Notes to Condensed Consolidated Financial Statements
(amounts in the tables are stated in thousands of U.S. dollars, except share related data)
(unaudited)
|
1.
|
Governing Statutes, Description of Business and Basis of Presentation
|
Axcan Intermediate Holdings Inc., a corporation incorporated on November 28, 2007, under the General Corporation Law of the State of Delaware and its subsidiaries (together the “Company”), commenced active operations with the purchase, through a wholly-owned indirect subsidiary, of all of the outstanding common shares of Axcan Pharma Inc., a company incorporated under the Canada Business Corporation Act. On February 25, 2008, the Company, pursuant to a Plan of Arrangement dated November 29, 2007, and through a wholly-owned indirect subsidiary, completed the acquisition of all common shares of Axcan Pharma Inc. at a price of $23.35 per share. The Company is involved in the research, development, production and distribution of pharmaceutical products mainly in the field of gastroenterology.
The accompanying unaudited condensed consolidated financial statements are presented in U.S. dollars, the reporting currency
,
and prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial statements and with the requirements of the Securities and Exchange Commission for reporting on Form 10Q. Accordingly, they do not include all the information and footnotes required by U
.
S
.
GAAP for complete financial statements. The interim financial statements and related notes should be read in conjunction with the Company’s audited financial statements for the fiscal year ended September 30, 2009. When necessary, the financial statements include amounts based on informed estimates and best judgment of management. The results of operations for the interim periods reported are not necessarily indicative of results to be expected for the year. In our opinion, the financial statements reflect all adjustments (including those that are normal and recurring) that are necessary for a fair presentation of the results of operation for the periods shown. Certain prior period amounts have been reclassified to conform to the current period presentation. All intercompany transactions and balances have been eliminated on consolidation.
|
2.
|
Significant Accounting Policies
|
The following policies are interim updates to those discussed in Note 2 to the Company’s audited financial statements for the fiscal year ended September 30, 2009.
Revenue recognition
Revenue is recognized when the product is shipped to the Company's customers, provided the Company has not retained any significant risks of ownership or future obligations with respect to the product shipped. Provisions for sales discounts and estimates for chargebacks, managed care and Medicaid rebates, product returns and distribution service agreement fees are recorded as a reduction of product sales revenues at the time such revenues are recognized. These revenue reductions are established by the Company at the time of sale, based on historical experience adjusted to reflect known changes in the factors that impact such reserves. In certain circumstances, returns of products are allowed under the Company’s policy and provisions are maintained accordingly. These revenue reductions are generally reflected as an addition to accrued liabilities. Amounts received from customers as prepayments for products to be shipped in the future are reported as deferred revenue.
The Company presents
,
on a net basis, taxes collected from customers and remitted to governmental authorities; that is, they are excluded from revenues
.
ULTRASE
®
and VIOKASE
®
, the Company’s pancreatic enzyme products (“PEPs”) have historically accounted for approximately a 19% of the Company’s net sales in the last three years. Existing products to treat exocrine pancreatic insufficiency have been marketed in the U.S. since before the passage of the Federal Food, Drug, and Cosmetic Act, or FDCA, in 1938 and, consequently, there are currently marketed PEPs that have not been approved under the NDA process by the FDA. In 1995, the FDA issued a final rule requiring that these PEPs be marketed by prescription only, and, in April 2004, the FDA mandated that all manufacturers of exocrine pancreatic insufficiency drug products file an NDA and receive approval for their products by April 2008 or be subject to regulatory action. In October 2007, the FDA published a notice in the Federal Register extending the deadline within which to obtain marketing approval for exocrine pancreatic insufficiency drug products to April 28, 2010, for those companies that were (a) marketing unapproved pancreatic enzyme products as of April 28, 2004; (b) submitted NDAs on or before April 28, 2009; and (c) that continue diligent pursuit of regulatory approval. The FDA required all manufacturers with unapproved NDAs to cease distribution of unapproved products after April 28, 2010, until such time that NDA approval is granted. After this date, the unapproved products may still be available on pharmacy shelves for a short time until stock is depleted. The FDA has stated that it will continue to review NDAs that have been submitted by manufacturers of unapproved PEPs, and will approve additional PEPs beyond the April 28, 2010 deadline, if they meet the required safety, effectiveness and product quality standards. The Company completed the submission for ULTRASE® in the fourth quarter of fiscal 2008. The submission of the Company’s rolling NDA for VIOKASE
®
was completed in the first quarter of fiscal 2010.
ULTRASE
®
and VIOKASE
®
did not receive NDA approval by the April 28, 2010 deadline and the Company has ceased distributing the two products after that date, in compliance with the FDA guideline. For the quarter ended March 31, 2010, the Company recorded a $10,444,000 returns provision which is an estimate of the Company’s liability for ULTRASE
®
and VIOKASE
®
that may be returned by the original purchaser in accordance with the Company’s policy as a result of not receiving NDA approval by the April 28, 2010 deadline. At June 30, 2010, the returns provision was of $18,753,000, reflecting an additional provision of $13,009,000 recorded in the quarter ended June 30, 2010, for the sales shipped through April 28, 2010.This estimate is based on ULTRASE
®
and VIOKASE
®
inventory in the distribution channel and related expiration dates of this inventory, estimated erosion of ULTRASE
®
and VIOKASE
®
demand based on competition from approved PEP products and the resulting estimated sell-through of ULTRASE
®
and VIOKASE
®
and other factors.
AXCAN INTERMEDIATE HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements
(amounts in the tables are stated in thousands of U.S. dollars, except share related data)
(unaudited)
Inventory valuation
Inventories of raw materials and packaging material are valued at the lower of cost and replacement cost. Inventories of work in progress and finished goods are valued at the lower of cost and net realizable value. Cost is determined by the first-in, first-out method. Cost for work in progress and finished goods include raw materials, direct labor, subcontracts and an allocation for overhead. Allowances are maintained for slow-moving inventories based on the remaining shelf life of products and estimated time required to sell such inventories. Obsolete inventory and rejected products are written off to cost of goods sold.
Inventory costs associated with products that have not yet received regulatory approval are capitalized if the Company believes there is probable future commercial use and future economic benefit. If future commercial use and future economic benefit are not considered probable, then costs associated with pre-launch inventory that has not yet received regulatory approval are expensed as research and development expense during the period the costs are incurred. The Company could be required to expense previously capitalized costs related to pre-approval inventory if the probability of future commercial use and future economic benefit changes due to denial or delay of regulatory approval, a delay in commercialization, or other factors.
All inventories of ULTRASE
®
and VIOKASE
®
amounting to $32,328,000 have been written-off during the nine-month period ended June 30, 2010.
Impairment of long lived-assets
The value of goodwill and intangible assets with an indefinite life are subject to an annual impairment test unless events or changes in circumstances indicate that the carrying amounts of these assets may not be recoverable. The intangible assets with a finite life and property, plant and equipment are subject to an impairment test whenever events or changes in circumstances indicate that the carrying amounts of these assets may not be recoverable. The Company compares the carrying value of the unamortized portion of property, plant and equipment and intangible assets with a finite life to estimated future undiscounted cash flows.
The goodwill impairment test is a two-step process. Step one consists of a comparison of the fair value of a reporting unit with its carrying amount, including the goodwill allocated to the reporting unit. Measurement of the fair value of a reporting unit may be based on one or more faire value measures including present value technique of estimated future cash flows and estimated amounts at which the unit as a whole could be bought or sold in a current transaction between willing parties. If the carrying amount of the reporting unit exceeds the fair value, step two requires the fair value of the reporting unit to be allocated to the underlying tangible and intangible assets and liabilities of that reporting unit, resulting in an implied fair value of goodwill. If the carrying amount of the goodwill of the reporting unit exceeds the implied fair value of that goodwill, an impairment loss equal to the excess is recorded in earnings.
