declines are other-than-temporary, including, among others,the financial condition of the investee, the length of time and magnitude ofthe decline, and the Company’s ability and intent to hold the investment.

 

The book value of suchsecurities exceeded market value by $391 at June 30, 2004 and $59 at March 31,2004.  The market value of suchsecurities exceeded book value by $61 and $49 at June 30, 2003 and March 31,2003, respectively.

 

The book value of suchsecurities exceeded market value by $391 at June 30, 2004 while the marketvalue of such securities exceeded book value by $7 at December 31, 2003.  The market value of such securities exceededbook value by $61 and $73 at June 30, 2003 and December 31, 2002, respectively.

 

**ComprehensiveIncome**

 

Statement of FinancialAccounting Standard (“SFAS”) No. 130, “Reporting Comprehensive Income,”requires reporting and displaying comprehensive income and its components,which for the Company includes net income, unrealized gains and losses onavailable-for-sale securities, net of tax, and foreign currency translationlosses.  Total comprehensive income was$60,840 and $33,133 for the six month period ended June 30, 2004 and 2003,respectively, and $28,570 and $18,040 for the three month period ended June 30,2004 and 2003, respectively.  Inaccordance with SFAS 130, the accumulated unrealized gains (losses) on available-for-salesecurities and losses on foreign currency translation are shown as a separatecomponent of stockholders’ equity.

 

7

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**OtherIncome**

 

Included in other income forthe three and six months ended June 30, 2004, is the receipt of a $3,000 bondreceived from GlaxoSmithKline (“Glaxo”) to settle all patent infringementlitigation related to the Company’s Bupropion HCl, ER 100 mg and 150 mgtablets.  Other income for the sixmonths ended June 30, 2004 also includes a $10,000 settlement received fromGlaxo, recorded in the quarter ended March 31, 2004, in exchange for agreeingto the dismissal of the Company’s complaint against Glaxo for maliciousprosecution of an earlier suit against the Company, which claimed the Company’sNabumetone product infringed Glaxo’s patent. See Note 8.

 

**Reclassifications**

 

Certain prior period amountshave been reclassified to conform to the current period presentation.

 

# **2.**     Stockholders’ Equity

# ** **

**Stock Split**

 

On June 1, 2004, the Companydistributed approximately 44.5 million additional shares of common stock inorder to effect a 2-for-1 stock split declared in May.  The stock split was effected in the form ofa 100% stock dividend for stockholders of record at the close of business onMay 17, 2004.  All share and per sharedata have been retroactively restated to reflect the impact of the stock split.

 

**AdditionalPaid-In Capital**

 

Additional paid-in capitaldecreased by $94 to $194,413 at June 30, 2004 from $194,507 at December 31, 2003.  The decrease is the result of the reissuanceof $5,418 of treasury shares offset by the proceeds of $697 from the exerciseof employee stock options and $4,627 of tax benefits associated with theseexercise transactions.

 

**Stock Options**

 

During the six months ended June 30, 2004 options to purchase 600,000shares of Common Stock at an average exercise price of $29.32 per share weregranted.  The stock options granted are exercisable for up to ten yearsfollowing the date of the grant.  Except for 60,000 options, which wereimmediately vested, the options vest and become exercisable at the rate of 20%per year.

 

During the six months ended June 30, 2004, 492,200 options with aweighted-average exercise price of $1.42 were exercised and 31,200 options wereterminated.

 

## ***Deferred Stock-Based Compensation***

## *** ***

The Company amortizeddeferred stock compensation in the amount of $46 and $112 for the three monthsended June 30, 2004 and 2003, respectively, and $92 and $224 for the six monthsended June 30, 2004 and 2003, respectively.

 

8

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**Stock-Based Compensation**

 

The Company has adoptedStatement of Financial Accounting Standards No. 123, “Accounting forStock-Based Compensation.” SFAS No. 123 allows companies which havestock-based compensation arrangements with employees to adopt a new fair-valuebasis of accounting for stock options and other equity instruments, or tocontinue to apply the existing accounting required by Accounting PrinciplesBoard (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees.”The Company intends to continue to account for stock-based compensationarrangements under APB Opinion No. 25 and related interpretations inaccounting for its stock-based compensation. The Company recognizes nocompensation expense with respect to stock options if the exercise price equalsor exceeds the fair value of the underlying security on the date of grant andother terms are fixed.  The Company hasalso adopted the disclosure provisions of SFAS No. 148, “Accounting forStock-Based Compensation - Transition and Disclosure.”This pronouncement requiresprominent disclosures in both annual and interim financial statements about themethod of accounting for stock-based employee compensation and the effect ofthe method used on reporting results as determined through the use of the Black-Scholes option-pricing model. The additional requireddisclosures are found below.

 

Thefair value of the options was determined using the Black-Scholes option-pricingmodel with the following assumptions:

 
|                    |   | **June 30, 2004** |   | **June 30, 2003** |   |
|-------------------------|--------|-------------------|--------|-------------------|--------|
|                    |   |              |   |              |   |
| Dividend yield          |   | 0%                |   | 0%                |   |
| Volatility              |   | 45%               |   | 45%               |   |
| Risk-free interest rate |   | 3.0% to 4.0%      |   | 3.0% to 4.0%      |   |
| Expected life           |   | 1 to 5 years      |   | 1 to 5 years      |   |

 

Areconciliation of the Company’s net earnings to pro forma net earnings and therelated pro forma earnings per share amounts for the three months and sixmonths ended June 30, 2004 and 2003, respectively, is provided below.  For purposes of pro forma disclosure,stock-based compensation expense is recognized in accordance with theprovisions of SFAS No. 123.
|                                                                                                             |   | **For the three months  ended June 30,** |   | **For the six months  ended June 30,** |   |
|------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------|--------|----------------------------------------|--------|
|                                                                                                             |   | **2004**                                 |   | **2003**                               |   | **2004** |   | **2003** |   |
|                                                                                                             |   |                                     |   |                                   |   |   |   |   |   |
| Net income, as reported                                                                                          |   | $                                        | 28,788 |                                   | $      | 18,032 |   | $ | 61,105 |   | $ | 33,139 |   |
| Add:  Compensation expenses included in net  income, net of related tax effect                              |   | 28                                       |   | 67                                     |   | 56 |   | 134 |   |
| Less:  Adjustment to net income for pro forma  stock-based compensation expenses, net of related tax effect |   | (586                                     | )      | (126                                   | )      | (1,504 | ) | (253 | ) |
|                                                                                                             |   |                                     |   |                                   |   |   |   |   |   |
| Pro forma net income                                                                                             |   | $                                        | 28,230 |                                   | $      | 17,973 |   | $ | 59,657 |   | $ | 33,020 |   |
|                                                                                                             |   |                                     |   |                                   |   |   |   |   |   |
| As reported net earnings  per share:                                                                             |   |                                     |   |                                   |   |   |   |   |   |
| Basic                                                                                                            |   | $                                        | 0.32   |                                   | $      | 0.20 |   | $ | 0.69 |   | $ | 0.38 |   |
| Diluted                                                                                                          |   | $                                        | 0.32   |                                   | $      | 0.20 |   | $ | 0.67 |   | $ | 0.37 |   |
|                                                                                                             |   |                                     |   |                                   |   |   |   |   |   |
| Pro forma net earnings per  share:                                                                               |   |                                     |   |                                   |   |   |   |   |   |
| Basic                                                                                                            |   | $                                        | 0.32   |                                   | $      | 0.20 |   | $ | 0.67 |   | $ | 0.37 |   |
| Diluted                                                                                                          |   | $                                        | 0.31   |                                   | $      | 0.20 |   | $ | 0.66 |   | $ | 0.37 |   |

 

9

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**StockRepurchase Program**

 

InApril 2003, the Company’s Board of Directors approved the repurchase of upto 600,000 shares of the Company’s common stock.  In July 2003, the Company adopted a plan to repurchase up to250,000 shares through December 31, 2003. In February 2004, the Company adopted a plan to repurchase up to 187,500shares through March 31, 2004.  InApril 2004, the Company adopted a plan to repurchase up to 187,500 sharesthrough June 30, 2004.  Depending onmarket conditions, the Company also expects to conduct purchases in the openmarket and in privately negotiated transactions from time to time during itsnormal trading window and may enter into future plans to repurchaseshares.  The repurchased shares havebeen accounted for as treasury shares and will be used to offset potentialdilution from the exercise of outstanding stock options.

