-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EGT9gay1c8mj5GZDbb6yj+Ro4LTevmXj/CshAEA1Pyh+UjvoU1oN7E+pOe9wV/n2 hbsEo6LS2MOrwnPtfzbd3A== 0000950123-01-502607.txt : 20010516 0000950123-01-502607.hdr.sgml : 20010516 ACCESSION NUMBER: 0000950123-01-502607 CONFORMED SUBMISSION TYPE: 10-K405/A PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20010515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BARR LABORATORIES INC CENTRAL INDEX KEY: 0000010081 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 221927534 STATE OF INCORPORATION: NY FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K405/A SEC ACT: SEC FILE NUMBER: 001-09860 FILM NUMBER: 1640604 BUSINESS ADDRESS: STREET 1: 2 QUAKER RD BOX 2900 CITY: POMONA STATE: NY ZIP: 10970-0519 BUSINESS PHONE: 9143621100 MAIL ADDRESS: STREET 1: 2 QUAKER RD STREET 2: BOX 2900 CITY: POMONA STATE: NY ZIP: 10970-0519 10-K405/A 1 y49301e10-k405a.txt BARR LABORATORIES INC 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K/A (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 2000 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission file number 1-9860 BARR LABORATORIES, INC. (Exact name of Registrant as specified in its charter) NEW YORK 22-1927534 --------- ------------------- (State or Other Jurisdiction of (I.R.S. - Employer Incorporation or Organization) Identification No.) TWO QUAKER ROAD, P. O. BOX 2900, POMONA, NEW YORK 10970-0519 ------------------------------------------------------------- (Address of principal executive offices) 914-362-1100 (Registrant's telephone number) Securities registered pursuant to Section 12(b) Name of each exchange on of the Act: which registered: Title of each class Common Stock, Par Value $0.01 New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock of the Registrant held by nonaffiliates was approximately $870,972,748 as of June 30, 2000 (assuming solely for purposes of this calculation that all Directors and Officers of the Registrant are "affiliates"). Number of shares of Common Stock, Par Value $.01, outstanding as of June 30, 2000: 34,827,937 DOCUMENTS INCORPORATED BY REFERENCE PORTIONS OF THE REGISTRANT'S 2000 ANNUAL REPORT TO SHAREHOLDERS ARE INCORPORATED BY REFERENCE IN PART II AND PART IV HEREOF. PORTIONS OF THE REGISTRANT'S 2000 PROXY STATEMENT ARE INCORPORATED BY REFERENCE IN PART III HEREOF. AMENDING ITEMS 1, 2, 3, 6, 7, 8 AND 14. 2 PART I ITEM 1. BUSINESS SAFE HARBOR STATEMENT To the extent that any statements made in this report contain information that is not historical, these statements are essentially forward-looking. These statements are subject to risks and uncertainties that cannot be predicted or quantified and, consequently, actual results may differ materially from those expressed or implied by such forward-looking statements. Such risks and uncertainties include: the timing and outcome of legal proceedings; the difficulty of predicting the timing of U.S. Food and Drug Administration, or FDA, approvals; the difficulty in predicting the timing and outcome of court decisions on patent challenges; the court and FDA's decisions on exclusivity periods; market and customer acceptance and demand for new pharmaceutical products; ability to market proprietary products; the impact of competitive products and pricing; timing and success of product development and launch; availability of raw materials; the regulatory environment; fluctuations in operating results; and, other risks detailed from time-to-time in the Company's filings with the Securities and Exchange Commission, or SEC. The Company wishes to caution each reader of this report to consider carefully these factors as well as specific factors that may be discussed with each forward-looking statement in this report or disclosed in the Company's filings with the SEC as such factors, in some cases, could affect the ability of the Company to implement its business strategy and may cause actual results to differ materially from those contemplated by the statements expressed herein. OVERVIEW We are a specialty pharmaceutical company engaged in the development, manufacture and marketing of generic and proprietary prescription pharmaceuticals. We currently market approximately 80 pharmaceutical products, representing various dosage strengths and product forms of approximately 30 chemical entities. Our product line focuses principally on the development and marketing of generic and proprietary products in the oncology and female healthcare categories, including hormone replacement and oral contraceptives. BUSINESS STRATEGY We focus our resources on three core strategies: Developing and Marketing Selected Generic Pharmaceuticals. We develop and market the generic equivalent of brand pharmaceuticals that are off-patent but that have one or more barriers to entry. The characteristics of the products that we pursue may include: - the need for specialized manufacturing capabilities; - difficulty in raw material sourcing; - complex formulation or development characteristics; 2 3 - regulatory or legal challenges; or - sales and marketing challenges. We believe products with such barriers will face limited competition and therefore should produce higher profits for a longer period of time than products that have no barriers, which many companies can develop. Developing and Introducing Proprietary Pharmaceuticals. We are also developing proprietary pharmaceuticals that may have some period of exclusivity. Although the time and cost to develop proprietary pharmaceuticals is usually much higher than generic products, we believe that such products will produce higher and more consistent profitability than the typical generic product. To share the costs of these proprietary products and therefore increase the number we work on, we often seek strategic partners to assist in the funding, development and marketing of these products. Challenging Patents Protecting Certain Brand Pharmaceuticals. We also develop generic equivalents of branded pharmaceuticals protected by patents that we believe are either invalid, unenforceable or not infringed by our products. This strategy is an extension of our first strategy because the patents we are challenging present barriers to entry to companies that do not have the legal and financial capabilities to assess and challenge such patents. We believe that the successful development of pharmaceuticals that were perceived by competitors to be patent protected may allow our products, if approved, to earn higher profits for a longer period of time. GENERIC PHARMACEUTICALS Our generic product line includes approximately 80 pharmaceutical products representing various dosage strengths and product forms of approximately 30 chemical entities. Our products are manufactured in tablet, capsule and powder form. Key Generic Products The following are descriptions of the products that contribute significantly to our sales and gross profit. All sales and product data is derived from industry sources. The market share information below concerning the number of units of a product dispensed does not correlate to a like percentage of industry sales due to the lower selling prices for generic products as compared to branded products. Tamoxifen. Tamoxifen is the generic name for AstraZeneca's Nolvadex, which is used to treat advanced breast cancer, impede the recurrence of tumors following surgery, and reduce the incidence of breast cancer in women at high risk for developing the disease. Total U.S. brand and generic sales were approximately $354 million for the twelve months ended June 30, 2000. Statistics indicate that one in eight women will get breast cancer during her lifetime, and each year, more than 180,000 new cases of breast cancer are diagnosed. Tamoxifen accounted for approximately 68%, 66% and 68% of our product sales during fiscal 2000, 1999 and 1998, respectively. Approximately 80% of the total prescriptions written for Tamoxifen in the United States were filled with our product during the twelve months ended June 30, 2000. Currently, we are the only distributor of Tamoxifen in the United States other than its innovator, AstraZeneca, whose product is sold under a brand name. We distribute Tamoxifen under an agreement with AstraZeneca, and therefore our gross margins for Tamoxifen are substantially lower than our gross margins for our manufactured products. For the twelve months ended June 30, 2000, Tamoxifen was prescribed approximately 4.3 million times, representing a 9.0% 3 4 increase from the prior twelve-month period. In 1993, as a result of a settlement of a patent challenge against AstraZeneca, we entered into a non-exclusive supply and distribution agreement. Under the terms of the Tamoxifen agreement, we purchase Tamoxifen directly from AstraZeneca. Although we currently are the only non-exclusive distributor, the Tamoxifen agreement provides that should an additional distributor or distributors be selected by AstraZeneca, we will be granted terms no less favorable than those granted to any subsequent distributor. We have a tentatively approved ANDA to manufacture the 10 mg tablet of Tamoxifen and are awaiting approval of our 20 mg tablet application. After the patent expires in August 2002, we expect that we will either continue to sell Tamoxifen as a distributed product or as our own manufactured product. Our cost to manufacture Tamoxifen should be lower than our cost to purchase it and, as a result, we believe our profit margins on Tamoxifen will improve once we begin to sell our manufactured product. We expect that additional competitors will enter the market upon patent expiry or six months later if AstraZeneca obtains a pediatric extension. Whenever this occurs, we believe that while our revenues and market share will be negatively affected, our gross margins on the sales of Tamoxifen will exceed those we currently earn as a distributor. Warfarin Sodium. Warfarin Sodium is the generic equivalent of DuPont Pharmaceutical's Coumadin, an anticoagulant that is given to patients with heart disease and/or high risk of stroke. We launched Warfarin Sodium in July 1997 and are one of three generic suppliers of the product. Total U.S. generic and brand sales of Warfarin Sodium were approximately $500 million for the twelve months ended June 30, 2000. Since launch in July 1997, nearly 11.2 million prescriptions for our generic product have been dispensed. At the end of fiscal 2000, our generic product had captured approximately 27% of all prescriptions written for the product. Warfarin Sodium accounted for approximately 14%, 15% and 11% of our product sales during fiscal 2000, 1999 and 1998, respectively. Generic Product Research and Development As of September 2000, we were developing approximately 60 pharmaceutical products, including 18 new generic product ANDAs pending approval at the FDA for products which had total U.S. brand and generic sales of approximately $2.8 billion for the twelve months ended June 30, 2000. Thirteen of the 18 generic product ANDAs pending are for products where there are currently no generic equivalents approved for sale. These 13 products represent approximately $2.5 billion of the $2.8 billion. Four of the 18 generic product ANDAs pending approval contain Paragraph IV Certifications. These 4 products represent total U.S. brand sales of approximately $680 million for the twelve months ended June 30, 2000. During the remainder of the fiscal year ending June 30, 2001, we anticipate filing another 13 to 16 generic product ANDAs for products which had total U.S. brand and generic sales of approximately $2.4 billion for the twelve months ended June 30, 2000. Thirteen of these products currently have no generic equivalents approved for sale. These 13 products represent total U.S. brand sales of $2.2 billion. In addition, three of these 13 products will be filed with a Paragraph IV Certification. As discussed elsewhere in this 10-K, we believe this status may entitle us to as much as 180 days of generic marketing exclusivity on each of these products. These three products had total U.S. brand sales of approximately $900 million for the twelve months ended June 30, 2000. Generic Product Sales And Marketing 4 5 We market our generic products to customers in the United States and Puerto Rico through an integrated sales and marketing force that includes a five person national sales force. The activities of the sales force are supplemented by two customer service representatives who inform our customers of new products, process orders and advise on order status and current pricing. All marketing activities are developed, implemented and coordinated by a product marketing group consisting of four employees. Our generic product customer base includes drug store chains, food chains, mass merchandisers, wholesalers, distributors, managed care organizations, mail order accounts, government/military and repackagers. Our products are primarily sold under the Barr label. We sell our generic products primarily to approximately 140 direct purchasing customers and approximately 105 indirect customers that purchase our products from wholesalers. In fiscal 2000, 1999 and 1998, McKesson Drug Company, the nation's largest pharmaceutical wholesaler, accounted for approximately 16%, 14% and 12%, respectively, of product sales. No other customer accounted for greater than 10% of product sales in any of the last three fiscal years. During the past three years the number of companies we sell to has declined due to industry consolidation. In addition, a number of customers have instituted buying programs that limit the number of generic suppliers they buy from. Having fewer customers and changes in customer buying patterns have increased competition among generic drug marketers. Adding to these market pressures, managed care organizations have in some cases limited the number of authorized vendors. In addition, mail-order prescription services, which typically purchase product from a limited number of suppliers, have continued to grow. While we believe that we have excellent relationships with our key customers, a continuation or expansion of the changes described above could negatively impact our business. PROPRIETARY PHARMACEUTICALS Our proprietary product development activities are not focused on discovering new molecules. We pursue candidates in three primary categories: - existing chemical compounds where the development of new forms (liquid vs. tablets or different dosages) offer therapeutic or marketing advantages; - new chemical entities in selected therapeutic categories, including some that are marketed in other countries but not currently sold in the United States; and - patent protected proprietary products in late stages of development. Pursuing products in these categories allows us to focus on products that should take less time and cost to gain approval than if we pursued new molecules. Our strategy focuses on products that we expect will have some period of market exclusivity and generate higher gross margins and maintain profitability longer than most generic products. In addition, we seek to license or acquire patented products. Currently Marketed Product ViaSpan(R). In August 2000, we began to market ViaSpan. ViaSpan is a solution used for hypothermic flushing and storage of organs including kidney, liver and pancreas at the time of their removal from the donor in 5 6 preparation for storage, transportation and eventual transplantation into a recipient. We acquired the marketing rights to ViaSpan in the United States and Canada from DuPont Pharmaceuticals Company through December 2007 as part of a co-development and marketing alliance. Under that agreement, we purchase finished product, sell it under a Barr label, and pay a royalty to DuPont. We now exclusively market the product in both the United States and Canada. Since ViaSpan is sold to a relatively small number of customers, the costs and risks assumed by us to market ViaSpan are not substantially different from the costs and risks assumed by us to market any of our other products. Total sales of ViaSpan in the United States and Canada for the twelve months ended June 30, 2000 were approximately $14 million. ViaSpan is patent protected through December 2007. Proprietary Products under Development We have a number of other proprietary pharmaceutical products under development including the six listed in the following chart. These six products are expected to compete in therapeutic categories, such as oncology and oral contraception, which have total U.S. annual sales of over $2.5 billion. PROPRIETARY PIPELINE
PRODUCT CATEGORY DOSAGES ------- -------- ------- BRL1 Oncology 2 2 BRL2 Oncology 1 1 BRL3 Oncology 1 CyPat(TM) Oncology 1 SEASONALE(TM) Oral Contraceptive 2 Japanese Anti-Viral 1 Encephalitis Vaccine
Selected Proprietary Products CyPat(TM). Cyproterone Acetate, which we intend to market in the United States under the name CyPat, is a steroid that blocks the action of testosterone. Cyproterone Acetate is not currently approved for marketing in the United States. Internationally, Cyproterone Acetate is mainly used in the management of prostate cancer, both as a single agent and in combination with other products. In addition, it is used as a component of oral contraceptives and in the treatment of acne, seborrhea, hirsutism in women, precocious puberty in children, and hypersexuality/deviant behavior in men. Currently, Cyproterone Acetate is approved for use in over 80 countries throughout Europe, Asia, South America, Australia, Japan and Canada. 6 7 In July 1999, we submitted an Investigational New Drug, or IND, application with the FDA for CyPat for the treatment of vasomotor symptoms associated with prostate cancer therapies and its effects on the patients' quality of life. We are developing CyPat to relieve the distressing hot flashes that typically accompany surgical or chemical castration that is often used in the treatment of prostate cancer. Of the more than 2.4 million patients in the United States who have been diagnosed with prostate cancer, CyPat may prove suitable for treating approximately 100,000 patients. Among the most common symptoms associated with prostate cancer treatments such as surgical or chemical castration are hot flashes and night sweats. Approximately 3 out of 4 patients experience hot flashes and night sweats. Patients report that hot flashes begin 1 to 12 months after treatment and can last for up to 3 years or, in some cases, the rest of their lives. Patients describe hot flashes as a sensation of warmth that spreads from the face, chest and back and then to the rest of the body. Sweating, a higher pulse rate, and feelings of anxiety, irritability, and queasiness usually go together with hot flashes and night sweats. Hot flashes and night sweats affect the patients' psychological equilibrium and adversely affect their quality of life. We have initiated a Phase III, randomized, multicenter, placebo-controlled, double blind clinical trial to study the efficacy and safety of CyPat for the treatment of hot flashes following surgical or chemical castration in prostate cancer patients. The clinical studies are expected to include several hundred patients at approximately 50 sites across the country. We have enrolled approximately 150 patients to date. We are working to complete enrollment of our Phase III clinical trial by December 2001. Pending FDA approval, CyPat could reach consumers as early as the second half of calendar 2003. SEASONALE(TM). SEASONALE is a patent protected oral contraceptive regimen which we are developing through an agreement with the Medical College of Hampton Roads, Eastern Virginia Medical School. Under the proposed SEASONALE regimen, women would take the product for up to 84 consecutive days, and then would have a seven-day pill-free interval. By contrast, the majority of oral contraceptive products currently available in the United States are based on a regimen of 21 treatment days and then seven pill-free days. The proposed SEASONALE regimen is expected to result in only 4 menstrual cycles per year, or one per "season". This type of oral contraceptive regimen is preferable to many women whose lifestyle dictates the convenience of fewer menstrual cycles per year. In addition, SEASONALE is expected to reduce anemias and iron deficiencies that are exacerbated by menstrual blood loss. Like all oral contraceptives, we will seek SEASONALE approval for the indication of prevention of pregnancy. Oral contraceptives are the most common method of reversible birth control, used by up to 65% of women in the United States at some time during their reproductive years. The oral contraceptives have a very long history with widespread use attributed to many factors including efficacy in preventing pregnancy, safety and simplicity in initiation and discontinuation, medical benefits and relatively low incidence of side effects. One Phase III clinical study is underway. The Phase III study is a prospective, parallel, multicenter, open-label, randomized study evaluating the use of two dose levels of SEASONALE in a 91-day cycle administered for approximately 12 months and two dose levels of conventional oral contraceptive therapy administered for approximately 12 months. We expect to complete our Phase III clinical trial by December 2001. Pending FDA approval, SEASONALE could reach consumers as early as the second half of calendar 2003. The SEASONALE regimen is patent protected through 2017. Barr/DuPont Pharmaceuticals Co-Development and Marketing Alliance 7 8 In March 2000, we announced four agreements with the DuPont Pharmaceuticals Company that resolved a legal dispute between our two companies. The first agreement with DuPont provides up to $45 million to support the ongoing development of three proprietary products: the CyPat prostate cancer therapy; the SEASONALE oral contraceptive; and a third product which we have identified but not yet disclosed. We will be responsible for marketing these three products, although DuPont may elect to play a role in product co- promotion, and DuPont may receive royalties based on product sales. Under terms of the second agreement, DuPont assumes sales and marketing responsibility for a proprietary product that we developed internally. This