-----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, GvZYNF8puLmOk0oYRlmFYgNUsNHfMoI9tN+mZmfe1K0KO5Bed0FPvF2hIYueyHb8 xzkJqfdOAUuopod6Occkww== 0000950123-99-008117.txt : 19990901 0000950123-99-008117.hdr.sgml : 19990901 ACCESSION NUMBER: 0000950123-99-008117 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990831 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 SEC ACT: SEC FILE NUMBER: 001-09860 FILM NUMBER: 99703274 BUSINESS ADDRESS: STREET 1: 2 QUAKER RD BOX 2900 CITY: POMONA STATE: NY ZIP: 10970-0519 BUSINESS PHONE: 9143538403 MAIL ADDRESS: STREET 1: 2 QUAKER RD STREET 2: BOX 2900 CITY: POMONA STATE: NY ZIP: 10970-0519 10-K405 1 BARR LABORATORIES, INC. 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (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, 1999 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) of the Act: Name of each exchange on Title of each class which registered: 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 $493,898,290 as of June 30, 1999 (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, 1999: 22,805,628. DOCUMENTS INCORPORATED BY REFERENCE PORTIONS OF THE REGISTRANT'S 1999 ANNUAL REPORT TO SHAREHOLDERS ARE INCORPORATED BY REFERENCE IN PART II AND PART IV HEREOF. PORTIONS OF THE REGISTRANT'S 1999 PROXY STATEMENT ARE INCORPORATED BY REFERENCE IN PART III HEREOF. 2 PART I ITEM 1. BUSINESS Barr Laboratories, Inc. ("Barr" or the "Company") is an established pharmaceutical company engaged in the development, manufacture and marketing of generic and proprietary prescription pharmaceuticals. 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 U.S. Food and Drug Administration ("FDA") approvals; market and customer acceptance and demand for new pharmaceutical products; ability to market new proprietary products; the impact of competitive products and pricing; timing and success of new 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. 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 Barr was founded in 1970 and commenced active business in 1972 as a manufacturer of generic drug products. Barr is listed on the New York Stock Exchange (NYSE-BRL). The Company currently markets 70 generic and proprietary products, representing various dosage strengths and product forms of 32 chemical entities. The Company's product line is concentrated primarily on six core therapeutic categories: oncology, female healthcare, cardiovascular, anti-infectives, pain management and psychotherapeutics. The Company's business strategy has three core components: (i) the development and marketing of generic pharmaceuticals that have one or more barriers to entry, (ii) developing the generic version and then challenging patents protecting select brand pharmaceuticals where the Company believes that such patents are either invalid, unenforceable or not infringed by the Company's product, and (iii) the development and introduction of proprietary pharmaceuticals. Generic Products The majority of the Company's currently marketed products represent generic forms of brand pharmaceutical products. These products are part of an industry with annual sales of approximately $9 billion. The Company rarely pursues those products where it expects that a significant number of its competitors will successfully develop a generic product. Instead, the Company principally pursues the development and marketing of generic pharmaceuticals that have one or more barriers to entry. The Company believes products with such barriers will face limited competition and, therefore, 2 3 provide longer product life cycles and/or higher profitability than commodity generic products. During the fiscal year ended June 30, 1999, the Company introduced seven new generic products, including a cancer agent, two additional strengths of its Warfarin Sodium anti-coagulant, two additional strengths of an anti-depressant, and two strengths of an anti-infective drug. Generic products introduced within the past two fiscal years, particularly the Company's Warfarin Sodium anti-coagulant, Naltrexone treatment for alcohol dependency, Hydroxyurea cancer agent, and members of the Company's portfolio of hormone replacement products have been the drivers behind sales and earnings increases. The Company's largest selling product, Tamoxifen Citrate ("Tamoxifen"), the generic equivalent of Nolvadex(R), is used to treat advanced breast cancer as well as impede the recurrence of tumors following surgery. In October 1998, the FDA approved the use of Tamoxifen for the reduction in incidence of breast cancer in women at high risk for developing this disease. Tamoxifen accounted for approximately 66%, 68% and 76% of the Company's product sales during fiscal 1999, 1998 and 1997, respectively. Warfarin Sodium is the generic equivalent of DuPont Pharmaceutical's Coumadin(R), an anti-coagulant with U.S. sales of approximately $500 million during the year ended December 31, 1998. Approved in March 1997, and launched in July 1997, approximately six million prescriptions for Barr's generic product had been dispensed as of the close of fiscal 1999. During the fiscal year, an additional generic competitor entered the market, and by fiscal year end a third competitor had received FDA approval for this product. Warfarin Sodium accounted for approximately 15% and 11% of the Company's product sales during fiscal 1999 and 1998, respectively. Patent Challenges The second part of Barr's generic product strategy is its patent challenge strategy. As part of this strategy, the Company identifies patent protected brand products where it believes the patents are either invalid or will not be infringed by the Company's product. Then, the Company undertakes the development and filing with the FDA of its generic version of the product, and engages in the litigation necessary to resolve the patent issues. As of the close of fiscal 1999, the Company has engaged in five patent challenges, of which three have been resolved and two are currently pending. The Company believes that the pursuit of these products to date has resulted in a significant consumer benefit, in that the successful outcome of two cases will ensure significant patient savings through the early introduction of more affordable versions of the branded products. In 1993, as a result of a settlement of a patent challenge against the innovator of Tamoxifen, Barr entered into a non-exclusive supply and distribution agreement. As a result of this agreement, breast cancer patients have had access to Barr's more affordable version of Tamoxifen eight years earlier than they might otherwise have. The Company also has a tentatively approved Abbreviated New Drug Application ("ANDA") for the manufacture of Tamoxifen. At the time of patent expiration in August 2002 (or should another company's patent challenge succeed), Barr will be permitted to begin the direct manufacture of Tamoxifen. In January 1997, Barr and Bayer AG settled the pending litigation regarding Bayer's patents protecting CIPRO(R) ("Ciprofloxacin"). Under terms of the settlement, Barr received a one-time 3 4 payment and entered into a contingent, non-exclusive supply agreement. Under this agreement, Bayer has the option to make payments to Barr or to provide Barr with quantities of Ciprofloxacin that Barr could market pursuant to a license from Bayer. Also as part of the settlement, Barr has the unconditional right to begin selling Ciprofloxacin no later than six months prior to the expiration of the patent. As a result of this agreement, the Company believes that consumers will receive a substantial benefit by having access to a more affordable generic product in advance of the date when the product would otherwise have been available for competition. The Company currently has two patent challenges pending, including a challenge against Prozac(R) and Ortho-Novum 7/7/7(R) (See Item 3, Legal Proceedings). The Company will continue to invest heavily in research and development and the legal costs necessary to identify future patent challenge opportunities. In August 1999, the FDA published a proposed 180-Day Generic Drug Exclusivity rule. This proposed rule is designed to clarify the FDA's interpretation of the 180-day generic drug exclusivity provision of the Drug Price Competition and Patent Term Restoration Act of 1984 ("Hatch-Waxman Act"), in response to numerous court challenges and citizens petitions. The proposed rule seeks to more clearly define who is entitled to the exclusivity period and how that period is "triggered." The comment period on the proposal ends in November 1999, and final rule-making, which is expected to incorporate comments from a number of parties including members of the generic industry, could also be the subject of additional court challenges. As a result, implementation of the FDA's interpretation could be delayed for a significant period. As such, it is impossible for the Company to predict what, if any, effect the proposed rule would have on the "first to file" status of its patent cases. In addition to Tamoxifen, products for which the Company was "first to file" include Ciprofloxacin ("CIPRO"), Zidovudine ("AZT(R)") and Fluoxetine ("Prozac"). The patent challenge process is a fundamental component of the Hatch-Waxman Act that is designed to encourage generic companies to develop versions of brand products and challenge suspect patents years ahead of patent expiry. The Company believes that its successful challenges provide more affordable medicine for consumers who otherwise would have paid higher brand prices for these products through patent expiry. Recently, the U.S. Department of Justice ("DOJ") and the Federal Trade Commission ("FTC") have been examining the settlement of such patent challenges (See Item 3, Legal Proceedings). The Company is confident the patent challenge provisions under the Hatch-Waxman Act provide a significant consumer benefit by allowing the introduction of more affordable generic products earlier than might otherwise be possible. Further, the Company believes that as the consumer benefits of this process become more apparent to the DOJ and FTC, any concerns will be resolved. Proprietary Pharmaceuticals Barr's focus on the development of proprietary pharmaceutical products, which was initiated in fiscal 1997, today includes a development portfolio of approximately ten projects. Under development are four cancer agents, three oral contraceptive products, one hormonal product, one anti-viral product, and a psycho-therapeutic agent. Projects in development are expected to compete in therapeutic categories that have total current annual sales in excess of $6 billion. The first product from Barr's proprietary product development program, the PREVEN(TM) Emergency Contraceptive Kit, a contraceptive co-developed with Gynetics, Inc., was approved in September 1998. Barr helped to develop and submit the new product application to the FDA and manufactures the oral contraceptive tablets that are part of the PREVEN Kit. Gynetics is responsible for marketing 4 5 the product. The development and regulatory experience gained in the approval of this first proprietary product is expected to strengthen ongoing proprietary projects. The Company's proprietary product development strategy is focused on pursuing a portfolio of products that will result in the introduction in the United States of innovative dosage forms of existing chemical entities, commercialization of therapies available outside of the U.S. market, as well as the development of novel chemical entities that are not currently available. This strategy will result in the introduction of products in the near-, mid- and long-term that have varying periods of market exclusivity. Barr estimates that the development and introduction of its current portfolio of ten proprietary products could require an investment of $25 to $35 million within the next three to four years. Research and Development For the fiscal years ended June 30, 1999, 1998 and 1997, total research and development expenditures were approximately $23 million, $19 million and $14 million, respectively. Approximately $4 million of the fiscal 1999 expenditures were in direct support of the Company's proprietary development activities. Management anticipates that research and development expenditures in fiscal 2000 will significantly exceed comparable expenditures in fiscal 1999, due to increased activity in generic and proprietary drug development activities. Marketing and Customers The Company markets its 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 three customer service representatives who inform the Company's customers of new products, process orders and advise of order status and current pricing. All marketing activities are developed, implemented and coordinated by a product marketing function consisting of three employees. The Company's generic product customer base includes drug store chains, food chains, mass merchandisers, wholesalers, distributors, managed care organizations, mail order accounts, government/military and repackagers. The Company's products are primarily sold under the Barr label. The Company's generic business has approximately 140 direct purchasing customers and 105 indirect customers that purchase the Company's products via wholesalers. In fiscal 1999, 1998 and 1997, McKesson Drug Company, the nation's largest wholesaler, accounted for approximately 14%, 12% and 13%, 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 Company's customer base has undergone significant consolidation, particularly in the chain drug store, food store, distributor and wholesaler trade classes. In addition, a number of customers have instituted single-source programs that limit the number of generic suppliers that provide products to that customer. This consolidation and changes in customer buying patterns have resulted in heightened 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 source product from a limited number of suppliers, have continued to grow. While the Company believes that it has excellent relationships with its key customers, there can be no assurance that continued consolidation will not 5 6 impact the Company's business, or that such impact might not be significant. The Company's proprietary products are expected to require a sales force to detail products directly to physicians and healthcare providers. Currently the Company does not have such a sales force but it expects to develop such sales capabilities through such activities as partnerships, joint ventures or strategic acquisitions. For example, Barr's first proprietary product, the PREVEN Emergency Contraceptive Kit, is marketed by the Company's partner, Gynetics Inc. As additional proprietary products reach the final stages of approval, the Company expects to have secured the sales resources necessary to successfully introduce these products. Competition The Company competes in varying degrees with numerous other manufacturers of pharmaceutical products (both branded and generic). These competitors include the generic divisions of proprietary pharmaceutical companies (either marketing units or other generic manufacturers), large independent generic manufacturers/distributors that seek to provide "one stop shopping" by offering a full line of products, generic manufacturers that have targeted select therapeutic categories and market niches, and proprietary pharmaceutical companies whose patent protected therapies compete with both generic and proprietary products marketed by the 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 therefore, 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 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 6 7 cause a significant delay in the manufacture of the drug product affected. In addition, recent and pending regulatory actions may make it more difficult for the Company and other generic pharmaceutical manufacturers to obtain commitments from foreign suppliers prior to the expiration of patents on branded products. The unavailability of such raw materials could also impede the Company in its efforts to develop and obtain FDA approval to manufacture and market new generic pharmaceutical products, including patent challenge candidates. 