UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended June 30, 2003 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
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(State or Other Jurisdiction of (I.R.S. - Employer
Incorporation or Organization) Identification No.)
2 Quaker Road Pomona, New York 10970
------------------------------------
(Address of principal executive offices)
845-362-1100
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(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of Name of each exchange on
the Act: which registered:
Title of each class
Common Stock, Par Value $0.01 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [X] No [ ]
The aggregate market value of the voting stock of the Registrant held by
non-affiliates was approximately $3,649,208,247 as of June 30, 2003 (assuming
solely for purposes of this calculation that all Directors and Officers of the
Registrant are "affiliates").
Number of shares of Common Stock, Par Value $.01, outstanding as of June 30,
2003: 66,785,798
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's 2003 Proxy Statement are incorporated by reference
in Part III of the Form 10-K, as amended by this form 10-K/A.
EXPLANATORY NOTE
This Amendment No. 1 on Form 10-K/A (this "Amendment") is being filed to
amend the Registrant's Annual Report on Form 10-K for the year ended June 30,
2003, as filed on August 26, 2003 (the "Original Report on Form 10-K"). The
purpose of this Amendment is to correct Note 16 to the Company's consolidated
financial statements and to correct a printer's error in Note 1, subsection (e)
to the financial statements. In particular, the following errors were included
in Note 16 of the Original Report on Form 10-K:
* options granted under employee stock option plans in fiscal 2003
were understated by 2,247;
* employee stock options exercisable at June 30, 2003 were understated
by 40,000; and
* options outstanding under non-employee director stock option plans
at June 30, 2003 were overstated by 42,265.
These errors affected certain other numbers contained in the tables
reflecting option activity in Note 16 under the employee and non-employee
director plans, including the weighted average exercise price of employee stock
options exercisable at June 30, 2003.
In addition, subsection (e) of Note 1 has been amended to provide that the
estimated useful lives of leasehold improvements are "2-10" years, rather than
"2-1" years as included in the Original Report on Form 10-K.
Pursuant to Rule 12b-15 under the Securities Exchange Act of 1934, this
Amendment contains the complete text of "Item 8. Financial Statements and
Supplementary Data," as amended.
This Amendment does not reflect events occurring after the filing of the
Original Report on Form 10-K, and does not modify or update the disclosures
therein in any way other than as required to reflect the corrections to Notes 1
and 16 described above.
2
PART II
ITEM 8. Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
Page
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Independent Auditors' Report F-2
Report of Independent Auditors F-3
Consolidated Balance Sheets as of June 30, 2003 and 2002 F-4
Consolidated Statements of Operations for the years ended June 30, 2003, 2002
and 2001 F-5
Consolidated Statements of Shareholders' Equity for the years ended June 30, 2003,
2002 and 2001 F-6
Consolidated Statements of Cash Flows for the years ended June 30, 2003, 2002
and 2001 F-8
Notes to Consolidated Financial Statements F-9
Schedule II - Valuation and Qualifying Accounts for the years
ended June 30, 2003, 2002 and 2001 S-1
F-1
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, 2003 and
2002, and the related consolidated statements of operations, shareholders'
equity, and cash flows for each of the three years in the period ended June 30,
2003. Our audits also included the financial statement schedule listed at Item
15. These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statements and financial statement schedule based on
our audits. The consolidated financial statements give retroactive effect to the
merger of the Company and Duramed Pharmaceuticals, Inc. ("Duramed"), which has
been accounted for as a pooling of interests as described in Note 3 to the
consolidated financial statements. We did not audit the financial statements of
Duramed for the six-month period ended June 30, 2001 or the year ended December
31, 2000, which statements reflect total assets of $136,587,000 and $81,966,000
as of June 30, 2001 and December 31, 2000, respectively, and total revenues of
$59,831,000 and $83,465,000 for the respective periods then ended. The financial
statements of Duramed for such periods were audited by other auditors whose
report has been furnished to us, and our opinion, insofar as it relates to the
amounts included for Duramed for such periods, is based solely on the report of
such other auditors. The financial statements of Duramed were combined with the
financial statements of the Company as described in Note 1. Certain accounts of
Duramed were reclassified to conform to the presentation method used by the
Company and restated to give effect to pooling of interest adjustments of
Duramed's tax valuation allowance in accordance with the provisions of SFAS No.
109, Accounting for Income Taxes.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits and the report of
other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, such
consolidated financial statements present fairly, in all material respects, the
financial position of Barr Laboratories, Inc. and subsidiaries at June 30, 2003
and 2002, and the results of their operations and their cash flows for each of
the three years in the period ended June 30, 2003, in conformity with accounting
principles generally accepted in the United States of America. Also, in our
opinion, based on our audits and the report of other auditors, such financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
We also audited the adjustments described in Note 3 that were applied to restate
the June 30, 2001 and December 31, 2000 financial statements of Duramed. In our
opinion, such adjustments are appropriate and have been properly applied.
/s/ Deloitte & Touche LLP
Stamford, Connecticut
August 6, 2003
F-2
Report of Independent Auditors
The Board of Directors
Duramed Pharmaceuticals, Inc.
We have audited the consolidated balance sheets of Duramed Pharmaceuticals, Inc.
as of June 30, 2001 and December 31, 2000, and the related consolidated
statements of operations, stockholders' equity (capital deficiency) and cash
flows for the six months ended June 30, 2001 and for the year ended December 31,
2000 (not presented separately herein). These 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. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Duramed
Pharmaceuticals, Inc. at June 30, 2001 and December 31, 2000, and the
consolidated results of its operations and its cash flows for the six months
ended June 30, 2001 and for the year ended December 31, 2000, in conformity with
accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
Cincinnati, Ohio
November 30, 2001
F-3
BARR LABORATORIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
JUNE 30, JUNE 30,
2003 2002
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 367,142 $ 331,257
Marketable securities 29,400 -
Accounts receivable, net (including receivables from related parties of $2,398 in 2003 and
$829 in 2002) 221,652 103,168
Other receivables 31,136 23,230
Inventories, net 163,926 151,133
Deferred income taxes 27,375 18,208
Prepaid expenses and other current assets 6,873 7,852
----------- -----------
Total current assets 847,504 634,848
Property, plant and equipment, net 223,516 165,522
Deferred income taxes 5,589 21,270
Marketable securities 15,055 15,502
Other intangible assets 45,949 28,200
Goodwill 14,118 13,941
Other assets 29,206 9,271
----------- -----------
Total assets $ 1,180,937 $ 888,554
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 188,852 $ 110,879
Accrued liabilities (including accrued liabilities to related parties of $648 in
2003 and $634 in 2002) 66,109 51,438
Current portion of long-term debt 7,029 3,642
Current portion of capital lease obligations 1,481 1,695
Income taxes payable 11,316 9,801
----------- -----------
Total current liabilities 274,787 177,455
Long-term debt 30,629 37,657
Long-term portion of capital lease obligations 3,398 4,977
Other liabilities 4,128 1,933
Commitments & Contingencies (Note 21)
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 67,066,196 and 43,792,170 in 2003 and 2002, respectively 671 438
Additional paid-in capital 326,001 291,637
Retained earnings 542,210 375,066
Accumulated other comprehensive (loss) income (179) 99
----------- -----------
868,703 667,240
Treasury stock at cost: 280,398 and 186,932 in 2003 and 2002, respectively (708) (708)
----------- -----------
Total shareholders' equity 867,995 666,532
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Total liabilities and shareholders' equity $ 1,180,937 $ 888,554
=========== ===========
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
F-4
BARR LABORATORIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 2003, 2002 AND 2001
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2003 2002 2001
---------- ---------- ----------
Revenues:
Product sales (including sales to related parties of $12,727, $16,472 and
$8,279 in 2003, 2002 and 2001, respectively) $ 894,888 $1,171,358 $ 576,656
Development and other revenue 7,976 17,626 16,495
---------- ---------- ----------
Total revenues 902,864 1,188,984 593,151
Costs and expenses:
Cost of sales (including amounts paid to related parties of $5,023, $180,013
and $2,644 in 2003, 2002 and 2001, respectively) 424,099 676,323 391,109
Selling, general and administrative 160,978 111,886 76,821
Research and development 91,207 75,697 57,617
Merger-related costs - 31,449 -
---------- ---------- ----------
Earnings from operations 226,580 293,629 67,604
Proceeds from patent challenge settlement 31,396 31,958 28,313
Interest income 6,341 7,824 9,423
Interest expense 1,474 3,530 7,195
Other (expense) income, net (128) 7,656 3,648
---------- ---------- ----------
Earnings before income taxes 262,715 337,537 101,793
Income tax expense 95,149 125,318 38,714
---------- ---------- ----------
Net earnings 167,566 212,219 63,079
Preferred stock dividends - 457 338
Deemed dividend on convertible preferred stock - 1,493 175
---------- ---------- ----------
Net earnings applicable to common shareholders $ 167,566 $ 210,269 $ 62,566
========== ========== ==========
Earnings per common share - basic $ 2.54 $ 3.25 $ 0.99
========== ========== ==========
Earnings per common share - diluted $ 2.43 $ 3.09 $ 0.94
========== ========== ==========
Weighted average shares 66,083 64,665 62,960
========== ========== ==========
Weighted average shares - diluted 69,061 68,135 66,860
========== ========== ==========
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
F-5
BARR LABORATORIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 2003, 2002 AND 2001
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Additional
Additional paid Warrant
Common stock paid in capital- subscription Retained
Shares Amount in capital warrants receivable earnings
-------------------------------------------------------------------
BALANCE, JULY 1, 2000 41,360,835 $ 413 $ 210,531 $ 16,418 $ (1,835) $ 97,268
Comprehensive income:
Net earnings 63,079
Unrealized gain on marketable
securities, net of
tax of $226
Reclassification adjustment
Total comprehensive income
Tax benefit of stock incentive plans 11,614
Issuance of stock in connection
with benefit plans 14,231 - 346
Conversion of Series F
Preferred Stock, net 331,503 4 4,914
Issuance of warrants in connection
with Series G Preferred Stock 765
Preferred stock valuation adjustment 1,335
Issuance of common stock
for exercised stock options
and employees' stock
purchase plans 626,955 7 10,272
Dividend on Preferred Stock (513)
Proceeds applied to
warrant receivable 1,835
-------------------------------------------------------------------
BALANCE, JUNE 30, 2001 42,333,524 424 239,264 16,418 - 160,347
Comprehensive income:
Net earnings 212,219
Unrealized loss on marketable
securities, net of
tax of $168
Total comprehensive income
Pooling adjustments 125,590 (1) 1,219 2,551
Tax benefit of stock incentive plans 5,611
Issuance of stock in connection
with benefit plans 2,349 - 177
Issuance of common stock
for exercised stock options
and employees' stock
purchase plans 797,380 8 19,882
Issuance of common stock for
exercised warrants 21,565 2 762
Conversion of preferred stock 512,387 5 8,841
Deemed dividend on convertible
preferred stock (80)
Dividend on convertible preferred
stock (457)
Cash in lieu of fractional shares (625) (51)
Common stock acquired for treasury -
-------------------------------------------------------------------
BALANCE, JUNE 30, 2002 43,792,170 438 275,219 16,418 - 375,066
Accumulated
other Total
comprehensive Treasury stock shareholders'
income/(loss) Shares Amount equity
---------------------------------------------
BALANCE, JULY 1, 2000 $ 1,916 176,932 $ (13) $ 324,698
Comprehensive income:
Net earnings 63,079
Unrealized gain on marketable
securities, net of
tax of $226 305 305
Reclassification adjustment (1,884) (1,884)
-------------
Total comprehensive income 61,500
Tax benefit of stock incentive plans 11,614
Issuance of stock in connection
with benefit plans 346
Conversion of Series F
Preferred Stock, net 4,918
Issuance of warrants in connection
with Series G Preferred Stock 765
Preferred stock valuation adjustment 1,335
Issuance of common stock
for exercised stock options
and employees' stock
purchase plans 10,279
Dividend on Preferred Stock (513)
Proceeds applied to
warrant receivable 1,835
---------------------------------------------
BALANCE, JUNE 30, 2001 337 176,932 (13) 416,777
Comprehensive income:
Net earnings 212,219
Unrealized loss on marketable
securities, net of
tax of $168 (238) (238)
-------------
Total comprehensive income 211,981
Pooling adjustments 3,769
Tax benefit of stock incentive plans 5,611
Issuance of stock in connection
with benefit plans 177
Issuance of common stock
for exercised stock options
and employees' stock
purchase plans 19,890
Issuance of common stock for
exercised warrants 764
Conversion of preferred stock 8,846
Deemed dividend on convertible
preferred stock (80)
Dividend on convertible preferred
stock (457)
Cash in lieu of fractional shares (51)
Common stock acquired for treasury 10,000 (695) (695)
---------------------------------------------
BALANCE, JUNE 30, 2002 99 186,932 (708) 666,532
F-6
BARR LABORATORIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONT.)