product is expected to be launched during the second half of fiscal 2001. The third agreement transferred the responsibility of marketing DuPont's ViaSpan organ transplant preservation agent to us. Under the fourth agreement, we granted DuPont warrants to purchase 1.5 million shares of our common stock: 750,000 shares at $31.33 per share and 750,000 shares at $38.00 per share. The warrants expire in March 2004 and are exercisable at any time by DuPont. Proprietary Product Sales And Marketing We are evaluating various strategies for selling and marketing our proprietary pharmaceuticals. These strategies include any combination of the following: - licensing our proprietary products to other pharmaceutical companies with sales organizations sufficient to support our products, - entering into co-promotion or contract sales arrangements with respect to the products, - establishing our own sales organization and related infrastructure, and/or - acquiring a company with an existing sales force. If we license our products or enter into co-promotional or contract sales arrangements, we would not incur the significant upfront expenses associated with building a sales organization. However, without our own sales force, we would retain a lower portion of the profits from the sales of the products. PATENT CHALLENGES We actively challenge the patents protecting branded pharmaceutical products where we believe such patents are invalid, unenforceable or not infringed by our products. Our activities in this area, including sourcing raw materials and developing equivalent formulations, are designed to obtain FDA approval for our product. Our legal activities, performed by outside counsel, are designed to eliminate the barrier to market entry created by the patent. Our patent challenges may also result in settlements. We have settled two cases and will continue to evaluate settlements that we believe are reasonable, lawful, and in our shareholders' best interests. Under the Hatch-Waxman Act, the developer of a bioequivalent drug which is the first to have its ANDA accepted for filing by the FDA, and whose filing includes a certification that the patent is invalid, unenforceable or not infringed, a so-called "paragraph IV certification", may be eligible to receive a 180-day period of generic market exclusivity. This period of market exclusivity may provide the patent challenger with the opportunity to earn a return on the risks taken and its legal and development costs and to build its market share. Because of the potential value of the 180-day market exclusivity as the only generic in the market for that period, our usual strategy or goal is to be the first company to file a paragraph IV certification. We have initiated 8 9 seven patent challenges: one has been resolved through settlement, two have resulted in favorable court decisions pending appeals, three are awaiting court decisions and, in one case, the patent was upheld. Patent challenges are complex, costly and can take three to six years to complete. They generally require an investment of $8-$10 million per challenge. As a result, we have in the past and may elect in the future to have partners on select patent challenges. These arrangements typically provide for a sharing of the costs and risks, and generally provide for a sharing of the benefits of a successful outcome. PATENT CHALLENGE HISTORY
Product (Brand Name) Outcome Status - -------------------- ------- ------ Tamoxifen (Nolvadex) - Resolved - Tentatively approved ANDA 10 mg tablet - Non-exclusive distribution agreement until August 2002 - Continue supply agreement or launch manufactured version upon patent expiry Ciprofloxacin - Resolved - Tentatively approved ANDA - Contingent non-exclusive supply agreement until December 2003 - Right to distribute with partner six months before patent expiry Fluoxetine (Prozac) - 2003 Patent - Tentatively approved ANDA 20 mg capsule Invalidated - Anticipated launch with partner CY 2001 - Appeal Pending Norethindrone/ethinyl estradiol - Pending - ANDA filed (Ortho-Novum 7/7/7) Norgestimate/ethinyl estradiol - Pending - ANDA filed (Ortho Tri-Cyclen) Flecainide Acetate (Tambocor) - Pending - ANDA filed Zidovudine (Retrovir) - Unsuccessful - Tentatively approved ANDA - Anticipated launch upon patent expiry in 2005
Tamoxifen. In 1993, as a result of a settlement of a patent challenge against AstraZeneca, we entered into a non-exclusive supply and distribution agreement. Under the terms of the Tamoxifen agreement, we purchase Tamoxifen directly from AstraZeneca. Although we are the only non-exclusive distributor, the Tamoxifen agreement provides that should an additional distributor or distributors be selected by AstraZeneca, we will be granted terms no less favorable than those granted to any subsequent distributor. For the reasons discussed under "Patent Challenge Process" below, unless recent court cases are reversed on appeal, we may not be eligible for generic exclusivity. Ciprofloxacin. Ciprofloxacin is the generic equivalent of Bayer's Cipro and is used to treat lower respiratory, skin, bone and joint, and urinary tract infections. Total U.S. brand sales were approximately $920 million in the twelve months ended June 30, 2000. In October 1991, we filed an ANDA for Ciprofloxacin which included a paragraph IV certification claiming that the patent covering Ciprofloxacin, the so-called 444 patent, was invalid. We believe we were the first company to file a paragraph IV ANDA for Ciprofloxacin. Shortly thereafter, Bayer sued us for patent infringement. In January 1995, we received a tentative approval from the FDA on our paragraph IV ANDA for Ciprofloxacin tablets. Such tentative approval indicates that the product has met all regulatory specifications to be granted final approval by the FDA. We expect that we will not be granted final FDA approval to market our generic Ciprofloxacin product until after the expiration of the 444 patent and any 9 10 applicable marketing exclusivity awarded to Bayer or others. For example, we anticipate Bayer will seek pediatric exclusivity which, if granted, could delay generic competition for six months beyond the expiration of the patent. For the reasons discussed under "Patent Challenge Process" below, unless recent court cases are reversed on appeal, we may not be eligible for generic exclusivity. In January 1997, Bayer AG, Bayer Corporation ("Bayer") and we agreed to settle the then pending litigation regarding Bayer's patent protecting ciprofloxacin hydrochloride. Under the settlement agreement, we withdrew our patent challenge by amending our ANDA from a paragraph IV certification (claiming invalidity) to a paragraph III certification (seeking approval upon patent expiry) and acknowledged the validity and enforceability of the Ciprofloxacin patent. In addition, we entered into a non-exclusive supply agreement which ends at the date of patent expiry, currently December 2003. The settlement agreement with Bayer does not prevent us from withdrawing our ANDA. However, it is in our commercial interest to maintain our tentatively approved ANDA so that after Bayer's patents do expire or are found invalid, we can receive final FDA approval and begin to manufacture and sell a generic Ciprofloxacin product manufactured under our ANDA. Under the supply agreement, Bayer has the option to either make payments to Barr or allow Barr and Rugby Laboratories, now owned by Watson Pharmaceuticals, Inc., to purchase Ciprofloxacin from Bayer at a predetermined discount. If Bayer chooses not to provide the product to Barr, we expect to receive cash and recognize related proceeds, ranging from approximately $28-$31 million per year through the fiscal year ending June 30, 2003. If Bayer elects to provide us product for resale, the amount we could earn would be dependent upon numerous market factors. The supply agreement also provides that, six months prior to patent expiry, if we are not already distributing the product, we and Rugby Laboratories will have the right to begin distributing Ciprofloxacin product manufactured by Bayer. The Bayer license is non-exclusive and Bayer may, at its option, provide other non-exclusive licenses to others after Barr and Rugby Laboratories have operated under the license for six months. If Bayer does not elect to license any other parties and if no other party is successful in its challenge of the patent, we expect that our product will be the only other Ciprofloxacin product in the market during the six months prior to patent expiry. Under FDA regulations in effect at the time of our challenge, it was our belief that had we proceeded with our patent challenge case against Bayer, had the courts entered a final judgment invalidating the patent, and had we received final approval from the FDA, we would have been entitled to receive generic market exclusivity allowing us to sell a Ciprofloxacin product manufactured under our ANDA for six months before another generic competitor would have been approved by the FDA. Fluoxetine. Fluoxetine is the generic equivalent of Eli Lilly Company's antidepressant, Prozac, which had annual sales of approximately $2.5 billion for the twelve months ended June 30, 2000. The 20 mg capsule represents approximately $2.0 billion of this market. We filed our ANDA for the 20 mg capsule of Fluoxetine in February 1996, and were sued for patent infringement by Lilly, initiating the patent challenge process. On August 9, 2000, the U.S. Court of Appeals for the Federal Circuit, located in Washington, D.C., ruled in favor of our challenge to a Lilly patent protecting Prozac. The Court unanimously upheld our "double-patenting" claims, finding that the invention claimed in Lilly's patent already had been the subject of a previous patent, and thus could not be patent-protected for a second time. In so ruling, the Court struck down a patent that would have protected Prozac from generic competition until after December 2003. Lilly is expected to seek a rehearing in the Court of Appeals and a review by the Supreme Court. If the August 9, 2000 ruling is not reversed, we and our partners expect to introduce a more affordable generic Prozac 20 mg capsule product in February 2001 10 11 (or August 2001, if the FDA grants an additional six months of exclusivity for pediatric use). As the first to file an application for the Prozac 20 mg capsule challenging Lilly's listed patents, we believe we are entitled to the 180-day generic exclusivity granted under the Hatch-Waxman Act and intend, if necessary, to vigorously defend our rights. However, we can give no assurances that our position on the implementation of the FDA's exclusivity rules will prevail. If we lose some or all of the 180 day exclusivity we expect, the value of the favorable ruling could be substantially diminished. We have two partners in our challenge of Lilly's patents for Prozac, Apotex, Inc., which is beneficially owned by Dr. Sherman, and Geneva Pharmaceuticals. Accordingly, we will share the benefits of the launch of Fluoxetine with our partners. Norethindrone/ethinyl estradiol. In October 1998, we filed an ANDA seeking approval from the FDA to market the three different tablet combinations of norethindrone and ethinyl estradiol, the generic equivalent of Ortho-McNeil Pharmaceutical Inc.'s Ortho-Novum 7/7/7(R) oral contraceptive regimen. We notified Ortho pursuant to the provisions of the Hatch-Waxman Act and on January 15, 1999, Ortho filed a patent infringement action in the United States District Court for the District of New Jersey -- Trenton Division, seeking to prevent us from marketing the three different tablet combinations of norethindrone and ethinyl estradiol until U.S. patents expire in 2003. The case is in the discovery stage. For the twelve months ended June 30, 2000, Ortho-Novum 7/7/7 had total U.S. brand sales of approximately $151 million. Norgestimate/ethinyl estradiol. In February 2000, we filed an ANDA seeking approval from the FDA to market three different tablet combinations of norgestimate and ethinyl estradiol, the generic equivalent of Ortho's Tri-Cyclen(R). We notified Ortho pursuant to the provisions of the Hatch-Waxman Act and on June 9, 2000, Ortho filed a patent infringement action in the United States District Court for the District of New Jersey -- Trenton Division, seeking to prevent us from marketing the three different tablet combinations of norgestimate and ethinyl estradiol until U.S. patents expire in 2003. The case is in the discovery stage. For the twelve months ended June 30, 2001, Ortho's Tri-Cyclen had total U.S. brand sales of approximately $409 million. Flecainide Acetate. In May 2000, we filed an ANDA with the FDA for Flecainide Acetate tablets, which is sold under its brand name, Tambocor(R). Following the required notice, 3M Pharmaceuticals, the innovator of the brand, sued us in the U.S. District Court in Minnesota to prevent us from proceeding with the commercialization of the product. This case involves an alleged infringement by us of raw material patents and not a challenge to the validity of patents protecting the product. For the twelve months ended June 30, 2000, Tambocor had total U.S. brand sales of approximately $60 million. Zidovudine. Zidovudine is the generic equivalent of Glaxo Wellcome's Retrovir(R), also known as AZT, a treatment for AIDS. The patent challenge that followed our filing was resolved unsuccessfully during 1996. However, we received tentative approval of our ANDA for this product in February 1995, and anticipate launching our generic equivalent when the patents expire in 2005. For the twelve months ended June 30, 2000, AZT had total U.S. brand sales of approximately $40 million. Three of the generic product ANDAs we expect to file during the fiscal year ended June 30, 2001, are patent challenges. These three products represent total U.S. brand sales of approximately $900 million. In addition, we are actively evaluating several potential additional challenges both on our own and as part of collaborations with other companies. Patent Challenge Process 11 12 The Hatch-Waxman Act provides incentives for generic pharmaceutical companies to challenge suspect patents on branded pharmaceutical products. The legislation recognizes that there is a potential for the improper issuance of patents by the United States Patent and Trade Office, or PTO, resulting from a variety of technical, legal or scientific factors. The Hatch-Waxman legislation places significant burdens on the challenger to ensure that such suits are not frivolous, but also offers the opportunity for significant financial reward if successful. All of the steps involved in the filing of an ANDA with the FDA, including research and development, are identical with those steps taken in development of any generic drug. At the time of filing with the FDA for approval of its version of the branded product, the generic company files with its ANDA a certification asserting that the patent is invalid, unenforceable and/or not infringed, a so-called "paragraph IV certification". After receiving notice from the FDA that its application is acceptable for filing, the generic company sends the patent holder a notice explaining why it believes that the patents in question are invalid, unenforceable or not infringed. Upon receipt of the notice from the generic company, the patent holder has 45 days in which to bring suit in federal district court against the generic company to establish the validity, enforceability and/or infringement of the challenged patent. The discovery, trial and appeals process can take several years. The Hatch-Waxman Act provides for an automatic stay on the time that the FDA may grant final approval, which would otherwise give the ANDA holder/patent challenger the option to market its generic product. This period is set at 30 months, or such shorter or longer period as may be ordered by the court. The 30 months may or may not and often do not coincide with the timing of a trial or the expiration of a patent. Under the Hatch-Waxman Act, the developer of a bioequivalent drug which is the first to have its ANDA accepted for filing by the FDA, and whose filing includes a paragraph IV certification, may be eligible to receive a 180-day period of market exclusivity. This period of market exclusivity may provide the patent challenger with the opportunity to earn a return on the risks taken and its legal and development costs and to build its market share. The FDA adopted regulations implementing the 180-day generic marketing exclusivity provision of the Hatch-Waxman Act. However, over the years, courts have found various provisions of the regulations to be in conflict with the statute. For example, in Mova Pharmaceutical Corp. v. Shalala, 140 F.3d 1060 (D.C. Cir. 1998), the court of appeals held that the Hatch-Waxman Act required generic exclusivity to be awarded to the first generic company to file a new drug application containing a paragraph IV certification, regardless of whether that company had prevailed in a court challenge to the relevant patent, in contrast to FDA regulations requiring the first patent challenger to successfully defend its challenge to the patent. And, in Mylan Pharmaceuticals v. Shalala, 81 F.Supp.2d 30 (D.D.C. 2000), the district court found that the statute requires the 180-day generic period to commence on the date of a district court decision finding the challenged patent invalid, even if the innovator company appealed the court's decision. The decision was in contrast to the FDA's rule that the exclusivity period would not commence until the appellate court affirmed the district court's decision, but also found that the interests of applicants who had relied in good faith on the FDA's regulations should be protected. These successful court challenges required the FDA to ignore portions of its regulations in implementing the statute. Ultimately, the FDA decided to propose a new regulatory scheme for implementing the 180-day market exclusivity provision of the Hatch-Waxman Act in August 1999. The FDA further modified its proposed new regulatory scheme in a March 2000 industry guidance. In general, the proposed rule and guidance would make a generic manufacturer's ability to obtain and benefit 12 13 from the Hatch-Waxman market exclusivity provisions more uncertain. Under the guidance, the 180-day period could begin to run when the federal district court enters a ruling finding the challenged patent to be invalid or not infringed. This would require the patent challenger to either begin marketing its generic product before the federal appellate process is complete or risk losing some or all of its marketing exclusivity waiting for the appellate process to conclude. In addition, the proposed rule could put the patent challenger in the position of losing some or all of its market exclusivity, if the 180-day period is deemed to have started before the challenger's ANDA has been approved by the FDA or before the challenger is willing to enter the market with its generic product. We have submitted comments on both the August 1999 proposed rule and the March 2000 guidance. At least 20 other entities, including other generic pharmaceutical companies, innovator companies and pharmaceutical industry organizations, also submitted comments on these proposals. No lawsuits have been filed against the FDA as a result of its proposed rule. However, in light of the numerous lawsuits filed against the FDA in the past on market exclusivity issues, such lawsuits may occur if the agency promulgates a final rule similar to its proposal. As a result, there is uncertainty as to what rule the FDA will eventually adopt, whether we or other companies will challenge part or all of the final rule in court and, if so, how the courts will rule in such lawsuits. In addition, given the scope of the proposed rule, the number of comments and the complexity of the issues contained therein, there is also uncertainty as to when, if ever, the FDA will adopt final regulations. A recent court decision has also complicated the generic exclusivity issue. A federal district court held that we would not be entitled to generic exclusivity on Tamoxifen, because our challenge to the tamoxifen patent was settled after a district court had found the patent to be unenforceable and because we changed our paragraph IV certification to a paragraph III certification as part of the settlement of the patent challenge case. We have appealed this decision. If upheld on appeal, this decision could prevent us from obtaining generic exclusivity on Tamoxifen and Ciprofloxacin, but would not prevent us from manufacturing and marketing our generic tamoxifen or ciprofloxacin products. In 1997, Congress enacted a new provision designed to reward branded pharmaceutical companies for conducting research in the pediatric population. If a branded company has a patent protecting the product that is either unchallenged or whose validity is upheld by a court, it is eligible to apply for an additional six months of market exclusivity following the patent's expiration. This is known as "pediatric exclusivity." Thus, where pediatric exclusivity is requested by a branded company and granted by FDA, the commencement of generic competition could possibly be delayed by six months. The FDA has not issued regulations, or any formal guidance, as to how it believes pediatric exclusivity and the 180-day marketing exclusivity period interact with one another. It is possible that the FDA could interpret these provisions in a way that prohibits the patent challenger from fully utilizing the 180-day period, which would diminish its value. The facts and circumstances of each patent challenge differ significantly. It is, therefore, impossible for us to provide a general conclusion as to the ultimate effect the Proposed Rule and the Guidance and effect of pediatric exclusivity would have on the exclusivity status of our patent cases. Nevertheless, if adopted, the Proposed Rule and Guidance would likely diminish the value of the 180-day marketing exclusivity period because, as discussed above, they increase the likelihood that the first patent challenger would lose some or all of the benefit of the marketing exclusivity period. How the FDA