<PAGE> 1
EXHIBIT 13
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(thousands of dollars)
Results of Operations
Fiscal 2000 to Fiscal 1999
Total revenues increased approximately 9% from $444,033 to $482,278. This
increase is attributable to increases in product sales and development and other
revenue offset by a slight decrease in proceeds from supply agreements.
Tamoxifen sales increased 8% from $275,127 to $297,395. The increase was
attributable to higher prices and an expansion in the use of Tamoxifen. In
October 1998, Tamoxifen was approved to reduce the incidence of breast cancer in
women at high risk of developing the disease. Tamoxifen is a patent protected
product manufactured for the Company by the Innovator. Currently, Tamoxifen only
competes against the Innovator's product, which is sold under a brand name. In
fiscal 2000, Tamoxifen accounted for 68% of product sales versus 66% in fiscal
1999.
The prior year's sales included $6,373 of Minocycline sales which the Company
stopped selling in late 1999 because of deteriorating market conditions.
Other product sales increased 6% from $134,450 to $142,583. The increase was
driven by sales of Warfarin Sodium, Medroxyprogesterone Acetate, Methotrexate,
Naltrexone, Trazodone and Hydroxyurea. Warfarin Sodium sales accounted for
approximately 14% of total product sales, which was a slight decline from 15% in
the prior year. Barr ended the fiscal year with nearly 80% of the overall
generic Warfarin Sodium market and approximately 27% of all brand and generic
Warfarin Sodium unit sales.
Development and other revenue consists of amounts received from DuPont
Pharmaceuticals Company ("DuPont") for various development and co-marketing
agreements (See Note 2 to the Consolidated Financial Statements).
Proceeds from supply agreements decreased $499, as expected, since proceeds
earned in the prior year under a separate contingent supply agreement related to
the Ciprofloxacin litigation ceased.
Cost of sales increased from $301,393 to $315,652 primarily related to an
increase in product sales. As a percentage of product sales, cost of sales
declined from 72.5% to 71.7%. The Company's product margins are dependent on
several factors including product sales mix, manufacturing efficiencies and
competition. The decrease in cost of sales as a percentage of product sales was
due to a more favorable mix among non-Tamoxifen product sales, which was
slightly offset by a higher percentage of Tamoxifen sales to total product
sales. Tamoxifen is distributed by the Company and has lower margins than most
of Barr's other products.
Selling, general and administrative expenses increased from $40,439 to $42,479.
The increase was primarily due to legal costs related to litigation with DuPont
that was resolved in March 2000 and to ongoing patent challenges. Also, the
prior year included approximately $1.7 million related to the Company's share of
the $4 million payment received from Eli Lilly & Company for reimbursement of
1
<PAGE> 2
legal costs incurred as part of the agreement to take the Prozac(R) case
directly to the court of appeals.
Research and development expenses increased from $22,593 to $40,451. This
increase resulted from increased bio-study and clinical trial costs, higher
personnel costs to support an increased number of products in development and
higher costs associated with the Company's proprietary drug development efforts.
Also, the prior year included $646 related to a proprietary product
collaboration with Eastern Virginia Medical School. This year's increased level
of spending enabled the Company to file fifteen applications with the U.S. Food
and Drug Administration and initiate Phase III clinical studies for two
proprietary products.
Agreement expenses consist of a one-time non-cash charge representing the fair
value of the 1.5 million warrants issued to DuPont (See Note 4 to the
Consolidated Financial Statements) as well as approximately $2,500 in one-time
legal charges associated with finalizing the Company's definitive agreements
with DuPont.
Interest income increased $1,912 primarily due to an increase in the average
cash and cash equivalents balance.
Interest expense decreased $292 due to a decrease in the Company's debt balances
and lower fees paid on the average unsecured Tamoxifen payable balance.
Other income increased $311 primarily due to the gain recognized on the warrants
received from Halsey Drug Co., Inc. (See Note 7 to the Consolidated Financial
Statements).
Results of Operations
Fiscal 1999 to Fiscal 1998
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 a 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.
2
<PAGE> 3
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 3 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 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, 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 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.
In fiscal 1998, the Company incurred an extraordinary loss of $790 on the early
extinguishment of debt (See Note 8 to the Consolidated Financial Statements).
3
<PAGE> 4
Liquidity and Capital Resources
The Company's cash and cash equivalents balance increased $61,055 or 64% to
$155,922 at June 30, 2000 from $94,867 at June 30, 1999. In connection with an
Alternative Collateral Agreement between the Company and the Innovator of
Tamoxifen (See Note 1 to the Consolidated Financial Statements), the Company has
increased the cash held in its interest bearing escrow account from $28,283 at
June 30, 1999 to $74,011 at June 30, 2000.
Cash provided by operating activities was $60,527 for the year ended June 30,
2000, as earnings before non-cash charges such as fair value of warrants issued,
depreciation and deferred income tax benefit more than offset working capital
increases. The working capital increase was led by increases in accounts
receivable and other receivables, which were partially offset by increases in
accounts payable and income taxes payable. Accounts receivable at June 30, 2000
were $54,669 or $4,785 higher than those at June 30, 1999 primarily attributable
to increased product sales. Other receivables increased due to development and
other revenue (See Note 2 to the Consolidated Financial Statements). Accounts
payable increased as a result of an increase in the Tamoxifen payable. Income
taxes payable increased as a result of increased taxable earnings and the timing
of estimated tax payments.
Working capital levels varied during the year due to the timing of Tamoxifen
inventory purchases, sales levels and the timing of Tamoxifen payables. During
fiscal 2000, inventory levels increased during the first half of the year and
declined during the second half. The Company expects that a similar trend will
occur in fiscal 2001.
During fiscal 2000, the Company invested $12,086 in capital assets, primarily on
the construction of its new 48,000 square foot warehouse and 13,500 square foot
laboratory facility at its Pomona, New York campus. In fiscal 2001, the Company
expects to invest an additional $15,000 to $18,000 in capital assets.
To expand its growth opportunities, the Company has and will continue to
evaluate and enter into various strategic collaborations. The timing and amount
of cash required to enter into these collaborations is difficult to predict
because it is dependent on several factors, many of which are outside of the
Company's control. However, the Company believes, that based on arrangements in
place at June 30, 2000, it could spend between $2 and $4 million over the next
twelve months for these collaborations. The $2 to $4 million excludes any cash
needed to fund strategic acquisitions the Company may consider in the future.
The Company believes that its current cash balances, cash flows from operations
and borrowing capacity, including unused amounts under its existing Revolving
Credit Facility, will be adequate to 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
4
<PAGE> 5
in developing and launching proprietary products is also driven by the desire to
market products that will have limited competition and longer product lives. The
Company's future operating results are dependent upon several factors that
impact its stated strategies. These factors include the ability to introduce new
products, patient acceptance of new products and new indications of existing
products, customer purchasing practices, pricing practices of new competitors
and spending levels including research and development. In addition, the ability
to receive sufficient quantities of raw materials to maintain its production is
critical. While the Company has not experienced any interruption in sales due to
lack of raw materials, the Company is continually identifying alternate raw
material suppliers for many of its key products in the event that raw material
shortages were to occur. The Company's operating results are expected to be
significantly impacted by a favorable final decision regarding its challenge of
the Prozac patent. The timing and impact of the launch of Prozac in fiscal 2001
is dependent on several factors and therefore has been excluded from the
following outlook section.
Total revenues are expected to increase in fiscal 2001 compared to fiscal 2000
driven by increasing development revenue, higher Tamoxifen sales and new product
launches, including Viaspan, which should more than offset declining prices on
certain existing products.
