-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WuSAXDHBvqIKGUeax8JlWUUcOTtXTVoh+uB4P2lX6I3lj1y7yZjU1A08LDZQfdmm qWGYdtHQLBF5B5SrTyEE3A== 0000950123-02-008446.txt : 20020826 0000950123-02-008446.hdr.sgml : 20020826 20020826165753 ACCESSION NUMBER: 0000950123-02-008446 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020826 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BARR LABORATORIES INC CENTRAL INDEX KEY: 0000010081 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 221927534 STATE OF INCORPORATION: NY FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-09860 FILM NUMBER: 02748599 BUSINESS ADDRESS: STREET 1: 2 QUAKER RD BOX 2900 CITY: POMONA STATE: NY ZIP: 10970-0519 BUSINESS PHONE: 8453621100 MAIL ADDRESS: STREET 1: 2 QUAKER RD STREET 2: BOX 2900 CITY: POMONA STATE: NY ZIP: 10970-0519 10-K 1 y63477e10vk.txt BARR LABORATORIES UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 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) Securities registered pursuant to Section 12(b) Name of each exchange on of the Act: which registered: Title of each class Common Stock, Par Value $0.01 New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ------ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock of the Registrant held by nonaffiliates was approximately $2,023,975,651 as of June 30, 2002 (assuming solely for purposes of this calculation that all Directors and Officers of the Registrant are "affiliates"). Number of shares of Common Stock, Par Value $.01, outstanding as of June 30, 2002: 43,605,238 DOCUMENTS INCORPORATED BY REFERENCE PORTIONS OF THE REGISTRANT'S 2002 PROXY STATEMENT ARE INCORPORATED BY REFERENCE IN PART III HEREOF. 1 PART I ITEM 1. BUSINESS SAFE HARBOR STATEMENT To the extent that any statements made in this report contain information that is not historical, these statements are essentially forward-looking. These statements are subject to risks and uncertainties that cannot be predicted or quantified and, consequently, actual results may differ materially from those expressed or implied by such forward-looking statements. Such risks and uncertainties include: the 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; competitor's ability 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; availability of 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, or SEC. We wish to caution each reader of this report to consider carefully these factors as well as specific factors that may be discussed with each forward-looking statement in this report or disclosed in our filings with the SEC as such factors, in some cases, could affect our ability to implement our business strategy and may cause actual results to differ materially from those contemplated by the statements expressed herein. OVERVIEW We are a specialty pharmaceutical company primarily engaged in the development, manufacture and marketing of generic and proprietary prescription pharmaceuticals. We currently manufacture and distribute more than 100 different dosage forms and strengths of pharmaceutical products in core therapeutic categories including oncology, female healthcare (including hormone replacement and oral contraceptives), cardiovascular, anti-infective and psychotherapeutics. In addition, we have a proprietary, novel vaginal ring drug delivery system, which we are using to develop products, intended to address a variety of female health issues and unmet medical needs. We operate manufacturing, research and development and administrative facilities located in the United States. Our principal executive offices are located at 2 Quaker Road, Pomona, New York 10970. We were incorporated in the State of New York in 1970. HIGHLIGHTS Fluoxetine Launch In August 2001, we launched our Fluoxetine 20 mg capsule, the generic equivalent of Eli Lilly's Prozac. For the fiscal year ended June 30, 2002 ("fiscal 2002"), sales of Fluoxetine were $367.5 million, or 31% of total product sales. On January 29, 2002, our 180-day generic exclusivity period on Fluoxetine ended and, as expected, the FDA approved several other generic versions produced by other companies. As a result, the selling price declined dramatically and we lost market share to competing products. Both factors caused our sales and profits from Fluoxetine to be substantially lower than those earned during the exclusivity period. Faced with other generic competitors for Fluoxetine, we expect Fluoxetine to account for approximately 1% of product sales in fiscal 2003. Merger with Duramed Pharmaceuticals, Inc. On October 24, 2001, we completed a stock-for-stock merger with Duramed Pharmaceuticals, Inc. ("Duramed"). Duramed, now a wholly owned subsidiary, was 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 our common stock for each share of Duramed common stock outstanding. Duramed preferred stock shareholders received 5.0632 shares of our common stock for each share of Duramed preferred stock outstanding. Based on these terms, we issued approximately 7.5 million shares of 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 our common stock. The transaction was a tax-free exchange, and has been accounted for under the "pooling-of-interests" method. 2 Business Development Venture with Natural Biologics On March 6, 2002, we entered into two agreements with Natural Biologics, LLC ("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). Under the terms of a Development, Manufacturing and Distribution ("DMD") agreement, we have agreed to be responsible for the product formulation and the regulatory, manufacturing and sales and marketing activities necessary to commercialize a generic conjugated estrogens product. Under the terms of a Loan and Security ("Loan") agreement, absent the occurrence of a material adverse event as defined, we could loan Natural Biologics up to $35 million over a three-year period and make payments totaling $35 million based on achieving certain legal and product approval milestones, including approval of a generic product. Acquisition of Enhance Pharmaceuticals, Inc. On June 6, 2002, we completed the purchase of certain assets and assumption of certain liabilities of Enhance Pharmaceuticals, Inc. ("Enhance") for approximately $46 million in cash. The assets we acquired included a proprietary, novel, vaginal ring drug delivery system developed by Enhance, which we are currently using to develop products that will address a variety of female health issues and unmet medical needs. The transaction was accounted for under the purchase method of accounting. Restructure of Co-Development and Marketing Alliance In March 2000, we entered into four agreements with the DuPont Pharmaceuticals Company that established a business relationship and resolved a legal dispute between our two companies. In April 2002, we completed the restructuring of two of these agreements and agreed to general terms on two others, with Bristol-Myers Squibb ("BMS"), which acquired DuPont Pharmaceuticals in 2001. The first agreement, a Product Development Agreement, was terminated. Under that agreement, DuPont was required to provide up to $45 million to support the ongoing development of three of our proprietary products: CyPat(TM), SEASONALE(R) and DP3. As a result of the termination, BMS's development payments were capped at $40 million, with the last payment made in April 2002. In addition, we assumed sole responsibility for marketing these three products and BMS forfeited the right to royalties on sales of products covered by the agreement. Under the terms of the second agreement, DuPont was responsible for the sales and marketing of our proprietary product, Trexall, and DuPont earned royalty payments based on Trexall sales. That agreement was also terminated. As a result of the termination, we assumed responsibility for the promotion and sales activities for the product using the same sales force previously under contract with BMS. BMS agreed to continue to fund its obligation for Trexall sales and marketing expenses for the next two years and to forfeit its royalty interest. When finalized, the third agreement will expand our interest in ViaSpan, an organ transplant preservation agent. We originally obtained our current right to market ViaSpan in the United States and Canada through December 2007 as part of a co-development and marketing alliance. Under that agreement, we purchase finished product, sell it under a Barr label, and pay a royalty to DuPont. In April 2002 we reached an agreement in principle with BMS, to extend in perpetuity, our rights and obligations for the marketing and distribution of ViaSpan in the United States and Canada. In addition, we would assume BMS's responsibilities for sourcing the product, coordinating distribution and performing certain regulatory functions, and BMS would forfeit its royalties related to the sales of the product. We are in negotiations with BMS to finalize the agreement that would reflect these changes. Finally, as part of the April 2002 restructuring, we reached an agreement in principle to acquire the New Drug Application ("NDA") for Revia(R), the brand version of naltrexone hydrochloride tablets. When finalized, we will have sole responsibility for all aspects of product production, regulatory compliance and sales and marketing of Revia in the United States and Canada. We currently manufacture and sell a generic version of Revia, which we launched in 1998. We are in negotiations with BMS to finalize the Revia agreement that would reflect these changes. BUSINESS STRATEGIES We focus our resources on four principal strategies within our pharmaceutical products business: Developing and Marketing Selected Generic Pharmaceuticals. We develop and market the generic equivalent of brand pharmaceuticals that no longer enjoy patent protection. We seek to 3 develop generic products that have one or more characteristics that we believe will make it difficult for other competitors to develop competing generics. The characteristics of the selected generic products we pursue may include one or more of the following: o those requiring specialized manufacturing capabilities; o those where sourcing the raw material may be difficult; o those with complex formulation or development characteristics; o those that must overcome unusual regulatory or legal challenges; or o those that confront difficult sales and marketing challenges. We believe that generic products with some or all of these characteristics may face limited competition and may produce higher profits for a longer period of time than products without these characteristics. Challenging Patents Protecting Certain Brand Pharmaceuticals As an adjunct to our selective generic development strategy, we develop generic equivalents of branded pharmaceuticals that are protected by patents that we believe are invalid, unenforceable or not infringed by our products. Developing and Marketing Proprietary Pharmaceuticals We develop and market proprietary pharmaceutical products that we believe may offer the potential for a longer period of market or product exclusivity than with generic products. Although the time and cost to develop proprietary pharmaceuticals is usually much greater than with generic products, we believe that such products have the potential to produce higher and more consistent profitability than the typical generic product. Pursuing Complementary or Strategic Acquisitions As with our Duramed and Enhance acquisitions, we will continue to evaluate and, as appropriate, may pursue additional strategic acquisitions or collaborations, including product or company acquisitions that we believe will complement our existing strategies and provide new product and marketing opportunities. GENERIC PHARMACEUTICALS Generic pharmaceutical products are the chemical and therapeutic equivalent of branded drug products listed in the FDA publication entitled "Approved Drug Products with Therapeutic Equivalence Evaluations," popularly known in the pharmaceutical industry as the "Orange Book." The Drug Price Competition and Patent Term Restoration Act of 1984, as amended (the "Hatch-Waxman Act") provides that generic drugs may enter the market upon: (i) approval of an Abbreviated New Drug Application ("ANDA"); (ii) expiry, invalidation or determination of non-infringement of any patent or patent(s) protecting the corresponding brand drug; and (iii) expiration of any non-patent statutory exclusivity applicable to the corresponding brand drug. Generic drugs are bioequivalent to their brand-name counterparts, meaning they deliver the same amount of active ingredient at the same rate as the brand-name drug. Accordingly, generic products provide safe, effective and cost-efficient alternatives to branded products. Growth in the generic pharmaceutical industry has been driven by the increased acceptance of generic drugs as well as the number of brand drugs for which patent terms or other market exclusivity periods have expired. Generic Products We Currently Market We currently market approximately 57 pharmaceutical products representing approximately 100 dosage strengths and product forms of approximately 54 chemical entities. Our products are manufactured in tablet, capsule and powder form. Examples of the generic products we currently market are set forth below: 4
Barr/Duramed Label Brand Equivalent Brand Holder - ------------------ ---------------- ------------ Apri(R) Desogen(R) Organon, Inc. Ortho-Cept(R) Ortho-McNeil Pharmaceutical, Inc. Aviane(TM) Alesse(R) Wyeth Pharmaceuticals Danazol Danocrine(R) Sanofi-Synthelabo, Inc. Dextro Salt Combo Adderall(R) Shire Richwood Inc. Dextroamphetamine Sulfate Dexedrine(R) Spansule(R) GlaxoSmithKline Dipyridamole Persantine(R) Boehringer Ingelheim Fluoxetine Prozac(R) Eli Lilly & Company Kariva(TM) Mircette(R) Organon Inc. Lessina(TM) Levlite(R) Berlex Laboratories Medroxyprogesterone Acetate (MPA) Provera Pharmacia Methotrexate Rheumatrex(R) Wyeth Pharmaceuticals Norethindrone Acetate Aygestin(R) Wyeth Pharmaceuticals Warfarin Sodium Coumadin(R) Bristol-Myers Squibb Pharma Company
Set forth below are descriptions of certain products that contributed significantly to our sales and gross profit in fiscal 2002. Product data is derived from industry sources. Fluoxetine. Fluoxetine hydrochloride is the generic name for Eli Lilly's Prozac(R), which is used as an anti-depressant. On August 2, 2001 we launched our generic Fluoxetine Hydrochloride 20 mg capsules. By successfully challenging the patents protecting Prozac in federal court, we won the right to launch generic Fluoxetine nearly three years earlier than would otherwise have been possible. Sales of Fluoxetine 20 mg capsules accounted for $367.5 million or approximately 31% of our product sales during fiscal 2002. From August 2, 2001 until January 29, 2002, we were the only distributor of generic Fluoxetine 20 mg capsules under the 180-day exclusivity period granted to us by the Hatch-Waxman act as the result of being the first to file an ANDA challenging the patent for Fluoxetine with the FDA, which we did in December 1995. In January 2002 numerous other generic competitors entered the market causing a dramatic decline in price and market share. Oral Contraceptives. We recently became the third largest manufacturer and marketer of oral contraceptive products in the United States, as measured by industry sources. Oral contraceptives are the most common method of reversible birth control, used by up to 65% of women in the United States at some time during their reproductive years. Oral contraceptives have a very long history with widespread use attributed to many factors including efficacy in preventing pregnancy, safety and simplicity in initiation and discontinuation, medical benefits and relatively low incidence of side effects. We currently have received FDA approval for eight generic oral contraceptive products. We sell them under the following tradenames: Apri(TM), Aviane(TM), Kariva (TM), Lessina(TM), Nortrel(TM) 1/35 and Nortrel(TM).05/35, Portia(TM), Cryselle(TM) and Enpresse(TM). Warfarin Sodium. Warfarin Sodium is the generic equivalent of Bristol-Myers Squibb Pharma's Coumadin, an anticoagulant for patients with heart disease and/or high risk of stroke. We launched Warfarin Sodium in July 1997 and are presently one of three generic suppliers of the product. Warfarin Sodium accounted for approximately 14% and 13% of our product sales during fiscal 2001 and 2000, respectively, and less than 10% of our sales in fiscal 2002. Dextro Salt Combo (Dextroamphetamine Saccharate, Amphetamine Aspartate, Dextroamphetamine Sulfate, and Amphetamine Sulfate Tablets). This amphetamine product, which we call Dextro Salt Combo, is a generic equivalent of Shire Richwood Inc.'s Adderall(R) tablets. Adderall is indicated as an integral part of a total treatment program that typically includes other remedial 5 measures (psychological, educational, social) for a stabilizing effect in children with behavioral syndrome characterized by the following group of developmentally inappropriate symptoms: moderate to severe distractibility, short attention span, hyperactivity and impulsivity. We launched Dextro Salt Combo in April 2002 and are presently one of three generic companies with FDA approval for the product. Generic Research and Development We focus our generic product research and development efforts on products having one or more of the characteristics described earlier in "Business Strategies". Over the past three years, we have expanded our research and development and related activities in order to increase the number of ANDAs we file annually. We filed 18 product applications during fiscal 2002. At June 30, 2002, we had 31 ANDAs pending at the FDA. Generic Sales and Marketing We market our generic products to customers in the United States and Puerto Rico under the "Barr" and "Duramed" labels, through an integrated sales and marketing team that includes a five-person national accounts sales force. The activities of the sales force are supported by marketing and customer service organizations in our New York headquarters. The customer base for our generic products includes drug store chains, food chains, mass merchandisers, wholesalers, distributors, managed care organizations, mail order accounts, government/military and repackagers. We sell our generic products to approximately 140 customers that purchase directly from us, and indirectly to approximately 90 customers that purchase our products from wholesalers. In fiscal 2002, three customers separately accounted for over 10% of product sales: McKesson Drug Company, Cardinal Health and Amerisource Bergen, which accounted for 18%, 13% and 12% of total product sales, respectively. In 2001 and 2000, McKesson Drug Company accounted for approximately 14% and 15% of total product sales, respectively. No other customer accounted for greater than 10% of total product sales in any of the last three fiscal years. During the past several years the number of chain drug stores and wholesaler customers have declined due to industry consolidation. In addition, the remaining chain drug stores and wholesaler customers have instituted buying programs that have caused them to buy more products from fewer suppliers. At the same time, mail-order prescription services and managed care organizations have grown in importance and they also limit the number of vendors. The reduction in the number of our customers and limitation on the number of vendors by the remaining customers has increased competition among generic drug marketers. These pressures have not had a material adverse impact on our business and we continue to believe that we have excellent relationships with our key customers. PROPRIETARY PHARMACEUTICALS Prescription pharmaceutical products in the United States are generally marketed as either generic drugs or as proprietary branded drugs. Brand products are marketed under brand names through programs that are designed to generate physician and consumer loyalty. Brand products generally are patent protected or benefit from other non-patent, market exclusivities. These market exclusivities generally provide brand products with the ability to maintain their profitability for longer periods of time. Brand products have an important role in the market following generic competition or end of other market exclusivities due to physician and customer loyalties. We focus our proprietary product development activities in three categories: o existing chemical compounds where the development of new forms (liquid vs. tablets, different dosages or other drug delivery systems, such as our proprietary, novel vaginal ring delivery system) offer therapeutic or marketing advantages; o new chemical entities in selected therapeutic categories, including some that are marketed in other countries but not currently sold in the United States; and o patent protected proprietary products in late stages of development. We believe that pursuing these types of products, which we expect will have some period of market exclusivity, should generate higher gross margins and maintain profitability longer than most generic products. 6 Proprietary Products We Currently Market We currently market three proprietary products: Cenestin(R). In 1999 we began to market Cenestin (synthetic conjugated estrogens, A) Tablets, a plant-derived synthetic conjugated estrogens with no animal precursors. We acquired Cenestin as part of our merger with Duramed. Cenestin is indicated for the treatment of moderate-to-severe vasomotor symptoms associated with menopause. We currently market the 0.625 mg, 0.9 mg and 1.25 mg tablet strengths of the Cenestin product and are developing other related products. At the end of June, 2002 we gained approval of the 0.3 mg tablet strength of Cenestin that we expect to launch in early fiscal 2003. The 0.3 mg tablet strength of Cenestin is indicated for the treatment of vulvar and vaginal atrophy. We have also filed a supplement to our New Drug Application ("NDA") for a 0.45 mg tablet strength. Cenestin competes in the $2 billion hormone replacement market with products such as Wyeth's Premarin(R), a conjugated equine estrogens product. Recent developments in the hormone replacement market include the decision by the National Institutes of Health (NIH) in July 2002 to discontinue the combined therapies arm of the Women's Health Initiative Study (WHI) related to the long-term usage of estrogen and progestin in healthy post-menopausal women. The combination product evaluated in that arm of the WHI study was a combination of conjugated equine estrogens and the progestin medroxyprogesterone acetate. This arm of the study was discontinued early based on health risks that exceeded health benefits over an average follow up of 5.2 years due to evidence of increased risk of cardiovascular disease and over time, the increased risk of invasive breast cancer. The estrogen-only arm of the study is continuing, and NIH is recommending that women in this arm of the study continue taking the estrogen only product. Even though our Cenestin product was not used in the WHI study, we expect that uncertainty regarding the risk/reward benefit of long-term hormone replacement products could reduce the number of women who use hormone replacement therapy for long-term therapy. However, we believe that a number of women and their physicians will elect to continue using these products, particularly estrogen-only therapies, such as Cenestin, for the treatment of various symptoms associated with menopause. (See "Proprietary Product Development") Trexall(TM). Trexall is the trademark name for our 5 mg, 7.5 mg, 10 mg and 15 mg Methotrexate tablets which were approved by the FDA in March 2001. Methotrexate is used in the treatment of certain forms of cancer, severe psoriasis and adult rheumatoid arthritis. We designed these new dosage strengths to simplify drug therapy and increase patient convenience and compliance. Prior to Trexall's approval, Methotrexate tablets were available only in a 2.5 mg strength tablet. ViaSpan(R). In August 2000, we began marketing ViaSpan under a license granted to us by DuPont Pharmaceuticals. ViaSpan is a solution used for hypothermic flushing and storage of organs, including kidney, liver and pancreas at the time of their removal from the donor in preparation for storage, transportation and eventual transplantation into a recipient. We exclusively market the product in both the United States and Canada to approximately 175 customers, primarily transplant centers and hospitals. Since ViaSpan is sold to a relatively small number of customers, the costs and risks assumed by us to market ViaSpan are not substantially different from the costs and risks assumed by us to market any of our other products. ViaSpan is patented through March 2006. We are negotiating with BMS to extend our license in perpetuity. (See "Restructure of Co-Development and Marketing Alliance"). Proprietary Products in Development We have proprietary products in clinical development in several key therapeutic categories. Examples of these products are discussed in detail below. Adenovirus Vaccines. In September 2001, we were awarded a $35.4 million, six year contract by the United States Department of Defense to develop Adenovirus Vaccines Type 4 and 7. The Adenovirus Vaccines are expected to be dispensed to armed forces recruits to prevent epidemics of severe acute respiratory diseases that have been a leading cause of hospitalizations of military trainees. Following completion of clinical studies and the approval of biological license applications, we would manufacture the vaccines under contract to the government specifically for dispensing to the U.S. armed forces. Cenestin Line Extensions. We are committed to expanding the Cenestin portfolio through a development program that includes the introduction of 0.45 mg tablet strength in fiscal 2004, development of a estrogen only vaginal cream product and a combination estrogen and progestin product using a different progestin than the one used in the WHI study. We will also continue to evaluate the development of additional products, based on medical developments in the hormone replacement therapy area. (See "Proprietary Products We Currently Market") SEASONALE(TM). SEASONALE is an extended regimen oral contraceptive that we are developing through an agreement with the Medical College of Hampton Roads, Eastern Virginia Medical School. The majority of oral contraceptive products currently 7 available in the United States are based on a regimen of 21 treatment days of active ingredient and then a seven-day placebo interval. By contrast, under the proposed SEASONALE regimen, women would take the active product for up to 84 consecutive days, and then would have a seven-day placebo interval. The proposed SEASONALE regimen is expected to result in only 4 menstrual cycles per year, or one per "season". This type of oral contraceptive regimen may be preferable to many women whose lifestyle dictates the convenience of fewer menstrual cycles per year. Like all oral contraceptives, we will seek SEASONALE approval for the indication of prevention of pregnancy. Our Phase III study involved more than 1,400 female patients and was a randomized four-arm, open-label, multi-center study evaluating the use of two dose levels of SEASONALE in a 91-day cycle administered for approximately 12 months and two dose levels of conventional oral contraceptive therapy administered for approximately 12 months. We completed our Phase III clinical trials in March 2002, submitted our NDA in August 2002, and are awaiting notification from the FDA as to whether the NDA has been accepted for filing. Pending FDA approval, SEASONALE could reach consumers as early as the second half of calendar 2003. The SEASONALE regimen is protected by a patent that expires in 2017. CyPat(TM). Cyproterone Acetate, which we intend to market in the United States under the name CyPat, is a steroid that blocks the action of testosterone. Cyproterone Acetate is not currently approved for marketing in the United States. Internationally, Cyproterone Acetate is mainly used in the management of prostate cancer, both as a single agent and in combination with other products. In addition, it is used as a component of oral contraceptives and in the treatment of acne, seborrhea, hirsutism in women, precocious puberty in children, and hypersexuality/deviant behavior in men. Currently, Cyproterone Acetate is approved for use in over 80 countries throughout Europe, Asia, South America, Australia, Japan and Canada. We have initiated a Phase III, randomized, multicenter, placebo-controlled, double blind clinical trial to study the efficacy and safety of CyPat for the treatment of hot flashes following surgical or chemical castration in prostate cancer patients. The clinical studies have enrolled approximately 950 patients at approximately 60 sites across the country. To date, approximately 650 patients have completed. We are working to complete enrollment of our Phase III clinical trial by December 2003. Pending FDA approval, CyPat could reach consumers as early as the second half of calendar 2005. We expect to receive five-years of market exclusivity and we have a patent, which expires in 2018, that covers the use of CyPat in prostate cancer patients. Vaginal Ring Products. We intend to use the proprietary, novel, vaginal ring drug delivery system acquired from Enhance Pharmaceuticals to develop products that address a variety of female health issues and unmet medical needs. We currently have several products that use this technology in various stages of development, including a urinary incontinence product being developed under a development and licensing agreement with Schering AG. Under this agreement we have licensed the worldwide marketing rights for the urinary incontinence product to Schering AG in exchange for