ultimately decides that pediatric exclusivity and the 180-day marketing exclusivity period interact 13 14 could also affect the benefit a patent challenger would receive. The August 9, 2000 court ruling in favor of our challenge to a patent protecting Eli Lilly's Prozac, discussed elsewhere in the Prospectus, is one example. If the FDA were to decide that Eli Lilly's pediatric exclusivity period overlaps with and diminishes our generic exclusivity period, we could lose some or all of the 180 days of generic market exclusivity, which we expect would diminish the value of the favorable Prozac ruling. Each patent challenge typically takes three to six years, and can cost approximately $8 to 10 million in legal and product development costs. As a result, we have in the past and may elect in the future to have partners on selected patent challenges. These agreements typically provide for a sharing of the costs and risks, and generally provide for a sharing of the benefits of a successful outcome. The process for initiating a patent challenge begins with the identification of a drug candidate and evaluation by qualified legal counsel of the patents protecting that product. We have reviewed a number of challenges and have pursued only those that we believe have merit. Generally, once we receive a favorable opinion from our patent counsel, we begin the formulation and development process. Patent challenge product candidates typically must have several years of remaining patent protection to ensure that the legal process can be completed prior to patent expiry. The FTC has investigated several cases in which manufacturers of pharmaceutical drug products and potential generic competitors have allegedly entered into anti-competitive agreements to delay generic entry, and has taken enforcement action against some alleged anticompetitive agreements. Please see Item 3, Legal Proceedings. We intend to cooperate fully with the FTC's inquiry. GOVERNMENT REGULATION We are subject to extensive regulation by the federal government, principally by the FDA, and, to a lesser extent, by the DEA and state governments. The Federal Food, Drug and Cosmetic Act, the Controlled Substances Act and other federal statutes and regulations govern or influence the testing, manufacturing, safety, labeling, storage, record keeping, approval, pricing, advertising and promotion of our products. Non-compliance with applicable requirements can result in fines, recalls and seizure of products. The FDA has the authority to revoke drug approvals previously granted. ANDA Process FDA approval is required before a generic equivalent or a new dosage form of an existing drug can be marketed. We usually receive approval for such products by submitting an ANDA to the FDA. When processing an ANDA, the FDA waives the requirement of conducting complete clinical studies, although it normally requires bioavailability and/or bioequivalence studies. "Bioavailability" indicates the rate and extent of absorption and levels of concentration of a drug product in the blood stream needed to produce a therapeutic effect. "Bioequivalence" compares the bioavailability of one drug product with another, and when established, indicates that the rate of absorption and levels of concentration of a generic drug in the body are the same as the previously approved drug. An ANDA may be submitted for a drug on the basis that it is the equivalent to a previously approved drug or, in the case of a new dosage form, is suitable for use for the indications specified. Before approving a product, the FDA also requires that our procedures and operations conform to cGMP regulations, as defined in the U.S. Code of Federal Regulations. We must follow the cGMP regulations at all times during the manufacture of our products. To help insure compliance with the cGMP regulations, we must continue to spend time, money and effort in the areas of production and quality control to ensure full technical 14 15 compliance. If the FDA believes a company is not in compliance with cGMP, sanctions may be imposed upon that company including - withholding from the company new drug approvals as well as approvals for supplemental changes to existing applications; - preventing the company from receiving the necessary export licenses to export its products; and - classifying the company as an "unacceptable supplier" and thereby disqualifying the company from selling products to federal agencies. We believe we are currently in compliance with cGMP. The timing of final FDA approval of ANDA applications depends on a variety of factors, including whether the applicant challenges any listed patents for the drug and whether the brand-name manufacturer is entitled to one or more statutory exclusivity periods, during which the FDA is prohibited from accepting applications for, or approving, generic products. In certain circumstances, a regulatory exclusivity period can extend beyond the life of a patent, and thus block ANDAs from being approved on the patent expiration date. For example, the FDA may now extend the exclusivity of a product by six months past the date of patent expiry if the manufacturer undertakes studies on the effect of their product in children, a so-called pediatric extension. In May of 1992, the Generic Act was enacted. The Generic Act, a result of the legislative hearings and investigations into the generic drug approval process, allows the FDA to impose debarment and other penalties on individuals and companies that commit certain illegal acts relating to the generic drug approval process. In some situations, the Generic Act requires the FDA to not accept or review ANDAs for a period of time from a company or an individual that has committed certain violations. It also provides for temporary denial of approval of applications during the investigation of certain violations that could lead to debarment and also, in more limited circumstances, provides for the suspension of the marketing of approved drugs by the affected company. Lastly, the Generic Act allows for civil penalties and withdrawal of previously approved applications. Neither we nor any of our employees have ever been subject to debarment. NDA Process FDA approval is required before any new drug can be marketed. An NDA is a filing submitted to the FDA to obtain approval of a drug not eligible for an ANDA and must contain complete pre-clinical and clinical safety and efficacy data or a right of reference to such data. Before dosing a new drug in healthy human subjects or patients may begin, stringent government requirements for preclinical data must be satisfied. The pre-clinical data, typically obtained from studies in animal species, as well as from laboratory studies, are submitted in an Investigational New Drug, or IND, application, or its equivalent in countries outside the United States, where clinical trials are to be conducted. The preclinical data must provide an adequate basis for evaluating both the safety and the scientific rationale for the initiation of clinical trials. Clinical trials are typically conducted in three sequential phases, although the phases may overlap. - In Phase I, which frequently begins with the initial introduction of the compound into healthy human 15 16 subjects prior to introduction into patients, the product is tested for safety, adverse effects, dosage, tolerance absorption, metabolism, excretion and other elements of clinical pharmacology. - Phase II typically involves studies in a small sample of the intended patient population to assess the efficacy of the compound for a specific indication, to determine dose tolerance and the optimal dose range as well as to gather additional information relating to safety and potential adverse effects. - Phase III trials are undertaken to further evaluate clinical safety and efficacy in an expanded patient population at typically dispersed study sites, in order to determine the overall risk-benefit ratio of the compound and to provide an adequate basis for product labeling. Each trial is conducted in accordance with certain standards under protocols that detail the objectives of the study, the parameters to be used to monitor safety and efficacy criteria to be evaluated. Each protocol must be submitted to the FDA as part of the IND. In some cases, the FDA allows a company to rely on data developed in foreign countries, or previously published data, which eliminates the need to independently repeat some or all of the studies. Data from preclinical testing and clinical trials are submitted to the FDA as an NDA for marketing approval and to other health authorities as a marketing authorization application. The process of completing clinical trials for a new drug may take several years and require the expenditure of substantial resources. Preparing an NDA or marketing authorization application involves considerable data collection, verification, analysis and expense, and there can be no assurance that approval from the FDA or any other health authority will be granted on a timely basis, if at all. The approval process is affected by a number of factors, primarily the risks and benefits demonstrated in clinical trials as well as the severity of the disease and the availability of alternative treatments. The FDA or other health authorities may deny an NDA or marketing authorization application if the regulatory criteria are not satisfied, or such authorities may require additional testing or information. Even after initial FDA or other health authority approval has been obtained, further studies, including Phase IV post-marketing studies, may be required to provide additional data on safety. The post marketing studies could be used to gain approval for the use of a product as a treatment for clinical indications other than those for which the product was initially tested. Also, the FDA or other regulatory authorities require post-marketing reporting to monitor the adverse effects of the drug. Results of post-marketing programs may limit or expand the further marketing of the products. Further, if there are any modifications to the drug, including changes in indication, manufacturing process or labeling or a change in the manufacturing facility, an application seeking approval of such changes must be submitted to the FDA or other regulatory authority. Additionally, the FDA regulates post-approval promotional labeling and advertising activities to assure that such activities are being conducted in conformity with statutory and regulatory requirements. Failure to adhere to such requirements can result in regulatory actions that could have a material adverse effect on our business, results of operations and financial condition. DEA Because we sell and develop products containing controlled substances, we must meet the requirements and regulations of the Controlled Substances Act which are administered by the DEA. These regulations include stringent requirements for manufacturing controls and security to prevent diversion of or unauthorized access to the drugs in each stage of the production and distribution process. The DEA regulates allocation to us of raw 16 17 materials used in the production of controlled substances based on historical sales data. We believe we are currently in compliance with all applicable DEA requirements. Medicaid/Medicare In November 1990, a law regarding reimbursement for prescribed Medicaid drugs was passed as part of the Congressional Omnibus Budget Reconciliation Act of 1990. The law requires drug manufacturers to enter into a rebate contract with the Federal Government. All generic pharmaceutical manufacturers, whose products are covered by the Medicaid program, are required to rebate to each state a percentage (currently 11% in the case of products manufactured by us and 15% for Tamoxifen sold by us) of their average net sales price for the products in question. We accrue for future estimated rebates in our consolidated financial statements. Over the last year, the extension of prescription drug coverage to all Medicare recipients has gained support in Congress. The generic pharmaceutical industry trade associations are actively involved in discussions regarding the structure and scope of any proposed Medicare prescription drug benefit plans. We, as an active member in the Generic Pharmaceutical Association, or the GPhA, the leading trade association representing the generic pharmaceutical industry, support the development of an industry-wide position on Medicare. We believe that federal and/or state governments may continue to enact measures in the future aimed at reducing the costs of drugs to the public. We cannot predict the nature of such measures or their impact on our profitability. Other We are also governed by federal, state and local laws of general applicability, such as laws regulating intellectual property, including patents and trademarks; working conditions; equal employment opportunity; and environmental protection. EMPLOYEES Our success depends on our ability to hire and retain highly qualified scientific and management personnel. We face intense competition for personnel from other companies, academic institutions, government entities and other organizations. As of June 30, 2000, we had approximately 606 full-time employees including 129 in research and development and 386 in production and quality assurance/control. Approximately 85 are represented by a union that has a collective bargaining agreement with us. Our current collective bargaining agreement with our employees, who are represented by Local 2-149 of the Paper, Allied, Chemical and Energy (PACE) Union International, expires on April 1, 2001. We believe that our relations with our employees are good and we have no history of work stoppages. PRODUCT DEVELOPMENT As discussed above, the Company's product development efforts are focused in two principal product areas: unique generic products and a portfolio of proprietary products. For the fiscal years ended June 30, 2000, 1999 and 1998, total research and development expenditures were approximately $40 million, $23 million and $19 million, respectively. The 79% increase in R&D investment during fiscal 2000 funded an enhanced commitment to both generic and proprietary product development activities. R&D expenditures for generic development activities include personnel costs, costs paid to third party 17 18 contract research organizations for conducting bioequivalence studies and costs for raw materials used in developing the products. Proprietary development costs are paid primarily to third party clinical research organizations who are responsible for conducting the clinical trials required to support a product application with FDA. The Company anticipates that research and development expenditures will increase 20-25% during fiscal 2001, due to continued investment in new generic drug development, continued progress on proprietary product development, and clinical studies related to two IND applications. COMPETITION The Company competes in varying degrees with numerous other manufacturers of pharmaceutical products, both branded and generic. These competitors include: - - the generic divisions and subsidiaries of brand pharmaceutical companies, including Apothecon Inc., a subsidiary of Bristol-Meyers Squibb, Geneva Pharmaceuticals, Inc., a subsidiary of Novartis AG, and the Lederle division of American Home Products; - - large independent generic manufacturers/distributors that seek to provide "one stop shopping" by offering a full line of products, including Mylan Laboratories and Teva Pharmaceuticals; - - generic manufacturers that have targeted select therapeutic categories and market niches, including Watson Pharmaceuticals; and - - brand pharmaceutical companies whose patent protected therapies compete with both generic and proprietary products marketed or being developed by the Company, including AstraZeneca, DuPont Pharmaceuticals, Johnson & Johnson, Bristol-Meyers Squibb and Eli Lilly & Company. Many of the Company's competitors have greater financial and other resources, and are therefore able to devote more resources than the Company in such areas as marketing support and product development. In order to ensure its ability to compete effectively, the Company has: - focused its proprietary and generic product development in areas of historical strength or competitive advantage; - targeted generic products for development that offer significant barriers to entry for competitors, including: difficulty in sourcing raw materials; difficulty in formulation or establishing bioequivalence; manufacturing that requires unique facilities, processes or expertise; and - invested in plant and equipment to give it a competitive edge in manufacturing. These factors, when combined with the Company's investment in new product development and its focus on select therapeutic categories, provide the basis for its belief that it will continue to remain a leading independent specialty pharmaceutical company. RAW MATERIALS The active chemical raw materials, essential to the Company's business, are bulk pharmaceutical chemicals, which are purchased from numerous manufacturers in the U.S. and throughout the world. All purchases are made in United States dollars, and while currency fluctuations do not have an immediate impact on prices the Company pays, such fluctuations may, over time, have an effect on prices to the Company. Certain products that have historically accounted for a significant portion of Barr's revenues are currently available only from sole or limited suppliers. Arrangements with foreign suppliers are subject to certain additional risks, including the availability of governmental clearances, export duties, political instability, currency fluctuations and 18 19 restrictions on the transfer of funds. Any inability to obtain raw materials on a timely basis, or any significant price increases that cannot be passed on to customers, could have a material adverse effect on the Company. Because prior FDA approval of raw material suppliers is required, if raw materials from an approved supplier were to become unavailable, the required FDA approval of a new supplier could cause a significant delay in the manufacture of the drug product affected. To date, the Company has not experienced any significant delays from lack of raw material availability. However, there can be no assurance that significant delays will not occur in the future. GOVERNMENT RELATIONS ACTIVITIES As a record number of branded pharmaceutical products are scheduled to go off patent over the next several years, the branded pharmaceutical industry has increased efforts to utilize state and federal legislative and regulatory arenas to delay generic competition, or limit the severe market erosion they can experience once monopoly protection is lost for the branded product. Efforts to achieve these goals include, but are not limited to, filing additional patents in the Orangebook in an attempt to increase the period of patent protection for products, directly petitioning the FDA to request amendments to FDA standards through the Citizen Petition process, seeking changes in United States Pharmacopeia standards and attempting to extend patents by attaching amendments to important federal legislation. Federal legislation designed to extend the patents an additional three years on several drugs, due to perceived delays in the FDA approval process, has been introduced. State by state initiatives to enact legislation opposing the substitution of equivalent generic drugs is an additional anti-generic defense strategy. Some companies have expressed interest over the last several years in reopening the Hatch-Waxman Act and renegotiating some of the compromises reached between the brand and generic pharmaceutical industries that resulted in the creation of the modern generic pharmaceutical industry. Reopening the act could disturb the delicate balance achieved in 1984 but may also offer the generic industry the opportunity to expand the Hatch-Waxman Act to include drug products not currently covered under the Act. Because a balanced and fair legislative and regulatory arena is critical to the generic pharmaceutical industry, the Company has and will continue to put a major emphasis in terms of management time and financial resources on government affairs activities. During fiscal 2000, the Company opened an office and staffed a full-time government affairs department in Washington, D.C., that assumed responsibility for coordinating state and federal legislative activities and coordination with generic industry trade associations. ITEM 2. PROPERTIES Barr has facilities and operations in Pomona and Blauvelt, New York; Northvale, New Jersey; Forest, Virginia; and Washington, D.C. The following table presents the facilities owned or leased by the Company and indicates the location and type of each of these facilities. 19 20
SQUARE LOCATION FOOTAGE STATUS DESCRIPTION - ----------------- ----------- ---------- ---------------------------------- NEW JERSEY Northvale 27,500 Owned Manufacturing NEW YORK Blauvelt 48,000 Leased Corporate Administration Pomona 1 34,000 Owned R&D, Laboratories, Manufacturing Pomona 2 90,000 Owned Laboratories, Administrative Offices, Manufacturing, Warehouse VIRGINIA Forest 165,500 Owned Administrative Offices, Manufacturing, Warehouse, Packaging, Distribution WASHINGTON, D.C. 1,800 Leased Corporate Administration