The Company distributes Tamoxifen in accordance with the terms of a
non-exclusive supply and distribution agreement that expires at the earlier of
patent expiry or upon successful challenge of the Tamoxifen patent by another
company. Barr is aware of two other companies who are challenging the Tamoxifen
patent. Though the outcome of any legal matter is uncertain, the Company
believes the current cases will not impact its fiscal 2001 Tamoxifen revenues.
The Company believes that Tamoxifen sales will increase during fiscal 2001 due
to higher prices and increased volume from the new indication. The extent of
such increase, if any, is dependent upon several factors including the
acceptance of the new indication by physicians and patients, customer buying
patterns, inventory levels and pricing decisions made by the Innovator.
Revenues earned under the various DuPont agreements and included in development
and other revenue are determined by several factors including the timing and
extent of Barr's spending on specific proprietary development products, and
achieving certain development milestones. Revenues under these agreements are
expected to range from $4 to $6 million per quarter in fiscal 2001.
Amounts earned in fiscal 2001 from the contingent supply agreement are dependent
upon decisions made by a third party but are expected to approximate amounts
earned in fiscal 2000.
Selling, general and administrative spending is impacted by several factors such
as the timing and number of legal matters, including patent challenges being
pursued by the Company, the level of government affairs spending and promotional
and advertising activities. Barr's government affairs spending is, in part,
dependent upon efforts by other companies to restrict generic substitution and
therefore, is difficult to predict. Promotional and advertising spending is
generally related to the number and type of products being launched in a given
year. The Company expects that selling, general and administrative expenses will
be higher in fiscal 2001 than in fiscal 2000 primarily due to higher costs
associated with new product launches, including Viaspan.
Since proprietary products require more extensive advertising and promotional
activities than traditional generic products, the future approval and launch of
Barr's proprietary products may impact selling, general and administrative
costs. Generally, selling, marketing and promotion costs are incurred several
months prior to a product's launch. In addition, some of these proprietary
products will require a sales force detailing directly to physicians. The
Company currently does not have an in-
5
<PAGE> 6
house sales force to sell its products directly to physicians. The Company has
successfully engaged DuPont to assume responsibility for sales and marketing
support for one of its proprietary products expected to be launched in fiscal
2001 (See Note 2 to the Consolidated Financial Statements) and is exploring
several alternatives for marketing the balance of its proprietary products
including, licensing out such products to third parties, engaging a contract
sales force or investing in or acquiring companies with an existing sales force.
Selecting the appropriate alternative depends on a variety of factors including
the number of physicians in a particular therapeutic category and the number of
products the Company offers within a therapeutic category. Therefore, the
Company's decision on how it will sell its proprietary products and the timing
of the product launches could have a significant impact on expense levels. While
the Company believes it will be able to successfully market and sell its
proprietary products using one or more of the alternatives described above,
there is no assurance it will be able to do so on favorable terms.
Research and development costs are expected to increase 20 - 25% in fiscal 2001
compared to fiscal 2000 due to substantial increases in both generic and
proprietary product development activities. In its generic development area, the
Company expects to file between 15 and 18 ANDAs in fiscal 2001 compared to 11
filed in fiscal 2000. While the number of applications filed is not the only
measure of research and development activity, a higher number of filings
generally requires higher raw material and clinical study costs.
Product development costs associated with many of the proprietary projects are
significantly higher and require more time to develop and receive approval to
market than traditional generic products. The increased time and costs are
primarily related to the clinical trials required for FDA approval. The Company
has two proprietary products that began Phase III clinical trials during fiscal
2000 and should be completed by 2002. The Company plans to spend approximately
$35 to $40 million on certain of its current proprietary products over the next
two to three years. The Company has entered into a development and marketing
alliance with DuPont (See Note 2 to the Consolidated Financial Statements) in
which DuPont may invest up to an additional $37 million over the next two fiscal
years to support the development of three of the Company's proprietary products.
The Company may seek other development partners to help fund the costs of some
additional projects. However, there is no assurance that the Company will be
able to utilize all amounts available under the DuPont agreements, identify
other such partners or be able to secure the funding on favorable terms. If such
partners are not secured and the Company continues to expand its generic product
development efforts and pursue all its proprietary projects, its operating
results may be adversely impacted.
The Company believes that interest income may increase in fiscal 2001 compared
to fiscal 2000 due primarily to higher average cash balances. Higher average
cash balances are expected as net earnings are expected to offset working
capital increases and capital expenditures in fiscal 2001. The anticipated
increase in cash balances in fiscal 2001 exclude the effect of using cash to
fund strategic acquisitions the Company may consider in the future.
Environmental Matters
The Company may have obligations for environmental safety and clean-up under
various state, local and federal laws, including the Comprehensive Environmental
Response, Compensation and Liability Act, commonly known as Superfund. Based on
information currently available, environmental expenditures have not had, and
are not anticipated to have, any material effect on the Company's consolidated
financial statements.
6
<PAGE> 7
Effects of Inflation
Inflation has had only a minimal impact on the operations of the Company in
recent years.
Forward-Looking Statements
Except for the historical information contained herein, this Form 10-K contains
forward-looking statements, all of which are subject to risks and uncertainties.
Such risks and uncertainties include: the timing and outcome of legal
proceedings; the difficulty of predicting the timing of FDA approvals; the
difficulty in predicting the timing and outcome of FDA decisions on patent
challenges; market and customer acceptance and demand for new pharmaceutical
products; ability to market proprietary products; the impact of competitive
products and pricing; timing and success of product development and launch;
availability of raw materials; the regulatory environment; fluctuations in
operating results; and, other risks detailed from time-to-time in the Company's
filings with the Securities and Exchange Commission. Forward-looking statements
can be identified by their use of words such as "expects," "plans," "will,"
"believes," "may," "estimates," "intends" and other words of similar meaning.
Should known or unknown risks or uncertainties materialize, or should our
assumptions prove inaccurate, actual results could vary materially from those
anticipated. The Company undertakes no obligation to publicly update any
forward-looking statements.
7
<PAGE> 8
BARR LABORATORIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
2000 1999
-------- --------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 155,922 $ 94,867
Marketable securities 96 8,127
Accounts receivable (including receivables from related parties of $865 in 2000 and
$1,051 in 1999) less allowances of $4,140 and $2,670 in 2000 and 1999, respectively 54,669 49,884
Other receivables 23,811 16,093
Inventories 79,482 77,613
Prepaid expenses 1,428 1,556
--------- ---------
Total current assets 315,408 248,140
Property, plant and equipment, net 95,296 93,764
Other assets 13,149 5,986
--------- ---------
Total assets $ 423,853 $ 347,890
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable (including payables to a related party of $497 and $632 in 2000 and
and 1999, respectively) $ 94,529 $ 88,982
Accrued liabilities 11,079 9,118
Deferred income taxes 1,036 833
Current portion of long-term debt 1,924 2,165
Income taxes payable 3,948 179
--------- ---------
Total current liabilities 112,516 101,277
Long-term debt 28,084 30,008
Other liabilities 519 127
Deferred income taxes 566 2,771
Commitments & Contingencies
Shareholders' equity
Preferred stock, $1 par value per share; authorized 2,000,000 shares; none issued
Common stock $.01 par value per share; authorized 100,000,000;
issued 35,004,869 and 22,923,583 in 2000 and 1999, respectively 350 229
Additional paid-in capital 99,881 76,903
Retained earnings 180,034 137,846
Accumulated other comprehensive income (loss) 1,916 (1,258)
--------- ---------
282,181 213,720
Treasury stock at cost: 176,932 and 117,955 shares in 2000 and 1999, respectively (13) (13)
--------- ---------
Total shareholders' equity 282,168 213,707
--------- ---------
Total liabilities and shareholders' equity $ 423,853 $ 347,890
========= =========
</TABLE>
See accompanying notes to the consolidated financial statements.
