2008 annual report · stiefel skin care solutions. the most valuable asset of the stiefel network...

2008 ANNUAL REPORT

Stiefel Laboratories, Inc. :: 2008 ANNUAL REPORT 54 Stiefel Laboratories, Inc. :: 2008 ANNUAL REPORT

LETTER FROM THE CHAIRMAN ................................ 4

STIEFEL STORY .............................................................................. 6Stiefel Way ............................................................................................ 9What Makes Stiefel Unique ........................................................ 10Brands .................................................................................................... 12

COMMITMENT .............................................................................. 15History.................................................................................................... 17Network ................................................................................................ 18

DRIVE ...................................................................................................... 21Research & Development ............................................................ 22Achievements in Fiscal Year 2008 .......................................... 24Strategy .............................................................................................. 25

PARTNERSHIP .............................................................................. 27Corporate Giving Philosophy ...................................................... 28

LEADERSHIP.................................................................................... 31Board of Directors............................................................................ 31Enterprise Leadership Team ........................................................ 32

GROWTH............................................................................................ 34Annual Sales Revenue 1978 - 2008

AUDITED FINANCIALS .................................................... 36

TABLE OF CONTENTS


LETTER FROM THECHAIRMAN

August, 2008

To my fellow shareholders:

I am very pleased to announce that for the fiscal year that ended March 31, 2008,your company once again posted record results. Net Sales grew by more than $263million to $912.4 million, an increase of 40.5% over the previous year. To place thisgrowth in perspective, in our 1999 fiscal year, the total consolidated worldwide salesof Stiefel Laboratories, Inc. were $246 million; and over the next 3 years combined,sales increased only $5 million, or 2%.

It is extremely rewarding to note that ourgrowth this year exceeded the size of ourentire company only 6 years ago. And thisgrowth was achieved notwithstandingextremely aggressive competition fromboth the brand and generic segments ofour industry.

Our top ten product families enjoyed salesof $598.5 million, reflecting our efforts toavoid dependence on any one brand. Wehave also achieved the goal we set sixyears ago of striking a 50 – 50 balancebetween sales within the US and salesoutside the US.

Our Total Assets increased from $1.34billion last year to $1.79 billion, and our cashposition as of fiscal year end remained verystrong at $464 million. This isnotwithstanding the fact that on August 30,2007, we paid in its entirety the $150million principal balance of our Second LienTerm Loan. This loan carried a significantlyhigher interest rate than the First Lien,which is why we opted to prepay it in full.

For the fiscal year ending March 31, 2009,we are forecasting sales of $1.04 billion andEBITDA of approximately $200 million. It willnot be easy to hit these targets, however,given the intensified efforts of the genericcompanies, which seek to genericize evenour patented products with increasingfrequency. These are challenging times forthe pharmaceutical industry; and regardlessof which candidate wins the US presidentialelection this fall, the challenges are likelyto intensify.

We continue our efforts to grow bothorganically and inorganically. On May 6,2008, we acquired two French companies,ABR Invent and ABR Development, whichspecialize in the development of injectableskin rejuvenators. ABR’s lead product,Atlean® Skin Rejuvenator, has alreadyreceived regulatory approval in Europe, andwe will aggressively seek to attain approval inthe remainder of our major markets. Thisacquisition reflects our continuing strategy tobecome a major player in the increasingly-important segment of aesthetic dermatology.

Finally, on August 6, 2008, StiefelLaboratories finalized the acquisition ofBarrier Therapeutics for approximately$148 million. Barrier was a publicly-tradedpharmaceutical company focused ondeveloping and commercializing productsin the field of dermatology. The addition ofBarrier broadens our therapeutic productportfolio and significantly strengthens ourR&D pipeline. We believe that thecombined organization has greater potentialfor understanding and meeting the needsof our customers around the globe.

Best wishes to all,

Charles W. StiefelChairman and CEOStiefel Laboratories, Inc.

Stiefel Laboratories, Inc. :: 2008 ANNUAL REPORT 7

One company has the passion anddrive to make a difference:

Stiefel.

At Stiefel Laboratories, we are driven by unbridled energy and passion for dermatologyand the field of skin health.

With an unparalleled track record of “being there” for our customers, we continue tocombine our expertise, knowledge and imagination to deliver the best solutions available.

Our zest for advancement arms us with a unique perspective and vision for the future.Every day we focus our energy and enthusiasm on advancing dermatology and skinhealth, and it is this relentlessness that will ensure we continue to develop and delivertomorrow’s solutions.

We have shared our customers’ dermatology and skin health experiences, which gives usinsight and understanding like no other. We know dermatologists and consumers in a waythat allows us to truly connect with them and to provide more than products, but also aunique Stiefel dermatology and skin health experience.

THESTIEFEL STORY

6 Stiefel Laboratories, Inc. :: 2008 ANNUAL REPORT


THESTIEFEL WAYOUR MISSIONTo create shareholder value and improve the quality of human life by enthusiastically enhancing thehealth, appearance, and comfort of the skin.

OUR VISIONTo be the world's most valued and respected dermatology company.

OUR VALUESTo embody and promote honesty, fairness, integrity, enthusiasm, entrepreneurship, excellence,and courage.

COMMITMENT TO CUSTOMERSWe provide a unique passion for understanding and advancing skin health, leveraging our unparalleledheritage and commitment to dermatology. Our high-quality products make people's skin healthier andhelp people feel more confident about their appearance.

COMMITMENT TO EMPLOYEESWe provide a challenging, enjoyable and rewarding work experience that inspires all Stiefel employeesto be passionate about serving our customers, living our Values, and advancing skin health worldwide.

COMMITMENT TO SOCIETYWe are dedicated to supporting the field of dermatology and our local and global communities.


WHAT MAKESSTIEFEL UNIQUE?

Stiefel Laboratories has been committed to theadvancement of dermatology for more than 160years giving us a keen understanding and depth ofexperience like no other.

Furthermore, we are not just fiscally, but alsoemotionally invested in skin health. We have aconnection with skin health professionals that canonly come from sharing the same experiences. Thisinsight has given us a deep appreciation for the globaldermatology community and we are devoted with thesame passion, goals and vision as skin healthprofessionals themselves.

This experience helps maintain our position at the forefrontof the dermatology industry. At the same time, understandingphysician and patient needs motivates us to constantly developnew solutions and technologies.

Our deeply-rooted dedication and drive for innovation along withour sole focus on dermatology has led us to become the world’slargest independent dermatology company.



With products marketed in more than 100 countries, more than 180 productfamilies and a product portfolio containing more than 3,000 SKUs, Stiefel has areputation for bringing high-quality, safe and effective skin health solutions thatcan provide relief and comfort to patients all over the world.

STIEFELBRANDS


COMMITMENTStiefel Laboratories has been in the dermatology industry for more than 160 years whichensures our dedication to the skin health specialty. Additionally, we have created a solidfoundation for the future with our global network of people and facilities.

14 Stiefel Laboratories, Inc. :: 2008 ANNUAL REPORT Stiefel Laboratories, Inc. :: 2008 ANNUAL REPORT 15


HISTORYThroughout our history, Stiefel has built a trusted reputation withdermatologists and other skin health professionals. Stiefel evokes a senseof certainty and partnership in the minds of skin health professionals.

We have been building this reputation since our inception – in 1847 – whenStiefel was established in Europe. Our founder, John David Stiefel joinedforces with trailblazing dermatologists Ferdinand von Hebra and Paul Unna,to develop some of the world’s first medicated soaps.

Since then, Stiefel has expanded beyond soap to pioneer the use of benzoylperoxide for acne management; introduce proven solutions, like dual-actionDuac® topical gel; and globalize breakthrough delivery vehicles, likeVersaFoam®, to patients of every age, gender and skin type. More than 160years later, skin health professionals and consumers have come to rely onStiefel and its products to serve their needs.

Today, Stiefel maintains the tradition J.D. Stiefel created by continuingto collaborate with skin health professionals around the world to findinnovative solutions to skin conditions.

STIEFELNETWORKStiefel’s global footprint isone of our greatest competitiveadvantages. The worldwidenetwork includes more than30 wholly-owned subsidiarieswhich allow us to marketproducts in more than 100countries. Stiefel also operatesstate-of-the-art research anddevelopment facilities andmanufacturing plants aroundthe world. These strategicallyplaced facilities allow us toconsistently develop andproduce new and uniqueStiefel skin care solutions.

The most valuable asset ofthe Stiefel network is ourworkforce. Every day nearly4,000 Stiefel associatesaround the world focus theirenergy and enthusiasm onhelping to achieve beautiful,healthy skin. From finance tofield representatives, eachemployee strives to fulfill theeternal commitment Stiefelhas made to advance thefield of dermatology.

Stiefel employees

and offices can

be found all over

the world.


Buenos Aires, ArgentinaSydney, AustraliaMelbourne, AustraliaSao Paulo, BrazilGrand Cayman, Cayman IslandsMontreal, CanadaSantiago, ChileHong Kong, ChinaBogotá, ColombiaHeredia, Costa RicaPrague, Czech RepublicCopenhagen, DenmarkQuito, EcuadorCairo, EgyptParis, FranceOffenbach, GermanyBudapest, Hungary

Mumbai, IndiaJakarta, IndonesiaDublin, IrelandSligo, IrelandMilan, ItalySeoul, KoreaMexico City, MexicoSan Juan Del Rio, MexicoCasablanca, MoroccoLahore, PakistanLima, PeruManila, PhilippinesWarsaw, PolandSintra, PortugalJurong, SingaporePretoria, South AfricaMadrid, Spain

Colombo, Sri LankaTaipei, TaiwanBangkok, ThailandMaidenhead, United KingdomWooburn Green, United KingdomPalo Alto, California, United StatesCoral Gables, Florida, United States

(Corporate Headquarters)Atlanta, Georgia, United States

(Sales and Marketing Headquarters)Rockville, Maryland, United StatesOak Hill, New York, United StatesResearch Triangle Park,

North Carolina, United States(Research & Development Headquarters)

Caracas, VenezuelaHo Chi Minh City, Vietnam



DRIVEStiefel is tireless in its pursuit to advance dermatology. From constantly fueling ourpipeline to seeking strategic partnerships, Stiefel examines every avenue that may leadto innovation.