Over the past three fiscal years, the Company has spent approximately $45 million in capital expenditures primarily to expand manufacturing capacity, extend research and development activities and strengthen certain competitive advantages. The Company believes that its current facilities are in good condition and are being used productively and are adequate to meet current operating requirements. ITEM 3. LEGAL PROCEEDINGS PATENT CHALLENGES In February 1996, Barr filed an ANDA seeking approval from the FDA to market the 20 mg capsule of fluoxetine hydrochloride ("Fluoxetine"), the generic equivalent of Eli Lilly Company's ("Lilly") Prozac. The Company notified Lilly pursuant to the provisions of the Hatch-Waxman Act, and on April 19, 1996, Lilly filed a patent infringement action in the United States District Court for the Southern District of Indiana - Indianapolis Division seeking to prevent Barr from marketing its Fluoxetine until certain U.S. patents expire in 2003. In rulings on pretrial motions on January 12, 1999, the U.S. District Court, Southern District of Indiana, dismissed several of the claims that the Company was to present at the trial. Prior to the trial beginning, Barr, two co-defendants and Lilly reached an agreement pursuant to which Barr and Lilly agreed to drop all the remaining claims in the litigation. In addition to dropping their remaining claims, Lilly made a one-time payment of $4 million to be shared between Barr and its co-defendants. 20 21 On August 9, 2000, the U. S. Court of Appeals for the Federal Circuit, located in Washington, D.C., ruled in favor of the Company's challenge to a Lilly patent protecting Prozac. The Court unanimously upheld the Company's "double-patenting" claim, finding that the invention claimed in Lilly's patent already had been the subject of a previous patent, and thus could not be patent-protected for a second time. In so ruling, the Court struck down a patent that would have protected Prozac from generic competition until after December 2003. Lilly is expected to seek a rehearing in the Appellate Court and a review by the Supreme Court. In October 1998, Barr filed an ANDA seeking approval from the FDA to market the three different tablet combinations of norethindrone and ethinyl estradiol, the generic equivalent of Ortho-McNeil Pharmaceutical Inc.'s ("Ortho") Ortho-Novum 7/7/7 oral contraceptive regimen. The Company notified Ortho pursuant to the provisions of the Hatch-Waxman Act and on January 15, 1999, Ortho filed a patent infringement action in the United States District Court for the District of New Jersey - Trenton Division, seeking to prevent Barr from marketing the three different tablet combinations of norethindrone and ethinyl estradiol until certain U.S. patents expire in 2003. The case is in the discovery stage. In February 2000, Barr filed an ANDA seeking approval from the FDA to market three different tablet combinations of norgestimate and ethinyl estradiol, the generic equivalent of Ortho's Tri-Cyclen(R). The Company notified Ortho pursuant to the provisions of the Hatch-Waxman Act and on June 9, 2000, Ortho filed a patent infringement action in the United States District Court for the District of New Jersey - Trenton Division, seeking to prevent Barr from marketing the three different tablet combinations of norgestimate and ethinyl estradiol until U.S. patents expire in 2003. The case is in the discovery stage. In May 2000, Barr filed an ANDA with the FDA for Flecainide Acetate tablets which is sold under its brand name, Tambocor. The Company notified Minnesota Mining and Manufacturing Company, or Minnesota Mining, pursuant to the provisions of the Hatch-Waxman Act and on August 25, 2000, Minnesota Mining filed a patent infringement action in the United States District Court for the District of Minnesota, seeking to prevent Barr from proceeding with the commercialization of the product until certain U.S. patents expire. This case involves an alleged infringement by Barr of raw material patents and not a challenge to the validity of patents protecting the product. The case is in the discovery stage. CLASS ACTION LAWSUITS On July 14, 2000, Louisiana Wholesale Drug Co. filed a class action complaint in the United States District Court for the Southern District of New York against Bayer Corporation, the Rugby Group and the Company. The complaint alleges that the Company and the Rugby Group agreed with Bayer Corporation not to compete with a generic version of Ciprofloxacin, or Cipro, pursuant to an agreement between the Company and the other defendants involving a prior patent infringement lawsuit. The plaintiff claims that this agreement violated antitrust laws. The plaintiff purports to bring claims on behalf of all direct purchasers of Cipro from 1997 to present. On August 1, 2000, Maria Locurto filed a similar class action complaint in the United States District Court for the Eastern Division of New York. On August 4, 2000, Ann Stuart et al filed a class action complaint in the Superior Court of New Jersey, Law Division, Camden County. This complaint alleges violations of New Jersey statutes relating to the Cipro agreement. The Company believes that its agreement with Bayer Corporation is a valid settlement to a patent dispute and cannot form the basis of an antitrust claim. Although it is not possible to forecast the outcome of these matters, the Company intends to vigorously defend itself. It is anticipated that these matters may take several years to be 21 22 resolved but an adverse judgment could have a material adverse impact on the Company's business and consolidated financial statements. OTHER LEGAL MATTERS In February 1998, Invamed, Inc., which has since been acquired by Geneva Pharmaceuticals, Inc., a subsidiary of Novartis AG, or Invamed, named the Company and several others as defendants in a lawsuit filed in the United States District Court for the Southern District of New York, charging that the Company unlawfully blocked access to the raw material source for Warfarin Sodium. In May 1999, Apothecon, Inc., a subsidiary of Bristol-Meyers Squibb, Inc. or Apothecon, filed a similar lawsuit. The two actions have been consolidated. The Company believes that the suits filed against it by Invamed and Apothecon are without merit and intends to defend its position vigorously. These actions are currently in the discovery stage. It is anticipated that this matter may take several years to be resolved but an adverse judgment could have a material adverse impact on the Company's business and consolidated financial statements. In March 1999, civil action complaints filed separately by Mylan Pharmaceuticals, Inc. and Pharmachemie, B.V. against the FDA were consolidated in Mylan Pharmaceuticals, Inc. v. Henney in the U.S. District Court, District of Columbia. These lawsuits challenged a March, 1999, FDA letter ruling that Barr was eligible for generic exclusivity on tamoxifen citrate. In April, 1999, Barr intervened as a defendant in support of the FDA. On March 31, 2000, the U.S. District Court for the District of Columbia issued a Memorandum Opinion vacating FDA's letter ruling. The court found that Barr was not eligible for exclusivity under the plain language of the Hatch-Waxman Act because Barr's challenge to the tamoxifen patent was settled after a district court had found the patent to be unenforceable and because Barr changed its Paragraph IV certification to a Paragraph III certification as part of the settlement of the patent challenge case. Barr appealed the district court's decision to the U.S. Court of Appeals for the District of Columbia Circuit. If upheld on appeal, this decision could prevent Barr from obtaining generic market exclusivity for Tamoxifen. Similarly, in the Ciprofloxacin patent challenge, Barr changed its Paragraph IV certification to a Paragraph III certification as part of the settlement of the patent challenge case. Therefore, if the decision in the tamoxifen case discussed above is upheld on appeal, it could effect Barr's ability to obtain generic market exclusivity for Ciprofloxacin. However, such a decision would not prevent Barr from manufacturing and marketing its tamoxifen or ciprofloxacin products and would not have a material adverse impact on the company's consolidated financial statements. In 1998 and 1999, the Company was contacted by the Department of Justice, or DOJ, regarding the March 1993 settlement of the Tamoxifen patent litigation. Barr continues to cooperate with the DOJ in this ongoing examination, and believes that the DOJ will ultimately determine that the settlement was appropriate and a benefit to consumers. The DOJ has not contacted the Company about this matter since June 1999. On June 30, 1999, the Company received a civil investigative demand and a subpoena from the Federal Trade Commission, or the FTC, that, although not alleging any wrongdoing, sought documents and data relating to the January 1997 agreements resolving patent litigation involving Ciprofloxacin hydrochloride, which had been pending in the U.S. District Court for the Southern District of New York. The FTC is investigating whether the Company, through settlement and supply agreements, has engaged or are engaging in activities in violation of the antitrust laws. The Company continues to cooperate with the FTC in this investigation. 22 23 The Company believes that the patent challenge process under the Hatch-Waxman Act represents a pro-consumer and pro-competitive alternative to bringing generic products to market more rapidly than might otherwise be possible. The Company believes that once all the facts are considered, and the benefits to consumers are assessed, that these DOJ and FTC investigations will be satisfactorily resolved. However, consideration of these matters could take considerable time, and while unlikely, any adverse judgment in either matter could have a material adverse impact on the Company's consolidated financial statements. As of June 30, 2000, the Company was involved, as plaintiff and defendant, in other lawsuits incidental to its business. Management of the Company, based on the advice of legal counsel, believes that the disposition of such litigation will not have any significant adverse effect on the Company's consolidated financial statements. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 23 24 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information required by Item 5 is included on page 45 of the 2000 Annual Report to Shareholders ("Annual Report") and is incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA The information required by Item 6 is included on page 48 of the Annual Report and is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by Item 7 is included on pages 25 through 28 of the Annual Report and is incorporated herein by reference. ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's exposure to market risk for a change in interest rates relates primarily to the Company's investment portfolio of approximately $156 million and debt instruments of approximately $30 million. The Company does not use derivative financial instruments. The Company's investment portfolio consists of cash and cash equivalents and marketable securities classified as "available for sale." The primary objective of the Company's investment activities is to preserve principal while at the same time maximizing yields without significantly increasing risk. To achieve this objective, the Company maintains its portfolio in a variety of high credit quality securities, including U.S. government and corporate obligations, certificates of deposit and money market funds. Approximately 99.9% of the Company's portfolio matures in less than three months and the remaining .1% matures in less than one year. The carrying value of the investment portfolio approximates the market value at June 30, 2000. Because the Company's investments are diversified and are of relatively short maturity, a hypothetical 10% change in interest rates would not have a material effect on the Company's consolidated financial statements. Approximately 90% of the Company's debt instruments at June 30, 2000, are subject to fixed interest rates and principal payments. The related note purchase agreements permit the Company to prepay these notes prior to their scheduled maturity, but may require the Company to pay a prepayment fee based on market rates at the time of prepayment and the note rates. The remaining 10% of debt instruments are primarily subject to variable interest rates based on LIBOR and have fixed principal payments. The fair value of all debt instruments is approximately $30 million at June 30, 2000. Management does not believe that any risk inherent in the variable-rate nature of these instruments is likely to have a material effect on the Company's consolidated financial statements. The Company's $20 million Unsecured Revolving Credit Facility ("Revolver") has an interest rate based on the prime rate or LIBOR plus 0.75%, at the Company's option. The Company currently maintains a zero balance on the Revolver. If the Company were to draw down on the line prior to its expiration in December 2001, and an unpredicted increase in both alternate rates occurred, it would not be likely to have a material effect on the Company's consolidated financial statements. 24 25 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by Item 8 is included on pages 29 through 47 of the Annual Report and is incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None. 25 26 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The Company's executive officers are as follows:
NAME AGE POSITION ---- --- -------- Bruce L. Downey 52 Chairman of the Board and Chief Executive Officer Paul M. Bisaro 39 President, Chief Operating Officer and Secretary Timothy P. Catlett 45 Senior Vice President, Sales and Marketing William T. McKee 39 Senior Vice President, Chief Financial Officer and Treasurer Mary E. Petit 51 Senior Vice President, Proprietary Product Development Martin Zeiger 63 Senior Vice President, Strategic Business Development and General Counsel Salah U. Ahmed 46 Vice President, Product Development Ezzeldin A. Hamza 49 Vice President, Scientific Affairs Catherine F. Higgins 48 Vice President, Human Resources
BRUCE L. DOWNEY was elected Chairman of the Board and Chief Executive Officer in February 1994. Prior to assuming these positions, from 1981 to 1993, Mr. Downey was a partner in the law firm of Winston & Strawn and a predecessor firm of Bishop, Cook, Purcell and Reynolds. Mr. Downey is also a director of Warner Chilcott, plc. PAUL M. BISARO was elected to the position of President and Chief Operating Officer in December 1999. In September 1996, Mr. Bisaro was elected to the position of Senior Vice President, Strategic Business Development. Mr. Bisaro is the Secretary of the Company and in June 1998, was elected to the Company's Board of Directors. Prior to September 1996, Mr. Bisaro held various positions of increasing responsibility including General Counsel and Chief Financial Officer. Prior to assuming these positions with the Company, he was associated with the law firm of Winston & Strawn and a predecessor firm, Bishop, Cook, Purcell and Reynolds. TIMOTHY P. CATLETT was elected to Senior Vice President, Sales and Marketing in September 1997. From February 1995 to August 1997, Mr. Catlett served as Vice President, Sales and Marketing. 26 27 WILLIAM T. MCKEE was elected to the position of Senior Vice President, Chief Financial Officer in December 1998. From December 1997 to November 1998, Mr. McKee served as Vice President, Chief Financial Officer. From September 1996 to November 1997, Mr. McKee served as Chief Financial Officer. Prior to this Mr. McKee served as Director of Finance. Mr. McKee is the Treasurer of the Company and is a C.P.A. MARY E. PETIT was elected to the position of Senior Vice President, Proprietary Product Development in December 1999. From September 1996 to November 1999, Dr. Petit held the position of Senior Vice President, Operations. Prior to this Dr. Petit held the position of Vice President, Quality. MARTIN ZEIGER was employed by the Company in December 1999 as Senior Vice President, Strategic Business Development and General Counsel. Mr. Zeiger joined Barr from Hoechst Marion Roussel, where he served as a Vice President since the 1995 acquisition by Hoechst of Marion Merrill Dow. SALAH U. AHMED was elected Vice President, Product Development in September 1996. Dr. Ahmed joined the Company as Director of Research and Development in 1993. EZZELDIN A. HAMZA was elected Vice President in 1993. Prior to this position Mr. Hamza held positions of increasing responsibility including Director of Quality Control, Director of Scientific Affairs and Vice President, Technical Affairs. CATHERINE F. HIGGINS was employed by the Company in January 1992 as Vice President, Human Resources and was elected an officer in September 1992. The Company's directors and executive officers are elected annually to serve until the next annual meeting or until their successors have been elected and qualified. The directors of the Company and their business experience are set forth in the section headed "Information on Nominees" of the Company's Notice of Annual Meeting of Shareholders, dated September 25, 2000 (the "Proxy Statement") and are incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION A description of the compensation of the Company's executive officers is set forth in the sections headed "Executive Compensation", "Option Grants", "Option Exercises and Option Values" and "Executive Agreements" of the Proxy Statement and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT A description of the security ownership of certain beneficial owners and management is set forth in the sections headed "Ownership of Securities" of the Proxy Statement and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 27 28 A description of certain relationships and related transactions is set forth in the section headed "Certain Relationships and Related Transactions" of the Proxy Statement and is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Financial Statement Schedules: The consolidated balance sheets as of June 30, 2000 and 1999, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended June 30, 2000 and the related notes to the consolidated financial statements, together with the Independent Auditors' Report, are incorporated herein by reference. With the exception of the aforementioned information and the information incorporated by reference in Items 5 through 8, the Annual Report is not deemed filed as part of this report. The following additional financial data should be read in conjunction with the financial statements in the Annual Report. All other schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes.
Page ---- Independent Auditors' Report 24 Schedule II - Valuation and Qualifying Accounts 25
Exhibits - -------- 3.1 Composite Restated Certificate of Incorporation of the Registrant(2) 3.2 Amended and Restated By-Laws of the Registrant(2) 4.1 Loan and Security Agreement dated April 12, 1996 (9) 4.2 Amended and Restated Loan Agreement dated November 18, 1997 (9) 4.3 Note Purchase Agreements dated November 18, 1997 (1) 10.1 Stock Option Plan (3) 10.2 Savings and Retirement Plan (8) 10.6 Collective Bargaining Agreement, effective April 1, 1996 (12) 10.7 Agreement with Bruce L. Downey (4) 28 29 10.8 Agreement with Ezzeldin A. Hamza (4) 10.9 Distribution and Supply Agreement for Tamoxifen Citrate dated March 8, 1993 (4) 10.10 1993 Stock Incentive Plan (5) 10.11 1993 Employee Stock Purchase Plan (6) 10.12 1993 Stock Option Plan for Non-Employee Directors (7) 10.13 Agreement with Edwin A. Cohen and Amendment thereto (8) 10.14 Distribution and Supply Agreement for Ciprofloxacin Hydrochloride dated January 1997 (10) 10.15 Proprietary Drug Development and Marketing Agreement dated March 20, 2000 (portions of this exhibit have been omitted pursuant to a request for confidential treatment) (13) 10.16 Description of Excess Savings and Retirement Plan * 10.17 Agreement with Paul M. Bisaro * 13.0 2000 Annual Report to Shareholders 21.0 Subsidiaries of the Company (11) 23.0 Consent of Deloitte & Touche LLP 27.0 Financial Data Schedule ---------------------------------------------------------------- * Previously Filed (1) Previously filed with the Securities and Exchange Commission as an Exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 1997 and incorporated herein by reference. (2) Previously filed with the Securities and Exchange Commission as an Exhibit to the Registrant's Annual Report on Form 10-K for the year ended June 30, 1999 and incorporated herein by reference. (3) Previously filed with the Securities and Exchange Commission as an Exhibit to the Registrant's Registration Statement on Form S-1 No. 33-13472 and incorporated herein by reference. (4) Previously filed with the Securities and Exchange Commission as an Exhibit to the Registrant's Annual Report on Form 10-K for the year ended June 30, 1993 and incorporated herein by reference. 29 30 (5) Previously filed with the Securities and Exchange Commission as an Exhibit to the Registrant's Registration Statement on Form S-8 Nos. 33-73696 and 333-17349 and incorporated herein by reference. (6) Previously filed with the Securities and Exchange Commission as an Exhibit to the Registrant's Registration Statement on Form S-8 No. 33-73700 and incorporated herein by reference. (7) Previously filed with the Securities and Exchange Commission as an Exhibit to the Registrant's Registration Statement on Form S-8 Nos. 33-73698 and 333-17351 incorporated herein by reference. (8) Previously filed with the Securities and Exchange Commission as an Exhibit to the Registrant's Annual Report on Form 10-K for the year ended June 30, 1995 and incorporated herein by reference. (9) The Registrant agrees to furnish to the Securities and Exchange Commission, upon request, a copy of any instrument defining the rights of the holders of its long-term debt wherein the total amount of securities authorized thereunder does not exceed 10% of the total assets of the Registrant and its subsidiaries on a consolidated basis. (10) Previously filed with the Securities and Exchange Commission as an Exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997 and incorporated herein by reference. (11) Previously filed with the Securities and Exchange Commission as an Exhibit to the Registrant's Annual Report on Form 10-K for the year ended June 30, 1988 and incorporated herein by reference. (12) Previously filed with the Securities and Exchange Commission as an Exhibit to the Registrant's Annual Report on Form 10-K for the year ended June 30, 1996 and incorporated herein by reference. (13) Previously filed with the Securities and Exchange Commission as an Exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2000 and incorporated herein by reference. (b) Reports on Form 8-K None. 30 31 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. BARR LABORATORIES, INC.