FOR THE YEARS ENDED JUNE 30, 2003, 2002 AND 2001
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Additional
Additional paid Warrant
Common stock paid in capital- subscription Retained
Shares Amount in capital warrants receivable earnings
-------------------------------------------------------------------
BALANCE, JUNE 30, 2002 43,792,170 438 275,219 16,418 - 375,066
Comprehensive income:
Net earnings 167,566
Unrealized loss on marketable
securities, net of
tax of $170
Total comprehensive income
Tax benefit of stock incentive plans 10,912
Issuance of common stock
for exercised stock options
and employees' stock
purchase plans 1,020,032 10 23,453
Issuance of common stock for
exercised warrants 83,940 1 (1)
Stock split (3-for-2) 22,170,054 222 (422)
-------------------------------------------------------------------
BALANCE, JUNE 30, 2003 67,066,196 $ 671 $ 309,583 $ 16,418 $ - $542,210
===================================================================
Accumulated
other Total
comprehensive Treasury stock shareholders'
income/(loss) Shares Amount equity
---------------------------------------------
BALANCE, JUNE 30, 2002 99 186,932 (708) 666,532
Comprehensive income:
Net earnings 167,566
Unrealized loss on marketable
securities, net of
tax of $170 (278) (278)
-------------
Total comprehensive income 167,288
Tax benefit of stock incentive plans 10,912
Issuance of common stock
for exercised stock options
and employees' stock
purchase plans 23,463
Issuance of common stock for
exercised warrants -
Stock split (3-for-2) 93,466 (200)
---------------------------------------------
BALANCE, JUNE 30, 2003 $ (179) 280,398 $ (708) $ 867,995
=============================================
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
F-7
BARR LABORATORIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 2003, 2002 AND 2001
(IN THOUSANDS OF DOLLARS)
2003 2002 2001
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 167,566 $ 212,219 $ 63,079
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization 22,713 15,290 14,324
Deferred income tax expense (benefit) 6,684 6,389 (4,159)
Write-off of intangible asset 1,330 - -
Write-off of deferred financing fees associated with early extinguishment of debt - 247 -
Loss on sale of assets 176 - 303
Gain on sale of marketable securities - - (6,671)
Write-off of investments 250 - 2,750
Other (64) 260 151
Tax benefit of stock incentive plans 10,912 5,611 11,614
Write-off of in-process research and development associated with acquisitions 3,946 1,000 -
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable and other receivables, net (126,390) (5,155) (24,389)
Inventories, net (12,793) (8,304) (29,916)
Prepaid expenses 923 (844) 39
Other assets (11,279) (179) 508
Increase (decrease) in:
Accounts payable, accrued liabilities and other liabilities 94,839 8,766 13,642
Income taxes payable 1,515 (475) 6,226
--------- --------- ---------
Net cash provided by operating activities 160,328 234,825 47,501
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (80,617) (47,205) (19,323)
Proceeds from sale of property, plant and equipment 2,997 395 27
Loans to Natural Biologics (9,166) (4,730) -
Acquisitions (25,992) (46,288) -
(Purchases) proceeds of marketable securities, net (29,400) (15,000) 10,839
Other - (500) -
--------- --------- ---------
Net cash used in investing activities (142,178) (113,328) (8,457)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt and capital leases (5,528) (12,166) (17,405)
Net borrowings under line of credit - (20,316) 2,535
Long-term borrowings - - 20,799
Proceeds from issuance of preferred stock - - 9,700
Proceeds from issuance of common stock - - 1,163
Earnings under DuPont agreements applied to warrant receivable - - 1,835
Purchase of treasury stock - (695) -
Proceeds from exercise of stock options and employee stock purchases 23,463 20,655 9,117
Dividends paid on preferred stock - (11) (371)
Other (200) (50) -
--------- --------- ---------
Net cash provided by (used in) financing activities 17,735 (12,583) 27,373
--------- --------- ---------
Increase in cash and cash equivalents 35,885 108,914 66,417
Cash and cash equivalents, beginning of year 331,257 222,343 155,926
--------- --------- ---------
Cash and cash equivalents, end of year $ 367,142 $ 331,257 $ 222,343
========= ========= =========
SUPPLEMENTAL CASH FLOW DATA:
Cash paid during the year:
Interest, net of portion capitalized $ 1,455 $ 3,510 $ 6,666
========= ========= =========
Income taxes $ 76,039 $ 113,563 $ 25,533
========= ========= =========
Non-cash transactions:
Equipment under capital lease $ 94 $ 5,318 $ 1,383
========= ========= =========
Write-off of equipment & leasehold improvements related to closed facility $ - $ 5,307 $ -
========= ========= =========
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
F-8
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
Barr Laboratories, Inc., a New York corporation, is a
specialty pharmaceutical company engaged in the development,
manufacture, and marketing of generic and proprietary
pharmaceutical products primarily in the United States. The
consolidated financial statements include the accounts of Barr
Laboratories, Inc. and its wholly-owned subsidiaries (the
"Company" or "Barr"). The Company, when used in the context of
"the Company and Duramed," refers to pre-merger Barr. All
significant intercompany balances and transactions have been
eliminated in consolidation.
Sherman Delaware, Inc. owned approximately 16% of the
outstanding common stock of the Company at June 30, 2003. Dr.
Bernard C. Sherman is a principal stockholder of Sherman
Delaware, Inc. and was a Director of Barr Laboratories, Inc.
until October 24, 2002 (see Note 14).
On October 24, 2001, the Company completed a merger with
Duramed Pharmaceuticals, Inc. ("Duramed"), a developer,
manufacturer, and marketer of prescription drug products
focusing on women's health and the hormone therapy markets.
The merger qualified as a tax-free reorganization and was
accounted for as a pooling-of-interests for financial
reporting purposes. Accordingly, in accordance with accounting
principles generally accepted in the United States of America
and pursuant to Regulation S-X of the U.S. Securities and
Exchange Commission, all financial data of the Company
presented in these financial statements has been restated as
described below to include the historical financial data of
Duramed (see Note 3).
The Company and Duramed had different fiscal year-ends.
Duramed had a calendar year-end, whereas the Company's fiscal
year ends on June 30th. Financial information for the fiscal
year ended June 30, 2002 is presented as if the Company and
Duramed were merged on July 1, 2001. For the fiscal year ended
June 30, 2001, financial information for Barr's fiscal year
ended June 30th was combined with financial information for
Duramed's calendar year ended December 31st. Barr's
consolidated statement of operations for the fiscal year ended
June 30, 2001 was combined with Duramed's statement of
operations for the calendar year ended December 31, 2000.
Barr's statement of cash flows for the fiscal year ended June
30, 2001 was combined with Duramed's statement of cash flows
for the calendar year ended December 31, 2000.
This presentation of the combined financial information
described above has the effect of excluding Duramed's audited
results from operations for the six-month period ended June
30, 2001. Net revenues and net income for Duramed for the
six-month period ended June 30, 2001 were $59,831 and $49,038,
respectively. On a stand alone basis, Duramed's net income of
$49,038 reflects the benefit of reversing $44,755 of the
valuation allowance that Duramed previously established to
offset certain deferred tax assets. The valuation allowance
was reversed based on the expectation that, as a result of the
merger, the combined company would be able to utilize a
majority of these deferred tax assets (see Note 3). In
addition, from July 1, 2001 through October 24, 2001, the date
of the merger, Duramed reversed an additional $1,732 of
valuation allowance, bringing the total valuation allowance
reversals to $46,487. In accordance with SFAS 109 "Accounting
for Income Taxes", Duramed's net earnings of $49,038 less the
$46,487 reversal of valuation allowance, or $2,551, has been
reported as an increase to Barr's retained earnings within the
consolidated statements of shareholders' equity for the year
ended June 30, 2002. Duramed's cash flows (used in) provided
by operating, investing and financing activities for the
six-months ended June 30, 2001 were ($208), ($1,446), and
$1,654, respectively.
On June 6, 2002, the Company completed the purchase of certain
assets and assumption of certain liabilities of Enhance
Pharmaceuticals, Inc. ("Enhance"). The operating results of
Enhance are included in the consolidated financial statements
subsequent to the June 6, 2002 acquisition date.
F-9
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, trade receivables and a loan receivable from
Natural Biologics. The Company performs ongoing credit
evaluations of its customers' financial condition and
generally does not require collateral from its customers.
(c) Cash and Cash Equivalents
Cash equivalents consist of short-term, highly liquid
investments including market auction debt securities with
maturities of three months or less and with interest rates
that are re-set in intervals of 7 to 49 days, which are
readily convertible into cash at par value, which approximates
cost.
As of June 30, 2003 and 2002, $0 and $84,834, respectively, of
the Company's cash was held in an interest bearing escrow
account. Such amounts represented the portion of the Company's
payable balance with AstraZeneca that the Company had decided
to secure in connection with its cash management policy. On
August 21, 2002, the Company's supply agreement with
AstraZeneca expired.
(d) Inventories
Inventories are stated at the lower of cost, determined on a
first-in, first-out (FIFO) basis, or market. The Company
establishes reserves for its inventory to reflect situations
in which the cost of the inventory is not expected to be
recovered. The Company regularly reviews its inventory,
including when product is close to expiration and is not
expected to be sold, when product has reached its expiration
date, or when product is not expected to be saleable based on
the Company's quality assurance and control standards. The
reserve for these products is equal to all or a portion of the
cost of the inventory based on the specific facts and
circumstances. In evaluating whether inventory is stated at
the lower of cost or market, management considers such factors
as the amount of inventory on hand, estimated time required to
sell such inventory, remaining shelf life and current and
expected market conditions, including levels of competition.
The Company monitors inventory levels, expiry dates and market
conditions on a regular basis. The Company records provisions
for inventory reserves as part of cost of sales.
(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. Amortization of
capital lease assets is included in depreciation expense.
Leasehold improvements are amortized on a straight-line basis
over the shorter of their useful lives or the terms of the
respective leases.
The estimated useful lives of the major classification of
depreciable assets are:
Years
-----
Buildings 30-45
Building improvements 10
Machinery and equipment 3-10
Leasehold improvements 2-10
Maintenance and repairs are charged to operations as incurred;
renewals and betterments are capitalized.
(f) Goodwill and Other Intangible Assets
In connection with acquisitions, the Company determines the
amounts assigned to goodwill and intangibles based on purchase
price allocations. These allocations, including an assessment
of the estimated useful lives of intangible assets, have been
performed by qualified independent appraisers using generally
accepted valuation methodologies. The valuation of intangible
assets is generally based on the estimated future cash flows
related to
F-10
those assets, while the value assigned to goodwill is the
residual of the purchase price over the fair value of all
identifiable assets acquired and liabilities assumed. Useful
lives are determined based on the expected future period of
benefit of the asset, which considers various characteristics
of the asset, including historical cash flows. As required by
Statement of Financial Accounting Standards ("SFAS") No. 142,
"Goodwill and Other Intangible Assets," the Company reviews
goodwill for impairment annually, or more frequently if
impairment indicators arise.
(g) Stock-Based Compensation
The Company has three stock-based employee compensation plans,
two stock-based non-employee director compensation plans and
an employee stock purchase plan, which are described more
fully in Note 16. The Company accounts for these plans under
the intrinsic value method described in Accounting Principles
Board Opinion No. 25 "Accounting for Stock Issued to
Employees," and related Interpretations. Under the intrinsic
value method, no stock-based employee compensation cost is
reflected in net income. The following table illustrates the
effect on net income and earnings per share if the Company had
applied the fair value recognition provisions of SFAS No. 123,
Accounting for Stock-Based Compensation, to stock-based
employee compensation.
FOR THE YEAR ENDED JUNE 30,
2003 2002 2001
---------- ------------ ----------
NET INCOME, AS REPORTED $ 167,566 $ 210,269 $ 62,566
Add: Stock-based employee
compensation expense included
in reported net income, net of
related tax effects - 387 174
Deduct: Total stock-based
employee compensation expense
determined under fair value
based method for all awards,
net of related tax effects 6,577 17,572 5,895
---------- ------------ ----------
PRO FORMA NET INCOME $ 160,989 $ 193,084 $ 56,845
========== ============ ==========
EARNINGS PER SHARE:
Basic - as reported $ 2.54 $ 3.25 $ 0.99
========== ============ ==========
Basic - pro forma $ 2.44 $ 2.99 $ 0.90
========== ============ ==========
Diluted - as reported $ 2.43 $ 3.09 $ 0.94
========== ============ ==========
Diluted - pro forma $ 2.33 $ 2.83 $ 0.85
========== ============ ==========
The pro forma results for fiscal 2002 reflect the accelerated
vesting of options as a result of the merger with Duramed as
described in Note 3.
For all plans, the fair value of each option grant was
estimated at the date of grant using the Black-Scholes Option
Pricing Model with the following weighted-average assumptions:
YEAR ENDED JUNE 30,
2003 2002 2001
---------- ------------ ----------
Average expected term (years) 4 3 3
Risk-free interest rate 2.29% 3.62% 5.25%
Dividend yield 0% 0% 0%
Volatility 53.73% 46.96% 51.30%
Fair value of options granted
at market $ 15.77 $ 17.11 $ 13.66
F-11
The weighted-average fair value of the options granted in
fiscal 2001, which were below the current market price on the
date of grant, was $28.01 per share.