RESEARCH &DEVELOPMENT


Stiefel’s research and development capabilities are among the best in thedermatology world. With several state-of-the-art R&D facilities, we have the abilityto conduct research that supports and improves our marketed products as well ashelps develop innovative medicines and novel delivery vehicles.

As a private company, Stiefel is able to make long-term investments byproviding the necessary resources to bring potential medications to market.Stiefel’s R&D supports every aspect of drug development from formulationto clinical trials to scale-up production.

The research we do at Stiefel expands beyond the scope of our productsand pipeline with the Center for Skin Biology. At this state-of-the-artfacility, Stiefel researchers grow and study live human tissue cultures tobetter understand how skin functions and how medicines and treatmentsaffect the skin.


Stiefel Laboratories has had another record-breaking year. Hundreds of new employees havejoined the company in our expanding global offices. We have continued to move quickly towardachieving global integration and unification. Stiefel employees around the world dedicate theirenergy and enthusiasm to improve not only our business, but also the lives of the customerswe serve.

• After a full year of activities, the integration of Connetics Corporation was completed in January 2008. Combining the creative culture of Connetics with the Stiefel heritage and growing Stiefel family was truly an accomplishment in company history. Having completed our first major acquisition integration, Stiefel is now well-equipped and prepared for future business development.

• In August 2007, Stiefel Laboratories partnered with private-equity firm The Blackstone Group.Their minority investment provided a strong financial platform for our continued growth and was a testament to the value and credibility of Stiefel in the dermatology industry.

• The launch of Revaléskin marked Stiefel’s premiere foray into the world of aesthetics. In fiscal year 2008, the Revaléskin line was introduced in more than 14 countries.

• In our continued efforts to integrate the company around the world, Stiefel has created a Global Marketing Team responsible for the marketing strategies of our global franchises and brands. This team has elevated Stiefel’s marketing excellence and represents ourcompany in a world-class manner.

• As Stiefel has grown, our people have remained at the heart of our success. This year, anumber of key initiatives were rolled out globally to support Stiefel employees’performance, recognition, career development, training and communication. At thecornerstone of these initiatives were Stiefel’s PEAK Performance Behaviors (PPBs). The PPBs served as a foundation for global programs such as Total Rewards, Leading Change, and Performance Reviews. Additionally, Stiefel rolled out its first global employeenewsletter, WorkLife, which is distributed to every employee around the world.

FISCAL YEAR 2008ACHIEVEMENTS STRATEGY

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•

•

•

•

•


Stiefel has put an emphasis for the future on creating a superior customer experiencefor physicians, patients and consumers. Whether the experience is a sales representative,a Web site or a product, our goal is to make that experience valuable and delightful.

In order to deliver on our promise to provide skin health solutions, we will continueto develop our dermatologic portfolio across its therapeutic, consumer healthcareand aesthetic divisions.

Next year (FY 09), we aim to reach our goal of $1 billion in sales, marking a milestonein Stiefel history.

As we near our goal, Stiefel must continue growing to support our success. Blue Fusion,Stiefel’s business transformation project, will continue to unify people, processes andtechnology to build an infrastructure for future growth.

To ensure Stiefel continues to grow and develop, we will leverage our life cyclemanagement capabilities globally by continuing to improve and expand product linesto meet patients’ needs.

As always, Stiefel is committed to advancing the field of dermatology. We willcontinue to fuel our pipeline and fortify our position as a worldwide leader indermatology through strategic partnerships, licensing agreements and acquisitions.


A key to Stiefel’s success has been the constant fostering of relationships betweenStiefel and our customers. Just as J.D Stiefel did when he founded the company, wecontinue to seek the input and advice of physicians around the world in order tounderstand important topics and needs in dermatology and overall skin health.

Stiefel collaborates not only with dermatologists, but all of our stakeholders andpartners. Collaboration is invaluable to our business and is a driver of our success.

PARTNERSHIP



OUR CORPORATEGIVING PHILOSOPHYAs a global corporate citizen, we at Stiefel Laboratories feel that we have have aresponsibility to give back, not only to the healthcare community, but also to the localcommunities in which we operate. Whether volunteering time, raising money or donatingsupplies, Stiefel aims to support the quality of life of our neighbors around the world.

Stiefel has a long-standing history of aiding those in need, which is why we collaboratewith international, national, regional and local organizations in an effort to provide betterhealthcare for all. By providing grants for research, funding continuing education andendowing lectureships at academic institutions, we help healthcare professionalscontinue to learn and advance. Whether we are volunteering time, organizing fundraisersor contributing needed materials, Stiefel and our employees give back to those whoinspire us to make a difference.

Stiefel’s goal is to provide support which has meaningful impact to charitable, researchand educational organizations around the world. Through our corporate giving, in-kinddonations and volunteer activities, we help support hundreds of institutions touchingthousands of lives.

Regardless of where or how contributions

are made, at Stiefel, we collaborate with our

partners to provide the most valuable and

beneficial support possible.


LEADERSHIP


CHARLES W. STIEFEL, CHAIRMANCEO

TODD R. STIEFELChief Strategy Officer

BRENT D. STIEFELChief of Pharmaceutical Operations

RICHARD J. MACKAY, VICE CHAIRMANPresident, Stiefel Canada Inc.

GABRIEL MCGLYNNSenior Vice President, Eurasia

WILLIAM D. HUMPHRIESPresident

CATHERINE M. STIEFEL

JEFFREY THOMPSON HealthEdge Investment Partners, LLC

ANJAN MUKHERJEEThe Blackstone Group

BOARD OF DIRECTORS



JOHN MAMONEJohn Mamone is Senior Vice President ofTechnical & Supply Chain Operations. Johnjoined Stiefel in 2006. He has more than40 years of experience in engineering,operations, and supply chain management.In his role, John maintains overall responsi-bility for the infrastructure, systems, and

processes related to sourcing, manufacturing, distribution,and delivery of products to customers.

BRENT STIEFELBrent Stiefel is Chief of PharmaceuticalOperations and a member of Stiefel’sBoard of Directors. In this position, Brentleads the company in identifying, negotiat-ing, and implementing commercially viablenew business opportunities, strategicpartnerships, acquisitions, and divesti-

tures. He also has oversight responsibilities for researchand development, supply chain, and technical services.Brent first worked at Stiefel as a summer intern in 1997and 1998. He joined the company full-time in 2000 and isbased in Coral Gables, Florida.

CHARLES STIEFELCharlie Stiefel is Chairman of the Boardand Chief Executive Officer. Charlie’sgreat-great-grandfather, John D. Stiefel,founded the company in 1847. Charlie isone of several generations of Stiefels tolead the company. He began working forStiefel as general counsel in 1982 and

became Chairman of the Board and CEO in 2001. In 2006,Charlie was named Florida Ernst & Young Entrepreneur ofthe Year in the health services category. Charlie is based inCoral Gables, Florida.

TODD STIEFELTodd Stiefel is Chief Strategy Officer anda member of Stiefel’s Board of Directors.He has oversight responsibilities for corpo-rate finance, the Futures Strategy process,and the EPMO. He is also Chairman of theELT. Todd’s first role in the business was asa summer intern in 1994. He has worked ina variety of capacities, including Marketing Manager ofGlades and Director of Strategic Planning. Todd is based inCoral Gables, Florida.

ALFONSO UGARTEAlfonso Ugarte is Senior Vice President ofGlobal Marketing. In this position, he leadsthe team responsible for global marketunderstanding and forecasting, businessintelligence, new product planning, globalfranchise management, global corporatebranding, public relations, and global salesoperations. Alfonso has 17 years of pharmaceutical industryexperience at the country, regional, and global levels. Hejoined Stiefel in 2006 and is based in Atlanta, Georgia.

VINCENT COLICCHIOVin Colicchio is Global Vice President ofManufacturing and Product Supply Chain.In this role, he is responsible for allproduct sourcing from the StiefelManufacturing Network, which includes sixmanufacturing plants and contractmanufacturing partners. He also overseesGlobal Technical Services and U.S. distribution operations.Vin joined Stiefel in 2006 and has more than 20 yearsof manufacturing and supply chain experience in thepharmaceutical industry. He is based in Atlanta, Georgia.


DEVIN BUCKLEYDevin Buckley is Senior Vice President andGeneral Counsel. In this role, Devin isresponsible for all legal affairs globally,including the management and selection ofoutside legal counsel. He leads the legalteam, which includes internal experts in reg-ulatory matters, patents, trademarks,

transactions, and general corporate legal affairs. He has morethan 20 years of legal experience and joined Stiefel in 1997.He is based in Coral Gables, Florida.

GAVIN CORCORANDr. Gavin Corcoran is Chief ScientificOfficer. Gavin is an M.D. with specialties inInternal Medicine and Infectious Diseasesand professional experience in privatepractice, academics, and the pharmaceuti-cal industry. As CSO, Gavin oversees allscientific activities at Stiefel, including

product development and support, clinical and non-clinicalresearch, regulatory affairs, pharmacovigilance, medical andscientific affairs, and portfolio management. He joinedStiefel in 2005 and is based in Research Triangle Park,North Carolina.

MICHAEL CORNELIUSMike Cornelius is Senior Vice President ofFinance and Chief Financial Officer. In thisposition, Mike is responsible for allfinance, accounting, treasury, tax, andbudget processes for the company’sglobal business. Mike is a Certified PublicAccountant and has a combined 21 years

of experience in public accounting and corporate finance.He has been with Stiefel since 1999 and is based in CoralGables, Florida.