8
<PAGE> 9
BARR LABORATORIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 2000, 1999 AND 1998
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Revenues:
Product sales (including sales to related parties of $7,479, $6,852 and
$7,537 in 2000, 1999 and 1998, respectively) $ 440,110 $ 415,950 $ 346,638
Development and other revenue 14,584 -- --
Proceeds from supply agreements 27,584 28,083 30,666
--------- --------- ---------
Total revenues 482,278 444,033 377,304
Costs and expenses:
Cost of sales 315,652 301,393 266,002
Selling, general and administrative 42,479 40,439 38,990
Research and development 40,451 22,593 18,955
Agreement expenses 18,940 -- --
--------- --------- ---------
Earnings from operations 64,756 79,608 53,357
Interest income 5,092 3,180 2,176
Interest expense 2,405 2,697 858
Other income (expense) 347 36 (17)
--------- --------- ---------
Earnings before income taxes and extraordinary loss 67,790 80,127 54,658
Income tax expense 25,448 30,877 21,148
--------- --------- ---------
Earnings before extraordinary loss 42,342 49,250 33,510
Extraordinary loss on early extinguishment of debt, net of taxes -- -- (790)
--------- --------- ---------
Net earnings $ 42,342 $ 49,250 $ 32,720
========= ========= =========
Earnings per common share:
Earnings before extraordinary loss $ 1.23 $ 1.45 $ 1.02
Net earnings $ 1.23 $ 1.45 $ 1.00
========= ========= =========
Earnings per common share-assuming dilution:
Earnings before extraordinary loss $ 1.19 $ 1.39 $ 0.96
Net earnings $ 1.19 $ 1.39 $ 0.94
========= ========= =========
Weighted average shares 34,406 33,877 32,716
========= ========= =========
Weighted average shares-assuming dilution 35,715 35,373 34,785
========= ========= =========
</TABLE>
See accompanying notes to the consolidated financial statements.
9
<PAGE> 10
BARR LABORATORIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 2000, 1999 AND 1998
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
Common Additional
stock paid-in Retained
Shares Amount capital earnings
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE, JUNE 30, 1997 21,446,053 $ 214 $46,061 $55,876
Comprehensive income:
Net earnings 32,720
Unrealized loss on marketable
securities, net of tax of $604
Total comprehensive income
Issuance of common
stock for stock offering 430,000 4 14,517
Stock issuance costs (353)
Issuance of common stock
for exercised stock options
and employees' stock
purchase plans 548,592 6 7,839
-----------------------------------------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 1998 22,424,645 224 68,064 88,596
Comprehensive income:
Net earnings 49,250
Unrealized loss on marketable
securities, net of tax of $238
Total comprehensive income
Issuance of common stock
for exercised stock options
and employees' stock
purchase plans 498,938 5 8,839
------------------------------------------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 1999 22,923,583 229 76,903 137,846
Comprehensive income:
Net earnings 42,342
Unrealized gain on marketable
securities, net of tax of $2,126
Total comprehensive income
Issuance of common stock
for exercised stock options
and employees' stock
purchase plans 426,947 5 6,587
Issuance of warrants 16,418
Stock split (3-for-2) 11,654,339 116 (27) (154)
------------------------------------------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 2000 35,004,869 $ 350 $99,881 $180,034
==============================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Accumulated Treasury Total
other comprehensive stock shareholders'
(loss) income Shares Amount equity
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE, JUNE 30, 1997 $-- 117,955 $ (13) $102,138
Comprehensive income:
Net earnings 32,720
Unrealized loss on marketable
securities, net of tax of $604 (942) (942)
--------------
Total comprehensive income 31,778
Issuance of common 14,521
stock for stock offering
Stock issuance costs
Issuance of common stock (353)
for exercised stock options
and employees' stock
purchase plans 7,845
--------------------------------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 1998 (942) 117,955 (13) 155,929
Comprehensive income:
Net earnings 49,250
Unrealized loss on marketable
securities, net of tax of $238 (316) (316)
--------------
Total comprehensive income 48,934
Issuance of common stock
for exercised stock options
and employees' stock
purchase plans 8,844
--------------------------------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 1999 (1,258) 117,955 (13) 213,707
Comprehensive income:
Net earnings 42,342
Unrealized gain on marketable
securities, net of tax of $2,126 3,174 3,174
--------------
Total comprehensive income 45,516
Issuance of common stock
for exercised stock options
and employees' stock
purchase plans 6,592
Issuance of warrants 16,418
Stock split (3-for-2) -- 58,977 -- (65)
-----------------------------------------------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 2000 $1,916 176,932 $ (13) $282,168
===================================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
10
<PAGE> 11
BARR LABORATORIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 2000, 1999 AND 1998
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES:
Net earnings $ 42,342 $ 49,250 $ 32,720
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization 10,420 9,306 5,521
Deferred income tax (benefit) expense (4,127) 1,834 3,585
Write-off of deferred financing fees associated with early extinguishment of debt -- -- 195
(Gain) loss on sale of assets (470) 11 63
Loss (gain) on sale of marketable securities 122 6 (2)
Fair value of warrants issued 16,418 -- --
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable and other receivables, net (12,503) (4,550) (26,195)
Inventories (1,869) (3,236) (18,161)
Prepaid expenses 128 (750) (238)
Other assets (1,718) (492) (389)
Increase (decrease) in:
Accounts payable, accrued liabilities and other 8,015 (14,633) 34,940
Income taxes payable 3,769 (3,178) 963
--------- --------- ---------
Net cash provided by operating activities 60,527 33,568 33,002
--------- --------- ---------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
Purchases of property, plant and equipment (12,086) (12,333) (20,431)
Proceeds from sale of property, plant and equipment 287 1 248
Purchases of strategic investments -- (2,800) (4,069)
Sales (purchases) of marketable securities, net 7,965 (901) (7,291)
--------- --------- ---------
Net cash used in investing activities (3,834) (16,033) (31,543)
--------- --------- ---------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
Principal payments on long-term debt (2,165) (1,968) (14,939)
Proceeds from loans -- -- 30,000
Net borrowings under line of credit -- (2,500) 2,500
Stock issuance costs -- -- (353)
Proceeds from stock offering -- -- 14,521
Fees associated with stock split (65) -- --
Proceeds from exercise of stock options and employee stock purchases 6,592 8,844 7,845
--------- --------- ---------
Net cash provided by financing activities 4,362 4,376 39,574
--------- --------- ---------
Increase in cash and cash equivalents 61,055 21,911 41,033
Cash and cash equivalents, beginning of year 94,867 72,956 31,923
--------- --------- ---------
Cash and cash equivalents, end of year $ 155,922 $ 94,867 $ 72,956
========= ========= =========
SUPPLEMENTAL CASH FLOW DATA:
Cash paid during the year
Interest, net of portion capitalized $ 2,438 $ 2,727 $ 855
Income taxes 24,946 27,869 13,254
Non-cash transactions
Write-off of equipment & leasehold improvements related to closed facility $ 115 $ 83 $ --
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
11
<PAGE> 12
BARR LABORATORIES, INC.
Notes to the Consolidated Financial Statements
(in thousands of dollars, except per share amounts)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of Consolidation 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 42.6% of the outstanding common
stock of the Company at June 30, 2000. Dr. Bernard C. Sherman
is a principal stockholder of Sherman Delaware, Inc. and a
Director of Barr Laboratories, Inc.
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 28 to 49 days) which are
readily convertible into cash at par value (cost). As of June
30, 2000 and 1999, $74,011 and $28,283, respectively, of the
Company's cash was held in an interest- bearing escrow
account. Such amounts represent the portion of the Company's
payable balance with the Innovator of Tamoxifen, which the
Company has decided to secure in connection with its cash
management policy.
