UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For quarterly period ended September 30, 2002 or
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 1-9860
BARR LABORATORIES, INC.
(Exact name of Registrant as specified in its charter)
NEW YORK 22-1927534
(State or Other Jurisdiction of (I.R.S. - Employer
Incorporation or Organization) Identification No.)
TWO QUAKER ROAD, P. O. BOX 2900, POMONA, NEW YORK 10970-0519
(Address of principal executive offices)
845-362-1100
(Registrant's telephone number)
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No | |
<Table>
<Caption>
Number of shares of common stock outstanding as of September 30, 2002: 43,863,830
</Table>
BARR LABORATORIES, INC.
INDEX TO FORM 10-Q
PAGE
PART I FINANCIAL INFORMATION NUMBER
------
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of September 30, 2002 (unaudited)
and June 30, 2002 ............................................... 1
Consolidated Statements of Operations for the three months
ended September 30, 2002 and 2001 (unaudited) ................... 2
Consolidated Statements of Cash Flows for the three months
ended September 30, 2002 and 2001 (unaudited) ................... 3
Notes to Consolidated Financial Statements (unaudited) ............ 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ........................................... 17
Item 3. Quantitative and Qualitative Disclosures About Market Risk ............ 29
Item 4. Controls and Procedures ............................................... 29
PART II OTHER INFORMATION
Item 1. Legal Proceedings ..................................................... 31
Item 2. Changes in Securities and Use of Proceeds ............................. 31
Item 6. Exhibits and Reports on Form 8-K ...................................... 31
Signatures and Rule 13a-14 Certifications ............................. 32
i
BARR LABORATORIES, INC.
Consolidated Balance Sheets
(in thousands, except share amounts)
SEPTEMBER 30,
2002 JUNE 30,
(UNAUDITED) 2002
------------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 355,522 $ 331,257
Marketable securities 5,000 --
Accounts receivable 99,890 103,168
Other receivables 24,133 23,230
Inventories 116,136 151,133
Deferred income taxes 18,208 18,208
Prepaid expenses 13,669 7,852
--------- ---------
Total current assets 632,558 634,848
Property, plant and equipment, net of accumulated depreciation
of $91,610 and $87,419, respectively 180,536 165,522
Deferred income taxes 21,304 21,270
Marketable securities 15,414 15,502
Patents and product licenses, net 27,498 28,200
Goodwill 14,118 13,941
Other assets 11,649 9,271
--------- ---------
Total assets $ 903,077 $ 888,554
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 64,932 $ 110,879
Accrued liabilities 45,773 51,438
Current portion of long-term debt 3,362 3,642
Current portion of capital lease obligations 1,602 1,695
Income taxes payable 30,080 9,801
--------- ---------
Total current liabilities 145,749 177,455
Long-term debt 37,257 37,657
Long-term capital lease obligations 4,670 4,977
Other liabilities 2,347 1,933
Commitments & Contingencies
Shareholders' equity:
Preferred stock $1 par value per share; authorized 2,000,000; none issued
Common stock $.01 par value per share; authorized 100,000,000;
issued 44,050,762 and 43,792,170, respectively 441 438
Additional paid-in capital 296,354 291,637
Retained earnings 416,923 375,066
Accumulated other comprehensive income 44 99
--------- ---------
713,762 667,240
Treasury stock, at cost: 186,932 shares (708) (708)
--------- ---------
Total shareholders' equity 713,054 666,532
--------- ---------
Total liabilities and shareholders' equity $ 903,077 $ 888,554
========= =========
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
1
BARR LABORATORIES, INC.
Consolidated Statements of Operations
(in thousands, except per share amounts)
(unaudited)
THREE MONTHS ENDED
SEPTEMBER 30,
2002 2001
--------- --------
Revenues:
Product sales $ 218,716 $346,395
Development and other revenue 1,712 5,708
--------- --------
Total revenues 220,428 352,103
Costs and expenses:
Cost of sales 110,919 203,834
Selling, general and administrative 31,312 27,647
Research and development 21,138 17,561
--------- --------
Earnings from operations 57,059 103,061
Proceeds from patent challenge settlement 8,563 7,938
Interest income 1,497 1,837
Interest expense 448 1,291
Other (income) expense (34) 13
--------- --------
Earnings before income taxes 66,705 111,532
Income tax expense 24,848 39,377
--------- --------
Net earnings 41,857 72,155
Preferred stock dividends -- 457
Deemed dividend on convertible preferred stock -- 1,493
--------- --------
Net earnings applicable to common shareholders $ 41,857 $ 70,205
========= ========
Earnings per common share $ 0.96 $ 1.65
========= ========
Earnings per common share - assuming dilution $ 0.92 $ 1.56
========= ========
Weighted average shares 43,721 42,442
========= ========
Weighted average shares - assuming dilution 45,565 44,926
========= ========
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
2
BARR LABORATORIES, INC.
Consolidated Statements of Cash Flows
For the Three Months Ended September 30, 2002 and 2001
(in thousands of dollars)
(unaudited)
2002 2001
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 41,857 $ 72,155
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization 4,949 3,697
Deferred income tax benefit -- (1,301)
Other (18) 137
Tax benefit of stock incentive plans 844 --
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable and other receivables, net 2,375 (104,000)
Inventories 34,997 (165)
Prepaid expenses 1,190 (5,885)
Other assets (2,594) 682
Increase (decrease) in:
Accounts payable, accrued liabilities and other liabilities (58,205) 92,351
Income taxes payable 20,279 34,088
--------- ---------
Net cash provided by operating activities 45,674 91,759
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (19,111) (5,929)
Purchases of marketable securities, net (5,000) --
--------- ---------
Net cash used in investing activities (24,111) (5,929)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt and capital leases (1,174) (1,569)
Net borrowings under line of credit -- (12,419)
Purchase of treasury stock -- (695)
Proceeds from exercise of stock options and employee stock purchases 3,876 6,331
Dividends paid on preferred stock -- (11)
--------- ---------
Net cash provided by (used in) financing activities 2,702 (8,363)
--------- ---------
Increase in cash and cash equivalents 24,265 77,467
Cash and cash equivalents at beginning of period 331,257 222,343
--------- ---------
Cash and cash equivalents at end of period $ 355,522 $ 299,810
========= =========
SUPPLEMENTAL CASH FLOW DATA:
Cash paid during the period:
Interest, net of portion capitalized $ 27 $ 639
========= =========
Income taxes $ 3,725 $ 5,605
========= =========
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
3
BARR LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
1. BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The unaudited consolidated financial statements of Barr Laboratories, Inc.
and subsidiaries ("Barr" or "the Company") are prepared in conformity with
accounting principles generally accepted in the United States. In the
opinion of management, all adjustments necessary for a fair presentation
of the financial position and results of operations for the periods
presented have been included. These unaudited consolidated financial
statements should be read in conjunction with the audited consolidated
financial statements of the Company for the year ended June 30, 2002,
included in the annual report on Form 10-K filed by the Company with the
Securities and Exchange Commission (the "SEC") on August 26, 2002. The
consolidated financial statements include the accounts of the Company and
its subsidiaries. All intercompany transactions have been eliminated.
Management believes that, along with the following information, the
disclosures are adequate to make the information presented herein not
misleading. Certain prior year amounts have been reclassified to conform
to the current presentation. The results of operations for the three
months ended September 30, 2002, may not be indicative of the results to
be expected for the fiscal year ending June 30, 2003.
2. BUSINESS COMBINATION
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
replacement therapy markets. Under the terms of the merger agreement,
Duramed common shareholders received a fixed exchange ratio of 0.2562
shares of Barr common stock for each share of Duramed common stock.
Duramed preferred stock shareholders received 5.0632 shares of Barr common
stock for each share of Duramed preferred stock. Based on these terms,
Barr issued approximately 7.5 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 1.2 million shares of the Company's common stock.