 

Duringthe six months ended June 30, 2004, under the Company’s plan, the Companyrepurchased 351,760 shares of its outstanding common stock at an average priceof $31.81 per share totaling $11,191. These transactions are accounted for under the cost method.

 

# **3.**     NetIncome Per Common Share

# ** **

Basicnet income per share is computed by dividing net income by the weightedaverage number of common shares outstanding for the period.  Diluted earnings per share reflects thepotential dilution of stock options. Details of the calculations are as follows:

 
|                                      |   | **For the  three months ended  June 30,** |   | **For the  six months ended  June 30,** |   |
|-------------------------------------------|--------|-------------------------------------------|--------|-----------------------------------------|--------|
|                                      |   | **2004**                                  |   | **2003**                                |   | **2004** |   | **2003** |   |
|                                      |   |                                      |   |                                    |   |   |   |   |   |
| **Net income per share-basic:**           |   |                                      |   |                                    |   |   |   |   |   |
|                                      |   |                                      |   |                                    |   |   |   |   |   |
| Net income                                |   | $                                         | 28,788 |                                    | $      | 18,032 |   | $ | 61,105 |   | $ | 33,139 |   |
|                                      |   |                                      |   |                                    |   |   |   |   |   |
| Weighted average shares outstanding-basic |   | 88,770,483                                |   | 88,491,194                              |   | 88,740,629 |   | 88,359,842 |   |
| Net income per share-basic                |   | $                                         | 0.32   |                                    | $      | 0.20 |   | $ | 0.69 |   | $ | 0.38 |   |
|                                      |   |                                      |   |                                    |   |   |   |   |   |
| **Net income per share-diluted:**         |   |                                      |   |                                    |   |   |   |   |   |
|                                      |   |                                      |   |                                    |   |   |   |   |   |
| Net income                                |   | $                                         | 28,788 |                                    | $      | 18,032 |   | $ | 61,105 |   | $ | 33,139 |   |
|                                      |   |                                      |   |                                    |   |   |   |   |   |
| Weighted average shares outstanding-basic |   | 88,770,483                                |   | 88,491,194                              |   | 88,740,629 |   | 88,359,842 |   |
| Dilutive effect of stock options          |   | 2,058,346                                 |   | 2,019,096                               |   | 2,062,989 |   | 2,110,244 |   |
|                                      |   |                                      |   |                                    |   |   |   |   |   |
| Weighted average shares-diluted           |   | 90,828,829                                |   | 90,510,290                              |   | 90,803,618 |   | 90,470,086 |   |
| Net income per share-diluted              |   | $                                         | 0.32   |                                    | $      | 0.20 |   | $ | 0.67 |   | $ | 0.37 |   |

 

10

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# **4.**     Adoption of New AccountingPronouncements

 

In January 2003, the FASB issued Interpretation No. (“Fin”) 46“Consolidation of Variable Interest Entities” (as revised by Fin 46R). Thisinterpretation, as revised, provides guidance with respect to the consolidationof certain entities, referred to as variable interest entities (“VIE”), inwhich an investor is subject to a majority of the risk of loss from the VIE’sactivities, or is entitled to receive a majority of the VIE’s residual returns.This interpretation also provides guidance with respect to the disclosure ofVIEs in which an investor maintains an interest,but is not required to consolidate. The provisions ofthe interpretation are effective immediately for all VIEs created afterJanuary 31, 2003, or in which the Company obtains an interest after thatdate. For VIEs created before February 1, 2003, the provisions areeffective July 1, 2003. In November 2003, the Company invested $1,150for 50% ownership in an entity formed to provide research and developmentservices for the Company as well as third parties. It has been determined thatsuch investee is deemed a VIE, which has been consolidated in the Company’sfinancial statements. The net assets and result of operations of this entitywere not material to the Company in 2004. Creditors, or beneficial interest holders, of the consolidated VIE haveno recourse to the general credit of the Company.

 

In April 2004, the FASB issued Staff Position No. 129-1 (FSP 129-1),“Disclosure Requirements under FASB Statement No. 129, Disclosure ofInformation about Capital Structure, Relating to Contingently ConvertibleSecurities.”  This FSP requires thedisclosure provisions of Statement No. 129 to apply to all existing and newlycreated contingently convertible securities and to their potentially dilutiveeffects on earnings per share.  TheCompany does not have any contingently convertible securities at June 30, 2004.

 

# **5.**     Inventories

# ** **

Inventories consist of thefollowing:

 
|            |   | **June 30,  2004** |   | **December 31,  2003** |   |
|-----------------|--------|--------------------|--------|------------------------|--------|
| Raw material    |   | $                  | 29,413 |                   | $      | 24,745 |   |
| Work-in-process |   | 13,175             |   | 7,529                  |   |
| Finished goods  |   | 31,558             |   | 24,167                 |   |
|            |   |               |   |                   |   |
|            |   | $                  | 74,146 |                   | $      | 56,441 |   |

 

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# **6.**     Line of Credit

# ** **

On February 8, 2002, theCompany entered into a three-year $25 million credit agreement, which iscollateralized by accounts receivable and inventory. Interest on any borrowingunder the line will accrue at the rate of interest equal to either the adjustedLIBOR rate plus 1.5%, the prime rate or the fixed rate (as set by the bank).The rate will depend upon the terms of the selected borrowings. The agreementhas covenants which require the maintenance of certain financial ratiosincluding leverage, consolidated debt and asset coverage, as defined. At June30, 2004 and December 31, 2003, there were no outstanding borrowings under theline of credit.

 

# **7.**     Transactions Between the Company and RelatedParties

# ** **

The following is a summaryof related party transactions:

 
|                                                                                                   |   | **For the  three months ended  June 30,** |   | **For the  six months ended  June 30,** |   |
|--------------------------------------------------------------------------------------------------------|--------|-------------------------------------------|--------|-----------------------------------------|--------|
|                                                                                                   |   | **2004**                                  |   | **2003**                                |   | **2004** |   | **2003** |   |
| Net sales to subsidiaries of Hexal AG                                                                  |   | $                                         | 484    |                                    | 162    |   | $ | 1,048 |   | 162 |   |
| Purchases of products and supplies from  subsidiaries of Hexal AG                                      |   | 738                                       |   | 83                                      |   | 1,345 |   | 318 |   |
| Hexal AG reimbursement to the Company for  expenditures that were made on Hexal AG’s behalf       |   | —                                    |   | —                                  |   | 574 |   | — |   |
| Company’s reimbursement to Hexal AG for  expenditures that were made on the Company’s behalf |   | —                                    |   | 27                                      |   | 90 |   | 27 |   |
| Cyclosporine agreements with Hexal AG(1)                                                               |   | 1,137                                     |   | 1,788                                   |   | 2,357 |   | 3,131 |   |
| Fees incurred under product development  agreements with Hexal AG                                      |   | 416                                       |   | —                                  |   | 716 |   | — |   |
|                                                                                                        |        |                                           |        |                                         |        |  |  |  |  |  |  |

 

----

(1)   Under agreements with Hexal AG,the Company pays Hexal AG based on sales of specific products, which weredeveloped using Hexal AG’s patented technology.