In December 1995, the Company and the Innovator of Tamoxifen
entered into an Alternative Collateral Agreement ("Collateral
Agreement") which suspends certain sections of the Supply and
Distribution Agreement ("Distribution Agreement") entered into
by both parties in March 1993. Under the Collateral Agreement,
extensions of credit to the Company are no longer required to
be secured by a letter of credit or cash collateral. However,
the Company may at its discretion maintain a balance in the
escrow account based on its short-term cash requirements. All
remaining terms of the Distribution Agreement remain in place.
In return for the elimination of the cash collateral
requirement and in lieu of issuing letters of credit, the
Company has agreed to pay the Innovator monthly interest based
on the average unsecured monthly Tamoxifen payable balance, as
defined in the Collateral Agreement, and maintain compliance
with certain financial covenants. The Company was in
compliance with such covenants at June 30, 2000.
12
<PAGE> 13
(d) Inventories
Inventories are stated at the lower of cost, determined on a
first-in, first-out (FIFO) basis, or market.
(e) Property, Plant and Equipment
Property, plant and equipment is recorded at cost.
Depreciation is recorded on a straight-line basis over the
estimated useful lives of the related assets. Leasehold
improvements are amortized on a straight-line basis over the
shorter of their useful lives or the terms of the respective
leases.
The estimated useful lives of the major classification of
depreciable assets are:
<TABLE>
<CAPTION>
Years
<S> <C>
Buildings 45
Building improvements 10
Machinery and equipment 3-10
Leasehold improvements 3-10
</TABLE>
Maintenance and repairs are charged to operations as incurred;
renewals and betterments are capitalized.
(f) Research and Development
Research and development costs, which consist principally of
product development costs, are charged to operations as
incurred.
(g) Earnings Per Share
On May 31, 2000, the Company's Board of Directors declared a
3-for-2 stock split effected in the form of a 50% stock
dividend. Approximately 11.6 million additional shares of
common stock were distributed on June 29, 2000 to shareholders
of record as of June 12, 2000. All applicable prior year share
and per share amounts have been adjusted for the stock split.
The following is a reconciliation of the numerators and
denominators used to calculate Earnings per common share
("EPS") before extraordinary loss in the Consolidated
Statements of Operations:
13
<PAGE> 14
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
EARNINGS PER COMMON SHARE:
Earnings before extraordinary loss (numerator) $ 42,342 $ 49,250 $33,510
Weighted average shares (denominator) 34,406 33,877 32,716
Earnings before extraordinary loss $ 1.23 $ 1.45 $ 1.02
=========== =========== ===========
EARNINGS PER COMMON SHARE - ASSUMING DILUTION:
Earnings before extraordinary loss (numerator) $ 42,342 $ 49,250 $33,510
Weighted average shares 34,406 33,877 32,716
Effect of dilutive options 1,309 1,496 2,069
----------- ----------- -----------
Weighted averages shares- assuming dilution (denominator) 35,715 35,373 34,785
Earnings before extraordinary loss $ 1.19 $ 1.39 $ 0.96
=========== =========== ===========
Share amounts in thousands
</TABLE>
During the years ended June 30, 2000, 1999 and 1998, there
were 1,560, 819 and 289 respectively, of outstanding options
and warrants that were not included in the computation of
diluted EPS, because their respective exercise prices were
greater than the average market price of the common stock for
the period.
(h) Deferred Financing Fees
All debt issuance costs are being amortized on a straight-line
basis over the life of the related debt, which matures in
2002, 2004 and 2007. The unamortized amounts of $238 and $305
at June 30, 2000 and 1999, respectively, are included in other
assets in the Consolidated Balance Sheets.
In connection with the November 1997 early extinguishment of
the then remaining $14,400 10.15% Senior Secured Notes, the
Company wrote off $195 in deferred financing fees in the year
ended June 30, 1998 (See Note 8 to the Consolidated Financial
Statements).
(i) Fair Value of Financial Instruments
Cash, Accounts Receivable, Other Receivables and Accounts
Payable - The carrying amounts of these items are a reasonable
estimate of their fair value.
Marketable Securities - Marketable securities are recorded at
their fair value (See Note 7 to the Consolidated Financial
Statements).
Other Assets - Investments in strategic collaborations that do
not have a readily determinable market value are recorded at
cost as it is a reasonable estimate of fair value (See Note 7
to the Consolidated Financial Statements).
14
<PAGE> 15
Long-Term Debt - The fair value at June 30, 2000 and 1999 is
estimated at $30 million and $32 million, respectively.
Estimates were determined by discounting the future cash flows
using rates currently available to the Company.
The fair value estimates presented herein are based on
pertinent information available to management as of June 30,
2000. Although management is not aware of any factors that
would significantly affect the estimated fair value amounts,
such amounts have not been comprehensively revalued for
purposes of these financial statements since that date, and
current estimates of fair value may differ significantly from
the amounts presented herein.
(j) Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and use assumptions that affect certain
reported amounts and disclosures; actual results may differ
substantially.
(k) Revenue Recognition
The Company recognizes product sales revenue when goods are
shipped. Development and other revenue and supply agreement
revenue is recognized when earned.
(l) Segment Reporting
The Company operates in one reportable segment - the
development, manufacture and marketing of generic and
proprietary pharmaceuticals.
The Company's manufacturing plants are located in New Jersey,
New York and Virginia and its products are sold throughout the
United States and Puerto Rico, primarily to wholesale and
retail distributors. In fiscal 2000, 1999 and 1998, a customer
accounted for approximately 16%, 14% and 12% of product sales,
respectively. No other customer accounted for greater than 10%
of product sales in any of the last three fiscal years.
(m) New Accounting Pronouncements
Derivative Instruments
On June 15, 1998, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 133, "Accounting for Derivative Instruments and
Hedging Activities," which requires that companies recognize
all derivatives as either assets or liabilities on the balance
sheet and measure those instruments at fair value. In June
1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities Deferral of the Effective
Date of FASB Statement No. 133," which defers the effective
date of SFAS No. 133 until the Company's fiscal year 2001. The
Company has evaluated this statement and determined that
implementation will not have a material impact on the
Company's existing accounting policies and financial reporting
disclosures.
15
<PAGE> 16
Revenue Recognition
In December 1999, the Securities and Exchange Commission
("SEC") staff issued Staff Accounting Bulletin ("SAB") 101,
"Revenue Recognition in Financial Statements" which summarizes
certain of the SEC staff's views in applying generally
accepted accounting principles to revenue recognition in
financial statements. The effective date of this bulletin is
no later than the fourth fiscal quarter of fiscal years
beginning after December 15, 1999. The Company is currently
evaluating this bulletin and its impact on the Company's
existing accounting policies and financial reporting
disclosures.
(2) DUPONT PHARMACEUTICALS COMPANY STRATEGIC ALLIANCE
On March 20, 2000, the Company signed definitive agreements to
establish a strategic relationship with DuPont Pharmaceuticals Company
("DuPont") to develop, market and promote several proprietary products
and to terminate all litigation between the two companies.
Development and Other Revenue
In connection with a proprietary product development funding agreement
("Product Development Agreement"), DuPont may invest up to $45 million
over three years to support the development of three of the Company's
proprietary products. All amounts earned under the Product Development
Agreement will be recorded as development and other revenue. Upon
approval of the products, Barr will be responsible for marketing the
products and DuPont may receive royalties based on product sales. In
connection with the Product Development Agreement, the Company recorded
$8 million as development and other revenue for the year ended June 30,
2000.
In a second agreement, DuPont will assume responsibility for sales and
marketing support of an undisclosed proprietary product that Barr
expects to launch in the first calendar quarter of 2001 ("Development
and Marketing Agreement"). In connection with this Development and
Marketing Agreement, DuPont will make milestone payments of up to $9
million over five quarters. For the year ended June 30, 2000, the
Company recorded $4 million as development and other revenue related to
this agreement.