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 and pursuant to Regulation S-X of the Securities and Exchange
Commission, for the three months ended September 30, 2001, all financial
data of the Company presented in these financial statements has been
restated to include the historical financial data of Duramed.
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
4
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.
The Company's statements of operations and cash flows for the three months
ended September 30, 2001 were combined with Duramed's statements of
operations and cash flows for the three months ended September 30, 2001.
3. ESTIMATES AND CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to
make estimates and assumptions that affect the amounts reported in the
financial statements and the related notes to the financial statements.
The methods, estimates and judgments the Company uses in applying the
accounting policies most critical to its financial statements have a
significant impact on the results reported in the Company's financial
statements. The U.S. Securities and Exchange Commission has defined the
most critical accounting policies as the ones that are most important to
the portrayal of the Company's financial condition and results, and
require the Company to make its most difficult and subjective judgments.
Based on this definition, the Company's most critical policies include:
provisions for estimated sales returns and allowances; accrual of
inventory reserves; deferred taxes; accrual for litigation; and the
assessment of recoverability of goodwill and other intangible assets. The
Company also has other key accounting policies, including policies for
revenue recognition. The Company believes that these other policies either
do not generally require it to make estimates and judgments that are as
difficult or as subjective, or it is less likely that they would have a
material impact on the Company's reported results of operations for a
given period. Although the Company believes that its estimates and
assumptions are reasonable, they are based upon information presently
available. Actual results may differ significantly from the Company's
estimates and such estimates could be different using different
assumptions or conditions.
The Company summarizes its most critical accounting policies below:
Sales returns and allowances
When the Company recognizes revenue from the sale of its pharmaceutical
products, it simultaneously records an estimate of various costs that
reduce product sales. These costs include estimates for product returns,
rebates, chargebacks and other sales allowances. In addition, as discussed
in detail below, the Company may record allowances for shelf-stock
adjustments when the conditions are appropriate. The Company bases its
estimates for sales allowances such as product returns, rebates and
chargebacks on a variety of factors including actual return experience of
other products, rebate agreements for each product, and estimated sales by
its wholesale customers to other third parties with whom the Company has
contracts. Actual experience associated with any of these items may differ
materially from the Company's estimates. The Company 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.
5
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
reduce a customer's inventory cost to better reflect current market prices
and is often used by the Company to maintain our 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. The Company records allowances for
shelf-stock adjustments at the time it sells products that it believes
will be subject to a price decrease. 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 date 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. The Company regularly monitors these and
other factors for its significant products and evaluates its reserves and
estimates as additional information becomes available.
Accounts receivable are presented net of allowances relating to the above
provisions of $95,867 and $93,789 at September 30, 2002 and June 30, 2002,
respectively.
Inventory reserves
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 such circumstances, including when product is
close to expiration and is not expected to be sold, when product has
reached its expiration date, or when a batch of product is not expected to
be saleable based on the Company's quality assurance 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 changes in inventory reserves as part of cost
of goods sold.
Deferred taxes
Income taxes are accounted for under Statement of Financial Accounting
Standards ("SFAS") No. 109, "Accounting for Income Taxes". Under this
method, deferred tax assets and liabilities are recognized for the
expected future tax consequences of temporary 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 which are "more-likely-than-not" to be unrealized. The
recoverability of deferred tax assets is dependent
6
upon the Company's assessment of whether it is more-likely-than-not that
sufficient future taxable income will be generated in the relevant tax
jurisdiction to utilize the deferred tax asset. The Company reviews its
internal forecasted sales and pre-tax earnings estimates to make its
assessment about the utilization of deferred tax assets. In the event the
Company determines that future taxable income will not be sufficient to
utilize the deferred tax asset, a valuation allowance will be recorded. If
that assessment changes, a charge or a benefit would be recorded on the
statement of operations.
Litigation
The Company is subject to litigation in the ordinary course of business
and also to certain other contingencies (See Note 15). Legal fees and
other expenses related to litigation and contingencies are recorded as
incurred. Additionally, the Company assesses, in consultation with its
counsel, the need to record a liability for litigation and contingencies
on a case-by-case basis. Reserves are recorded when the Company, in
consultation with counsel, determines that a loss related to a matter is
both probable and reasonably estimable.
Goodwill and 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. Valuation of
intangible assets is generally based on the estimated cash flows related
to 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 SFAS No. 142 "Goodwill and Other Intangible Assets" ("SFAS 142"), the
Company reviews goodwill for impairment annually or more frequently if
impairment indicators arise.
4. ADOPTION OF NEW ACCOUNTING STANDARD
Goodwill and Other Intangible Assets
In July 2001, the FASB issued SFAS 142, which 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 will
identify its reporting units and determine the carrying value of each
7
reporting unit by assigning the assets and liabilities, including the
existing goodwill and intangible assets, to those reporting units. Under
SFAS 142, to the extent a reporting unit's carrying amount exceeds its
fair value, an indication exists that the reporting unit's goodwill may be
impaired. The Company has until December 31, 2002 to complete the first
step. The second step of the goodwill impairment test, if required, must
be completed by June 30, 2003, and measures the amount of the impairment
loss (measured as of the beginning of the year of adoption), if any. The
Company expects to complete the steps in accordance with these guidelines.
Any impairment loss resulting from the transitional impairment tests will
be reflected as a cumulative effect of a change in accounting principle.
The Company does not expect the implementation of SFAS 142 to have a
material effect on its results of operations or financial position.
5. CASH AND CASH EQUIVALENTS
Cash equivalents consist of short-term, highly liquid investments,
including market auction securities 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 September 30, 2002 and June 30, 2002, approximately $29,857 and
$84,834, respectively, of the Company's cash was held in an
interest-bearing escrow account. Such amounts represent the portion of the
Company's payable balance with AstraZeneca Pharmaceuticals LP
("AstraZeneca"), which the Company has decided to secure in connection
with its cash management policy. The Company pays AstraZeneca a monthly
fee based on a rate multiplied by the average unsecured monthly payable
balance for Tamoxifen purchased by the Company from AstraZeneca. On August
21, 2002, the Company's supply agreement with AstraZeneca expired. Other
than product on order as of August 21, 2002, the Company has not ordered
additional Tamoxifen product and no additional amounts have been deposited
in the escrow account.
6. OTHER RECEIVABLES
Other receivables consist primarily of patent challenge settlement
receivables and receivables related to development and other revenue (See
Note 12).
7. INVENTORIES
Inventories consist of the following:
September 30, June 30,
2002 2002
------------- --------
Raw materials and supplies $ 44,836 $ 43,952
Work-in-process 13,497 12,897
Finished goods 57,803 94,284
-------- --------
Total $116,136 $151,133
======== ========
8
Tamoxifen Citrate, purchased as a finished product, accounted for
approximately $26,211 and $69,655 of finished goods inventory as of
September 30, 2002 and June 30, 2002, respectively. The September 30, 2002
finished goods balance reflects reduced Tamoxifen inventory levels as the
result of the expiration of the Company's supply agreement with
AstraZeneca on August 21, 2002 (See Note 5).
8. ASSET HELD FOR SALE
As of September 30, 2002, a redundant manufacturing facility with a
carrying amount of $2,328 was held for sale and was included in property,
plant and equipment, net. The Company has not recorded depreciation
expense for the building since July 2002, when the decision to sell the
building was made.
9. RELATED PARTIES
Dr. Bernard C. Sherman
During the three months ended September 30, 2002 and 2001, the Company
purchased $913 and $1,125, respectively, of bulk pharmaceutical material
from companies affiliated with Dr. Bernard C. Sherman, the Company's
largest beneficial shareholder and a former member of the Board of
Directors. In addition, during the three months ended September 30, 2002
and 2001, the Company sold $2,639 and $4,826, respectively, of certain of
its pharmaceutical products and bulk pharmaceutical materials to companies
owned by Dr. Sherman. As of September 30, 2002, the Company's accounts
receivable included $713 due as a result of such transactions.