 

At June 30, 2004 andDecember 31, 2003, the Company had a payable to Hexal AG of approximately$2,045 and $1,102, respectively, included in accrued liabilities.

 

At June 30, 2004 andDecember 31, 2003, the Company had receivables from subsidiaries of HexalAG of approximately $408 and $120, respectively, included in prepaid expensesand other current assets.

 

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# **8.**     Litigation

 

**Product Liability Litigation**

 

### *Fen-phen Litigation*

### * *

Since May 1997, the Company and certain of its customers have beennamed as defendants in numerous product liability lawsuits, some of which areclass actions, filed in various state and federal courts in connection with itsmanufacture of PhentermineHydrochloride.  These lawsuitstypically name as a defendant Wyeth (formerly American Home ProductsCorporation),themanufacturer of two anti-obesity drugs, Fenfluramine andDexfenfluramine, and also name manufacturers, distributors and retailers ofPhentermine.  Fenfluramine andPhentermine were prescribed in combination in an off-label use commonly called“fen-phen,” while Dexfenfluramine was generally prescribed alone, butoccasionally in combination with Phentermine.  In September 1997, themanufacturer of Fenfluramine and Dexfenfluramine agreed with the U.S. Food andDrug Administration (“FDA”) to voluntarily withdraw both products from themarket.  The FDA has not requested that Phentermine be withdrawn from themarket.

 

The plaintiffs in these cases (the “fen-phen cases”) typically allegethat the short- and long-term use of Fenfluramine in combination withPhentermine causes, among other things, primary pulmonary hypertension,valvular heart disease and/or neurological dysfunction.  Some lawsuitsallege emotional distress caused by the purported increased risk of injury inthe future.  Plaintiffs typically seek relief in the form of monetarydamages (including economic losses, medical care and monitoring expenses, lossof earnings and earnings capacity, other compensatory damages and punitive damages),generally in unspecified amounts, on behalf of the individual or the class.Some actionsseeking class certification ask forcertain types of equitable relief, including, but not limited to, declaratoryjudgments and the establishment of a research program or medical surveillancefund. Certain companies that distributed or sold the Company’s Phentermine andare named as defendants in certain of these lawsuits seek a defense andindemnity from the Company.

 

During 2000, the United States District Court for the Eastern District ofPennsylvania, the federal court before which all federal cases wereconsolidated for discovery, found that proposed anti-Phentermine “causation”testimony by two expert witnesses was not supported by scientific evidence andthus would be barred.  These two experts were the only “national”anti-Phentermine “causation” experts identified in the consolidated federallitigation, and were to have been “generic” experts in hundreds of cases. The Court’s decision to substantially curb their testimony has resulted in manycases being dismissed.  To date, there has been no scientific testimonyaccepted by any court that establishes a connection between the use ofPhentermine either alone or in combination with Fenfluramine and/or Dexfenfluramineand the allegations of injury made by plaintiffs in these lawsuits.

 

In late 1999, Wyeth, the major defendant in the fen-phen litigation andthe former manufacturer of both Fenfluramine and Dexfenfluramine, announced aproposed settlement of all fen-phen claims against it nationwide (exceptingonly claims for certain serious medical conditions).  The United StatesDistrict Court for the Eastern District of Pennsylvania, which supervisesdiscovery of all federal fen-phen cases in a consolidated multidistrictlitigation (the “Fen-Phen MDL”), certified a nationwide settlement class andapproved the proposed settlement, which became final inJanuary 2002.  This settlement has reduced the number of cases inwhich the Companyand its distributors have been namedas defendants.

 

13

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As of June 30, 2004, the Company had been named and served inapproximately 7,207 fen-phen product liability cases.  Approximately 91%of these cases have been dismissed. Since the beginning of the fen-phenlitigation, only one case has gone to trial with the Company and itsdistributors as defendants. The case against the Company and all thePhentermine defendants, including other Phentermine manufacturers anddistributors, was dismissed on motion before the presentation of any evidence.

 

While thenumber of lawsuits being filed has decreased substantially, the Company expectsadditional, similar lawsuits to be filed.  The Company and its outsidecounsel believe that the Company has substantial defenses to these claims,though the ultimate outcome cannot be determined. As of June 30, 2004, therehad been no finding of liability for fen-phen injury against the Company and nopayment by the Company to settle any combination-related fen-phen lawsuit. Noprovision for any related liability has been reflected in the Company’sfinancial statements.

 

*Phentermine Litigation*

 

The Company has been named as a defendant in several cases in which theplaintiffs allege injury from the use of Phentermine alone, and in one instancethe Company was named as a third-party defendant in a medical malpractice casein which negligent prescription of Phentermine was alleged.  A number ofthese claims have been dismissed in the Company’s favor, and as of June 30,2004 only one such claim remained pending.

 

Because discovery has not been completed in this pending case, predictingthe ultimate outcome of this action is not possible, and no provision for anyrelated liability has been reflected in the Company’s financialstatements.  The Company believes it has substantial defenses to thisclaim.

 

Net sales of Phentermine by the Company were approximately $3,200 and$4,900 for the six months ended June 30, 2004 and 2003, respectively,and $1,700 and $2,400 for the three months ended June 30, 2004 and 2003,respectively.

 

*Defense/Indemnity Issues Related to Fen-phen andPhentermine Litigation*

 

In or about April 2000, the Company exhausted its product liabilityinsurance covering all combination-related Phentermine lawsuits and anynon-combination Phentermine lawsuits resulting from claims regarding theingestion of Phentermine prior to June 1998.  Since that time, theCompany has funded its own defense in such lawsuits.  However, pursuant toan October 1999 settlement with an insurance carrier, the Company has madeinsurance coverage claims for fen-phen claims filed on or after June 22,2003 which allege fen-phen use prior to June 1998.  The Company hasreached an agreement in principle with its insurer regarding these insuranceclaims that, if completed, will defray the future cost of the Company’sfen-phen defense by approximately $1,400.  Additionally, the Company hasreached agreements under which the Company has agreed to fund or partially fundthe defense of certain of its distributors and indemnify them, provided certainconditions are met.  Furthermore, the Company has reached favorabledefense/indemnity agreements with several retailers of the Company’s

 

14

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Phentermineproducts.  Fen-phen and Phentermine litigation defense costs, and thecosts of related defense agreements, are being expensed as incurred.

 

*Other Product Liability Litigation*

 

The Company has been named as a defendant in several other productliability lawsuits in which plaintiffs allege that Company-manufacturedpharmaceuticals containing phenylpropanolamine (PPA) caused injury.  PPAwas removed from the market in 2000 at the FDA’s request after a study appearedto show a potentially increased risk of hemorrhagic stroke in certain patientcohorts.  The Company previously manufactured two low-volume prescriptionproducts that contained PPA that were discontinued in 1999 and 2000.