(h) Research and Development
Research and development costs, which consist principally of
product development costs, are charged to operations as
incurred.
(i) Shipping and Handling Costs
Shipping and handling costs, which approximated $1,591, $1,533
and $678 in fiscal 2003, 2002 and 2001, respectively, were
included in selling, general and administrative expenses.
(j) Stock Split
On February 18, 2003, the Company's Board of Directors
declared a 3-for-2 stock split effected in the form of a 50%
stock dividend. Approximately 22.2 million additional shares
of common stock were distributed on March 17, 2003 to
shareholders of record at the close of business on February
28, 2003. All applicable prior year share and per share
amounts have been adjusted for the stock split.
(k) Earnings Per Share
As discussed above, on October 24, 2001, the Company completed
a merger with Duramed where the Company issued approximately
11.25 million shares of its common stock for all the
outstanding common stock of Duramed and exchanged all options
and warrants to purchase Duramed stock for options and
warrants to purchase approximately 1.8 million shares of the
Company's common stock.
All applicable prior year share and per share amounts have
been adjusted for the merger.
The following is a reconciliation of the numerators and
denominators used to calculate earnings per common share
("EPS") as presented in the Consolidated Statements of
Operations:
(in thousands except
per share amounts) 2003 2002 2001
---------- ------------ ----------
Net earnings $ 167,566 $ 212,219 $ 63,079
Dividends on preferred stock - 457 338
Deemed dividend on convertible
preferred stock - 1,493 175
---------- ------------ ----------
Numerator for basic and diluted
earnings per share
available for common
shareholders $ 167,566 $ 210,269 $ 62,566
========== ============ ==========
Earnings per common share - basic 66,083 64,665 62,960
Earnings available for common
shareholders $ 2.54 $ 3.25 $ 0.99
========== ============ ==========
Earnings per common share - diluted:
Weighted average shares 66,083 64,665 62,960
Effect of dilutive options 2,978 3,470 3,900
---------- ------------ ----------
Weighted average shares- diluted
(denominator) 69,061 68,135 66,860
Earnings available for common
shareholders $ 2.43 $ 3.09 $ 0.94
========== ============ ==========
(in whole share amounts) 2003 2002 2001
---------- ------------ ----------
Not included in the calculation
of diluted earnings
per share because their impact
is antidilutive:
Stock options outstanding 1,265,874 1,132,788 266,464
Warrants - - 22,284
Preferred if converted - 759,486 759,486
F-12
(l) 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
2004, 2007 and 2010. Warrant issuance costs are being
amortized on a straight-line basis over the terms of the
related warrants. The total unamortized amounts of $310 and
$454 at June 30, 2003 and 2002, respectively, are included in
other assets in the Consolidated Balance Sheets.
(m) 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 8).
Other Assets - Investments that do not have a readily
determinable market value are recorded at cost, as it is a
reasonable estimate of fair value or current realizable value.
Long-Term Debt - The fair value at June 30, 2003 and 2002 is
estimated at $40,000 and $43,000, respectively (see Note 12
for carrying value). 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,
2003. 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.
(n) Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
of America requires management to make estimates and use
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent liabilities at the
date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual
results could differ from those estimates.
The most significant estimates made by management include
those made in the areas of sales returns and allowances,
including shelf stock adjustments; inventory reserves;
deferred taxes; litigation; self-insurance reserves; and the
assessment of the recoverability of goodwill and other
intangible assets.
Management periodically evaluates estimates used in the
preparation of the consolidated financial statements for
continued reasonableness. Appropriate adjustments, if any, to
the estimates used are made prospectively based on such
periodic evaluations.
(o) Self-Insurance Reserve
The Company is primarily self-insured for potential product
liability claims on products sold on or after September 30,
2002. The Company records a self-insurance reserve for each
reported claim on a case-by-case basis, plus an allowance for
the estimated future cost of incurred but not reported
("IBNR") claims. In assessing the amounts to record for each
reported claim, with the assistance of its counsel and
insurance consultants, the Company considers the nature and
amount of the claim, its prior experience with similar claims,
and whether the amount expected to be paid on a claim is both
probable and reasonably estimable. In determining the
allowance for the estimated future cost of both reported and
IBNR claims as of June 30, 2003, the Company utilized
projections of its outstanding estimated losses as determined
by an independent actuary. As of June 30, 2003, the Company
had recorded self-insurance reserves and related expenses of
$1,333 in accrued liabilities and selling, general and
administrative expenses. The costs of the ultimate disposition
of both existing and IBNR claims may differ from this reserve
amount.
F-13
(p) Litigation
The Company is subject to litigation in the ordinary course of
business and also to certain other contingencies (see Note
21). Legal fees and other expenses related to litigation and
contingencies are recorded as incurred. Additionally, the
Company, in consultation with its counsel, assesses the need
to record a liability for litigation and contingencies on a
case-by-case basis. Accruals are recorded when the Company
determines that a loss related to a matter is both probable
and reasonably estimable.
(q) Income Taxes
Income taxes are accounted for under SFAS No. 109, "Accounting
for Income Taxes." Under this method, deferred tax assets and
liabilities are recognized for the differences between the
financial statement and tax basis of assets and liabilities
using enacted tax rates in effect for the years in which the
differences are expected to reverse. A valuation allowance is
provided for the portion of deferred tax assets that are
"more-likely-than-not" to be unrealized. Deferred tax assets
and liabilities are measured using enacted tax rates and laws.
(r) Revenue Recognition
Product sales
The Company recognizes product sales revenue when title and
risk of loss have transferred to the customer, when estimated
provisions for product returns, rebates, chargebacks and other
sales allowances are reasonably determinable, and when
collectibility is reasonably assured. Accruals for these
provisions are presented in the consolidated financial
statements as reductions to revenues. Accounts receivable are
presented net of allowances relating to the above provisions
of $136,059 and $93,789 at June 30, 2003 and 2002,
respectively.
Development and other revenue
The Company recognizes revenues under research and development
agreements as it performs the related research and
development. Amounts Barr receives under these agreements are
not refundable. For the year ended June 30, 2001, development
and other revenue included $562 related to transition revenues
under the ViaSpan Agreement (see Note 4).
(s) Advertising and Promotion Costs
Costs associated with advertising and promotion expenses are
expensed in the period in which the advertising is first used
and these costs are included in selling, general and
administrative expenses. Advertising and promotion expenses
totaled approximately $21,377, $4,678, and $2,749 for the
years ending June 30, 2003, 2002 and 2001, respectively.
(t) Sales Returns and Allowances
At the time of sale, the Company records estimates for various
costs, which reduce product sales. These costs include
estimates for product returns, rebates, chargebacks and other
sales allowances. In addition, the Company may record
allowances for shelf-stock adjustments when the conditions are
appropriate. Estimates for sales allowances such as product
returns, rebates and chargebacks are based on a variety of
factors including actual return experience of that product or
similar products, rebate arrangements for each product, and
estimated sales by our wholesale customers to other third
parties who have contracts with Barr. Actual experience
associated with any of these items may be different than the
Company's estimates. Barr regularly reviews the factors that
influence its estimates and, if necessary, makes adjustments
when it believes that actual product returns, credits and
other allowances may differ from established reserves.
The Company often issues credits to customers for inventory
remaining on their shelves following a decrease in the market
price of a generic pharmaceutical product. These credits,
commonly referred to in the pharmaceutical industry as
"shelf-stock adjustments," can then be used by customers to
offset future amounts owing to the Company under invoices for
future product deliveries. The shelf-stock adjustment is
intended to
F-14
reduce a customer's inventory cost to better reflect current
market prices and is often used by the Company to maintain its
long-term customer relationships. The determination to grant a
shelf-stock credit to a customer following a price decrease is
usually at the Company's discretion rather than contractually
required. Allowances for shelf-stock adjustments are recorded
at the time Barr sells products it believes will be subject to
a price decrease or when market conditions indicate that a
shelf-stock adjustment is necessary to facilitate the
sell-through of its product. When determining whether to
record a shelf-stock adjustment and the amount of any such
adjustment, the Company analyzes several variables including
the estimated launch dates of a competing product, the
estimated decline in market price and estimated levels of
inventory held by the customer at the time of the decrease in
market price. As a result, a shelf-stock reserve depends on a
product's unique facts and circumstances. Barr regularly
monitors these and other factors for its significant products
and evaluates its reserves and estimates as additional
information becomes available.
(u) Segment Reporting
The Company operates in one segment - the development,
manufacture and marketing of pharmaceutical products. The
Company's chief operating decision-maker reviews operating
results on a consolidated company basis.
The Company's manufacturing plants are located in New Jersey,
New York, Ohio and Virginia and its products are sold
primarily in the United States to wholesale and retail
distributors. In fiscal 2003, four customers accounted for
at least 10% of product sales with 21%, 17%, 13% and 10%,
respectively. In fiscal 2002, three customers accounted for
at least 10% of product sales with 18%, 13% and 12% of sales.
In fiscal 2001, a single customer accounted for approximately
14% of product sales.
(v) Asset Impairment
The Company reviews the carrying value of its long-term assets
for impairment whenever events and circumstances indicate that
the carrying value of an asset may not be recoverable from the
estimated future cash flows expected to result from its use
and eventual disposition. In cases where undiscounted expected
future cash flows are less than the carrying value, an
impairment loss is recognized equal to an amount by which the
carrying value exceeds the fair value of assets.
(w) New Accounting Pronouncements
Goodwill and Other Intangible Assets
In June 2001, the FASB issued SFAS No. 142, "Goodwill and
Other Intangible Assets" ("SFAS 142"). SFAS 142 supercedes APB
opinion No. 17, "Intangible Assets." Under SFAS 142, goodwill
and indefinite lived intangible assets are no longer amortized
but are reviewed for impairment annually, or more frequently
if impairment indicators arise. The provisions of SFAS 142 are
effective for fiscal years beginning after December 15, 2001.
The Company adopted SFAS 142 on July 1, 2002. SFAS 142
requires goodwill to be tested for impairment annually using a
two-step process to determine the amount of impairment, if
any, which is then written-off. The first step is to identify
potential impairment, which is measured as of the beginning of
the fiscal year. To accomplish this, the Company identified
its reporting units and determined the carrying value of each
reporting unit by assigning the assets and liabilities,
including the existing goodwill and intangible assets, to
those reporting units. Under the first step of the process
required by SFAS 142, to the extent a reporting unit's
carrying amount exceeds its fair value, the reporting unit's
goodwill may be impaired. During the second quarter of fiscal
2003, the Company completed the first step of this process and
determined there was no indication of goodwill impairment.
Accounting for Asset Retirement Obligations
In June 2001, the FASB issued SFAS No. 143, "Accounting for
Asset Retirement Obligations" ("SFAS 143"). This statement
addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets
and the associated asset retirement costs. It applies to legal
obligations associated
F-15
with the retirement of long-lived assets that result from the
acquisition, construction, development and/or the normal
operation of a long-lived asset, except for certain
obligations of lessees. The standard requires entities to
record the fair value of a liability for an asset retirement
obligation in the period incurred with a corresponding
increase in the carrying amount of the related long-lived
asset. Over time, the liability is accreted to its present
value each period, and the capitalized cost is depreciated
over the useful life of the related asset. Upon settlement of
the liability, an entity either settles the obligation for its
recorded amount or incurs a gain or loss upon settlement. This
statement is effective for financial statements issued for
fiscal years beginning after June 15, 2002. The Company
adopted SFAS 143 effective as of July 1, 2002. The adoption of
SFAS 143 did not have a material impact on the Company's
consolidated financial statements.
Accounting for Impairment or Disposal of Long-Lived Assets
In August 2001, the FASB issued SFAS No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets" ("SFAS 144").
This statement addresses financial accounting and reporting
for the impairment of long-lived assets. This statement
supercedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed
Of," and the accounting and reporting provisions of APB
Opinion No. 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events
and Transactions." This statement also amends ARB No. 51,
"Consolidated Financial Statements," to eliminate the
exception to consolidation for a subsidiary for which control
is likely to be temporary. This statement requires that one
accounting model be used for long-lived assets to be disposed
of by sale, whether previously held and used or newly
acquired. This statement also broadens the presentation of
discontinued operations to include more disposal transactions.