WILLIAM HUMPHRIESBill Humphries is President and a memberof Stiefel’s Board of Directors. AsPresident, he is responsible for all sales,marketing, strategic communications,public relations, and commercial aspectsof the global business. Bill has been in thepharmaceutical industry for 20 years, with18 of those years focused in the specialty of dermatology.He joined Stiefel in 2004 and is based in Atlanta, Georgia.

STEVE KARASICKSteve Karasick is Senior Vice Presidentof People & Information Technology. Heoversees the company’s human resources,organizational development, and ITfunctions. Steve joined Stiefel in 2006after more than 15 years in consulting,where he led enterprise organization,process, and technology transformations on a global scalefor more than 70 clients. He is based in Atlanta, Georgia.

JEFF KLIMASKIJeff Klimaski is Vice President of Ethicsand Compliance and Global ComplianceOfficer. He is responsible for overseeingand monitoring the implementation ofStiefel’s compliance program and forassuring the development of globalstandards, training, and corrective actionprograms for compliance in all areas of the company. Jeffis a Certified Public Accountant and has a combined 15years of experience in internal controls and corporatecompliance. Jeff joined the company in 2006 and is basedin Atlanta, Georgia.

RICHARD MACKAYDick MacKay is President of StiefelCanada and Vice Chairman of Stiefel’sBoard of Directors. He has been with thecompany since 1962. He has over 50years of experience in the pharmaceuticalindustry and is highly regarded in theCanadian dermatology community. Dickis based in Montreal, Canada.

The Enterprise Leadership Team (ELT) acts as a cross-functional unit focused on aligningcorporate resources and strategies. The ELT provides guidance and support to the Futuresstrategic planning process, which maps the company’s road to success, and the EnterpriseProgram Management Office (EPMO), which manages and aligns resources around the portfolioof major cross-functional projects.

STIEFEL ENTERPRISELEADERSHIP TEAM


GROWTHAnnual Sales Revenue 1978 - 2008

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MILLIONS


CONSOLIDATEDFINANCIAL STATEMENTSAND REPORT OF INDEPENDENTCERTIFIED PUBLIC ACCOUNTANTS

STIEFEL LABORATORIES, INC. AND SUBSIDIARIESMarch 31, 2008 and 2007

CONTENTS PAGE

Report of Independent Certified Public Accountants ......................................................................29

Consolidated Balance Sheets ................................................................................................................30-31

Consolidated Statements of Income ........................................................................................................32

Consolidated Statement of Stockholders’ Equity........................................................................34-35

Consolidated Statements of Cash Flows ........................................................................................36-37

Notes to Consolidated Financial Statements ................................................................................38-59

We have audited the accompanyingconsolidated balance sheets of StiefelLaboratories, Inc. and Subsidiaries as ofMarch†31, 2008 and 2007, and the relatedconsolidated statements of income,stockholders’ equity, and cash flows for theyears then ended. These financial statementsare the responsibility of the Company’smanagement. Our responsibility is to expressan opinion on these financial statementsbased on our audits.

We conducted our audits in accordance withauditing standards generally accepted in theUnited States of America as established bythe American Institute of Certified PublicAccountants. Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of materialmisstatement. An audit includesconsideration of internal control overfinancial reporting as a basis for designingaudit procedures that are appropriate in thecircumstances, but not for the purpose ofexpressing an opinion on the effectiveness ofthe Company’s internal control over financialreporting. Accordingly, we express no suchopinion. An audit also includes examining, ona test basis, evidence supporting the amountsand disclosures in the financial statements,

assessing the accounting principles used andsignificant estimates made by management,as well as evaluating the overall financialstatement presentation. We believe that ouraudits provide a reasonable basis forour opinion.

In our opinion, the financial statementsreferred to above present fairly, in allmaterial respects, the consolidated financialposition of Stiefel Laboratories, Inc. andSubsidiaries as of March†31, 2008 and2007, and the consolidated results of theiroperations and their cash flows for theyears then ended in conformity withaccounting principles generally acceptedin the United States of America.

Miami, FloridaJune 2, 2008

Grant Thornton LLP

Report of IndependentCERTIFIED PUBLIC ACCOUNTANTS

Board of Directors,Stiefel Laboratories, Inc.


ASSETS

2008 2007CURRENT ASSETS

Cash and cash equivalents $464,043,227 $76,600,528Investments in equity and debt securities 9,099,284 6,877,349Accounts receivable, net of allowance for doubtful

accounts of approximately $7.2 and $4.9 millionat March 31, 2008 and 2007, respectively 169,064,107 159,739,077

INVENTORIES 68,931,832 77,094,371Prepaid expenses and other current assets 39,883,215 39,926,918Income taxes receivable - 4,500,000Deferred income taxes 38,454,386 35,971,832

TOTAL CURRENT ASSETS 789,476,051 400,710,075

PROPERTY, PLANT AND EQUIPMENT, AT COST:Land 6,591,690 6,344,358Buildings and leasehold improvements 157,942,666 146,025,547Machinery and equipment 143,485,951 127,091,544Construction in progress 44,018,216 19,058,862

GROSS PROPERTY, PLANT AND EQUIPMENT 352,038,523 298,520,311Less accumulated depreciation and amortization (126,605,133) (101,240,829)

TOTAL PROPERTY, PLANT AND EQUIPMENT, NET 225,433,390 197,279,482

Goodwill 351,790,326 248,062,627Intangible assets, net 392,685,287 425,854,012Deferred income taxes 4,012,913 37,403,104Other assets, net 24,555,924 29,300,522

TOTAL ASSETS $1,787,953,891 $1,338,609,822

Stiefel Laboratories, Inc. and SubsidiariesCONSOLIDATED BALANCE SHEETSMarch 31

LIABILITIES AND STOCKHOLDERS’ EQUITY

2008 2007CURRENT LIABILITIES

Accounts payable and accrued expenses $179,474,858 $169,448,275Current portion of long-term debt 56,496,745 28,985,704Income taxes payable 6,128,662 2,147,906Deferred revenue 15,970,768 9,773,018Deferred income taxes 476,520 -

TOTAL CURRENT LIABILITIES 258,547,553 210,354,903

NONCURRENT LIABILITIESLong-term debt, net of current portion 598,459,691 798,618,284Other noncurrent liabilities 18,657,450 736,753Deferred revenue 29,613,404 28,884,911Deferred income taxes 51,085,376 -

TOTAL NONCURRENT LIABILITIES 697,815,921 828,239,948

Total liabilities 956,363,474 1,038,594,851

Stockholders’ equity

Preferred stockSeries A, par value $.0001 per share - 100,000

shares authorized; 8,277 shares issued 501,769,216 -

Common stockClass A, par value $.0001 per share - 30,909

shares authorized; 6,545 shares issued 7 7Class B, par value $.0001 per share - 4,676

shares authorized and issued 5 5Class C, par value $.0001 per share - 69,487

shares authorized and issued 76 76

Additional paid-in capital 10,222,727 9,228,737Retained earnings 546,856,724 528,245,121Accumulated other comprehensive income 21,080,974 1,694,324Treasury stock at cost, 4,603 Class A shares,

2,261 Class B shares and 39,246 Class C sharesand 4,581 Class A shares, 2,247 Class B sharesand 38,701 Class C shares at March 31, 2008and 2007, respectively (248,339,312) (239,153,299)

Total stockholders’ equity 831,590,417 300,014,971

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $1,787,953,891 $1,338,609,822


2008 % 2007 %

Net sales $912,413,747 100.00 $649,209,451 100.00

Cost of sales 208,747,364 22.88 148,423,408 22.86

GROSS PROFIT 703,666,383 77.12 500,786,043 77.14

Selling, general andadministrative expenses

Selling and marketing 310,107,398 33.99 235,241,438 36.24General administration 185,115,608 20.29 130,321,092 20.07Research and development 105,742,468 11.59 81,866,253 12.61Acquired in-process R&D - - 15,510,000 2.39

Total selling, general andadministrative expenses 600,965,474 65.87 462,938,783 71.31

Operating income 102,700,909 11.26 37,847,260 5.83

Other income (expense)Interest expense (63,632,635) (6.97) (17,485,302) (2.69)Interest income 14,260,850 1.56 2,969,470 0.46Exchange loss (8,236,215) (0.90) (1,590,397) (0.24)Other, net 5,166,939 0.57 (1,844,963) (0.28)

Total other income (expense) (52,441,061) (5.75) (17,951,192) (2.77)

Income before provisionfor income taxes 50,259,848 5.51 19,896,068 3.06

Provision for income taxes 15,958,825 1.75 10,520,987 1.62

NET INCOME $34,301,023 3.76 $9,375,081 1.44

Stiefel Laboratories, Inc. and SubsidiariesCONSOLIDATED STATEMENTSOF INCOMEMarch 31


BALANCE AT MARCH 31, 2006 - $- 6,545 $7 4,676 $5 69,487 $76 $6,688,885 $518,870,040 $(8,055,145) (27,566) $(140,393,942) $377,109,926

Comprehensive income:Net income - - - - - - - - - 9,375,081 - - - 9,375,081Translation adjustment - - - - - - - - - - 12,309,612 - - 12,309,612Excess of additional pension liability - - - - - - - - - - - (2,579,427) - (2,579,427)

Unrealized changes in fair value ofinvestments available for sale and derivatives - - - - - - - - - - 19,284 - - 19,284

Total comprehensive income 9,375,081 9,749,469 19,124,550

Purchases of common stock - - - - - - - - - - - (18,312) (99,420,775) (99,420,775)Contribution of treasury stock to:

ESBT - - - - - - - - 1,183,585 - - 131 17,685 1,201,270UM - - - - - - - - 1,356,267 - - 218 643,733 2,000,000

BALANCE AT MARCH 31, 2007 - - 6,545 $7 4,676 $5 69,487 $76 9,228,737 528,245,121 1,694,324 (45,529) (239,153,299) 300,014,971