research and development funding, milestone payments upon the achievement of specified objectives and an ongoing royalty based on worldwide sales. DP3. DP3 is another extended regimen oral contraceptive product. We have initiated enrollment in two large full-scale Phase III clinical trials involving 12 months of treatment and including approximately 2,600 patients at 35 investigational sites. Proprietary Sales And Marketing Women's Healthcare Product Sales Force We have a 132-person contract sales organization, provided to us by Cardinal Market Force, that markets women's healthcare products and currently promotes Cenestin, our largest selling proprietary product, directly to physicians. Our contract with Cardinal expires on October 31, 2002 and we are currently negotiating to extend the contract through fiscal 2003. The contract allows us to convert Cardinal's contract sales people into our employees at the expiration of the contract and we plan to do so whether or not the contract is extended. We plan to build our women's healthcare product sales force to approximately 225-250 representatives over the second half of fiscal 2003, in anticipation of the launch of SEASONALE. We expect to use our women's healthcare sales force to promote additional women's healthcare products, as we develop or acquire additional products. Prior to July 1, 2002, Cenestin was co-promoted by Solvay Pharmaceuticals, using 180 Solvay sales representatives, in addition to the Cardinal sales force. Under that co-promotion agreement, Solvay paid the costs for its sales force and for the Cardinal sales force and was also responsible for the marketing and sales promotion costs for Cenestin. In return for assuming the costs and obligations for Cenestin, Solvay received a marketing fee of 80% of our gross profits for Cenestin. We terminated the co-promotion agreement effective June 30, 2002. Beginning July 1, 2002 we assumed the responsibility for all costs associated with the Cardinal sales force and assumed all responsibility for marketing and promoting Cenestin. We no longer are obligated to pay Solvay a marketing fee based on Cenestin gross profits. Solvay has disputed our right to terminate the contract and has initiated arbitration to collect damages. (See "Legal Proceedings") 8 Rheumatology Product Sales Force We have a 22-person contract sales force provided to us by Innovex, LP, an affiliate of Quintiles Transnational Corp. that promotes our Trexall product directly to rheumatologists. Costs for the sales force are being provided by BMS under a Trexall Marketing Agreement previously entered into between Barr and BMS (See "Restructure of Co-Development and Marketing Alliance"). We are responsible for all marketing and promotion costs and perform the sales management function. Our current sales force contract with Quintiles expires in December 2003. We expect to use our rheumatology sales force to promote additional rheumatology products if and when, they are added our product portfolio. Transplant Product Sales Force We employee a National Account Manager to promote our transplant preservation agent ViaSpan to approximately 175 customers, in both the United States and Canada. These customers are primarily transplant centers and hospitals. We expect to use our transplant sales force to promote additional transplant products, if and when, they are added to our product portfolio. Other Products We will continue to evaluate various strategies for selling and marketing additional proprietary pharmaceuticals, including any combination of the following: o entering into co-promotion or contract sales arrangements with respect to the products; o establishing our own sales organization and related infrastructure; and, o licensing our proprietary products to other pharmaceutical companies with sales organizations sufficient to support our products. TAMOXIFEN Tamoxifen Citrate is the generic name for AstraZeneca's Nolvadex, which is used to treat advanced breast cancer, impede the recurrence of tumors following surgery, and reduce the incidence of breast cancer in women at high risk for developing the disease. Statistics indicate that one in eight women will get breast cancer during her lifetime, and each year, more than 180,000 new cases of breast cancer are diagnosed. In 1993, as a result of a settlement of a patent challenge case, we entered into a non-exclusive supply and distribution agreement with AstraZeneca. Since that time, we have been the only distributor of Tamoxifen in the United States other than AstraZeneca. Under the distribution agreement, we purchased Tamoxifen directly from AstraZeneca in both 10 mg and 20 mg tablets and marketed the product in the Barr label. Our distribution agreement with AstraZeneca expired on August 21, 2002. Tamoxifen accounted for approximately 31% of our product sales during fiscal 2002, and approximately 65% and 68% of our product sales during fiscal 2001 and 2000, respectively. Because we purchased the product from AstraZeneca, our gross margins for sales of Tamoxifen were lower than our gross margins for our manufactured generic products. The patent covering Tamoxifen expired on August 20, 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 generics from launching Tamoxifen products prior to that date. Because of the unique regulatory history of our Tamoxifen ANDA, however, we believe that we are entitled to launch our own manufactured version of the 10 mg Tamoxifen product during AstraZeneca's pediatric exclusivity period. Our regulatory authorization to launch Tamoxifen 10mg was issued prior to the enactment of the legislation authorizing 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 enactment. AstraZeneca disagrees with our views and has informally asked FDA to block us from launching the 10 mg product prior to February 20, 2003. We are currently in discussions with FDA regarding the status of our 10 mg approval and expect to receive definitive guidance from FDA by mid-September. We also believe that AstraZeneca's attempted use of pediatric exclusivity to block the launch of our Tamoxifen products violates AstraZeneca's obligations under the distribution agreement. 9 We expect that our cost to manufacture Tamoxifen will be lower than our cost to purchase Tamoxifen from AstraZeneca and, as a result, we believe our profit margins on Tamoxifen will exceed the approximately 15% margins we earn as a distributor as soon as we begin to sell our manufactured product. Although our Tamoxifen profit margins should improve at such time, we do expect our profits and margin on Tamoxifen to decline over time as additional generic competitors enter the market following expiration of AstraZeneca's pediatric exclusivity period in February 2003 (See Item 7-"Outlook" in this Form 10-K). PATENT CHALLENGES We actively challenge the patents protecting branded pharmaceutical products where we believe such patents are invalid, unenforceable or not infringed by our products. Our activities in this area, including sourcing raw materials and developing equivalent formulations, are designed to obtain FDA approval for our product. Our legal activities, performed by outside counsel, are designed to eliminate the market barrier to market entry created by the patent. Under the Hatch-Waxman Act, the first generic ANDA applicant whose filing includes a certification that a listed patent on the brand name drug is invalid, unenforceable or not infringed (a so-called "paragraph IV certification"), may be eligible to receive a 180-day period of generic market exclusivity. This period of market exclusivity may provide the patent challenger with the opportunity to earn a return on the risks taken and its legal and development costs. Patent challenge product candidates typically must have several years of remaining patent protection to ensure that the legal process can be completed prior to patent expiry. Because of the potential value of the 180-day market exclusivity as the only generic in the market for that period, we typically seek to be the first company to file an ANDA claiming a paragraph IV certification for a targeted product. The process for initiating a patent challenge begins with the identification of a drug candidate and evaluation by qualified legal counsel of the patents protecting that product. We have reviewed a number of potential challenges and have pursued only those that we believe have merit. Our general practice is to disclose patent challenges after the patent holder has sued us. Thus, at any time, we could have several undisclosed patent challenges in various stages of development. Patent challenges are complex, costly and can take three to six years to complete. As a result, we have in the past and may elect in the future to have partners on select patent challenges. These arrangements typically provide for a sharing of the costs and risks, and generally provide for a sharing of the benefits of a successful outcome. In addition, our patent challenges may result in settlements that we believe are reasonable, lawful, and in our shareholders' best interests. PATENT CHALLENGE HISTORY
RESOLVED CASES -------------- PRODUCT (BRAND NAME) OUTCOME STATUS - ------------------ ------------------ ----------------------------- Tamoxifen (Nolvadex) o Settled o See Tamoxifen Section Ciprofloxacin (Cipro) o Settled o Tentatively approved ANDA o Contingent non-exclusive supply agreement until December 2003 o Right to distribute with partner six months before patent expiry Norethindrone/Ethinyl o Settled o Tentatively approved ANDA Estradiol (Ortho-Novum o Obtained Patent License to 7/7/7) launch generic in January 2003 Fluoxetine (Prozac) o Patent Invalidated o Launched product Aug. 2001 Flecainide Acetate o Determination of o Fiscal 2003 launch expected (Tambocor) non-infringement Trazodone (Desyrel) o Unsuccessful o Product launched in 2001 following patent expiry Zidovudine (Retrovir) o Unsuccessful o Tentatively approved ANDA o Anticipated launch upon patent expiry in 2005
PENDING CASES ------------- PRODUCT (BRAND NAME) STATUS - ------------------ ----------------------------- Desogestrel Ethinyl o Product launched in April, Estradiol (Mircette) 2002 o See Item 3 - Legal Proceedings Niacin (Niaspan) o See Item 3 - Legal Proceedings
10 Norgestimate/Ethinyl o See Item 3 - Legal Estradiol Proceedings (Ortho Tri-Cyclen) Alendronate Sodium o See Item 3 - Legal (Fosamax) Proceedings Mirtazapine Orally o See Item 3 - Legal Disintegrating Proceedings (Remeron Soltabs) Fexofenadine o See Item 3 - Legal Hydrochloride Proceedings Capsules (Allegra) Fexofenadine o See Item 3 - Legal Hydrochloride Proceedings Tablets (Allegra) Fexofenadine o See Item 3 - Legal Hydrochloride/ Proceedings Pseudoephedrine Hydrochloride Tablets (Allegra D) Norethindrone Acetate/ o See Item 3 - Legal Ethinyl estradiol (Estrostep) Proceedings Norethindrone Acetate/ o See Item 3 - Legal Ethinyl Estradiol (Estrostep FE) Proceedings Norethindrone o See Item 3 - Legal Acetate/Estradiol (Fem Proceedings HRT)
Selected Patent Case Settlements Tamoxifen. In 1993, as a result of a settlement of a patent challenge against AstraZeneca, we entered into a non-exclusive supply and distribution agreement. As discussed previously, under the terms of the Tamoxifen agreement, we have distributed a Tamoxifen product that we have purchased directly from AstraZeneca. Ciprofloxacin. In January 1997, as a result of a patent challenge against Bayer AG and Bayer Corporation ("Bayer"), we entered into a settlement agreement. Under the settlement agreement, we withdrew our patent challenge by amending our ANDA from a paragraph IV certification (claiming invalidity) to a paragraph III certification (seeking approval upon patent expiry) and acknowledged the validity and enforceability of the Ciprofloxacin patent. In addition, we entered into a non-exclusive supply agreement that ends at the date of patent expiry, currently December 2003. Under the supply agreement, Bayer has the option to either make payments to Barr or allow Barr and Rugby Laboratories, now owned by Watson Pharmaceuticals, Inc., to purchase Ciprofloxacin from Bayer at a predetermined discount. To date, Bayer has elected not to provide product to us. If Bayer chooses not to provide the product to Barr, we would recognize proceeds of approximately $31 million per year through the year ending June 30, 2003. If Bayer elects to provide us product for resale, the amount we could earn would depend upon numerous market factors. The supply agreement also provides that, six months prior to patent expiry, if we are not already distributing the product, we and Rugby Laboratories will have the right to begin distributing Ciprofloxacin product manufactured by Bayer. The Bayer license is non-exclusive and Bayer may, at its option, provide other non-exclusive licenses to others after Barr and Rugby Laboratories have operated under the license for six months. If Bayer does not elect to license any other parties and if no other party is successful in its challenge of the patent, we expect that the licensed product will be the only other Ciprofloxacin product in the market during the six months prior to patent expiry. We also anticipate that Bayer will seek pediatric exclusivity, which, if granted, could delay competition from other generics for six months beyond the expiration of the patent. Bayer has successfully defended its Cipro patent in two subsequent cases and we do not believe there will be a successful challenge. We do not expect to receive 180 days of generic exclusivity available to the first patent challenger under the Hatch-Waxman Act. Ortho-Novum 7/7/7(R). Ortho-Novum 7/7/7 is a regimen of oral contraceptives that includes three different tablet combinations of norethindrone and ethinyl estradiol. In October 2001 we reached a settlement of pending litigation regarding Ortho-McNeil Pharmaceutical, Inc.'s patents protecting Ortho-Novum 7/7/7. Under the terms of the settlement, Ortho-McNeil granted us a non-exclusive license to market our generic product effective January 1, 2003, nine months prior to patent expiry in September 2003. As part of the settlement we acknowledged our infringement of, and the validity and enforceability of, the patent claims at issue in the case. We also agreed that the settlement of the Ortho-Novum 7/7/7 litigation would not affect our challenge of the same patents that also protect Ortho-McNeil's Ortho Tri-Cyclen(R) oral contraceptive. 11 Patent Challenge Process The Hatch-Waxman Act provides incentives for generic pharmaceutical companies to challenge suspect patents on branded pharmaceutical products. The legislation recognizes that there is a potential for the improper issuance of patents by the United States Patent and Trade Office, or PTO, resulting from a variety of technical, legal or scientific factors. The Hatch-Waxman legislation places significant burdens on the challenger to ensure that such suits are not frivolous, but also offers the opportunity for significant financial reward if successful. All of the steps involved in the filing of an ANDA with the FDA, including research and development, are identical with those steps taken in development of any generic drug. At the time an ANDA is filed with the FDA , the generic company that wishes to challenge the patent files a certification asserting that the patent is invalid, unenforceable and/or not infringed, a so-called "paragraph IV certification". After receiving notice from the FDA that its application is accepted for filing, the generic company sends the patent holder a notice explaining why it believes that the patents in question are invalid, unenforceable or not infringed. Upon receipt of the notice from the generic company, the patent holder has 45 days in which to bring suit in federal district court against the generic company to establish the validity, enforceability and/or infringement of the challenged patent. The discovery, trial and appeals process can take several years. The Hatch-Waxman Act provides for an automatic stay of the FDA's authority to grant the approval that would otherwise give the ANDA holder/patent challenger the option to market its generic product. This stay is set at 30 months, or such shorter or longer period as may be ordered by the court. The 30 months may or may not and often does not coincide with the timing of a trial or the expiration of a patent. Under the Hatch-Waxman Act, the developer of a bioequivalent drug which is the first to have its ANDA accepted for filing by the FDA, and whose filing includes a paragraph IV certification, may be eligible to receive a 180-day period of market exclusivity. This period of market exclusivity may provide the patent challenger with the opportunity to earn a return on the risks taken and its legal and development costs. The FDA adopted regulations implementing the 180-day generic marketing exclusivity provision of the Hatch-Waxman Act. However, over the years, courts have found various provisions of the regulations to be in conflict with the statute. For example, in Mova Pharmaceutical Corp. v. Shalala, 140 F.3d 1060 (D.C. Cir. 1998), the court of appeals held that the Hatch-Waxman Act required generic exclusivity to be awarded to the first generic company to file a new drug application containing a paragraph IV certification, regardless of whether that company had prevailed in a court challenge to the relevant patent, in contrast to FDA regulations requiring the first patent challenger to successfully defend its challenge to the patent. In Mylan Pharmaceuticals v. Shalala, 81 F.Supp.2d 30 (D.D.C. 2000), the district court found that the statute requires the 180-day generic period to commence on the date of a district court decision finding the challenged patent invalid, even if the innovator company appealed the court's decision. The decision was in contrast to the FDA's rule that the exclusivity period would not commence until the appellate court affirmed the district court's decision, but also found that the interests of applicants who had relied in good faith on the FDA's regulations should be protected. These successful court challenges required the FDA to ignore portions of its regulations in implementing the statute. Ultimately, in August 1999 the FDA decided to propose a new regulatory scheme for implementing the 180-day market exclusivity provision of the Hatch-Waxman Act. The FDA further modified its proposed new regulatory scheme in a March 2000 industry guidance. In general, the proposed rule and guidance would make a generic manufacturer's ability to obtain and benefit from the Hatch-Waxman market exclusivity provisions more uncertain. Under the guidance, the 180-day period could begin to run when the federal district court enters a ruling finding the challenged patent to be invalid or not infringed. This would require the patent challenger to either begin marketing its generic product before the federal appellate process is complete or risk losing some or all of its marketing exclusivity waiting for the appellate process to conclude. In addition, the proposed rule could put the patent challenger in the position of losing some or all of its market exclusivity, if the 180-day period is deemed to have started before the challenger's ANDA has been approved by the FDA or before the challenger is willing to enter the market with its generic product. We have submitted comments on both the August 1999 proposed rule and the March 2000 guidance. At least 20 other entities, including other generic pharmaceutical companies, innovator companies and pharmaceutical industry organizations, also submitted comments on these proposals. Because of the uncertainty surrounding the rulemaking, the scope of the proposed rule, and the number of comments and the complexity of the issues covered by the proposed rule, there is uncertainty as to when, if ever, the FDA will adopt final regulations. If final regulations are ever adopted, the regulations would likely to be challenged in court and the outcome of such lawsuits is uncertain. 12 In addition to the rulemaking, Congress has recently become involved in some of these issues relating to the FDA. On July 31, 2002, the U.S. Senate approved by a vote of 78-21, the Greater Access to Affordable Pharmaceuticals bill, which we refer to as the "GAAP Bill". Sponsored by Senators Schumer and McCain, the bill addresses many of the issues in the FDA rulemaking that have been exploited by some brand pharmaceutical companies to delay generic competition and keep the cost of important medicines unnecessarily high. Among other things, the bill gives generic applicants and patent owners the right to sue brand companies to have patents added to, or removed from the Orange Book; requires brand companies to list all relevant patents on brand drugs; and limits brand companies to a single 30-month stay for the patents that are listed in the Orange Book when the brand drug is originally approved. The GAAP Bill also requires brand companies to sue a generic company within 45 days of receiving notice of a patent challenge or lose its right to sue that particular company; clarifies that the triggering event for 180-days of generic exclusivity is the date of a decision on a patent challenge by the appellate court; provides for the forfeiture of the first successful generic patent challenger's 180 days of market exclusivity if the generic company does not go to market within 60 days of specified events; and requires generic applicants to provide detailed notices when challenging brand patents. While ultimate approval of the legislation is not assured, the bill is expected to be debated by the House of Representatives when Congress reconvenes in the fall. In 1997, Congress enacted a new provision designed to reward branded pharmaceutical companies for conducting research in the pediatric population. Under certain circumstances, a branded company can obtain an additional six months of market exclusivity, known as "pediatric exclusivity" by performing pediatric research. Thus, where pediatric exclusivity is requested by a brand company and granted by FDA, the commencement of generic competition could possibly be delayed by six months. The facts and circumstances of each patent challenge differ significantly. It is, therefore, impossible for us to provide a general conclusion as to the ultimate effect that the proposed rule, the guidance, the new legislation or pediatric exclusivity would have on the exclusivity status of our patent cases. The FTC recently completed a study of patent settlements in the pharmaceutical industry and made recommendations to Congress to modify Hatch Waxman in certain respects. The FTC's primary recommendations include: permitting only one automatic 30 month stay per drug product per ANDA to resolve infringement disputes over patents listed in the Orange Book prior to the filing date of the generic applicant's ANDA; and, requiring brand-name pharmaceutical companies and first generic applicants to provide copies of certain agreements to the FTC. PATENTS AND PROPRIETARY RIGHTS We believe that patents and other proprietary rights are important to our business. Our policy is to file patent applications and to obtain patents to protect our products, technologies, inventions and improvements that we consider important to the development of our business. We also rely upon trade secrets, know-how, continuing technological innovations and licensing opportunities to develop and maintain our competitive position. Preserving our trade secrets and protecting our proprietary rights are important to our long-term success. From time to time, we may find it necessary to initiate litigation to enforce our patent rights, to protect our trade secrets or know-how or to determine the scope and validity of the proprietary rights of others. Litigation concerning patents, trademarks, copyrights and proprietary technologies can often be protracted and expensive and, as with litigation generally, the outcome is inherently uncertain. GOVERNMENT REGULATION We are subject to extensive regulation by the federal government, principally by the FDA, and, to a lesser extent, by the Drug Enforcement Agency or DEA and state governments. The Federal Food, Drug and Cosmetic Act, the Controlled Substances Act and other federal statutes and regulations govern or influence the testing, manufacturing, safety, labeling, storage, record keeping, approval, marketing, advertising and promotion of our products. Non-compliance with applicable requirements can result in fines, recalls and seizure of products. The FDA has the authority to revoke drug approvals previously granted. Abbreviated New Drug Application Process FDA approval is required before a generic equivalent or a new dosage form of an existing drug can be marketed. We receive 13 approval for such products by submitting an ANDA to the FDA. When processing an ANDA, the FDA waives the requirement of conducting complete clinical studies, although it normally requires bioavailability and/or bioequivalence studies. "Bioavailability" indicates the rate and extent of absorption and levels of concentration of a drug product in the blood stream needed to produce a therapeutic effect. "Bioequivalence" compares the bioavailability of one drug product with another, and when established, indicates that the rate of absorption and levels of concentration of the active drug substance in the body are the same for the generic drug and the previously approved drug. An ANDA may be submitted for a drug on the basis that it is the equivalent of a previously approved drug or, in the case of a new dosage form, is suitable for use for the indications specified. Before approving a product, the FDA also requires that our procedures and operations conform to Current Good Manufacturing Practice ("cGMP") regulations, relating to good manufacturing practices as defined in the U.S. Code of Federal Regulations. We must follow the cGMP regulations at all times during the manufacture of our products. To help insure compliance with the cGMP regulations, we continue to spend significant time, money and effort in the areas of production and quality control to ensure full technical compliance. If the FDA believes a company is not in compliance with cGMP, sanctions may be imposed upon that company including: o withholding from the company new drug approvals as well as approvals for supplemental changes to existing applications; o preventing the company from receiving the necessary export licenses to export its products; and o classifying the company as an "unacceptable supplier" and thereby disqualifying the company from selling products to federal agencies. We believe we are currently in compliance with cGMP. The timing of final FDA approval of ANDA applications depends on a variety of factors, including whether the applicant challenges any listed patents for the drug and whether the brand-name manufacturer is entitled to one or more statutory exclusivity periods, during which the FDA is prohibited from accepting applications for, or approving, generic products. In certain circumstances, a regulatory exclusivity period can extend beyond the life of a patent, and thus block ANDAs from being approved on the patent expiration date. For example, in certain circumstances the FDA may now extend the exclusivity of a product by six months past the date of patent expiry if the manufacturer undertakes studies on the effect of their product in children, a so-called pediatric extension. In May 1992, Congress enacted the Generic Drug Enforcement Act of 1992, which allows the FDA to impose debarment and other penalties on individuals and companies that commit certain illegal acts relating to the generic drug approval process. In some situations, the Generic Drug Enforcement Act requires the FDA to not accept or review ANDAs for a period of time from a company or an individual that has committed certain violations. It also provides for temporary denial of approval of applications during the investigation of certain violations that could lead to debarment and also, in more limited circumstances, provides for the suspension of the marketing of approved drugs by the affected company. Lastly, the Generic Drug Enforcement Act allows for civil penalties and withdrawal of previously approved applications. Neither we nor any of our employees have ever been subject to debarment. New Drug Application Process FDA approval is required before any new drug can be marketed. An NDA is a filing submitted to the FDA to obtain approval of a new drug and must contain complete pre-clinical and clinical safety and efficacy data or a right of reference to such data. Before dosing a new drug in healthy human subjects or patients may begin, stringent government requirements for preclinical data must be satisfied. The pre-clinical data, typically obtained from studies in animal species, as well as from laboratory studies, are submitted in an Investigational New Drug, or IND, application, or its equivalent in countries outside the United States, where clinical trials are to be conducted. The preclinical data must provide an adequate basis for evaluating both the safety and the scientific rationale for the initiation of clinical trials. Clinical trials are typically conducted in three sequential phases, although the phases may overlap. o In Phase I, which frequently begins with the initial introduction of the compound into healthy human subjects prior to introduction into patients, the product is tested for safety, adverse effects, dosage, tolerance absorption, metabolism, excretion and other elements of clinical pharmacology. o Phase II typically involves studies in a small sample of the intended patient population to assess the efficacy of the compound for a specific indication, to determine dose tolerance and the optimal dose range as well as to gather