This statement is effective for financial statements issued
for fiscal years beginning after June 15, 2002. The Company
adopted SFAS 144 effective as of July 1, 2002. The adoption of
SFAS 144 did not have a material impact on the Company's
consolidated financial statements,
Rescission of FASB Statements No. 4, 44, and 64, Amendment of
FASB Statement No. 13, and Technical Corrections
In April 2002, the FASB issued SFAS No. 145, "Rescission of
FASB Statements No. 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections" ("SFAS 145"). SFAS 145
rescinds SFAS 4, "Reporting Gains and Losses from
Extinguishment of Debt," and an amendment of that Statement,
SFAS 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements." SFAS 145 also rescinds SFAS 44, "Accounting for
Intangible Assets of Motor Carriers." SFAS 145 amends SFAS 13,
"Accounting for Leases," to eliminate an inconsistency between
the required accounting for sale-leaseback transactions and
the required accounting for certain lease modifications that
have economic effects that are similar to sale-leaseback
transactions. SFAS 145 also amends other existing
authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability
under changed conditions. This statement is effective for
financial statements issued for fiscal years beginning after
May 15, 2002. Upon adoption of SFAS 145 in July 2002, the
Company reclassified the $160 loss on early extinguishment of
debt that was reported as an extraordinary item, net of $87 in
tax, for the year ended June 30, 2002 to selling, general and
administrative expenses and income tax expense.
Accounting for Costs Associated with Exit or Disposal
Activities
In June 2002, the FASB issued SFAS No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities" ("SFAS
146"). SFAS 146 addresses financial accounting and reporting
for costs associated with exit or disposal activities and
nullifies EITF Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit
an Activity (Including Certain Costs Incurred in a
Restructuring)." SFAS 146 requires recognition of a liability
for a cost associated with an exit or disposal activity when
the liability is incurred, as opposed to when the entity
commits to an exit plan under EITF 94-3. This statement is
effective for exit or disposal activities initiated after
December 31, 2002. The Company adopted SFAS 146 effective
January 1, 2003 and has considered it in actions involving
exit or disposal costs initiated after that date. The adoption
of SFAS 146 did not have a material impact on the Company's
consolidated financial statements.
F-16
Accounting for Stock-Based Compensation - Transition and
Disclosure, An Amendment of FASB Statement No. 123
In December 2002, the FASB issued SFAS No. 148, "Accounting
for Stock-Based Compensation - Transition and Disclosure, An
Amendment of FASB Statement No. 123" ("SFAS 148"). This
statement provides alternative methods of transition for a
voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS 148
amends the disclosure requirements of Statement No. 123 to
require more prominent disclosures, in both interim and annual
financial statements, about the method of accounting for
stock-based employee compensation and the effect the method
used has on reported results. The provisions of SFAS 148 are
effective for fiscal years ending after December 15, 2002 and
the interim disclosure provisions are effective for financial
reports containing financial statements for interim periods
beginning after December 15, 2002. The Company will continue
to account for stock-based compensation using the intrinsic
value method and has adopted the disclosure requirements
prescribed by SFAS 148 as of March 31, 2003. The additional
required disclosures have been provided in Note 1 to the
consolidated financial statements.
Amendment of Statement 133 on Derivative Instruments and
Hedging Activities
In April 2003, the FASB issued SFAS No. 149, "Amendment of
Statement 133 on Derivative Instruments and Hedging
Activities" ("SFAS 149"), which is generally effective for
contracts entered into or modified after June 30, 2003 and for
hedging relationships designated after June 30, 2003. SFAS 149
clarifies under what circumstances a contract with an initial
net investment meets the characteristic of a derivative as
discussed in SFAS No. 133, clarifies when a derivative
contains a financing component, amends the definition of an
"underlying" to conform it to the language used in FASB
Interpretation No. 45, "Guarantor Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others," and amends certain other existing
pronouncements. The Company currently has no involvement with
derivative financial instruments, and therefore it does not
anticipate that the adoption of SFAS 149 will have a material
impact on its consolidated financial statements.
Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity
In May 2003, the FASB issued SFAS No. 150, "Accounting for
Certain Financial Instruments with Characteristics of both
Liabilities and Equity" ("SFAS 150"). SFAS 150 modifies the
accounting for certain financial instruments that, under
previous guidance, issuers could account for as equity. SFAS
150 requires that those instruments be classified as
liabilities in statements of financial position and affects an
issuer's accounting for (1) mandatorily redeemable shares,
which the issuing company is obligated to buy back in exchange
for cash or other assets, (2) instruments, other than
outstanding shares, that do or may require the issuer to buy
back some of its shares in exchange for cash or other assets,
or (3) obligations that can be settled with shares, the
monetary value of which is fixed, tied solely or predominantly
to a variable such as a market index, or varies inversely with
the value of the issuer's shares. In addition to its
requirements for the classification and measurement of
financial instruments within its scope, SFAS 150 also requires
disclosures about alternative ways of settling those
instruments and the capital structure of entities, all of
whose shares are mandatorily redeemable. SFAS 150 is effective
for financial instruments entered into or modified after May
31, 2003, and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003. The
Company does not believe that the adoption of SFAS 150 will
have a material impact on its consolidated financial
statements.
Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of
Others
In November 2002, the FASB issued Interpretation 45,
"Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of
Others, Interpretation of FASB Statement Nos. 5, 57 and 107
and Rescission of FIN 34" ("FIN 45"). FIN 45 clarifies the
requirements of SFAS No. 5, "Accounting for Contingencies,"
relating to the guarantor's accounting for, and disclosure of,
the issuance of certain types of guarantees. FIN 45 requires,
that upon issuance of a guarantee, the entity must recognize a
liability for the fair value of the obligation it assumes
under the guarantee. The disclosure provisions of FIN 45
F-17
are effective for financial statements of interim or annual
periods that end after December 15, 2002, while the initial
recognition and measurement provisions are effective on a
prospective basis for guarantees that are issued or modified
after December 31, 2002. The Company adopted the disclosure
and initial recognition and measurement provisions of FIN 45
effective for the period ended December 31, 2002 and as of
March 31, 2003, respectively. The adoption of FIN 45 has not
had a material effect on the Company's consolidated financial
statements.
Consolidation of Variable Interest Entities
In January 2003, the FASB issued Interpretation 46,
"Consolidation of Variable Interest Entities - An
Interpretation of ARB No. 51" ("FIN 46"). In general, a
variable interest entity is a corporation, partnership, trust,
or any other legal structure used for business purposes that
either (a) does not have equity investors with voting rights
or (b) has equity investors that do not provide sufficient
financial resources for the entity to support its activities.
FIN 46 requires a variable interest entity to be consolidated
by a company (known as the "primary beneficiary") if that
company is subject to a majority of the risk of loss from the
variable interest entity's activities or entitled to receive a
majority of the entity's residual returns or both. The
consolidation requirements of FIN 46 apply immediately to
variable interest entities created after January 31, 2003. The
consolidation requirements apply to variable interest entities
that existed as of January 31, 2003 in the first fiscal year
or interim period beginning after June 15, 2003. FIN 46 also
requires certain disclosures by all holders of a significant
variable interest in a variable interest entity that are not
the primary beneficiary. The Company does not have any
material investments in variable interest entities, and
therefore, the adoption of FIN 46 had no impact on its
consolidated financial statements.
(2) ACQUISITIONS
Purchase of Products from Wyeth
On June 9, 2003, the Company acquired from Wyeth the rights to four
products and a sublicense on a product currently being developed by
Wyeth for initial cash consideration of $25,992 and an agreement for
future royalty payments based on future sales of the products. The
Company also entered into an interim supply agreement with Wyeth in
relation to these products that will terminate as to certain portions
of the agreement on various dates over the next two fiscal years. Of
the total $25,992 purchase price, $22,046 was allocated to the marketed
products and $3,946 was allocated to the in-process research and
development project (see Note 9). No value was assigned to the supply
agreement for the acquired products because the product purchase prices
under the agreement approximate the price the Company would expect to
pay third party contract manufacturers. The products will be amortized
over a weighted-average useful life of 8.75 years.
The $3,946 was written off as research and development expenses upon
acquisition because technological feasibility, through FDA or
comparable regulatory body approval, had not been established and the
projects had no alternative future use.
Acquisition of Enhance Pharmaceuticals, Inc.
On June 6, 2002, the Company acquired certain assets from and assumed
certain liabilities of Enhance Pharmaceuticals, Inc. The acquisition
was accounted for under the purchase method of accounting. The total
purchase price, including acquisition costs of $1,071, was $46,288.
The fair values of assets acquired and liabilities assumed on June 6,
2002 were:
F-18
Current assets $ 1,252
Property and equipment 2,012
Intangible assets 28,200
Goodwill 13,941
In-process research and development 1,000
----------
Total assets acquired $ 46,405
----------
Current liabilities 89
Capital lease obligations 28
----------
Total liabilities assumed 117
----------
Purchase price $ 46,288
==========
Total cash paid $ 45,217
Accrued acquisition costs 1,071
----------
$ 46,288
==========
Intangible assets included $1,400 of patents and $26,800 in product
license agreements that are each subject to amortization over an
estimated useful life of ten years (see Note 9). The fair value of net
assets acquired was $32,464, resulting in goodwill of $13,941. The
Company acquired Enhance to further its expansion into the female
healthcare market. Certain of the factors contributing to the purchase
price that resulted in goodwill were Enhance's proprietary vaginal ring
drug delivery platform and its uses. The entire balance of goodwill is
deductible for tax purposes. The operating results of Enhance are
included in the consolidated financial statements subsequent to the
June 6, 2002 acquisition date.
Acquired in-process research and development projects in the amount of
$1,000 were written off as research and development expenses upon
acquisition because technological feasibility, through FDA or
comparable regulatory body approval, had not been established and the
projects had no alternative future use.
(3) MERGER WITH DURAMED PHARMACEUTICALS, INC.
On June 29, 2001, the Company announced the signing of a definitive
merger agreement with Duramed, a developer, manufacturer, and marketer
of prescription drug products focusing on women's health and the
hormone therapy markets. The merger was approved by the shareholders of
Duramed and Barr, respectively, and on October 24, 2001, a wholly-owned
subsidiary of Barr merged with and into Duramed, with Duramed surviving
as a wholly-owned subsidiary of the Company. The merger was treated as
a tax-free reorganization and was accounted for as a
pooling-of-interests for financial reporting purposes.
Under the terms of the merger agreement, Duramed common shareholders
received a fixed exchange ratio of 0.3843 shares of Barr common stock
for each share of Duramed common stock. Duramed preferred stock
shareholders received 7.5948 shares of Barr common stock for each share
of Duramed preferred stock. Based on these terms, Barr issued
approximately 11.25 million shares of its common stock for all the
outstanding common and preferred stock of Duramed and exchanged all
options and warrants to purchase Duramed stock for options and warrants
to purchase approximately 1.8 million shares of the Company's common
stock.
The Company and Duramed had certain differences in the classification
of expenses in their historical statements of operations and certain
differences in the classification of assets and liabilities in their
historical balance sheets. Reclassifications have been made to conform
the combined companies' statement of operations and balance sheet
classifications. In addition, the historical Duramed balance sheets
included approximately $50,000 in deferred tax assets, which had been
fully offset by a valuation allowance. On a combined basis, Barr
expects to utilize a majority of these deferred tax assets. Therefore,
in accordance with SFAS No. 109, "Accounting for Income Taxes," the
Company has restated Duramed's historical balance sheets to recognize
the deferred tax asset that is more-likely-than-not expected to be
utilized.
F-19
The combined amounts presented in the accompanying financial statements
are based on the basis of presentation described in Note 1 and are
summarized below:
Twelve Months Ended
June 30, 2001
-------------
Total revenues:
Barr $ 509,686
Duramed 83,465
-------------
Combined $ 593,151
=============
Net earnings:
Barr $ 62,487
Duramed 164
Adjustments to reverse valuation
allowance on deferred tax assets (85)
-------------
Combined $ 62,566
=============
As of June 30,
2001
-------------
Shareholders' equity:
Barr $ 365,642
Duramed 6,380
Cumulative effect of adjustments to
reverse valuation allowance on
deferred tax assets 44,755
-------------
Combined $ 416,777
=============
(4) STRATEGIC ALLIANCE WITH DUPONT PHARMACEUTICALS COMPANY
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. The Company
was unable to assess whether the individual terms of each of the
agreements would have been different had each of the agreements been
negotiated separately with other third parties not involved in
litigation.
DuPont has since been acquired by Bristol-Myers Squibb Company ("BMS").
In April 2002, the Company and BMS agreed to restructure and terminate
both the proprietary product development funding agreement and the
Trexall Marketing Agreement that were entered into between Barr and
DuPont in March 2000.
Under the terms of the March 2000 proprietary product development
funding agreement ("Product Development Agreement"), DuPont agreed to
invest up to $45,000 to support the ongoing development of Barr's
CyPat(TM) prostate cancer therapy and SEASONALE(R) and DP3 oral
contraceptive proprietary products in exchange for co-marketing rights
and royalties. Barr and BMS agreed to terminate this agreement and to
cap BMS's funding obligations at $40,000. In return, BMS agreed to
forego its royalty interest and other rights regarding the marketing of
these three products. In connection with the Product Development
Agreement, the Company earned $0, $15,343 and $12,008 for the years
ended June 30, 2003, 2002 and 2001, respectively.