The Company’s pancreatic enzyme products did not receive NDA approval from the FDA by the April 28, 2010 deadline. This is a change in circumstance that caused the Company to review the carrying value of its long lived assets including goodwill. Based on this review, an impairment charge of $107,158,000 was recorded during the quarter ended March 31, 2010. (Note 6)
|
3.
|
Recently Issued Accounting Standards
|
In March 2010, the FASB issued guidance related to revenue recognition that applies to arrangements with milestones relating to research or development deliverables. This guidance provides criteria that must be met to recognize consideration that is contingent upon achievement of a substantive milestone in its entirety in the period in which the milestone is achieved. The guidance provides a definition of substantive milestone and should be applied regardless of whether the arrangement includes single or multiple deliverables or units of accounting. This guidance is effective prospectively to milestones achieved in fiscal years, and interim periods within those years, after June 15, 2010, with early adoption permitted. The adoption of this guidance is not expected to have a material impact on the Company’s condensed consolidated financial statements.
In March 2010, the FASB amended the existing guidance on stock compensation to clarify that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity's equity securities trades should not be considered to contain a condition that is not a market, performance, or service condition. Therefore, such an award should not be classified as a liability if it otherwise qualifies as equity. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010.The adoption of this guidance is not expected to have a material impact on the Company’s condensed consolidated financial statements.
In January 2010, the FASB amended the existing authoritative guidance on disclosures of fair value measurements and clarifies and provides additional disclosure requirements related to recurring and non-recurring fair value measurements. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009. The disclosure of the roll forward of activity in Level 3 measurements on a gross basis is effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The adoption of this guidance did not have a material impact on the Company’s condensed consolidated financial statements.
AXCAN INTERMEDIATE HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements
(amounts in the tables are stated in thousands of U.S. dollars, except share related data)
(unaudited)
In October 2009, the FASB amended the existing guidance on revenue recognition related to accounting for multiple-element arrangements. This amendment addresses how to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting, and how the arrangement consideration should be allocated among the separate units of accounting. This guidance is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, and early adoption is permitted. The Company is currently evaluating the impact of the adoption of this guidance on its condensed consolidated financial statements.
In August 2009, the FASB amended the existing guidance on fair value measurements and disclosures to provide clarification in measuring the fair value of liabilities in circumstances when a quoted price in an active market for the identical liability is not available. In such circumstances, a reporting entity is required to measure fair value using one or more of the following methods: 1) a valuation technique that uses the quoted price of the identical liability when traded as an asset or quoted prices for similar liabilities or similar liabilities when traded as assets; and/or 2) a valuation technique that is consistent with the principles of fair value measurements (e.g. an income approach or market approach). This guidance is effective for reporting periods including interim periods beginning after August 28, 2009. The adoption of this guidance did not have a material impact on the Company’s condensed consolidated financial statements
.
In June 2009, the FASB amended the existing authoritative guidance on consolidation regarding variable interest entities for determining whether an entity is a variable interest entity (“VIE”) and requires an enterprise to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a VIE. According to the revised guidance, an enterprise has a controlling financial interest when it has a) the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and b) the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE. The guidance also requires an enterprise to assess whether it has an implicit financial responsibility to ensure that a VIE operates as designed when determining whether it has power to direct the activities of the VIE that most significantly impact the entity’s economic performance. The guidance also requires ongoing assessments of whether an enterprise is the primary beneficiary of a VIE, requires enhanced disclosures and eliminates the scope exclusion for qualifying special-purpose entities. The revised guidance is effective for fiscal years beginning after November 15, 2009, with early adoption prohibited. The Company is currently evaluating the impact of the adoption of the revised guidance on its condensed consolidated financial statements.
In May 2009, the FASB issued authoritative guidance on subsequent events. This guidance establishes general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. Specifically, the guidance sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. The guidance is effective for fiscal years and interim periods ended after June 15, 2009, and will be applied prospectively. In February 2010, the FASB amended the authoritative guidance on subsequent events to amend disclosures related to events occurring subsequent to year end. The amendment removes the requirement for an SEC filer to disclose a date through which subsequent events were evaluated in both issued and revised financial statements. The amendment removes potential conflicts with SEC guidance and is effective upon issuance. The adoption of this guidance did not have a material impact on the Company’s condensed consolidated financial statements.
In April 2009, the FASB amended the authoritative guidance on financial instruments to require disclosures about fair value of financial instruments in interim as well as in annual financial statements of publicly traded companies. The guidance is effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The adoption of this guidance did not have a material impact on its condensed consolidated financial statements since the Company has provided disclosures about fair value of financial instruments in its interim financial statements prior to the issuance of this guidance.
In April 2009, the FASB issued additional guidance on estimating fair value when the volume and level of activity for an asset or liability have significantly decreased in relation to normal market activity for the asset or liability. Guidance on identifying circumstances that indicate a transaction is not orderly was also issued and required additional disclosures. This guidance is to be applied prospectively and is effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The adoption of this guidance did not have a material impact on the Company’s condensed consolidated financial statements.
In April 2009, the FASB amended the guidance for investments in debt and equity securities on determining whether impairment for investments in debt securities is other than temporary and requires additional interim and annual disclosure of other-than-temporary impairments in debt and equity securities. Pursuant to the new guidance, an other-than-temporary impairment has occurred if a company does not expect to recover the entire amortized cost basis of the security. In this situation, if the company does not intend to sell the impaired security prior to recovery and it is more likely than not that it will not be required to sell the security before the recovery of its amortized cost basis, the amount of the other-than-temporary impairment recognized in earnings is limited to the portion attributed to the credit loss. The remaining portion of the other-than-temporary impairment is then recorded in other comprehensive income. The guidance is effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The adoption of this guidance did not have a material impact on the Company’s condensed consolidated financial statements.
AXCAN INTERMEDIATE HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements
(amounts in the tables are stated in thousands of U.S. dollars, except share related data)
(unaudited)
In April 2009, the FASB amended the guidance on business combinations previously revised in December 2007 to require that an acquirer recognize assets acquired and liabilities assumed in a business combination that arise from contingencies, at fair value at the acquisition date, if fair value can be determined during the measurement period. If the acquisition-date fair value of such an asset acquired or liability assumed cannot be determined, the acquirer should apply guidance on accounting for contingencies to determine whether the contingency should be recognized at the acquisition date or after it. This guidance is effective for assets or liabilities arising from contingencies in business combinations for which the acquisition date is after the beginning of the first annual reporting period beginning after December 15, 2008. The Company will apply this guidance for future acquisitions.
In November 2008, the FASB
issued guidance that clarifies the accounting for defensive intangible assets acquired in a business combination or an asset acquisition subsequent to their acquisition except for intangible assets that are used in research and development activities. A defensive intangible asset is defined as a separately identifiable intangible asset which an acquirer does not intend to actively use but intends to hold to prevent its competitors from obtaining access to them. This guidance requires an acquirer in a business combination to account for a defensive intangible asset as a separate unit of accounting and assign a useful life in accordance with the guidance on the determination of useful life of intangible assets. Defensive intangible assets must be recognized at fair value in accordance with the revised guidance on business combinations. This guidance is effective for intangible assets acquired on or after fiscal years beginning after December 15, 2008, with early adoption prohibited. The adoption of this guidance did not have a material impact on the Company’s condensed consolidated financial statements
.
In April 2008, the FASB issued guidance that amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset
.
The intent of this guidance is to improve the consistency between the useful life of a recognized intangible asset determined in accordance with the guidance on intangible assets and the period of expected cash flows used to measure the fair value of the asset determined in accordance with the amended guidance for business combinations and other authoritative guidance. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. The adoption of this guidance did not have a material impact on the Company’s condensed consolidated financial statements
.
In March 2008, the FASB amended the guidance on disclosure requirements related to derivative instruments and hedging activities. The new guidance requires that objectives for using derivative instruments be disclosed in terms of underlying risk and accounting designation. Pursuant to the new guidance, enhanced disclosures are required about (a) how and why derivative instruments are used, (b) how derivative instruments and related hedged items are accounted for and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. The fair value of derivative instruments and their gains and losses will need to be presented in tabular format in order to present a more complete picture of the effects of using derivative instruments. This guidance is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The adoption of this guidance did not have a material impact on the Company’s condensed consolidated financial statements (see Note 12).