Signature Title Date --------- ----- ---- BY BRUCE L. DOWNEY Chairman of the Board & Chief May 2, 2001 --------------- Executive Officer (Bruce L. Downey) BY WILLIAM T. MCKEE Senior Vice President, Chief May 2, 2001 ---------------- Financial Officer & Treasurer (William T. McKee) (Principal Financial Officer and Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- BRUCE L. DOWNEY Chairman of the Board May 2, 2001 - --------------- (Bruce L. Downey) EDWIN A. COHEN Vice Chairman of the Board May 2, 2001 - -------------- (Edwin A. Cohen) PAUL M. BISARO Director May 2, 2001 - -------------- (Paul M. Bisaro) ROBERT J. BOLGER Director May 2, 2001 - ---------------- (Robert J. Bolger) MICHAEL F. FLORENCE Director May 2, 2001 - ------------------- (Michael F. Florence) JACOB M. KAY Director May 2, 2001 - ------------ (Jacob M. Kay) BERNARD C. SHERMAN Director May 2, 2001 - ------------------ (Bernard C. Sherman) GEORGE P. STEPHAN Director May 2, 2001 - ----------------- (George P. Stephan)
31 32 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders of Barr Laboratories, Inc.: We have audited the accompanying consolidated balance sheets of Barr Laboratories, Inc. and subsidiaries (the "Company") as of June 30, 2000 and 1999, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended June 30, 2000. Our audits also included the financial statement schedule listed in the Index at Item 14. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Barr Laboratories, Inc. and subsidiaries at June 30, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2000 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. As discussed in Note 1, the accompanying consolidated financial statements have been restated. DELOITTE & TOUCHE LLP Parsippany, New Jersey August 7, 2000 May 2, 2001 as to Note 1 32 33 SCHEDULE II BARR LABORATORIES, INC. VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED JUNE 30, 2000, 1999 AND 1998 (IN THOUSANDS OF DOLLARS)
BALANCE AT ADDITIONS, RECOVERY BEGINNING COSTS AND AGAINST DEDUCTIONS, BALANCE AT OF YEAR EXPENSE WRITE-OFFS WRITE-OFFS END OF YEAR - ------------------------------------------------------------------------------------------------------------------------------------ Allowance for doubtful accounts: Year ended June 30, 1998 $ 270 $ 180 $ 1 $ 189 $ 262 Year ended June 30, 1999 262 180 1 44 399 Year ended June 30, 2000 399 155 4 221 337 Reserve for returns and allowances: Year ended June 30, 1998 1,350 5,003 -- 3,877 2,476 Year ended June 30, 1999 2,476 7,640 -- 7,845 2,271 Year ended June 30, 2000 2,271 9,895 -- 8,363 3,803 Inventory reserves: Year ended June 30, 1998 3,635 8,043 -- 6,103 5,575 Year ended June 30, 1999 5,575 5,398 -- 4,420 6,553 Year ended June 30, 2000 6,553 4,317 -- 5,300 5,570
33 EX-13 2 y49301ex13.txt EX-13 MANAGEMENT DISCUSSION AND ANALYSIS 1 EXHIBIT 13 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (thousands of dollars) As discussed in Note 1 in the Consolidated Financial Statements, the financial statements have been restated. This restatement results from a revision in the Company's method of accounting for the warrants issued to DuPont Pharmaceuticals Company entered into in connection with the strategic alliance executed in March 2000. In addition, the Company reclassified proceeds from supply agreements from revenue to proceeds from patent challenge settlement. The accompanying information has been amended to reflect the restatement and reclassification. Results of Operations Fiscal 2000 to Fiscal 1999 Product sales increased approximately 6% from $415,950 to $440,110. Tamoxifen sales increased 8% from $275,127 to $297,395. The increase was attributable to higher prices and an expansion in the use of Tamoxifen. In October 1998, Tamoxifen was approved to reduce the incidence of breast cancer in women at high risk of developing the disease. Tamoxifen is a patent protected product manufactured for the Company by AstraZeneca, the innovator. Currently, the Company is the only distributor of Tamoxifen in the U.S. other than AstraZeneca, whose product is sold under the brand name Nolvadex. In fiscal 2000, Tamoxifen accounted for 68% of product sales versus 66% in fiscal 1999. The prior year's sales included $6,373 of Minocycline sales which the Company discontinued selling in late 1999 due to deteriorating market conditions. Other product sales increased 6% from $134,450 to $142,583. The increase was attributable to sales of Warfarin Sodium, Medroxyprogesterone Acetate, Methotrexate, Naltrexone, Trazodone and Hydroxyurea. Warfarin Sodium sales accounted for approximately 14% of total product sales, which was a slight decline from 15% in the prior year. Barr ended the fiscal year with approximately 27% of all brand and generic Warfarin Sodium unit sales. Cost of sales increased from $301,393 to $315,652 primarily related to an increase in product sales. As a percentage of product sales, cost of sales declined from 72.5% to 71.7%. The Company's product margins are dependent on several factors including product sales mix, manufacturing efficiencies and competition. The decrease in cost of sales as a percentage of product sales was due to a more favorable mix among non-Tamoxifen product sales, which was slightly offset by a higher percentage of Tamoxifen sales to total product sales. Tamoxifen is distributed by the Company and has lower margins than most of Barr's other products. Selling, general and administrative expenses increased from $40,439 to $45,000. The increase was primarily due to legal costs related to litigation with DuPont that was resolved in March 2000, approximately $2,500 in one time legal charges associated with finalizing the Company's definitive agreements with DuPont and to ongoing patent challenges. Also, the prior year included approximately $1,700 related to the Company's share of the $4,000 payment received from Eli Lilly & Company for reimbursement of legal costs incurred as part of the agreement to take the Prozac(TM) 1 2 case directly to the court of appeals. Research and development expenses increased from $22,593 to $40,451. Over 60% of the increase in research and development spending was attributable to increased payments to clinical research organizations for clinical and bio-study services. The balance of the increase is mainly related to higher personnel costs which support an increased number of products in development and higher costs associated with the Company's proprietary drug development efforts. Also, the prior year included $646 related to a proprietary product collaboration with Eastern Virginia Medical School. The increased level of spending during the fiscal year ended June 30, 2000, enabled the Company to file fifteen applications with the U.S. Food and Drug Administration and initiate Phase III clinical studies for two proprietary products. Proceeds from patent challenge settlement decreased $499, as expected, since proceeds recognized in the prior year under a separate contingent supply agreement related to the Ciprofloxacin litigation ceased. Interest income increased $1,912 primarily due to an increase in the average cash and cash equivalents balance. Interest expense decreased $292 due to a decrease in the Company's debt balances and lower fees paid on the average unsecured Tamoxifen payable balance. Other income increased $311 primarily due to the gain recognized on the warrants received from Halsey Drug Co., Inc. (See Note 7 to the Consolidated Financial Statements). Results of Operations - --------------------- Fiscal 1999 to Fiscal 1998 - -------------------------- Product sales increased 20% from $346,638 to $415,950. This increase is attributable to increased sales of Tamoxifen, Warfarin Sodium, Naltrexone, Hydroxyurea and various hormonal products that were launched throughout fiscal 1998 and 1999. Tamoxifen sales increased 16% from $236,587 to $275,127 due to increased volume and, to a lesser extent, higher prices. Increased volumes appear to be related to investment buying and increased usage in the product from the expansion of Tamoxifen's indication for the reduction in the incidence of breast cancer in women at high risk for developing the disease. Investment buying generally refers to the decision by customers to increase their purchases above their anticipated immediate needs in order to buy ahead of expected future price increases. Higher prices are the result of 4% price increases in April 1998 and May 1999. Tamoxifen is a patent protected product manufactured for the Company by AstraZeneca. Currently, the Company is the only distributor of Tamoxifen in the U.S. other than AstraZeneca whose product is sold under the brand name Nolvadex. In fiscal 1999, Tamoxifen accounted for 66% of product sales versus 68% in fiscal 1998. The remaining increase in product sales from $110,051 to $140,823 was the result of increased sales of Warfarin Sodium as well as products such as Naltrexone, Hydroxyurea and various hormonal products, which were launched in fiscal 1998 and 1999. During fiscal 1999, the Company implemented additional marketing and market share incentive programs designed to maintain and increase the Company's market share of the total Coumadin/Warfarin market. In fiscal 1999, Warfarin Sodium accounted for approximately 15% of product sales versus 11% in fiscal 1998. Revenue from products launched in fiscal 1999 more than offset lower sales on products being phased 2 3 out of the Company's product line and price declines and higher discounts on certain existing products. Cost of sales increased from $266,002 to $301,393, due to increased product sales, but decreased as a percentage of product sales from 76.7% to 72.5%. The Company's product margins are dependent upon several factors including product sales mix, manufacturing efficiencies and competition. The decrease in cost of sales as a percentage of product sales in fiscal 1999 was the result of a more favorable mix of products including a lower percentage of Tamoxifen sales to total product sales. Tamoxifen is distributed by the Company and has lower margins than most of Barr's other products. Selling, general and administrative expenses increased 4% from $38,990 to $40,439. This increase is primarily due to increased legal and headcount costs, partially offset by a decrease in advertising and promotions and a decrease in charges incurred related to the shut down of previously leased facilities. Higher legal expenses, due to the Company's federal anti-trust suit against DuPont, more than offset the Company's share of a $4,000 payment received from Eli Lilly & Company, in January, for legal costs incurred as part of the agreement to take the Prozac case directly to the U.S. Court of Appeals. Higher headcount costs are due to the significant growth in the Company in fiscal 1998 and 1999. Advertising and promotion costs were lower than the prior year when the Company spent heavily on the launch of Warfarin Sodium. The fiscal year ended June 30, 1999 also includes a $360 restructuring charge compared to the $1,200 restructuring charge incurred in the prior fiscal year, both of which were primarily related to closing leased facilities. Total research and development expenses increased 19% from $18,955 to $22,593. The increase was primarily due to work on more clinical studies, an increase in personnel costs to support the number of products in development and higher costs associated with the Company's proprietary drug development efforts. Fiscal 1999 included $646 in expenses related to the proprietary product collaboration with Eastern Virginia Medical School, whereas fiscal 1998 included $645 for the acquisition of six Abbreviated New Drug Applications and related technologies to expand the Company's line of female healthcare products. Proceeds from patent challenge settlement declined $2,583, as expected, since proceeds recognized in the prior year under a separate contingent supply agreement related to the Ciprofloxacin litigation were not repeated (See Note 3 to the Consolidated Financial Statements). Interest income increased by $1,004 or 46% due primarily to an increase in the average cash and cash equivalents balance, partially offset by a slight decrease in the market rates on the Company's short-term investments. Interest expense increased $1,839 due to a decrease in capitalized interest over the prior fiscal year. The amount of interest capitalized declined, as expected, due to the reduction in capital spending on the Virginia facility, which was substantially completed by the spring of 1998. In fiscal 1998, the Company incurred an extraordinary loss of $790 on the early extinguishment of debt (See Note 8 to the Consolidated Financial Statements). 3 4 Liquidity and Capital Resources - ------------------------------- The Company's cash and cash equivalents balance increased $61,055 or 64% to $155,922 at June 30, 2000 from $94,867 at June 30, 1999. In connection with an Alternative Collateral Agreement between the Company and the Innovator of Tamoxifen (See Note 1 to the Consolidated Financial Statements), the Company has increased the cash held in its interest bearing escrow account from $28,283 at June 30, 1999 to $74,011 at June 30, 2000. Cash provided by operating activities was $45,944 for the year ended June 30, 2000, as earnings before non-cash charges such as depreciation and deferred income tax benefit more than offset working capital increases. The working capital increase was led by increases in accounts receivable and other receivables, which were partially offset by increases in accounts payable and income taxes payable. Accounts receivable at June 30, 2000 were $54,669 or $4,785 higher than those at June 30, 1999 primarily attributable to increased product sales. Other receivables increased due to amounts earned under the DuPont agreements (See Note 2 to the Consolidated Financial Statements). Accounts payable increased as a result of an increase in the Tamoxifen payable. Income taxes payable increased as a result of increased taxable earnings and the timing of estimated tax payments. Working capital levels varied during the year primarily due to the timing of Tamoxifen inventory purchases, sales levels and the timing of Tamoxifen payables. During fiscal 2000, inventory levels increased during the first half of the year and declined during the second half. The Company expects that a similar trend will occur in fiscal 2001. In addition, we expect to increase our research and development spending 45% to 55% in fiscal 2001 compared to fiscal 2000. We also expect to initiate three additional patent challenges in 2001. Patent challenges can take three to six years to complete and can require am investment of approximately $8,000 to $10,000. Approximately $28 million of the Company's fiscal 2000 cash flows from operations relates to payments from its contingent non-exclusive supply agreement with Bayer Corporation ("Bayer") related to its 1997 Cipro(R) patent challenge. Under that agreement, Bayer has, at its option, the right to allow Barr and its partner (collectively Barr) to purchase Cipro, at a predetermined discount, or to provide Barr quarterly cash payments. This contingent supply agreement expires in December 2003. If Bayer does not elect to supply Barr with product, Barr would receive approximately $28 to $31 million per year. However, there is no guarantee that Bayer will continue to make such payments. If Bayer elected to supply product to Barr for resale, the earnings and related cash flows, if any, Barr could earn from the sale of Cipro would be entirely dependent upon market conditions. The Supply Agreement also provides that, six months prior to patent expiry, if Barr is not already distributing the product, Barr will have the right to begin distributing ciprofloxacin product manufactured by Bayer. In fiscal 2000, the Company earned approximately $14.6 million related to the DuPont agreements entered into in March 2000. Of the $14.6 million, the Company received $7.8 million in cash prior to year end and the remaining $6.8 million was included in other receivables at June 30, 2000. The $14.6 million is included within cash flows from financing activities, as these amounts will be applied to the warrant subscription receivable of $16.4 million. Once the warrant subscription receivable is reduced to zero, all future earnings under the DuPont agreements will be considered development and other revenue and included in cash flows from operations. During fiscal 2000, the Company invested $12,086 in capital assets, primarily on the construction of its new 48,000 square foot warehouse and 13,500 square foot laboratory facility at its Pomona, New 4 5 York campus. In fiscal 2001, the Company expects to invest an additional $15,000 to $18,000 in capital assets. To expand its growth opportunities, the Company has and will continue to evaluate and enter into various strategic collaborations. The timing and amount of cash required to enter into these collaborations is difficult to predict because it is dependent on several factors, many of which are outside of the Company's control. However, the Company believes, that based on arrangements in place at June 30, 2000, it could spend between $2 and $4 million over the next twelve months for these collaborations. The $2 to $4 million excludes any cash needed to fund strategic acquisitions the Company may consider in the future. The Company believes that its current cash balances, cash flows from operations and borrowing capacity, including unused amounts under its existing Revolving Credit Facility, will be adequate to fund the increased levels of activity discussed above and to take advantage of strategic opportunities as they occur. To the extent that additional capital resources are required, such capital may be raised by additional bank borrowings, equity offerings or other means. Outlook - ------- The following section contains a number of forward-looking statements, all of which are based on current expectations. Actual results may differ materially. The generic pharmaceutical industry is characterized by relatively short product lives and declining prices and margins as competitors launch competing products. The Company's strategy has been to develop generic products with some barrier to entry to limit competition and extend product lives and margins. The Company's expanded efforts in developing and launching proprietary products is also driven by the desire to market products that will have limited competition and longer product lives. The Company's future operating results are dependent upon several factors that impact its stated strategies. These factors include the ability to introduce new products, patient acceptance of new products and new indications of existing products, customer purchasing practices, pricing practices of new competitors and spending levels including research and development. In addition, the ability to receive sufficient quantities of raw materials to maintain its production is critical. While the Company has not experienced any interruption in sales due to lack of raw materials, the Company is continually identifying alternate raw material suppliers for many of its key products in the event that raw material shortages were to occur. The Company's operating results are expected to be significantly impacted by a favorable final decision regarding its challenge of the Prozac patent. The timing and impact of the launch of Prozac in fiscal 2001 is dependent on several factors and therefore has been excluded from the following outlook section. Total revenues are expected to increase in fiscal 2001 compared to fiscal 2000 driven by development revenue, higher Tamoxifen sales and new product launches, including Viaspan, which should more than offset declining prices on certain existing products. The Company distributes Tamoxifen in accordance with the terms of a non-exclusive supply and distribution agreement that expires at the earlier of patent expiry or upon successful challenge of the Tamoxifen patent by another company. Barr is aware of two other companies who are challenging the Tamoxifen patent. Though the outcome of any legal matter is uncertain, the Company believes the current cases will not impact its fiscal 2001 Tamoxifen revenues. The Company believes that Tamoxifen sales will increase during fiscal 2001 due to higher prices and increased volume from the new indication. The extent of such increase, if any, is dependent upon several factors including the acceptance of the new indication by physicians and patients, customer 5 6 buying patterns, inventory levels and pricing decisions made by the Innovator. Revenues earned under the various DuPont agreements (see Note 2 to the Consolidated Financial Statements) are determined by several factors including the timing and extent of Barr's spending on specific proprietary development products, and achieving certain development milestones. Amounts earned under these agreements are expected to range from $4 to $6 million per quarter in fiscal 2001, the first $1,835 of which will be recorded as an offset to warrant receivable, with the balance being recorded as development and other revenue. Amounts earned in fiscal 2001 from the contingent supply agreement are dependent upon decisions made by a third party but are expected to approximate amounts earned in fiscal 2000. Selling, general and administrative spending is impacted by several factors such as the timing and number of legal matters, including patent challenges being pursued by the Company, the level of government affairs spending and promotional and advertising activities. Barr's government affairs spending is, in part, dependent upon efforts by other companies to restrict generic substitution and therefore, is difficult to predict. Promotional and advertising spending is generally related to the number and type of products being launched in a given year. The Company expects that selling, general and administrative expenses will be higher in fiscal 2001 than in fiscal 2000 primarily due to higher costs associated with new product launches, including Viaspan. Since proprietary products require more extensive advertising and promotional activities than traditional generic products, the future approval and launch of Barr's proprietary products may impact selling, general and administrative costs. Generally, selling, marketing and promotion costs are incurred several months prior to a product's launch. In addition, some of these proprietary products will require a sales force detailing directly to physicians. The Company currently does not have an in-house sales force to sell its products directly to physicians. The Company has successfully engaged DuPont to assume responsibility for sales and marketing support for one of its proprietary products expected to be launched in fiscal 2001 (See Note 2 to the Consolidated Financial Statements) and is exploring several alternatives for marketing the balance of its proprietary products including, licensing out such products to third parties, engaging a contract sales force or investing in or acquiring companies with an existing sales force. Selecting the appropriate alternative depends on a variety of factors including the number of physicians in a particular therapeutic category and the number of products the Company offers within a therapeutic category. Therefore, the Company's decision on how it will sell its proprietary products and the timing of the product launches could have