Sale of pref. stock, net of expenses - 8,277 - 486,079,796 - - - - - - - - - 486,079,796Accretion of dividends on pref. stock - - - 14,572,904 - - - - - - (14,572,904) - - -Accretion of issuance costs - - - 1,116,516 - - - - - - (1,116,516) - - -Comprehensive income:

Net income - - - - - - - - - 34,301,023 - - - 34,301,023Translation adjustment - - 32,699,145 32,699,145Excess of additional pension liability - - - - - - - - - - - 2,688,151 - 2,688,151

Unrealized changes in fair value ofinvestments available for sale andderivatives - - - - - - - - - - (15,325,341) - - (15,325,341)

Total comprehensive income - - - - - - - - - 34,301,023 20,061,955 - - 54,362,978

Adoption of FASB 158 - - - - - - - - - - (675,305) - - (675,305)Purchases of common stock - - - - - - - - - - - (679) (9,467,199) (9,467,199)Contribution of treasury stock

to ESBT - - - - - - - - 993,990 - - 98 281,186 1,275,176

BALANCE AT MARCH 31, 2008 8,277 $501,769,216 6,545 $7 4,676 $5 69,487 $76 $10,222,727 $546,856,724 $21,080,974 (46,110) $(248,339,312) $831,590,417

Stiefel Laboratories, Inc. and SubsidiariesCONSOLIDATED STATEMENTSOF STOCKHOLDERS’ EQUITYFor the Years Ended March 31, 2008 and 2007

PREFERRED STOCK COMMON STOCK ACCUMULATED Other

Series A Class A Class B Class C Additional Comprehensive Treasury Stock

Shares Amount Shares Amount Shares Amount Shares Amount Paid In Capital Retained Earnings Income (Loss) Shares Amount TOTAL


2008 2007

Cash flows from operating activitiesNet income $34,301,023 $ 9,375,081Adjustments to reconcile net income to net cashprovided by operating activities

Realized gain on sale of marketable securities (7,153,061) (14,308)Depreciation 20,905,936 14,270,103Amortization 37,648,787 11,125,156Provision for bad debts 1,822,155 1,152,004Deferred income taxes (12,032,095) (11,601,848)Amortization of financing fees 5,854,033 - Gain (loss) on sale of property, plant and equipment 706,450 (119,273)Unrealized exchange gain in net income 2,333,292 (172,410)ESBP contribution funded with treasury stock1,275,176 1,201,270Other contribution funded with treasury stock - 2,000,000Acquired in-process R&D - 15,510,000Changes in operating assets and liabilities

(Increase) decrease inTime deposit - (411,000)Accounts receivable (947,040) (14,619,712)Taxes receivable 4,500,000 6,328,894Inventories 13,326,875 (14,298,790)Prepaid expenses and other current assets (413,128) (1,361,839)

Increase (decrease) inAccounts payable and accrued expenses 7,726,764 91,458Other noncurrent liabilities 106,914 - Deferred revenue 6,926,243 34,894,943Income taxes payable 3,980,756 (268,183)

Net cash provided by operating activities 120,869,080 53,081,546

Cash flows from investing activitiesPurchases of property, plant and equipment (45,188,781) (36,404,289)Proceeds from disposal of property, plant and equipment 4,615,069 734,134Purchases of other assets (2,851,499) (4,395,132)Purchases of marketable securities (6,074,959) (1,222,934)Proceeds from sale of marketable securities 8,102,925 1,233,462Proceeds from disposal of other assets - 327,981Purchase of business, net of cash acquired - (405,829,620)

Net cash used in investing activities (41,397,245) (445,556,398)

Stiefel Laboratories, Inc. and SubsidiariesCONSOLIDATED STATEMENTSCASH FLOWSFor the Years Ended March 31

2008 2007

Cash flows from financing activitiesPayment of financing fees $- $(17,278,790)Proceeds from line of credit - 37,000,000Repayment of line of credit - (37,000,000)Repayment of convertible debt - (290,000,000)Repayment of long-term debt (180,145,266) (21,586,933)Proceeds from issuance of long-term debt 932,187 773,009,568Proceeds from issuance of preferred stock 500,000,000 - Preferred stock issuance costs (13,920,204) - Purchases of common stock (6,366,223) (79,706,180)

Net cash provided by financing activities 300,500,494 364,437,665

Effect of exchange rate changes on cash 7,470,370 2,798,013

Net increase (decrease) in cash and cash equivalents 387,442,699 (25,239,174)

Cash and cash equivalents, beginning 76,600,528 101,839,702

Cash and cash equivalents, ending $464,043,227 $76,600,528

Supplemental disclosure of cash flow informationCash paid during the year for:

Interest $59,059,802 $6,231,369Income taxes $13,911,467 $4,144,673

Schedule of noncash investing and financing activitiesUnrealized decrease in aggregate fair valueof derivatives $(11,222,683) $-

Purchases of common stock through issuanceof long-term debt $3,100,976 $19,714,595

Capitalized interest $2,259,057 $1,532,706

(continued)


NOTE A - BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BUSINESSStiefel Laboratories, Inc. (a Delaware corporation) together with its domestic and foreign subsidiaries(collectively the “Company”) is a pharmaceutical company engaged in the development, manufacture anddistribution of dermatological products worldwide. For over 160 years, the Company has produced and soldtherapeutic and preventative skin care products around the world.

BASIS OF PRESENTATIONThe consolidated financial statements include the accounts of Stiefel Laboratories, Inc. and all of its domestic andforeign subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.The accompanying consolidated financial statements are stated in United States dollars and have been preparedin accordance with accounting principles generally accepted in the United States of America.

The Company’s fiscal year end is March 31. Fiscal years ended March 31, 2008 and March 31, 2007 arereferred to herein as fiscal 2008 and fiscal 2007.

CASH AND CASH EQUIVALENTSThe Company considers all highly liquid investments with a maturity of three months or less as of the date ofpurchase to be cash equivalents. A portion of the cash and cash equivalents include interest bearing deposits.The related interest income is accrued as earned.

INVESTMENTS IN EQUITY AND DEBT SECURITIESInvestments in equity and debt securities consist primarily of common stocks. The Company classifiesinvestments into categories based on its intent regarding the holding of such investments. The Companydetermines the appropriate classifications at the time of purchase and reevaluates such designation as ofeach balance sheet date. All debt securities have been classified as held-to-maturity due to the Company’spositive intent and ability to hold such securities to their stated maturity. All debt securities are reportedat cost adjusted for amortization of premiums and discounts to maturity. All equity securities are classifiedas available-for-sale and are available to support current operations or to take advantage of otherinvestment opportunities.

Equity securities available-for-sale are stated at fair value based upon market quotes. Unrealized gains andlosses, net of tax, are computed on the basis of specific identification and are included in “accumulated othercomprehensive income (loss)” in the accompanying consolidated statement of stockholders’ equity. Included inrealized gains for fiscal 2008 is an approximate $9.1 million gain from the sale of an available for sale securitythat was originally purchased by the Company through several transactions during 1993 through 2000.Realized gains, realized losses and declines in value, judged to be other than temporary are included in “Otherincome, net” in the accompanying consolidated statements of income. The cost of securities sold is based onthe specific identification method.

Stiefel Laboratories, Inc. and SubsidiariesNOTES TO CONSOLIDATEDFINANCIAL STATEMENTSMarch 31, 2008 and 2007

INVESTMENTS IN DEBT AND EQUITY SECURITIES ARE CLASSIFIED AS FOLLOWS:

March 31,2008 2007

Available-for-sale $9,077,944 $6,854,593Held-to-maturity 21,340 22,756

$9,099,284 $6,877,349

The cost, gross unrealized gains and losses and fair value of equity securities available-for-sale as of March31, 2008 and 2007 are as follows:

Gross Unrealized Gross UnrealizedCost Holding Gains Holding Losses Fair Value

2008 $5,837,673 $3,240,271 $ - $9,077,9442007 1,304,527 5,577,541 (27,475) 6,854,593

Gross change in unrealized gain (loss) on investments available-for-sale .................................................. 2,223,351Deferred tax effect .................................................... (778,173)

Net change in unrealized gain (loss) on investments available-for-sale ................................................ $1,445,178

ACCOUNTS RECEIVABLE, NETTrade receivables consist of amounts owed by customers for product sales and are presented net of anallowance for doubtful accounts in the accompanying consolidated balance sheets. Payment terms range from30-180 days from the date of the invoice. The Company monitors the credit worthiness of its customers andreviews outstanding receivable balances for collectibility on a regular basis and records allowances fordoubtful accounts as necessary. Specific accounts are written-off upon determination that such amountswill not be collected. The Company generally does not require collateral.

The allowance for doubtful accounts is increased by provisions to bad debt expense charged against income.All recoveries on accounts receivable previously charged off are credited to the accounts receivable recoveryaccount included in income, while direct charge offs of accounts receivable are deducted from the allowance.

INVENTORIESInventories, consisting of raw materials, labor and overhead, are stated at the lower of cost or market,including provisions for obsolescence commensurate with known or estimated exposures. Cost is determinedby the first-in, first-out (FIFO) method. In the prior year the Company applied the last-in, first-out (LIFO)method to approximately 70% of its domestic inventory. In fiscal year 2008, the Company changed itsinventory pricing methodology for that portion of domestic inventory that was on LIFO to FIFO. This changewas made to better reflect inventory, cost of sales and net income to be more closely aligned withmethodology applied to all other inventory. The cumulative effect of the change on prior year’s retainedearnings from the change in methodology is not material.

Inventories consist of the following:March 31,

2008 2007Raw materials $26,546,306 $27,833,746Work in progress 4,324,590 4,743,194Finished goods 38,060,936 44,517,431

Total inventories, net $68,931,832 $77,094,371 (continued)



(continued from page 45)

INVENTORIES - (continued)During fiscal 2007, the Company experienced a significant decrement in its LIFO inventory due primarily to asubstantial decrease of certain unit costs and reduction in quantities related to Glades (see Note E). As aresult, there was a reduction to the LIFO reserve and an increase to income of $4.5 million.