 

To date, the Company has been named in five lawsuits alleging injury or wrongfuldeath from the use of Company-manufactured pharmaceuticals containingPPA.  As of June 30, 2004, all but two PPA cases against the Company hadbeen dismissed or discontinued.  Discovery in these lawsuits isincomplete, and predicting the ultimate outcome of these actions is notpossible.  The Company believes its product liability insurance isadequate to cover existing PPA claims and, consequently, no provision for anyrelated liability has been reflected in the Company’s financial statements.

 

The Company was also named as a defendant in April 2004 in a lawsuitalleging injury from the use of Company-manufactured Desipramine, which hasbeen settled in principle for a nominal amount.  The Company was also named defendant in May 2004 in a product liabilitylawsuit in which the plantiff alleges injury from the use ofCompany-manufactured Lisinopril-HCTZ. Discovery in this case continues, and the Company believes it would bepremature to express a judgment as to its outcome.  Finally, a lawsuit filed against the Company in 2003 alleginginjury from the use of Company-manufactured Amiodarone was settled in principlein July 2004 for a nominal amount.

 

**Patent Infringement Litigation**

 

In August 2000, Novartis Pharmaceuticals Corporation (“Novartis”)filed a complaint in the United States District Court for the District ofDelaware alleging, among other things, that the Company’s generic Cyclosporineproduct infringes a patent owned by Novartis.  In December 2002, theUnited States District Court for the District of Delaware granted the Company’smotion for summary judgment of non-infringement of the patent.  InApril 2004, the United States Court of Appeals for the Federal Circuitaffirmed the judgment of the Delaware district court that the Company’s genericCyclosporine product does not infringe Novartis’ patent.  Novartis’request for a rehearing by the United States Appeals Court *en banc* is still pending.  TheCompany’s potential liability and expenses in this matter are not covered byinsurance.  An adverse outcome in this litigation could result in theCompany being unable to market Cyclosporine, which could materially harmprofits and cash flows, and could result in paying damages, costs, expenses andfees that could have a material adverse impact on the Company’s financialperformance.

 

15

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In January 2001, Apotex, Inc. (“Apotex”) filed an action in theUnited States District Court for the Eastern District of New York alleging thatby manufacturing, selling and offering to sell Cyclosporine capsules theCompany is infringing a patent of which Apotex alleges it is the exclusivelicensee.  Apotex seeks injunctive relief as well as an unspecified amountof damages and has also asserted a claim that the alleged infringement waswillful, that the case is therefore exceptional and that Apotex shouldtherefore be awarded the attorney fees it has incurred and treble damages inthe action.  The Company’s potential liability and expenses in this matterare not covered by insurance.  An adverse outcome in this litigation couldresult in the Company being unable to market Cyclosporine, which couldmaterially harm profits and cash flows, and could result in paying damages,costs, expenses and fees that could have a material adverse impact on theCompany’s financial performance.

 

The Company has denied that it has infringed any valid patent claimsasserted by Apotex and has alleged affirmatively, among other things, that thepatent is invalid and that it is not infringed by the Company’s manufacture,sale or offer to sell its Cyclosporine capsules.

 

In November 2000, Glaxo filed suit against the Company in the UnitedStates District Court for the Southern District of New York alleginginfringement of two patents based on the Company’s filing of an Abbreviated NewDrug Application (“ANDA”) to market generic Bupropion Hydrochloride 100 mg and150 mg ER (extended release) tablets.  InApril 2004, a Stipulation andOrder was entered in the United States District Court for the Southern DistrictofNew York,terminating all pending claims andcounterclaims in the patent infringement litigationthat Glaxobrought against the Company inNovember 2000, concerning the Company’s Bupropion HCl, ER 100 mg and 150mg tablets (generic equivalents of Glaxo’s Wellbutrin SRÒ 100 mg and 150 mg tablets). Under the terms of the Stipulation and a separate Settlement Agreement, Glaxoagreed to drop any further effort to pursue its claim that the Company’sBupropion HCl, ER 100 mg and 150 mg tablets infringe Glaxo’s patents.  TheCompany received $3,000 as part of the Settlement Agreement which was recordedas other income in the quarter ended June 30, 2004.

 

In addition, the Company has been named in several other patentinfringement actions alleging that the Company has infringed patents by filingan application with the FDA for approval to market products before theplaintiffs’ patents expire.  In general, plaintiffs seek judgmentsprecluding the FDA from approving the Company’s application to market a productbefore their respective patents expire and have asserted claims that thealleged infringements were willful, that the actions are therefore exceptionaland that plaintiffs should therefore be awarded the attorney fees they haveincurred in the actions.

 

In July 2004, the U.S. District Court for the Eastern District of NewYork ruled on a pending patent infringement case that involved itraconazolecapsules.  The suit filed in April 2001,by Janssen Pharmaceutica, N.V. (“Janssen”) claimed that the Company’s filing ofan ANDA for Itraconazole capsules infringed its patent.  The District Court ruling found that theCompany’s ANDA product did not infringe the patent, but the Court did notinvalidate the patent.  Janssen hadindicated that they will appeal the District Court decision ofnon-infringement.

 

16

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The Company and its outside counsel believe that the Company hassubstantial defenses and counterclaims to the foregoing patent infringementactions, though the ultimate outcome cannot be determined.

 

Because predicting the ultimate outcome of these actions is not possible,no provision for any related liability has been reflected in the Company’sfinancial statements.

 

**Nabumetone Settlements**

 

In August 2001, the Company was successful in defending itself inthe United States District Court for the District of Massachusetts against apatent infringement claim involving Nabumetone.  At the conclusion of thetrial, the Company filed a motion to recover the legal fees it incurred indefending the action.  The motion was stayed pending the appeal of theDistrict Court’s ruling.  The Court of Appeals affirmed the District Courtdecision in August 2002. In May 2003, the Company and the originalplaintiff reached agreement regarding the Company’s motion to recover legalfees. Under the agreement, the Company was reimbursed $3,500 for legal fees ithad incurred in defending itself.  The $3,500 recovery of legal fees wasreflected in other selling, general and administrative expenses during thequarter ended June 30, 2003.  In February 2004, the Companystipulated to an order dismissing its complaint against Glaxo for maliciousprosecution of Glaxo’s earlier suit against the Company, which claimed theCompany’s Nabumetone product infringed Glaxo’s patent.  In exchange foragreeing to the dismissal of its complaint, the Company received $10,000, whichwas included in other income in the quarter ended March 31, 2004.

 

**Other Litigation**

 

The Company is in other litigation incidental to its businessactivities.  The ultimate disposition of such lawsuits will not materiallyaffect the Company’s financial statements.

 

# **9.**     Contingencies

 

## ***Medicaid Rebates***

 

The Omnibus BudgetReconciliation Act of 1990, effective January 1, 1991, as amended, requiresdrug companies to enter into a rebate agreement with the Centers for Medicareand Medicaid Services (formerly called the Health Care FinancingAdministration) of the Federal government. The rebate agreement states that drug companies must pay rebates tostates for drugs (prescription, non-prescription or biological products) soldto Medicaid recipients.  At June 30,2004 and December 31, 2003, $5,743 and $4,009, respectively, are included inaccrued liabilities as the estimated liability for Medicaid rebates.