In December 2007, the FASB revised the authoritative guidance for business combinations. The new guidance expands the definition of a business combination and requires the acquisition method of accounting to be used for all business combinations and an acquirer to be identified for each business combination. Pursuant to the new guidance, all assets, liabilities, contingent considerations and contingencies of an acquired business are required to be recorded at fair value at the acquisition date. In addition, the guidance establishes requirements in the recognition of acquisition cost, restructuring costs and changes in accounting for deferred tax asset valuation allowances and acquired income tax uncertainties. This guidance is to be applied prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Earlier adoption is prohibited. The Company will apply this guidance for future acquisitions.
In December 2007, the FASB issued guidance related to collaborative arrangements. The guidance defines collaborative arrangements and establishes reporting requirements for transactions between participants in a collaborative arrangement and between participants in the arrangement and third parties. The guidance also establishes the appropriate income statement presentation and classification for joint operating activities and payments between participants, as well as the sufficiency of the disclosures related to these arrangements. This guidance is effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2008, and shall be retrospectively to all prior periods presented for all collaborative arrangements existing as of the effective date. The adoption of this guidance did not have a material impact on the Company’s condensed consolidated financial statements
.
AXCAN INTERMEDIATE HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements
(amounts in the tables are stated in thousands of U.S. dollars, except share related data)
(unaudited)
In December 2007, the FASB amended the guidance on consolidation to establish new accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. Specifically, the new guidance requires the recognition of a non-controlling interest (minority interest) as equity in the condensed consolidated financial statements and separate from the parent’s equity. The amount of net income attributable to the non-controlling interest will be included in consolidated net income on the face of the income statement. The guidance clarifies that changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation are equity transactions if the parent retains its controlling financial interest. In addition, the guidance requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. Such gain or loss will be measured using the fair value of the non-controlling equity investment on the deconsolidation date. The guidance also includes expanded disclosure requirements regarding the interests of the parent and its non-controlling interest. This guidance is effective for fiscal years and interim periods within those fiscal years, beginning on or after December 15, 2008. Earlier adoption is prohibited. The adoption of this guidance did not have a material impact on the Company’s condensed consolidated financial statements, because the Company has wholly-owned subsidiaries
.
In September 2006, the FASB issued guidance on fair value measurements, which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements and is effective for fair-value measurements already required or permitted by other guidance for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. In February 2008, the FASB issued guidance, that deferred the effective date of the guidance for fair value measurement for one year for non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). In October 2008, the FASB issued guidance which clarifies the application of the guidance on fair value measurements in determining the fair value of a financial asset when the market for that asset is not active. This guidance was effective upon issuance, including prior periods for which financial statements had not been issued. On October 1, 2008, the Company adopted the guidance on fair value measurements for financial assets and liabilities. The adoption of the guidance on fair value measurements for financial assets and liabilities carried at fair value did not have a material impact on the Company’s condensed consolidated financial statements (see Note 14). On October 1, 2009, the Company adopted the guidance on fair value measurements for non-financial assets and liabilities. The adoption of the guidance on fair value measurements for non-financial assets and liabilities did not have a material impact on the Company’s condensed consolidated financial statements.
4. Inventories
|
|
|
June 30
,
201
0
|
|
|
September 30,
2009
|
|
|
|
|
|
|
|
|
|
|
Raw material and packaging material, net of write-down of $205 related to unapproved PEPs
|
|
|
11,976
|
|
|
|
8
,
416
|
|
|
Work in progress
|
|
|
729
|
|
|
|
886
|
|
|
Finished goods, net of write-down of $32
,
123 related to unapproved PEPs and net of reserve for obsolescence of $1,599 ($4,159 on September 30, 2009)
|
|
|
9,436
|
|
|
|
35
,
404
|
|
|
|
|
|
22,141
|
|
|
|
44,706
|
|
As disclosed in Note 2, the Company’s PEPs did not obtain regulatory approval by the April 28, 2010 deadline established by the FDA. As a result, during the nine-month period ended June 30, 2010, the on-hand inventory was written down to net realizable value and was charged to cost of goods sold. In addition, a charge to cost of goods sold has also been recorded for purchase and other materials and supply commitments related to the PEPs.
AXCAN INTERMEDIATE HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements
(amounts in the tables are stated in thousands of U.S. dollars, except share related data)
(unaudited)
5. Property, Plant and Equipment
|
|
|
|
|
|
June 30, 2010
|
|
|
|
|
Cost
|
|
|
Accumulated
depreciation
|
|
|
Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
|
2,194
|
|
|
|
-
|
|
|
|
2,194
|
|
|
Buildings
|
|
|
22,333
|
|
|
|
3,895
|
|
|
|
18,438
|
|
|
Furniture and equipment
|
|
|
7,230
|
|
|
|
2,391
|
|
|
|
4,839
|
|
|
Computer equipment and software
|
|
|
17,715
|
|
|
|
8,227
|
|
|
|
9,488
|
|
|
Leasehold and building improvements
|
|
|
1,207
|
|
|
|
235
|
|
|
|
972
|
|
|
|
|
|
50,679
|
|
|
|
14,748
|
|
|
|
35,931
|
|
|
|
|
|
|
|
September 30, 2009
|
|
|
|
|
Cost
|
|
|
Accumulated
depreciation
|
|
|
Net
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
Land
|
|
|
2,276
|
|
|
|
-
|
|
|
|
2,276
|
|
|
Buildings
|
|
|
22,739
|
|
|
|
2,931
|
|
|
|
19,808
|
|
|
Furniture and equipment
|
|
|
8,321
|
|
|
|
2,598
|
|
|
|
5,723
|
|
|
Computer equipment and software
|
|
|
15,218
|
|
|
|
4,805
|
|
|
|
10,413
|
|
|
Leasehold and building improvements
|
|
|
1,181
|
|
|
|
57
|
|
|
|
1,124
|
|
|
|
|
|
49,735
|
|
|
|
10,391
|
|
|
|
39,344
|
|
6. Impairment of Long-Lived Assets, Including Goodwill
Goodwill
As has been previously disclosed in the Company’s SEC filings, the FDA mandated that all manufacturers of exocrine pancreatic insufficiency drug products file an NDA and receive approval for their products by April 28, 2010. On April 28, 2010, neither of the Company’s two pancreatic insufficiency drug products, ULTRASE
®
and VIOKASE
®
, had obtained FDA approval. The Company plans to continue to seek to obtain an NDA approval for these products
.
Management currently expects that the future cash flows that would be generated from these products will be negatively impacted by market share erosion that will occur between April 28, 2010 and the date of eventual re-launch of the products on the market, and management cannot provide any assurances that the Company will be able to re-launch the products. Management has considered the FDA April 28, 2010 approval deadline to be a triggering event which causes the Company to assess whether any portion of its recorded goodwill balance was impaired. As a result, an estimate of the impact of the above was reflected in certain valuation assumptions of the Company’s goodwill as at March 31, 2010
.
The goodwill impairment test is a two step process. Step one of the impairment analysis consisted of a comparison of the fair value of the U.S. reporting unit with its net carrying value, including the goodwill. The Company performed extensive valuation analyses, utilizing both income and market-based approaches, in its goodwill assessment process. The following describes the valuation methodologies used to derive the estimated fair value of the reporting unit.
AXCAN INTERMEDIATE HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements
(amounts in the tables are stated in thousands of U.S. dollars, except share related data)
(unaudited)
Income approach
To determine the fair value, the Company discounted the expected future cash flows of the reporting unit, using a discount rate, which reflected the overall level of inherent risk and the rate of return an outside investor would have expected to earn. To estimate cash flows beyond the final year of its model, the Company used a terminal value approach. Under this approach, the Company used estimated operating income before interest, taxes, depreciation and amortization in the final year of its model, adjusted to estimate a normalized cash flow, applied a perpetuity growth assumption, and discounted by a perpetuity discount factor to determine the terminal value. The Company incorporated the present value of the resulting terminal value into its estimate of the fair value.