PREPAID EXPENSES AND OTHER CURRENT ASSETSPrepaid expenses and other current assets consist primarily of inventory samples, prepaid insurance, prepaidtaxes, prepaid rent and prepaid supplies.

PROPERTY, PLANT AND EQUIPMENTProperty, plant and equipment are stated at cost less accumulated depreciation. Depreciation is calculated ona straight-line basis over the estimated useful lives of the assets as follows:

YEARS

Buildings 39Leasehold improvements Lesser of useful life or term of the underlying leaseMachinery and equipment 3-12

Costs of major additions and improvements are capitalized and expenditures for maintenance and repairs thatdo not extend the life of the assets are expensed. Upon sale or disposition of property, plant and equipment,the cost and related accumulated depreciation are eliminated from the Company’s accounts and any gain orloss is credited or charged to income.

CAPITALIZATION OF INTEREST COSTSThe Company capitalizes interest cost on borrowings incurred during the new construction or upgrade ofqualifying assets. Capitalized interest is added to the cost of the underlying assets and is amortized over theuseful lives of the assets. For the years ended March 31, 2008 and 2007, the Company capitalized approxi-mately $2,259,000 and $1,533,000 of interest, respectively, in connection with capital expansion projects.

DEFERRED FINANCING COSTSDeferred financing costs represent fees and other costs incurred in connection with obtaining debt financing.These costs which were approximately $10,823,000 and $16,677,000 as of March 31, 2008 and 2007,respectively, are included in other assets and are being amortized as interest expense on a basis thatapproximates the effective interest method over the term of the related debt. Amortization expenseamounted to approximately $5,854,000 and $602,000 for the years ended March 31, 2008 and 2007,respectively. The 2008 amortization expense includes approximately $3,684,000 which was written offupon the repayment of the Second Lien Term Loan (see Note G).

IMPAIRMENT OF INTANGIBLE AND LONG-LIVED ASSETSIn accordance with SFAS No. 142, Goodwill and Other Intangibles Assets, the Company classifies intangibleassets into three categories: (1) Intangible assets with definite lives subject to amortization; (2) Intangibleassets with indefinite lives not subject to amortization; and (3) goodwill.

When events, circumstances or operating results indicate that the carrying values of certain long-lived assetsand related identifiable intangible assets (excluding indefinites lived intangible and goodwill) that are expectedto be held and used might be impaired, the Company prepares projections of the undiscounted future cashflows expected to result from the use of the assets and their eventual disposition. If the projections indicatethat the recorded amounts are not expected to be recoverable, such amounts are reduced to estimated fairvalue. Fair value may be estimated based upon internal evaluations that include quantitative analyses ofrevenues and cash flows, reviews of recent sales of similar assets and independent appraisals.

Under the provisions of SFAS No. 142, purchased goodwill and intangible assets with indefinite lives aretested for impairment at least annually. Intangible assets with finite lives are amortized over their useful lives.SFAS No. 142 requires a two-step impairment test for goodwill. The first step is to compare the carryingamount of the reporting unit’s assets to the fair value of the reporting unit. If the carrying amount exceedsthe fair value, then the second step is required to be completed, which involves allocating the fair value ofthe reporting unit to each asset and liability, with the excess being implied goodwill. An impairment lossoccurs if the amount of the recorded goodwill exceeds the implied goodwill.

EQUITY METHOD INVESTMENTSInvestments in unconsolidated investees representing ownership of at least 20%, but less than 50%, areaccounted for under the equity method of accounting. Under the equity method, the Company records itsproportionate share of the earnings or losses of investees. The Company’s investment in Kuhs GMbH & Co.(“Kuhs”) is accounted for on the equity method of accounting. This investment consists of 25% of the votingshares and a 15% silent interest.

The carrying values of the investment in Kuhs was approximately $2,742,000 and $2,119,000 as of March 31,2008 and March 31, 2007, respectively, and is presented under “Other assets, net” in the accompanyingconsolidated balance sheets. Kuhs is a supplier of raw materials to the Company. During fiscal 2008 and2007, the Company made purchases of approximately $4,149,000 and $3,933,000, respectively, from Kuhs.As of March 31, 2008 and 2007, the Company had no accounts payable due to Kuhs.

DERIVATIVESThe Company enters into interest rate swap agreements with certain lenders to minimize the impact ofchanges in interest rates on its variable rate debt. The Company has designated these swaps as cashflow hedges and has correspondingly recorded the fair value of the swaps as a noncurrent liability onthe balance sheet and the change in the fair value as other comprehensive income in the statement ofstockholders’ equity.

As of March 31, 2008, the Company has various interest rate swap agreements outstanding with commercialbanks, having a total notional amount of $365 million. Those agreements effectively change the base interestrate exposure on portions of the Company’s floating rate debt to a fixed rate between 4.92% and 5.34%.The interest rate swap agreements mature through 2010. The fair value of the swaps which amount toapproximately $17.8 million and zero as of March 31, 2008 and 2007, respectively, is based on quotesobtained from various financial institutions.

(continued)

(continued)



ACCOUNTS PAYABLE AND ACCRUED EXPENSESAccounts payable and accrued expenses consist primarily of trade payables and open receipts, accrued payroll,accrued bonus, accrued royalties and profit sharing, accrued sales returns and allowances, accrued managedcare rebates and accrued marketing expenses.

REVENUE RECOGNITIONRevenue and the related cost of sales are primarily recognized when product is delivered and accepted. Netsales are comprised of gross sales less a provision for expected customer returns, inventory credits, discounts,promotional allowances, volume rebates and charge backs. Royalty and licensing fee income are recognizedwhen obligations associated with earning the royalty or licensing fee has been satisfied.

The Company does not recognize revenue and the related cost of sales where it believes the customer has morethan a reasonable level of inventory, taking into account, among other factors, historical prescription dataprovided by external independent sources, projected prescription data, historical purchases and demand,incentives granted to customers, customers’ right of return, competing product introductions and the Company’sproduct inventory levels in the distribution channel, all of which the Company periodically evaluates.

Allowances for estimated returns, chargebacks and other sales allowances, including but not limited to shelfstock adjustments are established by the Company concurrently with the recognition of revenue. Theprovisions are established based upon consideration of a variety of factors, including but not limited to,actual return and historical experience by product type, the market for the product, estimated customerinventory levels by product and current and projected economic conditions and levels of competition.

Actual product returns, chargebacks and other sales allowances incurred are, however, dependent upon futureevents. The Company periodically monitors the factors that influence sales allowances and makes adjustmentsto these provisions when management believes that actual product returns, chargebacks and other salesallowances may differ from established allowances.

Revenue arrangements that include multiple deliverables are divided into separates units of accounting if thedeliverables meet certain criteria, including whether the fair value of the delivered items can be determinedand whether there is evidence of fair value of the undelivered items. In addition, the consideration is allocatedamong the separate units of accounting based on their fair values, and the applicable revenue recognitioncriteria are considered separately for each of the separate units of accounting.

ADVERTISING COSTSAdvertising costs are charged to selling and marketing expenses in the fiscal year in which they are incurred.Advertising expenses were approximately $95,326,000 and $69,657,000 in fiscal 2008 and 2007, respectively.

SHIPPING AND HANDLING FEESEmerging Issues Task Force (EITF) Issue No. 00-10, Accounting for Shipping and Handling Fees and Costs,requires that amounts billed to a customer related to shipping and handling be classified as revenue, andallows companies to adopt a policy of including shipping and handling costs in cost of sales or another incomestatement line item. The Company does not bill customers shipping and handling costs. Shipping and handlingcosts from third party carriers amounting to $5,545,000 and $2,696,000 for fiscal years 2008 and 2007 areincluded in selling, general and administrative expenses.

INCOME TAXESThe provision for income taxes is based on the consolidated domestic subsidiaries’ and individual foreignsubsidiaries’ estimated tax rates for the applicable year. The Company utilizes the asset and liability method.Deferred taxes are determined based on the estimated future tax effects of differences between theaccounting basis and tax basis of assets and liabilities under the applicable tax laws. Deferred income taxprovisions and benefits are based on the changes in deferred tax asset, or liabilities from period to period.

COMPREHENSIVE INCOMEComprehensive income includes net income as currently reported and also considers the effect of additionaleconomic events that are not required to be recorded in determining net income but are rather reported as aseparate component of stockholders’ equity. The Company reports foreign currency translation gains andlosses, unrealized changes in the fair value of available for sale securities and derivatives, and excess ofadditional pension liability as components of comprehensive income. Taxes attributable to translationadjustments were approximately $282,000 and $2,133,000 for fiscal 2008 and 2007, respectively. Taxesattributable to excess of additional pension liability were $897,000 and $(1,003,000) for fiscal 2008 and2007, respectively. Taxes attributable to unrealized changes in fair value of investments available for saleand derivatives was approximately $(7,591,000) and $0 for fiscal 2008 and 2007, respectively.

CONCENTRATION OF CREDIT RISKThe Company holds investments with investment grade credit ratings. The Company has established guidelinesrelative to the diversification and maturity of its investments that are designed to help limit losses and satisfythe Company’s liquidity needs. Accounts receivable are principally due from independent pharmacies,warehousing and non-warehousing pharmacy chains, pharmacy buying groups, physicians’ offices andpharmaceutical wholesalers and distributors. Sales to two pharmaceutical wholesale customers accountedfor 21.2% and 18.9% of the Company’s total sales in 2008. Amounts receivable from these customersrepresented 13.5% and 10.5% of the Company’s total net accounts receivable as of March 31, 2008.