additional information 14 relating to safety and potential adverse effects. o Phase III trials are undertaken to further evaluate clinical safety and efficacy in an expanded patient population at typically dispersed study sites, in order to determine the overall risk-benefit ratio of the compound and to provide an adequate basis for product labeling. Each trial is conducted in accordance with certain standards under protocols that detail the objectives of the study, the parameters to be used to monitor safety and efficacy criteria to be evaluated. Each protocol must be submitted to the FDA as part of the IND. In some cases, the FDA allows a company to rely on data developed in foreign countries, or previously published data, which eliminates the need to independently repeat some or all of the studies. Data from preclinical testing and clinical trials are submitted to the FDA as an NDA for marketing approval and to other health authorities as a marketing authorization application. The process of completing clinical trials for a new drug may take several years and require the expenditure of substantial resources. Preparing an NDA or marketing authorization application involves considerable data collection, verification, analysis and expense, and there can be no assurance that approval from the FDA or any other health authority will be granted on a timely basis, if at all. The approval process is affected by a number of factors, primarily the risks and benefits demonstrated in clinical trials as well as the severity of the disease and the availability of alternative treatments. The FDA or other health authorities may deny an NDA or marketing authorization application if the regulatory criteria are not satisfied, or such authorities may require additional testing or information. Even after initial FDA or other health authority approval has been obtained, further studies, including Phase IV post-marketing studies, may be required to provide additional data on safety. The post-marketing studies could be used to gain approval for the use of a product as a treatment for clinical indications other than those for which the product was initially tested. Also, the FDA or other regulatory authorities require post-marketing reporting to monitor the adverse effects of the drug. Results of post-marketing programs may limit or expand the further marketing of the products. Further, if there are any modifications to the drug, including changes in indication, manufacturing process or labeling or a change in the manufacturing facility, an application seeking approval of such changes must be submitted to the FDA or other regulatory authority. Additionally, the FDA regulates post-approval promotional labeling and advertising activities to assure that such activities are being conducted in conformity with statutory and regulatory requirements. Failure to adhere to such requirements can result in regulatory actions that could have a material adverse effect on our business, results of operations and financial condition. Drug Enforcement Agency Because we sell and develop products containing controlled substances, we must meet the requirements and regulations of the Controlled Substances Act which are administered by the DEA. These regulations include stringent requirements for manufacturing controls and security to prevent diversion of or unauthorized access to the drugs in each stage of the production and distribution process. The DEA regulates allocation to us of raw materials used in the production of controlled substances based on historical sales data. We believe we are currently in compliance with all applicable DEA requirements. Medicaid/Medicare In November 1990, a law regarding reimbursement for prescribed Medicaid drugs was passed as part of the Congressional Omnibus Budget Reconciliation Act of 1990. The law requires drug manufacturers to enter into a rebate contract with the Federal Government. All generic pharmaceutical manufacturers, whose products are covered by the Medicaid program, are required to rebate to each state a percentage (currently 11% in the case of products sold by us which are covered by an ANDA and 15% in the case of products sold by us which are covered by an NDA) of their average net sales price for the products in question. We accrue for future estimated rebates in our consolidated financial statements. Over the last year, the extension of prescription drug coverage to all Medicare recipients has gained support in Congress. The Generic Pharmaceutical Association, or the GPhA, is actively involved in discussions regarding the structure and scope of any proposed Medicare prescription drug benefit plans. We, as an active member in the GPhA, support the development of an industry-wide position on Medicare. We believe that federal and/or state governments may continue to enact measures in the future aimed at reducing this cost of providing a prescription drug benefits to the public and in particular senior citizens. We cannot predict the nature of such measures or their impact on our profitability. 15 EMPLOYEES Our success depends on our ability to hire and retain highly qualified scientific and management personnel. We face competition for personnel from other companies, academic institutions, government entities and other organizations. As of June 30, 2002, we had approximately 1,075 full-time employees, including 172 in research and development and 691 in production and quality assurance/control. Approximately 84 of our employees are represented by Local 2-149 of the Paper, Allied, Chemical and Energy (PACE) Union International under a collective bargaining agreement that expires on April 1, 2005. We believe that our relations with our employees are good and we have no history of work stoppages. PRODUCT DEVELOPMENT For the fiscal years ended June 30, 2002, 2001 and 2000, total research and development expenditures were approximately $76, $58 and $48 million, respectively. The increase in research and development spending during the past two fiscal years is consistent with the increase in spending on proprietary product development activities. Research and development expenditures for generic development activities include personnel costs, costs paid to third party contract research organizations for conducting bioequivalence studies and costs for raw materials used in developing the products. Proprietary development costs also include personnel costs, clinical study costs and funds paid to third party clinical research organizations that are responsible for conducting the clinical trials required to support a product application with FDA. We anticipate that total research and development expenditures will increase during fiscal 2003 as we increase our investment in proprietary products, pursue the development of some unusually expensive generic products, including conjugated estrogens, and invest in products using the proprietary vaginal ring delivery platform acquired with Enhance. COMPETITION The pharmaceutical business has historically been subject to intense competition. As patents and other basis for market exclusivity expire, generic competitors, such as we, enter the marketplace. Normally, there is a unit price decline as the number of generic competitors increases. The timing of these price decreases is unpredictable and can result in a significantly curtailed period of profitability for a generic product. In addition, brand-name manufacturers frequently take actions to prevent or discourage the use of generic equivalents. These actions may include: - filing new patents on drugs whose original patent protection is about to expire; - developing patented controlled-release products or other product improvements; and - increasing marketing initiatives and commencing litigation. Generic pharmaceuticals market conditions, particularly in the U.S., have been affected by industry consolidation and a fundamental shift in industry distribution, purchasing and stocking patterns resulting from the increased importance of sales to major chain drug stores and major wholesalers and, a concurrent reduction in sales to private label generic distributors. Large chain drug stores and large wholesalers expect lower prices on products sold and maintain lower levels of inventory at their facilities. These customers also tend to limit the number of vendors. We also face competition for our proprietary products from proprietary and generic products and from promotional activities by other competing pharmaceutical companies. This competition affects our ability to market our proprietary products effectively and customer acceptance of our products. We currently market three proprietary products that compete against other branded products: Cenestin, Trexall and Viaspan. Our Cenestin synthetic conjugated estrogens product competes in the hormone replacement market with products such as Premarin; Trexall competes in the rheumatology market with several different products, including 2.5 mg methotrexate tablets; and, Viaspan competes with several other products in the organ transplant preservation market. Pending a final approval by FDA, our SEASONALE extended regimen product will compete with other oral contraceptive products. We compete in varying degrees with numerous other manufacturers of pharmaceutical products, both branded and generic. These competitors include: - brand pharmaceutical companies whose patent protected therapies compete with both generic and proprietary products marketed or being developed by us, including AstraZeneca, Johnson & Johnson, Wyeth, Bristol-Myers Squibb and Eli Lilly & Company; - the generic divisions and subsidiaries of brand pharmaceutical companies, including Geneva Pharmaceuticals, Inc., a subsidiary of Novartis AG; 16 - large independent generic manufacturers/distributors that provide a broad line of products, including Mylan Laboratories and Teva Pharmaceuticals; - generic manufacturers that target categories in our product line, such as Watson Pharmaceuticals and Eon Labs. Many of our competitors have greater financial and other resources than we have, and are therefore able to devote more resources than we can in such areas as sales and marketing support and product development. In order to ensure our ability to compete effectively, we: - focus our proprietary and generic product development in areas of historical strength or competitive advantage; - target generic products for development that have unique characteristics, including: difficulty in sourcing raw materials; difficulty in formulation or establishing bioequivalence; manufacturing that requires unique facilities, processes or expertise; and - make significant investments in plant and equipment to give us a competitive edge in manufacturing. These factors, when combined with our investment in new product development and our focus on select therapeutic categories, provide the basis for our belief that we will continue to remain a leading independent specialty pharmaceutical company. RAW MATERIALS & MANUFACTURING SUPPLIERS We purchase the bulk pharmaceutical chemicals, which are essential to our business from numerous manufacturers in the U.S. and throughout the world. All purchases are made in United States dollars, and while currency fluctuations do not have an immediate impact on prices we pay, such fluctuations may, over time, have an effect on our costs. Certain products that have historically accounted for a significant portion of our revenues are currently available only from sole or limited suppliers. Arrangements with foreign suppliers are subject to certain additional risks, including the availability of governmental clearances, export duties, political instability, currency fluctuations and restrictions on the transfer of funds. Any inability to obtain raw materials on a timely basis, or any significant price increases that cannot be passed on to customers, could have a material adverse effect on us. Because prior FDA approval of raw material suppliers is required, if raw materials from an approved supplier were to become unavailable, the required FDA approval of a new supplier could cause a significant delay in the manufacture of the drug product affected. To date, we have not experienced any significant delays from lack of raw material availability. However, there can be no assurance that significant delays will not occur in the future. GOVERNMENT RELATIONS ACTIVITIES A large number of branded pharmaceutical products are scheduled to go off patent over the next several years and the branded pharmaceutical industry has increased its efforts to utilize state and federal legislative and regulatory arenas to delay generic competition, or limit the severe market erosion they can experience once monopoly protection is lost for the branded product. Efforts to achieve these goals include, but are not limited to, filing additional patents in the FDA's Orange Book in an attempt to increase the period of patent protection for products, directly petitioning the FDA to request amendments to FDA standards through the Citizen Petition process, seeking changes in United States Pharmacopeia standards and attempting to extend patents by attaching amendments to important federal legislation. The U.S. Congress is currently debating several legislative initiatives that address various brand and generic pharmaceutical issues. Should federal legislation be passed, it is unclear what effect it will have on the generic industry. Because a balanced and fair legislative and regulatory arena is critical to the generic pharmaceutical industry, we have and will continue to put a major emphasis in terms of management time and financial resources on government affairs activities. We currently maintain an office and staff a full-time government affairs department in Washington, D.C., has responsibility for coordinating state and federal legislative activities and coordinating with the generic industry trade association. ITEM 2. PROPERTIES We have facilities and operations in New York, New Jersey, Ohio, Pennsylvania, Virginia and Washington, D.C. The following table presents the facilities owned or leased by us as of June 30, 2002 and indicates the location and type of each of these facilities. 17
SQUARE LOCATION FOOTAGE STATUS DESCRIPTION - ------------------------ ------ ----- -------------------------------- NEW JERSEY Northvale............... 27,500 Owned Manufacturing Somerset................ 38,000 Owned Manufacturing Plainsboro.............. 27,000 Leased R&D, Administration NEW YORK Blauvelt................ 38,600 Leased Corporate Administration Pomona 1................ 34,000 Owned R&D, Laboratories, Manufacturing Pomona 2................ 90,000 Owned Laboratories, Administrative Offices, Manufacturing, Warehouse OHIO Cincinnati.............. 190,000 Owned Manufacturing Cincinnati.............. 29,200 Leased Administration Mason................... 120,000 Leased Distribution PENNSYLVANIA Bala Cynwyd ............ 2,900 Leased Administration VIRGINIA Forest.................. 320,000 Owned Administrative Offices, Manufacturing, Warehouse, Packaging, Distribution WASHINGTON D.C.......... 1,800 Leased Corporate Administration
Over the past three fiscal years, we have spent approximately $84 million in capital expenditures primarily to expand manufacturing capacity, extend research and development activities and strengthen certain competitive advantages. We believe that our current facilities are in good condition, are being used productively and are adequate to meet current operating requirements. ITEM 3. LEGAL PROCEEDINGS PATENT CHALLENGE LITIGATION Desogestrel Ethinyl Estradiol (Mircette(R)) In May 2000, Duramed, which is now a wholly owned subsidiary, filed an ANDA seeking approval from the FDA to market the tablet combination of desogesrel/ethinyl estradiol tablets and ethinyl estradiol tablets, the generic equivalent of Organon, Inc.'s Mircette oral contraceptive regimen. Duramed notified the patent holder, Biotechnology General Corp. ("BTG") pursuant to the provisions of the Hatch-Waxman Act and BTG filed a patent infringement case in the United States District Court for the District of New Jersey seeking to prevent Duramed from marketing the tablet combination. On December 17, 2001, the District Court granted summary judgment, finding that Duramed's product did not infringe the patent. Subsequently, BTG filed an appeal of the District Court's decision. On April 8, 2002, we launched Kariva, the generic version of Mircette. If BTG is successful in its appeal, we could be liable for damages for patent infringement, which could have a material adverse effect upon our consolidated financial statements. Niacin (Niaspan(R)) In November 2001, we filed an ANDA seeking approval from the FDA to market niacin extended release tablets 1000 mg, the generic equivalent of KOS Pharmaceuticals, Inc.'s Niaspan extended-release tablet. We notified KOS pursuant to the provisions of the Hatch-Waxman Act and on March 4, 2002, KOS filed suit in the United States District Court for the Southern District of New York to prevent us from proceeding with the commercialization of this product. The case is in the discovery stage. On March 22, 2002 and April 2, 2002, we filed ANDAs seeking approval from the FDA to market 500 mg and 750 mg niacin extended release tablets, respectively. We notified KOS pursuant to the provisions of the Hatch-Waxman Act, and on August 12, 2002, KOS filed suit against us in the United States District Court for the Southern District of New York. We believe that we were the first applicant to file an ANDA containing a paragraph IV patent challenge to these products. If so, we may be eligible for 180 days of generic exclusivity, depending on a variety of factors. Kos recently listed an additional patent on Niaspan in the Orange Book. We are reviewing that patent. 18 Norgestimate / Ethinyl Estradiol (Ortho Tri-Cyclen(R)) In February 2000, we filed an ANDA seeking approval from the FDA to market three different tablet combinations of norgestimate and ethinyl estradiol, the generic equivalent of Ortho-McNeil Pharmaceutical Inc.'s ("Ortho") OrthoTri-Cyclen. We notified Ortho pursuant to the provisions of the Hatch-Waxman Act and on June 9, 2000, Ortho filed a patent infringement action in the United States District Court for the District of New Jersey seeking to prevent us from marketing the three different tablet combinations of norgestimate and ethinyl estradiol until certain U.S. patents expire in September 2003. Motions for summary judgment are currently pending before the trial court and no trial date has been set. We believe that we were the first applicant to file an ANDA containing a paragraph IV patent challenge to this product. If so, we may be eligible for 180 days of generic exclusivity, depending on a variety of factors. Alendronate Sodium (Fosamax(R)) In June 2001, we filed an ANDA seeking approval from the FDA to market alendronate sodium 70 mg tablets, the generic equivalent of Merck's Fosamax 70 mg tablets. We notified Merck pursuant to the provisions of the Hatch-Waxman Act and on August 31, 2001, Merck filed the identical patent infringement action in the United States District Courts for the District of Delaware and the Southern District of New York, seeking to prevent us from marketing alendronate sodium 70 mg tablets until 2018 when the last of certain U.S. patents is alleged to expire. On January 2, 2002, the Court in Delaware granted our motion and dismissed the Delaware action based on a lack of personal jurisdiction over us. We answered the New York action. In August 2001, we filed an ANDA seeking approval from the FDA to market alendronate sodium 35 mg tablets, the generic equivalent of Merck's Fosamax 35 mg tablets. We notified Merck pursuant to the provisions of the Hatch-Waxman Act and on December 14, 2001, Merck filed a patent infringement action in the United States District Court for the District of Delaware, seeking to prevent us from marketing alendronate sodium 35 mg tablets until 2018 when the last of certain U.S. patents is alleged to expire. On December 17, 2001, Merck filed the identical patent infringement action in the United States District Court for the Southern District of New York. On January 29, 2002, Merck voluntarily dismissed the Delaware action. We answered the New York action. On January 18, 2002, the Court in New York consolidated the cases involving the 70 mg and 35 mg alendronate sodium products for all purposes. Discovery is proceeding, but no trial date has been set. We believe that we were the first applicant to file an ANDA containing a paragraph IV patent challenge to the alendronate sodium 35 mg product. If so, we may be eligible for 180 days of generic exclusivity, depending on a variety of factors. Mirtazapine Orally Disintegrating (Remeron(R) Soltabs(TM)) In February 2002, we filed an ANDA seeking approval from the FDA to market mirtazapine orally disintegrating tablets, the generic equivalent of Akzo Nobel and Organon, Inc.'s ("Akzo and Organon") Remeron Soltab. We notified Akzo and Organon pursuant to the Hatch-Waxman Act and on May 3, 2002, Akzo and Organon filed suit in the United States District Court for the District of New Jersey to prevent us from proceeding with the commercialization of this product. The case is in its initial stages. We believe that we were the first applicant to file an ANDA containing a paragraph IV patent challenge to this product. If so, we may be eligible for 180 days of generic exclusivity, depending on a variety of factors. Fexofenadine Hydrochloride Capsules (Allegra(R)) In May 2001, we filed an ANDA seeking approval from the FDA to market fexofenadine hydrochloride capsules ("Fexofenadine") the generic equivalent of Aventis Pharmaceuticals, Inc.'s ("Aventis") Allegra. We notified Aventis pursuant to the provisions of the Hatch-Waxman Act and on August 1, 2001, Aventis filed a patent infringement action in the United States District Court for the District of New Jersey-Newark Division, seeking to prevent us from marketing Fexofenadine until after the expiration of various U.S. patents, the last of which expires in 2017. We believe that we were the first applicant to file an ANDA containing a paragraph IV patent challenge to this product. If so, we may be eligible for 180 days of generic exclusivity, depending on a variety of factors. 19 Fexofenadine Hydrochloride Tablets (Allegra(R)) In June 2001, we filed an ANDA seeking approval from the FDA to market fexofenadine hydrochloride tablets in 30 mg, 60 mg and 180 mg strengths, the generic equivalent of Aventis Pharmaceutical, Inc.'s Allegra tablet products. We notified Aventis pursuant to the provisions of the Hatch-Waxman Act and on September 7, 2001, Aventis filed a patent infringement action in the United States District Court for the District of New Jersey - Newark Division, seeking to prevent us from marketing fexofenadine tablets until after the expiration of various U.S. patents, the last of which is alleged to expire in 2017. We believe that we were the first applicant to file an ANDA containing a paragraph IV patent challenge to this product. If so, we may be eligible for 180 days of generic exclusivity, depending on a variety of factors. Fexofenadine Hydrochloride / Pseudoephedrine Hydrochloride (Allegra-D(R)) In September 2001, we filed an ANDA seeking approval from the FDA to market fexofenadine hydrochloride and pseudoephedrine hydrochloride extended release tablets, the generic equivalent of Aventis Pharmaceutical, Inc.'s Allegra-D product. We notified Aventis pursuant to the provisions of the Hatch-Waxman Act and on January 28, 2002, Aventis filed a patent infringement action in the United States District Court for the District of New Jersey - Newark Division, seeking to prevent us from marketing fexofenadine and pseudoephedrine extended release tablets until after the expiration of various U.S. patents, the last of which is alleged to expire in 2017. We believe that we were the first applicant to file an ANDA containing a paragraph IV patent challenge to this product. If so, we may be eligible for 180 days of generic exclusivity, depending on a variety of factors. On March 27, 2002, the Court entered an order consolidating the three Allegra product patent challenge cases for all purposes. We have moved to dismiss portions of Aventis' complaints asserting infringement of various patents that are not listed in the Orange Book. Discovery has been deferred by agreement of the parties pending a ruling on our motion. No trial date has been set. Norethindrone Acetate / Ethinyl Estradiol (Estrostep(R)) In January 2001, we filed an ANDA seeking approval from the FDA to market three different tablet combinations of norethindrone acetate and ethinyl estradiol, the generic equivalent of Warner-Lambert Company's Estrostep oral contraceptive regimen. We notified Warner-Lambert pursuant to the provisions of the Hatch-Waxman act and on August 3, 2001, Warner-Lambert filed a patent infringement action in the United States District Court for the Southern District of New York, seeking to prevent us from marketing the three different tablet combinations of norethindrone acetate and ethinyl estradiol until after the expiration of two U.S. patents, the last of which expires in 2008. Discovery in the case is underway. We believe that we were the first applicant to file an ANDA containing a paragraph IV patent challenge to this product. If so, we may be eligible for 180 days of generic exclusivity, depending on a variety of factors. Norethindrone Acetate / Ethinyl Estradiol (Estrostep FE(R)) In January 2001, we filed an ANDA seeking approval from the FDA to market certain norethindrone acetate and ethinyl estradiol tablets in a 28 day regimen, the generic equivalent of Pfizer's Estrostep FE product. We notified Pfizer pursuant to the provisions of the Hatch-Waxman Act and on August 3, 2001, Pfizer filed a patent infringement action in the United States District Court for the Southern District of New York, seeking to prevent us from marketing norethindrone acetate and ethinyl estradiol tablets until two U.S. patents expire in 2007 and 2008. The case is in the discovery stage and no trial date has been set. We believe that we were the first applicant to file an ANDA containing a paragraph IV patent challenge to this product. If so, we may be eligible for 180 days of generic exclusivity, depending on a variety of factors. Norethindrone Acetate / Estradiol (FemHRT(R)) In September 2001, we filed an ANDA seeking approval from FDA to market norethindrone acetate and ethinyl estradiol tablets, the generic equivalent of Pfizer's FemHRT. We notified Pfizer pursuant to the provisions of the Hatch-Waxman Act and on December 6, 2001, Pfizer filed a patent infringement action in the United States District Court for the Southern District of New York, seeking to prevent us from marketing this product until after the expiration of certain patents, the last of which expires in 2010. The case is in the discovery phase. We believe that we were the first applicant to file an ANDA containing a paragraph IV patent challenge to this product. If so, we 20 may be eligible for 180 days of generic exclusivity, depending on a variety of factors. CLASS ACTION LAWSUITS Ciprofloxacin (Cipro(R)) To date we have been named in approximately 38 class action complaints filed in state and federal courts by direct and indirect purchasers of Ciprofloaxcin (Cipro(R)) from 1997 to the present against us, Bayer Corporation, The Rugby Group, Inc. and others. Each case is disclosed in prior filings and are incorporated herein by reference. 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. We believe that our agreement with Bayer Corporation reflects a valid settlement to a patent suit and cannot form the basis of an antitrust claim. Although it is not possible to forecast the outcome of this matter, we intend to vigorously defend ourselves. We anticipate that this matter may take several years to resolve, but an adverse judgment could have a material adverse impact on our consolidated financial statements. 