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 three months
ended September 30, 2002 and 2001, the Company recorded $125 and $641,
respectively, in connection with such agreement as a reduction to
operating expenses. Included in cost of sales for the three months ended
September 30, 2002 and 2001 is approximately $388 and $84,697,
respectively, for the related party's share of Fluoxetine profits as
defined in the profit sharing agreement.
10. INTANGIBLE ASSETS
Goodwill of $14,118 and $13,941 at September 30, 2002 and June 30, 2002,
respectively, was attributable to the June 2002 acquisition of certain
assets and assumption of certain liabilities of Enhance Pharmaceuticals,
Inc.
9
Intangible assets, excluding goodwill, which are comprised primarily of
patents and product licenses, consist of the following:
September 30, June 30,
2002 2002
------------- --------
Patents $ 1,400 $ 1,400
Product licenses 26,800 26,800
-------- -------
28,200 28,200
Less: accumulated amortization (702) --
-------- -------
Intangible assets, net $ 27,498 $28,200
======== =======
Estimated amortization expense on patents and product licenses is as
follows:
Year Ending
June 30,
-----------
2003 $ 2,820
2004 2,820
2005 2,820
2006 2,820
2007 2,820
The Company's current patents and product licenses have a weighted average
useful life of approximately ten years.
11. LONG-TERM DEBT
The Company has a $40,000 revolving credit facility that expires on
February 27, 2005. As of September 30, 2002, there was approximately
$29,400 available to the Company under this facility due to the issuance
of a $10,600 letter of credit in support of outstanding premiums on the
Company's product liability insurance (See Note 15).
12. DEVELOPMENT AND OTHER REVENUE
For the three months ended September 30, 2001, development and other
revenue consists primarily of amounts received from DuPont Pharmaceuticals
Company ("DuPont") for various development and co-marketing agreements
entered into in March 2000. DuPont has since been acquired by
Bristol-Myers Squibb ("BMS") and the March 2000 agreements that generated
these revenues were terminated in April 2002.
For the three months ended September 30, 2002, development and other
revenue includes royalty income earned under licensing agreements with
other unrelated third parties, a development agreement with the U.S.
Department of Defense, and a development agreement related to the
Company's vaginal ring products.
10
13. EARNINGS PER SHARE
The following is a reconciliation of the numerators and denominators used
to calculate earnings per common share ("EPS") in the Consolidated
Statements of Operations:
FOR THE THREE
MONTHS ENDED
SEPTEMBER 30,
Share amounts in thousands 2002 2001
------- -------
EARNINGS PER COMMON SHARE:
Net earnings applicable to common shareholders $41,857 $70,205
(numerator)
Weighted average shares (denominator) 43,721 42,442
Net earnings applicable to common shareholders $ 0.96 $ 1.65
======= =======
EARNINGS PER COMMON SHARE - ASSUMING DILUTION:
Net earnings applicable to common shareholders $41,857 $70,205
(numerator)
Weighted average shares 43,721 42,442
Effect of dilutive options 1,844 2,484
------- -------
Weighted average shares - assuming dilution (denominator) 45,565 44,926
Net earnings applicable to common shareholders $ 0.92 $ 1.56
======= =======
2002 2001
------- -------
Not included in the calculation of diluted earnings per share
because their impact is antidilutive:
Stock options outstanding 844 296
Preferred if converted -- 1,013
14. COMPREHENSIVE INCOME
Comprehensive income is defined as the total change in shareholders'
equity during the period other than from transactions with shareholders.
For the Company, comprehensive income is comprised of net income and the
net changes in unrealized gains and losses on securities classified for
SFAS No. 115 purposes as "available for sale." Total comprehensive income
for the three months ended September 30, 2002 and 2001 was $41,802 and
$72,085 respectively.
11
15. COMMITMENTS AND CONTINGENCIES
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 its generic conjugated estrogens product. 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. This trial began in November
2002. Under the terms of the Loan Agreement, absent the occurrence of a
material adverse event as defined, the Company could loan Natural
Biologics up to $35,000 over a three-year period, including an additional
$7,030 during fiscal 2003, and $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, which could occur in fiscal 2003. The loans
mature on June 3, 2007. An adverse decision in the Natural Biologics
litigation described above may require the Company to write-off all or a
portion of the loans. As of September 30, 2002, the Company had loaned
Natural Biologics approximately $6,870 under this agreement, and has
included the amount of the loan in other assets.
In fiscal 2002, the Company entered into a Development, Manufacturing and
Distribution Agreement with Natural Biologics which could obligate the
Company to make milestone payments totaling $35,000 to Natural Biologics
based on achieving certain legal and product approval milestones,
including the approval of a generic product.
Funding of Employee Savings Plan
On September 27, 2002, the Company committed to make a minimum aggregate
contribution of $9,200 to the Barr Laboratories, Inc. Savings and
Retirement Plan for the fiscal year ending June 30, 2003. The Company has
funded $2,200 of the contribution commitment and has recorded an asset and
a matching liability equal to the remaining contribution commitment.
Product Liability Insurance
Due to the significant increase in the cost of product liability
insurance, on September 30, 2002, the Company entered into a finite risk
insurance arrangement (the "Arrangement") with a third party insurer. The
Company believes that the Arrangement is the most 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 a premium of approximately
$14,250 in four equal annual installments of $3,563 beginning on October
1, 2002. Included in the initial premium payment is an insurer's margin of
approximately $1,000, which will be 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 premiums paid to the insurer, less
the insurer's margin and amounts for
12
any incurred claims. The Company is recording the premium payments, net of
the insurer's margin, as deposits included in other assets.
The Company continues to be self-insured for potential product liability
claims between $15,000 and $25,000. The Company has purchased additional
coverage for product liability claims related to certain products from
$25,000 to $50,000.
No significant product liability claim has ever been paid by the Company.
However, if a claim was filed and the Company was not successful in the
defense of the suit, it could have a material adverse effect on the
business and financial condition of the Company to the extent any loss
from such judgment was self-insured or exceeded policy limits.
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 relinquished
any claim to rights in Cenestin in exchange for a payment of $15,000,
which the Company 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 38 class action
complaints filed in state and federal courts by direct and indirect
purchasers of Ciprofloxacin (Cipro(R)) since 1997. The complaints allege
that the 1997 Bayer-Barr patent litigation settlement agreement was in
violation of federal antitrust laws and/or state antitrust and consumer
protection laws on the grounds that the agreement was allegedly
anti-competitive. 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.
Tamoxifen
To date, approximately 33 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. The complaints
allege, among other things, that the 1993 settlement of patent litigation
between Zeneca, Inc. and the Company violates the antitrust laws,
insulates Zeneca, Inc. and the Company from generic competition and
enables Zeneca, Inc. 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.
13
The Company believes that each of its agreements with Bayer Corporation
and Zeneca, Inc., respectively, is a valid settlement to a patent suit and
cannot form the basis of an antitrust claim. Although it is not possible
to forecast the outcome of these matters, the Company intends to
vigorously defend itself. It is anticipated that these matters may take
several years to be resolved but an adverse judgment could have a material
adverse impact on the Company's consolidated financial statements.
Invamed, Inc./Apothecon, Inc. 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. 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. On December 17, 2001,
the United States District Court for the District of New Jersey granted
summary judgment in favor of Barr, finding that Barr's product did not
infringe the patent at issue in the case. Subsequently, the patent holder
filed an appeal of the lower court's ruling. On April 8, 2002, the FDA
granted final approval for Barr's application and Barr launched its
product. If the patent holder's appeal is successful, the Company could be
liable for damages for patent infringement, which could have a material
adverse impact on the Company's consolidated financial statements.