Under the terms of a third agreement, Barr will become the sole
distributor in the United States and Canada of DuPont's Viaspan(R)
organ transplant preservation agent ("Viaspan Agreement"). During a
transition period, that ended July 31, 2000, DuPont remained the
distributor of Viaspan and will pay a fee to Barr based on a defined
formula ("Transition Revenue"). Such Transition Revenue is included in
development and other revenue. For the year ended June 30, 2000, the
Company recorded approximately $2.6 million as development and other
revenue related to the Viaspan Agreement. Beginning August 1, 2000,
Barr assumed responsibility for distributing the product and will
record product sales and related costs in its Consolidated Statements
of Operations.
Warrants
In connection with the strategic alliance, the Company issued two
warrants granting DuPont the right to purchase 750,000 shares of Barr's
common stock at $31.33 per share and 750,000
16
<PAGE> 17
shares at $38.00 per share, respectively. Each warrant is immediately
exercisable and has a four-year term. In connection with the issuance
of such warrants, the Company recorded a one-time, non-cash charge of
approximately $16.4 million. This non-recurring amount is recorded as
part of the agreement expenses in the Consolidated Statements of
Operations for the year ended June 30, 2000. The charge was calculated
using a Black-Scholes option pricing model.
(3) 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"). The Company and its partner 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. Further, the Supply Agreement provides
that six months prior to patent expiry, the Company and its partner can
begin distributing Ciprofloxacin.
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.
(4) AGREEMENT EXPENSES
Agreement expenses of $18,940 ($0.33 per share after tax) consist of a
one-time non-cash charge of $16.4 million associated with the issuance
of 1.5 million warrants (See Note 2 to the Consolidated Financial
Statements) and approximately $2,500 in one-time legal charges,
primarily related to a special fee paid to the Company's outside legal
counsel, associated with finalizing the Company's definitive agreements
with DuPont.
(5) INVENTORIES
A summary of inventories is as follows:
<TABLE>
<CAPTION>
June 30,
-------------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Raw materials and supplies $ 16,884 $ 15,790
Work-in-process 5,102 7,957
Finished goods 57,496 53,866
------------ ------------
$ 79,482 $ 77,613
============ ============
</TABLE>
Tamoxifen Citrate, purchased as a finished product, accounted for
$42,730 and $43,040 of finished goods inventory at June 30, 2000 and
1999, respectively.
17
<PAGE> 18
(6) PROPERTY, PLANT AND EQUIPMENT
A summary of property, plant and equipment is as follows:
<TABLE>
<CAPTION>
June 30,
-----------------------------
2000 1999
---- ----
<S> <C> <C>
Land $ 3,408 $ 3,256
Buildings and improvements 64,649 57,669
Machinery and equipment 72,886 69,789
Leasehold improvements 1,288 1,665
Automobiles and trucks 68 68
Construction in progress 3,823 7,041
------------- -------------
146,122 139,488
Less: Accumulated
depreciation & amortization 50,826 45,724
------------- -------------
$ 95,296 $ 93,764
============= =============
</TABLE>
For the years ended June 30, 2000, 1999 and 1998, $136, $205 and $2,047
of interest was capitalized, respectively.
(7) MARKETABLE SECURITIES & OTHER ASSETS
The Company's investments in marketable securities and certain other
assets are classified as "available for sale" and, accordingly, are
recorded at current market value with offsetting adjustments to
shareholders' equity, net of income taxes.
Marketable securities include investments in a short duration portfolio
of corporate and government debt. The debt securities will be held for
less than one year and are therefore, recorded as a current asset in
the Consolidated Balance Sheets.
Other assets include equity securities that represent the Company's
investments in Warner Chilcott plc. ("Warner Chilcott") and Halsey Drug
Co., Inc. ("Halsey").
Warner Chilcott plc.
On August 13, 1997, Barr made a strategic investment in Warner
Chilcott, a developer, marketer, and distributor of specialty
pharmaceutical products. In connection with Warner Chilcott's Initial
Public Offering ("Offering"), the Company acquired 250,000 Ordinary
Shares represented by 250,000 American Depository Shares ("ADSs") at a
price equal to the initial public offering price less underwriting
discounts and commissions. The initial investment totaled $4,069. In
addition, the Company was granted warrants to purchase an additional
250,000 shares in the form of ADSs. Beginning on the first anniversary
of the Offering and annually thereafter for the next three years,
one-fourth of the warrants will be exercisable by Barr. If Barr does
not exercise in full the portion of the warrant exercisable during any
one year, such portion of the warrant will terminate. The Company
elected not to exercise the first portion of the warrants because the
warrants' exercise price exceeded the then market price, and as a
result, such portion of the warrants terminated. The Company exercised
the second portion on August 7, 2000.
18
<PAGE> 19
Halsey Drug Co., Inc.
In April 1999, the Company sold its rights to several pharmaceutical
products to Halsey in exchange for 500,000 warrants exercisable for
500,000 shares of Halsey's common stock at $1.06 per share. The
warrants expire in April 2004. In connection with this sale, the
Company recorded an investment in warrants and realized a gain of $343.
The Company has valued the warrants at their fair value using the
Black-Scholes option-pricing model.
Other Investments
Also included in other assets is the Company's investment of $2,250 in
Gynetics, Inc., a private company that develops and markets
pharmaceutical products and medical devices to advance the healthcare
of women and an investment of $550 in another private company with whom
the Company will work in connection with another one of its proprietary
products. These investments are recorded at cost in the Consolidated
Balance Sheets.
The amortized cost and estimated market values of the securities at
June 30, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
JUNE 30, 1999 COST GAINS LOSSES VALUE
------------- ---- ----- ------ -----
<S> <C> <C> <C> <C>
Debt securities:
U.S. Government securities $ 101 $ -- $ 5 $ 96
Equity securities 4,412 3,206 -- 7,618
------ ------ ------ ------
Total securities $4,513 $3,206 $ 5 $7,714
====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
JUNE 30, 1999 COST GAINS LOSSES VALUE
------------- ---- ----- ------ -----
<S> <C> <C> <C> <C>
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
======= ======= ======= =======
</TABLE>
Proceeds of $52,916 and $9,446, which include a loss of $122 and $6,
respectively, were received on the sales of marketable securities in
the years ended June 30, 2000 and 1999, respectively. The cost of
investments sold is determined by the specific identification method.
19
<PAGE> 20
(8) LONG-TERM DEBT
A summary of long-term debt is as follows:
<TABLE>
<CAPTION>
June 30,
------------------------------
2000 1999
---- ----
<S> <C> <C>
New Jersey Economic Development
Authority Bond (a) $ -- $ 241
Senior unsecured notes (b) 27,143 28,571
Equipment financing (c) 2,865 3,361
Unsecured revolving credit facility (d) -- --
------- -------
30,008 32,173
Less: Current installments of long-term debt 1,924 2,165
------- -------
Total long-term debt $28,084 $30,008
======= =======
</TABLE>
(a) The New Jersey Economic Development Authority Bond was payable
to a bank. Such loan was secured by a first mortgage on land,
building and improvements on the facility located at 265
Livingston Street. Interest was charged at 75% of the bank's
prime rate. The final installment of $220 was paid in January
2000.