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. Employees As of June 30, 1999, the Company had approximately 574 full-time employees including 109 in research and development and 372 in production and quality assurance/control. Approximately 115 are represented by a union that has a collective bargaining agreement with the Company. The Company's current collective bargaining agreement with its employees, who are represented by Local 2-149 of the Paper, Allied, Chemical and Energy (PACE) Union International, expires on April 1, 2001. GOVERNMENT REGULATION All pharmaceutical manufacturers, including the Company, are subject to extensive regulation by the federal government, principally by the FDA, and, to a lesser extent, by the U.S. Drug Enforcement Administration ("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 the Company's products. Non-compliance with applicable requirements can result in fines, recalls and seizure of products. Under certain circumstances, the FDA also has the authority to revoke drug approvals previously granted. ANDA Process FDA approval is required before a generic equivalent to a previously approved drug or a new dosage form of an existing drug can be marketed. The Company usually receives 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 may require 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 substantially equivalent to 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. Among the requirements for drug approval by the FDA is that the Company's manufacturing procedures and operations conform to current Good Manufacturing Practices ("cGMP"), as defined in the U.S. Code of Federal Regulations. The cGMP regulations must be followed at all times during the manufacture of pharmaceutical products. In complying with the standards set forth in the cGMP regulations, the Company must continue to expend time, money and effort in the areas of production and quality control to ensure full technical compliance. 7 8 If the FDA believes a company is not in compliance with cGMP, certain sanctions are imposed upon that company including: (i) withholding from the company new drug approvals as well as approvals for supplemental changes to existing applications; (ii) preventing the company from receiving the necessary export licenses to export its products; and (iii) classifying the company as an "unacceptable supplier" and thereby disqualifying the company from selling products to federal agencies. The Company believes it is currently in compliance with cGMP. In May of 1992, the Generic Drug Enforcement Act of 1992 (the "Act") was enacted. The 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 Act requires the FDA to debar (i.e., not accept or review ANDAs for a period of time) 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 Act allows for civil penalties and withdrawal of previously approved applications. Neither the Company nor any of its employees have ever been subject to debarment. NDA Process FDA approval is required before any new drug can be marketed. A New Drug Application ("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 pre-clinical data must be satisfied. The pre-clinical 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. Data from pre-clinical testing and clinical trials are submitted to the FDA as a 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 requires the expenditure of substantial resources. Preparing a 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 a 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 may be required to provide additional data on safety and will be required 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. 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. DEA Because the Company markets some and intends to introduce or reintroduce a wide range of controlled substances in its analgesic and psychotherapeutic product lines, it must meet the requirements of the Controlled Substances Act and the regulations issued thereunder and administered 8 9 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 monitors allocation to the Company of raw materials used in the production of controlled substances based on historical sales data. The Company believes it is currently in compliance with all applicable DEA requirements. 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, directly petitioning the FDA to request amendments to FDA standards through the Citizen Petition process, seeking changes in United States Pharmacopoeia 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. Using such terminology as Narrow Therapeutic Index ("NTI") and "Critical Care or Critical Dose Drugs" to define sub-categories of drug products, the brand industry is attempting to erroneously suggest that there are clinical differences between brand and generic products that require additional attention by the prescribing physician or limits on substitution. Since January 1997, Barr has engaged the resources necessary to fight proposed legislation in over thirty states. Some brand 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. 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. This law basically required 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 the Company and 15% for Tamoxifen sold by the Company) of their average net sales price for the products in question. The Company provides an accrual for future estimated rebates in its consolidated financial statements. Over the last year, the extension of prescription drug coverage to all Medicare recipients has gained support in the Federal legislature. The generic pharmaceutical industry trade associations are actively 9 10 involved in discussions regarding the structure and scope of any proposed Medicare prescription drug benefit plans. The Company, as an active member of two of the three trade associations representing the generic pharmaceutical industry, supports the development of an industry wide position on Medicare. The Company believes that federal and/or state governments may continue to enact measures in the future aimed at reducing the costs of drugs to the public. The Company cannot predict the nature of such measures or their impact on the Company's profitability. Other The Company is 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. ITEM 2. PROPERTIES Barr has facilities and operations in Pomona and Blauvelt, New York; Northvale, New Jersey; and Forest, Virginia. The following table presents the facilities owned or leased by the Company and indicates the location and type of each of these facilities.
SQUARE LOCATION FOOTAGE STATUS DESCRIPTION - -------- ------- ------ ----------- NEW JERSEY Northvale 26,500 Owned Manufacturing Northvale 57,000 Leased Warehouse (to be closed October 1999) NEW YORK Blauvelt 50,000 Leased Corporate Administration Pomona 1 33,000 Owned R&D, Laboratories, Manufacturing Pomona 2 90,000 Owned Laboratories, Administrative Offices, Manufacturing, Warehouse VIRGINIA Forest 168,000 Owned Administrative Offices, Manufacturing, Warehouse, Packaging, Distribution
Over the past three fiscal years, the Company has spent approximately $68 million in capital expenditures primarily to expand manufacturing capacity, extend research and development activities and strengthen certain competitive advantages. 10 11 ITEM 3. LEGAL PROCEEDINGS Fluoxetine Hydrochloride Patent Challenge In February 1996, Barr filed an ANDA seeking approval from the FDA to market 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 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 have 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. During the quarter ended March 31, 1999, the Company filed an appeal in the U.S. Court of Appeals for the Federal Circuit on the issues that were dismissed. The Company anticipates oral arguments in late calendar 1999 and a decision in early calendar 2000. Invamed, Inc./Apothecon, Inc. Lawsuit In February 1998, Invamed, Inc. ("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. ("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 discovery stage. It is anticipated that this matter will take several years to be resolved but an adverse judgement could have a material adverse impact on the Company's consolidated financial statements. DuPont Anti-Trust Suit On March 9, 1998, the Company filed an anti-trust suit against DuPont Merck Pharmaceutical Company ("DuPont") in the United States District Court for the Southern District of New York, charging that DuPont has acted unlawfully to impede the marketplace acceptance of Barr's generic version of the anti-coagulant Coumadin. The Company's suit charges that DuPont's actions violated federal anti-trust laws, as well as the Lanham Act and the New York Deceptive Practices Act. This matter is currently in the discovery stage. The Company intends to prosecute this case vigorously. Norethindrone and Ethinyl Estradiol Patent Challenge 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 11 12 norethindrone and ethinyl estradiol until certain U.S. patents expire in 2003. The case is in discovery stage and no trial date has been set. OTHER LEGAL MATTERS Department of Justice Investigation Relating to Tamoxifen Citrate In 1998 and 1999, the Company was contacted by the Department of Justice ("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. Federal Trade Commission ("FTC") Civil Investigative Demand Relating to Ciprofloxacin On June 30, 1999, the Company received a demand for interrogatories and a subpoena for documents relating to the January 1997 settlement of the Hatch-Waxman Act patent litigation relating to 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 parties have engaged or are engaging in unfair methods of competition or affecting commerce in violation of Section 5 of the Federal Trade Commission Act. 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 is convinced that once all the facts are considered, and the benefits to consumers are assessed, that the DOJ and FTC investigations described above will be terminated. However, consideration of these matters could take considerable time, and while unlikely, any adverse judgement in either matter could have a material adverse impact on the Company's consolidated financial statements. Miscellaneous As of June 30, 1999, 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. 12 13 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 42 of the 1999 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 44 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 29 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 $103 million and debt instruments of $32 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 92% of the Company's portfolio matures in less than three months and the remaining 8% matures in less than one year. The carrying value of the investment portfolio approximates the market value at June 30, 1999. 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 89% of the Company's debt instruments at June 30, 1999, 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 11% 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 $32 million at June 30, 1999. 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 July 2000, 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. 13 14 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by Item 8 is included on pages 30 through 43 of the Annual Report and is incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None. 14 15 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 51 Chairman of the Board, Chief Executive Officer and President Paul M. Bisaro 38 Senior Vice President, Strategic Business Development, General Counsel and Secretary Timothy P. Catlett 44 Senior Vice President, Sales and Marketing William T. McKee 38 Senior Vice President, Chief Financial Officer and Treasurer Mary E. Petit 50 Senior Vice President, Operations Salah U. Ahmed 45 Vice President, Product Development Ezzeldin A. Hamza 48 Vice President, Research and Development Catherine F. Higgins 47 Vice President, Human Resources Gerald F. Price 52 Vice President, Business Development
BRUCE L. DOWNEY became the Company's President, Chief Operating Officer and a member of the Board of Directors in January 1993 and 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 became the Company's General Counsel in July 1992, was elected Secretary of the Company in September 1992 and elected a Vice President in 1993. In August 1994, Mr. Bisaro was elected to the position of Chief Financial Officer. In September 1996, Mr. Bisaro was elected to the position of Senior Vice President, Strategic Business Development. In June 1998, Mr. Bisaro was elected to the Company's Board of Directors. 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. Prior to his association with Winston & Strawn, Mr. Bisaro was a Consultant with Arthur Andersen & Co. TIMOTHY P. CATLETT was employed by the Company in February 1995 as Vice President, Sales and Marketing. In September 1997, Mr. Catlett was elected to Senior Vice President, Sales and Marketing. From 1978 through 1993, Mr. Catlett held a number of 15 16 positions with the Lederle Laboratories division of American Cyanamid including Vice President, Cardiovascular Marketing. WILLIAM T. MCKEE was employed by the Company in January 1995 as Director of Finance and was appointed Treasurer in March 1995. In September 1996, Mr. McKee was elected to the position of Chief Financial Officer, in December 1997 Mr. McKee was elected Vice President and in December 1998 was elected Senior Vice President. Prior to joining the Company, Mr. McKee served as Vice President, Finance for Absolute Entertainment Inc. From September 1983 through June 1993, Mr. McKee held management positions in the accounting firms of Deloitte & Touche LLP and Gramkow & Carnevale, CPAs. Mr. McKee is a C.P.A. MARY E. PETIT was employed by the Company in January 1995 as Vice President, Quality. In September 1996, Dr. Petit was elected to the position of Senior Vice President, Operations. From June 1992 to January 1995, Dr. Petit was Vice President, Quality Management with the Lederle Laboratories division of American Cyanamid. Dr. Petit held positions of increasing responsibility during her 12 year tenure with Lederle. SALAH U. AHMED was employed by the Company as Director of Research and Development in 1993. Dr. Ahmed was named Vice President, Product Development in September 1996. Before joining Barr, Dr. Ahmed was a Senior Scientist with Forest Laboratories, Inc. from 1989 to 1993. EZZELDIN A. HAMZA was employed by the Company in July 1984 as Director of Quality Control and thereafter, from August 1987, served as Director of Scientific Affairs. In December 1988, Mr. Hamza was elected to the position of Vice President, Technical Affairs. In 1993, he was elected Vice President, Research and Development. CATHERINE F. HIGGINS was employed by the Company in January 1992 as Vice President, Human Resources and was elected an officer in September 1992. From June 1985 to December 1991, Ms. Higgins served as Vice President, Human Resources for Inspiration Resources Corporation. GERALD F. PRICE was employed by the Company in January 1990 as Vice President, Manufacturing and Engineering. He was elected an officer of the Company in January 1990. Prior to assuming these positions, he served as Group Vice President, Operations of Del Laboratories. 