Adderall Trade Dress Infringement Suit
On May 1, 2002, Shire Richwood Inc. ("Shire") filed a lawsuit in the
United States District Court for the District of New Jersey against Barr
claiming that Barr's Dextro Salt Combo product uses trade dress that is
unlawfully similar in appearance to that of Shire's Adderall(R) product.
The Company believes that this lawsuit is without merit. Shire sought a
preliminary injunction to restrain Barr from using the trade dress and to
have Barr recall from the marketplace any product sold in such trade
dress. On August 29, 2002, the District Court issued an order denying
Shire's request for a preliminary injunction, which
14
Shire has appealed. The Company does not expect the on-going litigation to
cause any disruption in the manufacturing and sale of its Dextro Salt
Combo product or to affect the status of product currently in the
marketplace. However, if Shire is successful on appeal and an injunction
is granted or damages are awarded, it could have a material adverse impact
on the Company's consolidated financial statements.
Termination of Solvay Co-Marketing Relationship
On March 31, 2002, the Company gave notice of its intention to terminate
on June 30, 2002 the relationship between the Company and Solvay
Pharmaceuticals, Inc. ("Solvay") which covered the joint promotion of the
Company's Cenestin(R) tablets and Solvay's Prometrium(R) capsules. Solvay
has disputed the Company's right to terminate the relationship, claims it
is entitled to substantial damages and has notified the Company that it
has demanded arbitration of this matter. The Company believes its actions
are well founded, but if the Company is incorrect, the matter could have a
material adverse impact on the Company's consolidated financial
statements.
Lemelson
On November 23, 2001, the Lemelson Medical, Education & Research
Foundation, LP 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." On March 20, 2002, the court stayed the proceedings, pending
the resolution of another suit that involves the same patents, but does
not involve the Company. If Lemelson prevails in its action against the
Company, it could have a material adverse impact on the Company's
consolidated financial statements.
Other Litigation
As of September 30, 2002, the Company was involved with other lawsuits
incidental to its business, including patent infringement actions and
product liability claims. Management, 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.
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, which had been pending in the U.S. District
Court for the Southern District of New York. The CID was limited to a
request for information and did not allege any wrongdoing. The FTC is
investigating whether the Company, through the settlement and supply
agreements, has engaged in activities in violation of the antitrust laws.
The Company 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
civil investigative demand relating to its investigation of the Company's
settlement of the Tamoxifen patent challenge with
15
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's patent challenge settlement agreements relating to
Ciprofloxacin and Tamoxifen have been the subject of investigations by
state and federal antitrust enforcement agencies: the Texas Attorney
General initiated, and closed, an investigation into the Ciprofloxacin
settlement on behalf of several state Attorneys General; and the U.S.
Department of Justice initiated, and closed, an investigation into the
Tamoxifen settlement. The two investigations discussed in the paragraphs
above remain open.
The Company believes that the patent challenge settlements being
investigated represent a pro-consumer and pro-competitive outcome to the
patent challenge cases. The Company believes that once all the facts are
considered, and the benefits to consumers are assessed, these
investigations will be satisfactorily resolved as they have been by the
DOJ, regarding Tamoxifen, and the Texas Attorney General, regarding
Ciprofloxacin. However, consideration of these matters could take
considerable time, and any adverse judgment could have a material adverse
impact on the Company's 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. The Company is one of a number of pharmaceutical
companies that have received such subpoenas. The Company is cooperating
with the inquiry and believes that all of its product agreements and
pricing decisions have been lawful and proper.
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ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(dollars in thousands)
FORWARD-LOOKING STATEMENTS
The following sections contain a number of forward-looking statements. To the
extent that any statements made in this report contain information that is not
historical, these statements are essentially forward-looking. Forward-looking
statements can be identified by their use of words such as "expects," "plans,"
"will," "may," "anticipates," "believes," "should," "intends," "estimates" and
other words of similar meaning. These statements are subject to risks and
uncertainties that cannot be predicted or quantified and, consequently, actual
results may differ materially from those expressed or implied by such
forward-looking statements. Such risks and uncertainties include: the difficulty
in predicting the timing and outcome of legal proceedings, including those
relating to patent challenge settlements and patent infringement cases; the
difficulty of predicting the timing of U.S. Food and Drug Administration, or
FDA, approvals; court and FDA decisions on exclusivity periods; the ability of
competitors to extend exclusivity periods past initial patent terms; market and
customer acceptance and demand for our pharmaceutical products; reimbursement
policies of third party payors; our ability to market our proprietary products;
the successful integration of acquired businesses and products into our
operations; the use of estimates in the preparation of our financial statements;
the impact of competitive products and pricing; the ability to develop and
launch new products on a timely basis; the availability of raw materials; the
availability of any product we purchase and sell as a distributor; the
regulatory environment; fluctuations in operating results, including spending
for research and development, sales and marketing and patent challenge
activities; and other risks detailed from time-to-time in our filings with the
Securities and Exchange Commission.
OVERVIEW
We operate in one business segment, which is the development, manufacture and
marketing of pharmaceutical products. As discussed in Note 2 to the consolidated
financial statements, on October 24, 2001, we completed our merger with Duramed
Pharmaceuticals, Inc. ("Duramed"). The merger was treated as a tax-free
reorganization and was accounted for as a pooling-of-interests for financial
reporting purposes.
Financial data presented in these financial statements for the three months
ended September 30, 2001 have been restated to include Duramed's historical
financial data for that period. Both our statement of operations and statement
of cash flows for the three months ended September 30, 2001 were combined with
Duramed's statement of operations and statement of cash flows, respectively, for
the three months ended September 30, 2001.
17
CRITICAL ACCOUNTING POLICIES
The methods, estimates and judgments we use in applying the accounting policies
most critical to our financial statements have a significant impact on the
results we report in our financial statements. The U.S. Securities and Exchange
Commission has defined the most critical accounting policies as the ones that
are most important to the portrayal of our financial condition and results, and
require us to make our most difficult and subjective judgments. Based on this
definition, our most critical policies include: provisions for estimated sales
returns and allowances; accrual of inventory reserves; deferred taxes; accrual
for litigation; and the assessment of recoverability of goodwill and other
intangible assets. We also have other key accounting policies including policies
for revenue recognition. We believe that these other policies either do not
generally require us to make estimates and judgments that are as difficult or as
subjective, or it is less likely that they would have a material impact on our
reported results of operations for a given period. Although we believe that our
estimates and assumptions are reasonable, they are based upon information
presently available. Actual results may differ significantly from our estimates
and our estimates could be different using different assumptions or conditions.
Our critical accounting polices are as follows:
Sales Returns and Allowances
When we recognize revenue from the sale of our pharmaceutical products, we
simultaneously record an estimate of various costs which reduce product sales.
These costs include estimates for product returns, rebates, chargebacks and
other sales allowances. In addition, as discussed in detail below, we may record
allowances for shelf-stock adjustments when the conditions are appropriate. We
base our estimates for sales allowances such as product returns, rebates and
chargebacks on a variety of factors including actual return experience of other
products, rebate agreements for each product, and estimated sales by our
wholesale customers to other third parties who have contracts with us. Actual
experience associated with any of these items may differ materially from our
estimates. We review the factors that influence our estimates and, if necessary,
make adjustments when we believe actual product returns, credits and other
allowances may differ from established reserves.