 

The Attorneys General in atleast six states, including the State of Florida, sent letters to numerouspharmaceutical manufacturers during December 2003 instructing them tomaintain all records relating to their reporting of pricing information underthe Medicaid Drug Rebate Statute. The letters state that the document retentiondemand is in furtherance of an ongoing investigation of the manufacturers’compliance with Medicaid drug rebate program requirements.  The Company received letters from some, butnot all, of the states believed to be involved,

 

17

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including the State ofFlorida.  The Company believes theseletters may have been motivated, at least in part, by a federal regulationpublished in August 2003 that, effective January 1, 2004, would havelimited the document retention provisions under the federal Medicaid DrugRebate Statute to three years unless the records are the subject of an audit ora government investigation of which the manufacturer is aware. That regulationwas amended, effective January 6, 2004, to substitute a ten-year recordretention requirement.  The State ofFlorida issued subpoenas to six manufacturers requesting documents relating totheir pricing and discounting practices in July 2004.  The Company has not received any subpoenas, informal documentrequests, or any other communications from federal or state enforcementauthorities that suggest an investigation of its Medicaid drug rebate reportingpractices or its pricing practices is under way. The Company believes itoperates in compliance with the requirements of the Medicaid Drug RebateStatute.

 

## ***State Medicaid Claims***

## *** ***

Eon Labs Holdings, Inc.purchased Major Pharmaceuticals, Inc. (“Major”), a distributor of drugproducts, in 1991 and sold Major in 1995. At the time of the sale, EHI established an escrow account to cover anyMedicaid drug rebate liabilities incurred by Major prior to the sale.

 

As of June 30, 2004, therecorded liability for such claims is $817, which management believes isadequate to resolve such matters.  TheCompany has approximately $684 as of June 30, 2004, in an escrow account tofund any such claims.

 

**EnvironmentalContingencies**

 

The Company received aninquiry from the United States Environmental Protection Agency (“EPA”) in 2002concerning the Company’s relationship as a possible successor to a party thatmay be among a substantial number of parties liable for cleanup of the MattiacePetrochemical Superfund site, a contaminated site currently being addressed bythe EPA at a cost estimated by the EPA to be approximately $36.0 million.  Based on information available at this time,the Company does not expect this matter to require significant capitalexpenditures or to have a material adverse effect on its earnings or financialposition.

 

**ITEM 2. MANAGEMENT****’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

The following discussion andanalysis of the Company’s financial condition and results of operations shouldbe read in conjunction with the consolidated financial statements, the relatednotes to consolidated financial statements and “Management’s Discussion andAnalysis of Financial Condition and Results of Operations” included in theCompany’s annual report on Form 10-K and the unaudited interim condensedconsolidated financial statements and notes thereto included in Part I, Item 1of this Quarterly Report onForm 10-Q.

 

**SIXMONTHS ENDED JUNE 30, 2004 COMPARED WITH SIX MONTHS ENDED JUNE 30, 2003**

 

**Net sales.**  Net sales increased 41.2% to$211.2 million for the six months ended June 30, 2004 from $149.5 million inthe comparable period in 2003.  Themajority of the sales growth was attributable to sales of Bupropion HCl, ER 100mg and 150 mg tablets which were

 

18

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introduced during the firstquarter of 2004.  Other productsintroduced at the end of or subsequent to June 30, 2003 that also contributedto the increase in net sales include Midodrine HCl, Metolazone USP,Mirtazapine, Benazepril HCl and Benazepril/HCTZ.

 

**Gross profit.**  Gross profit as a percentageof net sales increased to 59.7% for the six months ended June 30, 2004 from53.5% in the comparable period in 2003. The increase was primarily due to the benefit of a favorable productmix, principally from the introduction of Bupropion HCl, ER and increasedutilization of manufacturing capacity, principally at our North Carolinafacility.  The Company’s gross profitmargins are dependent on several factors, including product sales mix, cost,volumes and competitive activity.

 

**Amortization of other intangibles. **Amortization of other intangible assets was $1.9million for the six months ended June 30, 2004 and for the comparable period in2003.

 

**Other selling, general and administrative. **Other selling, general andadministrative expenses increased $11.3 million to $25.4 million for the sixmonths ended June 30, 2004 from $14.1 million for the comparable period in2003.  Expenses for the six months endedJune 30, 2003 were reduced by a $3.5 million recovery of legal fees related toNabumetone litigation.  Excluding therecovery of legal fees, other selling, general and administrative expensesincreased by $7.8 million or 0.3% as a percentage of net sales.  The increase, excluding the recovery oflegal fees, is primarily attributable to increases of $1.9 million forinsurance expense due to higher insurance premiums for product liability anddirectors’ and officers’ coverage, $2.8 million for higher legal costsprimarily associated with patent infringement litigation, $1.4 million incompensation costs and $1.7 million in other expenses.

 

**Research and development. **Research and development expenses increased$2.9 million to $12.3 million for the six months ended June 30, 2004 comparedto $9.3 million for the comparable period in 2003.  Increases in bio-studies expense, purchases of research anddevelopment materials, and expenses relating to the completion of definedmilestones under third-party product development agreements totaled $1.5million.  The remaining $1.4 million ofthis increase is related to increases for various other items.  These increases include increases inpersonnel costs, supplies, depreciation and other internal costs.

 

**Operating income**.  Operating income increased $31.9 million to$86.6 million for the six months ended June 30, 2004 from $54.8 million for thecomparable period in 2003.  The increase in operating income was theresult of increased sales and gross profit, offset by increases in otherselling, general and administrative expenses and research and developmentcosts.

 

**Interest income (expense). **Net interest income for the six months endedJune 30, 2004 was $0.9 million compared to net interest income of $0.4 millionin the comparable period in 2003 due to the elimination of outstanding debt,which decreased interest expense by $0.3 million, and an increase in interestincome of $0.3 million, which is the result of higher investment balances.

 

**Other income, net. **Other incomefor the six months ended June 30, 2004, was $13.0 million, including a $10.0million settlement received from Glaxo in exchange for the Company

 

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agreeing to the dismissal ofthe its complaint against Glaxo for the malicious prosecution of its earliersuit against the Company, which claimed the Company’s Nabumetone productinfringed Glaxo’s patent.  Other incomefor this period also includes a $3.0 million bond received from Glaxo to settleall patent infringement litigation relating to Bupropion HCl, ER 100 mg and 150mg tablets.  Other income for the sixmonths ended June 30, 2003 was approximately $0.1 million.

 

**Taxes on income. **Taxes on income increased $17.4 million to $39.5 million during the sixmonths ended June 30, 2004 from $22.1 million for the comparable period in2003.  The increase was the result of higher pre-tax income for2004.  The effective tax rate decreased to 39.3% from 40.0% dueprincipally to lower state and local taxes in 2004.

 

**Net income.**  Net income increased $28.0 million to $61.1million for the six months ended June 30, 2004 from $33.1 million in thecomparable period in 2003 for the reasons described above.

 

**THREEMONTHS ENDED JUNE 30, 2004 COMPARED WITH THREE MONTHS ENDED JUNE 30, 2003**

 

**Net sales.**  Net sales increased 35.9% to$107.0 million for the three months ended June 30, 2004 from $78.7 million inthe comparable period in 2003.  Themajority of the sales growth was attributable to the introduction of BupropionHCl, ER 100 mg and 150 mg tablets which were introduced during the firstquarter of 2004.  Other productsintroduced at the end of or subsequent to June 30, 2003 that contributed to theincrease in net sales include Midodrine HCl, Metolazone USP, Mirtazapine, BenazeprilHCl and Benazepril/HCTZ.