Barr and BMS also agreed to terminate the Trexall Marketing Agreement,
under which DuPont had agreed to promote, market and sell Barr's
Trexall(TM) product in exchange for a royalty. As a result of the
termination, Barr has assumed BMS' responsibilities to coordinate the
promotion and sales activities for Trexall and BMS will forego its
royalty interest in the product. BMS agreed to fulfill its existing
obligation to fund the Trexall sales force costs during fiscal 2003 and
2004 and paid Barr $600 to cover BMS' other obligations during the term
of the contract. For the year ended June 30, 2001, the Company earned
$5,000 related to this agreement.
F-20
In March 2000, Barr received from DuPont the right to market and
distribute ViaSpan(R), an organ transplant preservation agent, in the
United States and Canada, through patent expiry in March 2006. During a
transition period that ended July 31, 2000, DuPont remained the
distributor of ViaSpan but paid a fee to Barr based on a defined
formula calculated on DuPont's actual sales of ViaSpan during this
transition period. For the year ended June 30, 2001, the Company earned
$562 during this transition period.
(5) PROCEEDS FROM PATENT CHALLENGE SETTLEMENT
In January 1997, Bayer AG, Bayer Corporation (collectively, "Bayer")
and the Company agreed to settle the then pending litigation regarding
Bayer's patent protecting ciprofloxacin hydrochloride. Under the
settlement agreement, the Company withdrew its patent challenge by
amending its ANDA from a paragraph IV certification (claiming
invalidity) to a paragraph III certification (seeking approval upon
patent expiry) and acknowledged the validity and enforceability of the
ciprofloxacin patent. As consideration for this settlement, the Company
received a non-refundable payment of $24,550 in January 1997, which it
recorded as proceeds from patent challenge settlement. Concurrent with
the Settlement Agreement, the Company also signed a contingent,
non-exclusive Supply Agreement ("Supply Agreement") with Bayer that
ends at patent expiry in December 2003.
Under the terms of the Supply Agreement, until June 9, 2003, Bayer, at
its sole option could either (i) allow Barr and Aventis, the
contractual successor to Barr's joint venture partner in the Cipro
patent challenge case, to purchase, at a predetermined discount to
Bayer's then selling price, quantities of ciprofloxacin for resale
under market conditions or (ii) make quarterly cash payments as defined
in the Agreement. Bayer elected to make payments rather than supply the
Company with ciprofloxacin. Barr recognized the amounts due under the
Supply Agreement as such amounts were realized based on the outcome of
Bayer's election. The amounts realized are reported as proceeds from
patent challenge settlement.
On June 9, 2003, the Company began distributing ciprofloxacin tablets.
The Company shares one-half of its profits from the sale of
ciprofloxacin, as defined, with Aventis.
(6) INVENTORIES, NET
June 30,
-----------------------
2003 2002
---------- ---------
Raw materials and supplies $ 60,075 $ 43,952
Work-in-process 18,561 12,897
Finished goods 85,290 94,284
---------- ---------
$ 163,926 $ 151,133
========== =========
Inventories are presented net of reserves of $13,201 and $10,236 at
June 30, 2003 and 2002, respectively. The Company's distributed version
of Ciprofloxacin, purchased as a finished product from Bayer, accounted
for approximately $48,300 of finished goods inventory as of June 30,
2003. As a result of the expiration of the Company's supply agreement
with AstraZeneca on August 21, 2002, the June 30, 2003 finished goods
balance includes only Tamoxifen inventory manufactured by the Company.
The June 30, 2002 finished goods balance included approximately $69,655
of Tamoxifen purchased from AstraZeneca.
F-21
(7) PROPERTY, PLANT AND EQUIPMENT, NET
June 30,
-----------------------
2003 2002
---------- ---------
Land $ 5,819 $ 4,870
Buildings and improvements 105,946 89,521
Machinery and equipment 144,676 123,908
Leasehold improvements 2,759 2,449
Automobiles and trucks 200 200
Construction in progress 64,430 31,993
---------- ---------
323,830 252,941
Less: accumulated
depreciation & amortization 100,314 87,419
---------- ---------
$ 223,516 $ 165,522
========== =========
For the years ended June 30, 2003, 2002 and 2001, $1,761, $1,072 and
$278 of interest was capitalized, respectively. The Company recorded
depreciation expense of $19,547, $15,010 and $13,631 for the years
ended June 30, 2003, 2002 and 2001, respectively.
(8) MARKETABLE SECURITIES
The Company's investments in marketable securities are classified as
"available for sale" and, accordingly, are recorded at current market
value with offsetting adjustments to shareholders' equity, net of
income taxes.
The amortized cost and estimated market values of marketable securities
at June 30, 2003 and 2002 are as follows:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
JUNE 30, 2003 COST GAINS (LOSSES) VALUE
------------------ --------- ---------- ---------- --------
Debt securities $ 44,400 $ - $ - $ 44,400
Equity securities 343 - (288) 55
--------- ---------- ---------- --------
Total securities $ 44,743 $ - $ (288) $ 44,455
========= ========== ========== ========
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
JUNE 30, 2002 COST GAINS (LOSSES) VALUE
------------------ --------- ---------- ---------- --------
Debt securities $ 15,000 $ - $ - $ 15,000
Equity securities 343 159 - 502
--------- ---------- ---------- --------
Total securities $ 15,343 $ 159 $ - $ 15,502
========= ========== ========== ========
The Company received proceeds of $12,873, which included a gain of
$6,671 on the sale of marketable securities in the year ended June 30,
2001. The cost of investments sold is determined by the specific
identification method.
Debt Securities
The Company has invested $44,400 in market auction debt securities,
which are readily convertible into cash at par value, which
approximates cost. The par value of each of the securities held is
equal to the market value, and the securities mature on various dates
between July 21, 2003 and July 13, 2004.
F-22
Equity Securities
In April 1999, the Company sold its rights to several pharmaceutical
products to Halsey Drug Company in exchange for 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 using the following assumptions for
June 30, 2003 and 2002, respectively: dividend yield of 0%; expected
volatility of 69.47% and 103.3%; risk-free interest rate of 5.78%; and
expected life of 0.75 and 1.75 years.
(9) OTHER INTANGIBLE ASSETS
Intangible assets, excluding goodwill, which are comprised primarily of
product licenses and product rights and related intangibles, consist of
the following:
June 30,
-----------------------
2003 2002
---------- ---------
Patents $ - $ 1,400
Product licenses 26,800 26,800
Product rights and related intangibles 22,046 -
---------- ---------
48,846 28,200
Less: accumulated amortization (2,897) -
---------- ---------
Intangible assets, net $ 45,949 $ 28,200
========== =========
In December 2002, the Company's management decided to suspend
development of a product for which $1,400 in patents had been recorded.
As a result, on December 31, 2002, the Company wrote off the remaining
$1,330 of patents, net of accumulated amortization. This amount has
been included in selling, general and administrative expense.
Estimated amortization expense on product licenses and product rights
and related intangibles is as follows:
Year Ending
June 30,
-----------
2004 $ 5,278
2005 5,278
2006 5,278
2007 5,278
2008 5,278
The Company's product licenses and product rights and related
intangibles have weighted average useful lives of approximately 10.0
and 8.75 years, respectively.
(10) GOODWILL
Goodwill of $14,118 and $13,941 at June 30, 2003 and 2002,
respectively, was attributable to the Company's acquisition of certain
assets and assumption of certain liabilities of Enhance
Pharmaceuticals, Inc. in June 2002. The increase in goodwill from June
30, 2002 is attributable to acquisition-related professional fees for
which estimates at June 30, 2002 differed from actual amounts.
(11) ACCRUED LIABILITIES
Included in accrued liabilities as of June 30, 2003 and 2002 is
approximately $33,335 and $23,175, respectively, related to amounts due
under various profit sharing agreements.
F-23
(12) LONG-TERM DEBT
A summary of long-term debt is as follows:
June 30,
-----------------------
2003 2002
---------- ---------
Senior Unsecured Notes (a) $ 22,858 $ 24,285
Provident Bank mortgage notes (b) 14,800 16,400
Equipment Financing (c) - 614
---------- ---------
37,658 41,299
Less: Current Installments of Long-Term Debt 7,029 3,642
---------- ---------
Total Long-Term Debt $ 30,629 $ 37,657
========== =========
(a) The Senior Unsecured Notes include a $20,000, 7.01% Note due
November 18, 2007 and $2,858 of 6.61% Notes due November 18,
2004. Annual principal payments under the Notes total $5,429
in fiscal 2004 and 2005, and $4,000 in 2006 through 2008.
The Senior Unsecured Notes contain certain covenants
including, among others, a restriction on dividend payments in
excess of $10 million plus 75% of consolidated net earnings
subsequent to June 30, 1997. The Company was in compliance
with all covenants under the senior unsecured notes as of June
30, 2003.
(b) In March 2000 Duramed refinanced existing notes payable with a
$12,000 note and an $8,000 note payable to Provident Bank.
Provident holds a first mortgage on the Company's Cincinnati,
Ohio manufacturing facility. Both notes are guaranteed by
Solvay America, the parent of Solvay Pharmaceuticals.
The $12,000 note bears interest at the prime rate (4.25% at
June 30, 2003) and requires monthly payments of $100 plus
interest for a ten-year period that commenced on April 1,
2000. The $8,000 note bears interest at the prime rate and
requires monthly payments of $33 plus interest that commenced
on April 1, 2000. Principal payments for the $8,000 note are
based upon a twenty-year amortization with a balloon payment
due on March 1, 2010 of $4,000.
(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 required no principal payment for the first two
quarters; interest payable quarterly thereafter at a rate
equal to the London Interbank Offer Rate (LIBOR) plus 125
basis points; and had a term of 72 months. LIBOR was 1.86% at
June 30, 2002. During December 2002, the Company repaid all
amounts outstanding under this loan.
The Company has a $40,000 revolving credit facility that expires on
February 27, 2005. As of June 30, 2003, there was $29,312 available to
the Company under this facility due to the issuance of a $10,688 letter
of credit in support of the Company's product liability self-insurance
program (see Note 21). The Company pays a fee on the committed portion
of the credit facility equal to 1.00% of the outstanding balance. A fee
of 0.25% is paid on the remainder.
Principal maturities of existing long-term debt for the next five years
and thereafter are as follows:
Year Ending
June 30,
--------
2004 $ 7,029
2005 7,029
2006 5,600
2007 5,600
2008 5,600
Thereafter 6,800
F-24
(13) MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
The following discussion is related to preferred stock issued by
Duramed prior to the merger with Barr.
Series G
On May 12, 2000, the Company completed a private placement of $10,000
of Series G Convertible preferred stock with an institutional investor.
The preferred shares were immediately convertible into shares of the
Company's common stock at a fixed price of $3.37 per share. The
preferred stock paid a dividend of 5% annually, payable quarterly in
arrears, on all unconverted preferred stock. The investor also received
warrants which were valued at $765 to purchase 192,157 shares of common
stock at a price of $14.31 per share, exercisable at any time before
May 12, 2005. In conjunction with the Company's issuance of the Series
G Convertible Preferred Stock, it recorded an adjustment of
approximately $1,300 to properly reflect deemed dividends beyond the
stated 5% dividend rate and a beneficial conversion feature as required
by EITF 98-5 and 00-27. This adjustment, which reduced the carrying
amount of the Series G Convertible Preferred Stock and increased
additional paid-in capital, was being amortized through May 12, 2004
and reflected as additional deemed dividends. On September 24 and 28,
2001, the preferred shares were converted to 303,795 and 455,691
shares, respectively, of common stock pursuant to the original terms of
the preferred stock. At the election of the holder of the preferred
stock, the dividend for the quarter ended September 30, 2001 of $120
was satisfied by the issuance of 9,094 shares of common stock. The
Company recorded both the dividend and the fair market valuation of
$337 associated with the shares issued to satisfy the dividend as
adjustments to additional paid in capital. Additionally, the Company
wrote-off the remaining unamortized deemed dividend valuation
adjustment of $913 and the unamortized Series G warrant valuation of
$500 as adjustments to additional paid in capital.
(14) RELATED-PARTY TRANSACTIONS
Dr. Bernard C. Sherman
During the years ended June 30, 2003, 2002 and 2001, the Company
purchased $3,583, $3,332 and $2,644, respectively, of bulk
pharmaceutical material from companies affiliated with Dr. Bernard C.
Sherman, the Company's largest shareholder and a director until October
24, 2002. In addition, during the years ended June 30, 2003, 2002 and
2001, the Company sold $12,727, $16,472, and $8,279, respectively, of
its pharmaceutical products and bulk pharmaceutical materials to
companies owned by Dr. Sherman. As of June 30, 2003 and 2002, the
Company's accounts receivable included $2,398 and $829, respectively,
due from such companies.
During fiscal 1996, the Company also entered into an agreement with a
company owned by Dr. Sherman to share litigation and related costs in
connection with its Fluoxetine patent challenge. For the years ended
June 30, 2003, 2002 and 2001, the Company recorded $585, $919 and
$2,867, respectively, in connection with such agreement as a reduction
to operating expenses. For the years ended June 30, 2003, 2002, and
2001, the Company recorded $1,440, $176,681, and $0, respectively, as
cost of sales related to this agreement.