Based on the “step one” analysis that was performed for the U.S. reporting unit, the Company determined that the carrying amount of the net assets of the reporting unit was in excess of its estimated fair value. As such, the Company was required to perform the “step two” analysis for its U.S. reporting unit, in order to determine the amount of any
goodwill
impairment. The “step two” analysis consisted of comparing the implied fair value of the goodwill with the carrying amount of the goodwill, with an impairment charge resulting from any excess of the carrying value of the goodwill over the implied fair value of the goodwill, based on a hypothetical allocation of the estimated fair value to the net assets. Based on the preliminary step two analysis, the Company determined that the goodwill allocated to the U.S. reporting unit, in the amount of $91,400,000 was impaired. As a result, the Company recorded a preliminary goodwill impairment charge of $91,400,000 during the three-month period ended March 31, 2010, which represented the Company’s best estimate as of March 31, 2010. During the three-month period ended June 30, 2010, the Company finalized its step two analysis. The finalization of this analysis did not result in any adjustment to the previously recorded impairment.
The determination of the fair value of the reporting unit required the Company to make significant estimates and assumptions that affected the reporting unit’s expected future cash flows. These estimates and assumptions primarily include, but are not limited to, the discount rate, terminal growth rates, operating income before depreciation and amortization, and capital expenditure forecasts. Additionally, the Company has made assumptions relating to the expected amount of time required to eventually obtain FDA approval for the Company’s pancreatic enzyme products and the eventual market share of these products. Due to the inherent uncertainty involved in making these estimates, actual results could differ significantly from those estimates. In addition, changes in underlying assumptions could have a significant impact on either the fair value of the reporting unit or the
goodwill
impairment charge.
The hypothetical allocation of the fair value of the reporting unit to individual assets and liabilities within the reporting unit also requires the Company to make significant estimates and assumptions. The hypothetical allocation required several analyses to determine the estimate of the fair value of assets and liabilities of the reporting unit.
The following table reflects the components of goodwill as at June 30, 2010:
Goodwill
|
|
|
|
$
|
|
|
Balance as at September 30, 2009
|
|
|
165,823
|
|
|
Impairment
|
|
|
(91,400
|
)
|
|
Foreign exchange
|
|
|
(2,006
|
)
|
|
Balance as at June 30, 2010
|
|
|
72,417
|
|
AXCAN INTERMEDIATE HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements
(amounts in the tables are stated in thousands of U.S. dollars, except share related data)
(unaudited)
Intangible assets
In conjunction with the goodwill impairment identified during the nine-month period ended June 30, 2010, the Company completed its review of the impairment test for intangible assets with a finite life within the U.S. reporting unit for recoverability.
The completion of this analysis did not result in any adjustment to the previously recorded
non-cash charge for impairment of intangible assets other than goodwill of $15,758,000 relating to its finite-life assets related to PEPs. Management used a discounted cash flow based approach to value these assets.
The following table reflects the components of intangible assets as at June 30, 2010:
Trademarks, trademark licenses and manufacturing rights with a finite life
|
|
|
Cost
|
|
|
Accumulated
amortization
|
|
|
Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as at September 30, 2009
|
|
|
491,411
|
|
|
|
70,121
|
|
|
|
421,290
|
|
|
Impairment
|
|
|
(23,694
|
)
|
|
|
(7,936
|
)
|
|
|
(15,758
|
)
|
|
Amortization
|
|
|
-
|
|
|
|
39,595
|
|
|
|
(39,595
|
)
|
|
Foreign exchange
|
|
|
(13,232
|
)
|
|
|
(2,081
|
)
|
|
|
(11,151
|
)
|
|
Balance as at June 30, 2010
|
|
|
454,485
|
|
|
|
99,699
|
|
|
|
354,786
|
|
The Company operates in a single field of activity, the pharmaceutical industry.
The Company operates in the following geographic areas:
|
|
|
For the
three-month
period ended
June 30
,
2010
|
|
|
For the
three-month
period ended
June 30,
2009
|
|
|
For the
nine-month
period ended
June 30
,
2010
|
|
|
For the
nine-month
period ended
June 30
,
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic sales
|
|
|
55,779
|
|
|
|
79,613
|
|
|
|
207,926
|
|
|
|
254,821
|
|
|
Foreign sales
|
|
|
530
|
|
|
|
1,018
|
|
|
|
3,151
|
|
|
|
3,768
|
|
|
Canada
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic sales
|
|
|
7,965
|
|
|
|
7,498
|
|
|
|
24,694
|
|
|
|
22,969
|
|
|
Foreign sales
|
|
|
192
|
|
|
|
118
|
|
|
|
192
|
|
|
|
165
|
|
|
European Union
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic sales
|
|
|
12,057
|
|
|
|
16,515
|
|
|
|
40,772
|
|
|
|
43,443
|
|
|
Foreign sales
|
|
|
3,957
|
|
|
|
1,103
|
|
|
|
8,242
|
|
|
|
5,154
|
|
|
Other
|
|
|
-
|
|
|
|
162
|
|
|
|
-
|
|
|
|
446
|
|
|
|
|
|
80,480
|
|
|
|
106,027
|
|
|
|
284,977
|
|
|
|
330,766
|
|
Revenue is attributed to geographic areas based on the country of origin of the sales.
AXCAN INTERMEDIATE HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements
(amounts in the tables are stated in thousands of U.S. dollars, except share related data)
(unaudited)
|
|
|
June 30
,
201
0
|
|
|
September 30,
2009
|
|
|
|
|
|
|
|
|
|
|
Property, plant, equipment and intangible assets
|
|
|
|
|
|
|
|
Canada
|
|
|
307,990
|
|
|
|
333,001
|
|
|
United States
|
|
|
17,635
|
|
|
|
44,448
|
|
|
European Union
|
|
|
65,092
|
|
|
|
83,185
|
|
|
|
|
|
390,717
|
|
|
|
460,634
|
|
|
|
|
June 30
,
201
0
|
|
|
September 30,
2009
|
|
|
|
|
|
|
|
|
$
|
|
|
Goodwill
|
|
|
|
|
|
|
|
|
Canada
|
|
|
61,887
|
|
|
|
61,887
|
|
|
United States
|
|
|
-
|
|
|
|
91,400
|
|
|
European Union
|
|
|
10,530
|
|
|
|
12,536
|
|
|
|
|
|
72,417
|
|
|
|
165,823
|
|
|
|
June 30
,
2010
|
|
|
September 30,
2009
|
|
|
|
|
|
|
|
|
|
|
Senior notes secured by substantially all of the present and future assets of the Company, bearing interest at 9.25% and maturing in March 2015
|
|
|
226,069
|
|
|
|
225,764
|
|
|
Term loans of $138,823 at June 30, 2010, ($159,688 at September 30, 2009), of whitch $138,823 ($109
,
688 at September 30, 2009) bear interest at the one-month British Banker Association LIBOR (0.35% as at June 30, 2010, and 0.25% as at September 30, 2009), and $0 ($50
,000
at September 30, 2009) bear interest at the three-month British Banker Association LIBOR (0.28% as at September 30, 2009), plus the applicable rate based on the consolidated total leverage ratio of the Company and certain of its subsidiaries for the preceding twelve months, secured by substantially all of the present and future assets of the Company, payable in quarterly installments, maturing in February 2014, subject to interest rate swap agreements as further disclosed in Note 13
|
|
|
134,886
|
|
|
|
154,779
|
|
|
Senior unsecured notes, bearing interest at 12.75% and maturing in March 2016
|
|
|
233,009
|
|
|
|
232,751
|
|
|
|
|
|
593,964
|
|
|
|
613,294
|
|
|
Installments due within one year
|
|
|
3,198
|
|
|
|
30,708
|
|
|
|
|
|
590,766
|
|
|
|
582,586
|
|
AXCAN INTERMEDIATE HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements
(amounts in the tables are stated in thousands of U.S. dollars, except share related data)
(unaudited)
On February 25, 2008, the Company obtained various types of financing in connection with the acquisition of the common shares of Axcan Pharma Inc. The Company issued $228,000,000 aggregate principal amount of its 9.25% Senior Secured Notes due March 1, 2015. The Senior Secured Notes were priced at $0.98737 with a 10% yield to March 1, 2015. The Senior Secured Notes rank pari passu with the Credit Facility.