We often issue 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 us under invoices for future product deliveries. The
shelf-stock adjustment is intended to reduce a customer's inventory cost to
better reflect current market prices and is often used by us to maintain our
long-term customer relationships. The determination to grant a shelf-stock
credit to a customer following a price decrease is usually at our discretion
rather than contractually required. We record allowances for shelf-stock
adjustments at the time we sell products that we believe will be subject to a
price decrease. When determining whether to record a shelf-stock adjustment and
the amount of any such adjustment, we analyze several variables including the
estimated launch date 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
18
on a product's unique facts and circumstances. We regularly monitor these and
other factors for our significant products and evaluate our reserves and
estimates as additional information becomes available.
Inventory Reserves
We establish reserves for our inventory to reflect those conditions when the
cost of the inventory is not expected to be recovered. We review such
circumstances including when product is close to expiration and is not expected
to be sold, when product has reached its expiration date, or when a batch of
product is not expected to be saleable based on our quality assurance 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. We monitor inventory levels, expiry dates and
market conditions on a regular basis. We record changes in inventory reserves as
part of cost of goods sold.
Deferred Taxes
Income taxes are accounted for under Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes". Under this method, deferred tax
assets and liabilities are recognized for the expected future tax consequences
of temporary 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. The recoverability of deferred tax assets
is dependent upon our assessment of whether it is more-likely-than-not that
sufficient future taxable income will be generated in the relevant tax
jurisdiction to utilize the deferred tax asset. We review our internal
forecasted sales and pre-tax earnings estimates to make our assessment about the
utilization of deferred tax assets. In the event we determine that future
taxable income will not be sufficient to utilize the deferred tax asset, a
valuation allowance will be recorded. If that assessment changes, a charge or a
benefit would be recorded on the statement of operations.
Litigation
We are subject to litigation in the ordinary course of business and also to
certain other contingencies (See Note 15 to the Consolidated Financial
Statements). Legal fees and other expenses related to litigation and
contingencies are recorded as incurred. Additionally, we assess, in consultation
with counsel, the need to record a liability for litigation and contingencies on
a case-by-case basis. Reserves are recorded when we, in consultation with
counsel, determine that a loss related to a matter is both probable and
reasonably estimable.
Goodwill and Intangible Assets
In connection with acquisitions, we determine 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. Valuation of intangible assets is generally based on
the estimated cash flows related to 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
19
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 SFAS 142 "Goodwill and Other
Intangible Assets", we will review goodwill annually or more frequently if
impairment indicators arise.
As the result of the June 2002 purchase of certain assets and assumption of
certain liabilities of Enhance Pharmaceuticals, Inc., we have approximately
$14,118 of goodwill and $27,498 of intangible assets, net on our balance sheet
as of September 30, 2002.
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 2002 AND SEPTEMBER 30, 2001
Revenues -- Overview
Total revenues for the three months ended September 30, 2002 were $220,428, a
decrease of 37% from $352,103 of total revenues in the three months ended
September 30, 2001. The decrease in total revenues was anticipated and was
primarily due to the sharp decline in sales of our Fluoxetine product (the
generic equivalent of Eli Lilly's Prozac(R)), and, to a lesser extent, a
decrease in sales of Tamoxifen. Partially offsetting the decline in sales of
Fluoxetine and Tamoxifen was a 73% increase in sales of other products, led by
our oral contraceptive franchise of products, our Dextro Salt Combo (a generic
equivalent of Shire Richwood, Inc.'s Adderall(R)), and Warfarin Sodium.
Revenues -- Product Sales
In August 2001, we launched our Fluoxetine 20 mg capsule. Sales of Fluoxetine
were $175,021 for the three months ended September 30, 2001, constituting
approximately 51% of product sales in that quarter. On January 29, 2002, our
180-day generic exclusivity period on the Fluoxetine 20 mg capsules ended and,
as expected, the FDA approved several other generic versions. As a result, the
selling price declined dramatically and we lost market share to competing
products, causing our sales and profits from Fluoxetine to be substantially
lower than those earned during the exclusivity period. As a result of these
declines, for the three months ended September 30, 2002, sales of Fluoxetine
were less than 1% of product sales.
Tamoxifen sales decreased 15% from $89,884 for the three months ended September
30, 2001 to $75,963 for the three months ended September 30, 2002. The decrease
in sales is due to a decrease in units sold, partially offset by price
increases. The decrease in the number of units sold is primarily attributable to
a change in buying patterns for our most significant customers.
Sales of products other than Fluoxetine and Tamoxifen increased 73% from $81,490
for the three months ended September 30, 2001 to $140,892 for the three months
ended September 30, 2002. The increase was primarily attributable to increased
sales of our oral contraceptive products, our Dextro Salt Combo and Warfarin
Sodium. Sales of oral contraceptives increased 139% from the three months ended
September 30, 2001 to the three months ended September 30, 2002. The increase in
sales of the oral contraceptives reflects higher sales of existing products,
including our Apri(R), Aviane(TM) and Nortrel(R) products, combined with sales
of our new oral contraceptive products, including Cryselle(TM), Enpresse(TM),
Kariva(TM) and Portia(TM). We launched our Dextro Salt
20
Combo in February 2002. Increases in the sales of Warfarin Sodium were due to a
combination of increased market share and a change in customer buying patterns.
Revenues -- Development and Other Revenue
For the three months ended September 30, 2001, development and other revenue
consisted primarily of amounts received from DuPont Pharmaceuticals Company for
various development and co-marketing agreements entered into in March 2000.
DuPont has since been acquired by Bristol-Myers Squibb ("BMS") and the March
2000 agreements that generated these revenues were terminated in April 2002. As
we incurred research and other development activity costs, we recorded such
expenses as research and development and invoiced and recorded the related
revenue from BMS as development and other revenue. We recorded revenue from
these agreements of $5,343 for the three months ended September 30, 2001. The
revenues from these agreements ended in fiscal 2002. For the three months ended
September 30, 2002, development and other revenue includes royalty income earned
under licensing agreements with other third parties, our development agreement
with the U.S. Department of Defense, and our development agreement related to
one of our vaginal ring products.
Cost of Sales
Cost of sales decreased 46% from $203,834 for the three months ended September
30, 2001 to $110,919 for the three months ended September 30, 2002, primarily
due to lower sales including the significant decrease in sales of Fluoxetine.
Cost of sales includes the profit split paid to Apotex, Inc., our partner in the
Fluoxetine patent challenge. As a percentage of product sales, cost of sales
decreased from 59% for the three months ended September 30, 2001 to 51% for the
three months ended September 30, 2002. The decrease in cost of sales as a
percentage of product sales was due primarily to a lower percentage of sales
from Fluoxetine, for which margins are generally lower than the average earned
on our other products due to the profit split paid to Apotex, Inc., our partner
in the patent challenge; higher margins on sales of Tamoxifen as a result of a
mid-year price increase; and an improved mix in product sales, as higher-margin
products such as our oral contraceptives, our Dextro Salt Combo and Warfarin
Sodium, made up a larger percentage of sales than our lower-margin products.
Selling, General and Administrative Expense
Selling, general and administrative expenses increased 13% from $27,647 for the
three months ended September 30, 2001 to $31,312 for the three months ended
September 30, 2002. The increase was primarily due to higher marketing and
selling expenses for our proprietary products, including Cenestin, and
pre-launch activities related to our extended regimen oral contraceptive,
SEASONALE(R), which we believe the FDA will approve and which we expect to
launch in early fiscal 2004. We also experienced increased legal costs, which
include costs associated with patent challenge activity, class action lawsuits
and other matters, and increased headcount costs.
Research and Development
Research and development expenses increased 20% from $17,561 for the three
months ended September 30, 2001 to $21,138 for the three months ended September
30, 2002. The increase reflected higher costs associated with increased clinical
study and headcount costs related to our
21
proprietary development program, including costs associated with our vaginal
ring product, and higher biostudy and headcount costs related to our generic
activities.