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 us alleging among other things, that the 1993 settlement of patent litigation between Zeneca, Inc. and us violated the antitrust laws, insulates Zeneca, Inc. and us from generic competition and enables Zeneca, Inc. and us to charge artificially inflated prices for Tamoxifen citrate. Each case is disclosed in prior filings and are incorporated herein by reference. We believe that our agreement with Zeneca, Inc. reflects a valid settlement to a patent suit and cannot form the basis of an antitrust claim. Although it is not possible to forecast the outcome of this matters, we intend to vigorously defend ourselves. We anticipate that this matter may take several years to resolve, but an adverse judgment could have a material adverse impact on our consolidated financial statements. OTHER LITIGATION Invamed, Inc./Apothecon, Inc. In February 1998, Invamed, Inc., which has since been acquired by Geneva Pharmaceuticals, Inc., a subsidiary of Novartis AG, , named several others and us as defendants in a lawsuit filed in the United States District Court for the Southern District of New York, charging that we unlawfully blocked access to the raw material source for Warfarin Sodium. In May 1999, Apothecon, Inc., then a subsidiary of Bristol-Myers Squibb, Inc. filed a similar lawsuit. The two actions have been consolidated. On May 10, 2002, the District Court granted summary judgment in our favor on all antitrust claims, but found that the plaintiffs could proceed to trial on their allegations that we tortiously interfered with an alleged raw material supply contract between Invamed and our raw material supplier. Our motion to reconsider the latter portion of the opinion is pending. We believe that the suits filed by Invamed and Apothecon are without merit and intend to defend our position vigorously. We anticipate that this matter may take several years to be resolved but an adverse judgment could have a material adverse impact on our business and consolidated financial statements. Termination of Solvay Co-Marketing Relationship On March 31, 2002, Duramed gave notice of its intention to terminate on June 30, 2002, the relationship between Duramed and Solvay Pharmaceuticals, Inc. ("Solvay") concerning the joint promotion of Duramed's Cenestin tablets and Solvay's Prometrium(R) capsules. Solvay has disputed Barr's right to terminate the relationship and claims that it is entitled to substantial damages, and has notified Duramed that it has demanded arbitration of this matter. We believe that Duramed's actions are well founded but if we are incorrect, the matter could have a material adverse effect on our 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 us claiming that our generic dextroamphetamine salt combination product uses trade dress that is similar in appearance to Shire's Adderall(R). Shire is seeking a preliminary injunction to restrain us from using the trade dress and to have us recall from the marketplace any product sold in such trade dress. On June 3, 2002, the District Court heard oral argument on Shire's preliminary injunction motion and took the matter under advisement. No order has issued to date. We believe the suit is without merit, but if we 21 are incorrect, the matter could have a material adverse effect on our consolidated financial statements. We do not expect the on-going litigation to cause any disruption in the manufacturing and sale of our product. Wyeth-Ayerst Laboratories, Inc. Antitrust Suit On September 5, 2000, our Duramed subsidiary filed an antitrust lawsuit against Wyeth-Ayerst Laboratories, Inc., the makers of Premarin(R). The complaint alleges that Wyeth-Ayerst has illegally perpetuated a monopoly in conjugated estrogens products by, among other things, inducing managed care organizations (MCOs) to execute exclusive contracts for Premarin, thus eliminating the possibility of our competitive product, Cenestin, being placed on the formulary with those same MCOs. We seek actual and treble damages associated with profits lost due to Wyeth-Ayerst's conduct in violation of antitrust laws and seek to permanently enjoin Wyeth-Ayerst from engaging in anti-competitive and exclusionary conduct. On August 31, 2001, Wyeth-Ayerst filed its answer to Duramed's Complaint. The matter is in discovery. Fluoxetine Hydrochloride Patent Infringement On August 1, 2001, aaiPharma Inc. filed a lawsuit in the United States District Court for the Eastern District of North Carolina against us and others claiming that the generic versions of fluoxetine hydrochloride (brand name Prozac(R)) manufactured by those companies infringe AAI's patent. We launched our generic version of the 20 mg Prozac capsule on August 2, 2001. If we are found to infringe the AAI patent, we may be liable to AAI for damages that may reduce our profits from our generic Prozac product. We believe that the suit filed against it by AAI is without merit, but if we are incorrect, the matter could have a material adverse effect on our 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 us, involving "machine vision" or "computer image analysis." On March 20, 2002, the court entered on Order of Stay in the Proceedings, pending the resolution of another suit that involves the same patents, but does not involve us. Administrative Matters On June 30, 1999, we received a civil investigative demand ("CID") and a subpoena from the FTC, that sought documents and data relating to the January 1997 agreements resolving our 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 we, through our settlement and supply agreements, have engaged in activities in violation of the antitrust laws. We continue to cooperate with the FTC in this investigation. On May 1, 2001, the Texas Attorney General's Office, as a liason on behalf of a group of state Attorneys General, served the Company with a civil investigative demand relating to our settlement of our Ciprofloxacin patent challenge. At the Attorney General's request, we entered into an agreement with the states to allow them to investigate our Cipro settlement. In December 2001 we were notified that the Attorney Generals closed their investigation. In 1998 and 1999, we were contacted by the Department of Justice ("DOJ") regarding our March 1993 settlement of our Tamoxifen patent challenge litigation. On May 6, 2002 we received notification that the DOJ had officially closed its investigation of this matter. On August 17, 2001, the Oregon Attorney General's Office, as liaison on behalf of a group of state Attorney Generals, served us with a civil investigation demand relating to its investigation of our settlement of our Tamoxifen patent challenge with AstraZeneca. The investigative demand requests the production of certain information and documents that may assist the Attorney General in its investigation. We are fully cooperating with the Attorney General's office in its investigation. We believe that the patent challenge settlements being investigated are lawful and represent a pro-consumer and pro-competitive outcome to the patent challenge cases. We believe 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 and the Texas Attorney General's Office. However, consideration of these matters could take considerable time, and any adverse judgment could have a material adverse impact on our consolidated financial statements. In the spring of 2001 the FTC issued special orders to approximately 100 pharmaceutical companies related to an inquiry into alleged anti-competitive practices in the entire pharmaceutical industry, including practices relating to patent challenge settlements. We received our special order on April 30, 2001 and have provided our responses to the FTC. The FTC recently completed the 22 study of patent settlements in the pharmaceutical industry and made recommendations to Congress to modify Hatch Waxman in certain respects. The FTC's primary recommendations include: permitting only one automatic 30 month stay per drug product per ANDA to resolve infringement disputes over patents listed in the Orange Book prior to the filing date of the generic applicant's ANDA; and, requiring brand-name pharmaceutical companies and first generic applicants to provide copies of certain agreements to the FTC. In May 2001, we 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. We are one of a number of pharmaceutical companies that have received such subpoenas. We are cooperating with the inquiry and believe that all of our product agreements and pricing decisions have been lawful and proper. Other Matters As of June 30, 2002, we were involved with other lawsuits incidental to our business, including patent infringement actions. Based on the advice of legal counsel, we believe that the ultimate disposition of such other lawsuits will not have material adverse effect on our consolidated financial statements. 23 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters put to the vote of our shareholders during the quarter ended June 30, 2002. 24 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information required by Item 5 is included in Item 8. See Note 20 to the Consolidated Financial Statements included in Item 8. ITEM 6. SELECTED FINANCIAL DATA The following data has been derived from our consolidated financial statements and should be read in conjunction with those statements, which are included in Item 8 of this report; together with "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in Item 7 of this report. (in thousands of dollars, except per share amounts)
YEAR ENDED JUNE 30, ----------------------------------------------------------------------- STATEMENTS OF OPERATIONS(1) 2002 2001 2000 1999 1998 ---------- ---------- ---------- ---------- ---------- Total revenues $1,188,984 $ 593,151 $ 490,972 $ 465,709 $ 390,934 Earnings before income taxes and extraordinary loss 337,784 101,793 18,602 71,730 37,217 Income tax expense 125,405 38,714 8,042 27,988 17,526 Earnings before extraordinary loss 212,379 63,079 10,560 43,742 19,691 Net earnings applicable to common shareholders 210,269 62,566 10,305 38,352 13,896 Earnings per common share: Earnings before extraordinary loss 4.93 1.50 0.26 1.14 0.54 Net earnings 4.88 1.49 0.26 1.00 0.38 Earnings per common share - assuming dilution: Earnings before extraordinary loss 4.68 1.42 0.26 1.09 0.51 Net earnings 4.63 1.40 0.25 0.96 0.36
BALANCE SHEET DATA(1) 2002 2001 2000 1999 1998 ---------- ---------- ---------- ---------- ---------- Working capital $ 460,213 $ 313,101 $ 212,275 $ 169,919 $ 103,619 Total assets 888,554 666,516 548,188 436,529 385,522 Long-term debt (2) 37,657 63,539 57,419 52,146 43,077 Shareholders' equity (3) 666,532 416,777 324,698 257,716 201,360
(1) All financial data presented has been restated to include the historical financial data of Duramed (See Note 1(a) to the consolidated financial statements). (2) Excludes current installments (See Note 10 to the Consolidated Financial Statements). (3) The Company has not paid a cash dividend in any of the above years. 25 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (thousands of dollars) 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; competitor's ability 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 in a timely basis; the availability of raw materials; availability of 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, or SEC. 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. In June 2002 we completed the acquisition of certain assets and assumption of certain liabilities of Enhance Pharmaceuticals, Inc. All of our financial data presented in these financial statements has been restated to include the historical financial data of Duramed pursuant to Regulation S-X of the Securities and Exchange Commission. For the year ended June 30, 2002, financial information as of and for the year then ended, includes such periods for both Barr and Duramed. For the fiscal years ended June 30, 2001 and 2002 financial information for Barr's fiscal year ended June 30th was combined with financial information for Duramed's calendar year ended December 31st. Barr's consolidated statements of operations for the years ended June 30, 2001 and 2000 were combined with Duramed's statements of operations for the calendar years ended December 31, 2000 and 1999, respectively. Barr's balance sheet as of June 30, 2001 was combined with Duramed's balance sheet as of December 31, 2000. Barr's statements of cash flows for the fiscal years ended June 30, 2001 and 2000 were combined with Duramed's statements of cash flows for the calendar years ended December 31, 2000 and December 31, 1999, respectively. 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; provisions for shelf-stock adjustments; accrual of inventory reserves; deferred taxes; accrual for litigation; and the assessment of recoverability of goodwill and other intangible assets. Below, we discuss these policies further. 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. For additional information see Note 1 "Summary of Significant Accounting Policies" in Item 8 of Part II, "Financial Statements and Supplementary Data," of this Report. 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. 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 26 addition, we may record allowances for shelf-stock adjustments when appropriate, as discussed under "Shelf-Stock Adjustments" below. 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, respectively. 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 that actual product returns, credits and other allowances may differ from established reserves. Shelf-Stock Adjustments 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 market share. The determination to grant a shelf-stock credit to a customer following a price decrease is 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 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 standards established by 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. We monitor inventory levels and expiry dates on a regular basis and record changes in inventory reserves as part of cost of goods sold. Deferred Taxes We apply an asset and liability approach to accounting for income taxes. 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 is recorded. If that assessment changes, a charge or a benefit would be recorded on the statement of operations. The Duramed balance sheets just prior to the merger had approximately $50 million in deferred tax assets which had been fully offset by a valuation allowance. On a combined basis, we expect to utilize a majority of these deferred tax assets. However, in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes," we have not reflected the benefit associated with utilizing this asset in our statement of operations. Rather we have restated Duramed's historical balance sheets and adjusted retained earnings to recognize the portion of the deferred tax assets that are more-likely-than-not to be utilized. Litigation We are subject to litigation in the ordinary course of business and also to certain other contingencies (see Item 3 this Form 10-K and Note 19 to the Consolidated Financial Statements). We record legal fees and other expenses related to litigation and contingencies as incurred. Additionally, we assess, in consultation with our 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 and related useful lives assigned to goodwill and intangibles based on purchase price allocations. These allocations, including an assessment of estimated useful lives, have been performed by qualified 27 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 142 "Goodwill and Other Intangible Assets", we will review goodwill annually or more frequently if impairment indicators arise for impairment. As the result of the purchase of certain assets and assumption of certain liabilities of Enhance Pharmaceuticals in June 2002, we recorded approximately $13,900 of goodwill and $28,200 of intangible assets on our balance sheet as of June 30, 2002. RESULTS OF OPERATIONS FISCAL YEAR ENDED JUNE 30, 2002 COMPARED TO FISCAL YEAR ENDED JUNE 30, 2001 Total revenues increased 100% from $593,151 in fiscal 2001 to $1,188,984 in fiscal 2002 driven by increased product sales. Increased product sales were due mainly to new product launches in fiscal 2002, including Fluoxetine, generic Adderall, new oral contraceptive products and increased sales of our Tamoxifen product. Revenues-Product Sales In August 2001, we launched our Fluoxetine 20 mg capsule, the generic equivalent of Eli Lilly's Prozac(R). Sales of Fluoxetine were $367,539, or 31% of product sales in fiscal 2002. 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, sales of Fluoxetine are expected to be $5,000 to $10,000 in fiscal 2003. Sales of other products increased 72% from $254,338 in fiscal 2001 to $437,505 in fiscal 2002. The increase was primarily attributable to new product launches including our generic Adderall(R), and increased sales of our oral contraceptive products. The year-over-year increase in the oral contraceptive franchise reflects higher sales of existing oral contraceptives, including our Apri and Aviane products, combined with sales of our new oral contraceptive products, primarily Kariva, our generic equivalent to Organon, Inc.'s Mircette. Also contributing to the increase was a 178% or $26,570 year-over-year increase in sales of Cenestin. The increases described above were driven primarily by higher volumes due to increasing market shares. Tamoxifen sales increased 14% from $322,318 in fiscal 2001 to $366,314 in fiscal 2002. The increase reflected an approximately 4.5% price increase combined with higher volumes resulting, we believe, from the timing of purchases by our customers. Our Tamoxifen sales are impacted not only by changes in the size of the Tamoxifen market and changes in our market share but are also influenced by customer buying patterns. During fiscal 2002, the increase in Tamoxifen volume appears to reflect the timing of customer purchases rather than being driven primarily by increases in market size or market share. In fiscal 2002, Tamoxifen accounted for 31% of product sales versus 56% in fiscal 2001. Revenues-Development and Other Revenue Development and other revenue consist 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 either modified or terminated in April 2002 (See Note 3 to the Consolidated Financial Statements). 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 $15,584 in fiscal 2002 compared to $17,570 in fiscal 2001. The revenues ended in fiscal 2002. For fiscal 2002, development and other revenue also includes royalty income earned under licensing agreements with other third parties and 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 increased 73% from $391,109 in fiscal 2001 to $676,323 in fiscal 2002 due mainly to an increase in product sales. 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 68% in fiscal 2001 to 58% in fiscal 2002. The decrease in cost of sales as a percentage of 28 product sales was due to an improved mix in product sales, as higher margin products such as Fluoxetine, our generic equivalent of Adderall, oral contraceptive products and Cenestin, made up a larger percentage of sales. Lower margin products such as Tamoxifen made up a smaller percentage of sales. Tamoxifen's margin has been substantially below the margin we generally earn on products we manufacture because we only have distributed the product as described above. Selling, General and Administrative Expense Selling, general and administrative expenses increased 45% from $76,821 in fiscal 2001 to $111,639 in fiscal 2002. The increase was primarily due to higher marketing and selling expenses for Cenestin under our sales and marketing agreement with Solvay Pharmaceuticals, Inc., which we terminated as of June 30, 2002; increased legal costs, which include costs associated with patent challenge activity, class action lawsuits and other matters; and increased headcount costs and higher advertising and promotion costs associated with our expanding product line. Research and Development Research and development expenses increased 31% from $57,617 in fiscal 2001 to $75,697 in fiscal 2002. The increase reflected higher costs associated with our proprietary development program, and higher biostudy and headcount costs related to our expanded generic activities. The fiscal 2002 amount also includes a $1,000 charge for the write-off of acquired in-process research and development resulting from our June 2002 acquisition of certain assets and liabilities of Enhance Pharmaceuticals, Inc. Proceeds from Patent Challenge Settlement Proceeds from patent challenge settlements 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 $28,313 and $31,958 in fiscal 2001 and fiscal 2002, respectively. Merger-Related Costs Merger-related costs were $31,449 in fiscal 2002. These costs relate to our merger with Duramed in October 2001 and include direct transaction costs such as legal, accounting and other costs; costs associated with facility and product rationalization; and severance costs. (See Notes 2 and 17 to the Consolidated Financial Statements). Interest Income Interest income decreased 17% from $9,423 in fiscal 2001 to $7,824 in fiscal 2002, primarily due to a decrease in market rates on our short-term investments, which was partially offset by an increase in the average cash and cash equivalents balance and marketable securities balance. Interest Expense Interest expense decreased 51% from $7,195 in fiscal 2001 to $3,530 in fiscal 2002, primarily due to a decrease in our debt balances, and a decrease in the rates we pay on our debt balances. Other Income Other income increased by 110% from $3,648 in fiscal 2001 to $7,656 in fiscal 2002. Other income in fiscal 2002 included $5,600 received as part of the restructuring of the agreements with BMS and the receipt of $2,000 in settlement of litigation. Fiscal 2001 included a $6,659 gain realized on the sale of our investment in Galen Holdings plc, partially offset by a $2,450 charge related to the write-off of our investment in Gynetics, Inc. Income Taxes Our income tax provision for the year ended June 30, 2002 reflected a 37% effective tax rate on pre-tax income, compared to 38% for the year ended June 30, 2001. The decrease in the effective tax rate is primarily due to a favorable mix in income among tax jurisdictions in the current fiscal year. 29 FISCAL YEAR ENDED JUNE 30, 2001 COMPARED TO FISCAL YEAR ENDED JUNE 30, 2000 Total revenues increased approximately 21% from $490,972 in fiscal 2000 to $593,151 in fiscal 2001 driven by increased product sales and increased development and other revenue. Revenues-Product Sales Product sales increased approximately 18% from $490,330 in fiscal 2000 to $576,656 in fiscal 2001 due to increased sales of Tamoxifen, Warfarin Sodium, Cenestin, Apri and the launch of new products such as ViaSpan, which more than offset declines in sales of other products due to pricing declines and/or lower volumes. Tamoxifen sales increased 8% from $297,395 in fiscal 2000 to $322,318 in fiscal 2001. The increase was attributable to higher prices and an expansion in the use of Tamoxifen as measured by an increase in total prescriptions written for the product. In October 1998, Tamoxifen was approved to reduce the incidence of breast cancer in women at high risk of developing the disease. In fiscal 2001, Tamoxifen accounted for 56% of product sales versus 61% in fiscal 2000. Sales of other products increased 32% from $192,935 in fiscal 2000 to $254,338 in fiscal 2001. The increase was attributable to increased sales of Warfarin Sodium, Cenestin, Apri and Trazodone and products introduced in fiscal 2001 including ViaSpan, which we began distributing on August 1, 2000 and Fluvoxamine, which we launched in January 2001. Warfarin Sodium sales accounted for approximately 12% of total product sales in both fiscal 2001 and 2000. Revenues-Development and Other Revenue Development and other revenue consists primarily of amounts received from DuPont Pharmaceuticals Company for various development and co-marketing agreements entered into in March 2000 (See Note 3 to the Consolidated Financial Statements). We recorded revenue of $17,570 in fiscal 2001 and $14,584 in fiscal 2000 under these agreements. Development and other revenue also includes royalty income earned under various licensing agreements with other third parties. Cost of Sales Cost of sales increased 10% from $355,612 in fiscal 2000 to $391,109 in fiscal 2001 primarily due to an increase in product sales. As a percentage of product sales, cost of sales declined from 73% to 68%. The decrease in cost of sales as a percentage of product sales was due mainly to a lower percentage of Tamoxifen sales to total product sales, higher margins earned on Tamoxifen due to a price increase which occurred earlier in 2001 than in 2000 and a more favorable mix of other higher margin products including Apri, Cenestin, Fluvoxamine, ViaSpan and Warfarin Sodium. Selling, General and Administrative Selling, general and administrative expenses decreased 20% from $95,653 in fiscal 2000 to $76,821 in fiscal 2001. The decrease was primarily due to fiscal 2000 including a $15,000 payment to Schein Pharmaceutical, Inc. as part of the settlement of Cenestin litigation. In addition, Solvay Pharmaceuticals assumed responsibility for the marketing and promotion of Cenestin in exchange for a share of the Cenestin profits. As a result, in fiscal 2001, our selling and marketing expenses related to Cenestin decreased by approximately $9,400. Offsetting these decreases were higher legal costs related to on-going patent challenges, legal research and preparation related to several potential patent challenges, and costs associated with anti-trust litigation brought against us in fiscal 2001. Research and Development Research and development expenses increased 20% from $48,171 in fiscal 2000 to $57,617 in fiscal 2001. Approximately 61% of the increase in research and development spending was attributable to increased raw material purchases and internal development costs associated with maintaining a higher number of products in development. The balance of the increase is mainly related to increased payments to clinical research organizations for clinical and bio-study services associated with our expanded development activities, as well as increased payments for strategic collaborations. Proceeds from Patent Challenge Settlement As discussed above, the sole source of this item is amounts recognized under our Supply and Distribution Agreement with Bayer in connection with the 1997 settlement of our patent challenge claim relating to Cipro. We recognized Proceeds from patent challenge settlements in the amounts of $27,584 and $28,313 in fiscal 2000 and fiscal 2001, respectively. 30 Interest Income Interest income increased 85% from $5,092 in fiscal 2000 to $9,423 in fiscal 2001 primarily due to an increase in the average cash and cash equivalents balance, partially offset by a decrease in the market rates on our short-term investments. Interest Expense Interest expense increased 21% from $5,957 in fiscal 2000 to $7,195 in fiscal 2001 primarily due to increases in the outstanding balances of our borrowings, principally the expanded mortgage facility with Provident Bank, as well as the amortization of financing costs and the effect of increases in the prime rate on the interest expense associated with our variable rate debt. Other Income Other income increased by 951% from $347 in fiscal 2000 to $3,648 in fiscal 2001 primarily due to the $6,659 gain realized on the sale of our investment in Galen Holdings plc, which was partially offset by the $2,450 charge related to the write-off of our investment in Gynetics, Inc. in fiscal 2001. The fiscal 2000 total reflects the $343 gain recognized on the warrants received from Halsey Drug Company, Inc. (See Note 8 to the Consolidated Financial Statements). Income Taxes Our income tax provision for the year ended June 30, 2001 reflected a 38% effective tax rate on pre-tax income, compared to 43% for the year ended June 30, 2000. The effective tax rate for fiscal year 2000 was negatively impacted by providing a full valuation allowance for the state tax benefit resulting from the loss that Duramed incurred in fiscal 2000. LIQUIDITY AND CAPITAL RESOURCES Our cash and cash equivalents balance increased $108,914 or 49% to $331,257 at June 30, 2002 from $222,343 at June 30, 2001. In connection with an alternative collateral agreement between us and AstraZeneca, the innovator of Tamoxifen (See Note 1 to the Consolidated Financial Statements), we have reduced the cash held in our interest-bearing escrow account from $96,820 at June 30, 2001 to $84,834 at June 30, 2002. The increase in cash from June 30, 2001 to June 30, 2002 was driven by $230,095 in cash provided by operations in fiscal 2002 which more than offset significant fiscal 2002 cash outlays to expand plant and equipment (approximately $47,000), acquire certain assets and liabilities of Enhance Pharmaceuticals, Inc. (approximately $46,000) and repay debt (approximately $32,000). Operating Activities Cash provided by operating activities was $230,095 for the year ended June 30, 2002, driven by net earnings of $212,219, which more than offset an increase in working capital. Working capital increased due to increases in accounts receivable, increases in inventory, and decreases in accounts payable, partially offset by increases in accrued liabilities. Accounts and other receivables at June 30, 2002 were $126,398 or $5,155 higher than those at June 30, 2001, with the increase primarily attributable to increased product sales. The $8,304 increase in inventory is due to an increase in Tamoxifen inventory as a result of the timing of Tamoxifen sales and increased Tamoxifen purchases, and an increase in other inventory primarily reflecting increased inventory associated with products we intend to launch in fiscal 2003. The decrease in accounts payable is primarily attributable to lower amounts owed for Tamoxifen purchases. The increase in accrued liabilities is primarily due to increased amounts owed on profit sharing agreements. Approximately $32,000 of our fiscal 2002 cash flows from operations relates to payments from our contingent non-exclusive supply agreement with Bayer Corporation ("Bayer") 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 of approximately $32,000 to $34,000 per calendar year for the remainder of the agreement. 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, if any, we could earn 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 will have the right to begin distributing ciprofloxacin product manufactured by Bayer. In fiscal 2002, we recorded approximately $21,184 related to the BMS agreements, including approximately $15,584 recognized as development revenue and $5,600 recognized as Other income. In April 2002 we received our final payment from BMS. 31 Cash flow increased by approximately $12,300 due to the reduction in federal income taxes payable resulting from the utilization of a portion of Duramed's federal net operating loss incurred before the merger. We expect cash flows in fiscal 2003 to be favorably impacted by approximately $9,800 as a result of the continued utilization of Duramed's federal net operating loss. 