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 27, 1999 (the "Proxy Statement") and are incorporated herein by reference. 16 17 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 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. 17 18 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, 1999 and 1998, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended June 30, 1999 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 22 Schedule II - Valuation and Qualifying Accounts 23 Exhibits 3.1 Composite Restated Certificate of Incorporation of the Registrant 3.2 Amended and Restated By-Laws of the Registrant 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) 10.3 Economic Development Bond Financing Agreement, dated December 19, 1984, relating to 265 Livingston Street(2) 10.6 Collective Bargaining Agreement, effective April 1, 1996(12) 10.7 Agreement with Bruce L. Downey(4) 10.8 Agreement with Ezzeldin A. Hamza(4) 10.9 Distribution and Supply Agreement for Tamoxifen Citrate dated March 8, 1993(4) 18 19 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) 13.0 1999 Annual Report to Shareholders 21.0 Subsidiaries of the Company (11) 23.0 Consent of Deloitte & Touche LLP 27.0 Financial Data Schedule (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, 1986 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. (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. 19 20 (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. (b) Reports on Form 8-K None. 20 21 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 August 11, 1999 --------------- Executive Officer & President (Bruce L. Downey) BY WILLIAM T. MCKEE Senior Vice President, Chief August 11, 1999 ---------------- Financial Officer & Treasurer (William T. McKee)
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, Chief August 11, 1999 - --------------- Executive Officer & President (Bruce L. Downey) EDWIN A. COHEN Vice Chairman of the Board August 11, 1999 - -------------- (Edwin A. Cohen) PAUL M. BISARO Director August 11, 1999 - -------------- (Paul M. Bisaro) ROBERT J. BOLGER Director August 11, 1999 - ---------------- (Robert J. Bolger) MICHAEL F. FLORENCE Director August 11, 1999 - ------------------- (Michael F. Florence) JACOB M. KAY Director August 11, 1999 - ------------ (Jacob M. Kay) BERNARD C. SHERMAN Director August 11, 1999 - ------------------ (Bernard C. Sherman) GEORGE P. STEPHAN Director August 11, 1999 - ----------------- (George P. Stephan)
21 22 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders of Barr Laboratories, Inc.: We have audited the financial statements of Barr Laboratories, Inc. and subsidiaries (the "Company") as of June 30, 1999 and 1998, and for each of the three years in the period ended June 30, 1999, and have issued our report thereon dated August 6, 1999; such financial statements and report are included in your June 30, 1999 Annual Report to Shareholders and are incorporated herein by reference. Our audits also included the financial statement schedule of Barr Laboratories, Inc., listed in Item 14. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. DELOITTE & TOUCHE LLP Parsippany, New Jersey August 6, 1999 22 23 SCHEDULE II BARR LABORATORIES, INC. VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED JUNE 30, 1999, 1998 AND 1997
BALANCE AT ADDITIONS, RECOVERY BEGINNING OF COSTS AND AGAINST DEDUCTIONS, BALANCE AT YEAR EXPENSE WRITE-OFFS WRITE-OFFS END OF YEAR - ---------------------------------------- --------------- -------------- --------------- --------------- -------------- Allowance for doubtful accounts: Year ended June 30, 1997 $ 192 $ 735 $ 22 $ 679 $ 270 Year ended June 30, 1998 270 180 1 189 262 Year ended June 30, 1999 262 180 1 44 399 Reserve for returns and allowances: Year ended June 30, 1997 1,607 5,105 - 5,362 1,350 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 Inventory reserves: Year ended June 30, 1997 1,279 5,334 - 2,978 3.635 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
23 24 EXHIBIT INDEX ------------- Exhibit No. Description - ----------- ----------- 3.1 Composite Restated Certificate of Incorporation of the Registrant 3.2 Amended and Restated By-Laws of the Registrant 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) 10.3 Economic Development Bond Financing Agreement, dated December 19, 1984, relating to 265 Livingston Street(2) 10.6 Collective Bargaining Agreement, effective April 1, 1996(12) 10.7 Agreement with Bruce L. Downey(4) 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) 13.0 1999 Annual Report to Shareholders 21.0 Subsidiaries of the Company (11) 23.0 Consent of Deloitte & Touche LLP 27.0 Financial Data Schedule (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, 1986 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. (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. 25 (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. EX-3.1 2 COMPOSITE RESTATED CERTIFICATE OF INCORPORATION 1 COMPOSITE RESTATED CERTIFICATE OF INCORPORATION OF BARR LABORATORIES, INC. (AS CHANGED AND AMENDED JULY 1, 1998) Under Section 807 of the Business Corporation Law We, the undersigned, Bruce L. Downey and Paul M. Bisaro, being respectively the President and the Secretary of Barr Laboratories, Inc., hereby certify: 1. The name of the corporation is Barr Laboratories, Inc. 2. The Certificate of Incorporation was filed by the Department of State on May 6, 1970. 3. The text of the Certificate of Incorporation is hereby restated without amendments or changes to read as herein set forth in full: FIRST: The name of the corporation is BARR LABORATORIES, INC. SECOND: The corporation is formed for the following purpose or purposes: To conduct and carry on in all its branches the business of manufacturing, selling, and distributing chemicals, chemical compounds, drugs, medicines, and chemical, medicinal, and pharmaceutical preparations, compounds, and materials of every kind and description, and all articles and products related thereto; and to purchase, manufacture, produce, refine, mine, or otherwise acquire, invest in, own, hold, use, mortgage, create security interests in, pledge, sell, assign, transfer or otherwise dispose of, trade, deal in, and deal with any and all kinds of chemicals and source materials, ingredients, mixtures, derivatives and compounds thereof, and any and all kinds of products of which any of the foregoing constitute an ingredient or in the production of which any of the foregoing are used, including but not limited to medicines, pharmaceuticals, and industrial chemicals of all kinds. 2 To carry on a general mercantile, industrial, investing, and trading business in all its branches; to devise, invent, manufacture, fabricate, assemble, install, service, maintain, alter, buy, sell, import, export, license as licensor or licensee, lease as lessor or lessee, distribute, job, enter into, negotiate, execute, acquire, and assign contracts in respect of, acquire, receive, grant, and assign licensing arrangements, options, franchises, and other rights in respect of, and generally deal in and with, at wholesale and retail, as principal, and as sales, business, special, or general agent, representative, broker, factor, merchant, distributor, jobber, advisor, and in any other lawful capacity, goods, wares, merchandise, commodities, and unimproved, improved, finished, processed, and other real, personal, and mixed property of any and all kinds, together with the components, resultants, and by-products thereof; to acquire by purchase or otherwise own, hold, lease, mortgage, sell, or otherwise dispose of, erect, construct, make, alter, enlarge, improve, and to aid or subscribe toward the construction, acquisition or improvement of any factories, shops, storehouses, buildings, and commercial and retail establishments of every character, including all equipment, fixtures, machinery, implements and supplies necessary, or incidental to, or connected with, any of the purposes or business of the corporation; and generally to perform any and all acts connected therewith or arising therefrom or incidental thereto, and all acts proper or necessary for the purpose of the business. To apply for, register, obtain, purchase, lease, take licenses in respect of or otherwise acquire, and to hold, own, use, operate, develop, enjoy, turn to account, grant licenses and immunities in respect of, manufacture under and to introduce, sell, assign, mortgage, pledge or otherwise dispose of, and, in any manner deal with and contract with reference to: (a) inventions, devices, formulae, processes and any improvements and modifications thereof; (b) letters patent, patent rights, patented processes, copyrights, designs, and similar rights, trade marks, trade symbols and other indications of origin and ownership granted by or recognized under the laws of the United States of America or of any state or subdivision thereof, or of any foreign country or subdivision thereof, and all rights connected therewith or appertaining thereunto; (c) franchises, licenses, grants and concessions. To have, in furtherance of the corporate purposes, all of the powers conferred upon corporations organized under the Business Corporation Law subject to any limitations thereof contained in this certificate of incorporation or in the laws of the State of New York. THIRD: The office of the corporation is to be located in Village of Pomona, Rockland County. FOURTH: The number of shares of all classes of stock which the corporation shall have authority to issue is 100,000,000 shares of common stock of the par value of $.01 per share, entitled to one vote per share, and 2,000,000 shares of preferred stock of the par value of $1.00 3 per share. The Board of Directors shall have authority, by amendments to the Certificate of Incorporation made from time to time by action of the Board of Directors without stockholder approval, in the manner provided by law, to divide the shares of Preferred Stock into series, to determine the number of shares of any such series, and to determine for any series the designation, relative rights, preferences, and limitations of the shares of any such series to the extent not fixed by the Certificate of Incorporation. Without limiting the generality of the foregoing, the authority hereby vested in the Board of Directors as to each series of Preferred Stock shall include, except to the extent restricted by law, authority in respect of: (a) the voting rights, if any, of the shares of such series, whether full or limited or multiple; (b) the dividends payable in respect thereof, whether cumulative, non-cumulative or partially cumulative; (c) whether the dividends thereon shall be payable on a parity with or in preference to or contingent upon dividends payable on any other class or series; (d) the preferential rights thereof upon dissolution or liquidation or upon any distribution of assets of the Company; (e) whether the shares thereof shall be subject to redemption, in whole or in part, at the option of the Company in cash, in bonds or other written obligations of the Company for the payment of money, or property, and at what price or prices, within such period or periods and under such condition as are stated in any amendment to the Certificate of Incorporation or in such other instrument as may be provided by law for the statement thereof; (f) the requirements of any sinking fund or funds if any, to be applied to the purchase or redemption of shares of such series and the amount of or manner of creating such fund or funds and the manner of application thereof; (g) the rights, if any, of the holders of shares of such series to convert the same into, or to exchange the same for, shares of any other class or classes or of any series of the same, and the price or prices and rate or rates of exchange at which such shares shall be convertible or exchangeable, and other terms or conditions of such conversion or exchange; and (h) any restriction on an increase in the number of shares of any series theretofore authorized and any qualifications, limitations or restrictions of rights or powers to which shares of any future series shall be subject. 4 FIFTH: No shareholder of this corporation shall by reason of his holding shares of any class have any preemptive or preferential right to purchase or subscribe to any shares of any class of this corporation, now or hereafter to be authorized, or any notes, debentures, bonds, or other securities convertible into or carrying options or warrants to purchase shares of any class, now or hereafter to be authorized (whether or not the issuance of any such shares, or such notes, debentures, bonds or other securities, would adversely affect the dividend or voting rights of such shareholder), other than such rights, if any, as the Board of Directors in its discretion, from time to time may grant; and at such price as the Board of Directors in its discretion may fix; and the Board of Directors may issue shares of any class of this corporation, or any notes, debentures, bonds, or other securities convertible into carrying options or warrants to purchase shares of any class without offering any such shares of any class, either in whole or in part, to the existing shareholders of any class. SIXTH: The Secretary of State is designated as the agent of the corporation upon whom process against the corporation may be served. The post office address within the State of New York to which the Secretary of State shall mail a copy of any process against the corporation served upon him is: Barr Laboratories, Inc., 2 Quaker Road, P.O. Box 2900, Pomona, NY 10970-0519. SEVENTH: The duration of the corporation is to be perpetual. EIGHTH: Except as may otherwise be specifically provided in this certificate of incorporation, no provision of this certificate of incorporation is intended by the corporation to be construed as limiting, prohibiting, denying, or abrogating any of the general or specific powers or rights conferred under the Business Corporation Law upon the corporation, upon its shareholders, bondholders, and security holders, and upon its directors, officers, and other corporate personnel, including, in particular, the power of the corporation to furnish indemnification to directors and officers in the capacities defined and prescribed by the Business Corporation Law and the defined and prescribed rights of said persons to indemnification as the same are conferred by the Business Corporation Law. 4. This Restatement of the Certificate of Incorporation was authorized by the Board of Directors. IN WITNESS WHEREOF, we