FAIR VALUE OF FINANCIAL INSTRUMENTSThe following methods and assumptions were used to estimate the fair value of each class of financialinstruments for which it is practical to estimate that value:

• Cash and cash equivalents: The carrying value approximates fair value due to the short-term nature of those instruments;

• Investments in equity securities available-for-sale: The Company’s equity securities are carried atfair value as determined using quoted market prices;

• Investments in debt securities held-to-maturity: The Company’s debt securities are carried atcost adjusted for amortization of premiums and discounts to maturity which approximates thefair value adjustments;

• Accounts and notes receivable: The carrying value approximates fair value due to the short-term nature, including reserves for potential losses, of these amounts;

• Accounts payable and accrued expenses: The carrying value of accounts payable and accruedexpenses approximates fair value due to the short-term nature of these obligations; and

• Current and long-term debt: The carrying value of the Company’s long-term debt approximates fair value since the interest rates of these instruments are variable and fluctuate with market interest rates.

(continued)



NOTE A - BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

USE OF ESTIMATES IN THE PREPARATION OF CONSOLIDATED FINANCIAL STATEMENTSThe preparation of financial statements in conformity with accounting principles generally accepted in heUnited States of America requires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of thefinancial statements and the amounts of revenues and expenses reported during the reporting period. Actualresults could differ from those estimates.

NOTE B - FOREIGN OPERATIONS

The Company has foreign subsidiaries operating in Argentina, Australia, Brazil, Canada, the Cayman Islands,Chile, Colombia, Costa Rica, the Czech Republic, Denmark, Dominica, Ecuador, Egypt, United Kingdom, France,Germany, Hong Kong, India, Ireland, Italy, Korea, Mexico, Morocco, Pakistan, Peru, the Philippines, Poland,Portugal, Singapore, South Africa, Spain, Taiwan, Thailand and Venezuela. The consolidated financial state-ments include the following approximate amounts relating to such subsidiaries:

March 31,2008 2007

Cash and cash equivalents $59,965,000 $35,373,000Working capital 152,065,000 117,911,000Net assets 277,886,000 249,803,000Net sales 434,721,000 372,400,000Income before provision for income taxes 51,062,000 50,890,000

The Company’s reporting currency is the U.S. dollar. For the Company’s operations where the functionalcurrency is other than the U.S. dollar, assets and liabilities are translated using the exchange rate in effect atthe balance sheet date. Revenue and expense accounts are translated at the average exchange rates for theperiod. The related translation adjustment is reported in the “accumulated other comprehensive income”caption in the stockholders’ equity section of the accompanying consolidated balance sheets.

NOTE C - ACQUISITION OF CONNETICS

On December 28, 2006, the Company completed the acquisition of Connetics Corporation, for a totalpurchase price of approximately $666.1 million and acquired net tangible assets of $17.1 million. In additionto the shares outstanding, which were acquired at $17.50 per share, the purchase price included satisfactionof outstanding stock options and restricted stock agreements held by key employees and members of theBoard of Directors, and acquisition related expenses. The Company paid a premium (i.e. goodwill) over thefair value of the net tangible and identified intangible assets acquired for a number of reasons, includingthe following:

• Further diversification of its branded product portfolio not only in the US but throughout more than 100 countries worldwide,

• Access to novel foam delivery technology with unique properties facilitating the movement of amedication across the skin’s protective barrier,

• Strengthened research & development pipeline,

• Readily achievable operating cost savings through combining the sales and support functions.

• The acquisition was funded primarily by borrowings under debt arrangement with Deutsche Bankand a syndicate of lenders (see Note G) and cash on hand at Connetics.

• In accordance with SFAS No 141, Business Combinations, the Company accounted for this acquisitionusing the purchase method, which requires that the total purchase price be allocated to the fair value of assets acquired and liabilities assumed based on their fair value at the date of acquisition, and any amount in excess of the fair values be recorded as goodwill. The allocation process requires that the Company make certain estimates and assumptions especially concerning the determination of the fair values of the acquired intangible assets assumed as of the date of acquisition. Forintangible assets associated with products, product related technology, and in-process researchand development, the Company based its valuation on the expected future cash flows using adiscounted cash flow methodology.

The amounts assigned to and weighted average amortization period for the intangible assets acquiredare as follows:

WeightedAverage

Useful LifeAmount in Years

Trade names $32,650,000 13Patents 44,870,000 10Developed technology 265,700,000 13In-process research and development 15,510,000 N/AOut licenses 53,910,000 12

$412,640,000

(continued)



In accordance with SFAS No 141, acquired in-process research and development was subsequently expensedfor the total amount of $15.5 million.

As a result of recording assets acquired and liabilities assumed at their fair values as of the acquisition date,the Company also recorded goodwill of approximately $236.4 million.

The following table summarizes the estimated fair values at the date of acquisition (in millions):

Cash and equivalents $260.4Accounts receivable, net 33.0Inventories 12.9Other current assets 11.0Fixed assets, net 14.7Intangibles, net 412.6Deferred taxes 53.2Other assets 8.7Goodwill 236.4Accounts payable (22.3)Accrued liabilities (64.5)Debt (290.0)

NET ASSETS ACQUIRED $666.1

The allocation of purchase price for the acquisition was preliminary as of March 31, 2007. During fiscal 2008,the Company received information needed to finalize the purchase price allocation primarily related todeferred taxes and certain operating assets along with additional costs of the acquisition which resulted inan increase to goodwill of approximately $104 million.

In connection with the Connetics acquisition the Company has executed a plan to terminate certainemployees of Connetics (the “Termination Plan”) and incurred approximately $52.9 million in costs related tovarious termination benefits payable pursuant to change in control, stock option, restricted stock andseverance agreements. These costs have been included in the acquisition cost for the Connetics acquisition.

From the date of acquisition through March 31, 2008, the Company accrued for and paid for the followingtermination benefits (in thousands):

Change in control $10,145Stock option 31,096Restricted stock 10,840Severance and other 3,088

$55,169

NOTE D - CLOSURE OF CERTAIN RESEARCH OPERATIONS

On July 23, 2007, the Company announced its decision to close its Research & Development facility inMaidenhead, UK. As a result, the Company began reducing the workforce in a phased approach in September2007. The termination of all affected employees will be completed by November 2008. In addition to thetermination costs, other restructuring costs will include various non personnel related contract terminations,costs related to the transfer to other research facilities or disposal of equipment and materials, and writedown of certain capital assets. The Company currently estimates these costs will aggregate approximately$3.0 million, of which $2.0 million has been recorded in fiscal year 2008.

On October 8, 2007, the Company announced its decision to close R&D Laboratories and associated pilotplant operation in Brazil. The closure is anticipated to be completed by July 2008 and has an estimated costof $1.4 million, of which $0.5 million have been recorded to date.

NOTE E - GLADES ASSET SALE

On March 5, 2007, an Asset Purchase and License Agreement (APA) was executed between GladesPharmaceuticals LLC, a wholly owned subsidiary of the Company (Glades) and Perrigo Company (Perrigo)for a total consideration of $55.7 million. In addition to the APA, several other related agreements weresimultaneously executed, including a Supply Agreement and a Transition Services Agreement. Theseagreements vary in length and potential financial impact. Terms of the APA agreement call for Perrigo topurchase certain finished product inventories, and for Glades to provide licensing, R&D services, as well as tosatisfy additional regulatory requirements as requested by the FDA. Under the Supply Agreement, Glades willmanufacture and deliver several products to Perrigo for up to 10 years, with various termination rightsgranted on multiple dates. The Transition Services Agreement requires Glades to perform labeling supportand regulatory reporting.

The Company treated all agreements entered into with Perrigo as a single arrangement and accounted for alldeliverables as a single unit of accounting. Of the $55.7 million consideration, $33.7 million was received asan initial payment in fiscal 2007, and $22 million was held in escrow pending additional performancerequirements by Stiefel and a satisfactory review of these additional requirements by the U.S. FDA. Norevenue was recognized during fiscal year 2007 and the entire initial payment was included in deferredrevenue as of March 31, 2007. The necessary FDA approval was received in September 2007 and theamount in escrow was paid to the Company. During fiscal 2008 the Company began to recognize revenue asservices were performed consistent with the performance requirements of the arrangement resulting in therecognition of approximately $18 million in revenue, approximately $9.6 million in related costs and deferredrevenue of approximately $44 million as of March 31, 2008. Revenue and costs relating to the Perrigo saleare included in net sales and cost of sales in the consolidated statement of income.

(continued)



NOTE F - INTANGIBLE ASSETS

Intangible assets consist of the following:

March 31, Amortization2008 2007 Period

Intangibles assets subject to an amortizationTrademarks and trade names $35,045,752 $35,045,767 11 - 14 yearsPatents 60,111,315 57,674,497 1 - 12 yearsDeveloped technology 279,593,266 279,393,266 11 - 14 yearsOther acquired intangibles 55,277,012 55,089,878 1 - 12 years

430,027,345 427,203,408

Accumulated amortization (60,580,613) (23,377,498)

Net intangible assets subject to amortization 369,446,732 403,825,910

Intangible assets not subject to amortizationTrademarks and trade names 15,797,582 15,355,951Developed technology 4,996,877 4,228,055Other acquired intangibles 2,444,096 2,444,096 N/A

23,238,555 22,028,102

Net intangible assets (excluding goodwill) $392,685,287 $425,854,012

Goodwill $351,790,326 $248,062,627 N/A

Amortizable intangible assets are being amortized on a straight line basis over their estimated useful lives.Estimated aggregate amortization expense for each of the five succeeding fiscal years is as follows:

2009 ............................................................................................................................................................ $38,646,539

2010 .............................................................................................................................................................. 37,336,349

2011................................................................................................................................................................ 35,454,829

2012 .............................................................................................................................................................. 34,904,829

2013 .............................................................................................................................................................. 34,805,555

NOTE G - DEBT OBLIGATIONS AND CREDIT ARRANGEMENTS

Debt obligations consist of the following:

March 31,2008 2007

First Lien Term Loan - Maturity date of December 28, 2013,quarterly amortization of 0.25% of initial principal, interestrate of Libor + 2.25%, (6.69% and 7.62% as of March 31,2008 and 2007, respectively). $615,212,500 $623,000,000

Second Lien Term Loan - Maturity date of June 28, 2014,interest rate of Libor + 5%, (10.37% as of March 31, 2007). - 150,000,000

Euro Term loan - Maturity of March 31, 2009, quarterlyamortization of 3,512,000 at Three Month Euribor +2.5%, (7.23% and 6.4% as of March 31, 2008 and2007, respectively). 18,297,404 31,692,852

Other Notes and loans, Maturity dates ranging betweenApril 1, 2007 and March 23, 2012, interest rates rangingbetween 4.0% and 8.25%. 21,446,532 22,911,136

654,956,436 827,603,988

Less: Current portion 56,496,745 28,985,704

Long term debt, net of current portion $598,459,691 $798,618,284

TERM LOANSOn December 28, 2006, Stiefel entered into the First Lien Credit Agreement as amended and restated as ofJanuary 10, 2007 (the “First Lien”), and the Second Lien Credit Agreement as amended and restated as ofJanuary 10, 2007 (the “Second Lien”), (collectively the “Loan Arrangements”) with Deutsche Bank, primarilyfor purposes of funding the Connetics acquisition. A portion of the proceeds from these loans was used torepay the amount outstanding ($37 million) under the Company’s revolving line of credit with Bank ofAmerica. A secondary draw on the First Lien was made on February 11, 2007 in order to fund the redemptionof the $290 million convertible debt that Connetics carried at the date of acquisition. In connection with theLoan Arrangements, the Company paid approximately $17.3 million in financing costs. The Loan Arrangementsare collateralized by virtually all assets of the Company.

