<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For quarterly period ended September 30, 1998 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)
(Former name, former address and former fiscal year,
if changed since last report)
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 / /
Number of shares of common stock, par value $.01, outstanding as of September
30, 1998: 22,379,847
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BARR LABORATORIES, INC.
<TABLE>
<CAPTION>
INDEX PAGE
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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of
September 30, 1998 and June 30, 1998 3
Consolidated Statements of Earnings
for the three months ended September 30,
1998 and 1997 4
Consolidated Statements of Cash Flows
for the three months ended
September 30, 1998 and 1997 5
Notes to Consolidated Financial
Statements 6-8
Item 2. Management's Discussion and
Analysis of Financial Condition and
Results of Operations 9-11
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 12
</TABLE>
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BARR LABORATORIES, INC.
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1998 1998
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<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 60,285 $ 72,956
Marketable securities 7,800 7,320
Accounts receivable, less allowances
of $2,777 and $2,738, respectively 52,445 46,760
Supply agreement receivable 14,917 14,667
Inventories 92,987 74,377
Prepaid expenses 603 806
--------- ---------
Total current assets 229,037 216,886
Property, plant and equipment, net 91,010 90,649
Other assets 5,032 3,316
--------- ---------
Total assets $ 325,079 $ 310,851
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 105,549 $ 103,321
Accrued liabilities 8,490 9,460
Deferred income taxes 1,000 1,000
Current portion of long-term debt 1,967 4,467
Income taxes payable 7,837 3,357
--------- ---------
Total current liabilities 124,843 121,605
Long-term debt 32,039 32,174
Other liabilities 165 162
Deferred income taxes 625 981
Commitments & Contingencies
Shareholders' equity
Common stock $.01 par value per share;
authorized 100,000,000; issued 22,497,802
and 22,424,645, respectively 225 224
Additional paid-in capital 68,908 68,064
Retained earnings 99,800 88,596
Unrealized loss on investments (1,513) (942)
--------- ---------
167,420 155,942
Treasury stock at cost: 117,955 shares (13) (13)
--------- ---------
Total shareholders' equity 167,407 155,929
--------- ---------
Total liabilities and shareholders' equity $ 325,079 $ 310,851
========= =========
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
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BARR LABORATORIES, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
1998 1997
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<S> <C> <C>
Revenues:
Product sales $ 89,149 $ 89,101
Proceeds from supply agreements 8,000 7,166
-------- --------
Total revenues 97,149 96,267
Costs and expenses:
Cost of sales 63,908 65,226
Selling, general and administrative 9,943 9,133
Research and development 5,370 5,198
-------- --------
Earnings from operations 17,928 16,710
Interest income 972 376
Interest expense (659) (237)
Other (expense) income (14) 17
-------- --------
Earnings before income taxes 18,227 16,866
Income tax expense 7,023 6,469
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Net earnings $ 11,204 $ 10,397
======== ========
Earnings per common share $ 0.50 $ 0.48
======== ========
Earnings per common share - assuming dilution $ 0.48 $ 0.45
======== ========
Weighted average shares 22,335 21,467
======== ========
Weighted average shares - assuming dilution 23,458 23,054
======== ========
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
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BARR LABORATORIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
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<S> <C> <C>
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES:
Net earnings $ 11,204 $ 10,397
Adjustments to reconcile net earnings to net cash from (used
in) operating activities:
Depreciation and amortization 2,062 1,291
Deferred income tax (benefit) expense (1) 2,601
Other, net 19 --
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable and supply agreement receivable, net (5,935) (25,318)
Inventories (18,610) 7,276
Prepaid expenses 203 (192)
Other assets (478) (52)
Increase (decrease) in:
Accounts payable, accrued liabilities and other 1,261 186
Income taxes payable 4,480 2,509
-------- --------
Net cash (used in) operating activities (5,795) (1,302)
-------- --------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
Purchases of property, plant and equipment (2,390) (5,876)
Purchases of strategic investments (2,250) (4,069)
Other, net (446) 65
-------- --------
Net cash (used in) investing activities (5,086) (9,880)
-------- --------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
Principal payments on long-term debt (135) (136)
Activity on revolving line of credit, net (2,500) --
Proceeds from exercise of stock options and employee stock purchases 845 1,827
-------- --------
Net cash (used in) from financing activities (1,790) 1,691
-------- --------
(Decrease) in cash and cash equivalents (12,671) (9,491)
Cash and cash equivalents at beginning of period 72,956 31,923
-------- --------
Cash and cash equivalents at end of period $ 60,285 $ 22,432
======== ========
SUPPLEMENTAL CASH FLOW DATA - CASH PAID DURING THE PERIOD
Interest, net of portion capitalized $ 126 $ --
Income taxes $ 2,543 $ 1,500
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
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BARR LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Barr
Laboratories, Inc. and its wholly-owned subsidiaries (the "Company" or
"Barr").