have signed this Certificate on this 16th day of January 1998 and we affirm the statements contained therein as true under penalties of perjury. /s/ Paul M. Bisaro /s/ Bruce L. Downey ------------------------ ------------------------- Paul M. Bisaro Bruce L. Downey Secretary President EX-3.2 3 AMENDED AND RESTATED BY-LAWS 1 AMENDED AND RESTATED BY-LAWS OF BARR LABORATORIES, INC. AS OF AUGUST 11, 1999 ARTICLE I - OFFICES ------------------- The office of the Corporation shall be located in the Village of Pomona, County of Rockland, and State of New York. The Corporation may also maintain offices at such other places within or without the United States as the Board of Directors may, from time to time, determine. ARTICLE II - MEETING OF SHAREHOLDERS ------------------------------------ SECTION 1 - ANNUAL MEETINGS: - ---------------------------- An annual meeting of shareholders shall be held each year for the election of directors at such date, time and place either within or without the State of New York as shall be designated by the Board of Directors. Any other proper business may be transacted at the annual meeting of shareholders. SECTION 2 - SPECIAL MEETINGS: - ----------------------------- Special meetings of the shareholders may be called at any time by the Board of Directors, and shall be called by the President or the Secretary at the written request of the holders of twenty-five per cent (25%) of the shares then outstanding and entitled to vote thereat, or as otherwise required under the provisions of the Business Corporation Law. SECTION 3 - PLACE OF MEETINGS: - ------------------------------ All meetings of shareholders shall be held at the principal office of the Corporation, or at such other places within or without the State of New York as shall be designated in the notices or waivers of notice of such meetings. SECTION 4 - NOTICE OF MEETINGS: - ------------------------------- (a) Written notice of each meeting of shareholders, whether annual or special, stating the time when and place where it is to be held, shall be served either personally or by mail, not less than ten or more than sixty days before the meeting, upon each 2 shareholder of record entitled to vote at such meeting, and to any other shareholder to whom the giving of notice may be required by law. Notice of a special meeting shall also state the purpose or purposes for which the meeting is called, and shall indicate that it is being issued by, or at the direction of, the person or persons calling the meeting. If, at any meeting, action is proposed to be taken that would, if taken, entitle shareholders to receive payment for their shares pursuant to the Business Corporation Law, the notice of such meeting shall include a statement of that purpose and to that effect. If mailed, such notice shall be directed to each such shareholder at his address, as it appears on the records of the shareholders of the Corporation, unless he shall have previously filed with the Secretary of the Corporation a written request that notices intended for him be mailed to some other address, in which case, it shall be mailed to the address designated in such request. (b) Notice of any meeting need not be given to any shareholder who attends such meeting, in person or by proxy, or to any shareholder who, in person or by proxy, submits a signed waiver of notice either before or after such meeting. Notice of any adjourned meeting of shareholders need not be given, unless otherwise required by statute. SECTION 5 - QUORUM: - ------------------- (a) Except as otherwise provided herein, or by statute, or in the Certificate of Incorporation (such Certificate and any amendments thereof being hereinafter collectively referred to as the "Certificate of Incorporation"), at all meetings of shareholders of the Corporation, the presence at the commencement of such meetings in person or by proxy of shareholders holding of record a majority of the total number of shares of the Corporation then issued and outstanding and entitled to vote, shall be necessary and sufficient to constitute a quorum for the transaction of any business. The withdrawal of any shareholder after the commencement of a meeting shall have no effect on the existence of a quorum, after a quorum has been established at such meeting. (b) Despite the absence of a quorum at any annual or special meeting of shareholders, the shareholders, by a majority of the votes cast by the holders of shares entitled to vote thereon, may adjourn the meeting. At any such adjourned meeting at which a quorum is present, any business may be transacted which might have been transacted at the meeting as originally called if a quorum had been present. SECTION 6 - VOTING: - ------------------- (a) Except as otherwise provided by statute or by the Certificate of Incorporation, any corporate action, other than the election of directors, to be taken by vote of the shareholders, shall be authorized by a majority of votes cast at a meeting of shareholders by the holders of shares entitled to vote thereon. 2 3 (b) Except as otherwise provided by statute or by the Certificate of Incorporation, at each meeting of shareholders, each holder of record of stock of the Corporation entitled to vote thereat, shall be entitled to one vote for each share of stock registered in his name on the books of the Corporation. (c) Each shareholder entitled to vote or to express consent or dissent without a meeting may authorize another person or persons to act for him by proxy by any valid means set forth in the Business Corporation Law. No proxy shall be valid after the expiration of eleven months from the date of its execution, unless the person executing it shall have specified therein the length of time it is to continue in force. Such instrument shall be exhibited to the Secretary at the meeting. (d) Any resolution in writing, signed by all of the shareholders entitled to vote thereon, shall be and constitute action by such shareholders to the effect therein expressed, with the same force and effect as if the same had been duly passed by unanimous vote at a duly called meeting of shareholders. ARTICLE III - BOARD OF DIRECTORS -------------------------------- SECTION 1 - NUMBER, ELECTION AND TERM OF OFFICE: - ------------------------------------------------ (a) The number of the directors of the Corporation shall be eight (8), unless and until otherwise determined by vote of a majority of the entire Board of Directors. The number of Directors shall not be less than three, unless all of the outstanding shares are owned beneficially and of record by less than three shareholders, in which event the number of directors shall not be less than the number of shareholders. (b) Except as may otherwise be provided herein or in the Certificate of Incorporation, the members of the Board of Directors of the Corporation, who need not be shareholders, shall be elected by a plurality of the votes cast at a meeting of shareholders, by the holders of shares entitled to vote in the election. (c) Each director shall hold office until the annual meeting of the shareholders next succeeding his election, and until his successor is elected and qualified, or until his prior death, resignation or removal. SECTION 2 - DUTIES AND POWERS: - ------------------------------ The Board of Directors shall be responsible for the control and management of the affairs, property and interests of the Corporation, and may exercise all powers of the Corporation, except as are in the Certificate of Incorporation or by statute expressly conferred upon or reserved to the shareholders. SECTION 3 - ANNUAL AND REGULAR MEETINGS; NOTICE: - ------------------------------------------------ 3 4 (a) A regular annual meeting of the Board of Directors shall be held immediately following the annual meeting of the shareholders, at the place of such annual meeting of shareholders. (b) The Board of Directors, from time to time, may provide by resolution for the holding of other regular meetings of the Board of Directors, and may fix the time and place thereof. (c) Notice of any regular meeting of the Board of Directors shall not be required to be given and, if given, need not specify the purpose of the meeting; provided, however, that in case the Board of Directors shall fix or change the time or place of any regular meeting, notice of such action shall be given to each director who shall not have been present at the meeting at which such action was taken within the time limited, and in the manner set forth in paragraph (b) of Section 4 of this Article III, with respect to special meetings, unless such notice shall be waived in the manner set forth in paragraph (c) of such Section 4. SECTION 4 - SPECIAL MEETINGS; NOTICE: - ------------------------------------- (a) Special meetings of the Board of Directors shall be held whenever called by one of the directors, at such time and place as may be specified in the respective notices or waivers of notice thereof. (b) Notice of special meetings shall be mailed directly to each director, addressed to him at his residence or usual place of business, at least two (2) days before the day on which the meeting is to be held, or shall be sent to him at such place by telegram, radio or cable, or shall be delivered to him personally or given to him orally, not later than the day before the day on which the meeting is to be held. A notice, or waiver of notice, except as required by Section 8 of this Article III, need not specify the purpose of the meeting. (c) Notice of any special meeting shall not be required to be given to any director who shall attend such meeting without protesting prior thereto or at its commencement, the lack of notice to him, or who submits a signed waiver of notice, whether before or after the meeting. SECTION 5 - CHAIRMAN: - --------------------- At all meetings of the Board of Directors, the Chairman of the Board, if any and if present, shall preside. If there shall be no Chairman, or he shall be absent, then the President shall preside, and in his absence, a Chairman chosen by the directors shall preside. SECTION 6 - QUORUM AND ADJOURNMENTS: - ------------------------------------ 4 5 (a) At all meetings of the Board of Directors, the presence of a majority of the entire Board shall be necessary and sufficient to constitute a quorum for the transaction of business, except as otherwise provided by law, by the Certificate of Incorporation, or by these By-Laws. (b) A majority of the directors present at the time and place of any regular or special meeting, although less than a quorum, may adjourn the same from time to time without notice. SECTION 7 - MANNER OF ACTING: - ----------------------------- (a) At all meetings of the Board of Directors, each director present shall have one vote, irrespective of the number of shares of stock, if any, which he may hold. (b) Except as otherwise provided by statute, by the Certificate of Incorporation, or by these By-Laws, the action of a majority of the directors present at any meeting at which a quorum is present shall be the act of the Board of Directors. SECTION 8 - VACANCIES: - ---------------------- Any vacancy in the Board of Directors occurring by reason of an increase in the number of directors, or by reason of the death, resignation, disqualification, removal (unless a vacancy created by the removal of a director by the shareholders shall be filled by the shareholders at the meeting at which the removal was effected) or inability to act of any director, or otherwise, shall be filled for the unexpired portion of the term by a majority vote of the remaining directors, though less than a quorum at any regular meeting or special meeting of the Board of Directors called for that purpose. SECTION 9 - RESIGNATION: - ------------------------ Any director may resign at any time by giving written notice to the Board of Directors, the President or the Secretary of the Corporation. Unless otherwise specified in such written notice, such resignation shall take effect upon receipt thereof by the Board of Directors or such officer, and the acceptance of such resignation shall not be necessary to make it effective. SECTION 10 - REMOVAL: - --------------------- Any director may be removed with or without cause at any time by the shareholders, at a special meeting of the shareholders called for that purpose, and may be removed for cause by action of the Board. SECTION 11 - COMPENSATION: - -------------------------- Unless otherwise provided by the Certificate of Incorporation, the Board of Directors 5 6 shall have the authority to fix the compensation of directors, which compensation may include the reimbursement of expenses incurred in connection with meetings of the Board of Directors or a committee thereof; provided, however, that nothing herein contained shall be construed to preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. SECTION 12 - COMMITTEE: - ----------------------- The Board of Directors, by resolution adopted by a majority of the entire Board, may from time to time designate from among its members an executive committee and such other committees, and alternate members thereof, as they may deem desirable, each consisting of one or more members, with such powers and authority (to the extent permitted by law) as may be provided in such resolution. Each such committee shall serve at the pleasure of the Board. ARTICLE IV - OFFICERS --------------------- SECTION 1 - NUMBER, QUALIFICATIONS, ELECTION AND TERM OF OFFICE: - ---------------------------------------------------------------- (a) The officers of the Corporation shall consist of a President, a Secretary, a Treasurer, and such other officers, including a Chairman of the Board of Directors, and one or more Vice Presidents, as the Board of Directors may from time to time deem advisable. Any officer other than the Chairman of the Board of Directors may be, but is not required to be, a director of the Corporation. Any two or more offices may be held by the same person. (b) The officers of the Corporation shall be elected by the Board of Directors at the regular annual meeting of the Board following the annual meeting of shareholders. (c) Each officer shall hold office until the annual meeting of the Board of Directors next succeeding his election, and until his successor shall have been elected and qualified, or until his death, resignation or removal. SECTION 2 - RESIGNATION: - ------------------------ Any officer may resign at any time by giving written notice of such resignation to the Board of Directors, or to the President or the Secretary of the Corporation. Unless otherwise specified in such written notice, such resignation shall take effect upon receipt thereof by the Board of Directors or by such officer, and the acceptance of such resignation shall not be necessary to make it effective. SECTION 3 - REMOVAL: - -------------------- Any officer may be removed, either with or without cause, and a successor elected by the Board at any time. 6 7 SECTION 4 - VACANCIES: - ---------------------- A vacancy in any office by reason of death, resignation, inability to act, disqualification, or any other cause, may at any time be filled for the unexpired portion of the term by the Board of Directors. SECTION 5 - DUTIES OF OFFICERS: - ------------------------------- Officers of the Corporation shall, unless otherwise provided