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. Cash flows from operations are expected to decline in fiscal 2003 compared to fiscal 2002. We expect this decline will be primarily attributable to a decline in net income and higher expected working capital. Net income is expected to decline primarily due to lower sales and profits from Fluoxetine, which will be partially offset by sales from new product launches. Increased research and development costs and higher selling, general and administrative expenses are also expected to contribute to lower earnings in fiscal 2003. Working capital is expected to increase to support new product launches and to reflect changes in the working capital components of Tamoxifen described below. Once we begin manufacturing and selling our own Tamoxifen product in fiscal 2003, the working capital costs associated with selling Tamoxifen are expected to increase. For example, our accounts payable would be expected to decline significantly due to lower costs to manufacture and shorter payment terms to the Company's suppliers compared to those contained in Barr's distribution agreement with AstraZeneca. In addition, inventory costs for Tamoxifen are expected to decline significantly, as the cost to manufacture would be well below Barr's current purchase price. Accounts receivable balances will be affected by lower sales due to the launch of other generic versions of Tamoxifen and by longer payment terms offered to customers. This increase in working capital could lower Barr's cash balances. The extent of such decline is dependent upon several factors, some of which are outside Barr's control and is therefore difficult to predict. Investing Activities During fiscal 2002, we initiated a multi-year capital expansion program to expand our production capacity in Virginia and Cincinnati, and our distribution and laboratory capacity in Virginia. In addition to starting these programs in fiscal 2002, we also continued to upgrade equipment in all of our locations. These capital programs are designed to ensure that we have the manufacturing, distribution and laboratory facilities to meet the expected demand of our pipeline products and handle the increases in current product sales, including our line of oral contraceptives. During fiscal 2002, we incurred $47,205 of capital expenditures and expect our capital expansion program will continue at a level of between $40 to $50 million per year over the next few years. During that time, we will be constructing, on our Virginia campus, a dedicated facility for the manufacture of the Adenovirus vaccine. The cost of this facility, expected to be $6 to $8 million over the next two years, is being reimbursed by the Federal government in accordance with our contract with the U.S. Department of Defense. While we believe we have the cash resources to fund our capital expansion 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 and believe we have the capital structure and cash flow to complete such financing. In fiscal 2002, we invested $15,000 in market auction debt securities that are readily convertible into cash at par value. The par value of each of the three securities held is $5,000 and the maturity dates are July 21, 2003, January 6, 2004 and April 26, 2004, respectively. We may continue to invest in longer term 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 $32,482 during fiscal 2002 due to debt repayments, including debt assumed in the Duramed merger. Scheduled principal repayments on our existing debt will be approximately $3,600 in fiscal 2003. On February 27, 2002, we replaced our previous $20,000 revolving credit facility with a new $40,000 revolving credit facility that expires on February 27, 2005. We did not borrow any funds under either of these facilities during fiscal 2002. Other On October 24, 2001 we completed our merger with Duramed. In connection with the transaction, we incurred approximately $31,449 in direct transaction costs. These costs include direct transaction costs such as legal, accounting and other costs; costs associated with facility and product rationalization; and severance costs. Amounts which remain to be paid during fiscal 2003 in connection with these costs will not be material. 32 In fiscal 2002 we entered into a Loan and Security 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). Under the terms of the Loan and Security 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 and make payments totaling $35,000 based on achieving certain legal and product approval milestones, including approval of a generic product. As of June 30, 2002, we had loaned approximately $4,700 under this agreement. We expect to loan Natural Biologics approximately $9,200, $8,300 and $2,800 during fiscal 2003, 2004 and 2005, respectively. The Loan agreement also provides for a loan of $10,000 based upon the successful outcome of pending legal proceedings, which could occur in fiscal 2003. The loans mature on June 3, 2007. 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 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. RECENT ACCOUNTING PRONOUNCEMENTS Business Combinations/Goodwill and Other Intangible Assets In July 2001, the FASB issued SFAS No. 141, "Business Combinations" ("SFAS 141"), and No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141 supercedes APB Opinion No. 16, "Business Combinations" ("APB 16") and amends or supercedes a number of related interpretations of APB 16. SFAS 141 eliminates the pooling-of-interests method of accounting for business combinations, and changes the criteria to recognize intangible assets apart from goodwill. 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 annually, or more frequently if impairment indicators arise, for impairment. We adopted SFAS 141 on July 1, 2001 and, as discussed in Note 2 to the Consolidated Financial Statements, applied it to the June 2002 acquisition of Enhance Pharmaceuticals, Inc. The provisions of SFAS 142 are effective for fiscal years beginning after December 15, 2001. We will adopt SFAS 142 beginning in the first fiscal quarter of fiscal 2003. We believe that the adoption of SFAS 142 will not have a material impact on our results of operations or financial position. Accounting for Asset Retirement Obligations In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143"). This statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long lived assets and the associated asset retirement costs. It applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or the normal operation of a long-lived asset, except for certain obligations of lessees. The standard requires entities to record the fair value of a liability for an asset retirement obligation in the period incurred with a corresponding increase in the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. This statement is effective for financial statements issued for fiscal years beginning after June 15, 2002. We believe that the adoption of SFAS 143 will not have a material impact on our results of operations or financial position. Accounting for Impairment or Disposal of Long-Lived Assets In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). This statement addresses financial accounting and reporting for the impairment of long-lived assets. This statement supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions". This statement also amends ARB No. 51, "Consolidated Financial Statements", to eliminate the exception to consolidation for a subsidiary for which control is likely to be temporary. This statement requires that one accounting model be used for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired. This statement also broadens the presentation of discontinued operations to include more disposal transactions. This statement is effective for financial statements issued for fiscal years beginning after June 15, 2002. We believe that the adoption of SFAS 144 will not have a material impact on our results of operations or financial position. 33 Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections" ("SFAS 145"). SFAS 145 rescinds SFAS 4, "Reporting Gains and Losses from Extinguishment of Debt", and an amendment of that Statement, SFAS 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements." SFAS 145 also rescinds SFAS 44, "Accounting for Intangible Assets of Motor Carriers." SFAS 145 amends SFAS 13, "Accounting for Leases," to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. SFAS 145 also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. This statement is effective for financial statements issued for fiscal years beginning after May 15, 2002. We believe that the adoption of SFAS 145 will not have a material impact on our results of operations or financial condition. Accounting for Costs Associated with Exit or Disposal Activities In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146"). SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring). SFAS 146 requires recognition of a liability for a cost associated with an exit or disposal activity when the liability is incurred, as opposed to when the entity commits to an exit plan under EITF 94-3. This statement is effective for exit or disposal activities initiated after December 31, 2002. We believe that the adoption of SFAS 146 will not have a material impact on our results of operations or financial position. OUTLOOK Revenues We expect product sales to decline in fiscal 2003 as sales from new products, and increasing sales of certain existing products, are only expected to partially offset lower sales of Fluoxetine and lower sales of Tamoxifen. Sales of Fluoxetine 20 mg tablets, which totaled approximately $367,000 in fiscal 2002, are expected to be less than $10,000 in fiscal 2003 reflecting both a drop in our market share and a significant reduction in price. Sales of Tamoxifen, which totaled approximately $366,000 in fiscal 2002, are expected to decline in fiscal 2003 as additional competitors enter the market following the expiration of AstraZeneca's pediatric exclusivity in February 2003. The patent covering Tamoxifen expired on August 20, 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 generics from launching Tamoxifen products prior to that date. Because of the unique regulatory history of our Tamoxifen ANDA, however, we believe that we are entitled to launch our own manufactured version of the 10 mg Tamoxifen 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 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 enactment. AstraZeneca disagrees with our views and has informally asked FDA to block us from launching the 10 mg product prior to February 20, 2002. We are currently in discussions with FDA regarding the status of our 10 mg approval and expect to receive definitive guidance from FDA by mid-September. We also believe that AstraZeneca's attempted use of pediatric exclusivity to block the launch of our Tamoxifen 10 mg product violates AstraZeneca's obligations under the distribution agreement. We expect that our cost to manufacture Tamoxifen will be lower than our cost to purchase Tamoxifen from AstraZeneca and, as a result, we believe our profit margins on Tamoxifen will exceed the approximately 15% margins we earn as a distributor as soon as we begin to sell our manufactured product. Although our Tamoxifen profit margins should improve at such time, we do expect our profits and margin on Tamoxifen to decline over time as additional generic competitors enter the market following expiration of AstraZeneca's pediatric exclusivity period in February 2003. We expect that higher sales from other products including those we expect to launch in fiscal 2003 will partially offset the declines in Fluoxetine and Tamoxifen sales. In fiscal 2002 sales of products other than Fluoxetine and Tamoxifen totaled approximately $438,000 including approximately $90,000 from our oral contraceptive products. We expect sales from our generic oral contraceptive products to more than triple in fiscal 2003 based on expected new product launches and higher sales of currently marketed products. 34 In the first quarter of fiscal 2003 ending September 30, 2002, we expect product sales to decline from the September 2001 quarter as lower Fluoxetine sales more than offset higher sales of other products. Sales of Fluoxetine 20 mg capsules totaled approximately $175,000 in the prior year quarter. Sales of products other than Fluoxetine and Tamoxifen were approximately $80,000 in the prior year quarter but increased throughout fiscal 2002 to approximately $145,000 in the quarter ended June 30, 2002. In the quarter ending September 30, 2002, we expect sales of products other than Fluoxetine and Tamoxifen to increase significantly when compared to the prior year reflecting year-over-year increases in sales of existing products and contributions from expected launches including SPRINTEC, our generic equivalent to Organon's Cyclen oral contraceptive. We expect Development and other revenue to decline in fiscal 2003 and in the quarter ending September 30, 2002 due to the termination of the BMS development agreement in April 2002. Development revenue under the BMS Development Agreement totaled approximately $15,600 in fiscal 2002. Partially offsetting this decline will be development revenue we expect to earn under our development agreement with Schering, AG and from reimbursements we expect to receive under the Adenovirus contract with the U.S. Department of Defense. Proceeds from patent challenge settlement represents amounts earned under the terms of the supply agreement entered into as part of the 1997 settlement of our patent challenge on Bayer's Cipro antibiotic. If Bayer does not elect to provide product to us for resale, we expect to record proceeds of approximately $8,600 in the quarter ending September 30, 2002, up approximately 8% from the prior year amount, and approximately $31,000 for fiscal 2003. Margins Our product margins represent the amount of gross profit we expect to earn on product sales expressed as a percentage of product sales. Margins totaled 42% in fiscal 2002 and are expected to increase in fiscal 2003 due to several factors. First, a declining percentage of sales from Tamoxifen, as well as higher margins expected to be earned on Tamoxifen while we market our own manufactured version of the product are expected to increase overall margins. In addition, the decline in Fluoxetine sales is also expected to favorably impact margins since the margin earned on Fluoxetine after accounting for our profit split was lower than that earned on the average of our other products. Finally, a continuing shift in other product sales toward products with higher margins including new products expected to be launched in fiscal 2003 and increased sales of products launched in fiscal 2002 should help improve overall margins. We expect overall product margins in the first quarter of fiscal 2003 to be up slightly from the prior year quarter due to the expected improvement in product sales mix discussed above. Operating Expenses We expect Selling, general and administrative expenses to increase in fiscal 2003 over fiscal 2002 levels due to higher sales and marketing, distribution and administrative costs. We expect to incur higher sales and marketing costs primarily due to higher anticipated promotion and marketing costs associated with the launch of Seasonale. Offsetting these increases is expected lower sales and marketing costs associated with Cenestin. Through fiscal 2002, our marketing expenses included costs paid to Solvay, under a Cenestin co-promotional agreement. On June 30, 2002, we terminated the Solvay co-promotion agreement. As a result, in fiscal 2003, we will fund the entire amount of Cenestin sales and marketing costs which are expected to be lower than the fee we previously paid to Solvay. Solvay has disputed our right to terminate the co-promotion agreement and has demanded arbitration seeking damages. We have not provided for any potential payment to Solvay as we believe Solvay's claim is without merit. During fiscal 2003 we expect to continue selling Cenestin through a sales force provided by Cardinal Health ("Cardinal"). Our contract with Cardinal provides for a fixed monthly payment based on the number of sales representatives dedicated to the Cenestin product. The term of our current agreement with Cardinal expires in October 2002, but we expect to negotiate an extension of the contract and that it will remain in effect throughout the fiscal year. In addition, we expect to increase the size of the sales force, beginning in the second half of fiscal 2003, to prepare for the launch of Seasonale in fiscal 2004. Other selling, general and administrative expense increases include higher distribution costs and higher expected legal costs due to an increase in patent challenge activities and higher costs associated with defending against class action suits relating to our patent challenge settlements. Selling, general and administrative expenses in the September quarter of fiscal 2003 are expected to be slightly higher than those incurred in the prior year quarter due mainly to increased sales and marketing costs. We expect research and development costs to increase in fiscal 2003 compared to fiscal 2002 as we increase our investment in proprietary products, pursue the development of some unusually expensive generic products, including conjugated estrogens, and invest in products using the proprietary vaginal ring drug delivery platform acquired with Enhance. In the September quarter of fiscal 2003, research and development spending is expected to be higher than the prior year for the reasons noted above. 35 Interest Income / Expense Interest income for fiscal 2003 and for the first quarter thereof is expected to remain flat with the prior year amounts as lower market interest rates should be somewhat offset by higher expected cash balances. Interest expense for fiscal 2003 and for the first quarter thereof is expected to be less than the prior year periods due to somewhat lower debt balances. Income Taxes Our effective tax rate is impacted by several factors, including federal and state tax law, the level of income earned in the taxing jurisdictions where we operate and the differences in the accounting methods and treatment of certain items for tax and financial reporting purposes. Tax legislation recently has been enacted in several of the jurisdictions where we operate. We are currently evaluating the impact of the new legislation but, at this time, do not expect it to substantially change our overall effective tax rate. We expect our effective tax rate for fiscal year 2003 and the first quarter thereof will be similar to the tax rate incurred in the prior year. Earnings Per Share For the year ending June 30, 2003 we expect our earnings to be approximately $3.85 - 3.90 per share. Our earnings guidance of $3.85 - $3.90 per share for fiscal 2003 assumes that we will either launch our 10 mg Tamoxifen product in the second quarter, once our existing inventories of product supplied by AstraZeneca run out, or negotiate an extension of our distribution agreement with AstraZeneca on both the 10 mg and 20 mg products. If we are unable to supply Tamoxifen during some portion of AstraZeneca's pediatric exclusivity period, we will lose projected revenues and profits during that interruption. Depending on the duration of the supply interruption, our projected earnings for fiscal 2003 could be adversely affected by as much as 5% to 8%, assuming that all other factors are unchanged. Because future performance is impacted by many variables, and the ability to supply Tamoxifen is just one of them and because we believe we currently have the legal right to launch our own generic version of the 10 mg Tamoxifen tablet during AstraZeneca's pediatric exclusivity, we are not changing our guidance for fiscal 2003 at this time. Our earnings per share for the quarter ending September 30, 2002 is expected to decline compared to the $1.56 reported in the prior year's quarter. The contribution of Fluoxetine 20 mg capsules to the prior year's total is not separately and definitively determinable because we do not prepare individual income statements for each product. However, Fluoxetine's contribution was significant to our first quarter fiscal 2002 results based on sales of approximately $175,000 in that quarter and a margin of approximately 48%. In addition, we believe the ultimate resolution of the Tamoxifen matter described above will not materially affect our earnings guidance for the quarter ending September 30, 2002 assuming that all other factors are unchanged. Based on this, we are not changing our earnings guidance of $.80 - $.85 per share for the quarter at this time. ENVIRONMENTAL MATTERS We may have obligations for environmental safety and clean-up under various state, local and federal laws, including the Comprehensive Environmental Response, Compensation and Liability Act, commonly known as Superfund. Based on information currently available, environmental expenditures have not had, and are not anticipated to have, any material effect on our consolidated financial statements. EFFECTS OF INFLATION Inflation has had only a minimal impact on our operations in recent years. ITEM 7a. 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 $346 million and debt instruments of approximately $48 million. 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. 36 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 June 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. Approximately 59% of our debt instruments at June 30, 2002, are subject to fixed interest rates and principal payments. 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 and the note rates. The remaining 41% of debt instruments are primarily subject to variable interest rates based on the prime rate or LIBOR and have fixed principal payments. The fair value of all debt instruments is approximately $43 million at June 30, 2002. In addition, borrowing under our $40 million 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 June 30, 2002 there were no amounts outstanding under the Revolver. We do not believe that any risk inherent in these instruments is likely to have a material effect on our consolidated financial statements. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Our financial statements are filed together with this Form 10-K. See the Index to Fiancial Statements and Financial Statements Schedules on Page [F-1] for a list of the financial statements filed together with this Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None. 37 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The Company's executive officers are as follows:
NAME AGE POSITION ---- --- -------- Bruce L. Downey 54 Chairman of the Board and Chief Executive Officer Paul M. Bisaro 41 Director, President and Chief Operating Officer, Barr Laboratories Carole S. Ben-Maimon 43 Director, President and Chief Operating Officer, Barr Research Salah U. Ahmed 48 Senior Vice President, Product Development Michael J. Bogda 40 Senior Vice President, Manufacturing and Engineering Timothy P. Catlett 47 Senior Vice President, Sales and Marketing Catherine F. Higgins 45 Senior Vice President, Human Resources Fredrick J. Killion 48 Senior Vice President and General Counsel William T. McKee 40 Senior Vice President, Chief Financial Officer, Treasurer and Secretary Christine Mundkur 33 Senior Vice President, Quality and Regulatory Counsel Martin Zeiger 65 Senior Vice President, Strategic Business Development
BRUCE L. DOWNEY became a member of the Board of Directors in January 1993 was elected Chairman of the Board and Chief Executive Officer in February 1994. From January 1993 to December 1999 he served as President and Chief Operating Officer. Prior to assuming these positions, from 1981 to 1993, Mr. Downey was a partner in the law firm of Winston & Strawn and a predecessor firm of Bishop, Cook, Purcell and Reynolds. PAUL M. BISARO was elected a Director in June 1998 and in December 1999 was appointed to the position of President and Chief Operating Officer. Previously, he served as Senior Vice President, Strategic Business Development and General Counsel. Prior to joining the Company in 1992 as General Counsel, Mr. Bisaro was associated with the law firm of Winston & Strawn and a predecessor firm, Bishop, Cook, Purcell and Reynolds. CAROLE S. BEN-MAIMON was elected a Director in February 2001. Prior to joining the Company in January 2001, Dr. Ben-Maimon was with Teva Pharmaceuticals USA, where she served as Senior Vice President Science and Public Policy, North America. From 1996 until 2000, Dr. Ben-Maimon was Senior Vice President, Research and Development. She is Medical Doctor and is Board Certified in Internal Medicine. SALAH U. AHMED was employed by the Company as Director of Research and Development in 1993. Dr. Ahmed was named Vice President, Product Development in September 1996 and Senior Vice President, Product Development in October 2000. Before joining Barr, Dr. Ahmed was a Senior Scientist with Forest Laboratories from 1989 to 1993. MICHAEL J. BOGDA was employed by the Company in October, 2000 as Vice President of Validation and Technical Services and was promoted to Senior Vice President-Manufacturing and Engineering in September, 2001. Mr. Bogda joined Barr from Copley Pharmaceuticals where he was Vice President Operations / Facility General Manager from 1995-2000. 38 TIMOTHY P. CATLETT was employed by the Company in February 1995 as Vice President, Sales and Marketing. In September 1997, Mr. Catlett was elected to Senior Vice President, Sales and Marketing. From 1978 through 1993, Mr. Catlett held a number of positions with the Lederle Laboratories division of American Cyanamid including Vice President, Cardiovascular Marketing. CATHERINE F. HIGGINS was employed by the Company as Vice President, Human Resources in 1991 and became Senior Vice President, Human Resources in September, 2001. Prior to joining Barr, Ms. Higgins was employed by Continental Grain Company as Director, Human Resources. FREDERICK J. KILLION was employed by the Company in March 2002 as Senior Vice President and General Counsel. Mr. Killion joined Barr from the law firm of Winston & Strawn, where he had served as a capital partner since 1999. Prior to joining Winston & Strawn in 1990, Mr. Killion was a partner in the law firm of Bishop, Cook, Purcell and Reynolds where he began as an associate in 1982. Bishop, Cook, Purcell and Reynolds merged with Winston & Strawn in 1990. WILLIAM T. MCKEE was employed by the Company in January 1995 as Director of Finance and was appointed Treasurer in March 1995. In September 1996 he was elected to the position of Chief Financial Officer, in December 1997 Mr. McKee was elected Vice President and in December 1998 was elected Senior Vice President. Mr. McKee also serves as Secretary. Prior to joining Barr, Mr. McKee served as Vice President, Finance for a software development company and held management positions in the accounting firms of Deloitte & Touche LLP and Gramkow & Carnevale, CPAs. Mr. McKee is a C.P.A. CHRISTINE MUNDKUR was employed by the Company in 1993 as Associate Counsel. In September, 1997 Ms. Mundkur became Director of Regulatory and Regulatory Counsel. In September 1998 she became Vice President, Quality and Regulatory Counsel and in August, 2001 was promoted to Senior Vice President Quality and Regulatory Counsel. MARTIN ZEIGER was employed by the Company in December 1999 as Senior Vice President, Strategic Business Development and General Counsel. Mr. Zeiger joined Barr from Hoechst Marion Roussel, where he served as a Vice President since the 1995 acquisition by Hoechst of Marion Merrill Dow. Our directors and executive officers are elected annually to serve until the next annual meeting or until their successors have been elected and qualified. Our director's business experience is set forth in the section headed "Information on Nominees" of the Company's Notice of Annual Meeting of Shareholders, dated September 24, 2002 (the "Proxy Statement") which information is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION A description of our executive officers compensation is set forth in the sections titled "Executive Compensation", "Option Grants", "Option Exercises and Option Values" and "Executive Agreements" of the Proxy Statement and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT A description of the security ownership of certain beneficial owners and management, as well as equity compensation plan information, is set forth in the sections titled "Ownership of Securities" of the Proxy Statement and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS A description of certain relationships and related transactions is set forth in the section titled "Certain Relationships and Related Transactions" of the Proxy Statement and is incorporated herein by reference. 39 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Financial Statement Schedules: See the Index on Page [F-1] below. (b) Reports on Form 8-K: The Company did not file any Current Reports on Form 8-K in the quarter ended June 30, 2002. (c) Exhibits 2.1 Agreement and Plan of Merger, dated as of June 29, 2001, by and among the Registrant, Beta Merger Sub I, Inc. and Duramed Pharmaceuticals, Inc. (14) 2.2 Asset Purchase Agreement dated March 16, 2002 between Enhance Pharmaceuticals, Inc. and the Company 3.1 Composite Restated Certificate of Incorporation of the Registrant(2) 3.2 Amended and Restated By-Laws of the Registrant(2) 4.1 The Registrant agrees to furnish to the Securities and Exchange Commission, upon request, a copy of any instrument defining the rights of the holders of its long-term debt wherein the total amount of securities authorized thereunder does not exceed 10% of the total assets of the Registrant and its subsidiaries on a consolidated basis. 