a significant impact on expense levels. While the Company believes it will be able to successfully market and sell its proprietary products using one or more of the alternatives described above, there is no assurance it will be able to do so on favorable terms. Research and development costs are expected to increase 20 - 25% in fiscal 2001 compared to fiscal 2000 due to substantial increases in both generic and proprietary product development activities. In its generic development area, the Company expects to file between 15 and 18 ANDAs in fiscal 2001 compared to 11 filed in fiscal 2000. While the number of applications filed is not the only measure of research and development activity, a higher number of filings generally requires higher raw material and clinical study costs. Product development costs associated with many of the proprietary projects are significantly higher and require more time to develop and receive approval to market than traditional generic products. The increased time and costs are primarily related to the clinical trials required for FDA approval. The Company has two proprietary products that began Phase III clinical trials during fiscal 2000 and should be completed by 2002. The Company plans to spend approximately $35 to $40 million on 6 7 certain of its current proprietary products over the next two to three years. The Company has entered into a development and marketing alliance with DuPont (See Note 2 to the Consolidated Financial Statements) in which DuPont may invest up to an additional $37 million over the next two fiscal years to support the development of three of the Company's proprietary products. The Company may seek other development partners to help fund the costs of some additional projects. However, there is no assurance that the Company will be able to utilize all amounts available under the DuPont agreements, identify other such partners or be able to secure the funding on favorable terms. If such partners are not secured and the Company continues to expand its generic product development efforts and pursue all its proprietary projects, its operating results may be adversely impacted. The Company believes that interest income may increase in fiscal 2001 compared to fiscal 2000 due primarily to higher average cash balances. Higher average cash balances are expected as net earnings are expected to offset working capital increases and capital expenditures in fiscal 2001. The anticipated increase in cash balances in fiscal 2001 exclude the effect of using cash to fund strategic acquisitions the Company may consider in the future Environmental Matters - --------------------- The Company may have obligations for environmental safety and clean-up under various state, local and federal laws, including the Comprehensive Environmental Response, Compensation and Liability Act, commonly known as Superfund. Based on information currently available, environmental expenditures have not had, and are not anticipated to have, any material effect on the Company's consolidated financial statements. Effects of Inflation - -------------------- Inflation has had only a minimal impact on the operations of the Company in recent years. Forward-Looking Statements - -------------------------- Except for the historical information contained herein, this Form 10-K contains forward-looking statements, all of which are subject to risks and uncertainties. Such risks and uncertainties include: the timing and outcome of legal proceedings; the difficulty of predicting the timing of FDA approvals; the difficulty in predicting the timing and outcome of FDA decisions on patent challenges; market and customer acceptance and demand for new pharmaceutical products; ability to market proprietary products; the impact of competitive products and pricing; timing and success of product development and launch; availability of raw materials; the regulatory environment; fluctuations in operating results; and, other risks detailed from time-to-time in the Company's filings with the Securities and Exchange Commission. Forward-looking statements can be identified by their use of words such as "expects," "plans," "will," "believes," "may," "estimates," "intends" and other words of similar meaning. Should known or unknown risks or uncertainties materialize, or should our assumptions prove inaccurate, actual results could vary materially from those anticipated. 7 8 BARR LABORATORIES, INC. Consolidated Balance Sheets (in thousands of dollars, except share amounts)
RESTATED JUNE 30, JUNE 30, 2000 1999 ------- ------ Assets Current assets: Cash and cash equivalents $ 155,922 $ 94,867 Marketable securities 96 8,127 Accounts receivable (including receivables from related parties of $865 in 2000 and $1,051 in 1999) less allowances of $4,140 and $2,670 in 2000 and 1999, respectively 54,669 49,884 Other receivables 23,811 16,093 Inventories 79,482 77,613 Prepaid expenses 1,428 1,556 --------- --------- Total current assets 315,408 248,140 Property, plant and equipment, net 95,296 93,764 Other assets 13,149 5,986 --------- --------- Total assets $ 423,853 $ 347,890 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable (including payables to a related party of $497 and $632 in 2000 and and 1999, respectively) $ 94,529 $ 88,982 Accrued liabilities 11,079 9,118 Deferred income taxes 1,036 833 Current portion of long-term debt 1,924 2,165 Income taxes payable 3,948 179 --------- --------- Total current liabilities 112,516 101,277 Long-term debt 28,084 30,008 Other liabilities 519 127 Deferred income taxes 566 2,771 Commitments & Contingencies Shareholders' equity Preferred stock, $1 par value per share; authorized 2,000,000 shares; none issued Common stock, $.01 par value per share; authorized 100,000,000; issued 35,004,869 and 22,923,583 in 2000 and 1999, respectively 350 229 Additional paid-in capital 83,463 76,903 Additional paid-in capital - warrants 16,418 -- Warrant subscription receivable (1,835) -- Retained earnings 181,869 137,846 Accumulated other comprehensive income (loss) 1,916 (1,258) --------- --------- 282,181 213,720 Treasury stock at cost: 176,932 and 117,955 shares in 2000 and 1999, respectively (13) (13) --------- --------- Total shareholders' equity 282,168 213,707 --------- --------- Total liabilities and shareholders' equity $ 423,853 $ 347,890 ========= =========
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS. 8 9 BARR LABORATORIES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED JUNE 30, 2000, 1999 AND 1998 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
RESTATED RESTATED RESTATED 2000 1999 1998 ---------- --------- ---------- Revenues: Product sales (including sales to related parties of $7,479, $6,852 and $7,537 in 2000, 1999 and 1998, respectively) $ 440,110 $ 415,950 $ 346,638 Costs and expenses: Cost of sales 315,652 301,393 266,002 Selling, general and administrative 45,000 40,439 38,990 Research and development 40,451 22,593 18,955 --------- --------- --------- Earnings from operations 39,007 51,525 22,691 Proceeds from patent challenge settlement (Note 3) 27,584 28,083 30,666 Interest income 5,092 3,180 2,176 Interest expense 2,405 2,697 858 Other income (expense) 347 36 (17) --------- --------- --------- Earnings before income taxes and extraordinary loss 69,625 80,127 54,658 Income tax expense 25,448 30,877 21,148 --------- --------- --------- Earnings before extraordinary loss 44,177 49,250 33,510 Extraordinary loss on early extinguishment of debt, net of taxes -- -- (790) --------- --------- --------- Net earnings $ 44,177 $ 49,250 $ 32,720 ========= ========= ========= EARNINGS PER COMMON SHARE: Earnings before extraordinary loss $ 1.28 $ 1.45 $ 1.02 Net earnings $ 1.28 $ 1.45 $ 1.00 ========= ========= ========= EARNINGS PER COMMON SHARE-ASSUMING DILUTION: Earnings before extraordinary loss $ 1.24 $ 1.39 $ 0.96 Net earnings $ 1.24 $ 1.39 $ 0.94 ========= ========= ========= Weighted average shares 34,406 33,877 32,716 ========= ========= ========= Weighted average shares-assuming dilution 35,715 35,373 34,785 ========= ========= =========
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS. 9 10 BARR LABORATORIES, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED JUNE 30, 2000, 1999 AND 1998 (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
Additional Additional paid-in Warrant Common stock paid-in capital - subscription Retained Shares Amount capital warrants receivable earnings ----------------------------------------------------------------------------------------- BALANCE, JUNE 30, 1997 21,446,053 $ 214 $ 46,061 $ - $ - $ 55,876 Comprehensive income: Net earnings 32,720 Unrealized loss on marketable securities, net of tax of $604 Total comprehensive income Issuance of common stock for stock offering 430,000 4 14,517 Stock issuance costs (353) Issuance of common stock for exercised stock options and employees' stock purchase plans 548,592 6 7,839 ----------------------------------------------------------------------------------------- BALANCE, JUNE 30, 1998 22,424,645 224 68,064 - - 88,596 Comprehensive income: Net earnings 49,250 Unrealized loss on marketable securities, net of tax of $238 Total comprehensive income Issuance of common stock for exercised stock options and employees' stock purchase plans 498,938 5 8,839 ----------------------------------------------------------------------------------------- BALANCE, JUNE 30, 1999 22,923,583 229 76,903 - - 137,846 Comprehensive income: Net earnings 44,177 Unrealized gain on marketable securities, net of tax of $2,126 Total comprehensive income Issuance of common stock for exercised stock options and employees' stock purchase plans 426,947 5 6,587 Issuance of warrants 16,418 (16,418) Proceeds applied to warrant receivable 14,583 Stock split (3-for-2) 11,654,339 116 (27) (154) ----------------------------------------------------------------------------------------- BALANCE, RESTATED, JUNE 30, 2000 35,004,869 $ 350 $ 83,463 $ 16,418 $ (1,835) $ 181,869 =========================================================================================
Accumulated other comprehensive Total (loss) Treasury stock shareholders' income Shares Amount equity -------------------------------------------------------------- Balance, June 30, 1997 $ - 117,955 $ (13) $ 102,138 Comprehensive income: Net earnings 32,720 Unrealized loss on marketable securities, net of tax of $604 (942) (942) --------------- Total comprehensive income 31,778 Issuance of common stock for stock offering 14,521 Stock issuance costs (353) Issuance of common stock for exercised stock options and employees' stock purchase plans 7,845 --------------------------------------------------------------- Balance, June 30, 1998 (942) 117,955 (13) 155,929 Comprehensive income: Net earnings 49,250 Unrealized loss on marketable securities, net of tax of $238 (316) (316) --------------- Total comprehensive income 48,934 Issuance of common stock for exercised stock options and employees' stock purchase plans 8,844 --------------------------------------------------------------- Balance, June 30, 1999 (1,258) 117,955 (13) 213,707 Comprehensive income: Net earnings 44,177 Unrealized gain on marketable securities, net of tax of $2,126 3,174 3,174 --------------- Total comprehensive income 47,351 Issuance of common stock for exercised stock options and employees' stock purchase plans 6,592 Issuance of warrants - Proceeds applied to warrant receivable 14,583 Stock split (3-for-2) - 58,977 - (65) --------------------------------------------------------------- Balance, restated, June 30, 2000 $ 1,916 176,932 $ (13) $ 282,168 ===============================================================
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS. 10 11 BARR LABORATORIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 2000, 1999 AND 1998 (IN THOUSANDS OF DOLLARS)
Restated 2000 1999 1998 ---- ---- ---- CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES: Net earnings $ 44,177 $ 49,250 $ 32,720 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 10,420 9,306 5,521 Deferred income tax (benefit) expense (4,127) 1,834 3,585 Write-off of deferred financing fees associated with early extinguishment of debt -- -- 195 (Gain) loss on sale of assets (470) 11 63 Loss (gain) on sale of marketable securities 122 6 (2) Changes in assets and liabilities: (Increase) decrease in: Accounts receivable and other receivables, net (12,503) (4,550) (26,195) Inventories (1,869) (3,236) (18,161) Prepaid expenses 128 (750) (238) Other assets (1,718) (492) (389) Increase (decrease) in: Accounts payable, accrued liabilities and other 8,015 (14,633) 34,940 Income taxes payable 3,769 (3,178) 963 --------- --------- --------- Net cash provided by operating activities 45,944 33,568 33,002 --------- --------- --------- CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES: Purchases of property, plant and equipment (12,086) (12,333) (20,431) Proceeds from sale of property, plant and equipment 287 1 248 Purchases of strategic investments -- (2,800) (4,069) Sales (purchases) of marketable securities, net 7,965 (901) (7,291) --------- --------- --------- Net cash used in investing activities (3,834) (16,033) (31,543) --------- --------- --------- CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES: Principal payments on long-term debt (2,165) (1,968) (14,939) Proceeds from loans -- -- 30,000 Net borrowings under line of credit -- (2,500) 2,500 Stock issuance costs -- -- (353) Proceeds from stock offering -- -- 14,521 Fees associated with stock split (65) -- -- Earnings under DuPont agreements applied to warrant receivable 14,583 -- -- Proceeds from exercise of stock options and employee stock purchases 6,592 8,844 7,845 --------- --------- --------- Net cash provided by financing activities 18,945 4,376 39,574 --------- --------- --------- Increase in cash and cash equivalents 61,055 21,911 41,033 Cash and cash equivalents, beginning of year 94,867 72,956 31,923 --------- --------- --------- Cash and cash equivalents, end of year $ 155,922 $ 94,867 $ 72,956 ========= ========= ========= SUPPLEMENTAL CASH FLOW DATA: Cash paid during the year Interest, net of portion capitalized $ 2,438 $ 2,727 $ 855 Income taxes 24,946 27,869 13,254 Non-cash transactions Write-off of equipment & leasehold improvements related to closed facility $ 115 $ 83 $ -- Warrants issued for subscription receivable $ 16,418 $ -- $ --
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS. 11 12 BARR LABORATORIES, INC. Notes to the Consolidated Financial Statements (in thousands of dollars, except per share amounts) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Principles of Consolidation, Restatement and Other Matters The consolidated financial statements include the accounts of Barr Laboratories, Inc. (the "Company or Barr") and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Sherman Delaware, Inc. owned 42.6% of the outstanding common stock of the Company at June 30, 2000. Dr. Bernard C. Sherman is a principal stockholder of Sherman Delaware, Inc. and a Director of Barr Laboratories, Inc. The Company has restated its consolidated financial statements as of June 30, 2000 and for the year then ended. This restatement results from a revision in the Company's method of accounting for the warrants issued to DuPont Pharmaceuticals Company in connection with the strategic alliance executed in March 2000 (see Note 2). The Company and its independent accountants, Deloitte & Touche LLP, believed that its original accounting for these agreements was appropriate. However, after further discussion and advice from the Staff of the Securities and Exchange Commission ("SEC") in connection with their review of the Company's financial statements, the Company has revised its accounting. In March 2000, the Company issued 1.5 million fully vested and immediately exercisable warrants to DuPont and immediately expensed the $16,418 fair value as Agreement expense. The Company separately recorded the $14,583 of revenues it earned under its Product Development Agreement, Development and Marketing Agreement and ViaSpan Agreement (see Note 2) as Development and other revenue for the year ended June 30, 2000. The Company revised its accounting for the warrants to report a warrant subscription receivable for the fair value of the warrants upon issuance and to apply the proceeds earned under the related DuPont agreements to the warrant subscription receivable. As a result, the Company has restated its 2000 consolidated financial statements. The total effect of the restatement was to increase previously reported 2000 net income by $1,835 or $.05 per share assuming dilution and to decrease net income and earnings per share in the first quarter of fiscal year 2001 by $1,835 or $0.05 per share assuming dilution. The net effect of adjustments made to 2000 quarterly reported results is disclosed in Note 16. In addition, the Company has reclassified proceeds from supply agreements from revenues to proceeds from patent challenge settlement (See Note 3). The Company and its independent accountants, Deloitte & Touche LLP, believed the decision to classify such proceeds as revenues was 12 13 appropriate since patent challenges are part of Barr's three-part business strategy. However, based on further discussions with the SEC, the Company has reclassified the amounts to reflect that the cash Bayer elects to pay us under our Ciprofloxacin supply agreement is non-operating revenue. The reclassification had no effect on the previously reported net income for the years ended June 30, 2000, 1999 and 1998 or for any quarters therein. A summary of the effects of the restatement and reclassification is as follows:
FISCAL 2000 FISCAL 1999 FISCAL 1998 ----------- ----------- ----------- As As As Previously As Previously As Previously As Reported Revised Reported Revised Reported Revised -------- ------- -------- ------- -------- ------- Total revenues $482,278 $440,110 $444,033 $415,950 $377,304 $346,638 Earnings from operations 64,756 39,007 79,608 51,525 53,357 22,691 Net earnings 42,342 44,177 49,250 49,250 32,720 32,720 Earnings per common share - assuming dilution $ 1.19 $ 1.24 $ 1.39 $ 1.39 $ 0.94 $ 0.94
Certain amounts in the prior year's financial statements have been reclassified to conform to the current year presentation. (b) Credit and Market Risk Financial instruments that potentially subject the Company to credit risk consist principally of interest-bearing investments and trade receivables. The Company performs ongoing credit evaluations of its customers' financial condition and generally requires no collateral from its customers. (c) Cash and Cash Equivalents Cash equivalents consist of short-term, highly liquid investments (primarily market auction securities with interest rates that are re-set in intervals of 28 to 49 days) which are readily convertible into cash at par value (cost). As of June 30, 2000 and 1999, $74,011 and $28,283, respectively, of the Company's cash was held in an interest- bearing escrow account. Such amounts represent the portion of the Company's payable balance with the Innovator of Tamoxifen, which the Company has decided to secure in connection with its cash management policy. In December 1995, the Company and the Innovator of Tamoxifen entered into an Alternative Collateral Agreement ("Collateral Agreement") which suspends certain sections of the Supply and Distribution Agreement ("Distribution Agreement") entered into by both parties in March 1993. Under the Collateral Agreement, extensions of credit to the Company are no longer required to be secured by a letter of credit or cash collateral. However, the Company may at its discretion maintain a balance in the escrow account based on its short-term cash requirements. All remaining terms of the Distribution Agreement remain in place. In return for the elimination of the cash 13 14 collateral requirement and in lieu of issuing letters of credit, the Company has agreed to pay the Innovator monthly interest based on the average unsecured monthly Tamoxifen payable balance, as defined in the Collateral Agreement, and maintain compliance with certain financial covenants. The Company was in compliance with such covenants at June 30, 2000. (d) Inventories Inventories are stated at the lower of cost, determined on a first-in, first-out (FIFO) basis, or market. (e) Property, Plant and Equipment Property, plant and equipment is recorded at cost. Depreciation is recorded on a straight-line basis over the estimated useful lives of the related assets. Leasehold improvements are amortized on a straight-line basis over the shorter of their useful lives or the terms of the respective leases. The estimated useful lives of the major classification of depreciable assets are:
Years ----- Buildings 45 Building improvements 10 Machinery and equipment 3-10 Leasehold improvements 3-10
Maintenance and repairs are charged to operations as incurred; renewals and betterments are capitalized. (f) Research and Development Research and development costs, which consist principally of product development costs, are charged to operations as incurred. (g) Earnings Per Share On May 31, 2000, the Company's Board of Directors declared a 3-for-2 stock split effected in the form of a 50% stock dividend. Approximately 11.6 million additional shares of common stock were distributed on June 29, 2000 to shareholders of record as of June 12, 2000. All applicable prior year share and per share amounts have been adjusted for the stock split. The following is a reconciliation of the numerators and denominators used to calculate Earnings per common share ("EPS") before extraordinary loss in the Consolidated Statements of Operations: 14 15
AS REVISED 2000 1999 1998 ---- ---- ---- Earnings per common share: Earnings before extraordinary loss (numerator) $44,177 $49,250 $33,510 Weighted average shares (denominator) 34,406 33,877 32,716 Earnings before extraordinary loss $ 1.28 $ 1.45 $ 1.02 ======= ======= ======= Earnings per common share - assuming dilution: Earnings before extraordinary loss (numerator) $44,177 $49,250 $33,510 Weighted average shares 34,406 33,877 32,716 Effect of dilutive options 1,309 1,496 2,069 ------- ------- ------- Weighted averages shares- assuming dilution (denominator) 35,715 35,373 34,785 Earnings before extraordinary loss $ 1.24 $ 1.39 $ 0.96 ======= ======= ======= Share amounts in thousands