The Company may redeem some or all of the Senior Secured Notes prior to March 1, 2011, at a redemption price equal to 100% of the principal amount of the Senior Secured Notes redeemed plus a “make-whole” premium and accrued and unpaid interest. On or after March 1, 2011, the Company may redeem some or all of the Senior Secured Notes at the redemption prices (expressed as percentages of principal amount of the Senior Secured Notes to be redeemed) set forth below
:
|
|
|
Senior
Secured Notes
|
|
|
|
|
%
|
|
|
2011
|
|
|
106.938
|
|
|
2012
|
|
|
104.625
|
|
|
2013
|
|
|
102.313
|
|
|
2014 and thereafter
|
|
|
100.000
|
|
Prior to March 1, 2011, the Company may also redeem up to 35% of the aggregate principal amount of the Senior Secured Notes using the proceeds of one or more equity offerings at a redemption price equal to 109.250% of the aggregate principal amount of the Senior Secured Notes plus accrued and unpaid interest. If there is a change of control as specified in the indenture governing the Senior Secured Notes, the Company must offer to repurchase the Senior Secured Notes at a price in cash equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest.
The Company also obtained a Credit Facility for a total amount of $290,000,000 composed of available term loans totaling $175,000,000 and of a revolving credit facility of $115,000,000 (“Credit Facility”). The Credit Facility bears interest at a variable rate available composed of either the Federal Funds Rate or the British Banker Association LIBOR rate, at the option of the Company, plus the applicable rate based on the consolidated total leverage ratio of the Company and certain of its subsidiaries for the preceding twelve months. The Credit Facility matures on February 25, 2014, with payments on the term loans beginning in fiscal year 2008. As at June 30, 2010, $175,000,000 of term loans had been issued and no amounts had been drawn against the revolving credit facility. The term loans were priced at $0.96 with a yield to maturity of 8.75% before the effect of the interest rate swaps as disclosed in Note 13. The Credit Facility requires the Company to meet certain financial covenants, which were met as at June 30, 2010. The credit agreement governing the Credit Facility requires the Company to prepay outstanding term loans contingent upon the occurrence of events, subject to certain exceptions, with: (1) 100% of the net cash proceeds of any incurrence of debt other than debt permitted under the Credit Facility, (2) commencing with the fiscal year ended September 30, 2009, 50% (which percentage will be reduced to 25% if the senior secured leverage ratio is less than a specified ratio) of the annual excess cash flow (as defined in the credit agreement governing the Credit Facility) and (3) 100% of the net cash proceeds of all non-ordinary course asset sales or other dispositions of property (including casualty events) by the Company or by its subsidiaries, subject to reinvestments rights and certain other exceptions. Pursuant to the annual excess cash flow requirements for the fiscal year 2009 defined in the credit agreement, the Company was required to prepay $17,583,000 of outstanding term loans in the first quarter of fiscal year 2010. As allowed by the credit agreement, the prepayment has been applied to the remaining scheduled installments of principal in direct order of maturity.
On February 25, 2008, as part of the acquisition financing, the Company also obtained $235,000,000 in financing under a senior unsecured bridge facility (the “Bridge Financing”) maturing on February 25, 2009. On May 6, 2008, the Bridge Financing was refinanced on a long-term basis, by repaying the bridge facility with the proceeds from the sale by the Company of $235,000,000 aggregate principal amount of its 12.75% senior unsecured notes due March 1, 2016, (the “Senior Unsecured Notes”). The Senior Unsecured Notes were priced at $0.9884 with a yield to maturity of 13.16%. The Senior Unsecured Notes are subordinated to the Credit Facility and Senior Secured Notes.
AXCAN INTERMEDIATE HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements
(amounts in the tables are stated in thousands of U.S. dollars, except share related data)
(unaudited)
The Company may redeem some or all of the Senior Unsecured Notes prior to March 1, 2012, at a redemption price equal to 100% of the principal amount of the Senior Unsecured Notes redeemed plus a “make-whole” premium and accrued and unpaid interest. On or after March 1, 2012, the Company may redeem some or all of the Senior Unsecured Notes at the redemption prices (expressed as percentages of principal amount of the Senior Unsecured Notes to be redeemed) set forth below:
|
|
|
Senior
Unsecured Notes
|
|
|
|
|
%
|
|
|
2012
|
|
|
106.375
|
|
|
2013
|
|
|
103.188
|
|
|
2014 and thereafter
|
|
|
100.000
|
|
Prior to March 1, 2011, the Company may also redeem up to 35% of the aggregate principal amount of the Senior Unsecured Notes using the proceeds of one or more equity offerings at a redemption price equal to 112.750% of the aggregate principal amount of the Senior Unsecured Notes plus accrued and unpaid interest. If there is a change of control as specified in the indenture governing the Senior Unsecured Notes, the Company must offer to repurchase the Senior Unsecured Notes at a price in cash equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest.
Payments required in each of the next five twelve-month periods to meet the retirement provisions of the long-term debt are as follows:
|
|
|
|
$
|
|
|
|
|
|
|
|
|
2011
|
|
|
3,198
|
|
|
2012
|
|
|
18,594
|
|
|
2013
|
|
|
41,562
|
|
|
2014
|
|
|
75,469
|
|
|
2015
|
|
|
228,000
|
|
|
Thereafter
|
|
|
235,000
|
|
|
|
|
|
601,823
|
|
|
Unamortized original issuance discount
|
|
|
7,859
|
|
|
|
|
|
593,964
|
|
AXCAN INTERMEDIATE HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements
(amounts in the tables are stated in thousands of U.S. dollars, except share related data)
(unaudited)
|
9.
|
Financial Information Included in the Consolidated Operations
|
|
|
|
For the
three-month
period ended
June 30
,
2010
|
|
|
For the
three-month
period ended
June 30,
2009
|
|
|
For the
nine-month
period ended
June 30
,
2010
|
|
|
For the
nine-month
period ended
June 30
,
2009
|
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
Interest on long-term debt (including amortization of original issuance
discount of $510 and $1,535 ($515 and $1,542 in 2009)
|
|
|
14,604
|
|
|
|
15,006
|
|
|
|
43,983
|
|
|
|
46,921
|
|
|
Interest and bank charges
|
|
|
224
|
|
|
|
72
|
|
|
|
649
|
|
|
|
562
|
|
|
Interest rate swaps
|
|
|
-
|
|
|
|
239
|
|
|
|
17
|
|
|
|
1,212
|
|
|
Financing fees
|
|
|
143
|
|
|
|
163
|
|
|
|
421
|
|
|
|
537
|
|
|
Amortization of deferred debt issue expenses
|
|
|
1,241
|
|
|
|
1,243
|
|
|
|
3,724
|
|
|
|
3,723
|
|
|
|
|
|
16,212
|
|
|
|
16,723
|
|
|
|
48,794
|
|
|
|
52,955
|
|
|
|
|
For the
three-month
period ended
June 30
,
2010
|
|
|
For the
three-month
period ended
June 30
,
2009
|
|
|
For the
nine-month
period ended
June 30
,
201
0
|
|
|
For the
nine-month
period ended
June 30
,
2009
|
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
Rental expenses
|
|
|
920
|
|
|
|
794
|
|
|
|
2,797
|
|
|
|
2,112
|
|
|
Shipping and handling expenses
|
|
|
1,758
|
|
|
|
1,626
|
|
|
|
5,052
|
|
|
|
5,747
|
|
|
Advertizing expenses
|
|
|
337
|
|
|
|
2,663
|
|
|
|
8,191
|
|
|
|
11,425
|
|
|
Depreciation of property, plant and equipment
|
|
|
2,136
|
|
|
|
1,517
|
|
|
|
6,235
|
|
|
|
4,481
|
|
|
Amortization of intangible assets
|
|
|
13,002
|
|
|
|
13,319
|
|
|
|
39,595
|
|
|
|
39,307
|
|
|
Stock-based compensation expenses
|
|
|
1,163
|
|
|
|
1,494
|
|
|
|
272
|
|
|
|
5,455
|
|
|
Transaction and integration costs
|
|
|
1,490
|
|
|
|
599
|
|
|
|
2,555
|
|
|
|
2,536
|
|
A subsidiary of the Company has a defined contribution plan (the “Plan”) for its U.S. employees. Participation is available to substantially all U.S. employees. Employees may contribute up to 15% of their gross pay or up to limits set by the U.S. Internal Revenue Service. The Company may make matching contributions of a discretionary percentage. The Company charged to operations contributions to the plan totaling $378,000 for the three-month period and $780,000 for the nine-month period ended June 30, 2010, ($155,000 for the three-month period and $406,000 for the nine-month period ended June 30, 2009).