Proceeds from Patent Challenge Settlement
Proceeds from patent challenge settlement represent amounts earned under the
terms of the supply agreement entered into with Bayer to settle our patent
challenge litigation regarding Bayer's Cipro antibiotic. Under the terms of the
supply agreement, Bayer, at its option, must either allow us to purchase Cipro
from them at a predetermined discount or make quarterly cash payments to us. To
date, Bayer has elected to make payments to us rather than supply us with Cipro.
Accordingly, we have recognized proceeds from patent challenge settlements of
$7,938 for the three months ended September 30, 2001 and $8,563 for the three
months ended September 30, 2002.
Interest Income
Interest income decreased 19% from $1,837 for the three months ended September
30, 2001 to $1,497 for the three months ended September 30, 2002, primarily due
to a decrease in market interest rates on our short-term investments. The
decline was partially offset by an increase in the average cash and cash
equivalents balance and marketable securities balance.
Interest Expense
Interest expense decreased 65% from $1,291 for the three months ended September
30, 2001 to $448 for the three months ended September 30, 2002, primarily due to
a decrease in our debt balances.
Income Taxes
Our income tax provision for the three months ended September 30, 2001 reflected
a 35.3% effective tax rate on pre-tax income, compared to 37.3% for the three
months ended September 30, 2002. The increase in the effective tax rate is
primarily due to the fact that net operating losses and a corresponding release
of the related valuation allowance that were available to offset taxable income
for the three months ended September 30, 2001 were not available for the three
months ended September 30, 2002.
LIQUIDITY AND CAPITAL RESOURCES
Our cash and cash equivalents balance increased $24,265 or 7% from $331,257 at
June 30, 2002, to $355,522 at September 30, 2002. In connection with an
alternative collateral agreement between us and AstraZeneca, the innovator of
Tamoxifen (See Note 5 to the Consolidated Financial Statements), we maintain an
interest-bearing escrow account that may be funded at our discretion in
connection with purchases of Tamoxifen from AstraZeneca. On August 21, 2002, our
supply agreement with AstraZeneca terminated, and we have not received product
from AstraZeneca since September 2002. Cash held in the escrow account has
declined as funds from the escrow account were used to pay invoices for
previously purchased product. Cash held in our escrow account decreased from
$84,834 at June 30, 2002 to $29,857 at September 30, 2002.
22
The amount of cash held in our interest-bearing escrow account will continue to
decrease as our payable to AstraZeneca decreases until there are no funds
remaining in the account, which we anticipate will occur by the end of December
2002.
Operating Activities
Cash provided by operating activities was $45,674 for the three months ended
September 30, 2002, driven by net earnings of $41,857 which more than offset an
increase in working capital. Working capital increased as decreases in accounts
payable and accrued liabilities more than offset a decrease in inventory and
higher income taxes payable. The decrease in accounts payable is primarily
attributable to a reduction in the payable owed to AstraZeneca due to reduced
Tamoxifen purchases. The decrease in accrued liabilities is primarily due to a
decrease in amounts owed under royalty agreements to raw material suppliers and
lower amounts due under our Fluoxetine profit-split agreement with Apotex as the
result of lower Fluoxetine sales. The $34,997 decrease in inventory is due
primarily to lower Tamoxifen inventory which continues to decline as we sell
product previously purchased from AstraZeneca. Income taxes payable were higher
at September 30, 2002 as compared to June 30, 2002 because our estimated tax
payment for the three months ending September 30, 2002 was not due until October
2002, while our estimated payment for the three months ended June 30, 2002 was
made before June 30, 2002.
Approximately $7,937 of our cash flows from operations for the three months
ended September 30, 2002 relates to payments from our contingent non-exclusive
supply agreement with Bayer Corporation related to our 1997 Cipro(R) patent
challenge. Under that agreement, Bayer, at its option, must either allow us and
our partner to purchase Cipro at a predetermined discount or provide us with
quarterly cash payments. This contingent supply agreement expires in December
2003. If Bayer does not elect to supply us with product, we would receive
payments totaling approximately $42,000 for the remainder of the agreement,
which expires in December 2003. However, there is no guarantee that Bayer will
continue to make such payments. If Bayer elected to supply product to us for
resale, the earnings and related cash flows we could earn, if any, from the sale
of Cipro would be entirely dependent upon market conditions. The supply
agreement also provides that, six months prior to patent expiry, if we are not
already distributing the product, we, along with our partner, will have the
right to begin distributing ciprofloxacin product manufactured by Bayer.
We expect operating cash flows over the next several years to be favorably
impacted by our continued utilization of federal net operating loss
carryforwards acquired in our merger with Duramed. The annual limitation on the
amount of the pre-merger net operating loss that may be deducted is governed by
Section 382 of the Internal Revenue Code. We believe utilizing such federal net
operating losses could generate approximately $9,800 of cash flows in fiscal
2003.
We expect cash flows from operations to be lower in fiscal 2003 than the record
levels we achieved in fiscal 2002 due to several factors. First, net income from
operations is expected to decline in fiscal 2003 due primarily to the lower
sales and profits from Fluoxetine 20 mg. In addition, our working capital is
expected to increase in fiscal 2003 to support new product launches and to
reflect the significant decline in accounts payable to AstraZeneca as we
continue to pay AstraZeneca for previous purchases of Tamoxifen.
23
Operating cash flows for the three months ending December 31, 2002 will be
impacted by whether we will be permitted to launch our 10 mg Tamoxifen product
during the quarter.
Investing Activities
During fiscal 2002, we initiated a multi-year capital expansion program to
increase our production capacity in Virginia and Cincinnati, and our
distribution and laboratory capacity in Virginia. In addition to continuing
these programs in fiscal 2003, we also continued to add and upgrade equipment in
all of our locations. These capital programs are designed to help ensure that we
have the manufacturing, distribution and laboratory facilities necessary to meet
the expected demand of our pipeline products and handle the increases in current
product sales, including our line of oral contraceptives.
During the three months ended September 30, 2002, we incurred $19,111 of capital
expenditures and believe our fiscal 2003 capital expenditures could total
approximately $60,000. In addition, we expect that our capital spending will
continue at a level of between $40,000 to $50,000 per year over the next several
years. During that time, we will be continuing the construction of a dedicated
facility for the manufacture of the Adenovirus vaccine at our Virginia campus.
The cost of this facility, expected to be $6,000 to $8,000, is being reimbursed
by the Federal government in accordance with our contract with the U.S.
Department of Defense. In addition to completing the projects described above,
we are evaluating other significant capital projects, which could cause us to
increase our current capital spending estimates, including purchasing and
implementing a new enterprise resource planning system and relocating our
corporate administrative offices when the current lease expires in May 2003.
While we believe we have the cash resources to fund the capital spending
described above from cash derived from operations, given the large scale and
extended nature of some of the planned expenditures, we may consider financing a
portion of our projects. We believe we have the capital structure and cash flow
to complete any such financing.
As of September 30, 2002, we have invested $20,000 in market auction debt
securities that are readily convertible into cash at par value. The par value of
each of the four securities held is $5,000 and the maturity dates are July 21,
2003, January 6, 2004, April 26, 2004 and July 7, 2004. We may continue to
invest in extended maturity securities based on operating needs and strategic
opportunities.
Financing Activities
We have not engaged in any off-balance sheet financing involving unconsolidated
subsidiaries.
Debt balances decreased by approximately $1,080 during the three months ended
September 30, 2002 due to debt repayments. Scheduled principal repayments on our
existing debt will be approximately $3,600 in fiscal 2003. We have a $40,000
revolving credit facility that expires on February 27, 2005. We currently have
approximately $29,400 available under this facility due to
24
the issuance of a $10,600 letter of credit in support of outstanding premiums on
our product liability insurance, as discussed below.