As of June 30, 2003 and 2002, the Company's accounts payable included
$648 and $634, respectively, related to transactions with these
entities.
The Company also incurred $55 and $1,290 in expenses in the years ended
June 30, 2002 and 2001, respectively, which were reimbursed by Dr.
Sherman, related to a secondary stock offering, completed in May 2001,
for the sale of 5.25 million shares of the Company's common stock,
beneficially owned by Dr. Sherman.
Edwin A. Cohen
In accordance with the provisions of a consulting agreement, which
expired on June 30, 2002, the Company's founder and former Vice
Chairman, Edwin A. Cohen, earned $200 in each of the years ended June
30, 2002 and 2001.
Harold M. Chefitz
Harold M. Chefitz, a member of the Company's Board of Directors, serves
as the Chairman of GliaMed, Inc., in which the Company has made an
investment of $500 which is accounted for at cost and included in other
assets at June 30, 2003 and 2002.
F-25
William T. McKee
In connection with the Company's investment in GliaMed, Inc., William
T. McKee, the Company's Chief Financial Officer, became a member of
GilaMed's Board of Directors.
(15) INCOME TAXES
A summary of the components of income tax expense is as follows:
Year Ended June 30,
---------------------------------
2003 2002 2001
--------- --------- ---------
Current:
Federal $ 77,615 $ 103,528 $ 37,218
State 10,911 12,719 5,655
--------- --------- ---------
88,526 116,247 42,873
--------- --------- ---------
Deferred:
Federal 9,010 8,981 (3,603)
State (2,387) 90 (556)
--------- --------- ---------
6,623 9,071 (4,159)
--------- --------- ---------
Total $ 95,149 $ 125,318 $ 38,714
========= ========= =========
The provision for income taxes differs from amounts computed by
applying the statutory federal income tax rate to earnings before
income taxes due to the following:
Year Ended June 30,
---------------------------------
2003 2002 2001
--------- --------- ---------
Federal income taxes at statutory rate $ 91,950 $ 118,225 $ 35,628
State income taxes,
net of federal income tax effect 8,207 8,326 3,314
Tax credits (1,000) - -
Other, net (4,008) (1,233) (228)
--------- --------- ---------
$ 95,149 $ 125,318 $ 38,714
========= ========= =========
F-26
The temporary differences that give rise to deferred tax assets and
liabilities as of June 30, 2003 and 2002 are as follows:
2003 2002
---------- ---------
Deferred tax assets:
Net operating loss $ 16,205 $ 26,599
Receivable reserves 24,514 17,282
Inventory 2,680 2,895
Goodwill amortization 2,131 2,736
Warrants issued 6,536 6,350
Tax credit carryforward 4,008 4,159
Capital loss carryforward 3,084 2,997
Amortization of intangibles 3,076 303
Investments 109 -
Other 3,866 2,346
---------- ---------
Total deferred tax assets 66,209 65,667
Deferred tax liabilities:
Plant and equipment (14,631) (9,328)
Proceeds from supply agreement (10,225) (7,243)
Investments - (133)
Other (2,242) (1,030)
---------- ---------
Total deferred tax liabilities (27,098) (17,734)
Less valuation allowance (6,147) (8,455)
---------- ---------
Net deferred tax asset $ 32,964 $ 39,478
========== =========
At June 30, 2003 and 2002, as a result of the merger with Duramed, the
Company had cumulative regular net operating loss carryforwards of
approximately $38,800 and $66,900, respectively, for federal and state
income tax purposes, which will expire in the years 2011 to 2015. There
is an annual limitation on the utilization of the net operating loss
carryforward, which is calculated under Internal Revenue Code Section
382.
The tax credit carryforward is primarily comprised of credits related
to research and development activities that expire in the years 2004 to
2021.
The Company has established a valuation allowance to reduce the
deferred tax asset recorded for certain tax credits, capital loss
carryforwards, and certain net operating loss carryforwards. A
valuation allowance is recorded because based on available evidence, it
is more-likely-than-not that a deferred tax asset will not be realized.
The valuation allowance reduces the deferred tax asset to the Company's
best estimate of the net deferred tax asset that, more-likely-than-not,
will be realized. The valuation allowance will be reduced when and if
the Company determines that the deferred income tax assets are likely
to be realized. Accordingly, during the year ended June 30, 2003, the
Company reduced the valuation allowance by a net of $2,308, due to the
expiration of certain tax credits and after determining that it was
more-likely-than-not that a deferred tax asset related to certain net
operating losses would be realized.
(16) SHAREHOLDERS' EQUITY
Employee Stock Option Plans
The Company has three employee stock option plans, the Barr
Laboratories, Inc. 2002 Stock and Incentive Award Plan (the "2002
Option Plan"), the Barr Laboratories, Inc. 1993 Stock Incentive Plan
(the "1993 Option Plan") and the Barr Laboratories, Inc. 1986 Option
Plan, which were approved by the shareholders and which authorize the
granting of options to officers and employees to purchase the Company's
common stock. On February 20, 2003, all shares available for grant in
the 1993 Option Plan were transferred to the 2002 Option Plan and all
subsequent grants have been made under the 2002 Option Plan. Effective
June 30, 1996, options were no longer granted under the 1986 Option
Plan. For fiscal 2003, 2002 and 2001, there were no options that
expired under this plan.
F-27
All options granted prior to June 30, 1996 under the 1993 Option Plan
and 1986 Option Plan, become 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.
All options outstanding on October 24, 2001 became fully vested upon
completion of the Duramed merger. Options granted after October 24,
2001 are exercisable between one and five years from the date of grant.
Through fiscal 2000, no option had 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. In fiscal
2001, options for 45,000 shares were granted to a key executive as part
of her employment agreement at various prices below the current market
price on the date of grant. The total value of the discount associated
with this grant was $896 and was being amortized over the five-year
vesting period of the options. In fiscal 2001, the amortization of the
discount totaled $281. In fiscal 2002, these options fully vested as
the result of the Duramed merger and the remaining discount of $615 was
expensed. Options granted after February 20, 2003 become exercisable
between one and three years from the date of grant and expire ten years
after the date of grant except in cases of death or termination of
employment.
In addition, the Company has options outstanding under the terms of
various former Duramed plans. These include the 1986 Stock Option Plan
(the "Duramed 1986 Plan"), the 1988 Stock Option Plan (the "1988
Plan"), the 1997 Stock Option Plan (the "1997 Plan"), and the 2000
Stock Option Plan (the "2000 Plan"). All outstanding options under the
Duramed plans, with the exception of options held by certain senior
executives of Duramed, vested as of October 24, 2001, the effective
date of the merger, as provided by the Plan. Such options were assumed
by Barr under the same terms and conditions as were applicable under
the Duramed stock option plans under which the options were granted.
The number of options and related exercise prices have been adjusted to
a Barr equivalent number of options and exercise price pursuant to the
merger. Subsequent to October 24, 2001, additional options are no
longer granted under these Duramed plans.
A summary of the activity for the three fiscal years ended June 30,
2003, adjusted for the March 2003 3-for-2 stock split is as follows:
WEIGHTED-AVERAGE
NO. OF SHARES EXERCISE PRICE
------------- ----------------
Outstanding at July 1, 2000 4,707,456 $ 11.85
Granted 1,241,698 32.55
Canceled (124,637) 20.75
Exercised (760,782) 9.27
-----------
Outstanding at June 30, 2001 5,063,735 17.09
Granted 1,005,013 52.89
Adjustment for pooling (47,577) 21.97
Canceled (83,834) 38.51
Exercised (1,011,755) 14.58
-----------
Outstanding at June 30, 2002 4,925,582 24.64
Granted 1,406,222 40.11
Canceled (138,698) 41.88
Exercised (903,028) 18.85
-----------
Outstanding at June 30, 2003 5,290,078 $ 29.26
===========
Available for Grant (13,378,125 authorized) 4,944,098
Exercisable at June 30, 2001 2,761,049 $ 10.49
Exercisable at June 30, 2002 4,506,530 $ 24.02
Exercisable at June 30, 2003 3,705,318 $ 25.19
F-28
Available for grant and authorized amounts are for the 2002 Option Plan
only, because as of June 30, 2003 options are no longer granted under
any of the other option plans discussed above.
Non-Employee Directors' Stock Option Plans
During fiscal year 1994, the shareholders approved the Barr
Laboratories, Inc. 1993 Stock Option Plan for Non-Employee Directors
(the "1993 Directors' Plan"). All options granted under the 1993
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.
On October 24, 2002, the shareholders approved the Barr Laboratories,
Inc. 2002 Stock Option Plan for Non-Employee Directors (the "2002
Directors' Plan"). This plan, among other things, enhances the
Company's ability to attract and retain experienced directors. On
February 20, 2003, all shares available for grant under the 1993
Directors' Plan were transferred to the 2002 Directors' Plan. As of
June 30, 2003, no options had been granted under the 2002 Directors'
Plan.
Duramed had a Stock Option Plan for Non-employee Directors (the "1991
Duramed Directors' Plan") under which each new non-employee director
was granted, at the close of business on the date he or she first
became a director, options to purchase 3,843 shares of common stock.
Annually, each then serving non-employee director, other than a new
director, was also automatically granted options to purchase 1,921
shares of common stock at a price equal to the closing market price on
the date of grant. Options granted under the 1991 Duramed Directors'
Plan expire 10 years after the date of grant. Subsequent to October 24,
2001, options will no longer be granted under this plan.
WEIGHTED-AVERAGE
NO. OF SHARES EXERCISE PRICE
------------- ----------------
Outstanding at July 1, 2000 628,810 $ 11.69
Granted 90,279 39.48
Cancelled (3,843) 21.67
Exercised (88,313) 11.92
--------
Outstanding at June 30, 2001 626,933 15.61
Granted 135,000 49.95
Adjustment for pooling 15,372 24.61
Cancelled (9,222) 22.35
Exercised (33,372) 12.26
--------
Outstanding at June 30, 2002 734,711 22.15
Granted 67,500 40.14
Canceled (39,513) 49.31
Exercised (309,374) 14.63
--------
Outstanding at June 30, 2003 453,324 $ 27.60
========
Available for grant (1,865,625 authorized) 713,063
Exercisable at June 30, 2001 540,496 $ 11.67
Exercisable at June 30, 2002 599,710 $ 15.89
Exercisable at June 30, 2003 385,809 $ 25.41
Available for grant and authorized amounts are for the 2002 Directors'
Plan and the 1993 Directors' Plan only, because as of June 30, 2003,
options are no longer granted under the 1991 Duramed Directors' Plan.
F-29
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
1,012,500 shares of common stock at approximately 85% of the fair
market value of such shares. Under the Purchase Plan, 77,136, 44,476
and 75,442 shares of common stock were purchased during the years ended
June 30, 2003, 2002 and 2001, respectively.
Warrants
Warrants issued by Duramed prior to the merger with Barr
On September 13, 1996, in connection with the acquisition of the assets
of Hallmark Pharmaceuticals, Inc., the Company issued warrants to
purchase 153,720 shares of the Company's common stock at an exercise
price of $65.05 per share. These warrants were repriced on September
12, 1997 to $26.02 per share. The warrants had a term of five years and
were fully vested as of March 25, 1999. During calendar year 2000,
based on an antidilutive clause in the purchase contract, the exercise
price was adjusted to $22.86 and the number of warrants to purchase
shares of the Company's common stock was adjusted to 174,763. As of
June 30, 2002, these warrants were no longer outstanding.
On June 5, 1997, in connection with the issuance of Series E preferred
stock, the Company granted warrants to purchase 7,686 shares of the
Company's common stock at an exercise price of $11.22 per share. The
warrants vested immediately and, unless exercised, expired on June 5,
2000.
On February 4, 1998, in conjunction with the issuance of Series F
preferred stock, the Company granted warrants to purchase 211,374
shares of the Company's common stock. Of the total amount, warrants for
192,159 shares were issued to investors of the Series F preferred stock
at an exercise price of $14.93 per share. These warrants vested on
October 2, 1998 and were exercised on September 19, 2002 in a cashless
exercise that resulted in the issuance of 125,910 shares of the
Company's common stock. The remaining 19,215 warrants were granted at
an exercise price of $13.58 per share. The warrants vested immediately
and expired on February 4, 2001. As of June 30, 2003, of the remaining
warrants, 16,718 were exercised and 2,497 had expired.
During 1999, in conjunction with an amendment to a financing agreement,
the Company granted to a bank warrants to purchase 42,273 shares of the
Company's common stock at an exercise price of $33.28. These warrants
vested immediately and expire four years from the date of grant. In
December 1999, the financing agreement was amended to reset the
exercise price of 50% of the warrants to $23.43 per share. During 2000,
based on an antidilutive clause in the agreement, the number of
warrants was adjusted to 44,227. The price of 22,284 warrants was
adjusted to $31.57 and the remaining 21,945 warrants were repriced to
$22.55. In November 2001 and January 2002 a total of 38,196 of the
warrants were exercised. As of June 30, 2003, warrants for 6,031 shares
were outstanding with an expiration of July 2009.