by the Board of Directors, each have such powers and duties as generally pertain to their respective offices as well as such powers and duties as may be set forth in these By-Laws, or may from time to time be specifically conferred or imposed by the Board of Directors. SECTION 6 - SURETIES AND BONDS: - ------------------------------- In case the Board of Directors shall so require, any officer, employee or agent of the Corporation shall execute to the Corporation a bond in such sum, and with such surety or sureties as the Board of Directors may direct, conditioned upon the faithful performance of his duties to the Corporation, including responsibility for negligence and for the accounting for all property, funds or securities of the Corporation which may come into his hands. SECTION 7 - SHARES OF OTHER CORPORATIONS: - ----------------------------------------- Whenever the Corporation is the holder of shares of any other corporation, any right or power of the Corporation as such shareholder (including the attendance, acting and voting at shareholders meetings and execution of waivers, consents, proxies or other instruments) may be exercised on behalf of the Corporation by the President, any Vice President, or such other person as the Board of Directors may authorize. ARTICLE V - SHARES OF STOCK --------------------------- SECTION 1 - CERTIFICATE OF STOCK: - --------------------------------- (a) The certificates representing shares of the Corporation shall be in such form as shall be adopted by the Board of Directors, and shall be numbered and registered in the order issued. They shall bear the holder's name and the number of shares, and shall be signed by (i) the Chairman of the Board or the President or a Vice President, and (ii) the Secretary or Treasurer, or any Assistant Secretary or Assistant Treasurer, and may bear the corporate seal. (b) No certificate representing shares shall be issued until the full amount of consideration therefor has been paid, except as otherwise permitted by law. 7 8 (c) The Board of Directors may authorize the issuance of certificates for fractions of a share which shall entitle the holder to exercise voting rights, receive dividends and participate in liquidating distributions, in proportion to the fractional holdings, or it may authorize the payment in cash of the fair value of fractions of a share as of the time when those entitled to receive such fractions are determined; or it may authorize the issuance, subject to such conditions as may be permitted by law, of scrip in registered or bearer form over the signature of an officer or agent of the Corporation, exchangeable as therein provided for full shares, but such scrip shall not entitle the holder to any rights of a shareholder, except as therein provided. SECTION 2 - LOST OR DESTROYED CERTIFICATES: - ------------------------------------------- The holder of any certificate representing shares of the Corporation shall immediately notify the Corporation of any loss or destruction of the certificate representing the same. The Corporation may issue a new certificate in the place of any certificate theretofore issued by it, alleged to have been lost or destroyed. On production of such evidence of loss or destruction as the Board of Directors in its discretion may require, the Board of Directors may, in its discretion, require the owner of the lost or destroyed certificate, or his legal representatives, to give the Corporation a bond in such sum as the Board may direct, and with such surety or sureties as may be satisfactory to the Board, to indemnify the Corporation against any claims, loss, liability or damage it may suffer on account of the issuance of the new certificate. A new certificate may be issued without requiring any such evidence or bond when, in the judgment of the Board of Directors, it is proper so to do. SECTION 3 - TRANSFERS OF SHARES: - -------------------------------- (a) Transfers of shares of the Corporation shall be made on the share records of the Corporation only by the holder of record thereof, in person or by his duly authorized attorney, upon surrender for cancellation of the certificate or certificates representing such shares, with an assignment or power of transfer endorsed thereon or delivered therewith, duly executed, with such proof of the authenticity of the signature and of authority to transfer and of payment of transfer taxes as the Corporation or its agents may require. (b) The Corporation shall be entitled to treat the holder of record of any shares as the absolute owner thereof for all purposes, and, accordingly, shall not be bound to recognize any legal, equitable or other claim to, or interest in, such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise expressly provided by law. SECTION 4 - RECORD DATE: - ------------------------ In lieu of closing the share records of the Corporation, the Board of Directors may fix, in advance, a date not exceeding sixty days, nor less than ten days, as the record date for the 8 9 determination of shareholders entitled to receive notice of, or to vote at, any meeting of shareholders, or to consent to any proposal without a meeting, or for the purpose of determining shareholders entitled to receive payment of any dividends, or allotment of any rights, or for the purpose of any other action. If no record date is fixed, the record date for the determination of shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business on the day next preceding the day on which notice is given, or, if no notice is given, the day on which the meeting is held; the record date for determining shareholders for any other purpose shall be at the close of business on the day on which the resolution of the directors relating thereto is adopted. When a determination of shareholders of record entitled to notice of or to vote at any meeting of shareholders has been made as provided for herein, such determination shall apply to any adjournment thereof, unless the directors fix a new record date for the adjournment meeting. ARTICLE VI - DIVIDENDS ---------------------- Subject to applicable law, dividends may be declared and paid out of any funds available therefor, as often, in such amounts, and at such time or times as the Board of Directors may determine. ARTICLE VII - FISCAL YEAR ------------------------- The fiscal year of the Corporation shall be fixed by the Board of Directors from time to time, subject to applicable law. ARTICLE VIII - CORPORATE SEAL ----------------------------- The corporate seal, if any, shall be in such form as shall be approved from time to time by the Board of Directors. ARTICLE IX - AMENDMENTS ----------------------- SECTION 1 - BY SHAREHOLDERS: - ---------------------------- All by-laws of the Corporation shall be subject to alteration or repeal, and new by-laws may be made, by a majority vote of the shareholders at the time entitled to vote in the election of directors. SECTION 2 - BY DIRECTORS: - ------------------------- The Board of Directors shall have power to make, adopt, alter, amend and repeal, from time to time, by-laws of the Corporation; provided, however, that the shareholders entitled to vote with respect thereto as in this Article IX above-provided may alter, amend or repeal by-laws made by the Board of Directors, except that the Board of Directors shall have no power to change the quorum for meeting of shareholders or of the Board of 9 10 Directors, or to change any provisions of the by-laws with respect to the removal of directors or the filling of vacancies in the Board resulting from the removal by the shareholders. ARTICLE X - INDEMNIFICATION --------------------------- Subject to the conditions and qualifications set forth in the Business Corporation Law, the Corporation may indemnify any person, made a party to an action by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that he, his testator or intestate, is or was a director or officer of the Corporation, against the reasonable expenses, including attorneys fees, actually and necessarily incurred by him in connection with the defense of such action, or in connection with an appeal therein, except in relation to matters as to which such director or officer is adjudged to have breached his duty to the Corporation, as such duty is defined in Section 717 of the Business Corporation Law. Subject to the conditions and qualifications set forth in the Business Corporation Law, the Corporation may also indemnify any person, made or threatened to be made a party to an action or proceeding other than one by or in the right of the Corporation to procure a judgment in its favor, whether civil or criminal, including an action by or in the right of any other corporation, domestic or foreign, which he served in any capacity at the request of the Corporation, by reason of the fact, that he, his testator or intestate was a director or officer of the Corporation or served such other corporation in any capacity, against judgments, fines, amounts paid in settlement, and reasonable expenses, including attorneys' fees actually and necessarily incurred as a result of such action or proceeding, or any appeal therein, if such director or officer acted in good faith for a purpose which he reasonably believed to be in the best interests of the Corporation and, in criminal actions or proceedings, in addition, had no reasonable cause to believe that his conduct was unlawful. 10 EX-13.0 4 1999 ANNUAL REPORT 1 EXHIBIT 13 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (thousands of dollars) Results of Operations Fiscal 1999 to Fiscal 1998 Total revenues increased approximately 18% from $377,304 to $444,033. This increase is attributable to increases in product sales offset by a slight decrease in proceeds from supply agreements. Product sales increased 20% from $346,638 to $415,950. The increase is the result of 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. 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 the Innovator. Currently, Tamoxifen only competes against the Innovator's product, which is sold under the brand name. 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 out of the Company's product line and price declines and higher discounts on certain existing products. Proceeds from supply agreements declined $2,583, as expected, since proceeds earned in the prior year under a separate contingent supply agreement related to the ciprofloxacin litigation were not repeated (See Note 2 to the Consolidated Financial Statements). Cost of sales increased from $266,002 to $301,393, due to increased product sales, but decreased as a percentage of product sales from 77% to 72%. 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 is 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 remaining generic product portfolio. Selling, general and administrative expenses increased 4% from $38,990 to $40,439. This increase is 24 2 primarily due to increased legal and headcount costs, partially offset by a decrease in advertising and promotions and a decrease in facility rationalization charges. Higher legal expenses, due to the Company's federal anti-trust suit against DuPont Merck Pharmaceutical Company ("DuPont"), more than offset the Company's share of a $4 million payment received from Eli Lilly & Company, in January, for legal costs incurred as part of the agreement to take the Prozac(R) case directly to the U.S. Court of Appeals. Higher headcount costs are due to the significant growth in the Company over the past two years. Lower advertising and promotions were the result of a decrease in advertising and promotions in connection with the launch of Warfarin Sodium in the prior year. The current year includes a $360 restructuring charge versus a $1.2 million restructuring charge in the prior 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 is primarily the result of an increase in the number of outside clinical studies, increased personnel costs to support the number of products in development and higher costs associated with the Company's proprietary drug development efforts. The current year included $646 in expenses related to the proprietary product collaboration with Eastern Virginia Medical School, whereas the prior year included $645 for the acquisition of six Abbreviated New Drug Applications and related technologies to expand the Company's line of female healthcare products. 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. Results of Operations Fiscal 1998 to Fiscal 1997 Total revenues increased approximately 33% from $284,486 to $377,304. The increase is the result of increased product sales and higher proceeds from supply agreements. Product sales increased 35% from $257,436 to $346,638. The increase is attributable to increases in demand for Tamoxifen and sales of Minocycline, which the Company began distributing in October 1997, as well as sales of Warfarin Sodium, which was launched in July 1997. Tamoxifen sales increased 21% from $195,734 or 76% of product sales to $236,587 or 68% of product sales. The increase is the result of an expanding Tamoxifen market, as well as an increased market share for Barr's Tamoxifen. Increased demand for the 20mg strength of Tamoxifen, which the Company began distributing in December 1996, also contributed to the increase. The remaining increase in product sales is primarily attributable to sales of Warfarin Sodium, which the Company launched in July 1997. Fiscal 1998 sales include revenues from nine new products compared to five new products in fiscal 1997. These products represented approximately 14% and 4% of product sales in fiscal 1998 and 1997, respectively. Revenues from these products more than offset price declines and higher discounts on certain existing products. Warfarin Sodium accounted for approximately 11% of the Company's product sales in fiscal 1998. Proceeds from supply agreements increased 13% from $27,050 to $30,666 primarily as a result of 25 3 $4,500 received under a separate contingent supply agreement related to the ciprofloxacin patent challenge. Cost of sales increased from $217,196 to $266,002 primarily related to an increase in product sales. As a percentage of product sales, cost of sales declined from 84% to 77%. This percentage decline was attributable to a more favorable mix of products. The improved mix was attributable to the launch of new products, primarily, Warfarin Sodium, which have higher margins than Tamoxifen and other existing products. Selling, general and administrative expenses increased from $23,391 to $38,990. The largest components of the increase related to legal and government affairs activities as well as higher expenses in promotions, advertising and clinical trial costs associated with the launching of Warfarin Sodium. The increased legal fees primarily resulted from lower reimbursements received from patent challenge partners; the prior year reflected approximately $4,600 in reimbursement of legal fees. Government affairs expenses were higher in the current year due to the Company's activities directed at countering DuPont's continuing anti-competitive efforts to restrict substitution of Warfarin Sodium. Research and development expenses increased from $13,536 to $18,955. The increase is the result of increased personnel costs to support the number of products in development; higher raw material and outside clinical study costs including costs associated with the Company's proprietary drug program which was not in place in the prior year; and a strategic investment of $645, which was allocated to in-process research and development, for six Abbreviated New Drug Applications and related technologies. Interest income decreased by $222 in comparison to the prior year. The decrease is due to the decrease in the average cash and cash equivalents balance as well as a slight decrease in the market rates of the Company's short-term investments. Interest expense decreased $81 due to an increase in capitalized interest associated with the facility expansion projects during the fiscal year. The increase in capitalized interest was partially offset by higher fees paid on the unsecured Tamoxifen balance. In fiscal 1998, the Company incurred an extraordinary loss of $790 on the early extinguishment of debt (See Note 6 to the Consolidated Financial Statements). Liquidity and Capital Resources The Company's cash and cash equivalents balance increased to $94,867 at June 30, 1999 from $72,956 at June 30, 1998. 