(b) In November 1997, the Company refinanced $14,400 of
outstanding Senior Secured Notes with $30,000 of Senior
Unsecured Notes with an average interest rate of 6.88% per
year. The cash payment of $16,055 included the outstanding
principal of $14,400, a prepayment penalty of $1,087 and
accrued interest through November 18, 1997 of $568. The
prepayment penalty of $1,087 and the related write-off of
approximately $195 in previously deferred financing costs
resulted in an extraordinary loss. This extraordinary loss
from early extinguishment of debt, net of taxes of $492, was
$790 or $0.02 per share. The Senior Unsecured Notes of $30,000
include a $20,000, 7.01% Note due November 18, 2007 and
$10,000, 6.61% Notes due November 18, 2004. Annual principal
payments under the Notes total $1,429 through November 2002,
$5,429 in 2003 and 2004, and $4,000 in 2005 through 2007.
The Senior Unsecured Notes contain certain financial covenants
including restrictions on dividend payments not to exceed $10
million plus 75% of consolidated net earnings subsequent to
June 30, 1997. The Company was in compliance with all such
covenants as of June 30, 2000.
(c) In April 1996, the Company signed a Loan and Security
Agreement with BankAmerica Leasing and Capital Group that
provided the Company up to $18,750 in financing for equipment
to be purchased through October 1997. Notes entered into under
this agreement require no principal payment for the first two
quarters; bear interest quarterly at a rate equal to the
London Interbank Offer Rate (LIBOR) plus 125 basis points; and
have a term of 72 months. LIBOR was 6.769% and 5.368% at June
30, 2000 and June 30, 1999, respectively.
(d) The Company currently has no outstanding borrowings under its
$20,000 Unsecured Revolving Credit Facility ("Revolver") with
Bank of America, National Association. Borrowings under this
facility bear interest at either prime or LIBOR plus 0.75%. In
20
<PAGE> 21
addition, the Company is required to pay a commitment fee
equal to .25% of the difference between the outstanding
borrowings and $20,000. In December 1999, the term of the
Revolver was extended to December 31, 2001.
Principal maturities of existing long-term debt for the next five years
and thereafter are as follows:
<TABLE>
<CAPTION>
Year Ending
June 30,
-----------
<S> <C>
2001 $1,924
2002 3,184
2003 2,042
2004 5,429
2005 5,429
Thereafter 12,000
</TABLE>
(9) RELATED-PARTY TRANSACTIONS
The Company's related-party transactions were with affiliated companies
of Dr. Bernard C. Sherman. During the years ended June 30, 2000, 1999
and 1998, the Company purchased $2,716, $1,134 and $1,799,
respectively, of bulk pharmaceutical material from such companies. In
addition, the Company sold certain of its pharmaceutical products and
bulk pharmaceutical materials to two other companies owned by Dr.
Sherman. During fiscal 1996, the Company also entered into a multi-year
agreement with a Company owned by Dr. Sherman to share litigation and
development costs in connection with one of its patent challenges. For
the years ended June 30, 2000, 1999 and 1998, the Company recorded
$668, $1,438 and $1,170, respectively, in connection with such
agreement as a reduction to selling, general and administrative
expenses and research and development expenses.
During the years ended June 30, 2000, 1999 and 1998, the Company's
founder and Vice Chairman, Edwin A. Cohen, earned $200, $200 and $250,
respectively, under a consulting agreement, which expires on June 30,
2002.
(10) INCOME TAXES
A summary of the components of income tax expense is as follows:
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Current:
Federal $ 25,475 $ 25,173 $ 15,504
State 4,100 3,870 1,567
-------- -------- --------
29,575 29,043 17,071
-------- -------- --------
Deferred:
Federal (3,577) 1,588 3,103
State (550) 246 482
-------- -------- --------
(4,127) 1,834 3,585
-------- -------- --------
Total $ 25,448 $ 30,877 $ 20,656
======== ======== ========
</TABLE>
21
<PAGE> 22
Income tax expense for the years ended June 30, 2000, 1999 and 1998 is included
in the financial statements as follows:
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Continuing operations $ 25,448 $ 30,877 $ 21,148
Extraordinary loss on early
extinguishment of debt -- -- (492)
-------- -------- --------
$ 25,448 $ 30,877 $ 20,656
======== ======== ========
</TABLE>
The provision for income taxes differs from amounts computed by applying the
statutory federal income tax rate to earnings before income taxes due to the
following:
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Federal income taxes at statutory rate $ 23,726 $ 28,044 $ 18,681
State income taxes,
net of federal income tax effect 2,307 2,675 1,332
Other, net (585) 158 643
-------- -------- --------
$ 25,448 $ 30,877 $ 20,656
======== ======== ========
</TABLE>
The temporary differences that give rise to deferred tax assets and liabilities
as of June 30, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Deferred tax assets:
Receivable reserves $ 2,313 $ 900
Inventory reserves 620 2,290
Inventory capitalization 895 385
Investments* -- 842
Other operating reserves 2,443 2,471
Warrants issued 6,610 --
-------- --------
Total deferred tax assets 12,881 6,888
Deferred tax liabilities:
Plant and equipment (6,384) (4,173)
Proceeds from supply agreement (6,576) (6,319)
Other operating reserves (240) --
Investments* (1,283) --
-------- --------
Total deferred tax liabilities (14,483) (10,492)
-------- --------
Net deferred tax liability $ (1,602) $ (3,604)
======== ========
</TABLE>
* Tax effects are reflected directly in equity
As of June 30, 2000, the Company has capital loss carryforwards of $151,
expiring in 2004 and 2005.
22
<PAGE> 23
(11) SHAREHOLDERS' EQUITY
Employee Stock Option Plans
The Company has two stock option plans, the 1993 Stock Incentive Plan
(the "1993 Option Plan") and the 1986 Option Plan, which were approved
by the shareholders and which authorize the granting of options to
officers and certain key employees to purchase the Company's common
stock at a price equal to the market price on the date of grant.
Effective June 30, 1996, options are no longer granted under the 1986
Option Plan. For fiscal 2000, 1999 and 1998, there were no options that
expired under this plan.
All options granted prior to June 30, 1996, under the 1993 Option Plan
and 1986 Option Plan, are exercisable between one and two years from
the date of grant and expire ten years after the date of grant except
in cases of death or termination of employment as defined in each Plan.
Options issued after June 30, 1996 are exercisable between one and
three years from the date of grant. To date, no option has been granted
under either the 1993 Option Plan or the 1986 Option Plan at a price
below the current market price of the Company's common stock on the
date of grant.
A summary of the activity resulting from all plans, adjusted for the
June 2000 3-for-2 stock split, is as follows:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
NO. OF SHARES OPTION PRICE
------------- ----------------
<S> <C> <C>
Outstanding at 6/30/97 2,978,086 $ 8.55
Granted 293,250 26.39
Canceled (58,488) 15.07
Exercised (701,117) 4.82
---------
Outstanding at 6/30/98 2,511,731 9.05
Granted 417,000 22.75
Canceled (48,864) 21.69
Exercised (644,566) 4.67
---------
Outstanding at 6/30/99 2,235,301 12.59
Granted 617,516 24.07
Canceled (5,947) 26.20
Exercised (515,575) 7.76
---------
Outstanding at 6/30/00 2,331,295 $16.67
=========
Available for grant (6,243,750 authorized) 658,173
Exercisable at 6/30/00 1,366,460 $11.56
</TABLE>
23
<PAGE> 24
Non-Employee Directors' Stock Option Plan
During fiscal year 1994, the shareholders ratified the adoption by the Board of
Directors of the 1993 Stock Option Plan for Non-Employee Directors (the
"Directors' Plan"). This formula plan, among other things, enhances the
Company's ability to attract and retain experienced directors. In December 1998,
the number of shares which each non-employee director is optioned was decreased
from 11,250 to 7,500 shares on the grant date. In October 1999, the number of
shares which each non-employee director is optioned was decreased from 7,500 to
5,000 shares on the grant date. Effective October 2000, the number of shares
which each non-employee director is optioned is 7,500 shares on the grant date.