Other
In fiscal 2002, we entered into a Loan and Security Agreement (the "Loan
Agreement") with Natural Biologics, the raw material supplier for our generic
conjugated estrogens product. We believe 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. This trial began
in November 2002. Under the terms of the Loan Agreement, absent the occurrence
of a material adverse event as defined, we could loan Natural Biologics up to
$35,000 over a three-year period, including an additional $7,030 during fiscal
2003, and $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 the pending legal proceeding between Wyeth and Natural Biologics, which could
occur in fiscal 2003. The loans mature on June 3, 2007. An adverse decision in
the Natural Biologics litigation described above may require us to write-off all
or a portion of the loans. As of September 30, 2002, we had loaned approximately
$6,870 to Natural Biologics under this agreement, and included the amount of the
loan in other assets.
In fiscal 2002, we entered into a Development, Manufacturing and Distribution
Agreement with Natural Biologics which could obligate us to make milestone
payments totaling $35,000 to Natural Biologics based on achieving certain legal
and product approval milestones, including the approval of a generic product.
On September 27, 2002, we committed to make a minimum aggregate contribution of
$9,200 to the Barr Laboratories, Inc. Savings and Retirement Plan for the fiscal
year ending June 30, 2003. We have funded $2,200 of the contribution commitment
and have recorded an asset and a matching liability equal to the remaining
contribution commitment.
Due to the significant increase in the cost of product liability insurance, on
September 30, 2002 we entered into a finite risk insurance arrangement (the
"Arrangement") with a third party insurer. We believe that the Arrangement is
the most cost-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 us to pay a premium of
approximately $14,250 in four equal annual installments of $3,563 beginning on
October 1, 2002. Included in the initial premium payment is an insurer's margin
of approximately $1,000, which will be amortized over the five-year term. At any
six-month interval, we may, at our option, cancel the Arrangement. In addition,
at the earlier of termination or expiry, we are eligible for a return of all
premiums paid to the insurer, less the insurer's margin and amounts for any
incurred claims. We are recording the premium payments, net of the insurer's
margin, as deposits included in other assets.
We continue to be self-insured for potential product liability claims between
$15,000 and $25,000. We have purchased additional product liability coverage for
claims related to certain products from $25,000 to $50,000.
25
No significant product liability claim has ever been paid by us. However, if a
claim was filed and we were not successful in the defense of the suit, it could
have a material adverse effect on our business and financial condition to the
extent any loss from such judgment was self-insured or exceeded policy limits.
To expand our business opportunities, we have and will continue to evaluate and
enter into various strategic collaborations or acquisitions. The timing and
amount of cash required to enter into these collaborations may be significant.
We believe that our current cash balances, cash flows from operations and
borrowing capacity, including unused amounts under our $40,000 revolving credit
facility, will be adequate to meet the operations described above and to take
advantage of certain strategic opportunities as they occur. To the extent that
additional capital resources are required, we believe that such capital may be
raised by additional bank borrowings, equity offerings or other means.
ADOPTION OF NEW ACCOUNTING STANDARD
In July 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 will identify its reporting units and determine
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 SFAS 142, to the extent a reporting unit's carrying
amount exceeds its fair value, an indication exists that the reporting unit's
goodwill may be impaired. The Company has until December 31, 2002 to complete
the first step. The second step of the goodwill impairment test, if required,
must be completed by June 30, 2003, and measures the amount of the impairment
loss (measured as of the beginning of the year of adoption), if any. The Company
expects to complete the steps in accordance with these deadlines. Any impairment
loss resulting from the transitional impairment tests will be reflected as a
cumulative effect of a change in accounting principle. We do not expect the
implementation of SFAS 142 to have a material effect on our results of
operations.
OUTLOOK
In 1993, as a result of the settlement of a patent challenge against
AstraZeneca, we entered into a non-exclusive supply and distribution agreement
for Tamoxifen. Under the terms of the supply and distribution agreement, we have
distributed a Tamoxifen product that we have purchased directly from
AstraZeneca. The patent covering Tamoxifen expired on August 20, 2002, and our
supply and distribution agreement with Astra Zeneca expired on August 21, 2002.
We expect
26
that our inventory of Tamoxifen previously purchased from AstraZeneca will be
depleted by sometime in mid-November 2002. AstraZeneca has received FDA approval
for a six-month period of pediatric exclusivity, which will expire on February
20, 2003. We believe that AstraZeneca's pediatric exclusivity will prevent other
generic manufacturers from launching Tamoxifen products prior to that date.
However, because of the regulatory history of our Tamoxifen ANDA, we believe
that we are entitled to launch our own manufactured version of the Tamoxifen 10
mg product during AstraZeneca's pediatric exclusivity period. Our regulatory
authorization to launch Tamoxifen 10 mg was issued prior to the enactment of the
legislation authorizing the FDA to grant pediatric exclusivity. We believe that
Congress did not intend to have pediatric exclusivity apply to products that had
received regulatory authorization prior to the date of the legislation's
enactment.
In September, the FDA notified us that the approval date of our application for
Tamoxifen 10 mg tablet was being altered, thereby preventing Barr from launching
its Tamoxifen 10 mg tablets until the expiration of AstraZeneca's pediatric
exclusivity in February 2003. We promptly filed a court action in the U.S.
District Court for the District of Colombia, seeking to re-affirm the April 1997
final approval date. The court is expected to rule on this matter by
mid-November. A favorable decision by the judge allowing us to launch our own 10
mg manufactured version of Tamoxifen could have a significant positive effect on
our earnings and cash flows in the quarter ending December 31, 2002 and for the
year ending June 30, 2003. Conversely, an unfavorable decision could negatively
affect our earnings and cash flows. Our earnings per share outlook included
below provides a range of earnings estimates that assume either a positive or
negative court decision.
Revenues
Total product sales for the three months ending December 31, 2002 are expected
to be substantially lower than for the same period last year due to decreases in
sales of Fluoxetine and Tamoxifen, partially offset by significant increases in
sales of other products. Fluoxetine sales, which were approximately $136,000 in
the three months ended December 31, 2001, will be substantially lower for the
three months ending December 31, 2002 as the result of our generic exclusivity
period ending in February 2002. Tamoxifen sales, which were also $136,000 in the
three months ended December 31, 2001, are expected to decline dramatically as
the result of our distribution agreement with AstraZeneca expiring in August
2002, as well as an anticipated change in buying patterns from our customers
versus the prior year. Sales of products other than Tamoxifen and Fluoxetine,
which totaled approximately $93,000 in the three months ended December 31, 2001,
are expected to increase significantly due to higher sales of our oral
contraceptive products and other products launched in the second half of the
fiscal year ended June 30, 2002, including our Dextro Salt Combo.
Development and other revenues are expected to be down compared to the prior
year, as the total for the three months ended December 31, 2001 included
approximately $5,000 related to our development agreement with Bristol-Myers
Squibb which was terminated in April 2002.
Proceeds from Patent Challenge Settlement
Proceeds from patent challenge settlement are expected to increase approximately
8% for the three months ending December 31, 2002 compared with the three months
ended December 31,
27
2001. Proceeds from patent challenge settlement are amounts earned pursuant to
the supply agreement entered into as part of the 1997 settlement of our patent
challenge on Bayer's Cipro product, and assumes that Bayer will elect, as they
have in the past, not to provide product to us for resale.
Margins
Product margins represent the amount of gross profit we expect to earn on
product sales expressed as a percentage of product sales. During the three
months ending December 31, 2002, we expect our overall gross profit margins to
increase significantly compared to the 37% margin we earned during the three
months ended December 31, 2001. This increase is due to a lower percentage of
sales from our distributed Tamoxifen product, which carries a much lower margin
than our manufactured products, and corresponding increases in the proportion of
sales of higher-margin products such as our oral contraceptives and Dextro Salt
Combo. We believe that our margins in the December 2002 quarter should also
improve compared to the margins we earned in the September 2002 quarter for the
same reasons.