 

**Gross profit.**  Gross profit as a percentageof net sales increased to 59.7% for the three months ended June 30, 2004compared to 52.9% in the comparable period in 2003.  The gross margin for the quarter ended June 30, 2004 reflectedthe benefit of a favorable product mix, principally from the introduction ofBupropion HCl, ER, and increased utilization of manufacturing capacity,principally at our North Carolina facility. The Company’s gross profit margins are dependent on several factors,including product sales mix, cost, volumes and competitive activity.

 

**Amortization of other intangibles. **Amortization of other intangible assets was $0.9million for the three months ended June 30, 2004 and for the comparable periodin 2003.

 

**Other selling, general andadministrative. **Other selling,general and administrative expenses increased $7.1 million to $12.4 million forthe three months ended June 30, 2004 from $5.3 million for the comparableperiod in 2003.  Expenses for the threemonths ended June 30, 2003 were reduced by a $3.5 million recovery of legalfees related to Nabumetone litigation. Excluding the recovery of legal fees, other selling, general andadministrative expenses increased by $3.6 million or 0.4% as a percentage ofnet sales.  The increase, excluding therecovery of legal fees, is primarily attributable to increases of $0.8 millionfor insurance expense due to higher insurance premiums for product liabilityand directors’ and officers’ coverage, $1.5 million for higher legal costsprimarily associated with patent infringement litigation, $0.3 million incompensation costs and $1.0 million in other expenses.

 

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**Research and development. **Research and development expenses increased17.8% to $6.7 million for the three months ended June 30, 2004 from $5.7million for the comparable period in 2003. The increase in research and development spending is due primarily toan $0.8 million increase in expense for the purchase of research anddevelopment materials and the associated labor and overhead used in theproduction of research batches.  Theremaining $0.2 million increase is related to increases in various other items.

 

**Operating income**.  Operating income increased $14.2 million to$43.9 million for the three months ended June 30, 2004 from $29.7 million forthe comparable period in 2003.  The increase in operating income was theresult of increased sales and gross profit, offset by increases in otherselling, general and administrative expenses and research and developmentcosts.

 

**Interest income (expense). **Net interest income for the three monthsended June 30, 2004 was $0.5 million compared to net interest income of $0.3million in the comparable period in 2003. Interest income increased by $0.2 million, the result of higherinvestment balances.

 

**Other income, net. **Other incomefor the three months ended June 30, 2004, was $3.0 million, which represents a$3.0 million bond received from Glaxo to settle all patent infringementlitigation relating to Bupropion HCl, ER 100 mg and 150 mg tablets.  Other income for the three months ended June30, 2003 was approximately $0.1 million.

 

**Taxes on income. **Taxes on income increased $6.6 million to $18.6 million during the threemonths ended June 30, 2004 from $12.0 million for the comparable period in2003.  The increase was the result of higher pre-tax income for2004.  The effective tax rate decreased to 39.2% from 40.0% dueprincipally to lower state and local taxes in 2004.

 

**Net income.**  Net income increased $10.8 million to $28.8million for the three months ended June 30, 2004 from $18.0 million in thecomparable period in 2003 for the reasons described above.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

Cash and cash equivalents were$101.1 million at June 30, 2004, as compared to $43.9 million at December 31,2003.  Additionally, the Company hadinvestments in marketable debt securities of $73.1 million at June 30, 2004, ascompared to $115.3 million at December 31, 2003.

 

The Company has a three-year$25 million credit facility which expires on February 8, 2005. Under thisfacility, the Company can borrow at LIBOR plus 1.5%, the bank’s prime rate or afixed rate. The credit facility, which is for working capital purposes, had nooutstanding borrowings against it at June 30, 2004 and December 31, 2003,respectively.

 

Stockholders’ equityincreased to $383.8 million at June 30, 2004 from $328.8 million at December31, 2003.  The increase in Stockholders’equity was comprised primarily of net earnings of $61.1 million for the sixmonths ended June 30, 2004 offset by net purchases of $5.8 million of treasuryshares.

 

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For the six months endedJune 30, 2004, cash increased by $57.2 million.  Operations generated $29.8 million of cash, comprised of netearnings of $61.1 million, non-cash items totaling $27.9 million, and anincrease in working capital of $59.3 million. Working capital is defined as current assets (excluding cash and cashequivalents, investments and restricted cash) less current liabilities.  The increase in working capital resultedprimarily from increases in accounts receivable, inventory and other assets of$41.1 million, $17.7 million, and $1.6 million, respectively, and a decrease inaccrued liabilities of $1.9 million.  Adecrease in prepaid expenses and other current assets of $1.9 million and anincrease in accounts payable of $1.1 million partially offset the other workingcapital increases.  The increases inaccounts receivable and inventory are attributed to increased sales.  The increase in other assets is attributedto the timing of deposits for future purchases.  The decrease in accrued liabilities is due to a decrease inreserve for returns.  The decreases inprepaid expenses and other current assets and increase in accounts payable weredue to amortization of prepaid insurance and timing of payments, respectively.

 

Investing activitiesprovided $37.9 million of cash for the six months ended June 30, 2004.  Approximately $41.8 million represented netsales of short-term investment grade debt securities during the six monthsended June 30, 2004 offset by $3.9 million used for capital expenditures.  The capital expenditures relate primarily toequipment required to support increased production volume in the Company’sNorth Carolina facility.

 

Financing activitiesconsumed $10.4 million of cash during the six months ended June 30, 2004.  The purchase of treasury shares consumed$11.2 million.  Other financing activitiesgenerated $0.8 million, of which $0.7 million represents cash proceeds receivedfrom employees who exercised stock options.

 

The Company is involved in various product liability and patentlitigation not covered by insurance. Adverse rulings in litigation related toproduct liability could result in the Company paying damages and expenses thatcould have a material adverse effect on the Company’s financial performance.

 

An adverse outcome in patent litigation with Novartis and Apotexinvolving Cyclosporine capsules could result in the Company not being able tomarket this product, which could materially harm its profits and cashflows.  Furthermore, an adverse outcomein either matter could result in the Company paying damages, costs, expensesand fees that could have a material adverse impact on its financialperformance.

 

In December 2002, the United States District Court for the Districtof Delaware granted the Company’s motion for summary judgment ofnon-infringement of the patent with respect to the Novartis matter.  In April 2004, the United States Court ofAppeals for the Federal Circuit affirmed the judgment of the Delaware districtcourt that the Company’s generic Cyclosporine product does not infringe Novartis’patent.  Novartis’ request for a rehearingby the United States Court of Appeals is pending.

 

The Company has denied that it has infringed any valid patent claimsasserted by Apotex, and has alleged affirmatively, among other things, that thepatent is invalid and is not infringed by the Company’s manufacture, sale oroffer to sell its Cyclosporine capsules. Discovery for this

 

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case isongoing and is to continue through December 31, 2004.  The Company expects to go to trial during the second quarter of2005.

 

The Company does not currently have or anticipate any short-term fundingrequirements outside of the ordinary course of its business, and the Companydoes not have or anticipate any liquidity concerns. The Company’s principalfuture cash requirements are associated with increased working capital tosupport future growth, capital expenditures and legal defense costs. TheCompany anticipates that its operating cash flows and current cash balancestogether with its available borrowings under its credit facility will besufficient to meet all of its cash requirements for both the short-term andforeseeable future.