AXCAN INTERMEDIATE HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements
(amounts in the tables are stated in thousands of U.S. dollars, except share related data)
(unaudited)
The Company establishes a valuation allowance against deferred tax assets in accordance with U.S. GAAP. At June 30, 2010, the Company has a valuation allowance of $52,616,000 against the Company’s net deferred tax assets generated in the U.S. reporting unit. In future periods, if the deferred tax assets are determined by management to be more likely than not to be realized, the recognized tax benefits relating to the reversal of the valuation allowance will be recorded.
The Company’s effective tax rates for the three-month and nine-month periods ended June 30, 2010 were 35.5% and minus 10.9%, respectively, as compared to 50.1% and 104.7% in the prior year periods, respectively. The effective tax rates for the three-month and nine-month periods ended June 30, 2010, are affected by a number of elements, the most important being the establishment of the valuation allowance of $7,644,000 during the three-month period and $52,616,000 during the nine-month period ended June 30, 2010 resulting from the unapproved status PEPs event.
Effective October 1, 2007, the Company adopted the provisions of the guidance issued by the FASB related to accounting for uncertainty in income taxes. The guidance prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. The adoption of the provisions of this guidance did not have a material impact on the Company’s consolidated financial position and results of operations and a cumulative effect adjustment to the opening balance of retained earnings was not necessary. As at June 30, 2010, the Company had unrecognized tax benefits of $11,023,000 ($10,409,000 as at September 30, 2009).
The following table presents a summary of the changes to unrecognized tax benefits:
|
|
|
For the
three-month
period ended
June 30
,
2010
|
|
|
For the
three-month
period ended
June 30
,
2009
|
|
|
For the
nine-month
period ended
June 30
,
2010
|
|
|
For the
nine-month
period ended
June 30
,
2009
|
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
Balance, beginning of period
|
|
|
11,318
|
|
|
|
8,973
|
|
|
|
10,409
|
|
|
|
10,446
|
|
|
Additions based on tax positions related to the current year
|
|
|
8
|
|
|
|
15
|
|
|
|
23
|
|
|
|
23
|
|
|
Additions for tax positions of prior years
|
|
|
120
|
|
|
|
723
|
|
|
|
1,040
|
|
|
|
1,117
|
|
|
Reductions for tax positions of prior years
|
|
|
(423
|
)
|
|
|
-
|
|
|
|
(449
|
)
|
|
|
(1,875
|
)
|
|
Balance, end of period
|
|
|
11,023
|
|
|
|
9,711
|
|
|
|
11,023
|
|
|
|
9,711
|
|
The Company has historically recognized interest relating to income tax matters as a component of financial expenses and penalties related to income tax matters as a component of income tax expense. As at June 30, 2010, the company had accrued $1,000,000 ($649,000 as at September 30, 2009) for interest relating to income tax matters. There were no amounts recorded for penalties as at June 30, 2010.
The Company and its subsidiaries file tax returns in the U.S. federal jurisdiction and various states, local and foreign jurisdictions including Canada and France. In many cases, the Company’s uncertain tax positions are related to tax years that remain subject to examination by relevant tax authorities. The Company is subject to federal and state income tax examination by U.S. tax authorities for fiscal years 2005 through 2009. The Company is subject to Canadian and provincial income tax examination for fiscal years 2005 through 2009. There are numerous other income jurisdictions for which tax returns are not yet settled, none of which is individually significant. The Company is currently being audited by Canada Revenue Agency for fiscal year 2005 to fiscal year 2008.
The Company and its U.S. subsidiaries file as members of a U.S. Federal consolidated income tax return, of which Axcan Holdings Inc. is the parent. The consolidated income tax liability is allocated among the members of the group in accordance with a tax allocation agreement. The tax allocation agreement provides that each member of the group is allocated its share of the consolidated tax provision determined generally on a separate income tax return method.
As at June 30, 2010, the Company had a provision of $3
,
226,000 for income taxes on the undistributed earnings of the Company’s foreign subsidiaries that the Company does not intend to indefinitely reinvest. The corresponding amount at September 30, 2009, was $2,097,000 net of deferred tax asset of $1,129,000 against which full valuation allowance has now been provided for as at June 30, 2010.
AXCAN INTERMEDIATE HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements
(amounts in the tables are stated in thousands of U.S. dollars, except share related data)
(unaudited)
|
11.
|
Stock Incentive Plans
|
Management equity incentive plan
In April 2008, the Company’s indirect parent company adopted a Management Equity Incentive Plan (the “MEIP Plan”), pursuant to which the indirect parent company will grant options to selected employees and directors of the Company. The MEIP Plan provides that a maximum of 3,833,307 shares of common stock of the indirect parent company are issuable pursuant to the exercise of options. The per share purchase price cannot be less than the fair value of the share of common stock of the indirect parent company at the grant date and the option expires no later than ten years from the date of grant. Vesting of these stock options is split into 3 categories: 1) time-based options: 50% of option grants generally vest ratably over 5 years and feature a fixed exercise price equal to the fair value of common stock of the indirect parent company on grant date; 2) premium options: 25% of stock option grants with an exercise price initially equal to the fair value of common stock on grant date that will increase by 10% each year and generally vesting ratably over 5 years; and 3) performance-based options: 25% of stock option grants with a fixed exercise price equal to the fair value of common stock on grant date which vest upon the occurrence of a liquidity event (as defined under the terms of the MEIP Plan) based on the achievement of return targets calculated based on the return received by majority shareholders from the liquidity event. While the time-based options and the premium options are expensed over the requisite service period, the performance-based options will not be expensed until the occurrence of the liquidity event.
Special equity grant
In April 2008, the indirect parent company approved the Restricted Stock Unit grant agreement and the penny option grant agreement (collectively “Equity Grant Agreements”) pursuant to which a one-time grant of equity-based awards of either restricted stock units (“RSUs”) or options to purchase shares of common stock of the indirect parent company for a penny (“Penny Options”) was made to certain employees of the Company. A maximum of 1,343,348 shares of common stock of the indirect parent company are issuable with respect to the special grants. As a result of the option to allow the recipients to elect to have an amount withheld that is in excess of the required minimum withholding under the current tax law, the special grants will be accounted for as liability awards. As a liability award, the fair value on which the expense is based is remeasured each period based on the estimated fair value and the final expense will be based on the fair value of the shares on the date the award is settled. The RSUs and Penny Options expire no later than four years and ten years from the date of grant. One third of the granted RSUs and Penny Options vested immediately on date of grant; one third vested on August 25, 2009, and the remainder shall vest on August 25, 2010.
The carrying value of an RSU or Penny Option is always equal to the estimated fair value of one common share of the indirect parent company. The RSUs and Penny Options entitle the holders to receive common shares of the indirect parent company at the end of a vesting period. The total number of RSUs and Penny Options granted were 1,343,348 with an initial fair value of $10, equal to the share price at the date of grant. As at June 30, 2010, there were 1,188,827 outstanding RSUs and Penny Options (1,275,220 as at September 30, 2009) of which 779,681 (851,490 as at September 30, 2009) were vested.