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 continued to reduce the cash held in its interest-bearing cash collateral account from $59,321 at June 30, 1998 to $28,283 at June 30, 1999. Cash provided by operating activities was $33,568 for the year ended June 30, 1999, as net earnings of $49,250 and higher depreciation offset increases in working capital. The working capital increase was led by increases in inventory and accounts receivable as well as decreases in accounts payable and income taxes payable. The increase in accounts receivable was attributable to increased sales and an increase in the receivable related to the proceeds from supply agreement. The inventory increase was primarily to support increased sales. Accounts payable decreased as a result of the pay down of 26 4 the Tamoxifen payable. Income taxes payable decreased as a result of the timing of estimated tax payments. Working capital levels varied during the year due to the timing of Tamoxifen inventory purchases, sales levels and the timing of Tamoxifen payables. During fiscal 1999, 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 2000. During fiscal 1999, the Company invested $12,333 in capital assets, primarily on construction and new equipment for its facilities. The decline from the prior year was anticipated due to the reduction in capital spending on the Virginia facility, which was substantially completed by the spring of 1998. In fiscal 2000, the Company expects to invest an additional $14,000 to complete a new warehouse and expand its research and development facilities on its Pomona, New York campus and continue to invest in technology-related items for its New York, New Jersey and Virginia facilities. The Company made strategic investments totaling $2,800 in fiscal 1999 to expand its growth opportunities and will continue to evaluate and enter into various strategic collaborations (See Note 5 to the Consolidated Financial Statements). 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 it will spend between $3 and $5 million by June 2000 on these collaborations. The $3 to $5 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 existing borrowing capacity under its Revolving Credit Facility will be adequate to meet its needs 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. Product revenues are expected to increase in fiscal 2000 compared to fiscal 1999 driven by increasing sales of existing products such as Tamoxifen, Warfarin Sodium, Medroxyprogesterone and new product launches which should more than offset declining prices on certain existing products and revenues lost due to product rationalizations. Fiscal 1999 revenues from products being phased out of the Company's product line totaled approximately $7 million, though their elimination will not have a 27 5 negative impact on operating results. 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 2000 Tamoxifen revenues. The Company believes that Tamoxifen sales will increase during fiscal 2000 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 and customer buying patterns. Warfarin Sodium revenues are expected to increase due to increases in the Company's market share. Currently, Barr markets its Warfarin Sodium product against the brand product and another generic product. The potential impact of current and future competition on Barr's revenues, market share and profits is impossible to predict because it depends on several factors outside Barr's control. Amounts earned in fiscal 2000 from the contingent supply agreement are dependent upon decisions made by a third party but are expected to approximate amounts earned in fiscal 1999. Selling, general and administrative spending is impacted by several factors including the timing and number of legal matters, including patent challenges being pursued by the Company, the level of government affairs spending and promotion 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. Promotion 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 2000 than in fiscal 1999 primarily due to higher legal spending on patent challenges and the Company's anti-trust suit against DuPont. Since proprietary products require more extensive advertising and promotion activities than traditional generic products, the future approval and launch of Barr's proprietary products may impact selling, general and administrative costs. 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. Generally, selling, marketing and promotion costs are incurred several months prior to a product's launch. 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. The Company is exploring several alternatives for marketing 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. 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 significantly in fiscal 2000 compared to fiscal 1999 due to substantial increases in both generic and proprietary product development activities. In its generic development area, the Company expects to file approximately 15 28 6 Abbreviated New Drug Applications in fiscal 2000 compared to seven filed in fiscal 1999. 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 expects that two of these proprietary products will begin Phase III clinical trials during the middle to end of fiscal 2000 and should be completed by 2002. The Company plans to spend an additional $25 to $35 million on certain of its proprietary products over the next three to four years. The Company may seek development partners to help fund the costs of some of these projects. However, there is no assurance that the Company will be able to identify such partners or will 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. During 1998, the Company established a project team to assess the impact of the Year 2000 issue on the Company's operations. The project team developed a multi-phase approach to assessing and resolving any Year 2000 issues. These phases included: 1. Company-wide awareness of Year 2000 implications; 2. Assessment of the Company's information technology ("IT") and non-IT systems, as well as, evaluation of third parties with which the Company has a material relationship; 3. Implementation of compliant IT and non-IT systems including contingency plans related to third parties with which the Company has a material relationship; 4. Testing/Validation of new and/or updated systems. As of June 30, 1999, approximately 99% of the Company's critical IT systems, including the financial, manufacturing and laboratory information systems and 95% of critical non-IT systems, have completed the four phases indicated above. All costs associated with the Year 2000 project to date have been expensed as incurred. The Company will continue to incur costs that include internal resources, external consulting, software and certain equipment upgrades through the balance of calendar 1999. To date the Company has spent less than $100 in remediation efforts and believes that the cost to gain company-wide compliance will not be material. The Company's Year 2000 readiness program identified several third parties with which it has a material relationship. These third parties include certain raw material suppliers, software providers and customers. The Company's Year 2000 project identified these third parties and determined, based on obtaining written verification, reviewing publicly available financial statement disclosures and other means, that such third parties are either in compliance or expect to be in compliance prior to January 1, 2000. Barr believes that the most likely worst-case Year 2000 scenarios would relate to problems with the systems of third parties rather than with the Company's internal systems or its products. Because the Company has less control over assessing and remediating the Year 2000 problems of third parties, the Company believes the risks are greatest with infrastructure (e.g., electricity supply and water and sewer service), telecommunications and transportation supply chains. The Company's operations are conducted in four domestic facilities. Each location relies on local, 29 7 private and governmental suppliers for electricity, water, sewer and other needed supplies. Failure of an electricity grid or an uneven supply of power, for example, would be a worst-case scenario that would shut down the affected facilities. The Company does not maintain facilities that would allow it to generate its own electrical or water supply in place of that supplied by utilities. Because the Company's Year 2000 compliance is dependent upon key third parties also being Year 2000 compliant on a timely basis, there can be no guarantee that the Company's efforts will prevent a material adverse impact on its results of operations, financial condition or cash flows. To the extent that key third parties are not compliant, this could result in delays in the distribution of finished goods or receipt of raw material, errors in the receipts of customer orders, disruption of clinical activities or delays in product development. These consequences could have a material adverse impact on our results of operations, financial condition and cash flows if the Company is unable to substantially conduct business in the ordinary course. The Company continues to evaluate contingency plans to address possible changes in customer order patterns due to Year 2000 issues. As with suppliers, the readiness of customers to deal with Year 2000 issues may affect their operations and their ability to order and pay for products. The foregoing discussion regarding the Year 2000 project's timing, effectiveness, implementation, and cost, contains forward-looking statements, which are based on management's best estimates, derived utilizing numerous assumptions of future events including the continued availability of certain resources, third party modification plans and other factors. However, there can be no guarantee that these estimates will be achieved, and actual results could differ materially from those contemplated estimates. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes and similar uncertainties and remediation success of the Company's customers and suppliers. 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, impact of competition on sales and profitability of key products, fluctuations in operating results, capital spending, obtaining funding for certain R&D projects, the ability of the Company to obtain additional capital, the impact of Year 2000 issues on the business 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," "estimates," "intends" and other words of similar meaning. 30 8 Should known or unknown risks or uncertainties materialize, or should our assumptions prove inaccurate, actual results could vary materially from those anticipated. The Company undertakes no obligation to publicly update any forward-looking statements. 31 9 BARR LABORATORIES, INC. Consolidated Balance Sheets (in thousands of dollars, except share amounts)
JUNE 30, JUNE 30, 1999 1998 --------- --------- ASSETS Current assets: Cash and cash equivalents $ 94,867 $ 72,956 Marketable securities 8,127 7,320 Accounts receivable (including receivables from related parties of $1,051 in 1999 and $1,015 in 1998) less allowances of $2,670 and $2,738 in 1999 and 1998, respectively 50,227 46,760 Supply agreement receivable 15,750 14,667 Inventories 77,613 74,377 Prepaid expenses 1,556 806 --------- --------- Total current assets 248,140 216,886 Property, plant and equipment, net 93,764 90,649 Other assets 5,986 3,316 --------- --------- Total assets $ 347,890 $ 310,851 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable (including payables to a related party of $632 and $ 88,982 $ 103,321 $656 in 1999 and 1998, respectively) Accrued liabilities 9,118 9,460 Deferred income taxes 833 1,000 Current portion of long-term debt 2,165 4,467 Income taxes payable 179 3,357 --------- --------- Total current liabilities 101,277 121,605 Long-term debt 30,008 32,174 Other liabilities 127 162 Deferred income taxes 2,771 981 Commitments & Contingencies Shareholders' equity: Preferred stock $1 par value per share; authorized 2,000,000; none issued Common stock $.01 par value per share; authorized 100,000,000; issued 22,923,583 and 22,424,645, respectively 229 224 Additional paid-in capital 76,903 68,064 Retained earnings 137,846 88,596 Accumulated other comprehensive loss (1,258) (942) --------- --------- 213,720 155,942 Treasury stock at cost: 117,955 shares (13) (13) --------- --------- Total shareholders' equity 213,707 155,929 --------- --------- Total liabilities and shareholders' equity $ 347,890 $ 310,851 ========= =========
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS. 32 10 BARR LABORATORIES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1999 1998 1997 --------- --------- --------- Revenues: Product sales (including sales to related parties of $6,852, $7,537 and $4,971 in 1999, 1998 and 1997, respectively) $ 415,950 $ 346,638 $ 257,436 Proceeds from supply agreements 28,083 30,666 27,050 --------- --------- --------- Total revenues 444,033 377,304 284,486 Costs and expenses: Cost of sales 301,393 266,002 217,196 Selling, general and administrative 40,439 38,990 23,391 Research and development 22,593 18,955 13,536 --------- --------- --------- Earnings from operations 79,608 53,357 30,363 Interest income 3,180 2,176 2,398 Interest expense (2,697) (858) (939) Other income (expense) 36 (17) 228 --------- --------- --------- Earnings before income taxes and extraordinary loss 80,127 54,658 32,050 Income tax expense 30,877 21,148 12,603 --------- --------- --------- Earnings before extraordinary loss 49,250 33,510 19,447 Extraordinary loss on early extinguishment of debt, net of taxes -- (790) -- --------- --------- --------- Net earnings $ 49,250 $ 32,720 $ 19,447 ========= ========= ========= EARNINGS PER COMMON SHARE: Earnings before extraordinary loss $ 2.18 $ 1.54 $ 0.92 Net earnings $ 2.18 $ 1.50 $ 0.92 ========= ========= ========= EARNINGS PER COMMON SHARE-ASSUMING DILUTION: Earnings before extraordinary loss $ 2.09 $ 1.45 $ 0.87 Net earnings $ 2.09 $ 1.41 $ 0.87 ========= ========= ========= Weighted average shares 22,585 21,811 21,133 ========= ========= ========= Weighted average shares-assuming dilution 23,582 23,190 22,430 ========= ========= =========