All options granted under the Directors' Plan have ten-year terms and are
exercisable at an option exercise price equal to the market price of the common
stock on the date of grant. Each option is exercisable on the date of the first
annual shareholders' meeting immediately following the date of grant of the
option, provided there has been no interruption of the optionee's service on the
Board before that date. The following is a summary of activity adjusted for the
June 2000 3-for-2 stock split, for the three fiscal years ended June 30, 2000:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
NO. OF SHARES OPTION PRICE
------------- ----------------
<S> <C> <C>
Outstanding at 6/30/97 365,250 $ 8.07
Granted 101,250 24.00
Canceled (16,875) 24.00
Exercised (57,000) 6.60
-------
Outstanding at 6/30/98 392,625 11.70
Granted 56,250 32.42
Exercised (43,875) 7.88
-------
Outstanding at 6/30/99 405,000 14.99
Granted 37,500 19.96
Exercised (52,500) 8.30
-------
Outstanding at 6/30/00 390,000 $16.37
=======
Available for grant (843,750 authorized) 240,375
Exercisable at 6/30/00 352,500 $15.99
</TABLE>
Employee Stock Purchase Plan
During fiscal 1994, the shareholders ratified the adoption by the Board of
Directors of the 1993 Employee Stock Purchase Plan (the "Purchase Plan") to
offer employees an inducement to acquire an ownership interest in the Company.
The Purchase Plan permits eligible employees to purchase, through regular
payroll deductions, an aggregate of 675,000 shares of common stock at
approximately 85% of the fair market value of such shares. Under the Plan,
purchases were 60,874, 59,965 and 64,771 shares for the years ended June 30,
2000, 1999 and 1998, respectively.
24
<PAGE> 25
Accounting for Stock-Based Compensation Plans
The Company applies APB No. 25 and related Interpretations in accounting for its
stock-based compensation plans. Accordingly, no compensation cost has been
recognized for its stock option plans and its stock purchase plan. Had
compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method of SFAS No. 123, the Company's net earnings and
earnings per share would have been reduced to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
2000 1999 1998
------- ------- -------
<S> <C> <C> <C>
Net earnings As reported $42,342 $49,250 $32,720
Pro forma $39,398 $46,940 $30,752
Net earnings per share As reported $ 1.23 $ 1.45 $ 1.00
Pro forma $ 1.15 $ 1.39 $ 0.94
Net earnings per share- As reported $ 1.19 $ 1.39 $ 0.94
assuming dilution Pro forma $ 1.10 $ 1.33 $ 0.89
</TABLE>
The fair value of each option grant was estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions for 2000, 1999
and 1998, respectively: dividend yield of 0%; expected volatility of 50.6%,
48.9% and 42.1%; weighted-average risk-free interest rates of 5.8%, 4.7% and
5.9%; and expected option life of 3 years for the 1993 Option Plan and 4 years
for the Directors' Plan.
The following table summarizes information about stock options outstanding at
June 30, 2000:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------------- ----------------------------------
Weighted
Range of Number Average Weighted Number Weighted
Exercise Outstanding Remaining Average Exercisable Average
Prices at 6/30/00 Contractual Life Exercise Price at 6/30/00 Exercise Price
------ ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 3.03 - 7.58 925,184 4.43 $6.44 925,184 $6.44
11.50 - 14.74 373,285 6.27 12.51 373,285 12.51
19.60 - 24.89 1,118,218 8.72 23.44 203,325 23.21
26.02 - 32.41 304,608 7.43 27.57 217,166 28.00
--------- ---------
2,721,295 1,718,960
========= =========
</TABLE>
(12) SAVINGS AND RETIREMENT PLAN
The Company has a savings and retirement plan (the "401(k) Plan") which is
intended to qualify under Section 401(k) of the Internal Revenue Code. Employees
are eligible to participate in the 401(k) Plan in the first month following the
month of hire. Participating employees may contribute up to a maximum of 12% of
their earnings before or after taxes. The Company is required, pursuant to the
terms of its union contract, to contribute to each
25
<PAGE> 26
union employee's account an amount equal to the 2% minimum contribution made by
such employee. The Company may, at its discretion, contribute a percentage of
the amount contributed by an employee to the 401(k) Plan up to a maximum of 10%
of such employee's compensation. Participants are always fully vested with
respect to their own contributions and any profits arising therefrom.
Participants become fully vested in the Company's contributions and related
earnings after five full years of employment.
The Company's contributions to the 401(k) Plan were $2,608, $2,292 and $2,194
for the years ended June 30, 2000, 1999 and 1998, respectively.
In Fiscal 2000, the Board of Directors approved a non-qualified plan ("Excess
Plan") that enables certain executives to defer up to 10% of their compensation
in excess of the qualified plan. The Company may, at its discretion, contribute
a percentage of the amount contributed by the individuals covered under this
Excess Plan to a maximum of 10% of such individual's compensation. In fiscal
2000, the Company chose to make contributions at the 10% rate to this plan. As
of June 30, 2000, the Company had recorded an asset and liability for the Excess
Plan of $422.
(13) OTHER INCOME (EXPENSE)
A summary of other income (expense) is as follows:
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------
2000 1999 1998
----- ----- -----
<S> <C> <C> <C>
Net gain (loss) on sale of assets $ 470 $ (11) $ (63)
Net (loss) gain on sale of securities (141) (11) 2
Other 18 58 44
----- ----- -----
Other income (expense) $ 347 $ 36 $ (17)
===== ===== =====
</TABLE>
(14) COMMITMENTS AND CONTINGENCIES
The Company is party to various operating leases which relate to the rental of
office facilities and equipment. The Company believes it will be able to extend
such leases, if necessary. Rent expense charged to operations was $1,069, $1,099
and $1,493 in fiscal 2000, 1999 and 1998, respectively. Future minimum rental
payments, exclusive of taxes, insurance and other costs under noncancellable
long-term operating lease commitments, are as follows:
<TABLE>
<CAPTION>
Minimum
Year Ending Rental
June 30, Payments
----------- ---------
<S> <C>
2001 $ 614
2002 185
2003 159
2004 148
2005 110
</TABLE>
26
<PAGE> 27
Product Liability
The Company maintains product liability insurance coverage in the amount of
$20,000. No significant product liability suit has ever been filed against the
Company. However, if one were filed and such a case were successful against the
Company, it could have a material adverse effect upon the business and financial
condition of the Company to the extent such judgment was not covered by
insurance or exceeded the policy limits.
Class Action Lawsuits
On July 14, 2000, Louisiana Wholesale Drug Co. filed a class action complaint in
the United States District Court for the Southern District of New York against
Bayer Corporation, the Rugby Group and the Company. The complaint alleges that
the Company and the Rugby Group agreed with Bayer Corporation not to compete
with a generic version of Ciprofloxacin (Cipro(R)) pursuant to an
anti-competitive agreement between the defendants. The plaintiff purports to
bring claims on behalf of all direct purchasers of Cipro from 1997 to present.
On August 1, 2000, Maria Locurto filed a similar class action complaint in the
United States District Court for the Eastern Division of New York. On August 4,
2000, Ann Stuart, et al filed a class action complaint in the Superior Court of
New Jersey, Law Division, Camden County. This complaint alleges violations of
New Jersey statutes relating to the Cipro agreement.
The Company believes that its agreement with Bayer Corporation is a valid
settlement to a patent suit and cannot form the basis of an antitrust claim.
Although it is not possible to forecast the outcome of these matters, the
Company intends to vigorously defend itself. It is anticipated that these
matters may take several years to be resolved but an adverse judgment could
have a material adverse impact on the Company's financial statements.