On May 12, 2000, in combination with the issuance of Series G preferred
stock, the Company granted warrants to purchase 192,157 common shares
at a price of $14.31 per share. The warrants vested immediately and
expire on May 12, 2005. As of June 30, 2003, all of these warrants
remained outstanding.
DuPont Warrants
In March 2000, the Company issued warrants granting DuPont the right to
purchase 1,125,000 shares of Barr's common stock at $20.89 per share,
and 1,125,000 shares at $25.33 per share, respectively. Each warrant
was immediately exercisable and expires in March 2004. As of June 30,
2003, DuPont has sold its rights to all the warrants to third parties
and none of the warrants have been exercised.
F-30
The following table summarizes information about stock options and
warrants outstanding at June 30, 2003:
Options and Warrants Outstanding Options and Warrants Exercisable
------------------------------------------------------ ----------------------------------
Weighted
Range of Number Average Weighted Number Weighted
Exercise Outstanding Remaining Average Exercisable Average
Prices at June 30, 2003 Contractual Life Exercise Price at June 30, 2003 Exercise Price
------------- ---------------- ---------------- -------------- ---------------- --------------
$ 4.07-$5.06 616,533 1.82 $ 4.54 616,533 $ 4.54
$ 7.67-$10.08 343,233 3.44 $ 8.52 340,391 $ 8.51
$11.55-$18.70 1,844,334 5.28 $15.11 1,719,008 $15.68
$20.17-$31.90 2,317,120 0.87 $23.12 2,316,352 $23.12
$34.15-$40.27 1,955,775 8.49 $38.98 613,279 $37.06
$41.95-$57.37 1,114,595 8.20 $51.61 933,752 $52.58
---------- ----------
8,191,590 6,539,315
========== ==========
(17) SAVINGS AND RETIREMENT PLANS
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 60% of their earnings before or after
taxes, limited to a maximum of $12,000 for pre-tax contributions. The
Company is required, pursuant to the terms of its collective bargaining
agreement, to contribute to each union employee's account an amount
equal to the 2% minimum contribution made by such employee, which
becomes fully-vested at the time of the Company's contribution. The
Company may, at its discretion, make cash contributions equal to 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.
Duramed had a defined contribution plan, the "Duramed Pharmaceuticals,
Inc. 401(k) / Profit Sharing Plan" ("Duramed Plan" or "Plan") available
to all employees. The Plan provided for Duramed to match 50% of
employee contributions to a maximum of 3% of each employee's
compensation. Prior to October 2001, Duramed's matching contribution
was made with Duramed's common stock, as permitted by the Plan. The
Plan also had a profit sharing provision at the discretion of Duramed's
board of directors. Duramed did not make a profit sharing contribution
to the Plan. All full-time employees were eligible to participate in
the deferred compensation and company matching provisions of the Plan.
Employees were immediately vested with respect to the company matching
provisions of the Plan.
On January 1, 2002, the Duramed Plan was merged with the Barr 401(k)
Plan and the participants of the Duramed Plan became eligible for
participation in the Barr 401(k) Plan. The Company's contributions to
the 401(k) Plans were $5,549, $4,790 and $3,304 for the years ended
June 30, 2003, 2002 and 2001, 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 years 2003, 2002 and 2001,
the Company chose to make contributions at the 10% rate to this plan.
As of June 30, 2003 and 2002, the Company had an asset and matching
liability for the Excess Plan of $2,282 and $1,394, respectively.
The Company has an unfunded pension plan covering two non-employee
directors of Duramed who were elected prior to 1998 and who had served
on Duramed's Board for at least five years. At the time of the merger
with Barr, two Duramed directors were eligible to receive benefits. The
plan provides an annual benefit, payable monthly over each director's
life, from the time a participating director ceased to be a member of
the Board, equal to 85% and 60%, respectively, of the director's most
recent annual Board fee, as adjusted annually to reflect changes in the
Consumer Price Index. As of June 30, 2003 and 2002, the Company has
recorded $487 and $490, respectively, as a long-term liability
representing the
F-31
present value of the estimated future benefit obligation to the
eligible directors. The right of a director to receive benefits under
the plan is forfeited if the director engages in any activity
determined by the Board to be contrary to the best interests of the
Company.
(18) OTHER (EXPENSE) INCOME, NET
A summary of other (expense) income, net is as follows:
Year Ended June 30,
---------------------------------
2003 2002 2001
--------- --------- ---------
Net loss on sale of assets $ - $ - $ (302)
Net gain on sale of securities - - 6,671
Litigation settlement - 2,000 -
Bristol-Myers Squibb termination payments - 5,600 -
Write-off of investment (214) - (2,450)
Other 86 56 (271)
--------- --------- ---------
Other (expense) income, net $ (128) $ 7,656 $ 3,648
========= ========= =========
For the year ended June 30, 2001, the net gain on sale of securities
consists primarily of the gain realized on the sale of the investment
in Galen Holdings plc, formerly Warner Chilcott plc.
(19) MERGER-RELATED COSTS
As a result of the Duramed merger, the Company incurred pre-tax
merger-related expenses for the year ended June 30, 2002 of
approximately $31,449, which is included in the consolidated statements
of operations as merger-related costs. Such expenses included
approximately $13,000 in direct transaction costs such as investment
banking, legal and accounting costs, as well as approximately $7,000 in
costs associated with facility and product rationalization and $11,000
in severance costs. Portions of these expenses were not tax deductible.
The severance costs included approximately $7,000 intended to satisfy
the change in control payments under certain previously existing
employment contracts along with the expected cost associated with
terminating approximately 120 former Duramed employees primarily
representing certain manufacturing and general and administrative
functions.
As of June 30, 2002, all of the direct transaction costs and
involuntary termination benefits had been paid and charged against the
liability leaving a remaining liability of approximately $1,600, of
which $700 related to severance and change in control payments and $900
related to facility costs. As of June 30, 2003, the remaining liability
balance of approximately $700 relates to facility costs.
(20) COMMON STOCK REPURCHASE
On September 17, 2001, the Securities and Exchange Commission ("SEC")
issued an Emergency Order permitting companies to initiate common stock
repurchase programs without impacting pooling-of-interests accounting.
As a result, the Company's board of directors authorized the Company to
spend up to $100,000 for such a common stock repurchase program. Such
authorization was limited to the time periods established by the SEC.
On October 12, 2001, the SEC's order expired and the Company's
repurchase program ended. During the period the Company repurchased
15,000 shares of its common stock at a total cost of approximately
$695.
F-32
(21) COMMITMENTS AND CONTINGENCIES
Leases
The Company is party to various 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 $1,875, $1,444 and $2,043 in fiscal 2003, 2002 and 2001,
respectively. The table below shows the future minimum rental payments,
exclusive of taxes, insurance and other costs under noncancellable
long-term lease commitments at June 30, 2003. Such payments total
$25,507 for operating leases. The net present value of such payments on
capital leases was $4,878 after deducting executory costs and imputed
interest of $196 and $1,043, respectively.
Year Ending June 30,
2004 2005 2006 2007 2008 Thereafter
--------------------------------------------------------
Operating leases $1,634 $2,632 $2,064 $2,038 $2,120 $15,019
Capital leases 2,104 1,815 1,517 681 - -
--------------------------------------------------------
Minimum lease payments 3,738 4,447 3,581 2,719 2,120 15,019
--------------------------------------------------------
Business Development Venture
In fiscal 2002, the Company entered into a Loan and Security Agreement
(the "Loan Agreement") with Natural Biologics, the raw material
supplier for the Company's generic equine-based conjugated estrogens
product for which the Company filed an ANDA with the FDA in June 2003.
The Company believes that the raw material is pharmaceutically
equivalent to raw material used to produce Wyeth's Premarin(R). Natural
Biologics is a defendant in litigation brought by Wyeth alleging that
Natural Biologics misappropriated certain Wyeth trade secrets with
respect to the preparation of this raw material. This case was tried in
November 2002, and a decision may be rendered by the trial court at any
time. An unfavorable decision for Natural Biologics could materially
and adversely affect Natural Biologics' ability to repay the loans the
Company has made to it. If that were to be the case, the Company may be
required to write-off all or a portion of the loans made to Natural
Biologics. As of June 30, 2003 and 2002, the Company had loaned Natural
Biologics approximately $14,408 and $4,746, respectively, under this
agreement, including accrued interest, and has included such amount in
other assets on the consolidated balance sheets.
Under the terms of the Loan Agreement, absent the occurrence of a
material adverse event (including an unfavorable court decision in the
Wyeth matter), the Company could loan Natural Biologics up to $35,000
over a three-year period, including $8,300 and $2,800 during fiscal
2004 and 2005, respectively. The Loan Agreement also provides for a
loan of $10,000 based upon the successful outcome of pending legal
proceedings between Wyeth and Natural Biologics, as discussed above.
The loans mature on June 3, 2007, are collateralized by a security
interest in inventory and certain other assets of Natural Biologics and
bear interest at the applicable federal rate as defined by the Loan
Agreement (3.03% at June 30, 2003).
In fiscal 2002, the Company also entered into a Development,
Manufacturing and Distribution Agreement with Natural Biologics which
could obligate the Company to make milestone payments totaling an
additional $35,000 to Natural Biologics based on achieving certain
legal and product approval milestones, including the approval of a
generic product.
Employment Agreements
The Company has entered into employment agreements with certain key
employees. These agreements terminate at various dates through 2006.
F-33
Product Liability Insurance
On September 30, 2002, the Company entered into a finite risk insurance
arrangement (the "Arrangement") with a third party insurer due to the
significant increase in the cost of traditional product liability
insurance. The Company believes that the Arrangement is an effective
way to insure against a portion of potential product liability claims.
In exchange for $15,000 in product liability coverage over a five-year
term, the Arrangement provides for the Company to pay approximately
$14,250 in four equal annual installments of $3,563, with the first
annual payment having been made in October 2002. Included in the
initial payment is an insurer's margin of approximately $1,000, which
is being amortized over the five-year term. At any six-month interval,
the Company may, at its option, cancel the Arrangement. In addition, at
the earlier of termination or expiry, the Company is eligible for a
return of all amounts paid to the insurer, less the insurer's margin
and amounts for any incurred claims. The Company is recording the
payments, net of the insurer's margin, as deposits included in other
assets.
The Company is self-insured for potential product liability claims
between $15,000 and $25,000. The Company has purchased additional
coverage from an insurance carrier that will offer coverage for claims
between $25,000 and $50,000, subject to a $10,000 limitation on some of
the Company's products and an exclusion on others.
Simultaneously with entering into the Arrangement, the Company
exercised the extended reporting period under its previous insurance
policy that provides $10,000 of product liability coverage of unlimited
duration for product liability claims on products sold from September
10, 1987 to September 30, 2002. Additionally, in connection with its
merger with Duramed, the Company purchased a supplemental extended
reporting policy under Duramed's prior insurance policy that provides
$10,000 of product liability coverage for an unlimited duration for
product liability claims on products sold by Duramed between October 1,
1985 and October 24, 2001, and for product liability claims.
The Company has never been held liable for, or agreed to pay, a
significant product liability claim. However, the Company is from time
to time a defendant in several product liability actions. If the
Company incurs defense costs and liabilities in excess of the Company's
self-insurance reserve that are not otherwise covered by insurance, it
could have a material adverse effect on the Company's consolidated
financial statements.
Indemnity Provisions
From time-to-time, in the normal course of business, we agree to
indemnify our suppliers and customers concerning product liability
and other matters.
Litigation Settlement
On October 22, 1999, the Company reached a settlement agreement with
Schein Pharmaceutical, Inc. (now part of Watson Pharmaceuticals, Inc.)
relating to a 1992 agreement regarding the pursuit of a generic
conjugated estrogens product. Under the terms of the settlement, Schein
gave up any claim to rights in Cenestin in exchange for a payment of
$15,000, which was paid to Schein in 1999. An additional $15,000
payment is required under the terms of the settlement if Cenestin
achieves total profits (product sales less product-specific cost of
goods sold, sales and marketing and other relevant expenses) of greater
than $100,000 over any five year or less period prior to October 22,
2014.
Class Action Lawsuits
Ciprofloxacin (Cipro(R))
To date the Company has been named as co-defendants with Bayer
corporation, The Rugby Group, Inc. and others in approximately 38 class
action complaints filed in state and federal courts by direct and
indirect purchasers of Ciprofloxacin (Cipro(R)) from 1997 to the
present. The complaints allege that the 1997 Bayer-Barr patent
litigation settlement agreement was anti-competitive and violated
federal antitrust laws and/or state antitrust and consumer protection
laws. A prior investigation of this agreement by the Texas Attorney
General's Office on behalf of a group of state Attorneys General was
closed without further action in December 2001.