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS. 33 11 BARR LABORATORIES, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997 (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
Accumulated Common Additional other Common stock Total Stock paid-in Retained comprehensive in treasury Shareholders' Shares Amount capital Earnings loss Shares Amount Equity ------ ------ ------- -------- ---- ------ ------ ------ BALANCE, JUNE 30, 1996 14,115,664 $141 $ 43,526 $ 36,507 $ -- 78,637 $ (13) $ 80,161 Net earnings 19,447 19,447 Issuance of common stock for exercised stock options and employees' stock purchase plans 220,526 2 2,549 2,551 Stock split (3-for-2) 7,109,863 71 (14) (78) 39,318 -- (21) ---------- ---- -------- ---------- ---------- ------- ----- --------- BALANCE, JUNE 30, 1997 21,446,053 214 46,061 55,876 -- 117,955 (13) 102,138 Comprehensive income: Net earnings 32,720 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 430,000 4 14,517 14,521 Stock issuance costs (353) (353) Issuance of common stock for exercised stock options and employees' stock purchase plans 548,592 6 7,839 7,845 ---------- ---- -------- ---------- ---------- ------- ----- --------- BALANCE, JUNE 30, 1998 22,424,645 224 68,064 88,596 (942) 117,955 (13) 155,929 Comprehensive income: Net earnings 49,250 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 498,938 5 8,839 8,844 ---------- ---- -------- ---------- ---------- ------- ----- --------- BALANCE, JUNE 30, 1999 22,923,583 $229 $ 76,903 $ 137,846 $ (1,258) 117,955 $ (13) $ 213,707 ========== ==== ======== ========== ========== ======= ===== =========
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS. 34 12 BARR LABORATORIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997 (IN THOUSANDS OF DOLLARS)
1999 1998 1997 -------- -------- -------- CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES: Net earnings $ 49,250 $ 32,720 $ 19,447 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 9,306 5,521 4,989 Deferred income tax expense 1,834 3,585 474 Write-off of deferred financing fees associated with early extinguishment of debt -- 195 -- Loss (gain) on disposal of property, plant & equipment 11 63 (203) Loss (gain) on sale of marketable securities 6 (2) -- Changes in assets and liabilities: (Increase) decrease in: Accounts receivable and supply agreement receivable, net (4,550) (26,195) (3,167) Inventories (3,236) (18,161) (13,820) Prepaid expenses (750) (238) 80 Other assets (492) (389) (194) Increase (decrease) in: Accounts payable, accrued liabilities and other (14,633) 34,940 12,896 Income taxes payable (3,178) 963 1,290 -------- -------- -------- Net cash provided by operating activities 33,568 33,002 21,792 -------- -------- -------- CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES: Purchases of property, plant and equipment (12,333) (20,431) (35,087) Proceeds from sale of property, plant and equipment 1 248 239 Purchases of strategic investments (2,800) (4,069) -- Purchases of marketable securities, net (901) (7,291) -- -------- -------- -------- Net cash used in investing activities (16,033) (31,543) (34,848) -------- -------- -------- CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES: Principal payments on long-term debt (1,968) (14,939) (4,081) Proceeds from loans -- 30,000 1,637 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 -- -- (21) Proceeds from exercise of stock options and employee stock purchases 8,844 7,845 2,551 -------- -------- -------- Net cash provided by financing activities 4,376 39,574 86 -------- -------- -------- Increase (decrease) in cash and cash equivalents 21,911 41,033 (12,970) Cash and cash equivalents, beginning of year 72,956 31,923 44,893 -------- -------- -------- Cash and cash equivalents, end of year $ 94,867 $ 72,956 $ 31,923 ======== ======== ======== SUPPLEMENTAL CASH FLOW DATA: Cash paid during the year Interest, net of portion capitalized $ 2,727 $ 855 $ 930 Income taxes 27,869 13,254 10,830 Non-cash transactions Write-off of equipment & leasehold improvements related to restructuring $ 83 $ -- $ --
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS. 35 13 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 and Other Matters The consolidated financial statements include the accounts of Barr Laboratories, Inc. (the "Company") and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Sherman Delaware, Inc. owned 43.5% of the outstanding common stock of the Company at June 30, 1999. Dr. Bernard C. Sherman is a principal stockholder of Sherman Delaware, Inc. and a Director of Barr Laboratories, Inc. Certain amounts in the prior year's financial statements have been reclassified to conform with 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 7 to 28 days) which are readily convertible into cash at par value (cost). As of June 30, 1999 and 1998, $28,283 and $59,321, 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 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, 1999. In March 1999, the Innovator reduced the rate 36 14 charged on the average unsecured Tamoxifen payable based on the Company's improved financial condition and lower market rates. (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 provided for 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 Automobiles and trucks 3-5
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 In accordance with Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share," the following is a reconciliation of the numerators and denominators used to calculate Earnings per common share before extraordinary loss on the Consolidated Statements of Operations: 37 15
1999 1998 1997 ------- ------- ------- EARNINGS PER COMMON SHARE: Earnings before extraordinary loss (numerator) $49,250 $33,510 $19,447 Weighted average shares (denominator) 22,585 21,811 21,133 Earnings before extraordinary loss $ 2.18 $ 1.54 $ 0.92 ======= ======= ======= EARNINGS PER COMMON SHARE - ASSUMING DILUTION: Earnings before extraordinary loss (numerator) $49,250 $33,510 $19,447 Weighted average shares 22,585 21,811 21,133 Effect of dilutive options 997 1,379 1,297 ------- ------- ------- Weighted averages shares- assuming dilution (denominator) 23,582 23,190 22,430 Earnings before extraordinary loss $ 2.09 $ 1.45 $ 0.87 ======= ======= =======
(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 $305 and $398 at June 30, 1999 and 1998, respectively, are included in Other Assets in the Consolidated Balance Sheets. In connection with the November 1997 early extinguishment of the remaining $14,400 of the 10.15% Senior Secured Notes, the Company wrote off $195 in deferred financing fees in the year ended June 30, 1998 (See Note 6 to the Consolidated Financial Statements). (i) Fair Value of Financial Instruments Cash, Accounts Receivable 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 5 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 5 to the Consolidated Financial Statements). Long-Term Debt - The fair value at June 30, 1999 and 1998 is estimated at $32 million and $34 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 38 16 to management as of June 30, 1999. 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. (k) Revenue Recognition The Company recognizes revenue when goods are shipped. (l) New Accounting Pronouncements Comprehensive Income Effective July 1, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income." Comprehensive income is defined as the total change in shareholders' equity during the period other than from transactions with shareholders. For the Company, comprehensive income is comprised of net income and the net changes in unrealized gains and losses on securities classified for SFAS No. 115 purposes as "available for sale." In accordance with this Statement, comprehensive income is included in the Consolidated Statements of Shareholders' Equity. Application of this statement did not change recognition or measurement of net income and, therefore, did not affect the Company's consolidated financial position or results of operations. Segment Reporting Effective July 1, 1998, the Company adopted SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information." SFAS No. 131 requires segment information to be reported based on how management internally evaluates the operating performance of its business. The Company operates in one reportable segment - the development, manufacture and distribution of generic pharmaceuticals. Implementation of SFAS No. 131 had no impact on the Company's consolidated financial position or results of operations. 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 1999, 1998 and 1997, a customer accounted for approximately 14%, 12% and 13% of product sales, respectively. No other customer accounted for greater than 10% of product sales in any of the last three fiscal years. 39 17 Derivative Instruments On June 15, 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which becomes effective for financial statements beginning after June 15, 2000. SFAS No. 133 requires that companies recognize all derivatives as either assets or liabilities on the balance sheet and measure those instruments at fair value. The Company is currently evaluating this statement and its impact on the Company's existing accounting policies and financial reporting disclosures. (2) PROCEEDS FROM SUPPLY AGREEMENTS In January 1997, Bayer AG and Bayer Corporation ("Bayer") and the Company reached an agreement to settle the then pending litigation regarding Bayer's patent protecting Ciprofloxacin hydrochloride ("Settlement Agreement"). In connection with the Settlement Agreement, the Company acknowledged the validity and enforceability of Bayer's world-wide Ciprofloxacin patent, received an initial cash payment of $24,550, and signed a contingent, non-exclusive Supply Agreement ("Supply Agreement") which ends at patent expiry in December 2003. In accordance with the Supply Agreement, the Company recognizes income and a related receivable on a monthly basis, as certain contingencies are met. Collection of these receivables occurs quarterly. Also included in Proceeds from supply agreements 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. (3) INVENTORIES A summary of inventories is as follows:
June 30, --------------------- 1999 1998 ------- ------- Raw materials and supplies $15,790 $17,459 Work-in-process 7,957 4,132 Finished goods 53,866 52,786 ------- ------- $77,613 $74,377 ======= =======
Tamoxifen Citrate, purchased as a finished product, accounted for $43,040 and $40,777 of finished goods inventory at June 30, 1999 and 1998, respectively. 40 18 (4) PROPERTY, PLANT AND EQUIPMENT A summary of property, plant and equipment is as follows:
June 30, ----------------------- 1999 1998 -------- -------- Land $ 3,256 $ 3,257 Buildings and improvements 57,669 48,950 Machinery and equipment 69,789 56,550 Leasehold improvements 1,665 1,858 Automobiles and trucks 68 68 Construction in progress 7,041 18,380 -------- -------- 139,488 129,063 Less: Accumulated depreciation & amortization 45,724 38,414 -------- -------- $ 93,764 $ 90,649 ======== ========
For the years ended June 30, 1999, 1998 and 1997, $205, $2,047 and $1,801 of interest was capitalized, respectively. (5) MARKETABLE SECURITIES & OTHER ASSETS The Company accounts for investments in marketable securities in accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." The Company's investments 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. Equity securities represent the Company's investment in Warner Chilcott plc. ("Warner Chilcott"). The amortized cost and estimated market values of the securities at June 30, 1999 and 1998 are as follows: 41 19
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 ======= ======= ======= =======
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED MARKET JUNE 30, 1998 COST GAINS LOSSES VALUE - ----------------------------------- --------- ---------- ---------- ------- Debt securities: U.S. Government securities $ 4,930 $ 35 $ 6 $ 4,959 Corporate bonds 2,363 -- 2 2,361 ------- ------- ------- ------- Total debt securities 7,293 35 8 7,320 Equity securities 4,069 -- 1,600 2,469 ------- ------- ------- ------- Total securities $11,362 $ 35 $ 1,608 $ 9,789 ======= ======= ======= =======
Proceeds of $9,446 and $600, which include a loss of $6 and a gain of $2, were received on the sales of marketable securities in the years ended June 30, 1999 and 1998, respectively. The cost of investments sold is determined by the specific identification method. Strategic Collaborations 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, and as a result, such portion of the warrants terminated. The investment in Warner Chilcott is recorded in Other Assets in the Consolidated Balance Sheets. Also included in Other Assets are the Company's investments of $2,250 in Gynetics, Inc., a developer and marketer of 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 one of its proprietary products. Since these investments do not have a readily determinable market value they are recorded at cost in the Consolidated Balance Sheets. 42 20 (6) LONG-TERM DEBT A summary of long-term debt is as follows:
June 30, --------------------- 1999 1998 ------- ------- New Jersey Economic Development Authority Bond (a) $ 241 $ 285 Senior Unsecured Notes (b) 28,571 30,000 Equipment Financing (c) 3,361 3,856 Unsecured Revolving Credit Facility (d) -- 2,500 ------- ------- 32,173 36,641 Less: Current Installments of Long-Term Debt 2,165 4,467 ------- ------- Total Long-Term Debt $30,008 $32,174 ======= =======
(a) The New Jersey Economic Development Authority Bond is payable to a bank. Such loan is secured by a first mortgage on land, building and improvements on the facility located at 265 Livingston Street. Interest is charged at 75% of the bank's prime rate. The prime rate was 7.75% and 8.5% at June 30, 1999 and 1998, respectively. Monthly installments are $3.6 plus interest, through December 1999. Upon maturity in January 2000, there will be a final installment equal to the then remaining principal balance of $220. (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 $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 $0.04 per share. The new 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 income subsequent to June 30, 1997. The Company was in compliance with all such covenants as of June 30, 1999. (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 5.368% and 5.719% at June 30, 43 21 1999 and June 30, 1998, respectively. (d) In November 1997, the Company replaced its $10,000 Secured Revolving Credit Facility with Bank of America, National Association with a $20,000 Unsecured Revolving Credit Facility ("Revolver"). In addition, the term of the Revolver was extended one year to July 31, 2000. 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. Principal maturities of existing long-term debt for the next five years and thereafter are as follows:
Year Ending June 30, -------- 2000 $ 2,165 2001 1,924 2002 3,184 2003 2,043 2004 5,428 Thereafter 17,429
(7) RELATED-PARTY TRANSACTIONS The Company's related-party transactions were with affiliated companies of Dr. Bernard C. Sherman. During the years ended June 30, 1999, 1998 and 1997, the Company purchased $1,134, $1,799 and $1,800, 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 costs in connection with one of its patent challenges. For the years ended June 30, 1999, 1998 and 1997, the Company recorded $1,438, $1,170 and $987, respectively, in connection with such agreement as a reduction to selling, general and administrative expenses. During the years ended June 30, 1999, 1998 and 1997, the Company's founder and Vice Chairman, Edwin A. Cohen, earned $200, $250 and $250, respectively, under a consulting agreement. 44 22 (8) INCOME TAXES A summary of the components of income tax expense is as follows:
Year Ended June 30, ------------------------------------- 1999 1998 1997 ------- ------- ------- Current: Federal $25,173 $15,504 $10,757 State 3,870 1,567 1,372 ------- ------- ------- 29,043 17,071 12,129 ------- ------- ------- Deferred: Federal 1,588 3,103 294 State 246 482 180 ------- ------- ------- 1,834 3,585 474 ------- ------- ------- Total $30,877 $20,656 $12,603 ======= ======= =======
Income tax expense for the years ended June 30, 1999, 1998 and 1997 is included in the financial statements as follows:
Year Ended June 30, --------------------------------------- 1999 1998 1997 -------- -------- -------- Continuing operations $ 30,877 $ 21,148 $ 12,603 Extraordinary loss on early extinguishment of debt -- (492) -- -------- -------- -------- $ 30,877 $ 20,656 $ 12,603 ======== ======== ========
The provision for income taxes differs from amounts computed by applying the statutory federal income tax rate to income before taxes due to the following:
Year Ended June 30, ----------------------------------- 1999 1998 1997 ------- ------- ------- Federal income taxes at statutory rate $28,044 $18,681 $11,214 State income taxes, net of federal income tax effect 2,675 1,332 1,070 Other, net 158 643 319 ------- ------- ------- $30,877 $20,656 $12,603 ======= ======= =======
45 23 The temporary differences that give rise to deferred tax assets and liabilities as of June 30, 1999 and 1998 are as follows:
1999 1998 -------- -------- Deferred tax assets: Receivable reserves $ 900 $ 1,152 Inventory reserves 2,290 1,589 Inventory capitalization 385 208 Investments 842 631 Other operating reserves 2,471 1,934 -------- -------- Total deferred tax assets 6,888 5,514 Deferred tax liabilities: Plant and equipment (4,173) (1,612) Proceeds from supply agreement (6,319) (5,883) -------- -------- Total deferred tax liabilities (10,492) (7,495) -------- -------- Net deferred tax liability $ (3,604) $ (1,981) ======== ========
Internal Revenue Service ("IRS") As of June 30, 1999, the U.S. Internal Revenue Service has completed its examination of the Company's tax returns for all years through 1992 and there are no unresolved issues outstanding for those years. (9) SHAREHOLDERS' EQUITY Employee Stock Option Plans The Company has stock option plans, 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. During fiscal 1994, the shareholders ratified the adoption by the Board of Directors of the 1993 Stock Incentive Plan (the "1993 Option Plan"). In December 1996, the shareholders ratified an amendment to the 1993 Option Plan which increased the number of shares of common stock which may be granted by 1,125,000 to a total of 2,812,500 (after giving effect to the May 1997 3-for-2 stock split). The Company's other option plan was approved by the shareholders in 1986 (the "1986 Option Plan"). Effective June 30, 1996, options are no longer granted under this Plan. For fiscal 1999, 1998 and 1997, 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 46 24 Option Plan at a price below the current market price of the Company's common stock on the date of grant. A summary of the activity resulting from all plans, adjusted for the May 1997 3-for-2 stock split, is as follows:
WEIGHTED AVERAGE NO. OF SHARES OPTION PRICE ------------- ------------ Outstanding at 6/30/96 1,838,048 $ 7.91 Granted 330,406 19.53 Canceled (1,125) 10.52 Exercised (181,938) 8.57 --------- Outstanding at 6/30/97 1,985,391 12.83 Granted 195,500 39.58 Canceled (38,992) 22.60 Exercised (467,411) 7.23 --------- Outstanding at 6/30/98 1,674,488 13.58 Granted 278,000 34.13 Canceled (32,576) 32.53 Exercised (429,711) 7.00 --------- Outstanding at 6/30/99 1,490,201 $18.89 ========= Available for Grant (4,162,500 authorized) 846,617 Exercisable at 6/30/99 1,018,936 $12.54
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"). An aggregate of 337,500 shares of common stock were authorized to be granted under the Directors' Plan. In December 1996, the shareholders ratified an amendment to the Directors' Plan that increased the number of shares of common stock that may be granted by 225,000 to a total of 562,500. 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. Effective October 1999, the number of shares which each non-employee director is optioned will be decreased to 5,000 on the grant date. 47 25 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 May 1997 3-for-2 stock split, for the three fiscal years ended June 30, 1999:
WEIGHTED AVERAGE NO. OF SHARES OPTION PRICE ------------- ------------ Outstanding at 6/30/96 216,000 $ 9.95 Granted 67,500 17.25 Exercised (40,000) 9.16 ------- Outstanding at 6/30/97 243,500 12.10 Granted 67,500 36.00 Canceled (11,250) 36.00 Exercised (38,000) 9.90 ------- Outstanding at 6/30/98 261,750 17.55 Granted 37,500 48.63 Exercised (29,250) 11.82 ------- Outstanding at 6/30/99 270,000 $22.49 ======= Available for Grant (562,500 authorized) 185,250 Exercisable at 6/30/99 232,500 $18.27
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 450,000 shares of common stock at approximately 85% of the fair market value of such shares. Under the Plan, purchases were 39,977, 43,181 and 50,916 for the years ended June 30, 1999, 1998 and 1997, 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 48 26 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 income and earnings per share would have been reduced to the pro forma amounts indicated below:
1999 1998 1997 ---------- ---------- ---------- Net income As reported $ 49,250 $ 32,720 $ 19,447 Pro forma $ 46,940 $ 30,752 $ 18,120 Net earnings per share As reported $ 2.18 $ 1.50 $ 0.92 Pro forma $ 2.08 $ 1.41 $ 0.86 Net earnings per share- As reported $ 2.09 $ 1.41 $ 0.87 assuming dilution Pro forma $ 1.99 $ 1.33 $ 0.81
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 1997, 1998 and 1999, respectively: dividend yield of 0%; expected volatility of 42.6%, 42.1% and 48.9%; weighted-average risk-free interest rates of 6.3%, 5.9% and 4.7%; 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, 1999:
Options Outstanding Options Exercisable ------------------------------------------------------------------------- ----------------------------- Weighted Range of Number Average Weighted Number Weighted Exercise Outstanding Remaining Average Exercisable Average Prices at 6/30/99 Contractual Life Exercise Price at 6/30/99 Exercise Price ------ ---------- ---------------- -------------- ---------- -------------- $ 3.72 - 9.64 454,776 3.88 $ 8.07 454,776 $ 8.07 10.33 - 17.79 540,154 6.35 11.62 532,155 11.54 19.29 - 39.03 553,105 8.29 28.04 207,150 23.86 39.66 - 48.63 212,166 8.43 41.33 57,355 39.66 --------- --------- 1,760,201 1,251,436 ========= =========
(10) 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 salary and cash contributions and any profits arising therefrom. Participants become vested with respect to 20% of the Company's contributions to their accounts and any profits arising therefrom for each full year of employment with the Company and thus become fully vested after five full years of employment. 49 27 The Company's contributions to the 401(k) Plan were $2,292, $2,194 and $1,745 for the years ended June 30, 1999, 1998 and 1997, respectively. The Board of Directors recently 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. (11) OTHER INCOME (EXPENSE) A summary of other income (expense) is as follows:
Year Ended June 30, ---------------------------- 1999 1998 1997 ---- ---- ---- Net (loss) gain on sale of property, plant and equipment $(11) $(63) $203 Other 47 46 25 ---- ---- ---- Other income (expense) $ 36 $(17) $228 ==== ==== ====
(12) COMMITMENTS AND CONTINGENCIES The Company is party to various operating leases which relate to the rental of office and plant facilities and of equipment. The Company believes it will be able to extend such leases, if necessary. Rent expense charged to operations was $1,099, $1,493 and $1,314 in fiscal 1999, 1998 and 1997, 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 ----------- -------- 2000 $832 2001 519 2002 15
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 judgement was not covered by insurance or exceeded the policy limits. Invamed, Inc./Apothecon, Inc. Lawsuit In February 1998 and May 1999, Invamed, Inc. ("Invamed") and Apothecon, Inc. ("Apothecon"), respectively, 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, 50 28 charging that the Company unlawfully blocked access to the raw material source for Warfarin Sodium. The Company believes that the suit is without merit and intends to defend its position vigorously. These actions are currently in discovery stage. It is anticipated that this matter will take several years to be resolved but an adverse judgement could have a material 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 1999, 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. (13) 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, primarily those affiliated with the closed facility. As of June 30, 1999, the 1998 fourth quarter restructuring plan has been completed and all payments have been made. 51 29 (14) QUARTERLY DATA (UNAUDITED) A summary of the quarterly results of operations is as follows:
THREE MONTH PERIOD ENDED ----------------------------------------------------------------- SEPT. 30 DEC. 31 MAR. 31 JUNE 30 ----------- ----------- ----------- ----------- Fiscal Year 1999: Total revenues(1) $ 97,149 $ 109,220 $ 122,572 $ 115,092 Cost of sales 63,908 73,920 87,968 75,597 Net earnings 11,204 12,281 12,662 13,103 EARNINGS PER COMMON SHARE - ASSUMING DILUTION Net earnings(2) $ 0.48 $ 0.52 $ 0.54 $ 0.56 =========== =========== =========== =========== PRICE RANGE OF COMMON STOCK(3) High $ 39.75 $ 49.75 $ 48.56 $ 40.50 Low 24.69 24.88 28.38 28.50 FISCAL YEAR 1998: Total revenues(4) $ 96,267 $ 92,328 $ 96,387 $ 92,322 Cost of sales 65,226 68,769 70,042 61,965 Earnings before extraordinary loss on early extinguishment of debt 10,397 7,115 7,151 8,847 Net earnings 10,397 6,325 7,151 8,847 EARNINGS PER COMMON SHARE - ASSUMING DILUTION Earnings before extraordinary loss on early extinguishment of debt(2) $ 0.45 $ 0.31 $ 0.31 $ 0.38 =========== =========== =========== =========== Net earnings(2) $ 0.45 $ 0.27 $ 0.31 $ 0.38 =========== =========== =========== =========== PRICE RANGE OF COMMON STOCK High $ 49.00 $ 40.13 $ 41.75 $ 46.94 Low 37.00 32.50 33.25 37.81
(1) Amounts include Proceeds from supply agreements of $8,000, $6,583, $6,750 and $6,750 for the quarters ended September 30, 1998, December 31, 1998, March 31, 1999 and June 30, 1999, respectively. (2) 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. (3) The Company's common stock is listed and traded on the New York Stock Exchange (BRL). At June 30, 1999, there were approximately 688 shareholders of record of common stock. The Company believes that a significant number of beneficial owners hold their shares in street names. (4) Amounts include Proceeds from supply agreements of $7,166, $6,417, $8,750 and $8,333 for the quarters ended September 30, 1997, December 31, 1997, March 31, 1998 and June 30, 1998, respectively. 52 30 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, 1999 and 1998, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended June 30, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. 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, the consolidated financial statements present fairly, in all material respects, the financial position of Barr Laboratories, Inc. and subsidiaries at June 30, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1999 in conformity with generally accepted accounting principles. /s/ DELOITTE & TOUCHE LLP Parsippany, New Jersey August 6, 1999 53 31 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 judgements. 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, Chief Executive Officer and President 54 32 ITEM 6. SELECTED FINANCIAL DATA (IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED JUNE 30, ------------------------------------------------------------------------------------------------ STATEMENTS OF OPERATIONS 1999 1998 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------------ Total revenues $444,033(1) $377,304(2) $284,486(4) $232,224 $199,720 Earnings before income taxes and extraordinary loss 80,127 54,658 32,050 11,509 10,222 Income tax expense 30,877 21,148 12,603 4,368 3,852 Earnings before extraordinary loss 49,250 33,510 19,447 7,141 6,370 Net earnings 49,250 32,720(3) 19,447 7,016(5) 6,225(8) Earnings per common share: Earnings before extraordinary loss 2.18 1.54 0.92 0.34(6) 0.32(7) Earnings per common share - assuming dilution: Earnings before extraordinary loss 2.09 1.45 0.87 0.33(6) 0.31(7) Net earnings(9) 2.09 1.41(3) 0.87 0.32(5)(6) 0.30(7)(8) BALANCE SHEET DATA 1999 1998 1997 1996 1995 ------------------------------------------------------------------------------------------------ Working capital $146,863 $ 95,281 $ 41,807 $ 52,985 $ 58,364 Total assets 347,890 310,851 202,845 169,220 155,953 Long-term debt(10) 30,008 32,174 14,941 17,709 20,371 Shareholders' equity(11) 213,707 155,929 102,138 80,161 71,853
(1) Includes $28,083 in Proceeds from supply agreements. (2) Includes $30,666 in Proceeds from supply agreements. (3) Fiscal 1998 includes the effect of a $790 ($0.04 per share) extraordinary loss (net of tax of $492) on early extinguishment of debt (See Note 6 to the Consolidated Financial Statements). (4) Includes $27,050 in Proceeds from supply agreement. (5) Fiscal 1996 includes the effect of a $125 ($0.01 per share) extraordinary loss (net of tax of $76) on early extinguishment of debt. (6) Amounts have been adjusted for the May 1997 3-for-2 stock split effected in the form of a 50% stock dividend. (7) Amounts have been adjusted for the March 1996 and May 1997 3-for-2 stock splits effected in the form of 50% stock dividends. (8) Fiscal 1995 includes the effect of a $145 ($0.01 per share) extraordinary loss (net of tax of $92) on early extinguishment of debt. (9) Fiscal 1997, 1996 and 1995 earnings per share amounts have been restated to conform with the provisions of Statement of Financial Accounting Standards No. 128 "Earnings per Share." (10) Excludes current installments (See Note 6 to the Consolidated Financial Statements). (11) The Company has not paid a cash dividend in any of the above years. 55 EX-23.0 5 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 reports dated August 6, 1999, appearing in and incorporated by reference in the Annual Report on Form 10-K of Barr Laboratories, Inc. for the year ended June 30, 1999. DELOITTE & TOUCHE LLP Parsippany, New Jersey August 25, 1999 56 EX-27.0 6 FINANCIAL DATA SCHEDULE
5 1,000 U.S. DOLLARS YEAR JUN-30-1999 JUL-01-1998 JUN-30-1999 1 94,867 8,127 65,977 0 77,613 248,140 93,764 0 347,890 101,277 30,008 0 0 229 213,478 347,890 415,950 444,033 301,393 301,393 0 0 2,697 80,127 30,877 49,250 0 0 0 49,250 2.18 2.09 Accounts Receivable and PP+E are net Earnings per share are simple, not primary
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