Research and development
We expect research and development spending during the three months ending
December 31, 2002 to increase significantly when compared to the three months
ended December 31, 2001 and to modestly exceed spending incurred during the
three months ended September 30, 2002. These increases are related to higher
spending on proprietary products as well as higher bio-study and raw material
costs.
Selling, general and administrative
We expect selling, general and administrative costs for the three months ending
December 31, 2002, excluding merger-related costs, to increase slightly from the
three months ended December 31, 2001. Contributing to this increase are expected
increases in sales and marketing costs to support our proprietary products,
including Cenestin, and activities related to our anticipated launch of
SEASONALE. We also expect costs to be relatively consistent with, or slightly
greater than, the $33,800 we incurred in the three months ended September 30,
2002.
Earnings per share
Earnings per share for the three months ended December 31, 2001 were $0.91 per
share. This result reflected an after-tax charge of $22,400, or $0.49 per share,
in non-recurring items and expenses related to our merger with Duramed. In
addition, while the contribution of Fluoxetine 20 mg capsules to the prior
year's earnings per share is not separately and definitively determinable
because we do not prepare individual income statements for each product, we
believe that based on Fluoxetine sales of approximately $136,000 in the second
quarter of fiscal 2002, Fluoxetine contributed approximately $0.90 per share.
Excluding the merger related costs and estimated earnings attributable to
Fluoxetine, earnings per share would have been approximately $0.50 per share.
Based on the revenue and expense assumptions described above, the Company
believes earnings in the second quarter of fiscal 2003 could be in the range of
approximately $1.02 to $1.07 per
28
share. However, if we are not permitted to launch our manufactured version of
Tamoxifen in the second quarter and, all other assumptions remain unchanged, we
would expect earnings per share to be $0.82 to $0.87 per share.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk for a change in interest rates relates primarily to
our investment portfolio of approximately $375,936 and debt instruments of
approximately $46,891. We do not use derivative financial instruments.
Our investment portfolio consists of cash and cash equivalents and marketable
securities classified as "available for sale." The primary objective of our
investment activities is to preserve principal while at the same time maximizing
yields without significantly increasing risk. To achieve this objective, we
maintain our portfolio in a variety of high credit-quality securities, including
U.S. government and corporate obligations, certificates of deposit and money
market funds. Ninety-six percent of our portfolio matures in less than three
months. The carrying value of the investment portfolio approximates the market
value at September 30, 2002. Because our investments are diversified and are of
relatively short maturity, a hypothetical 1 or 2 percentage point change in
interest rates would not have a material effect on our consolidated financial
statements.
At September 30, 2002, approximately 65% of our debt instruments are subject to
fixed interest rates. The related note purchase agreements permit us to prepay
these notes prior to their scheduled maturity, but may require us to pay a
prepayment fee based on market rates at the time of prepayment. The remaining
35% of debt instruments are primarily subject to variable interest rates based
on the prime rate or LIBOR. The fair value of all debt instruments is
approximately $43,000 at September 30, 2002. In addition, borrowings under our
$40,000 unsecured revolving credit facility (the "Revolver") with Bank of
America, N.A., bear interest at a variable rate based on the prime rate, the
Federal Funds rate or LIBOR. At September 30, 2002, there were no amounts
outstanding under the Revolver. We currently have approximately $29,400
available under the Revolver due to the issuance of a $10,600 letter of credit
in support of our finite risk product liability insurance. We do not believe
that any risk inherent in these instruments is likely to have a material effect
on our consolidated financial statements.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to insure that
information required to be disclosed in our Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms, and that such information is accumulated and communicated
to our management, including our Chairman and Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure. Management necessarily applied its judgment in assessing the costs
and benefits of such controls and procedures, which, by their nature, can
provide only reasonable assurance regarding management's control objectives.
29
Within the 90 days prior to the date of this report, we carried out an
evaluation, under the supervision and with the participation of our management,
including the Chairman and Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure controls and
procedures. Based upon that evaluation, the Chairman and Chief Executive Officer
and Chief Financial Officer concluded that our disclosure controls and
procedures were effective in alerting them in a timely manner to information
relating to Barr and its consolidated subsidiaries required to be disclosed in
this report.
CHANGES IN INTERNAL CONTROLS
Subsequent to the date of their evaluation as described above, there have not
been any significant changes in our internal controls or in other factors that
could significantly affect these controls. No significant deficiencies or
material weaknesses have been identified.
30
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Fluoxetine Hydrochloride Patent Infringement Suit
This case was previously reported in our annual report Form 10-K for the year
ended June 30, 2002 as filed with the SEC on August 26, 2002. aaiPharma Inc.
claimed that our generic versions of Prozac(R) infringed aaiPharma's patent. The
case has been settled and dismissed.
HHS Supboena
The Department of Health and Human Services Office of Inspector General has
issued a subpoena to us requesting documents relating to a recently published
study on our Cenestin(R) product. We believe the study was properly conducted
and are cooperating in the investigation.
PPA Litigation
We are a defendant in three personal injury product liability lawsuits involving
phenylpropanolamine ("PPA"). One of these cases is pending in state court in
North Carolina. Another case is pending in California state court. The third
case was originally filed in the United States District Court in Connecticut,
but has been transferred for pretrial proceedings to the U.S. District Court in
Seattle, Washington. All three cases are in their initial stages. We believe we
have strong defenses to all three cases and intend to vigorously defend the
Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On September 19, 2002, Shepherd Investments International, Inc. and Stark
International (collectively, the "investors") holders of warrants to purchase an
aggregate of 128,100 shares of our common stock at an exercise price of $22.4071
per share, notified us of their desire to exercise the warrants in a cashless
exercise that would result in the issuance of an aggregate of 83,940 shares of
our common stock. The warrants were originally issued by Duramed
Pharmaceuticals, Inc. in February 1998. We acquired Duramed on October 24, 2001
in a merger accounted for as a pooling-of-interests. On September 25, 2002, in
compliance with the request, we issued to the investors an aggregate of 83,940
shares of our common stock. As this was a cashless exercise, we did not receive
any proceeds for the issuance of the shares.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) There are no exhibits filed as part of this Form 10-Q.
31
(b) We filed the following reports on Form 8-K in the quarter ended
September 30, 2002:
REPORT DATE ITEM REPORTED
August 14, 2002 Press release announcing results for fiscal
year 2002 and fourth quarter 2002.
August 26, 2002 We filed with the Securities and Exchange
Commission our Annual Report on Form 10-K for
the fiscal year ended June 30, 2002. Pursuant
to Section 906 of the Sarbanes-Oxley Act of
2002, the Form 10-K was accompanied by a
certification of Bruce L. Downey, Chairman of
the Board and Chief Executive Officer of the
Company, and William T. McKee, Chief Financial
Officer of the Company.
September 23, 2002 Press release announcing that we will contest
a ruling by the U.S. Food and Drug
Administration, which retroactively alters the
approval date of our application for Tamoxifen
10 mg tablets.
- --------------------------------------------------------------------------------
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BARR LABORATORIES, INC.
Dated: November 14, 2002 /s/ William T. McKee
--------------------------------
William T. McKee
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
- --------------------------------------------------------------------------------
32
RULE 13a-14 CERTIFICATIONS
I, Bruce L. Downey, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Barr Laboratories,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
33
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: November 14, 2002
/s/ Bruce L. Downey
------------------------------
Bruce L. Downey
Chief Executive Officer
I, William T. McKee, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Barr Laboratories,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
34
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 14, 2002
/s/ William T. McKee
------------------------------
William T. McKee
Chief Financial Officer
35