 

** Critical Accounting Policies**

 

The Company’s critical accounting policies are those policies that areimportant to the portrayal of its financial condition and results of operationsand require management’s subjective judgments. As a result, these judgments aresubject to an inherent degree of uncertainty. The Company bases its judgmentson its experience and various other assumptions that the Company believes to bereasonable under the circumstances. On an ongoing basis, the Company evaluatesits estimates, including those related to revenues, returns, inventories,income taxes and litigation. The Company’s actual results could differ fromthese estimates under different assumptions or conditions. The Company believesthe following accounting policies to be critical:

 

Sales are recognized when the products are received by the customer,which represents the point when the risks and rewards of ownership aretransferred to the customer. Discounts, rebates and contract pricingadjustments are recorded as a reduction of sales based on agreed-upon termswith the Company’s customers at the time of sale. The Company calculates areserve for discounts and rebates based upon actual sales under sucharrangements. Reserves for contract pricing adjustments represent thedifference between the prices wholesalers are billed by the Company and thecontract prices billed by wholesalers to their customers. In determining areserve for contract pricing adjustments, the Company takes into account anestimate of the percentage of product sales subject to such pricing adjustmentsbased on historical trends. Historical trends are adjusted for new product introductionsand changes in wholesaler or contract prices.

 

Shelf stock adjustments areprovided following a reduction in the prices of the Company’s products due tothe competitive environment. Such adjustments are credited to the Company’scustomers based on their on-hand inventory quantities. Reserves are generallyestablished when the Company reduces its prices.

 

Estimatesfor returns, which are recorded at the time of sale, relate primarily toreturns of expiring products. The Company utilizes historical trends toestimate the amount of products to be returned due to product expiration.

 

In determining whether liabilities should be recorded for pendinglitigation claims, the Company must assess the allegations made and thelikelihood that it will successfully defend itself. When the Company believesit is probable that it will not prevail in a particular matter, it will thenmake an estimate of the amount of liability based in part on advice of outsidelegal counsel.

 

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**ImpactOf Recently Issued Accounting Standards**

 

In January 2003, theFASB issued Interpretation No. (“Fin”) 46, “Consolidation of VariableInterest Entities” (as revised by Fin 46R). This interpretation, as revised,provides guidance with respect to the consolidation of certain entities,referred to as variable interest entities (“VIE”), in which an investor issubject to a majority of the risk of loss from the VIE’s activities, or isentitled to receive a majority of the VIE’s residual returns. Thisinterpretation also provides guidance with respect to the disclosure of VIEs inwhich an investor maintains an interest,but is not required to consolidate. Theprovisions of the interpretation are effective immediately for all VIEs createdafter January 31, 2003, or in which the Company obtains an interest afterthat date. For VIEs created before February 1, 2003, the provisions areeffective July 1, 2003. In November 2003, the Company invested$1.2 million for 50% ownership in an entity formed to provide research anddevelopment services for the Company as well as third parties. It has beendetermined that such investee is deemed a VIE, which has been consolidated inthe Company’s financial statements. The net assets and result of operations ofthis entity were not significant to the Company in 2004.  Creditors, or beneficial interest holders,of the consolidated VIE have no recourse to the general credit of the Company.

 

In April 2004, the FASB issued Staff Position No. 129-1 (FSP 129-1),“Disclosure Requirements under FASB Statement No. 129, Disclosure ofInformation about Capital Structure, Relating to Contingently ConvertibleSecurities.”  This FSP requires thedisclosure provisions of Statement 129 to apply to all existing and newlycreated contingently convertible securities and to their potentially dilutiveeffects on earnings per share.  TheCompany does not have any contingently convertible securities at June 30, 2004.

 

**Off-BalanceSheet Arrangements**

 

None.

 

**ITEM 3** - QUANTITATIVEAND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

** **

The following discusses theCompany’s exposure to market risk related to changes in interest rates, equityprices and foreign currency exchange rates. The Company does not believe that its exposure to market risk is material.

 

As of June 30, 2004, theCompany had cash and cash equivalents of $101.1 million.  Cash equivalents are interest-bearinginvestment grade securities, primarily short-term, highly liquid investmentswith maturities at the date of purchase of less than 90 days.  In addition, the Company currently owns$73.1 million in publicly traded debt securities with an average maturity ofapproximately 231 days, which are subject to market fluctuations.

 

These investments aresubject to interest rate risk and will decrease in value if market interestrates increase.  A hypothetical increasein the market interest rates by 10 percent from the rates in effect on the dateof this Form 10-Q would cause the fair value of these short-term investments todecline by an immaterial amount.  TheCompany has the ability to hold these investments until maturity, and thereforeit does not expect the value of these investments to be affected to any

 

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significant degree by the effectof a sudden change in market interest rates. Declines in interest rates over time will, however, reduce the Company’sinterest income.

 

The Company currently doesnot have any significant foreign currency exchange rate risk.

 

**ITEM 4****- CONTROLS AND PROCEDURES**

 

As of the end of the period covered by this report, the Company’smanagement performed an evaluation, under the supervision and with theparticipation of its Chief Executive Officer and Chief Financial Officer, ofthe effectiveness of the design and operation of the Company’s disclosurecontrols and procedures (as defined in Rules 13a-15(e) and 15d-15(e) ofthe Securities Exchange Act of 1934, as amended). Based on that evaluation, theCompany’s management, including its Chief Executive Officer and Chief FinancialOfficer, concluded that the Company’s disclosure controls and procedures wereeffective as of the end of the period covered by this report.

 

There have been no changes in the Company’s internal control overfinancial reporting that have materially affected, or are reasonably likely tomaterially affect, the Company’s internal control over financial reporting.

 

**SPECIALNOTE REGARDING FORWARD-LOOKING STATEMENTS**

 

This quarterly report onForm 10-Q report contains forward-looking statements relating to future eventsand future performance of the Company within the meaning of Section 27A of theSecurities Act of 1933 and Section 21E of the Securities Exchange Act of 1934,including, without limitation, statements regarding the Company’s expectations,beliefs, intentions or future strategies that are signified by the words“expects,” “anticipates,” “intends,” “believes” or similar language.  Actual results could differ materially fromthose anticipated in such forward-looking statements.  Some specific factors that may have a significant effect on theCompany’s operating results and common stock market price include:

 

•      new product introductions;

•      changes in the degree ofcompetition for the Company’s products;

•      regulatory issues,including, but not limited to, receipt of ANDA approvals from the FDA,compliance with FDA or other agency regulations or the lack or failure ofeither of the foregoing;

•      the inability to acquiresufficient supplies of raw materials;

•      litigation and/or threats oflitigation;

•      changes in the Company’sgrowth rates or the growth rate of the Company’s competitors;

•      legislative and FDA actionswith respect to the government regulation of pharmaceutical products;

•      public concern as to thesafety of the Company’s products;

•      changes in health carepolicy in the United States;

•      conditions in the financialmarkets in general or changes in general economic conditions;

•      the Company’s inability toraise additional capital;

•      conditions of other genericpharmaceutical companies or the generic pharmaceutical industry generally; and

 

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•      changes in stock marketanalyst recommendations regarding the Company’s common stock, other comparablecompanies or the generic pharmaceutical industry generally.

 

All forward-lookingstatements included in this document are based on information available to theCompany on the date hereof, and the Company assumes no obligation to update anyforward-looking statements. The Company cautions investors that its businessand financial performance are subject to substantial risks and uncertainties.