In the opinion of the Management of the Company, the interim consolidated
financial statements include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the financial
position, results of operations and cash flows for the interim periods.
Interim results are not necessarily indicative of the results that may be
expected for a full year. These financial statements should be read in
conjunction with the Company's Annual Report on Form 10-K for the year
ended June 30, 1998.
2. PROCEEDS FROM SUPPLY AGREEMENTS/SUPPLY AGREEMENT RECEIVABLE
In accordance with the Ciprofloxacin Supply Agreement, the Company
recognizes income and a related receivable on a monthly basis, as certain
contingencies are met. Collection of certain of these receivables occurs
quarterly. The Company has recognized revenue of $6,500 for the three
months ended September 30, 1998. The Company received payment of $6,250 in
September 1998 for amounts earned in the three-month period ended February
28, 1998.
Also included in Proceeds from supply agreements is the final $1,500 earned
under a separate contingent supply agreement related to the ciprofloxacin
litigation.
3. CASH AND CASH EQUIVALENTS
Cash equivalents consist of short-term, highly liquid investments
(primarily market auction securities with interest rates that are re-set
every 7 days) which are readily convertible into cash at par value (cost).
As of September 30, 1998 and June 30, 1998, approximately $49,649 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. The
Company pays the Innovator a monthly fee based on the average unsecured
monthly Tamoxifen payable balance, as defined in the December 1995
Alternative Collateral Agreement.
4. OTHER ASSETS
On September 23, 1998, the Company made a strategic investment in Gynetics,
Inc. ("Gynetics") by acquiring 806,451 shares of Gynetics common stock
through a private placement, for $2,250. The investment is carried at cost
and is included in Other assets on the Consolidated Balance Sheets.
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5. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
September 30, June 30,
1998 1998
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<S> <C> <C>
Raw materials and supplies $15,359 $17,459
Work-in-process 6,528 4,132
Finished goods 71,100 52,786
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$92,987 $74,377
======= =======
</TABLE>
Tamoxifen Citrate, purchased as a finished product, accounted for
approximately $57,509 and $40,777 of finished goods as of September 30,
1998 and June 30, 1998, respectively.
6. EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share". SFAS No. 128 specifies the computation, presentation and disclosure
requirements for earnings per share ("EPS") and became effective for both
interim and annual periods ending after December 15, 1997. All prior period
EPS data have been restated to conform with the provisions of SFAS No. 128.
The following is a reconciliation of the numerators and denominators used
to calculate Earnings per common share in the Consolidated Statements of
Earnings:
<TABLE>
<CAPTION>
Three Months Ended
September 30,
1998 1997
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<S> <C> <C>
EARNINGS PER COMMON SHARE:
Net earnings (numerator) $11,204 $10,397
Weighted average shares (denominator) 22,335 21,467
Net earnings $ 0.50 $ 0.48
======= =======
EARNINGS PER COMMON SHARE - ASSUMING DILUTION:
Net earnings (numerator) $11,204 $10,397
Weighted average shares 22,335 21,467
Effect of dilutive options 1,123 1,587
------- -------
Weighted averages shares -
assuming dilution (denominator) 23,458 23,054
Net earnings $ 0.48 $ 0.45
======= =======
</TABLE>
(share amounts in thousands)
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During the three months ended September 30, 1998, there were 518,250
outstanding options that were not included in the computation of diluted
EPS, because the options' exercise prices were greater than the average
market price of the common stock for the period.