During the years ended June 30, 2000, 1999 and 1998, there were 1,560,000, 819,000 and 289,000 respectively, of outstanding options and warrants that were not included in the computation of diluted EPS, because their respective exercise prices were greater than the average market price of the common stock for the period. (h) Deferred Financing Fees All debt issuance costs are being amortized on a straight-line basis over the life of the related debt, which matures in 2002, 2004 and 2007. The unamortized amounts of $238 and $305 at June 30, 2000 and 1999, respectively, are included in other assets in the Consolidated Balance Sheets. In connection with the November 1997 early extinguishment of the then remaining $14,400 10.15% Senior Secured Notes, the Company wrote off $195 in deferred financing fees in the year ended June 30, 1998 (See Note 8 to the Consolidated Financial Statements). (i) Fair Value of Financial Instruments Cash, Accounts Receivable, Other Receivables and Accounts Payable - The carrying amounts of these items are a reasonable estimate of their fair value. Marketable Securities - Marketable securities are recorded at their fair value (See Note 7 to the Consolidated Financial Statements). Other Assets - Investments in strategic collaborations that do not have a readily determinable market value are recorded at cost as it is a reasonable estimate of fair value (See Note 7 to the Consolidated Financial Statements). 15 16 Long-Term Debt - The fair value at June 30, 2000 and 1999 is estimated at $30 million and $32 million, respectively. Estimates were determined by discounting the future cash flows using rates currently available to the Company. The fair value estimates presented herein are based on pertinent information available to management as of June 30, 2000. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date, and current estimates of fair value may differ significantly from the amounts presented herein. (j) Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and use assumptions that affect certain reported amounts and disclosures; actual results may differ substantially. (k) Revenue Recognition The Company recognizes product sales revenue when goods are shipped. Barr earns revenues under the DuPont research and development agreements (see Note 2) as Barr performs the related research and development. Amounts received under these agreements are not refundable. For the period between January 1, 2000 and June 30, 2000, Barr earned Transition Revenues under the ViaSpan Agreement. For the year ended June 30, 2000, all revenues earned under the DuPont and ViaSpan Agreements have been applied against the warrant receivable (see Note 2). (l) Segment Reporting The Company operates in one reportable segment - the development, manufacture and marketing of generic and proprietary pharmaceuticals. The Company's chief operating decision-maker reviews operating results on a consolidated company basis. The Company's manufacturing plants are located in New Jersey, New York and Virginia and its products are sold throughout the United States and Puerto Rico, primarily to wholesale and retail distributors. In fiscal 2000, 1999 and 1998, a customer accounted for approximately 16%, 14% and 12% of product sales, respectively. No other customer accounted for greater than 10% of product sales in any of the last three fiscal years. (m) Asset Impairment The Company reviews the carrying value of its property, plant and equipment for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets. 16 17 (n) New Accounting Pronouncements Derivative Instruments On June 15, 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," which requires that companies recognize all derivatives as either assets or liabilities on the balance sheet and measure those instruments at fair value. In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133," which defers the effective date of SFAS No. 133 until the Company's fiscal year 2001. The Company has evaluated this statement and determined that implementation will not have a material impact on the Company's existing accounting policies and financial reporting disclosures. Revenue Recognition In December 1999, the Securities and Exchange Commission ("SEC") staff issued Staff Accounting Bulletin ("SAB") 101, "Revenue Recognition in Financial Statements" which summarizes certain of the SEC staff's views in applying generally accepted accounting principles to revenue recognition in financial statements. The accounting described in this bulletin must be applied no later than the fourth fiscal quarter of fiscal years beginning after December 15, 1999. Based on its current accounting policies, the Company does not expect any material changes to its consolidated financial statements as a result of adopting SAB 101. (2) DUPONT PHARMACEUTICALS COMPANY STRATEGIC ALLIANCE On March 20, 2000, the Company signed definitive agreements to establish a strategic relationship with DuPont Pharmaceuticals Company ("DuPont") to develop, market and promote several proprietary products and to terminate all litigation between the two companies. Each agreement contains common termination provisions including for bankruptcy and material breach by either party which is not cured within a specified period. The Company is unable to assess whether the individual terms of each of the agreements would have been different had each of the agreements been negotiated separately with other third parties not involved in litigation. These agreements are individually described below. Development and Other Revenue/Warrant Subscription Receivable In connection with a proprietary product development funding agreement ("Product Development Agreement"), DuPont may invest up to $45 million over three years to support the development of three of the Company's proprietary products. The funding is subject to a maximum amount of $17 million per product. Funding is made on a quarterly basis and is limited to a maximum of $5 million per quarter. As Barr incurs qualified research and development expenses, as defined in the Product Development Agreement, Barr records such expenses as R&D, and invoices and records the related revenue from DuPont as development and other revenue. Upon approval of the products, Barr will be responsible for marketing the products and DuPont may receive royalties based on product sales for a term of ten years. Such royalties may be reduced if Barr elects to repay the funding provided by DuPont. If 17 18 Barr elects this option, DuPont may elect to eliminate the royalty in exchange for an additional fee. In connection with the Product Development Agreement, the Company earned $8 million for the year ended June 30, 2000 and reported such amount as an offset to the warrant subscription receivable described below. In a second agreement, DuPont will assume responsibility for sales and marketing support of an undisclosed proprietary product that Barr expects to launch in the first calendar quarter of 2001 ("Development and Marketing Agreement"). During the development period, as Barr completes its ongoing research and other development activities necessary to gain FDA approval for the product, Barr receives payments and records revenues. Such payments, including a milestone payment if FDA approval is achieved by a certain date, could total up to $9 million over five quarters. Upon FDA approval of the product, Barr will be responsible for manufacturing and packaging the product for DuPont, and DuPont will receive a royalty based on product sales for a term of five years. In addition to general termination provisions, DuPont may terminate the agreement after two years from launch of the product. Barr may terminate the agreement after three years from the launch of the product and if so, DuPont will receive a quarterly royalty based on product sales for one year following the termination date. For the year ended June 30, 2000, the Company earned $4 million related to this agreement and reported such amount as an offset to the warrant subscription receivable described below. Under the terms of a third agreement, ("ViaSpan Agreement"), Barr will become the sole distributor in the United States and Canada of DuPont's ViaSpan(TM) organ transplant preservation agent for a period of eight years. Barr will purchase ViaSpan from DuPont for resale. During a transition period, that ended July 31, 2000, DuPont remained the distributor of ViaSpan but paid a fee to Barr based on a defined formula ("Transition Revenue") calculated on DuPont's actual sales of ViaSpan during this transition period. In addition to general termination provisions, Barr may terminate this agreement at any time upon a defined notice period. For the year ended June 30, 2000, the Company earned approximately $2.6 million during this transition period and reported such amount as an offset to the warrant subscription receivable described below. Beginning August 1, 2000, Barr assumed complete responsibility for distributing the product and records product sales and related costs, including royalties to DuPont based on product sales, in its Consolidated Statements of Operations. Warrants In connection with the strategic alliance, the Company issued two warrants granting DuPont the right to purchase 750,000 shares of Barr's common stock at $31.33 per share, and 750,000 shares at $38.00 per share, respectively. Each warrant is immediately exercisable and expires in March 2004. DuPont cannot assign or transfer the warrants to a third party without Barr's consent. If Barr were not to provide consent within a specified period, DuPont has put rights that require Barr to purchase all or a portion of the warrant to be transferred. In connection with the issuance of such warrants, the Company recorded approximately $16.4 million as the fair value of the warrants as a subscription receivable in the shareholder's equity section of the Consolidated Balance Sheets at June 30, 2000. The amount was calculated using a Black-Scholes option pricing model with the following assumptions at the grant date: dividend yield of 0%; expected volatility of 38%; weighted-average risk-free interest rate of 7.1341% and expected term of 4 years. For the year ended June 30, 2000, the Company applied the entire $14.6 million earned under the three 18 19 agreements with DuPont as a reduction of the warrant receivable, leaving a remaining balance of $1,835 in shareholder's equity at June 30, 2000. Once the warrant receivable has been reduced to zero, the Company will report all future revenues earned under the Product Development and Development and Marketing Agreements as Development and other revenue on the Consolidated Statements of Operations. (3) PROCEEDS FROM PATENT CHALLENGE SETTLEMENT In January 1997, Bayer AG and Bayer Corporation ("Bayer") and the Company agreed to settle the then pending litigation regarding Bayer's patent protecting ciprofloxacin hydrochloride. Under the Settlement Agreement, the Company withdrew its patent challenge by amending its ANDA from a paragraph IV certification (claiming invalidity) to a paragraph III certification (seeking approval upon patent expiry) and acknowledged the validity and enforceability of the ciprofloxacin patent. As consideration for this settlement, the Company received a non-refundable payment of $24.55 million in January 1997 which it recorded as proceeds from patent challenge settlement (See Note 1). Concurrent with the Settlement Agreement, the Company also signed a contingent, non-exclusive Supply Agreement ("Supply Agreement") with Bayer which ends at patent expiry in December 2003. Under the terms of the Supply Agreement, Bayer, at its sole option can either allow Barr and Rugby Laboratories, now owned by Watson Pharmaceuticals, Inc., to purchase, at a predetermined discount to Bayer's then selling price, quantities of ciprofloxacin for resale under market conditions or make quarterly cash payments as defined in the Agreement. Further, the Supply Agreement also provides that, six months prior to patent expiry, currently July 2003, if Barr is not already distributing the product, Barr and Rugby Laboratories will have the right to begin distributing ciprofloxacin product manufactured by Bayer. The Bayer license is non-exclusive and Bayer may, at its option, provide other non-exclusive licenses to others after Barr and Rugby Laboratories have operated under the license for six months. If Bayer elects to supply Barr and Rugby Laboratories with product for resale in the market, the amount Barr and Rugby Laboratories could earn would be dependent upon numerous market factors including, the existence of competing products, market acceptance of the Barr product and pricing decisions. If Bayer elects not to allow Barr and Rugby Laboratories to purchase product for resale, Barr is entitled to receive cash payments which could range from $28-$31 million per year through June 30, 2003. As of June 30, 2000, the present value of the cash payments Barr may receive approximates $93 million. However, there is no guarantee that Bayer will continue to elect to make cash payments. Barr recognizes the amounts due under the Supply Agreement as such amounts are realized based on the outcome of Bayer's election. The amounts realized are reported as proceeds from patent challenge settlement. Also included in proceeds from patent challenge settlement for the years ended June 30, 1999 and 1998 is $1,500 and $4,500, respectively, received under a separate contingent supply agreement with an unrelated party relating to the ciprofloxacin patent challenge. 19 20 (5) INVENTORIES A summary of inventories is as follows:
June 30, --------------------------- 2000 1999 ---- ---- Raw materials and supplies $16,884 $15,790 Work-in-process 5,102 7,957 Finished goods 57,496 53,866 ------- ------- $79,482 $77,613 ======= =======
Tamoxifen Citrate, purchased as a finished product, accounted for $42,730 and $43,040 of finished goods inventory at June 30, 2000 and 1999, respectively. (6) PROPERTY, PLANT AND EQUIPMENT A summary of property, plant and equipment is as follows:
June 30, -------------------------- 2000 1999 ---- ---- Land $ 3,408 $ 3,256 Buildings and improvements 64,649 57,669 Machinery and equipment 72,886 69,789 Leasehold improvements 1,288 1,665 Automobiles and trucks 68 68 Construction in progress 3,823 7,041 -------- -------- 146,122 139,488 Less: Accumulated depreciation & amortization 50,826 45,724 -------- -------- $ 95,296 $ 93,764 ======== ========
For the years ended June 30, 2000, 1999 and 1998, $136, $205 and $2,047 of interest was capitalized, respectively. (7) MARKETABLE SECURITIES & OTHER ASSETS The Company's investments in marketable securities and certain other assets are classified as "available for sale" and, accordingly, are recorded at current market value with offsetting adjustments to shareholders' equity, net of income taxes. Marketable securities include investments in a short duration portfolio of corporate and government debt. The debt securities will be held for less than one year and are therefore, recorded as a current asset in the Consolidated Balance Sheets. Other assets include equity securities that represent the Company's investments in Galen Holdings plc. (formerly Warner Chilcott plc.) and Halsey Drug Co., Inc. ("Halsey"). 20 21 Warner Chilcott plc. On August 13, 1997, Barr made a strategic investment in Warner Chilcott, a developer, marketer, and distributor of specialty pharmaceutical products. In connection with Warner Chilcott's Initial Public Offering ("Offering"), the Company acquired 250,000 Ordinary Shares represented by 250,000 American Depository Shares ("ADSs") at a price equal to the initial public offering price less underwriting discounts and commissions. The initial investment totaled $4,069. In addition, the Company was granted warrants to purchase an additional 250,000 shares in the form of ADSs. Beginning on the first anniversary of the Offering and annually thereafter for the next three years, one-fourth of the warrants will be exercisable by Barr. If Barr does not exercise in full the portion of the warrant exercisable during any one year, such portion of the warrant will terminate. The Company elected not to exercise the first portion of the warrants because the warrants' exercise price exceeded the then market price, and as a result, such portion of the warrants terminated. The Company exercised the second portion on August 7, 2000. Halsey Drug Co., Inc. In April 1999, the Company sold its rights to several pharmaceutical products to Halsey in exchange for 500,000 warrants exercisable for 500,000 shares of Halsey's common stock at $1.06 per share. The warrants expire in April 2004. In connection with this sale, the Company recorded an investment in warrants and realized a gain of $343. The Company has valued the warrants at their fair value using the Black-Scholes option-pricing model. Other Investments Also included in other assets is the Company's investment of $2,250 in Gynetics, Inc., a private company that develops and markets pharmaceutical products and medical devices to advance the healthcare of women and an investment of $550 in another private company with whom the Company will work in connection with another one of its proprietary products. These investments are recorded at cost in the Consolidated Balance Sheets. The amortized cost and estimated market values of the securities at June 30, 2000 and 1999 are as follows: 21 22
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED MARKET June 30, 2000 COST GAINS LOSSES VALUE - ------------- ---- ----- ------ ----- Debt securities: U.S. Government securities $ 101 $ -- $ 5 $ 96 Equity securities 4,412 3,206 -- 7,618 ------ ------ ------ ------ Total securities $4,513 $3,206 $ 5 $7,714 ====== ====== ====== ======
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED MARKET June 30, 1999 COST GAINS LOSSES VALUE - ------------- ---- ----- ------ ----- Debt securities: U.S. Government securities $ 5,954 $ - $ 55 $ 5,899 Corporate bonds 2,235 1 8 2,228 ------- ------- ------- ------- Total debt securities 8,189 1 63 8,127 Equity securities 4,069 -- 2,038 2,031 ------- ------- ------- ------- Total securities $12,258 $ 1 $ 2,101 $10,158 ======= ======= ======= =======
Proceeds of $52,916 and $9,446, which include a loss of $122 and $6, respectively, were received on the sales of marketable securities in the years ended June 30, 2000 and 1999, respectively. The cost of investments sold is determined by the specific identification method. (8) LONG-TERM DEBT A summary of long-term debt is as follows:
June 30, -------------------------- 2000 1999 ---- ---- New Jersey Economic Development Authority Bond (a) $ -- $ 241 Senior unsecured notes (b) 27,143 28,571 Equipment financing (c) 2,865 3,361 Unsecured revolving credit facility (d) -- -- ------- ------- 30,008 32,173 Less: Current installments of long-term debt 1,924 2,165 ------- ------- Total long-term debt $28,084 $30,008 ======= =======
(a) The New Jersey Economic Development Authority Bond was payable to a bank. Such loan was secured by a first mortgage on land, building and improvements on the facility located at 265 Livingston Street. Interest was charged at 75% of the bank's prime rate. The final installment of $220 was paid in January 2000. (b) In November 1997, the Company refinanced $14,400 of outstanding Senior Secured Notes with $30,000 of Senior Unsecured Notes with an average interest rate of 6.88% per year. The cash payment of $16,055 included the outstanding principal of $14,400, a prepayment penalty of $1,087 and accrued interest through November 18, 1997 of $568. The prepayment penalty of $1,087 and the related write-off of approximately 22 23 $195 in previously deferred financing costs resulted in an extraordinary loss. This extraordinary loss from early extinguishment of debt, net of taxes of $492, was $790 or $0.02 per share. The Senior Unsecured Notes of $30,000 include a $20,000, 7.01% Note due November 18, 2007 and $10,000, 6.61% Notes due November 18, 2004. Annual principal payments under the Notes total $1,429 through November 2002, $5,429 in 2003 and 2004, and $4,000 in 2005 through 2007. The Senior Unsecured Notes contain certain financial covenants including restrictions on dividend payments not to exceed $10 million plus 75% of consolidated net earnings subsequent to June 30, 1997. The Company was in compliance with all such covenants as of June 30, 2000. (c) In April 1996, the Company signed a Loan and Security Agreement with BankAmerica Leasing and Capital Group that provided the Company up to $18,750 in financing for equipment to be purchased through October 1997. Notes entered into under this agreement require no principal payment for the first two quarters; bear interest quarterly at a rate equal to the London Interbank Offer Rate (LIBOR) plus 125 basis points; and have a term of 72 months. LIBOR was 6.769% and 5.368% at June 30, 2000 and June 30, 1999, respectively. (d) The Company currently has no outstanding borrowings under its $20,000 Unsecured Revolving Credit Facility ("Revolver") with Bank of America, National Association. Borrowings under this facility bear interest at either prime or LIBOR plus 0.75%. In addition, the Company is required to pay a commitment fee equal to .25% of the difference between the outstanding borrowings and $20,000. In December 1999, the term of the Revolver was extended to December 31, 2001. Principal maturities of existing long-term debt for the next five years and thereafter are as follows:
Year Ending June 30, -------- 2001 $1,924 2002 3,184 2003 2,042 2004 5,429 2005 5,429 Thereafter 12,000
(9) RELATED-PARTY TRANSACTIONS The Company's related-party transactions were with affiliated companies of Dr. Bernard C. Sherman. During the years ended June 30, 2000, 1999 and 1998, the Company purchased $2,716, $1,134 and $1,799, respectively, of bulk pharmaceutical material from such companies. In addition, the Company sold certain of its pharmaceutical products and bulk pharmaceutical materials to two other companies owned by Dr. Sherman. During fiscal 1996, the Company also entered into a multi-year agreement with a Company owned by Dr. Sherman to share litigation and development costs in connection with one of its patent challenges. For the years ended June 30, 2000, 1999 and 1998, the Company recorded $668, $1,438 and $1,170, respectively, in connection with such agreement as a reduction to selling, 23 24 general and administrative expenses and research and development expenses. During the years ended June 30, 2000, 1999 and 1998, the Company's founder and Vice Chairman, Edwin A. Cohen, earned $200, $200 and $250, respectively, under a consulting agreement, which expires on June 30, 2002. (10) INCOME TAXES A summary of the components of income tax expense is as follows: Year Ended June 30, --------------------------------------------- 2000 1999 1998 ---- ---- ---- Current: Federal $ 25,475 $ 25,173 $ 15,504 State 4,100 3,870 1,567 -------- -------- -------- 29,575 29,043 17,071 -------- -------- -------- Deferred: Federal (3,577) 1,588 3,103 State (550) 246 482 -------- -------- -------- (4,127) 1,834 3,585 -------- -------- -------- Total $ 25,448 $ 30,877 $ 20,656 ======== ======== ======== Income tax expense for the years ended June 30, 2000, 1999 and 1998 is included in the financial statements as follows:
Year Ended June 30, ------------------------------------ 2000 1999 1998 -------- -------- -------- Continuing operations $ 25,448 $ 30,877 $ 21,148 Extraordinary loss on early extinguishment of debt -- -- (492) -------- -------- -------- $ 25,448 $ 30,877 $ 20,656 ======== ======== ========
The provision for income taxes differs from amounts computed by applying the statutory federal income tax rate to earnings before income taxes due to the following:
Year Ended June 30, --------------------------------------- 2000 1999 1998 ---- ---- ---- Federal income taxes at statutory rate $ 23,726 $ 28,044 $ 18,681 State income taxes, net of federal income tax effect 2,307 2,675 1,332 Other, net (585) 158 643 -------- -------- -------- $ 25,448 $ 30,877 $ 20,656 ======== ======== ========
24 25 The temporary differences that give rise to deferred tax assets and liabilities as of June 30, 2000 and 1999 are as follows:
2000 1999 ---- ---- Deferred tax assets: Receivable reserves $ 2,313 $ 900 Inventory reserves 620 2,290 Inventory capitalization 895 385 Investments* -- 842 Other operating reserves 2,443 2,471 Warrants issued 6,610 -- -------- -------- Total deferred tax assets 12,881 6,888 Deferred tax liabilities: Plant and equipment (6,384) (4,173) Proceeds from patent challenge settlement (6,576) (6,319) Other operating reserves (240) -- Investments* (1,283) -- -------- -------- Total deferred tax liabilities (14,483) (10,492) -------- -------- Net deferred tax liability $ (1,602) $ (3,604) ======== ========
*Tax effects are reflected directly in equity. As of June 30, 2000, the Company has capital loss carryforwards of $151, expiring in 2004 and 2005. (11) SHAREHOLDERS' EQUITY Employee Stock Option Plans The Company has two stock option plans, the 1993 Stock Incentive Plan (the "1993 Option Plan") and the 1986 Option Plan, which were approved by the shareholders and which authorize the granting of options to officers and certain key employees to purchase the Company's common stock at a price equal to the market price on the date of grant. Effective June 30, 1996, options are no longer granted under the 1986 Option Plan. For fiscal 2000, 1999 and 1998, there were no options that expired under this plan. All options granted prior to June 30, 1996, under the 1993 Option Plan and 1986 Option Plan, are exercisable between one and two years from the date of grant and expire ten years after the date of grant except in cases of death or termination of employment as defined in each Plan. Options issued after June 30, 1996 are exercisable between one and three years from the date of grant. To date, no option has been granted under either the 1993 Option Plan or the 1986 Option Plan at a price below the current market price of the Company's common stock on the date of grant. 25 26 A summary of the activity resulting from all plans, adjusted for the June 2000 3-for-2 stock split, is as follows:
WEIGHTED-AVERAGE NO. OF SHARES OPTION PRICE ------------- ------------ Outstanding at 6/30/97 2,978,086 $ 8.55 Granted 293,250 26.39 Canceled (58,488) 15.07 Exercised (701,117) 4.82 ------- Outstanding at 6/30/98 2,511,731 9.05 Granted 417,000 22.75 Canceled (48,864) 21.69 Exercised (644,566) 4.67 ------- Outstanding at 6/30/99 2,235,301 12.59 Granted 617,516 24.07 Canceled (5,947) 26.20 Exercised (515,575) 7.76 -------- Outstanding at 6/30/00 2,331,295 $ 16.67 ========= Available for grant (6,243,750 authorized) 658,173 Exercisable at 6/30/00 1,366,460 $ 11.56
Non-Employee Directors' Stock Option Plan During fiscal year 1994, the shareholders ratified the adoption by the Board of Directors of the 1993 Stock Option Plan for Non-Employee Directors (the "Directors' Plan"). This formula plan, among other things, enhances the Company's ability to attract and retain experienced directors. In December 1998, the number of shares which each non-employee director is optioned was decreased from 11,250 to 7,500 shares on the grant date. In October 1999, the number of shares which each non-employee director is optioned was decreased from 7,500 to 5,000 shares on the grant date. Effective October 2000, the number of shares which each non-employee director is optioned is 7,500 shares on the grant date. All options granted under the Directors' Plan have ten-year terms and are exercisable at an option exercise price equal to the market price of the common stock on the date of grant. Each option is exercisable on the date of the first annual shareholders' meeting immediately following the date of grant of the option, provided there has been no interruption of the optionee's service on the Board before that date. The following is a summary of activity adjusted for the June 2000 3-for-2 stock split, for the three fiscal years ended June 30, 2000: 26 27
WEIGHTED-AVERAGE NO. OF SHARES OPTION PRICE ------------- ------------ Outstanding at 6/30/97 365,250 $ 8.07 Granted 101,250 24.00 Canceled (16,875) 24.00 Exercised (57,000) 6.60 ------ Outstanding at 6/30/98 392,625 11.70 Granted 56,250 32.42 Exercised (43,875) 7.88 ------ Outstanding at 6/30/99 405,000 14.99 Granted 37,500 19.96 Exercised (52,500) 8.30 ------ Outstanding at 6/30/00 390,000 $ 16.37 ====== Available for grant (843,750 authorized) 240,375 Exercisable at 6/30/00 352,500 $ 15.99
Employee Stock Purchase Plan During fiscal 1994, the shareholders ratified the adoption by the Board of Directors of the 1993 Employee Stock Purchase Plan (the "Purchase Plan") to offer employees an inducement to acquire an ownership interest in the Company. The Purchase Plan permits eligible employees to purchase, through regular payroll deductions, an aggregate of 675,000 shares of common stock at approximately 85% of the fair market value of such shares. Under the Plan, purchases were 60,874, 59,965 and 64,771 shares for the years ended June 30, 2000, 1999 and 1998, respectively. Accounting for Stock-Based Compensation Plans The Company applies APB No. 25 and related Interpretations in accounting for its stock-based compensation plans. Accordingly, no compensation cost has been recognized for its stock option plans and its stock purchase plan. Had compensation cost for the Company's stock-based compensation plans been determined based on the fair value at the grant dates for awards under those plans consistent with the method of SFAS No. 123, the Company's net earnings and earnings per share would have been reduced to the pro forma amounts indicated below:
As Revised 2000 1999 1998 ----------------- ---------------- ---------------- Net earnings As reported $ 44,177 $ 49,250 $ 32,720 Pro forma $ 41,233 $ 46,940 $ 30,752 Net earnings per share As reported $ 1.28 $ 1.45 $ 1.00 Pro forma $ 1.20 $ 1.39 $ 0.94 Net earnings per share- As reported $ 1.24 $ 1.39 $ 0.94 assuming dilution Pro forma $ 1.15 $ 1.33 $ 0.89
27 28 The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions for 2000, 1999 and 1998, respectively: dividend yield of 0%; expected volatility of 50.6%, 48.9% and 42.1%; weighted-average risk-free interest rates of 5.8%, 4.7% and 5.9%; and expected option life of 3 years for the 1993 Option Plan and 4 years for the Directors' Plan. The following table summarizes information about stock options outstanding at June 30, 2000:
Options Outstanding Options Exercisable --------------------------------------------------------- ---------------------------------------- Weighted Range of Number Average Weighted Number Weighted Exercise Outstanding Remaining Average Exercisable Average Prices at 6/30/00 Contractual Life Exercise Price at 6/30/00 Exercise Price ------ ---------- ---------------- ------------- ---------- -------------- $ 3.03 - 7.58 925,184 4.43 $6.44 925,184 $6.44 11.50 - 14.74 373,285 6.27 12.51 373,285 12.51 19.60 - 24.89 1,118,218 8.72 23.44 203,325 23.21 26.02 - 32.41 304,608 7.43 27.57 217,166 28.00 ------------ ---------- 2,721,295 1,718,960 ============ ==========
(12) SAVINGS AND RETIREMENT PLAN The Company has a savings and retirement plan (the "401(k) Plan") which is intended to qualify under Section 401(k) of the Internal Revenue Code. Employees are eligible to participate in the 401(k) Plan in the first month following the month of hire. Participating employees may contribute up to a maximum of 12% of their earnings before or after taxes. The Company is required, pursuant to the terms of its union contract, to contribute to each union employee's account an amount equal to the 2% minimum contribution made by such employee. The Company may, at its discretion, contribute a percentage of the amount contributed by an employee to the 401(k) Plan up to a maximum of 10% of such employee's compensation. Participants are always fully vested with respect to their own contributions and any profits arising therefrom. Participants become fully vested in the Company's contributions and related earnings after five full years of employment. The Company's contributions to the 401(k) Plan were $2,608, $2,292 and $2,194 for the years ended June 30, 2000, 1999 and 1998, respectively. In Fiscal 2000, the Board of Directors approved a non-qualified plan ("Excess Plan") that enables certain executives to defer up to 10% of their compensation in excess of the qualified plan. The Company may, at its discretion, contribute a percentage of the amount contributed by the individuals covered under this Excess Plan to a maximum of 10% of such individual's compensation. In fiscal 2000, the Company chose to make contributions at the 10% rate to this plan. As of June 30, 2000, the Company had recorded an asset and liability for the Excess Plan of $422. 28 29 (13) OTHER INCOME (EXPENSE) A summary of other income (expense) is as follows:
Year Ended June 30, ----------------------------------- 2000 1999 1998 ---- ---- ---- Net gain (loss) on sale of assets $ 470 $ (11) $ (63) Net (loss) gain on sale of securities (141) (11) 2 Other 18 58 44 ----- ----- ----- Other income (expense) $ 347 $ 36 $ (17) ===== ===== =====
(14) COMMITMENTS AND CONTINGENCIES The Company is party to various operating leases which relate to the rental of office facilities and equipment. The Company believes it will be able to extend such leases, if necessary. Rent expense charged to operations was $1,069, $1,099 and $1,493 in fiscal 2000, 1999 and 1998, respectively. Future minimum rental payments, exclusive of taxes, insurance and other costs under noncancellable long-term operating lease commitments, are as follows:
Minimum Year Ending Rental June 30, Payments --------------- --------------- 2001 $ 614 2002 185 2003 159 2004 148 2005 110
Product Liability The Company maintains product liability insurance coverage in the amount of $20,000. No significant product liability suit has ever been filed against the Company. However, if one were filed and such a case were successful against the Company, it could have a material adverse effect upon the business and financial condition of the Company to the extent such judgment was not covered by insurance or exceeded the policy limits. Class Action Lawsuits On July 14, 2000, Louisiana Wholesale Drug Co. filed a class action complaint in the United States District Court for the Southern District of New York against Bayer Corporation, the Rugby Group and the Company. The complaint alleges that the Company and the Rugby Group agreed with Bayer Corporation not to compete with a generic version of Ciprofloxacin (Cipro(TM)) pursuant to an anti-competitive agreement between the defendants. The plaintiff purports to bring claims on behalf of all direct purchasers of Cipro from 1997 to present. On August 1, 2000, Maria Locurto filed a similar class action complaint in the United States District Court for the Eastern Division of New York. On August 4, 2000, Ann Stuart, et al filed a class action complaint in the Superior Court of New Jersey, Law Division, Camden County. This complaint alleges violations of New Jersey statutes relating to the Cipro agreement. 29 30 The Company believes that its agreement with Bayer Corporation is a valid settlement to a patent suit and cannot form the basis of an antitrust claim. Although it is not possible to forecast the outcome of these matters, the Company intends to vigorously defend itself. It is anticipated that these matters may take several years to be resolved but an adverse judgment could have a material adverse impact on the Company's financial statements. Invamed, Inc./Apothecon, Inc. Lawsuit In February 1998 and May 1999, Invamed, Inc., which has since been acquired by Geneva Pharmaceuticals, Inc., a division of Novartis AG ("Invamed"), and Apothecon, Inc., a division of Bristol-Meyers Squibb, Inc. ("Apothecon"), respectively, named the Company and several others as defendants in lawsuits filed in the United States District Court for the Southern District of New York, charging that the Company unlawfully blocked access to the raw material source for Warfarin Sodium. The Company believes that these suits are without merit and intends to defend its position vigorously. These actions are currently in the discovery stage. It is anticipated that this matter may take several years to be resolved but an adverse judgment could have a material adverse impact on the Company's consolidated financial statements. Administrative Matters Federal antitrust authorities have undertaken a review of certain trade practices within the pharmaceutical industry, specifically patent challenge settlements, unfair trade practices by brand drug companies and exclusive supply arrangements. The Company has voluntarily discussed with the Federal Trade Commission ("FTC") its arrangements with the supplier of the raw material for its Warfarin Sodium. The Company has voluntarily responded to requests from the Department of Justice by providing documents relating to the settlement of its Tamoxifen patent challenge. On June 30, 1999, the Company received a subpoena and civil investigative demand from the FTC relating to its March 1997 patent litigation settlement regarding Ciprofloxacin hydrochloride. The Company believes that it has complied with all applicable laws and regulations governing trade and competition in the marketplace in connection with its arrangements with its raw material suppliers and its two patent challenge settlements. Other Litigation As of June 2000, the Company was involved with other lawsuits incidental to its business, including patent infringement actions. Management of the Company, based on the advice of legal counsel, believes that the ultimate disposition of such other lawsuits will not have any significant adverse effect on the Company's consolidated financial statements. (15) FOURTH QUARTER CHARGE FOR FISCAL 1998 During the quarter ended June 1998, the Company recorded a $1.2 million restructuring charge which is included in selling, general and administrative expenses in the Consolidated Statements of Operations. Approximately half of this charge related to the write-off of equipment and leasehold improvements in connection with the closing of a leased New Jersey packaging facility, for which the operations have been relocated to other company facilities. The remainder related to severance related expenses for certain operations employees, 30 31 primarily those affiliated with the closed facility. As of June 30, 1999, the 1998 fourth quarter restructuring plan was completed and all payments were made. (16) QUARTERLY DATA (UNAUDITED) A summary of the quarterly results of operations is as follows:
THREE MONTH PERIOD ENDED ---------------------------------------------------------------------------- As As As As Revised Revised Revised Revised Sept. Dec. Mar. June 30 31 31 30 - ------------------------------------------------------------------------------------------------------------------------------- FISCAL YEAR 2000: Total revenues (3) $ 92,103 $ 113,987 $ 121,522 $ 112,498 Cost of sales 61,973 81,326 92,889 79,464 Net earnings (3) 11,493 12,394 11,848 8,442 EARNINGS PER COMMON SHARE - ASSUMING DILUTION Net earnings (1)(3) $ 0.32 $ 0.35 $ 0.33 $ 0.23 ========== =========== =========== =========== PRICE RANGE OF COMMON STOCK (2) High $ 26.75 $ 23.50 $ 33.92 $ 45.88 Low 18.88 19.00 20.00 25.38 FISCAL YEAR 1999: Total revenues (3) $ 89,149 $ 102,637 $ 115,822 $ 108,342 Cost of sales 63,908 73,920 87,968 75,597 Net earnings (3) 11,204 12,281 12,662 13,103 EARNINGS PER COMMON SHARE - ASSUMING DILUTION Net earnings (1)(3) $ 0.32 $ 0.35 $ 0.36 $ 0.37 ========== =========== =========== =========== PRICE RANGE OF COMMON STOCK (2) High $ 26.50 $ 33.17 $ 32.37 $ 27.00 Low 16.46 16.59 18.92 19.00
- ---------------- (1) The sum of the individual quarters may not equal the full year amounts due to the effects of the market prices in the application of the treasury stock method. During its two most recent fiscal years, the Company paid no cash dividend. (2) The Company's common stock is listed and traded on the New York Stock Exchange (BRL). At June 30, 2000, there were approximately 669 shareholders of record of common stock. The Company believes that a significant number of beneficial owners hold their shares in street names. (3) The quarters ended March 31, 2000 and June 30, 2000 have been restated to record a warrant subscription receivable for the value of the warrants issued to DuPont and to apply the initial proceeds earned under the related DuPont Agreements to the warrant subscription receivable (see Notes 1 and 2). In addition, the Company has reclassified proceeds from supply agreement for all periods presented from revenue to proceeds from patent challenge settlement (see Notes 1 and 3). A summary of the effects of the restatement and reclassification is as follows: 31 32
Three Month Period Ended ----------------------------------------------------------------------------------------------------- Fiscal 2000 Sep. 30 Dec. 31 Mar. 31 Jun. 30 As As As As Previously As Previously As Previously As Previously As Reported Revised Reported Revised Reported Revised Reported Revised -------- ------- -------- ------- -------- ------- -------- ------- Total revenues $ 98,853 $ 92,103 $120,820 $ 113,987 $ 135,760 $ 121,522 $126,845 $ 112,498 Net earnings 11,493 11,493 12,394 12,394 2,667 11,848 15,788 8,442 Earnings per common share - - assuming dilution $ 0.32 $ 0.32 $ 0.35 $ 0.35 $ 0.07 $ 0.33 $ 0.44 $ 0.23
FISCAL 1999
As As As As Previously As Previously As Previously As Previously As Reported Revised Reported Revised Reported Revised Reported Revised -------- ------- -------- ------- -------- ------- -------- ------- Total revenues $ 97,149 $ 89,149 $109,220 $ 102,637 $ 122,572 $ 115,822 $115,092 $ 108,342 Net earnings 11,204 11,204 12,281 12,281 12,662 12,662 13,103 13,103 Earnings per common share - - assuming dilution $ 0.32 $ 0.32 $ 0.35 $ 0.35 $ 0.36 $ 0.36 $ 0.37 $ 0.37
32 33 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders of Barr Laboratories, Inc.: We have audited the accompanying consolidated balance sheets of Barr Laboratories, Inc. and subsidiaries (the "Company") as of June 30, 2000 and 1999, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended June 30, 2000. Our audits also included the financial statement schedule listed in the Index at Item 14. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Barr Laboratories, Inc. and subsidiaries at June 30, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2000 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. As discussed in Note 1, the accompanying consolidated financial statements have been restated. DELOITTE & TOUCHE LLP Parsippany, New Jersey August 7, 2000 May 2, 2001 as to Note 1 33 34 RESPONSIBILITY FOR FINANCIAL REPORTING Management is responsible for the preparation and accuracy of the consolidated financial statements and other information included in this report. The consolidated financial statements have been prepared in conformity with generally accepted accounting principles using, where appropriate, management's best estimates and judgments. In meeting its responsibility for the reliability of the financial statements, management has developed and relies on the Company's system of internal accounting control. The system is designed to provide reasonable assurance that assets are safeguarded and that transactions are executed as authorized and are properly recorded. The Board of Directors reviews the financial statements and reporting practices of the Company through its Audit Committee, which is composed entirely of directors who are not officers or employees of the Company. The Committee meets with the independent auditors and management to discuss audit scope and results and also to consider internal control and financial reporting matters. The independent auditors have direct unrestricted access to the Audit Committee. The entire Board of Directors reviews the Company's financial performance and financial plan. /s/ Bruce L. Downey Chairman of the Board and Chief Executive Officer 34 35 ITEM 6. SELECTED FINANCIAL DATA (in thousands of dollars, except per share amounts)
YEAR ENDED JUNE 30, -------------------------------------------------------------------------------- Statements of Operations 2000 (8) 1999 (8) 1998 (8) 1997 (8) 1996 - -------------------------------------------------------------------------------------------------------------------------- Total revenues $ 440,110 $ 415,950 $ 346,638 $ 257,436 $ 232,224 Earnings before income taxes and extraordinary loss 69,625 80,127 54,658 32,050 11,509 Income tax expense 25,448 30,877 21,148 12,603 4,368 Earnings before extraordinary loss 44,177 49,250 33,510 19,447 7,141 Net earnings 44,177 49,250 32,720(2) 19,447 7,016(3) Earnings per common share: Earnings before extraordinary loss 1.28 1.45(1) 1.02(1) 0.61(1) 0.23(1)(4) Earnings per common share - assuming dilution: Earnings before extraordinary loss 1.24 1.39(1) 0.96(1) 0.58(1) 0.22(1)(4) Net earnings (5) 1.24 1.39(1) 0.94(1)(2) 0.58(1) 0.21(1)(3)(4)
BALANCE SHEET DATA 2000 1999 1998 1997 1996 ----------------------------------------------------------------- Working capital $202,892 $146,863 $ 95,281 $ 41,807 $ 52,985 Total assets 423,853 347,890 310,851 202,845 169,220 Long-term debt (6) 28,084 30,008 32,174 14,941 17,709 Shareholders' equity (7)(8) 282,168 213,707 155,929 102,138 80,161
(1) Amounts have been adjusted for the June 2000 3-for-2 stock split effected in the form of a 50% stock dividend. (2) Fiscal 1998 includes the effect of a $790 ($0.02 per share) extraordinary loss (net of tax of $492) on early extinguishment of debt (See Note 8 to the Consolidated Financial Statements). (3) Fiscal 1996 includes the effect of a $125 ($0.01 per share) extraordinary loss (net of tax of $76) on early extinguishment of debt. (4) Amounts have been adjusted for the May 1997 3-for-2 stock split effected in the form of a 50% stock dividend. (5) Fiscal 1997 and 1996 earnings per share amounts have been restated to conform with the provisions of Statement of Financial Accounting Standards No. 128 "Earnings per Share." (6) Excludes current installments (See Note 8 to the Consolidated Financial Statements). (7) The Company has not paid a cash dividend in any of the above years. (8) The fiscal year ended June 30, 2000 has been restated to record a warrant subscription receivable for the value of the warrants issued to DuPont and to apply the initial proceeds earned under the related DuPont agreements to the warrant subscription receivable (see Notes 1 and 2 to the Consolidated Financial Statements). In addition, the Company has reclassified proceeds from supply agreement for the fiscal years ended June 30, 1999, 1998 and 1997 from revenue to proceeds from patent challenge settlement (see Notes 1 and 3). 35 EX-23 3 y49301ex23.txt EX-23 CONSENT OF DELOITTE & TOUCHE LLP 1 EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in the Post-Effective Amendment to Registration Statement No. 33-13901, and in Registration Statement Nos. 33-73696, 33-73698, 33-73700, 333-17349 and 333-17351 of Barr Laboratories, Inc. on Form S-8 of our report dated August 7, 2000, May 2, 2001 as to Note 1 (which report expresses an unqualified opinion and includes an explanatory paragraph relating to the restatement described in Note 1) appearing in and incorporated by reference in the Annual Report on Form 10-K/A of Barr Laboratories, Inc. for the year ended June 30, 2000. DELOITTE & TOUCHE LLP Parsippany, New Jersey May 2, 2001 36 EX-27.0 4 y49301ex27-0.xfd FINANCIAL DATA SCHEDULE
5 YEAR Jul-01-1999 Jun-30-2000 Jun-30-2000 155,922 96 78,480 0 79,482 315,408 95,296 0 423,853 112,516 28,084 0 0 350 281,818 423,853 440,110 440,110 315,652 315,652 0 0 2,405 69,625 25,448 44,177 0 0 0 44,177 1.28 1.24 PP&E IS NET. RECEIVABLES ARE NET.
-----END PRIVACY-ENHANCED MESSAGE-----