Annual grant
In June 2008, the Company’s indirect parent company adopted a Long Term Incentive Plan (the “LTIP”), pursuant to which the indirect parent company is expected to grant annual awards to certain employees of the Company (the “participants”). The value of an award is initially based on the participant’s pay grade and base salary and is subsequently adjusted based on the outcome of certain performance conditions relating to the fiscal year. Each award that vests is ultimately settleable, at the option of the participant, in cash or in parent company common stock of equivalent value. The awards vest (i) upon the occurrence of a liquidity event (as defined under the terms of the LTIP) and (ii) in varying percentages based on the level of return realized by majority shareholders as a result of the liquidity event.
The awards granted under this LTIP are classified as liabilities in accordance with the FSAB issued guidance on distinguishing liabilities from equity, since the award is for a fixed amount of value that can be settled, at the option of the participant, in (i) cash, or (ii) a variable number of parent company common stock of equivalent value.
The Company will not recognize any compensation expense until such time as the occurrence of a liquidity event generating sufficient return to the majority shareholders (in order for the award to vest) is probable. If such an event was probable as of June 30, 2010, the value of the awards to be expensed by the Company would range between $3
,
970,000 and $4
,
764,000 depending on the level of return expected to be realized by the majority shareholders.
AXCAN INTERMEDIATE HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements
(amounts in the tables are stated in thousands of U.S. dollars, except share related data)
(unaudited)
|
12.
|
Financial Instruments
|
Interest rate risk
The Company is exposed to interest rate risk on its variable interest bearing term loans. The term loans bear interest based on British Banker Association LIBOR. As further disclosed in Note 13, the Company may enter into derivative financial instruments to manage its exposure to interest rate changes and reduce its overall cost of borrowing.
Currency risk
The Company is exposed to financial risk arising from fluctuations in foreign exchange rates and the degree of volatility of the rates. The Company does not use derivative instruments to reduce its exposure to foreign currency risk. As at June 30, 2010, the financial assets totaling $206,662,000 ($183,252,000 as at September 30, 2009) include cash and cash equivalents and accounts receivable for CAN$3,795,000, 18,528,000 Euros and 1,134,000 Swiss francs (CAN$3,525,000, 19,014,000 Euros and 2,000,000 Swiss francs as at September 30, 2009). As at June 30, 2010, the financial liabilities totaling $703,721,000 ($700,978,000 as at September 30, 2009) include accounts payable and accrued liabilities and long-term debt of CAN$9,361,000 and 7,250,000 Euros (CAN$11,432,000 and 8,044,000 Euros as at September 30, 2009).
Credit risk
As at June 30, 2010, the Company had $137,806,000 ($98,630,000 as at September 30, 2009) of cash with one financial institution.
Fair value of the financial instruments on the balance sheet
The estimated fair value of the financial instruments is as follows:
|
|
|
June 30, 2010
|
|
|
September 30, 2009
|
|
|
|
|
Fair
value
|
|
|
Carrying
amount
|
|
|
Fair
value
|
|
|
Carrying
amount
|
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
163,775
|
|
|
|
163,775
|
|
|
|
126,435
|
|
|
|
126,435
|
|
|
Accounts receivable from the parent company
|
|
|
450
|
|
|
|
450
|
|
|
|
306
|
|
|
|
306
|
|
|
Accounts receivable, net
|
|
|
42,437
|
|
|
|
42,437
|
|
|
|
56,511
|
|
|
|
56,511
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
|
109,757
|
|
|
|
109,757
|
|
|
|
87,684
|
|
|
|
87,684
|
|
|
Long-term debt
|
|
|
599,495
|
|
|
|
593,964
|
|
|
|
649,689
|
|
|
|
613,294
|
|
The following methods and assumptions were used to calculate the estimated fair value of the financial instruments on the balance sheet.
|
a)
|
Financial instruments for which fair value is deemed equivalent to carrying amount
|
The estimated fair value of certain financial instruments shown on the consolidated balance sheet is equivalent to their carrying amount. These financial instruments include cash and cash equivalents, accounts receivable, net, accounts receivable from the parent company, accounts payable and accrued liabilities.
The fair value of the long-term debt bearing interest at fixed rates has been established according to market prices obtained from a large U.S. financial institution. The fair value of the variable interest bearing term loan has been established based on broker-dealer quotes.
AXCAN INTERMEDIATE HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements
(amounts in the tables are stated in thousands of U.S. dollars, except share related data)
(unaudited)
|
13.
|
Derivates and Hedging Activities
|
Risk management objective of using derivatives
The Company is exposed to certain risk arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity and credit risk primarily by managing the amount, sources, conditions and duration of its debt funding and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing and duration of the Company’s known or expected cash payments principally related to the Company’s borrowings.
Cash flow hedges of interest rate risk
The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. During the nine-month period ended June 30, 2010, such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt.
The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in Accumulated Other Comprehensive Income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings.
Effective March 3, 2008, the Company entered into two pay-fixed, receive-floating interest rate swap agreements, effectively converting $115,000,000 of variable-rate debt under its secured senior credit facilities to fixed-rate debt. Through the first two quarters of 2008, the Company’s two interest rate swaps were designated as effective hedges of cash flows. For the quarter ended September 30, 2008, due to the increased volatility in short-term interest rates and a realignment of the Company’s LIBOR rate election on its debt capital repayment schedule, hedge accounting was discontinued as the hedge relationship ceased to satisfy the strict conditions of hedge accounting. On December 1, 2008, the Company redesignated its $50,000,000 notional interest rate swap that matures in February 2010 anew as a cash flow hedge using an improved method of assessing the effectiveness of the hedging relationship. The Company’s $65,000,000 notional interest rate swap matured in February 2009. Effective March 2009, the Company entered into a pay-fixed, receive-floating interest rate swap of a notional amount of $52,000,000 amortizing to $13,000,000 through February 2010. The Company’s two interest rate swaps with a combined notional amount of $63,000,000 that were designated as cash flow hedges of interest rate risk matured during the quarter ended March 31, 2010, and the Company has not entered into new derivative agreements.
Amounts reported in Accumulated Other Comprehensive Income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt.
The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the consolidated balance sheet as of June 30, 2010, and September 30, 2009.
Tabular disclosure of fair values of derivative instruments
|
|
|
|
|
Liability Derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010
|
|
September 30, 2009
|
|
|
|
Balance sheet location
|
|
Fair value
|
|
Fair value
|
|
Derivatives designated as hedging instruments
|
|
|
|
$
|
|
$
|
|
Interest rate swaps
|
|
Other long-term liabilities
|
|
-
|
|
610
|
|
Total derivatives designated as hedging instruments
|
|
|
|
-
|
|
610
|
AXCAN INTERMEDIATE HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements
(amounts in the tables are stated in thousands of U.S. dollars, except share related data)
(unaudited)
Cash flow hedges of interest rate risk
The tables below present the effect of the Company’s derivative financial instruments on the consolidated operations as at June 30, 2010, and 2009
.
Tabular disclosure of the effect of derivative instruments for the three-month and nine-month periods ended June 30, 2010 and 2009
|
|
Location in the
Condensed Consolidated
Financial
Statements
|
|
For the
three-month
period ended
June 30
,
2010
|
|
|
For the
three-month
period ended
June 30
,
2009
|
|
|
Interest rate swaps in cash flow hedging relationships
|
|
|
$
|
|
|
$
|
|
|
Loss recognized in other comprehensive income on derivatives (effective portion), net of tax of $114 in 2009
|
OCI
|
|
|
-
|
|
|
|
(212
|
)
|
|
Gain (loss) reclassified from accumulated comprehensive income into income (effective portion)
|
Financial expenses
|
|
|
-
|
|
|
|
(239
|
)
|
|
Gain (loss) recognized in income on derivatives (ineffective portion and amount excluded from effectiveness testing)
|
Financial expenses
|
|
|
-
|
|
|
|
-
|
|
|
Interest rate swaps not designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
Loss recognized in income on derivatives
|
Financial expenses
|
|
|
-
|
|
|
|
-
|
|
|
|
Location in the
Condensed Consolidated
Financial
Statements
|
|
For the
nine-month
period ended
June 30
,
2010
|
|
|
For the
nine
-
month
period ended
June 30,
20
0
9
|
|
|
Interest rate swaps in cash flow hedging relationships
|
|
|
|
|
|
|
|
|
Loss recognized in other comprehensive income on derivatives (effective portion), net of tax of $166 ($181 in 2009)
|
OCI
|
|
|
(309
|
)
|
|
|
(521
|
)
|
|
Gain (loss) reclassified from accumulated comprehensive income into income (effective portion)
|
Financial expenses
|
|
|
(464
|
)
|
|
|
(180
|
)
|
|
Gain (loss) recognized in income on derivatives (ineffective portion and amount excluded from effectiveness testing)
|
Financial expenses
|
|
|
447
|
|
|
|
-
|
|
|
Interest rate swaps not designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
Loss recognized in income on derivatives
|
Financial expenses
|
|
|
-
|
|
|
|
(1,032
|
)
|
|
14.
|
Fair Value Measurements
|
Effective October 1, 2008, the Company adopted the authoritative guidance for fair value measurements. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The guidance also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The guidance describes three levels of inputs that may be used to measure fair value:
Level 1
- Quoted prices in active markets for identical assets or liabilities.