Invamed, Inc./Apothecon, Inc. Lawsuit
In February 1998 and May 1999, Invamed, Inc., which has since been acquired by
Geneva Pharmaceuticals, Inc., a division of Novartis AG ("Invamed"), and
Apothecon, Inc., a division of Bristol-Meyers Squibb, Inc. ("Apothecon"),
respectively, named the Company and several others as defendants in lawsuits
filed in the United States District Court for the Southern District of New York,
charging that the Company unlawfully blocked access to the raw material source
for Warfarin Sodium. The Company believes that these suits are without merit and
intends to defend its position vigorously. These actions are currently in the
discovery stage. It is anticipated that this matter may take several years to be
resolved but an adverse judgment could have a material adverse impact on the
Company's consolidated financial statements.
Administrative Matters
Federal antitrust authorities have undertaken a review of certain trade
practices within the pharmaceutical industry, specifically patent challenge
settlements, unfair trade practices by brand drug companies and exclusive supply
arrangements. The Company has voluntarily discussed with the Federal Trade
Commission ("FTC") its arrangements with the supplier of the raw material for
its Warfarin Sodium. The Company has voluntarily responded to requests from the
Department of Justice by providing documents relating to the settlement of its
Tamoxifen patent challenge. On June 30, 1999, the Company received a subpoena
and civil
27
<PAGE> 28
investigative demand from the FTC relating to its March 1997 patent litigation
settlement regarding Ciprofloxacin hydrochloride. The Company believes that it
has complied with all applicable laws and regulations governing trade and
competition in the marketplace in connection with its arrangements with its raw
material suppliers and its two patent challenge settlements.
Other Litigation
As of June 2000, the Company was involved with other lawsuits incidental to its
business, including patent infringement actions. Management of the Company,
based on the advice of legal counsel, believes that the ultimate disposition of
such other lawsuits will not have any significant adverse effect on the
Company's consolidated financial statements.
(15) FOURTH QUARTER CHARGE FOR FISCAL 1998
During the quarter ended June 1998, the Company recorded a $1.2 million
restructuring charge which is included in selling, general and administrative
expenses in the Consolidated Statements of Operations. Approximately half of
this charge related to the write-off of equipment and leasehold improvements in
connection with the closing of a leased New Jersey packaging facility, for which
the operations have been relocated to other company facilities. The remainder
related to severance related expenses for certain operations employees,
primarily those affiliated with the closed facility. As of June 30, 1999, the
1998 fourth quarter restructuring plan was completed and all payments were made.
28
<PAGE> 29
(16) QUARTERLY DATA (UNAUDITED)
A summary of the quarterly results of operations is as follows:
<TABLE>
<CAPTION>
Three Month Period Ended
-------------------------------------------------------------
Sept. 30 Dec. 31 Mar. 31 June 30
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Fiscal Year 2000:
Total revenues $ 98,853 $ 120,820 $ 135,760 $ 126,845
Cost of sales 61,973 81,326 92,889 79,464
Net earnings 11,493 12,394 2,667 15,788
Earnings per common share - assuming dilution
Net earnings (1)(3) $ 0.32 $ 0.35 $ 0.07 $ 0.44
=========== =========== =========== ===========
Price Range of Common Stock (2)
High $ 26.75 $ 23.50 $ 33.92 $ 45.88
Low 18.88 19.00 20.00 25.38
Fiscal Year 1999:
Total revenues $ 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 (1) $ 0.32 $ 0.35 $ 0.36 $ 0.37
=========== =========== =========== ===========
Price Range of Common Stock (2)
High $ 26.50 $ 33.17 $ 32.37 $ 27.00
Low 16.46 16.59 18.92 19.00
</TABLE>
(1) The sum of the individual quarters may not equal the full year amounts due
to the effects of the market prices in the application of the treasury
stock method. During its two most recent fiscal years, the Company paid no
cash dividend.
(2) The Company's common stock is listed and traded on the New York Stock
Exchange (BRL). At June 30, 2000, there were approximately 669 shareholders
of record of common stock. The Company believes that a significant number
of beneficial owners hold their shares in street names.
(3) The quarter ended March 31, 2000 includes a non-recurring charge of $18,940
for agreement expenses ($11.8 million after tax or $0.33 per share) (See
Note 2 to the Consolidated Financial Statements).
29
<PAGE> 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, 2000 and
1999, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the three years in the period ended June 30,
2000. 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 auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits 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
the significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Barr Laboratories, Inc. and
subsidiaries at June 30, 2000 and 1999, and the results of their operations and
their cash flows for each of the three years in the period ended June 30, 2000
in conformity with accounting principles generally accepted in the United States
of America.
DELOITTE & TOUCHE LLP
Parsippany, New Jersey
August 7, 2000
30
<PAGE> 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 judgments.
In meeting its responsibility for the reliability of the financial statements,
management has developed and relies on the Company's system of internal
accounting control. The system is designed to provide reasonable assurance that
assets are safeguarded and that transactions are executed as authorized and are
properly recorded.
The Board of Directors reviews the financial statements and reporting practices
of the Company through its Audit Committee, which is composed entirely of
directors who are not officers or employees of the Company. The Committee meets
with the independent auditors and management to discuss audit scope and results
and also to consider internal control and financial reporting matters. The
independent auditors have direct unrestricted access to the Audit Committee. The
entire Board of Directors reviews the Company's financial performance and
financial plan.
/s/ Bruce L. Downey
Chairman of the Board and Chief Executive Officer
31
<PAGE> 32
ITEM 6. SELECTED FINANCIAL DATA
(in thousands of dollars, except per share amounts)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS 2000 1999 1998 1997 1996
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total revenues $482,278 $444,033 $ 377,304 $284,486 $232,224
Earnings before income taxes and
extraordinary loss 67,790(1) 80,127 54,658 32,050 11,509
Income tax expense 25,448 30,877 21,148 12,603 4,368
Earnings before extraordinary loss 42,342(1) 49,250 33,510 19,447 7,141
Net earnings 42,342(1) 49,250 32,720(3) 19,447 7,016(4)
Earnings per common share:
Earnings before extraordinary loss 1.23(1) 1.45(2) 1.02(2) 0.61(2) 0.23(2)(5)
Earnings per common share assuming dilution:
Earnings before extraordinary loss 1.19(1) 1.39(2) 0.96(2) 0.58(2) 0.22(2)(5)
Net earnings (6) 1.19(1) 1.39(2) 0.94(2)(3) 0.58(2) 0.21(2)(4)(5)
</TABLE>
<TABLE>
<CAPTION>
BALANCE SHEET DATA 2000 1999 1998 1997 1996
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Working capital $202,892 $ 146,863 $ 95,281 $ 41,807 $ 52,985
Total assets 423,853 347,890 310,851 202,845 169,220
Long-term debt (7) 28,084 30,008 32,174 14,941 17,709
Shareholders' equity (8) 282,168 213,707 155,929 102,138 80,161
</TABLE>
(1) Includes a non-recurring charge of $18,940 for agreement expenses ($11.8
million after tax or $0.33 per share).
(2) Amounts have been adjusted for the June 2000 3-for-2 stock split effected
in the form of a 50% stock dividend.
(3) Fiscal 1998 includes the effect of a $790 ($0.02 per share) extraordinary
loss (net of tax of $492) on early extinguishment of debt (See Note 8 to
the Consolidated Financial Statements).
(4) Fiscal 1996 includes the effect of a $125 ($0.01 per share) extraordinary
loss (net of tax of $76) on early extinguishment of debt.
(5) Amounts have been adjusted for the May 1997 3-for-2 stock split effected in
the form of a 50% stock dividend.
(6) Fiscal 1997 and 1996 earnings per share amounts have been restated to
conform with the provisions of Statement of Financial Accounting Standards
No. 128 "Earnings per Share."
(7) Excludes current installments (See Note 8 to the Consolidated Financial
Statements).
(8) The Company has not paid a cash dividend in any of the above years.
32