7. COMMITMENTS AND CONTINGENCIES
Invamed, Inc. Lawsuit
On February 25, 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. The Company believes that the suit filed against it by Invamed is
without merit and intends to defend its position vigorously. This action is
currently in the 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.
Other Litigation
The Company, at September 30, 1998, was involved in 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.
8. NEW ACCOUNTING PRONOUNCEMENTS
In 1997, the FASB issued 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." Total comprehensive income for
the three months ended September 30, 1998 and 1997 was $10,633 and $10,623.
In 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." As required by the standard, the
Company will begin reporting under SFAS No. 131 in its fiscal 1999 Annual
Report.
9. OTHER
During the quarter ended June 30, 1998, the Company recorded a $1.2 million
restructuring charge. 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 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 September 30, 1998, the
fourth quarter restructuring plan has been completed.
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ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations:
Comparison of the Quarter Ended September 30, 1998 to the Quarter Ended
September 30, 1997 - (thousands of dollars)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
1998 1997 Change
---- ---- ------
<S> <C> <C> <C>
Revenues:
Product sales:
Distributed $57,247 $60,444 $(3,197)
Manufactured 31,902 28,657 3,245
------- ------- -------
Total product sales 89,149 89,101 48
Proceeds from supply agreements 8,000 7,166 834
------- ------- -------
Total revenues $97,149 $96,267 $ 882
</TABLE>
Total revenues were consistent with the prior year with slight increases in
Product sales and Proceeds from supply agreements.
The increase in Product sales was attributable to an increase in sales of
manufactured products offset by a decrease in distributed product sales.
Distributed product sales declined 5% as sales of Minocycline, which the Company
began distributing in October 1997, partially offset lower sales of Tamoxifen.
The decrease in sales of Tamoxifen was the result of accelerated buying by
customers during the first three quarters of fiscal 1998, which was
attributable, in part, to customers anticipating a price increase for Barr's
Tamoxifen, which occurred on April 1, 1998. Tamoxifen is a patent protected
product manufactured for the Company by the Innovator, and is distributed by the
Company under a non-exclusive license agreement with the Innovator. Currently
Tamoxifen only competes against the Innovator's product, which is sold under the
brand name.
Sales of manufactured products increased 11% primarily attributable to sales
from eight products launched in the most recent four quarters including
Naltrexone, Estradiol, Estropipate and Triamterene. The prior year quarter
included sales from the July 1997 launch of Warfarin Sodium that included
significant launch quantities purchased by major wholesalers and chain drug
stores. The current quarter Warfarin Sodium sales were slightly higher than
those of the previous year's quarter reflecting the increased demand experienced
in the preceding twelve months. Revenue from products launched in the most
recent four quarters 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.
As the Company anticipated, a second generic version of Warfarin Sodium was
launched in October 1998. Based on the current Warfarin Sodium market, the
Company believes that the second generic launch will not have a material adverse
effect on the Company's future consolidated financial statements and that
Warfarin Sodium will continue to be an important contributor to revenues and
profits.
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Proceeds from supply agreements increased 12% primarily from the final $1,500
proceeds earned under a separate contingent supply agreement related to the
ciprofloxacin litigation (See Note 2 to the Consolidated Financial Statements).
Cost of sales decreased from $65,226 or 73% of product sales to $63,908 or 72%
of product sales. The decrease in both dollars and percent of product sales is
the result of a more favorable mix within manufactured products, a better mix of
manufactured products to distributed products, and higher margins on distributed
products. This improved mix within manufactured products and between
manufactured products and distributed products was the result of sales of
products launched in the previous twelve months which generally have higher
margins than certain existing products and distributed products. The increase in
distributed product margins was due to the April 1998 price increase on
Tamoxifen by the Innovator. Margins on Tamoxifen are expected to return to
historical levels as the Company has depleted its lower-cost inventory.
Selling, general and administrative expenses increased to $9,943 from $9,133.
The largest component of the dollar increase related to legal expenses. The
increased legal fees resulted from the Company's federal anti-trust suit against
DuPont Pharmaceutical Company, the Company's upcoming Prozac(R) trial, as well
as development of additional patent challenges.
Total research and development expenses in the quarter increased 3% to $5,370.