On August 30, 2007, the $150 million in principal of the Second Lien Term Loan was paid in its entirety. TheCompany incurred a prepayment penalty of $3 million in connection with the payment. The prepaymentpenalty and remaining unamortized deferred financing costs of approximately $3.7 million were recorded as acharge to interest expense on the consolidated statement of income for the year ended March 31, 2008.

(continued)



Under the First Lien and Second Lien arrangements, the Company must comply with various covenantsincluding restrictions on additional borrowings, liens, cash dividends, acquisitions or investments, asset salesand capital expenditures. In addition, the Company is required to maintain specified minimum interestcoverage ratios and not exceed defined maximum consolidated net leverage ratios.

The Euro Term loan with AIB is collateralized by guarantees from Stiefel Laboratories, Inc., Stiefel Canada, Inc.,Laboratorios Stiefel Ltda, Stiefel Laboratories (Pte) Limited, and Stiefel Laboratories, (UK) Limited.

Other notes and loans are related to promissory notes issued to former employees of the Company associatedwith the buyback of shares of the Company’s common stock issued to employees under the terms of theESBT (see Note H).

Aggregate annual maturities of the debt obligations are as follows:

Years Ended March 31, Amount

2009 $56,496,7452010 11,973,7472011 11,330,0582012 10,176,3872013 6,230,000

Thereafter 558,749,499

$654,956,436

REVOLVING CREDIT ARRANGEMENTSOn December 28, 2006, the Company obtained a $75 million revolving facility from Deutsche Bank. Thisfacility remains unused as of March 31, 2008. Interest is set at the three-month LIBOR rate + 2.25%,with a fee of 0.5% per annum charged on the unused portion of the facility. This credit arrangement requirescompliance with certain financial covenants. There was $0 outstanding under this facility at March 31, 2008and 2007.

NOTE H - EMPLOYEE RETIREMENT PLANS

Domestic employees with a minimum of one year of service are covered under the Company’s EmployeeStock Bonus Trust (ESBT) and Profit Sharing Plan. Each year, the Board of Directors determines the amountof contribution, if any, to be made under this plan, limited, however, to the maximum amount deductible forfederal income tax purposes.

During fiscal 2008, the Company contributed 98 shares of its Class C common stock, held in treasury, witha value of approximately $1,275,000 and cash of approximately $542,000 to the ESBT.

During fiscal 2007, the Company contributed 131 shares of its Class A common stock, held in treasury, witha value of approximately $1,201,000, and cash of approximately $287,000 to the ESBT.

The Company has a 401(k) Plan to provide retirement and incidental benefits for its domestic employees.Employees may contribute from 1% to 60% of their annual compensation to the 401(k) Plan, limited to amaximum annual amount as set periodically by the Internal Revenue Service. In fiscal 2008 and 2007, theCompany matched 75% of the first 5% of employee contributions. All matching contributions fully vest afterone year of service. Company matching contributions to its 401(k) Plan were approximately $2,382,000 infiscal 2008 and $1,642,000 in fiscal 2007.

The Company also participates in three defined benefit pension plans (the “Plans”) covering approximately260 employees with Plan years ending with either March 31, June 30, or December 31. The measurementdate used to determine plan assets and benefit obligations is February 29.

In September 2006, FASB issued SFAS No. 158 (“SFAS 158”), Employers’ Accounting for Defined BenefitPension and Other Postretirement Plans. This standard requires an employer to recognize the overfunded orunderfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset orliability in its balance sheet and to recognize changes in that funded status in the year in which the changesoccur through comprehensive income. The Company adopted SFAS 158 for the year ended March 31, 2008.Prior to this adoption the Company accounted for the Pension Plan for Other Employees in accordance withSFAS No. 132(R), Employers’ Disclosures about Pensions and Other Postretirement Benefits.

(continued)



The following table details the impact of adopting SFAS 158 as of March 31, 2008:

Before AfterApplication Application

of SFAS 158 Adjustments of SFAS 158

Deferred income taxes $38,335,546 $118,840 $38,454,386Liability for pension benefits 9,041,685 556,465 9,598,150Total liabilities 955,807,009 556,465 956,363,474Other comprehensive income (loss) 21,756,279 (675,305) 21,080,974Total stockholders’ equity 832,265,722 (675,305) 831,590,417

At March 31, the reconciliation of the beginning and ending balances of the benefit obligation and fair value ofplan assets, and the funded status of the plan are as follows:

2008 2007

Change in benefit obligationBenefit obligation, beginning of year $72,379,626 $55,781,319Curtailment of plan (888,597) - Service cost 3,571,342 3,125,812Interest cost 3,971,769 3,036,315Participant contributions 902,144 784,288Benefit paid to participants (1,385,075) (933,407)Actuarial (gains) losses (8,604,183) 4,002,087Plan amendments (656,903) (14,845)Exchange rate adjustment 4,836,185 6,598,057

Benefit obligation, end of year $74,126,308 $72,379,626

Change in plan assetsFair value of plan assets, beginning of year $56,905,238 $44,502,510Curtailment of plan (961,070) - Actual return on plan assets 624,227 4,006,577Employer contributions 4,781,078 3,732,526Participant contributions 902,144 784,288Benefit paid to participants (1,385,075) (948,241)Expenses, taxes and premiums paid (466,381) (446,713)Exchange rate adjustment 4,127,997 5,274,291

Fair value of plan assets, end of year $64,528,158 $56,905,238

NOTE H - EMPLOYEE RETIREMENT PLANS - (continued)

2008 2007

Funded status $9,598,150 $15,474,388Unrecognized actuarial net loss - - Unrecognized initial transition obligation - (3,515,512)

Accrued pension liability recognizedin the Company’s balance sheet $9,598,150 $11,958,876

For fiscal 2008 net actuarial losses of $675,305 were recognized in accumulated other comprehensive income.

At March 31, 2007, the balance sheet includes liabilities for accrued benefit cost of $9,270,725 andadditional minimum liability of ($2,579,427).

Components of net periodic benefit costService cost $4,037,723 $3,580,395Interest cost 3,971,769 3,036,321Expected return on plan assets (4,104,111) (3,335,990)

Amortization of:Prior service cost - - Transition obligation - - Actuarial losses 138,592 16,456

Net periodic benefit cost $4,043,973 $3,297,182

The estimated amortization amount for fiscal year 2009 net periodic benefit pension costs consist ofactuarial losses of approximately $3,092,000.

The weighted average assumptions used to determine benefit cost for the years ended March 31, are:

Discount rate 5.14% 4.75%Expected return on plan assets 6.70% 6.54%Rate of compensation increase 3.84% 3.74%

The weighted average assumptions used to determine benefit obligations at March 31, are:

Discount rate 6.04% 5.17%Rate of compensation increase 4.27% 3.87%

The accrued pension liability is included in accounts payable and accrued expenses in the accompanyingconsolidated balances sheets.

(continued)



The deficit in Plans assets when compared to projected benefit obligations of approximately $9,600,000 asof March 31, 2008 is primarily attributed to the defined benefit plans for Stiefel UK and Stiefel Ireland in theamounts of approximately $5,327,000 and $3,995,000, respectively.

Historically, the Company has funded the Plans at a level sufficient to provide the related projected benefitobligations upon retirement of the participants and expects to continue to do so in the future.

The accumulated benefit obligation for the Plans as of March 31, 2008 and 2007 amounted to approximately$65,015,628 and $64,125,000, respectively.

The Plans’ asset allocation at March 31, by asset category is as follows:

2008 2007

Equity securities 67.00% 74.00%Fixed income 21.00% 16.00%Other 12.00% 10.00%

TOTAL 100.00% 100.00%

The Plans trustees’ overall investment policy is guided by the following objectives:

a) To ensure the Plans assets and future contributions are invested in such a manner that the benefits due tomembers and their beneficiaries can be paid from the Plans as they arise.

b) The main aim of the investment policy is that the Plans should at least be 100% funded on an ongoingbasis - that is, the trustees wish to avoid situations where the Plans are in deficit. On the other hand, thetrustees do not wish the Plans to have an excessively high funding level.

c) The trustees wish the Plans to meet the statutory minimum funding standard in the event of winding up.

d) To set and monitor realistic performance targets for the appointed investment manager.

e) To pay due regard to the interests of the Company in relation to the payment of the employer’s contributions.

f) The trustees wish to adopt a reasonably cautious investment policy in terms of both long-run strategicasset allocation and implementation by their investment manager on a tactical or short-run basis.