The lawsuits include nine consolidated in California state court, one
in Kansas state court, one in Wisconsin state court, one in Florida
state court, and two in New York state court, with the remainder of the
actions pending in the United States District Court for the Eastern
District of New York for coordinated or consolidated pre-trial
proceedings (the "MDL Case"). Fact discovery in the MDL case is
currently scheduled to close on November 7, 2003, after which the
parties will proceed with expert discovery, followed by anticipated
summary judgment briefing. The direct purchaser and indirect purchaser
plaintiffs also have filed motions for class certification in the MDL
case, but briefing is not complete
F-34
and the Court has indicated that it will defer ruling on the motions at
the present time. The state court actions remain in a relatively
preliminary stage generally, tracked to follow the MDL Case, although
defendants have filed dispositive motions and plaintiffs have moved for
class certification in certain of the cases.
On May 20, 2003, the District Court entered an order in the MDL Case
holding that the Barr-Bayer settlement did not constitute a per se
violation of the antitrust laws and restricting the scope of the legal
theories the plaintiffs could pursue in the case.
The Company believes that our agreement with Bayer Corporation reflects
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
this matter, the Company intends to vigorously defend itself. We
anticipate that this matter may take several years to resolve, but an
adverse judgment could have a material adverse impact on the Company's
consolidated financial statements.
Tamoxifen
To date approximately 31 consumer or third party payor class action
complaints have been filed in state and federal courts against Zeneca,
Inc., AstraZeneca Pharmaceuticals LP and the Company alleging, among
other things, that the 1993 settlement of patent litigation between
Zeneca and the Company violated the antitrust laws, insulated Zeneca
and the Company from generic competition and enabled Zeneca and the
Company to charge artificially inflated prices for Tamoxifen citrate. A
prior investigation of this agreement by the U.S. Department of Justice
was closed without further action.
The Judicial Panel on Multidistrict Litigation has transferred these
cases to the United States District Court for the Eastern District of
New York for pretrial proceedings. On May 13, 2003, the District Court
entered an order dismissing the cases for failure to state a viable
antitrust claim. Plaintiffs have filed a notice of appeal.
The Company believes that its agreement with Zeneca reflects 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 this
matter, the Company intends to vigorously defend itself. It is
anticipated that this matter may take several years to resolve, but an
adverse judgment could have a material adverse impact on the Company's
consolidated financial statements.
Invamed/Apothecon Lawsuit
In February 1998 and May 1999, Invamed, Inc. and Apothecon, Inc.,
respectively, both of which have since been acquired by Geneva
Pharmaceuticals, Inc., which is a subsidiary of Novartis AG, 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 two actions have been consolidated. On
May 10, 2002, the District Court granted summary judgment in the
Company's favor on all antitrust claims in the case, but found that the
plaintiffs could proceed to trial on their allegations that the Company
interfered with an alleged raw material supply contract between Invamed
and Barr's raw material supplier. Invamed and Apothecon have appealed
the District Court's decision to the United States Court of Appeals for
the Second Circuit. Trial on the merits has been stayed pending the
outcome of the appeal.
The Company believes that these suits are without merit and intends to
vigorously defend its position, but an adverse judgment could have a
material impact on the Company's consolidated financial statements.
Desogestrel/Ethinyl Estradiol Suit
In May 2000, the Company filed an Abbreviated New Drug Application
("ANDA") seeking approval from the FDA to market the tablet combination
of desogestrel/ethinyl estradiol tablets and ethinyl estradiol tablets,
the generic equivalent of Organon Inc.'s Mircette(R) oral contraceptive
regimen. The Company notified Bio-Technology General Corp. ("BTG"), the
owner of the patent for the Mircette product, pursuant to the
provisions of the Hatch-Waxman Act and BTG filed a patent infringement
action in the United States District Court for the District of New
Jersey seeking to prevent Barr from marketing the tablet combination.
In December 2001, the United States District Court for the District of
New Jersey granted summary judgment in favor or Duramed, finding that
Barr's product did not infringe the patent at issue in the case. BTG
appealed the District Court's decision. In April 2002, the Company
launched its Kariva(R) product, the generic version of Mircette. In
April 2003, the U.S. Court of Appeals for the Federal Circuit reversed
the District Court's decision granting summary judgment in Duramed's
favor and remanded the case to the District Court for further
F-35
proceedings.
In July, 2003, BTG (now Savient) filed an amended complaint adding
Organon (Ireland) Ltd. and Organon USA as plaintiffs and adding the
Company as a defendant. The amended complaint seeks damages and
enhanced damages based upon willful infringement. The Company believes
that it has not infringed BTG's patent and continues to manufacture and
market Kariva. If BTG and Organon are successful, the Company could be
liable for damages for patent infringement, which could have a material
adverse effect on our consolidated financial statements.
Termination of Solvay Co-Marketing Relationship
On March 31, 2002, Barr's Duramed subsidiary gave notice of its
intention to terminate, as of June 30, 2002, the relationship between
Barr and Solvay Pharmaceuticals, Inc. which covered the joint promotion
of Barr's Cenestin tablets and Solvay's Prometrium(R) capsules. Solvay
has disputed Duramed's right to terminate the relationship and claims
it is entitled to substantial damages and has notified Barr that it has
demanded arbitration of this matter. Discovery is underway and the
arbitration hearing is currently scheduled to begin in January 2004.
The Company believes its actions are well founded but if the Company is
incorrect, an adverse decision in the matter could have a material
adverse impact on the Company's consolidated financial statements.
Lemelson
In November, 2001, the Lemelson Medical, Education & Research
Foundation filed an action in the United States District Court for the
District of Arizona alleging patent infringement against many
defendants, including the Company, involving "machine vision" or
"computer image analysis." In March, 2002, the court stayed the
proceedings, pending the resolution of another suit that involves the
same patents, but does not involve the Company.
Nortrel 7/7/7 Product Recall
On July 9, 2003, the Company initiated a recall of three lots of its
Nortrel 7/7/7 oral contraceptive product after receiving two customer
complaints that the tablets that had been dispensed to them were
misconfigured. The Company has since received reports of pregnancies
from approximately 16 women who claim to have taken the product. The
Company is in the process of investigating whether these women have
taken affected product and whether their pregnancies are related to use
of affected product. The Company anticipates that one or more of these
women will commence formal legal actions against it. The Company does
not have sufficient information at this time to evaluate the likelihood
of success in these matters. However, an unfavorable outcome in one or
more of these matters could have a material adverse effect on the
Company's consolidated financial statements.
PPA Litigation
The Company is a defendant in three personal injury product liability
lawsuits involving phenylproanolamine ("PPA"). All three cases are in
their initial stages. The Company believes it has strong defenses to
all three cases and intends to vigorously defend against them. However,
an unfavorable outcome could have a material adverse effect on the
Company's consolidated financial statements.
MPA Litigation
The Company has been named as a defendant in at least ten personal
injury product liability cases brought against the Company and other
manufacturers by plaintiffs claiming that they suffered injuries
resulting from the use of medroxyprogesterone acetate ("MPA") in
conjunction with Premarin or other hormone therapy products. These
cases are in a preliminary stage and the Company does not know whether
any of these individuals took an MPA product manufactured by the
Company. We intend to vigorously defend against these cases. However,
an unfavorable outcome could have a material adverse effect on our
consolidated financial statements.
Medical Reimbursement Cases
We have learned that we have been named as a defendant in separate
actions brought by the County of Suffolk, New York and Westchester
County, New York against numerous pharmaceutical manufacturers. The
action seeks to recover damages and other relief for alleged
overcharges for prescription medications paid for by Medicaid. We
believe that we have not engaged in any improper conduct and intend to
vigorously defend against the cases. However, an unfavorable outcome
could have a material adverse effect on our consolidated financial
statements.
Other Litigation
As of June 30, 2003, the Company was involved with other lawsuits
incidental to its business, including patent infringement actions and
personal injury claims. Management of the Company, based on the advice
of legal counsel, believes that the ultimate disposition of such other
lawsuits will not have a material adverse effect on the Company's
consolidated financial statements.
F-36
Administrative Matters
On June 30, 1999, the Company received a civil investigative demand
("CID") and a subpoena from the FTC seeking documents and data relating
to the January 1997 agreements resolving the patent litigation
involving ciprofloxacin hydrochloride. The CID was limited to a request
for information and did not allege any wrongdoing. The FTC is
investigating whether Barr, through the settlement and supply
agreements, has engaged in activities in violation of the antitrust
laws. Barr continues to cooperate with the FTC in this investigation.
On August 17, 2001, the Oregon Attorney General's Office, as liaison on
behalf of a group of state Attorneys General, served the Company with a
CID relating to its investigation of our settlement of the Tamoxifen
patent challenge with AstraZeneca. The investigative demand requests
the production of certain information and documents that may assist the
Attorney General in its investigation. The Company is reviewing the
demand and intends to fully cooperate with the Attorney General's
office in its investigation.
The Company believes that the patent challenge settlements being
investigated represent a pro-consumer and pro-competitive outcome to
the patent challenge cases. An investigation of the tamoxifen
settlement by the U.S. Department of Justice and an investigation of
the ciprofloxacin settlement by the Texas Attorney General's Office on
behalf of other state Attorneys General already have been
satisfactorily resolved without further action and we expect these
investigations to be satisfactorily resolved, as well. However,
consideration of these matters could take considerable time, and any
adverse judgment could have a material adverse impact on our
consolidated financial statements.
In May 2001, the Company received a subpoena, issued by the
Commonwealth of Massachusetts Office of the Attorney General, for the
production of documents related to pricing and Medicaid reimbursement
of select products in Massachusetts. Barr is one of a number of
pharmaceutical companies that have received such subpoenas. Barr is
cooperating with the inquiry and believes that all of its product
agreements and pricing decisions have been lawful and proper.
F-37
(22) QUARTERLY DATA (UNAUDITED)
A summary of the quarterly results of operations is as follows:
THREE MONTH PERIOD ENDED
----------------------------------------------------
SEPT. 30 DEC. 31 MAR. 31 JUNE 30
----------------------------------------------------
FISCAL YEAR 2003:
Total revenues $ 220,428 $ 209,035 $ 171,923 $ 301,478
Cost of sales 110,919 94,872 55,182 163,126
Net earnings applicable to common shareholders 41,857 42,747 45,874 37,088
Earnings per common share - diluted (1) (3) $ 0.61 $ 0.63 $ 0.66 $ 0.53
========== ========== ========== ==========
PRICE RANGE OF COMMON STOCK (2) (3)
High $ 48.07 $ 45.15 $ 58.15 $ 66.52
Low 32.93 36.84 43.39 51.40
SEPT. 30 DEC. 31 MAR. 31 JUNE 30
----------------------------------------------------
FISCAL YEAR 2002:
Total revenues $ 352,103 $ 366,090 $ 261,411 $ 209,380
Cost of sales 203,834 227,064 139,142 106,283
Net earnings applicable to common shareholders 70,205 42,091 53,107 44,866
Earnings per common share - diluted (1) (3) $ 1.04 $ 0.61 $ 0.78 $ 0.66
========== ========== ========== ==========
PRICE RANGE OF COMMON STOCK (2) (3)
High $ 60.40 $ 60.00 $ 53.33 $ 48.23
Low 41.33 39.50 41.43 38.87
(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 did not
pay any cash dividends.
(2) The Company's common stock is listed and traded on the New York Stock
Exchange under the symbol "BRL". At June 30, 2003, there were approximately
1,569 shareholders of record of common stock. The Company believes that a
significant number of beneficial owners hold their shares in street name.
(3) Adjusted for the March 17, 2003 3-for-2 stock split effected in the form of
a 50% stock dividend (See Note 1).
F-38
SCHEDULE II
BARR LABORATORIES, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED JUNE 30, 2003, 2002 AND 2001
(IN THOUSANDS)
BALANCE AT ADDITIONS, RECOVERY
BEGINNING COSTS AND AGAINST DEDUCTIONS, POOLING BALANCE AT
OF YEAR EXPENSE WRITE-OFFS WRITE-OFFS ADJUSTMENT END OF YEAR
----------------------------------------------------------------------------------
Allowance for doubtful accounts:
Year ended June 30, 2001 $ 337 $ 80 $ 18 $ 234 $ - $ 201
Year ended June 30, 2002 201 80 - - - 281
Year ended June 30, 2003 281 60 - 52 - 289
Reserve for returns and allowances:
Year ended June 30, 2001 4,754 14,466 - 9,996 - 9,224
Year ended June 30, 2002 9,224 76,935 - 57,136 (44) 28,979
Year ended June 30, 2003 28,979 48,623 - 24,926 - 52,676
Inventory reserves:
Year ended June 30, 2001 14,018 7,691 - 9,270 - 12,439
Year ended June 30, 2002 12,439 12,847 - 15,364 314 10,236
Year ended June 30, 2003 10,236 10,280 - 7,315 - 13,201
S-1
EXHIBIT INDEX
Exhibit
Number Description
------- -----------
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Ernst & Young LLP
31.1 Certification of Bruce L. Downey pursuant to Exchange Act Rules
13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of William T. McKee to Exchange Act Rule 13a-14(a) and
15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
32.0 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized, dated as of August 29,
2003.
BARR LABORATORIES, INC.
By: /s/ Bruce L. Downey
-------------------------
Bruce L. Downey
Chairman of the Board and
Chief Executive Officer