The increase is primarily the result of increased personnel costs to support the
number of products in development and higher raw material costs offset by lower
bio-study costs. The prior year amount 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 $596 primarily due to an increase in the average
cash and cash equivalents balance as well as a slight increase in the market
rates of the Company's short-term investments.
Interest expense increased $422 due to a decrease in capitalized interest over
the corresponding quarter of the prior fiscal year. The amount of interest
capitalized declined due to the reduction in capital spending on the Virginia
facility, which was substantially complete by the spring of 1998.
Liquidity and Capital Resources
The Company's cash and cash equivalents decreased from $72,956 at June 30, 1998
to $60,285 at September 30, 1998. During the three months ended September 30,
1998, the Company decreased the cash held in its interest bearing escrow account
from $59,321 at June 30, 1998 to $49,649.
Cash used in operating activities totaled $5,795 for the three months ended
September 30, 1998 as working capital increases more than offset quarterly
income. The working capital increase was led by increases in inventory and
accounts receivable which were partially offset by increases in accounts
payable. Accounts receivable increased due to a slight increase in collection
times. The increase in inventory is primarily a result of the Company's
increased investment in Tamoxifen inventory in anticipation of the U.S. Food and
Drug Administration's ("FDA") approval of Tamoxifen for the reduction in the
incidence of breast cancer in women at high risk for developing the disease. The
FDA approval for that indication occurred in October 1998.
During the first three months of fiscal 1999, the Company invested approximately
$2 million in capital expenditures primarily on construction and new equipment
for its facilities. This decline from the prior year was anticipated and was
related to the reduction in capital spending on the Virginia facility,
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which was substantially complete by the spring of 1998. The Company expects to
invest an additional $11 million in capital assets in fiscal 1999.
In September 1998, Barr made a strategic investment of $2,250 in Gynetics, Inc.
(See Note 4 to the Consolidated Financial Statements).
The Company continues to evaluate other growth opportunities including
additional strategic investments, acquisitions and joint ventures, which could
require significant capital resources.
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.
Other Matters
Market Risk Disclosure
As discussed in the 1998 Annual Report on Form 10-K, the Company's exposure to
market risk from changes in interest rates, in general, is not material.
Year 2000
As disclosed in the 1998 Annual Report on Form 10-K, 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 continues to verify that third parties,
with which it has a material relationship, are in compliance or expect to be in
compliance prior to January 1, 2000. In addition, the project team continues to
review its information technology ("IT") and non-IT systems for compliance and
will make modifications to these systems as necessary. 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.
To date the Company has not completed a formal contingency plan for
non-compliance, but continues to develop such plans based on the information
obtained from the third parties with which it has a material relationship and
the on-going evaluation of its IT and non-IT systems.
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.
Forward Looking Statements
Except for the historical information contained herein, this Form 10-Q contains
forward looking statements that involve a number of risks and uncertainties
including the timing and outcome of legal proceedings, impact of competition,
fluctuations in operating results, capital spending, 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.
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BARR LABORATORIES, INC.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit Number Exhibit
-------------- -------
27.1 Financial data schedule
(b) There were no reports filed on Form 8-K in the quarter ended
September 30, 1998.
SIGNATURES
Pursuant to the requirements 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.
Dated: November 11, 1998 /s/ William T. McKee
--------------------
William T. McKee
Chief Financial Officer
12
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 60,285
<SECURITIES> 7,800
<RECEIVABLES> 67,362<F1>
<ALLOWANCES> 0
<INVENTORY> 92,987
<CURRENT-ASSETS> 229,037
<PP&E> 91,010<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 325,079
<CURRENT-LIABILITIES> 124,843
<BONDS> 34,006
0
0
<COMMON> 225
<OTHER-SE> 167,182
<TOTAL-LIABILITY-AND-EQUITY> 325,079
<SALES> 89,149
<TOTAL-REVENUES> 97,149
<CGS> 63,908
<TOTAL-COSTS> 63,908
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 659
<INCOME-PRETAX> 18,227
<INCOME-TAX> 7,023
<INCOME-CONTINUING> 11,204
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,204
<EPS-PRIMARY> 0.50<F2>
<EPS-DILUTED> 0.48
<FN>
<F1>Accounts Receivable and PP&E are net.
<F2>Earnings per share are simple, not primary.
</FN>
</TABLE>