Funds are invested in equities, bonds, property and cash. There are no specific target allocation percentagesin respect of each major category of Plans assets except that the allocation will reflect the collective assetallocation decisions of investment managers in the respective countries where the Plans are in effect.

The Company’s expects to contribute approximately $4,962,000 to the plan in 2009.

Benefits expected to be paid in each of the five succeeding fiscal years and thereafter are as follows:

2009 $790,0002010 976,0002011 1,062,0002012 1,127,0002013 1,212,000


NOTE I - INCOME TAXES

The effective tax rate in 2008 and 2007 was 31.8 % and 52.9%, respectively, compared to the U.S. statutoryincome tax rate of 35%. The difference between the effective and statutory tax rate is primarily due to themix of income taxed at varying rates in multiple jurisdictions and actual and deemed dividends subject to taxin the U.S.

The income tax provision consisted of the following:

Current Deferred Total(in Thousands)

Year ended March 31, 2008Federal $16,199 $(14,047) $2,152State 1,422 (277) 1,145Foreign 10,370 2,292 12,662

$27,991 $(12,032) $15,959

Year ended March 31, 2007Federal $3,260 $(12,213) $(8,953)State 718 - 718Foreign 18,145 611 18,756

$22,123 $(11,602) $10,521

(Loss) income before income taxes by source consisted of the following:

March 31,2008 2007

(in Thousands)

United States $(802) $(25,370)Foreign 51,062 45,266

$50,260 $19,896

(continued)



The Company recorded deferred tax assets and liabilities of approximately $42,467,000 and $51,562,000,respectively as of March 31, 2008 and approximately $73,375,000 and $0, as of March 31, 2007,respectively. These amounts are primarily attributable to the elimination of inter-company profit in inventory,accelerated depreciation and amortization, unrealized gain (loss) on investments, net operating losscarryforwards, foreign tax credit carryforwards, research and development credit carryforwards, accruals forreturns and allowances and the recognition of deferred revenue.

Deferred income taxes are not provided for the remaining undistributed earnings of foreign subsidiariesbecause the Company intends to permanently reinvest these earnings. As of March 31, 2008 and 2007,the cumulative amount of such undistributed earnings amounted to approximately $223,924,000 and$254,168,000, respectively.

On December 28, 2006, the company completed the acquisition of Connetics Corporation. At the time of theacquisition, Connetics had approximately $133 million of federal net operating loss carryforwards (NOL), andapproximately $5 million of federal tax credit carryovers. This acquisition constituted a change in ownership ofConnetics as defined under the Internal (Revenue Code Section 382 (IRC §382).

The Company has determined that the net operating loss carryovers will be limited under IRC §382 and thecredit carryovers will be limited under IRC §383 due to the ownership change. Per estimated calculations, theyearly limitation on the net operating losses will be approximately $63 million. At the end of fiscal year endedMarch 31, 2008, the Company has approximately $39 million and $5 million of NOL and federal tax creditcarryforwards, respectively, remaining as a deferred tax asset which begins to expire in the fiscal year endedMarch 31, 2026.

As of March 31, 2008 and March 31, 2007, there were approximately $4,000,000 and $1,000,000 of foreignnet operating loss carryforwards representing deferred tax assets of approximately $1,300,000 and$300,000, respectively. The net operating losses have varying expiration dates through 2016.

A valuation allowance is required to reduce the deferred tax assets reported if, based on the weight of theevidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Asof March 31, 2008, the Company has a $1,779,000 valuation allowance for deferred assets it does not expectto realize.

NOTE J - STOCKHOLDERS’ EQUITY

The Company’s Board of Directors consists of nine members that are elected by the stockholders. Holders ofClass A common stock are entitled to elect four members and holders of Class B common stock are entitledto elect five members. Holders of the Class C common stock have no voting rights.

BLACKSTONE INVESTMENT On August 6, 2007, the Company entered into an agreement with the Blackstone Group under whichBlackstone invested $500 million in a newly issued class of preferred stock. Pursuant to the agreement amember designated by Blackstone was elected to the Company’s Board of Directors. The preferred stock,which is designated as series A, is convertible, at the option of the holder, into Class C common stockbased on a formula as defined in the agreement. The preferred stockholders also have the option to redeemtheir stock holdings, including unpaid dividends, for cash at any time on or after the eight years from theoriginal issuance. Among other financial terms, the agreements also provide for quarterly dividends (in kind)of 4.5% of a defined per share “Stated Value”. The Company is accreting the difference between the amountredeemable in cash and the carrying value of the preferred stock to the earliest possible redemption date(eight years). The initial carrying value of the preferred stock of $486,079,797 includes issuance costs of$13,920,203. Periodic accretion of the preferred stock, which amounted to $15,689,419 for the year endedMarch 31, 2008, consists of issuance costs and dividends, and is deducted from retained earnings.

The funds from this investment were used in part to repay a portion of the Company’s outstanding debt.Another portion of the proceeds has been set aside primarily for potential acquisitions and other investments.

BACAMACHLI TRANSACTIONIn August 2006, the Company entered into an Agreement and Plan of Merger (the “Agreement”) withBacamachli, Inc. On completion of the merger, Bacamachli was liquidated, with the Company being thesurviving corporation. Under the Agreement, stockholders of Bacamachli could exchange their shares for cash,shares of the Company’s common stock, or a combination thereof on a pro-rata basis, and the remainingshares of Stiefel stock held by Bacamachli immediately prior to the merger were recorded as treasury stockof the Company. As a result, the Company paid approximately $44.5 million and recorded 846 Stiefel ClassA shares and 8,463 Stiefel Class C shares as treasury shares of the Company.

OTHEROn May 7, 2003, the Company entered into an agreement with certain shareholders whereby the Companywould purchase 653 Class A shares and 6,527 Class C shares of its common stock owned by these share-holders for $36,600,000 upon the occurrence of certain events. The purchase price will increase 2% per yearcompounded annually until the shares are repurchased and may require the Company to pay any relatedstate and federal taxes incurred by the selling shareholders under certain circumstances. The event occurredon June 8, 2006, and the Company purchased the shares under this agreement in December 2006.

During fiscal 2008, the Company acquired 22 shares of its class A common stock, 14 shares of its class Bcommon stock, and 643 shares of its class C common stock and recorded them as treasury shares at a costof approximately $399,402, $198,713, and $8,869,084, respectively.

During fiscal 2007, the Company acquired 1,620 shares of its Class A common stock, 40 shares of its ClassB common stock, and 16,652 shares of its Class C common stock and recorded them as treasury shares ata cost of approximately $8,557,000, $461,000 and $90,403,000, respectively. Total amounts are inclusiveof the Bacamachli and December 2006 transactions described above.

(continued)



NOTE K - COMMITMENTS AND CONTINGENCIES

LEASESThe Company has long-term operating lease obligations for office space, buildings and equipment expiringon various dates through fiscal year 2045, some of which contain provisions for future rent increases. Inaccordance with accounting principles generally accepted in the United States of America, the Companyrecords monthly rent expense equal to the total of the payments due over the lease term, divided by thenumber of months of the lease term. The difference between rent expense recorded and the amount paid iscredited or charged to “Accounts payable and accrued expenses,” which is reflected as a separate line itemin the accompanying consolidated balance sheets. The estimated future minimum lease payments underoperating leases with an initial noncancelable term in excess of one year are as follows as of March 31, 2008:

Years Ended March 31, Amount

2009 $10,368,6642010 7,393,1742011 5,771,2572012 5,027,4662013 6,193,623


$60,438,130

Rent expense was approximately $20,624,000 and $11,713,000 during fiscal 2008 and 2007, respectively.

OTHER COMMITMENTSOn July 12, 2005, the Company entered into an exclusive licensing agreement to develop and market a newchemical entity. Under terms of the agreement, the Company is required to make additional license paymentsbased on defined development milestones. The aggregate of these additional payments is approximately$44,240,000. None of the development milestones took place as of March 31, 2008 and consequently noamounts have been accrued.

REVENUE AGENT REVIEWSThe Company is currently undergoing several revenue agent reviews in the United States and various othercountries. Management does not believe that the outcomes of these reviews will have a material impact onthe Company’s consolidated results of operations or financial position.

LITIGATIONThe Company is subject to legal proceedings and claims that have arisen in the ordinary course of its businessand have not been finally adjudicated. Although there can be no assurance as to the ultimate disposition ofthese matters and the proceedings disclosed below, it is the opinion of the Company’s management, basedupon the information available at this time, that the expected outcome of these matters, both individually orin the aggregate, will not have a material adverse effect on either the results of operations or financialcondition of the Company.

On March 8, 2005, the Company received two separate Tax Assessment Notices (“TAN”) from theFederal Treasury of Brazil in relation to HIDRAFIL Gel and HIDRAFIL Lotion products sold by LaboratoriesStiefel Ltda. (“Stiefel Brazil”). In May 2008, the Company learned that the administrative processinvolving the largest potential claim had been concluded with no appeal from the authorities. A second,smaller TAN relating to these same issues remains unresolved. In light of the closure of the firstproceeding, legal counsel believes that a favorable outcome is likely. However, no assurance can begiven of the ultimate outcome of this matter.

As of March 31, 2008, the Company had placed in escrow approximately $4.9 million in order to maintain itsability to sell HIDRAFIL products within its original “ethical” category while this claim was open. These fundswill be returned to the Company at the final conclusion of all aspects of their litigation.

NOTE L - SUBSEQUENT EVENT

On May 6, 2008, the Company acquired all of the outstanding shares of ABR Invent and ABR Development(“ABR”). ABR is domiciled in France and currently markets Atlean® Dermal Filler in France and Italy. Totalconsideration for the acquisition if all future milestones are achieved will approximate $27.0 million.


Stiefel Laboratories Inc255 Alhambra Circle

Suite 1000Coral Gables, FL 33134

tel: 305.443.3800fax: 305.443.3467

www.stiefel.com

2008 annual report · stiefel skin care solutions. the most valuable asset of the stiefel network...

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