Level 2
- Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3
- Inputs that are unobservable and significant to the overall fair value measurement.
If the inputs used to measure the financial assets and liabilities fall within the different levels described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.
AXCAN INTERMEDIATE HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements
(amounts in the tables are stated in thousands of U.S. dollars, except share related data)
(unaudited)
Financial assets and liabilities measured at fair value on a recurring basis as at June 30, 2010, and September 30, 2009, are summarized below:
|
|
|
Quoted prices in
active markets for identical assets and liabilities
(Level 1)
|
|
|
Significant other observable inputs
(Level 2)
|
|
|
Significant unobservable inputs
(Level 3)
|
|
|
Balance at
June 30
,
201
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative financial instruments
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
Quoted prices in
active markets for identical assets and liabilities
(Level 1)
|
|
|
Significant other observable inputs
(Level 2)
|
|
|
Significant unobservable inputs
(Level 3)
|
|
|
Balance at
September 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative financial instruments
|
|
|
-
|
|
|
|
610
|
|
|
|
-
|
|
|
|
610
|
|
Derivative financial instruments consist of interest rate swap agreements as more fully described in Note 13 and are measured at fair value based on observable market interest rate curves as of the measurement date.
During the nine-month period ended June 30, 2010, the Company recorded a goodwill impairment charge of $91,400,000 and an intangible assets impairment charge of $15,758,000
.
The fair value measurement method used in the Company’s impairment analysis utilized a discounted cash flow model and market approach that incorporates significant unobservable inputs or Level 3 assumptions. These assumptions include, among others, projections of the Company’s future operating results, the implied fair value using an income approach by preparing a discounted cash flow analysis and other subjective assumptions.
|
15.
|
Related Party Transactions
|
As at June 30, 2010, and September 30, 2009, the Company had a note receivable from its parent company amounting to $133,154,000. During the three-month period ended June 30, 2010, the Company earned interest income on the note amounting to $1,952,000 net of taxes amounting to $1,052,000 and $5,857,000 net of taxes amounting to $3,155,000 for the nine-month period ended June 30, 2010, ($1,952,000 net of taxes amounting to $1,052,000 during the three-month period ended June 30, 2009, and $5,858,000 net of taxes amounting to $3,155,000 during the nine-month period ended June 30, 2009) and the related interest receivable from the parent company amounting to $24,093,000 as at June 30, 2010, ($15,078,000 as at September 30, 2009) has been recorded in the shareholder’s equity section of the consolidated balance sheet. As at June 30, 2010, the Company has an account receivable from the parent company amounting to $450,000 ($306,000 as at September 30, 2009).
The Company recorded management fees from a controlling shareholding company amounting to $703,000 for the three-month period ended June 30, 2010, and $2,558,000 for the nine-month period ended June 30, 2010, ($4,756,000 during the three-month period ended June 30, 2009, and $4,899,000 during the nine-month period ended June 30, 2009). As at June 30, 2010, the Company accrued fees payable to a controlling shareholding company amounting to $576,000 ($436,000 as at September 30, 2009).
During the nine-month period ended June 30, 2010, the Company paid a dividend to its parent company amounting to $128,000.
|
16.
|
Acquired In-Process Research
|
During the quarter, the Company entered into an asset purchase and license agreement to acquire rights in and to the intellectual property, assigned contracts, permits and inventories related to a compound to be used in the development of an undisclosed product in the field of gastroenterology. Certain other rights were licensed under the agreement. Pursuant to the agreement, the Company made an upfront payment of $ 8,000,000 on closing and additional payments of up to $86,000,000 based on the achievement of certain development, regulatory and commercialization milestones. In addition, the Company will pay royalties on the basis of net sales. The Company completed the asset acquisition in April 2010 and recorded an expense of $7,948,000 for the payment of acquired in-process research and development in the third quarter of fiscal year 2010.
AXCAN INTERMEDIATE HOLDINGS INC.
Notes to Condensed Consolidated Financial Statements
(amounts in the tables are stated in thousands of U.S .dollars, except share related data)
(unaudited)
|
17.
|
Condensed Consolidating Financial Information
|
As of June 30, 2010, the Company had outstanding $228,000,000 aggregate principal amount of the Senior Secured Notes. The Secured Notes are fully and unconditionally guaranteed, jointly and severally by certain of the Company’s wholly-owned subsidiaries.
The following supplemental tables present condensed consolidating balance sheets for the Company and its subsidiary guarantors and non-guarantors as at June 30, 2010, and September 30, 2009, the condensed consolidating statements of operations for the three-month and nine-month periods ended June 30, 2010, and the three-month and nine-month periods ended June 30, 2009, and the condensed consolidating statement of cash flows for the nine-month period ended June 30, 2010, and the nine-month period ended June 30, 2009
.
Condensed consolidating balance sheet balance sheet as at June 30, 2010
|
|
|
Axcan
Intermediate
Holdings Inc.
|
|
|
Subsidiary
guarantors
|
|
|
Subsidiary
non-
guarantors
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
69
|
|
|
|
117,672
|
|
|
|
46,034
|
|
|
|
-
|
|
|
|
163,775
|
|
|
Accounts receivable, net
|
|
|
-
|
|
|
|
29,110
|
|
|
|
13,777
|
|
|
|
-
|
|
|
|
42,887
|
|
|
Accounts receivable from the parent company
|
|
|
48
|
|
|
|
402
|
|
|
|
-
|
|
|
|
-
|
|
|
|
450
|
|
|
Intercompany receivables
|
|
|
41,911
|
|
|
|
555
|
|
|
|
620
|
|
|
|
(43,086
|
)
|
|
|
-
|
|
|
Income taxes receivable
|
|
|
-
|
|
|
|
1,454
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,454
|
|
|
Inventories, net
|
|
|
-
|
|
|
|
16,075
|
|
|
|
6,332
|
|
|
|
(266
|
)
|
|
|
22,141
|
|
|
Prepaid expenses and deposits
|
|
|
77
|
|
|
|
1,647
|
|
|
|
603
|
|
|
|
-
|
|
|
|
2,327
|
|
|
Deferred income taxes
|
|
|
-
|
|
|
|
1,825
|
|
|
|
830
|
|
|
|
80
|
|
|
|
2,735
|
|
|
Total current assets
|
|
|
42,105
|
|
|
|
168,740
|
|
|
|
68,196
|
|
|
|
(43,272
|
)
|
|
|
235,769
|
|
|
Property, plant and equipment, net
|
|
|
-
|
|
|
|
28,393
|
|
|
|
7,538
|
|
|
|
-
|
|
|
|
35,931
|
|
|
Intangible assets, net
|
|
|
-
|
|
|
|
297,232
|
|
|
|
57,554
|
|
|
|
-
|
|
|
|
354,786
|
|
|
Investment in subsidiaries
|
|
|
(335,784
|
)
|
|
|
812,202
|
|
|
|
78,175
|
|
|
|
(554,593
|
)
|
|
|