 

**PART II****– OTHER INFORMATION**

 

**ITEM 1 – LEGAL****PROCEEDINGS**

 

In April 2004, a Stipulation and Order (the “Stipulation”) wasentered in the United States District Court for the Southern District of NewYork, terminating all pending claims and counterclaims in a patent infringementlitigation that Glaxo brought against the Company in November 2000,concerning the Company’s Bupropion HCl, ER 100 mg and 150 mg tablets (genericequivalents of Glaxo’s Wellbutrin SRÒ 100 mg and 150 mg tablets). Under theterms of the Stipulation and a separate settlement agreement (the “SettlementAgreement”), Glaxo agreed to drop any further effort to pursue its claim thatthe Company’s Bupropion HCl, ER 100 mg and 150 mg tablets infringe Glaxo’spatents.  In April 2004, the Company received $3.0 million as part ofthe Settlement Agreement.  The $3.0 million received was recorded as otherincome by the Company in the quarter ended June 30, 2004.

 

In April 2001, Janssen filedsuit against the Company in the U.S. District Court for the Eastern District ofNew York claiming that the Company’s filing of an ANDA for Itraconazolecapsules infringed their patent.  InJuly 2004, the District Court found that the Company’s ANDA product did notinfringe the patent, but the Court did not invalidate the patent.  Janssen has indicated that they will appealthe District Court decision of non-infringement.

 

**ITEM 2 – CHANGES****IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASESOF EQUITY SECURITIES**

 

In June 2002, the Companyclosed an initial public offering of its common stock.  The Registration Statement on Form S-1 (FileNo. 333-83638) was declared effective by the Securities and Exchange Commissionon May 23, 2002 and the Company commenced the offering on that date.  After deducting underwriting discounts andcommissions and the offering expenses, the net proceeds from the offering tothe Company were approximately $139.2 million.

 

The Company has used proceedsfrom the offering as follows: (i) $66.9 million has been used to repay debt dueto Hexal AG; (ii) $10.0 million has been used to repay debt incurred inconnection with the acquisition of EHI; and (iii) $2.0 million has been usedfor general working capital purposes. The remaining $60.3 million of the proceeds to the Company from theoffering are invested in cash investments and short-term investment grade debtsecurities.  The Company anticipatesusing the balance of the proceeds from the offering for general corporatepurposes, including funding working capital, increased research and developmentexpenditures to expand the Company’s product offerings and the potentialacquisition of product lines or companies.

 

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The Company has no presentunderstandings, commitments or agreements with respect to anyacquisitions.  The Company has notdetermined the amounts it plans to spend on any of the areas listed above orthe timing of these expenditures.

 

The following table sets forth the repurchases of shares of the Company’scommon stock made during the quarter ended June 30, 2004:  (1)

 
| **Period**                              |   | **(a)  Total Number  of Shares  Purchased** |   | **(b)  Average  Price Paid per  Share** |   | **(c)  Total Number  of Shares  Purchased as Part  of Publicly  Announced Plan  or Programs** |   | **(d)  Maximum  Number (or  Approximate  Dollar Value) of  Shares that May  Yet Be  Purchased Under  the Plans or  Programs** |   |
|-----------------------------------------|--------|---------------------------------------------|--------|-----------------------------------------|--------|-----------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------|--------|
| April 1, 2004  - April 30, 2004    |   | 29,000                                      |   | $33.17                                  |   | 29,000                                                                                        |   | 158,500                                                                                                                       |   |
| May 1, 2004 - May 31,  2004             |   | 112,760                                     |   | 33.88                                   |   | 112,760                                                                                       |   | 45,740                                                                                                                        |   |
| June 1, 2004 -  June 30, 2004 |   | 22,500                                      |   | 38.32                                   |   | 22,500                                                                                        |   | —                                                                                                                        |   |
| Total                                   |   | 164,260                                     |   | $34.36                                  |   | 164,260                                                                                       |   | —                                                                                                                        |   |

 

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(1) InApril 2003, the Company’s Board of Directors approved the repurchase of upto 600,000 shares of the Company’s common stock.  In February 2004,the Company adopted a plan to repurchase up to 187,500 shares throughMarch 31, 2004.  In April 2004, the Company adopted a plan torepurchase up to 187,500 shares through June 30, 2004.  Depending onmarket conditions, the Company also expects to conduct purchases in the openmarket and in privately negotiated transactions from time to time during itsnormal trading window and may enter into future plans to repurchase shares.

 

**ITEM4 — SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

The Company’s Annual Meeting of Stockholderswas held on May 28, 2004, at which meeting the following actions were taken(the tabulations of the votes with respect to each action have been adjusted toreflect the 2-for-1 stock split declared May 2004 and effected on June 1, 2004in the form of a 100% stock dividend for stockholders of record as of the closeof business on May 17, 2004):

 

The following director was elected to servefor a term of office expiring in 2007:

 

|                          |   | **Votes For** |   | **Votes  Withheld** |   |
|-------------------------------|--------|---------------|--------|---------------------|--------|
|                          |   |          |   |                |   |
| Thomas Strüngmann, Ph.D. |   | 71,567,236    |   | 15,177,582          |   |

 

As described in the Notice of Annual Meetingand Proxy Statement, abstentions and broker non-votes were not calculated inthe election of directors.

 

A proposal by the Board ofDirectors to approve an amendment to the Company’s Restated Certificate ofIncorporation increasing the number of authorized shares of common stock from70 million to 100 million shares was approved by the stockholders.  The stockholders cast 86,481,276 votes in favorof this proposal and 235,644 votes against.  There were

 

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27,898abstentions.  As described in the Notice of Annual Meeting and ProxyStatement, broker non-votes were not included for purposes of calculating voteson this matter.

 

A proposal by the Board of Directors toratify the selection of PricewaterhouseCoopers LLP as the Company’s independentauditors for the year ending December 31, 2004 was approved by thestockholders.  The stockholders cast 85,692,236 votes in favor of thisproposal and 1,047,284 votes against.  There were 5,298 abstentions. As described in the Notice of Annual Meeting and Proxy Statement, brokernon-votes were not included for purposes of calculating votes on this matter.

 

**ITEM 5** - OTHERINFORMATION

** **

**Audit Committee Pre-Approval of Non-Audit Services**

 

During the quarter endedJune 30, 2004 the Company’s Audit Committee pre-approved one category ofaudit-related services for $225,000.

 

**ITEM 6****– EXHIBITS AND REPORTS ON FORM 8-K**

 

(a)           Exhibits

 

31.1         Certificationspursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

31.2         Certificationspursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

32.1         CertificationPursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of theSarbanes-Oxley Act of 2002

 

32.2         CertificationPursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of theSarbanes-Oxley Act of 2002

 

(b)           Reports on Form 8-K

 

On April 22, 2004, the Companyfiled a Current Report on Form 8-K reporting the Press Release regardingearnings for the three months ended March 31, 2004.

 

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**SIGNATURES**

 

Pursuant tothe requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
|                 | Eon Labs, Inc. |
|----------------------|----------------|
|                 |           |   |
| August  9, 2004 | By:            | /s/ Bernhard Hampl, Ph.D. |   |
|                 |           | Bernhard Hampl, Ph.D. |
|                 |           | President, Chief Executive  Officer  and Director |
|                 |           |   |
|                 |           |   |
| August  9, 2004 | By:            | /s/ William F. Holt |   |
|                 |           | William F. Holt |
|                 |           | Chief Financial Officer |

 

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