4.3 Note Purchase Agreements dated November 18, 1997 (1) 10.1 Stock Option Plan (3) 10.2 Savings and Retirement Plan (8) 10.6 Collective Bargaining Agreement, effective April 1, 1996 (10) 10.7 Agreement with Bruce L. Downey 10.8 Agreement with Ezzeldin A. Hamza (4) 10.9 Distribution and Supply Agreement for Tamoxifen Citrate dated March 8, 1993 (4) 10.10 1993 Stock Incentive Plan (5) 10.11 1993 Employee Stock Purchase Plan (6) 10.12 1993 Stock Option Plan for Non-Employee Directors (7) 10.13 Agreement with Edwin A. Cohen and Amendment thereto (8) 10.14 Distribution and Supply Agreement for Ciprofloxacin Hydrochloride dated January 1997 (9) 10.15 Proprietary Drug Development and Marketing Agreement dated March 20, 2000 (11) 10.17 Description of Excess Savings and Retirement Plan(12) 40 10.18 Agreement with Paul M. Bisaro 10.19 Agreement with Carole S. Ben-Maimon 10.20 Agreement with Timothy P. Catlett(14) 10.21 Agreement with William T. McKee(14) 10.22 Agreement with Martin Zeiger(14) 10.23 Agreement with Fredrick J. Killion 10.24 Agreement with E. Thomas Arington 10.25 Agreement with Salah U. Ahmed 10.26 Agreement with Christine Mundkur 10.27 Agreement with Catherine F. Higgins 10.28 Duramed 1988 Stock Option Plan(15) 10.29 Duramed 1991 Stock Option Plan for Nonemployee Directors(16) 10.30 Duramed 1997 Stock Option Plan(17) 10.31 Duramed 2000 Stock Option Plan(18) 10.32 Duramed 1999 Nonemployee Director Stock Plan(19) 21.0 Subsidiaries of the Company 23.0 Consent of Deloitte & Touche LLP (1) Previously filed with the Securities and Exchange Commission as an Exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 1997 and incorporated herein by reference. (2) Previously filed with the Securities and Exchange Commission as an Exhibit to the Registrant's Annual Report on Form 10-K for the year ended June 30, 1999 and incorporated herein by reference. (3) Previously filed with the Securities and Exchange Commission as an Exhibit to the Registrant's Registration Statement on Form S-1 No. 33-13472 and incorporated herein by reference. (4) Previously filed with the Securities and Exchange Commission as an Exhibit to the Registrant's Annual Report on Form 10-K for the year ended June 30, 1993 and incorporated herein by reference. (5) Previously filed with the Securities and Exchange Commission as an Exhibit to the Registrant's Registration Statement on Form S-8 Nos. 33-73696 and 333-17349 and incorporated herein by reference. (6) Previously filed with the Securities and Exchange Commission as an Exhibit to the Registrant's Registration Statement on Form S-8 No. 33-73700 and incorporated herein by reference. (7) Previously filed with the Securities and Exchange Commission as an Exhibit to the Registrant's Registration Statement on Form S-8 Nos. 33-73698 and 333-17351 incorporated herein by reference. 41 (8) Previously filed with the Securities and Exchange Commission as an Exhibit to the Registrant's Annual Report on Form 10-K for the year ended June 30, 1995 and incorporated herein by reference. (9) Previously filed with the Securities and Exchange Commission as an Exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997 and incorporated herein by reference. (10) Previously filed with the Securities and Exchange Commission as an Exhibit to the Registrant's Annual Report on Form 10-K for the year ended June 30, 1996 and incorporated herein by reference. (11) Previously filed with the Securities and Exchange Commission as an Exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2000 and incorporated herein by reference. (12) Previously filed with the Securities and Exchange Commission as an Exhibit to the Registrant's Annual Report on Form 10-K for the year ended June 30, 2000 and incorporated herein by reference. (13) Previously filed with the Securities and Exchange Commission as an Exhibit to the Registrant's Registration Statement No. 333-66986 on Form S-4 on August 6, 2001 and incorporated herein by reference. (14) Previously filed with the Securities and Exchange Commission as an Exhibit to the Registrant's Annual Report on Form 10-K for the year ended June 30, 2001. (15) Previously filed with the Securities and Exchange Commission as an Exhibit to the Duramed Pharmaceuticals, Inc. Proxy Statement relating to the 1993 Annual Meeting of Stockholders and incorporated herein by reference. (16) Previously filed with the Securities and Exchange Commission as an Exhibit to the Duramed Pharmaceuticals, Inc. Proxy Statement relating to the 1998 Annual Meeting of Stockholders and incorporated herein by reference. (17) Previously filed with the Securities and Exchange Commission as an Exhibit to the Duramed Pharmaceuticals, Inc. Proxy Statement relating to the 1997 Annual Meeting of Stockholders and incorporated herein by reference. (18) Previously filed with the Securities and Exchange Commission as an Exhibit to the Duramed Pharmaceuticals, Inc. Proxy Statement relating to the 2000 Annual Meeting of Stockholders and incorporated herein by reference. (19) Previously filed with the Securities and Exchange Commission as an Exhibit to the Duramed Pharmaceuticals, Inc. Annual Report on Form 10-K for the year ended December 31, 1998 and incorporated herein by reference. (b) Reports on Form 8-K The Company did not file any Current Reports on Form 8-K in the quarter ended June 30, 2002. 42 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. BARR LABORATORIES, INC. By: /s/ Bruce L. Downey --------------------------- Bruce L. Downey Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date - --------- ----- ---- /s/ Bruce L. Downey Chairman of the Board and Chief August 26, 2002 - ------------------- Executive Officer (Principal Bruce L. Downey Executive Officer) /s/William T. McKee Senior Vice President, Chief August 26, 2002 - ------------------- Financial Officer, Treasurer and William T. McKee Secretary (Principal Financial Officer and Principal Accounting Officer) /s/Edwin A. Cohen Vice Chairman of the Board August 26, 2002 - ----------------- Edwin A. Cohen /s/Carole Ben-Maimon Director August 26, 2002 - -------------------- Carole Ben-Maimon /s/Paul M. Bisaro Director August 26, 2002 - ----------------- Paul M. Bisaro /s/Robert J. Bolger Director August 26, 2002 - ------------------- Robert J. Bolger /s/Harold N. Chefitz Director August 26, 2002 - -------------------- Harold N. Chefitz /s/Richard R. Frankovic Director August 26, 2002 - ----------------------- Richard R. Frankovic /s/James S. Gilmore III Director August 26, 2002 - ----------------------- James S. Gilmore III /s/Jack M. Kay Director August 26, 2002 - -------------- Jack M. Kay
43 /s/Bernard C. Sherman Director August 26, 2002 - --------------------- Bernard C. Sherman /s/Peter R. Seaver Director August 26, 2002 - ------------------ Peter R. Seaver /s/George P. Stephan Director August 26, 2002 - -------------------- George P. Stephan
44 INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Page ---- Independent Auditors' Report F-2 Report of Independent Auditors F-3 Consolidated Balance Sheets as of June 30, 2002 and 2001 F-4 Consolidated Statements of Operations for the years ended June 30, 2002, 2001 and 2000 F-5 Consolidated Statements of Shareholders' Equity for the years ended June 30, 2002, 2001 and 2000 F-6 Consolidated Statements of Cash Flows for the years ended June 30, 2002, 2001 and 2000 F-8 Notes to Consolidated Financial Statements of Barr Laboratories, Inc. F-9 Schedule II - Barr Laboratories, Inc. Valuation and Qualifying Accounts for the years ended June 30, 2002, 2001 and 2000 S-1
F-1 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders of Barr Laboratories, Inc.: We have audited the accompanying consolidated balance sheets of Barr Laboratories, Inc. and subsidiaries (the "Company") as of June 30, 2002 and 2001, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended June 30, 2002. Our audits also included the financial statement schedule listed at Item 14. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits. The consolidated financial statements give retroactive effect to the merger of the Company and Duramed Pharmaceuticals, Inc. ("Duramed"), which has been accounted for as a pooling of interests as described in Note 2 to the consolidated financial statements. We did not audit the financial statements of Duramed for the six-month period ended June 30, 2001 or the years ended December 31, 2000 and 1999, which statements reflect total assets of $136,587, $81,966, and $80,773 as of June 30, 2001, December 31, 2000 and December 31, 1999, respectively, and total revenues of $59,831, $83,465, and $50,220 for the respective periods then ended. The financial statements of Duramed for such period were audited by other auditors whose reports have been furnished to us, and our opinion, insofar as it relates to the amounts included for Duramed for such periods, are based solely on the report of such other auditors. The financial statements of Duramed were combined with the financial statements of the Company as described in Note 1. Certain accounts of Duramed were reclassified to conform to the presentation method used by Barr and restated to give effect to pooling of interest adjustments of Duramed's tax valuation allowance in accordance with the provisions of SFAS No. 109, Accounting for Income Taxes. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of the other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the reports of the other auditors, the consolidated financial statements present fairly, in all material respects, the financial position of Barr Laboratories, Inc. and subsidiaries at June 30, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2002 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, based on our audits and the report of other auditors, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein. We also audited the adjustments described in Note 2 that were applied to restate the June 30, 2001, December 31, 2000 and December 31, 1999 financial statements of Duramed. In our opinion, such adjustments are appropriate and have been properly applied. /s/ Deloitte & Touche LLP Stamford, Connecticut August 9, 2002 F-2 Report of Independent Auditors The Board of Directors Duramed Pharmaceuticals, Inc. We have audited the consolidated balance sheets of Duramed Pharmaceuticals, Inc. as of June 30, 2001, December 31, 2000 and December 31, 1999, and the related consolidated statements of operations, stockholders' equity (capital deficiency) and cash flows for the six months ended June 30, 2001 and for each of the two years in the period ended December 31, 2001 (not presented separately herein). These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Duramed Pharmaceuticals, Inc. at June 30, 2001, December 31, 2000 and December 31, 1999, and the consolidated results of its operations and its cash flows for the six months ended June 30, 2001 and for each of the two years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP Cincinnati, Ohio November 30, 2001 F-3 BARR LABORATORIES, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
JUNE 30, JUNE 30, 2002 2001 ---- ---- ASSETS Current assets: Cash and cash equivalents $ 331,257 $ 222,343 Accounts receivable (including receivables from related parties of $829 in 2002 and $3,826 in 2001) 103,168 85,811 Other receivables 23,230 24,732 Inventories 151,133 142,308 Deferred income taxes 18,208 6,248 Prepaid expenses and other current assets 10,672 6,282 --------- --------- Total current assets 637,668 487,724 Property, plant and equipment, net 165,522 131,075 Deferred income taxes 21,270 42,208 Marketable securities 15,502 908 Other assets 48,592 4,601 --------- --------- Total assets $ 888,554 $ 666,516 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 110,879 $ 123,774 Accrued liabilities (including accrued liabilities to related parties of $634 and $954 in 2002 and 2001, respectively) 51,438 31,743 Current portion of long-term debt 3,642 7,929 Current portion of capital lease obligations 1,695 1,003 Income taxes payable 9,801 10,174 --------- --------- Total current liabilities 177,455 174,623 Long-term debt 37,657 63,539 Long-term portion of capital lease obligations 4,977 2,024 Other liabilities 1,933 1,376 Mandatory redeemable convertible preferred stock -- 8,177 Commitments & Contingencies Shareholders' equity: Preferred stock, $1 par value per share; authorized 2,000,000 shares; none issued Common stock $.01 par value per share; authorized 100,000,000; issued 43,792,170 and 42,333,524 in 2002 and 2001, respectively 438 424 Additional paid-in capital 275,219 239,264 Additional paid-in capital - warrants 16,418 16,418 Retained earnings 375,066 160,347 Accumulated other comprehensive income 99 337 --------- --------- 667,240 416,790 Treasury stock at cost: 186,932 and 176,932 in 2002 and 2001, respectively (708) (13) --------- --------- Total shareholders' equity 666,532 416,777 --------- --------- Total liabilities and shareholders' equity $ 888,554 $ 666,516 ========= =========
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS. F-4 BARR LABORATORIES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED JUNE 30, 2002, 2001 AND 2000 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2002 2001 2000 ---- ---- ---- Revenues: Product sales (including sales to related parties of $16,472, $8,279 and $8,416 in 2002, 2001 and 2000, respectively) $1,171,358 $576,656 $490,330 Development and other revenue 17,626 16,495 642 ---------- -------- -------- Total revenues 1,188,984 593,151 490,972 Costs and expenses: Cost of sales 676,323 391,109 355,612 Selling, general and administrative 111,639 76,821 95,653 Research and development 75,697 57,617 48,171 Merger-related costs 31,449 -- -- ---------- -------- -------- Earnings (loss) from operations 293,876 67,604 (8,464) Proceeds from patent challenge settlement 31,958 28,313 27,584 Interest income 7,824 9,423 5,092 Interest expense 3,530 7,195 5,957 Other income 7,656 3,648 347 ---------- -------- -------- Earnings before income taxes and extraordinary loss 337,784 101,793 18,602 Income tax expense 125,405 38,714 8,042 ---------- -------- -------- Earnings before extraordinary loss 212,379 63,079 10,560 Extraordinary loss on early extinguishment of debt, net of taxes of $87 160 -- -- ---------- -------- -------- Net earnings 212,219 63,079 10,560 Preferred stock dividends 457 338 255 Deemed dividend on convertible preferred stock 1,493 175 -- ---------- -------- -------- Net earnings applicable to common shareholders $ 210,269 $ 62,566 $ 10,305 ========== ======== ======== EARNINGS PER COMMON SHARE - BASIC: Earnings before extraordinary loss $ 4.93 $ 1.50 $ 0.26 ========== ======== ======== Net earnings $ 4.88 $ 1.49 $ 0.26 ========== ======== ======== EARNINGS PER COMMON SHARE - ASSUMING DILUTION: Earnings before extraordinary loss $ 4.68 $ 1.42 $ 0.26 ========== ======== ======== Net earnings $ 4.63 $ 1.40 $ 0.25 ========== ======== ======== Weighted average shares 43,110 41,973 39,976 ========== ======== ======== Weighted average shares-assuming dilution 45,423 44,573 41,285 ========== ======== ========
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS. F-5 BARR LABORATORIES, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED JUNE 30, 2002, 2001 AND 2000 (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
Additional Additional paid Warrant Common stock paid in capital- subscription Retained Shares Amount in capital warrants receivable earnings ------------------------------------------------------------------------------------ BALANCE, JUNE 30, 1999 27,999,209 $279 $171,848 $ - $ - $ 86,862 Comprehensive income: Net earnings 10,560 Unrealized loss on marketable securities, net of tax of $2,126 Total comprehensive income Tax benefit of stock incentive plans 846 Issuance of stock in connection with benefit plans 12,109 - 394 Issuance of stock in settlement of certain liabilities 1,694 - 100 Conversion of Series F Preferred Stock, net 254,351 3 2,800 Issuance of stock in connection with Solvay alliance, net 768,600 8 25,737 Issuance of common stock for exercised stock options and employees' stock purchase plans 670,533 7 9,088 Issuance of warrants 16,418 (16,418) Proceeds applied to warrant receivable 14,583 Dividend on Preferred Stock (255) Stock split (3-for-2) 11,654,339 116 (27) (154) ------------------------------------------------------------------------------------ BALANCE, JUNE 30, 2000 41,360,835 413 210,531 16,418 (1,835) 97,268 Comprehensive income: Net earnings 63,079 Unrealized gain on marketable securities, net of tax of $226 Reclassification adjustment Total comprehensive income Tax benefit of stock incentive plans 11,614 Issuance of stock in connection with benefit plans 14,231 - 346 Conversion of Series F Preferred Stock, net 331,503 4 4,914 Issuance of warrants in connection with Series G Preferred Stock 765 Preferred stock valuation adjustment 1,335 Issuance of common stock for exercised stock options and employees' stock purchase plans 626,955 7 10,272 Dividend on Preferred Stock (513) Proceeds applied to warrant receivable 1,835 ------------------------------------------------------------------------------------ BALANCE, JUNE 30, 2001 42,333,524 424 239,264 16,418 - 160,347
Accumulated other Total comprehensive Treasury stock shareholders' income/(loss) Shares Amount equity -------------------------------------------------------------- BALANCE, JUNE 30, 1999 $(1,258) 117,955 $(13) $ 257,718 Comprehensive income: Net earnings 10,560 Unrealized loss on marketable securities, net of tax of $2,126 3,174 3,174 --------- Total comprehensive income 13,734 Tax benefit of stock incentive plans 846 Issuance of stock in connection with benefit plans 394 Issuance of stock in settlement of certain liabilities 100 Conversion of Series F Preferred Stock, net 2,803 Issuance of stock in connection with Solvay alliance, net 25,745 Issuance of common stock for exercised stock options and employees' stock purchase plans 9,095 Issuance of warrants - Proceeds applied to warrant receivable 14,583 Dividend on Preferred Stock (255) Stock split (3-for-2) 58,977 (65) ---------------------------------------------------------------- BALANCE, JUNE 30, 2000 1,916 176,932 (13) 324,698 Comprehensive income: Net earnings 63,079 Unrealized gain on marketable securities, net of tax of $226 305 305 Reclassification adjustment (1,884) (1,884) --------- Total comprehensive income 61,500 Tax benefit of stock incentive plans 11,614 Issuance of stock in connection with benefit plans 346 Conversion of Series F Preferred Stock, net 4,918 Issuance of warrants in connection with Series G Preferred Stock 765 Preferred stock valuation adjustment 1,335 Issuance of common stock for exercised stock options and employees' stock purchase plans 10,279 Dividend on Preferred Stock (513) Proceeds applied to warrant receivable - - 1,835 ---------------------------------------------------------------- BALANCE, JUNE 30, 2001 337 176,932 (13) 416,777
F-6 BARR LABORATORIES, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONT.) FOR THE YEARS ENDED JUNE 30, 2002, 2001 AND 2000 (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
Additional Additional paid Warrant Common stock paid in capital- subscription Retained Shares Amount in capital warrants receivable earnings --------------------------------------------------------------------------------- BALANCE, JUNE 30, 2001 42,333,524 424 239,264 16,418 - 160,347 Comprehensive income: Net earnings 212,219 Unrealized gain on marketable securities, net of tax of $168 Total comprehensive income Pooling adjustments 125,590 (1) 1,219 2,551 Tax benefit of stock incentive plans 5,611 Issuance of stock in connection with benefit plans 2,349 - 177 Issuance of common stock for exercised stock options and employees' stock purchase plans 797,380 8 19,882 Issuance of common stock for exercised warrants 21,565 2 762 Conversion of preferred stock 512,387 5 8,841 Deemed dividend on convertible preferred stock (80) Dividend on convertible preferred stock (457) Cash in lieu of fractional shares (625) (51) Common stock acquired for treasury - --------------------------------------------------------------------------------- 43,792,170 $ 438 $275,219 $16,418 $ - $375,066 =================================================================================
Accumulated other Total comprehensive Treasury stock shareholders' income / (loss) Shares Amount equity -------------------------------------------------------------- BALANCE, JUNE 30, 2001 337 176,932 (13) 416,777 Comprehensive income: Net earnings 212,219 Unrealized gain on marketable securities, net of tax of $168 (238) (238) ----------- Total comprehensive income 211,981 Pooling adjustments 3,769 Tax benefit of stock incentive plans 5,611 Issuance of stock in connection with benefit plans 177 Issuance of common stock for exercised stock options and employees' stock purchase plans 19,890 Issuance of common stock for exercised warrants 764 Conversion of preferred stock 8,846 Deemed dividend on convertible preferred stock (80) Dividend on convertible preferred stock (457) Cash in lieu of fractional shares (51) Common stock acquired for treasury 10,000 (695) (695) ------------------------------------------------------ $ 99 186,932 $(708) $ 666,532 ======================================================
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS F-7 BARR LABORATORIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 2002, 2001 AND 2000 (IN THOUSANDS OF DOLLARS)
2002 2001 2000 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 212,219 $ 63,079 $ 10,560 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 15,290 14,324 13,463 Deferred income tax expense (benefit) 6,389 (4,159) (21,533) Write-off of deferred financing fees associated with early extinguishment of debt 247 -- -- Loss (gain) on sale of assets -- 303 (470) (Gain) loss on sale of marketable securities -- (6,671) 122 Write-off of investments -- 2,750 -- Other 260 151 394 Tax benefit of stock incentive plans 5,611 11,614 846 In-process research and development associated with Enhance Pharmaceuticals, Inc. acquisition 1,000 -- -- Changes in assets and liabilities: (Increase) decrease in: Accounts receivable and other receivables, net (5,155) (24,389) (11,783) Inventories (8,304) (29,916) (14,993) Prepaid expenses (844) 39 (3,933) Other assets (4,909) 508 (1,718) Increase (decrease) in: Accounts payable, accrued liabilities and other liabilities 8,766 13,642 37,388 Income taxes payable (475) 6,226 3,769 --------- --------- --------- Net cash provided by operating activities 230,095 47,501 12,112 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment (47,205) (19,323) (17,605) Proceeds from sale of property, plant and equipment 395 27 287 Acquisition of Enhance Pharmaceuticals, Inc. (46,288) -- -- (Purchases) proceeds of marketable securities, net (15,000) 10,839 7,965 Other (500) -- -- --------- --------- --------- Net cash used in investing activities (108,598) (8,457) (9,353) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on long-term debt and capital leases (12,166) (17,405) (6,026) Net borrowings under line of credit (20,316) 2,535 3,886 Long-term borrowings -- 20,799 11,246 Proceeds from issuance of preferred stock -- 9,700 -- Proceeds from issuance of common stock -- 1,163 29,196 Earnings under DuPont agreements applied to warrant receivable -- 1,835 14,583 Purchase of treasury stock (695) -- -- Proceeds from exercise of stock options and employee stock purchases 20,655 9,117 5,746 Dividends paid on preferred stock (11) (371) (270) Other (50) -- (65) --------- --------- --------- Net cash (used in) provided by financing activities (12,583) 27,373 58,296 --------- --------- --------- Increase in cash and cash equivalents 108,914 66,417 61,055 Cash and cash equivalents, beginning of year 222,343 155,926 94,871 --------- --------- --------- Cash and cash equivalents, end of year $ 331,257 $ 222,343 $ 155,926 ========= ========= ========= SUPPLEMENTAL CASH FLOW DATA: Cash paid during the year: Interest, net of portion capitalized $ 3,510 $ 6,666 $ 5,402 ========= ========= ========= Income taxes $ 113,563 $ 25,533 $ 24,946 ========= ========= ========= Non-cash transactions: Equipment under capital lease $ 5,318 $ 1,383 $ 2,553 ========= ========= ========= Write-off of equipment & leasehold improvements related to closed facility $ 5,307 $ -- $ 115 ========= ========= ========= Warrants issued for subscription receivable $ -- $ -- $ 16,418 ========= ========= =========
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS. F-8 BARR LABORATORIES, INC. Notes to the Consolidated Financial Statements (in thousands of dollars, except per share amounts) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Principles of Consolidation and Other Matters The consolidated financial statements include the accounts of Barr Laboratories, Inc. and its wholly-owned subsidiaries (the "Company" or "Barr"). The Company, when used in the context of "the Company and Duramed," refers to pre-merger Barr. All significant intercompany balances and transactions have been eliminated in consolidation. Sherman Delaware, Inc. owned approximately 26% of the outstanding common stock of the Company at June 30, 2002. Dr. Bernard C. Sherman is a principal stockholder of Sherman Delaware, Inc. and a Director of Barr Laboratories, Inc. (see Note 12). 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. 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, all financial data of the Company presented in these financial statements has been restated as described below to include the historical financial data of Duramed (see Note 2). The Company and Duramed had different fiscal year-ends. Duramed had a calendar year-end, whereas the Company's fiscal year ends on June 30th. Financial information for the fiscal year ended June 30, 2002 is presented as if the Company and Duramed were merged on July 1, 2001. For the fiscal years ended June 30, 2001 and 2000, financial information for Barr's fiscal years ended June 30th was combined with financial information for Duramed's calendar years ended December 31st. Barr's consolidated statements of operations for the years ended June 30, 2001 and 2000 were combined with Duramed's statement of operations for the years ended December 31, 2000 and 1999, respectively. Barr's balance sheet as of June 30, 2001 was combined with Duramed's balance sheet as of December 31, 2000. Barr's statements of cash flows for the fiscal years ended June 30, 2001 and 2000 were combined with Duramed's statements of cash flows for the calendar years ended December 31, 2000 and December 31, 1999, respectively. This presentation of the combined financial information described above has the effect of excluding Duramed's audited results from operations for the six-month period ended June 30, 2001. Net revenues and net income for Duramed for the six-month period ended June 30, 2001 were $59,831 and $49,038, respectively. On a stand alone basis, Duramed's net income of $49,038 reflects the benefit of reversing $44,755 of the valuation allowance that Duramed previously established to offset certain deferred tax assets. The valuation allowance was reversed based on the expectation that, as a result of the merger, the combined company will be able to utilize a majority of these deferred tax assets (see Note 2). In addition, from July 1, 2001 through October 24, 2001, the date of the merger, Duramed reversed an additional $1,732 of valuation allowance, bringing the total valuation allowance reversals to $46,487. In accordance with SFAS 109 "Accounting for Income Taxes", Duramed's net earnings of $49,038 less the $46,487 reversal of valuation allowance, or $2,551, has been reported as an increase to Barr's retained earnings within the Consolidated Statements of Shareholders' Equity for the year ended June 30, 2002. Duramed's cash flows (used in) provided by operating, investing and financing activities for the six-months ended June 30, 2001 were ($208), ($1,446), and $1,654, respectively. On June 6, 2002, the Company completed the purchase of certain assets and assumption of certain liabilities of Enhance Pharmaceuticals, Inc., ("Enhance"). The operating results of Enhance are included in the consolidated financial statements subsequent to the June 6, 2002 acquisition date. Certain amounts in the prior year's financial statements have been reclassified to conform with the current year presentation. F-9 (b) Credit and Market Risk Financial instruments that potentially subject the Company to credit risk consist principally of interest-bearing investments and trade receivables. The Company performs ongoing credit evaluations of its customers' financial condition and, consistent with industry practice, generally does not requires collateral from its customers. (c) 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 June 30, 2002 and 2001, $84,834 and $96,820, 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. In December 1995, the Company and AstraZeneca, the innovator of Tamoxifen, entered into an Alternative Collateral Agreement ("Collateral Agreement") which suspends certain sections of the Supply and Distribution Agreement ("Distribution Agreement") entered into by both parties in March 1993. Under the Collateral Agreement, extensions of credit to the Company are no longer required to be secured by a letter of credit or cash collateral. However, the Company may at its discretion maintain a balance in the escrow account based on its short-term cash requirements. In return for the elimination of the cash collateral requirement and in lieu of issuing letters of credit, the Company has agreed (i) to pay AstraZeneca monthly interest based on the average unsecured monthly Tamoxifen payable balance, as defined in the Collateral Agreement, and (ii) to comply with certain financial covenants. The Company was in compliance with such covenants at June 30, 2002. (d) Inventories Inventories are stated at the lower of cost, determined on a first-in, first-out (FIFO) basis, or market. The Company establishes reserves for its inventory to reflect those conditions when 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 standards established by 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. (e) Property, Plant and Equipment Property, plant and equipment is recorded at cost. Depreciation is recorded on a straight-line basis over the estimated useful lives of the related assets. Leasehold improvements are amortized on a straight-line basis over the shorter of their useful lives or the terms of the respective leases. The estimated useful lives of the major classification of depreciable assets are:
Years ----- Buildings 30-45 Building improvements 10 Machinery and equipment 3-10 Leasehold improvements 3-10
Maintenance and repairs are charged to operations as incurred; renewals and betterments are capitalized. (f) Research and Development Research and development costs, which consist principally of product development costs, are charged to operations as incurred. F-10 (g) Earnings Per Share On May 31, 2000, the Company's Board of Directors declared a 3-for-2 stock split effected in the form of a 50% stock dividend. Approximately 11.6 million additional shares of common stock were distributed on June 29, 2000 to shareholders of record as of June 12, 2000. As discussed in Note 2, on October 24, 2001, the Company completed a merger with Duramed where the Company issued approximately 7.5 million shares of its common stock for all the outstanding common stock of Duramed and exchanged all options and warrants to purchase Duramed stock for options and warrants to purchase approximately 1.2 million shares of the Company's common stock. All applicable prior year share and per share amounts have been adjusted for the stock split and the merger. The following is a reconciliation of the numerators and denominators used to calculate earnings per common share ("EPS") as presented in the Consolidated Statements of Operations:
2002 2001 2000 ---- ---- ---- Earnings before extraordinary loss $212,379 $63,079 $10,560 Dividends on preferred stock 457 338 255 Deemed dividend on convertible preferred stock 1,493 175 -- -------- ------- ------- Numerator for basic and diluted earings per share- earnings before extraordinary loss available for common stockholders $210,429 $62,566 $10,305 ======== ======= ======= EARNINGS PER COMMON SHARE - BASIC: Weighted average shares (denominator) 43,110 41,973 39,976 Earnings before extraordinary loss available for common stockholders $ 4.88 $ 1.49 $ 0.26 ======== ======= ======= EARNINGS PER COMMON SHARE - ASSUMING DILUTION: Weighted average shares 43,110 41,973 39,976 Effect of dilutive options 2,313 2,600 1,309 -------- ------- ------- Weighted average shares- assuming dilution (denominator) 45,423 44,573 41,285 Earnings before extraordinary loss available for common stockholders $ 4.63 $ 1.40 $ 0.25 ======== ======= =======
2002 2001 2000 ---- ---- ---- Not included in the calculation of diluted earnings per share because their impact is antidilutive: Stock options outstanding 755,192 177,643 896,215 Warrants - 14,856 1,843,656 Preferred if converted 506,324 506,324 331,502
(h) Deferred Financing Fees All debt issuance costs are being amortized on a straight-line basis over the life of the related debt, which matures in 2002, 2004, 2007 and 2010. Warrant issuance costs are being amortized on a straight-line basis over the terms of the related warrants. The total unamortized amounts of $454 and $1,074 at June 30, 2002 and 2001, respectively, are included in Other assets in the Consolidated Balance Sheets. (i) Fair Value of Financial Instruments Cash, Accounts Receivable, Other Receivables and Accounts Payable - The carrying amounts of these items are a reasonable estimate of their fair value. Marketable Securities - Marketable securities are recorded at their fair value (see Note 7). F-11 Other Assets - Investments that do not have a readily determinable market value are recorded at cost, as it is a reasonable estimate of fair value or current realizable value (see Note 8). Long-Term Debt - The fair value at June 30, 2002 and 2001 is estimated at $43 million and $71 million, respectively. Estimates were determined by discounting the future cash flows using rates currently available to the Company. The fair value estimates presented herein are based on pertinent information available to management as of June 30, 2002. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date, and current estimates of fair value may differ significantly from the amounts presented herein. (j) Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and use assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The most significant estimates made by management include those made in the areas of sales returns and allowances, including shelf stock adjustments; inventory reserves; deferred taxes; litigation reserves and goodwill and intangible assets. Management periodically evaluates estimates used in the preparation of the consolidated financial statements for continued reasonableness. Appropriate adjustments, if any, to the estimates used are made prospectively based on such periodic evaluations. (k) Income 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 differences between the financial statement and income tax basis of assets and liabilities, and for operating and capital losses and tax credit carryforwards. A valuation allowance is provided for the portion of deferred tax assets which are "more-likely-than-not" to be unrealized. Deferred tax assets and liabilities are measured using enacted tax rates and laws. (l) Revenue Recognition Product sales The Company recognizes product sales revenue when substantially all risks and rights of ownership have transferred. Development and other revenue Barr earned revenues under the DuPont research and development agreements (see Note 3) as Barr performed the related research and development. Amounts received under these agreements are not refundable. For the years ended June 30, 2001 and 2000, Development and other revenue included $562 and $2,584, respectively, related to transition revenues under the ViaSpan Agreement (see Note 3). (m) Sales returns and allowances At the time of sale, the Company records estimates for various costs, which reduce product sales. These include estimates for product returns, rebates, chargebacks and other sales allowances. In addition, the Company may record allowances for shelf-stock adjustments when the conditions are appropriate. Accounts receivable are presented net of allowances relating to the above provisions, of $93,789 and $44,293 at June 30, 2002 and 2001, respectively. Estimates for sales allowances such as product returns, rebates and chargebacks are based on a variety of factors including actual return experience of other products, rebate arrangements for each product, and estimated sales by our wholesale customers to other third parties who have contracts with Barr. Actual experience associated F-12 with any of these items may be different than the Company's estimates. Barr regularly reviews the factors that influence its estimates and, if necessary, makes adjustments when it believes that actual product returns, credits and other allowances may differ from established reserves. In the generic pharmaceutical industry, manufacturers such as Barr often issue credits to customers following decreases in the market price of a generic pharmaceutical product (also known as shelf-stock adjustments). The shelf-stock adjustment is intended to reduce a customer's inventory cost to better reflect current market prices and is often used to maintain market share. The determination to grant a shelf-stock credit to a customer following a price decrease is at the Company's discretion, and is not pursuant to contractual agreements with customers. Allowances for shelf-stock adjustments are recorded at the time Barr sells products it believes will be subject to such adjustments. The timing and amount of a reserve for shelf-stock adjustments depends on several variables including the estimated launch date of a competing product, estimated declines in market price and estimated levels of inventory held by the customer. As a result, a shelf-stock reserve depends on a product's unique facts and circumstances. Barr regularly monitors these and other factors for its significant products and evaluates its reserves and estimates as additional information becomes available. (n) Segment Reporting The Company operates in one segment - the development, manufacture and marketing of pharmaceutical products. The Company's chief operating decision-maker reviews operating results on a consolidated company basis. The Company's manufacturing plants are located in New Jersey, New York, Ohio and Virginia and its products are sold throughout the United States, Puerto Rico and Canada, primarily to wholesale and retail distributors. In fiscal 2002, three customers accounted for over 10% of product sales with 18%, 13% and 12% of sales. In fiscal 2001 and 2000, a single customer accounted for approximately 14% and 15% of product sales, respectively. (o) Asset Impairment The Company reviews the carrying value of its assets for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets. (p) New Accounting Pronouncements Business Combinations/Goodwill and Other Intangible Assets In July 2001, the FASB issued SFAS No. 141, "Business Combinations" ("SFAS 141"), and No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141 supercedes APB Opinion No. 16, "Business Combinations" ("APB 16") and amends or supercedes a number of related interpretations of APB 16. SFAS 141 eliminates the pooling-of-interests method of accounting for business combinations, and changes the criteria to recognize intangible assets apart from goodwill. 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 Company adopted SFAS 141 on July 1, 2001 and, as discussed in Note 2, applied it to the June 2002 acquisition of Enhance Pharmaceuticals, Inc. The provisions of SFAS 142 are effective for fiscal years beginning after December 15, 2001. The Company will adopt SFAS 142 beginning in the first fiscal quarter of fiscal 2003. The Company believes that the adoption of SFAS 142 will not have a material impact on its results of operations or financial position. Accounting for Asset Retirement Obligations In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143"). This statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long lived assets and the associated asset retirement costs. It applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or the normal operation of a long-lived asset, except for certain obligations of lessees. The standard F-13 requires entities to record the fair value of a liability for an asset retirement obligation in the period incurred with a corresponding increase in the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. This statement is effective for financial statements issued for fiscal years beginning after June 15, 2002. The Company believes that the adoption of SFAS 143 will not have a material impact on its results of operations or financial position. Accounting for Impairment or Disposal of Long-Lived Assets In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). This statement addresses financial accounting and reporting for the impairment of long-lived assets. This statement supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions". This statement also amends ARB No. 51, "Consolidated Financial Statements", to eliminate the exception to consolidation for a subsidiary for which control is likely to be temporary. This statement requires that one accounting model be used for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired. This statement also broadens the presentation of discontinued operations to include more disposal transactions. This statement is effective for financial statements issued for fiscal years beginning after June 15, 2002. The Company believes that the adoption of SFAS 144 will not have a material impact on its results of operations or financial position. Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections" ("SFAS 145"). SFAS 145 rescinds SFAS 4, "Reporting Gains and Losses from Extinguishment of Debt", and an amendment of that Statement, SFAS 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements." SFAS 145 also rescinds SFAS 44, "Accounting for Intangible Assets of Motor Carriers." SFAS 145 amends SFAS 13, "Accounting for Leases," to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. SFAS 145 also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. This statement is effective for financial statements issued for fiscal years beginning after May 15, 2002. The Company believes that the adoption of SFAS 145 will not have a material impact on its results of operations or financial condition. Upon adoption, amounts previously recorded as extraordinary items will be reclassified into current operations. Accounting for Costs Associated with Exit or Disposal Activities In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146"). SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring). SFAS 146 requires recognition of a liability for a cost associated with an exit or disposal activity when the liability is incurred, as opposed to when the entity commits to an exit plan under EITF 94-3. This statement is effective for exit or disposal activities initiated after December 31, 2002. The Company believes that the adoption of SFAS 146 will not have a material impact on its results of operations or financial position. (2) BUSINESS COMBINATIONS Merger with Duramed Pharmaceuticals, Inc.: On June 29, 2001, the Company announced the signing of a definitive merger agreement with Duramed, a developer, manufacturer, and marketer of prescription drug products focusing on women's health and the hormone replacement therapy markets. The merger was approved by the shareholders of Duramed and Barr, respectively, and on October 24, 2001, a wholly-owned subsidiary of Barr merged with and into Duramed with Duramed surviving as a wholly-owned subsidiary of the Company. The merger was treated as a tax-free reorganization and was accounted for as a pooling-of- F-14 interests for financial reporting purposes. 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 Company and Duramed had certain differences in the classification of expenses in their historical statements of operations and certain differences in the classification of assets and liabilities in their historical balance sheets. Reclassifications have been made to conform the combined companies' statement of operations and balance sheet classifications. In addition, the historical Duramed balance sheets included approximately $50,000 in deferred tax assets, which had been fully offset by a valuation allowance. On a combined basis, Barr expects to utilize a majority of these deferred tax assets. Therefore, in accordance with SFAS No. 109, "Accounting for Income Taxes," the Company has restated Duramed's historical balance sheets to recognize the deferred tax asset that is more-likely-than-not expected to be utilized. The combined amounts presented in the accompanying financial statements are based on the basis of presentation described in Note 1 and are summarized below:
Twelve Months Ended June 30, 2001 2000 Total revenues: Barr $509,686 $440,752 Duramed 83,465 50,220 -------- -------- Combined $593,151 $490,972 ======== ======== Net earnings / (loss): Barr $ 62,487 $ 44,177 Duramed 164 (51,278) Adjustments to reverse valuation allowance on deferred tax assets (85) 17,406 -------- -------- Combined $ 62,566 $ 10,305 ======== ========
As of June 30, -------------- 2001 2000 ---- ---- Shareholders' equity: Barr $365,642 $282,168 Duramed 6,380 (2,310) Cumulative effect of adjustments to reverse valuation allowance on deferred tax assets 44,755 44,840 -------- -------- Combined $416,777 $324,698 ======== ========
Acquisition of Enhance Pharmaceuticals, Inc.: On June 6, 2002, the Company acquired certain assets and assumed certain liabilities of Enhance Pharmaceuticals, Inc. The acquisition was accounted for under the purchase method of accounting. The total purchase price, including acquisition costs of $1,071, was $46,288. The fair values of assets acquired and liabilities assumed on June 6, 2002 were: F-15 Current assets $ 1,252 Property and equipment 2,012 Intangible assets 28,200 Goodwill 13,941 In-process research and development 1,000 ------- Total assets acquired $46,405 ------- Current liabilities 89 Capital lease obligations 28 ------- Total liabilities assumed 117 ------- Purchase price $46,288 ======= Total cash paid $45,217 Accrued acquisition costs 1,071 ------- $46,288 =======
Intangible assets included $1,400 of patents and $26,800 in product license agreements that are each subject to amortization over an estimated useful life of ten years. The fair value of net assets acquired was $32,464, resulting in goodwill of $13,941. The Company acquired Enhance to further its expansion into the female healthcare market. Certain of the factors contributing to the purchase price that resulted in goodwill were Enhance's proprietary vaginal ring drug delivery platform and its uses. The entire balance of goodwill is deductible for tax purposes. The operating results of Enhance are included in the consolidated financial statements subsequent to the June 6, 2002 acquisition date. Acquired in-process research and development projects were expensed to the Consolidated Statement of Operations upon acquisition because technological feasibility, through FDA or comparable regulatory body approval, had not been established and the projects had no further alternative use. (3) DUPONT PHARMACEUTICALS COMPANY STRATEGIC ALLIANCE On March 20, 2000, the Company signed definitive agreements to establish a strategic relationship with DuPont Pharmaceuticals Company ("DuPont") to develop, market and promote several proprietary products and to terminate all litigation between the two companies. The Company was unable to assess whether the individual terms of each of the agreements would have been different had each of the agreements been negotiated separately with other third parties not involved in litigation. DuPont has since been acquired by Bristol-Myers Squibb Company ("BMS"). In April 2002, the Company and BMS agreed to restructure and terminate the proprietary product development funding agreement and the Trexall Marketing Agreement that were forged between Barr and DuPont in March 2000. Under the terms of the March 2000 proprietary product development funding agreement ("Product Development Agreement"), DuPont agreed to invest up to $45,000 to support the ongoing development of Barr's CyPat((TM)) prostate cancer therapy and SEASONALE((TM)) and DP3 oral contraceptive proprietary products in exchange for co-marketing rights and royalties. Barr and BMS agreed to terminate this agreement and to cap BMS's funding obligations at $40,000. In return, BMS agreed to forego its royalty interest and other rights regarding the marketing of these three products. In connection with the Product Development Agreement, the Company earned $15,343, $12,008 and $8,000 for the years ended June 30, 2002, 2001 and 2000, respectively and reported $0, $1,835 and $8,000, respectively, as an offset to the warrant subscription receivable described in Note 14. Barr and BMS also agreed to terminate the Trexall Marketing Agreement, under which DuPont had agreed to promote, market and sell Barr's Trexall((TM)) product in exchange for a royalty. As a result of the termination, Barr has assumed BMS' responsibilities to coordinate the promotion and sales activities for Trexall and BMS will forego its royalty interest in the product. BMS agreed to fulfill its existing obligation to fund the Trexall sales force costs over the next two years and paid Barr $600 to cover BMS' other obligations during the term of the contract. For the years ended June 30, 2002, 2001 and 2000, the Company earned $0, $5,000 and $4,000, respectively, related to this agreement. For the year ended June F-16 30, 2000, the Company reported the $4,000 identified above as an offset to the warrant subscription receivable described in Note 14. In March 2000, Barr received from DuPont, the right to market and distribute ViaSpan (R), an organ transplant preservation agent, in the United States and Canada, through patent expiry in March 2006. During a transition period that ended July 31, 2000, DuPont remained the distributor of ViaSpan but paid a fee to Barr based on a defined formula calculated on DuPont's actual sales of ViaSpan during this transition period. For the years ended June 30, 2001 and 2000, the Company earned $562 and $2,584, respectively, during this transition period. For the year ended June 30, 2000, the Company reported the $2,584 identified above as an offset to the warrant subscription receivable described in Note 14. Under an agreement in principle reached in April 2002, to amend the existing ViaSpan Marketing Agreement, BMS agreed to extend Barr's rights and obligations for the marketing and distribution of ViaSpan in the United States and Canada. If a final agreement is reached, Barr will assume BMS' responsibilities for sourcing the product; coordinating distribution and performing certain regulatory functions and BMS will forego any further royalties related to sales of the product. (4) PROCEEDS FROM PATENT CHALLENGE SETTLEMENT In January 1997, Bayer AG and Bayer Corporation ("Bayer") and the Company agreed to settle the then pending litigation regarding Bayer's patent protecting ciprofloxacin hydrochloride. Under the Settlement Agreement, the Company withdrew its patent challenge by amending its ANDA from a paragraph IV certification (claiming invalidity) to a paragraph III certification (seeking approval upon patent expiry) and acknowledged the validity and enforceability of the ciprofloxacin patent. As consideration for this settlement, the Company received a non-refundable payment of $24,550 in January 1997, which it recorded as Proceeds from patent challenge settlement. Concurrent with the Settlement Agreement, the Company also signed a contingent, non-exclusive Supply Agreement ("Supply Agreement") with Bayer that ends at patent expiry in December 2003. Under the terms of the Supply Agreement, Bayer, at its sole option can (i) either allow Barr and Rugby Laboratories, now owned by Watson Pharmaceuticals, Inc., to purchase, at a predetermined discount to Bayer's then selling price, quantities of ciprofloxacin for resale under market conditions or (ii) make quarterly cash payments as defined in the Agreement. Further, the Supply Agreement also provides that, six months prior to patent expiry, currently July 2003, if Barr is not already distributing the product, Barr and Rugby Laboratories will have the right to begin distributing ciprofloxacin product manufactured by Bayer. The Bayer license is non-exclusive and Bayer may, at its option, provide other non-exclusive licenses to others after Barr and Rugby Laboratories have operated under the license for six months. If Bayer elects to supply Barr and Rugby Laboratories with product for resale in the market, the amount Barr and Rugby Laboratories could earn would be dependent upon numerous market factors including, the existence of competing products, market acceptance of the Barr product and pricing decisions. If Bayer elects not to allow Barr and Rugby Laboratories to purchase product for resale, Barr is entitled to receive cash payments during the remainder of the agreement that could range from $32 to $34 million per calendar year through December 31, 2003. As of June 30, 2002, the present value of the cash payments Barr may receive approximates $47.0 million. However, there is no guarantee that Bayer will continue to elect to make cash payments. Barr recognizes the amounts due under the Supply Agreement as such amounts are realized based on the outcome of Bayer's election. The amounts realized are reported as Proceeds from patent challenge settlement. (5) INVENTORIES
June 30, -------- 2002 2001 ---- ---- Raw materials and supplies $ 43,952 $ 36,895 Work-in-process 12,897 6,172 Finished goods 94,284 99,241 -------- -------- $151,133 $142,308 ======== ========
Tamoxifen Citrate, purchased as a finished product, accounted for $69,655 and $66,890 of finished goods inventory at June 30, 2002 and 2001, respectively. F-17 (6) PROPERTY, PLANT AND EQUIPMENT
June 30, ---------------------- 2002 2001 ---- ---- Land $ 4,870 $ 4,462 Buildings and improvements 89,521 86,993 Machinery and equipment 123,908 105,775 Leasehold improvements 2,449 1,160 Automobiles and trucks 200 95 Construction in progress 31,993 13,136 -------- -------- 252,941 211,621 Less: accumulated depreciation & amortization 87,419 80,546 -------- -------- $165,522 $131,075 ======== ========
For the years ended June 30, 2002, 2001 and 2000, $1,072, $278 and $136 of interest was capitalized, respectively. For the years ended June 30, 2002, 2001 and 2000, the Company recorded depreciation expense of $15,010, $13,631 and $12,831, respectively. (7) MARKETABLE SECURITIES The Company's investments in marketable securities are classified as "available for sale" and, accordingly, are recorded at current market value with offsetting adjustments to shareholders' equity, net of income taxes. Debt Securities The Company has invested $15,000 in market auction debt securities, which are readily convertible into cash at par value, which approximates cost. The par value of each of the three securities held is $5,000 and the maturity dates are July 21, 2003, January 6, 2004 and April 26, 2004, respectively. Equity Securities In April 1999, the Company sold its rights to several pharmaceutical products to Halsey Drug Company in exchange for warrants exercisable for 500,000 shares of Halsey's common stock at $1.06 per share. The warrants expire in April 2004. In connection with this sale, the Company recorded an investment in warrants and realized a gain of $343. The Company has valued the warrants at their fair value using the Black-Scholes option-pricing model using the following assumptions for June 30, 2002 and 2001, respectively: dividend yield of 0%; expected volatility of 103.3% and 121.7%; risk-free interest rate of 5.78%; and expected life of 1.75 and 2.75 years. The amortized cost and estimated market values of marketable securities at June 30, 2002 and 2001 are as follows: F-18
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED MARKET JUNE 30, 2002 COST GAINS LOSSES VALUE Debt securities $15,000 $ -- $-- $15,000 Equity securities 343 159 -- 502 ------- ---- --- ------- Total securities $15,343 $159 $-- $15,502 ======= ==== === =======
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED MARKET JUNE 30, 2001 COST GAINS LOSSES VALUE - ------------- ---- ----- ------ ----- Equity securities $343 $565 $ -- $908 ==== ==== ==== ====
Proceeds of $12,873, which included a gain of $6,671, were received on the sale of marketable securities in the year ended June 30, 2001. The cost of investments sold is determined by the specific identification method. (8) OTHER ASSETS
June 30, -------- 2002 2001 ---- ---- Goodwill $13,941 $ - Loan receivable 4,746 - Patents 1,260 - Licenses / agreements 24,562 522 Deferred costs 1,847 1,873 Investments 750 250 Other 1,486 1,956 ------- ------ $48,592 $4,601 ======= ======
Goodwill, Patents and Licenses / Agreements The Company recorded goodwill in connection with its June 2002 acquisition of certain assets and assumption of certain liabilities of Enhance Pharmaceuticals, Inc. which included certain patents and license agreements (see Note 2). Loan receivable The Loan receivable relates to loans made to Natural Biologics LLC under the terms of the Natural Biologics Loan and Security Agreement dated June 3, 2002. The loans are secured by a security interest in inventory and certain other assets of Natural Biologics LLC and bear interest at the applicable federal rate as defined by the loan agreement (4.66% at June 30, 2002). All amounts owed under that agreement are due on June 3, 2007 (see Note 19). Investments Investment in GliaMed, Inc. Included in Other assets for the year ended June 30, 2002, is the Company's investment in GliaMed, Inc. ("GliaMed"), a private company that has created a platform of compounds designed for the treatment of neurodegeneration diseases and primary brain cancers. In January 2002, the Company purchased 364,583 of GliaMed Series A Convertible Preferred Stock for $500. The Company's investment represents less than 20% of the outstanding voting shares of GliaMed. The Company does not F-19 have the ability to exercise significant influence on GliaMed's operations and there was no readily determinable market value for the GliaMed Series A Convertible Preferred Stock, therefore, this investment has been accounted for using the cost method. A director of the Company is the Chairman of GliaMed (see Note 12). Investment in Gynetics, Inc. In September 1998, the Company made an investment in Gynetics that represented less than 20% of Gynetics' outstanding voting shares. Barr did not have the ability to exercise significant influence on Gynetics' operations and there was no readily determinable market value, therefore, the Company accounted for this investment using the cost method of accounting. In the quarter ended September 30, 2000, the Company reviewed the valuation of its investment related to Gynetics in light of numerous negative events that occurred in the quarter including product development delays and threatened litigation. Due to these events as well as continued operating difficulties at Gynetics that included extensive losses and negative operating cash flow, Barr concluded as of September 30, 2000, that its investment related to Gynetics was other than temporarily impaired and that as of September 30, 2000, its investment related to Gynetics should be written down to $0, the current realizable value. (9) ACCRUED LIABILITIES Included in Accrued liabilities as of June 30, 2002 and 2001 is approximately $23,175 and $1,056, respectively, related to amounts due under various profit sharing agreements related primarily to raw material supply arrangements. (10) LONG-TERM DEBT A summary of long-term debt is as follows:
June 30, -------- 2002 2001 ---- ---- Senior Unsecured Notes (a) $24,285 $25,714 Provident Bank mortgage notes (b) 16,400 18,800 Equipment Financing (c) 614 2,370 Foothill Capital financing facilities: (d) Revolving credit facility -- 17,123 Intangible term note -- 3,667 Equipment term note -- 2,860 Note payable to contract sales organization (e) -- 887 Installment notes payable -- 47 Unsecured Revolving Credit Facility (f) -- -- ------- ------- 41,299 71,468 Less: Current Installments of Long-Term Debt 3,642 7,929 ------- ------- Total Long-Term Debt $37,657 $63,539 ======= =======
(a) The Senior Unsecured Notes of $24,285 include a $20,000, 7.01% Note due November 18, 2007 and $4,285, 6.61% Notes due November 18, 2004. Annual principal payments under the Notes total $1,427 through November 2002, $5,429 in 2003 and 2004, and $4,000 in 2005 through 2007. The Senior Unsecured Notes contain certain financial covenants including restrictions on dividend payments not to exceed $10 million plus 75% of consolidated net earnings subsequent to June 30, 1997. The Company was in compliance with all such covenants as of June 30, 2002. (b) In March 2000 Duramed refinanced existing notes payable with a $12,000 note and an $8,000 note payable to Provident Bank. Provident holds a first mortgage on the Company's Cincinnati, Ohio manufacturing facility. Both notes are guaranteed by Solvay America, the parent of Solvay Pharmaceuticals. The $12,000 note bears interest at the prime rate (4.75% at June 30, 2002) and requires monthly payments of F-20 $100 plus interest for a ten-year period commencing April 1, 2000. The $8,000 note bears interest at the prime rate and requires monthly payments of $33 plus interest commencing on April 1, 2000. Principal payments for the $8,000 note are based upon a twenty-year amortization with a balloon payment due on March 1, 2010 of $4,000. (c) In April 1996, the Company signed a Loan and Security Agreement with BankAmerica Leasing and Capital Group that provided the Company up to $18,750 in financing for equipment to be purchased through October 1997. Notes entered into under this agreement require no principal payment for the first two quarters; bear interest quarterly at a rate equal to the London Interbank Offer Rate (LIBOR) plus 125 basis points; and have a term of 72 months. LIBOR was 1.86% and 3.84% at June 30, 2002 and June 30, 2001, respectively. (d) The initial term of the financing agreement with Foothill Capital Corporation ("Foothill") was through November 2002, with provisions for renewals. The financing agreement provided for a revolving credit facility, collateralized by the Company's trade receivables and two term notes. In connection with the Duramed merger, the financing agreement with Foothill Capital Corporation was terminated and all outstanding balances were paid in November 2001. As a result of the termination of the facility, the Company wrote-off approximately $247 in previously deferred financing costs, which resulted in an extraordinary loss. This extraordinary loss, net of taxes of $87, was $160. (e) The note payable to a contract sales organization represented the initial cost to establish the brand sales force that represents the Company's Cenestin product to the physician community. The firm with which the Company agreed to establish and manage the dedicated sales force agreed to finance its own startup costs over the 36-month term of the agreement in exchange for a monthly principal and interest payment by the Company. All outstanding principal and interest was repaid by the Company as of June 30, 2002. (f) The Company currently has no outstanding borrowings under its $40,000 Unsecured Revolving Credit Facility ("Revolver") with Bank of America, NA, which replaced its previous $20,000 Unsecured Revolving Credit Facility in February 2002. Borrowings under the Revolver bear interest based on the greater of either prime or the Federal Funds Rate, or LIBOR. In addition, the Company is required to pay a commitment fee based upon a calculation currently equal to 0.25% of the difference between the outstanding borrowings and $40,000. The Revolver expires in February 2005. Principal maturities of existing long-term debt for the next five years and thereafter are as follows:
Year Ending June 30, -------- 2003 $ 3,642 2004 7,028 2005 7,029 2006 5,600 2007 5,600 Thereafter 12,400
(11) MANDATORY REDEEMABLE CONVERTIBLE PREFERRED STOCK The following discussion is related to preferred stock issued by Duramed prior to the merger with Barr. Series G On May 12, 2000, the Company completed a private placement of $10,000 of Series G Convertible preferred stock with an institutional investor. The preferred shares were immediately convertible to shares of the Company's common stock at a fixed price of $5.06 per share. The preferred stock paid a dividend of 5% annually, payable quarterly in arrears, on all unconverted preferred stock. The investor also received warrants which were valued at $765 to purchase 128,105 shares of common stock at a price of $21.47 per share, exercisable at any time before May 12, 2005. In conjunction with the Company's issuance of the Series G Convertible Preferred Stock, it recorded an adjustment of approximately $1,300 to properly reflect deemed dividends beyond the stated 5% dividend rate and a beneficial conversion feature as required by EITF 98-5 and 00-27. This adjustment, which reduced the carrying amount of the Series G Convertible Preferred Stock and increased additional paid-in capital, was being amortized through May 12, 2004 and reflected as additional deemed dividends. On September 24 and 28, 2001, the preferred shares were converted to 202,530 and 303,794 shares, F-21 respectively, of common stock pursuant to the original terms of the preferred stock. At the election of the holder of the preferred stock, the dividend for the quarter ended September 30, 2001 of $120 was satisfied by the issuance of 6,063 shares of common stock. The Company recorded both the dividend and the fair market valuation of $337 associated with the shares issued to satisfy the dividend as adjustments to additional paid in capital. Additionally, the Company wrote-off the remaining unamortized deemed dividend valuation adjustment of $913 and the unamortized Series G warrant valuation of $500 as adjustments to additional paid in capital. Series F In February 1998, the Company issued $12,000 in Series F convertible preferred stock, which as of February 3, 2000 had been converted in full into shares of common stock. (12) RELATED-PARTY TRANSACTIONS Dr. Bernard C. Sherman During the years ended June 30, 2002, 2001 and 2000, the Company purchased $3,332, $2,644 and $2,716, respectively, of bulk pharmaceutical material from companies affiliated with Dr. Bernard C. Sherman, the Company's largest shareholder and a director. In addition, the Company sold certain of its pharmaceutical products and bulk pharmaceutical materials to two other companies owned by Dr. Sherman. As of June 30, 2002, the Company's accounts receivable included $829 due from such companies. During fiscal 1996, the Company also entered into an agreement with a company owned by Dr. Sherman to share litigation and related costs in connection with its Fluoxetine patent challenge. For the years ended June 30, 2002, 2001 and 2000, the Company recorded $919, $2,867 and $668, respectively, in connection with such agreement as a reduction to Selling, general and administrative expenses and research and development expenses. Included in Cost of sales for the year ended June 30, 2002 is approximately $176,681 related to the related party's share of Fluoxetine profit's as defined in the profit sharing agreement. The Company also incurred $55 and $1,290 in expenses in the years ended June 30, 2002 and 2001, respectively, which were reimbursed by Dr. Sherman, related to a secondary stock offering, completed in May 2001, for the sale of 3.5 million shares of the Company's common stock, beneficially owned by Dr. Sherman. Edwin A. Cohen In accordance with the provisions of a consulting agreement, which expired on June 30, 2002, the Company's founder and Vice Chairman, Edwin A. Cohen, earned $200 in each of the years ended June 30, 2002, 2001 and 2000. Harold M. Chefitz Harold M. Chefitz, a member of the Company's Board of Directors serves as the Chairman of GliaMed, Inc., in which the Company has made an investment as described in Note 8. (13) INCOME TAXES A summary of the components of income tax expense is as follows:
Year Ended June 30, ------------------- 2002 2001 2000 ---- ---- ---- Current: Federal $103,528 $37,218 $ 25,475 State 12,719 5,655 4,100 -------- ------- -------- 116,247 42,873 29,575 -------- ------- -------- Deferred: Federal 8,981 (3,603) (20,983) State 90 (556) (550) -------- ------- -------- 9,071 (4,159) (21,533) -------- ------- -------- Total $125,318 $38,714 $ 8,042 ======== ======= ========
F-22 Income tax expense for the years ended June 30, 2002, 2001 and 2000 is included in the financial statements as follows:
Year Ended June 30, ------------------- 2002 2001 2000 ---- ---- ---- Continuing operations $ 125,405 $ 38,714 $ 8,042 Extraordinary loss on early extinguishment of debt (87) -- -- --------- --------- --------- $ 125,318 $ 38,714 $ 8,042 ========= ========= =========
The provision for income taxes differs from amounts computed by applying the statutory federal income tax rate to earnings before income taxes due to the following:
Year Ended June 30, ------------------- 2002 2001 2000 ---- ---- ---- Federal income taxes at statutory rate $ 118,225 $ 35,628 $ 5,868 State income taxes, net of federal income tax effect 8,326 3,314 2,307 Other, net (1,233) (228) (133) --------- --------- --------- $ 125,318 $ 38,714 $ 8,042 ========= ========= =========
The temporary differences that give rise to deferred tax assets and liabilities as of June 30, 2002 and 2001 are as follows:
2002 2001 ---- ---- Deferred tax assets: Net operating loss $ 26,599 $ 44,629 Receivable reserves 17,282 5,464 Inventory 2,895 4,667 Goodwill amortization 2,736 3,162 Warrants issued 6,350 6,657 Capital loss carryforward 2,997 -- Tax credit carryforward 4,159 3,382 Investments 992 1,019 Other 1,657 3,720 -------- -------- Total deferred tax assets 65,667 72,700 Deferred tax liabilities: Plant and equipment (9,328) (8,751) Proceeds from supply agreement (7,243) (6,657) Investments (133) (226) Other (1,030) (197) -------- -------- Total deferred tax liabilities (17,734) (15,831) Less valuation allowance (8,455) (8,413) -------- -------- Net deferred tax asset $ 39,478 $ 48,456 ======== ========
At June 30, 2002 and 2001, as a result of the merger with Duramed, the Company had cumulative net operating loss F-23 carryforwards of approximately $66,900 and $110,000, respectively, for federal and state income tax purposes, which will expire in the years 2011 to 2015. There is an annual limitation on the utilization of the net operating loss carryforward, which is calculated under Internal Revenue Code Section 382. The tax credit carryforward is primarily comprised of credits related to research and development activities which expire in the years 2003 to 2021. The Company has established a valuation allowance to reduce the deferred tax asset recorded for certain tax credits, capital loss carryforwards, and certain net operating loss carryforwards. A valuation allowance is recorded because based on available evidence, it is more-likely-than-not that a deferred tax asset will not be realized. The valuation allowance reduces the deferred tax asset to the Company's best estimate of the net deferred tax asset which, more-likely-than-not, will be realized. The valuation allowance will be reduced when and if the Company determines that the deferred income tax assets are likely to be realized. (14) SHAREHOLDERS' EQUITY Employee Stock Option Plans The Company has two stock option plans, the Barr Laboratories, Inc. 1993 Stock Incentive Plan (the "1993 Option Plan") and the Barr Laboratories, Inc. 1986 Option Plan, which were approved by the shareholders and which authorize the granting of options to officers and employees to purchase the Company's common stock at a price equal to the market price on the date of grant. Effective June 30, 1996, options are no longer granted under the 1986 Option Plan. For fiscal 2002, 2001 and 2000, there were no options that expired under this plan. All options granted prior to June 30, 1996, under the 1993 Option Plan and 1986 Option Plan, are exercisable between one and two years from the date of grant and expire ten years after the date of grant except in cases of death or termination of employment as defined in each Plan. All options outstanding on October 24, 2001 became fully vested upon completion of the merger. Options granted after October 24, 2001 are exercisable between one, three and five years from the date of grant. Through fiscal 2000, no option had been granted under either the 1993 Option Plan or the 1986 Option Plan at a price below the current market price of the Company's common stock on the date of grant. In fiscal 2001, options for 30,000 shares were granted to a key executive as part of her employment agreement at various prices below the current market price on the date of grant. The total value of the discount associated with this grant was $896 and was being amortized over the five-year vesting period of the options. In fiscal 2001, the amortization of the discount totaled $281. In fiscal 2002, these options fully vested as the result of the merger and the remaining discount of $615 was expensed. In addition, the Company has options outstanding under the terms of various former Duramed plans. This includes the 1986 Stock Option Plan (the "Duramed 1986 Plan"), the 1988 Stock Option Plan (the "1988 Plan"), the 1997 Stock Option Plan (the "1997 Plan"), and the 2000 Stock Option Plan (the "2000 Plan"). All outstanding options under the Duramed plans vested as of October 24, 2001, the effective date of the merger except for, as provided by the Plan, certain senior executives of Duramed. Such options were assumed by Barr under the same terms and conditions as were applicable under the Duramed stock option plans under which the options were granted. The number of options and related exercise prices have been adjusted to a Barr equivalent number of options and exercise price pursuant to the merger. Subsequent to October 24, 2001, additional options will not be granted under these plans. A summary of the activity for the three fiscal years ended June 30, 2002 is as follows: F-24
WEIGHTED-AVERAGE NO. OF SHARES OPTION PRICE ------------- ------------ Outstanding at 6/30/99 3,092,893 $ 13.33 Granted 815,113 26.20 Canceled (35,573) 20.80 Exercised (734,129) 8.26 --------- Outstanding at 6/30/00 3,138,304 17.78 Granted 827,798 48.82 Canceled (83,091) 31.12 Exercised (507,188) 13.90 --------- Outstanding at 6/30/01 3,375,823 25.64 Granted 670,008 79.34 Adjustment for pooling (31,718) 32.95 Canceled (55,889) 57.76 Exercised (674,503) 21.87 --------- Outstanding at 6/30/02 3,283,721 $ 36.96 ========= Available for Grant (5,918,750 authorized) 1,147,751 Exercisable at 6/30/00 1,829,658 $ 12.85 Exercisable at 6/30/01 1,840,699 $ 15.74 Exercisable at 6/30/02 3,004,353 $ 36.03
Available for grant and authorized amounts are for the 1993 Employee plan only, because as of June 30, 2002 options are no longer granted under any of the other option plans discussed above. Non-Employee Directors' Stock Option Plans During fiscal year 1994, the shareholders ratified the adoption by the Board of Directors of the Barr Laboratories, Inc. 1993 Stock Option Plan for Non-Employee Directors (the "Directors' Plan"). This plan, among other things, enhances the Company's ability to attract and retain experienced directors. In October 1999, the number of shares which each non-employee director is optioned was decreased from 7,500 to 5,000 shares on the grant date. Effective October 2000, as a result of Barr's 3-for-2 stock split in June 2000, the number of shares which each non-employee director is optioned is 7,500 shares on the grant date. All options granted under the Directors' Plan have ten-year terms and are exercisable at an option exercise price equal to the market price of the common stock on the date of grant. Each option is exercisable on the date of the first annual shareholders' meeting immediately following the date of grant of the option, provided there has been no interruption of the optionee's service on the Board before that date. Duramed had a Stock Option Plan for Non-employee Directors (the "1991 Duramed Directors' Plan") under which each new non-employee director was granted, at the close of business on the date he or she first became a director, options to purchase 2,562 shares of common stock. Annually, each then serving non-employee director, other than a new director, was also automatically granted options to purchase 1,281 shares of common stock at a price equal to the closing market price on the date of grant. Options granted under the 1991 Duramed Directors' Plan expire 10 years after the date of grant. Subsequent to October 24, 2001, options will no longer be granted under this plan. On October 24, 2001, all outstanding options under the Directors' Plan and the 1991 Duramed Directors' Plan became fully vested upon completion of the merger. The following is a summary of activity for the three fiscal years ended June 30, 2002: F-25
NO. OF SHARES OPTION PRICE ------------- ------------ Outstanding at 6/30/99 427,801 $ 15.95 Granted 43,905 21.42 Exercised (52,500) 8.30 ------- Outstanding at 6/30/00 419,206 17.53 Granted 60,186 59.22 Cancelled (2,562) 32.51 Exercised (58,875) 17.88 ------- Outstanding at 6/30/01 417,955 23.42 Granted 90,000 74.92 Adjustment for pooling 10,248 36.92 Canceled (6,148) 33.52 Exercised (22,248) 18.39 ------- Outstanding at 6/30/02 489,807 $ 33.23 ======= Available for grant (943,750 authorized) 197,875 Exercisable at 6/30/00 375,301 $ 17.04 Exercisable at 6/30/01 360,331 $ 17.51 Exercisable at 6/30/02 399,807 $ 23.84
Available for grant and authorized amounts are for the Directors' Plan only, because options are no longer granted under the 1991 Duramed Directors' Plan. Employee Stock Purchase Plan During fiscal 1994, the shareholders ratified the adoption by the Board of Directors of the 1993 Employee Stock Purchase Plan (the "Purchase Plan") to offer employees an inducement to acquire an ownership interest in the Company. The Purchase Plan permits eligible employees to purchase, through regular payroll deductions, an aggregate of 675,000 shares of common stock at approximately 85% of the fair market value of such shares. Under the Purchase Plan, 29,651, 50,295 and 60,874 shares of common stock were purchased during the years ended June 30, 2002, 2001 and 2000, respectively. Warrants Warrants issued by Duramed prior to the merger with Barr. On September 13, 1996, in connection with the acquisition of the assets of Hallmark Pharmaceuticals, Inc., the Company issued warrants to purchase 102,480 shares of the Company's common stock at an exercise price of $97.58 per share. These warrants were repriced on September 12, 1997 to $39.03 per share. The warrants had a term of five years and were fully vested as of March 25, 1999. During calendar year 2000, based on an antidilutive clause in the purchase contract, the exercise price was adjusted to $34.29 and the number of warrants to purchase shares of the Company's common stock was adjusted to 116,509. As of June 30, 2002, there were no warrants outstanding. On June 5, 1997, in connection with the issuance of Series E preferred stock, the Company granted warrants to purchase 5,124 shares of the Company's common stock at an exercise price of $16.83 per share. The warrants vested immediately and, unless sooner exercised, expired on June 5, 2000. On February 4, 1998, in conjunction with the issuance of the Series F preferred stock, the Company granted warrants to purchase 140,916 shares of the Company's common stock. Of the total amount, warrants for 128,106 shares were issued to investors of the Series F preferred stock F-26 at an exercise price of $22.40 per share. These warrants vested on October 2, 1998 and expire on October 2, 2002. The warrants require for-cash exercise unless the Company elects to allow a cashless exercise. As of June 30, 2002, warrants for 128,106 shares granted to investors of the Series F preferred stock were outstanding. The remaining 12,810 warrants were granted at an exercise price of $20.37 per share. The warrants vested immediately and expired on February 4, 2001. As of June 30, 2002, 11,145 warrants were exercised and 1,665 warrants expired. During 1999, in conjunction with an amendment to a financing agreement, the Company granted to its bank warrants to purchase 28,182 shares of the Company's common stock at an exercise price of $49.92. These warrants vested immediately and expire four years from the date of grant. In December 1999, the financing agreement was amended to reset the exercise price of 50% of the warrants to $35.13 per share. During 2000, based on an antidilutive clause in the agreement, the number of warrants was adjusted to 29,485. The price of 14,856 warrants was adjusted to $47.35 and the remaining 14,630 warrants were repriced to $33.83. In November 2001 and January 2002 a total of 25,464 of the warrants were exercised. As of June 30, 2002, warrants for 4,021 shares were outstanding with an expiration of July 2009. On May 12, 2000, in combination with the issuance of Series G preferred stock, the Company granted warrants to purchase 128,105 common shares at a price of $21.47 per share. The warrants vested immediately and expire on May 12, 2005. As of June 30, 2002, all of these warrants remained outstanding. DuPont Warrants / Warrant Subscription Receivable The Company issued warrants granting DuPont the right to purchase 750,000 shares of Barr's common stock at $31.33 per share, and 750,000 shares at $38.00 per share, respectively. Each warrant is immediately exercisable and expires in March 2004. As of June 30, 2001, DuPont had sold its rights to all the warrants to other third parties. None of the options have been exercised as of June 30, 2002. In connection with the issuance of such warrants, the Company recorded $16,418 as the fair value of the warrants as a subscription receivable in the shareholders' equity section of the Consolidated Balance Sheet at June 30, 2000. The amount was calculated using a Black-Scholes option pricing model with the following assumptions at the grant date: dividend yield of 0%; expected volatility of 38%; weighted-average risk-free interest rate of 7.13% and expected term of 4 years. For the years ended June 30, 2001 and 2000, the Company applied $1,835 and $14,584, respectively, earned under the three agreements with DuPont as a reduction of the warrant subscription receivable. In September 2000, when the warrant receivable was reduced to zero, the Company began to report all revenues earned under the DuPont agreements as Development and other revenue on the Consolidated Statements of Operations. Accounting for Stock-Based Compensation Plans The Company applies Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees," and related Interpretations, in accounting for its stock-based compensation plans. Accordingly, no compensation cost has been recognized for its stock option plans and its stock purchase plan. Had compensation cost for the Company's stock-based compensation plans been determined based on the fair value at the grant dates for awards under those plans consistent with SFAS No. 123, the Company's net earnings and earnings per share would have been reduced to the pro forma amounts indicated below:
2002 2001 2000 ---- ---- ---- Net earnings applicable As reported $ 210,269 $ 62,566 $ 10,305 to common shareholders Pro forma $ 192,697 $ 56,671 $ 6,221 Net earnings per share As reported $ 4.88 $ 1.49 $ 0.26 Pro forma $ 4.47 $ 1.35 $ 0.16 Net earnings per share- As reported $ 4.63 $ 1.40 $ 0.25 assuming dilution Pro forma $ 4.24 $ 1.27 $ 0.15
The weighted average fair value of the options granted at market during the years ended June 30, 2002, 2001 and 2000 was $25.66, $20.49 and $13.19 per share, respectively. The weighted average fair value of the options granted in fiscal 2001, which were below the current market price on the date of grant, was $42.02 per share. The fair values were estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions for 2002, 2001 and 2000, respectively: dividend yield of 0%; expected volatility of 46.96%, 51.30% and 54.84%; weighted-average risk-free interest rates of 3.62%, 5.25% and 6.01%; and expected option lives of 3 years for all plans. F-27 The pro forma results for fiscal 2002 reflect the accelerated vesting of options as a result of the merger with Duramed as described in Note 2. The following table summarizes information about stock options and warrants outstanding at June 30, 2002:
Options and Warrants Outstanding Options and Warrants Exercisable -------------------------------- -------------------------------- Weighted Range of Number Average Weighted Number Weighted Exercise Outstanding Remaining Average Exercisable Average Prices at 6/30/02 Contractual Life Exercise Price at 6/30/02 Exercise Price ------ ---------- ---------------- -------------- ---------- -------------- 3.03 - 12.86 846,652 3.11 $8.40 846,652 $8.40 13.19 - 22.61 1,004,070 4.74 $21.01 977,332 $21.05 22.68 - 31.33 1,505,472 4.16 $28.53 1,391,135 $28.66 32.41 - 38.00 822,751 2.13 $37.57 819,218 $37.59 38.42 - 75.82 841,253 8.47 $61.11 625,493 $57.51 76.31 - 86.06 513,562 9.11 $81.65 504,562 $81.75 --------- --------- 5,533,760 5,164,392 ========= =========
(15) SAVINGS AND RETIREMENT PLANS The Company has a savings and retirement plan (the "401(k) Plan") which is intended to qualify under Section 401(k) of the Internal Revenue Code. Employees are eligible to participate in the 401(k) Plan in the first month following the month of hire. Participating employees may contribute up to a maximum of 12% of their earnings before or after taxes. The Company is required, pursuant to the terms of its union contract, to contribute to each union employee's account an amount equal to the 2% minimum contribution made by such employee. The Company may, at its discretion, make cash contributions equal to a percentage of the amount contributed by an employee to the 401(k) Plan up to a maximum of 10% of such employee's compensation. Participants are always fully vested with respect to their own contributions and any profits arising therefrom. Participants become fully vested in the Company's contributions and related earnings after five full years of employment. Duramed had a defined contribution plan, the "Duramed Pharmaceuticals, Inc. 401(k) / Profit Sharing Plan" ("Duramed Plan" or "Plan") available to all employees. The Plan provided for Duramed to match 50% of employee contributions to a maximum of 3% of each employee's compensation. Prior to October 2001, Duramed's matching contribution was made with Duramed's common stock, as permitted by the Plan. The Plan also had a profit sharing provision at the discretion of Duramed's board of directors. Duramed did not make a profit sharing contribution to the Plan. All full-time employees were eligible to participate in the deferred compensation and company matching provisions of the Plan. Employees were immediately vested with respect to the company matching provisions of the Plan. On January 1, 2002 the Duramed Plan was merged with the Barr 401(k) Plan and the participants of the Duramed Plan became eligible for participation in the Barr 401(k) Plan. The Company's contributions to the 401(k) Plans were $4,790, $3,304 and $2,953 for the years ended June 30, 2002, 2001 and 2000, respectively. In fiscal 2000, the Board of Directors approved a non-qualified plan ("Excess Plan") that enables certain executives to defer up to 10% of their compensation in excess of the qualified plan. The Company may, at its discretion, contribute a percentage of the amount contributed by the individuals covered under this Excess Plan to a maximum of 10% of such individual's compensation. In fiscal years 2002, 2001 and 2000, the Company chose to make contributions at the 10% rate to this plan. As of June 30, 2002 and 2001, the Company had an asset and matching liability for the Excess Plan of $1,394 and $847, respectively. The Company has an unfunded pension plan covering two non-employee directors of Duramed who were elected prior to 1998 and who had served on Duramed's Board for at least five years. At the time of the merger with Barr, two Duramed directors were eligible to receive benefits. The plan provides an annual benefit, payable monthly over each director's life, from the time a participating director ceased to be a member of the Board, equal to 85% and 60%, respectively, of the director's most recent annual Board fee, as adjusted annually to reflect changes in the Consumer Price Index. As of June 30, 2002, the Company has recorded $490 as a long-term liability representing the present value of the estimated F-28 future benefit obligation to the eligible directors. The right of a director to receive benefits under the plan is forfeited if the director engages in any activity determined by the Board to be contrary to the best interests of the Company. (16) OTHER INCOME A summary of other income is as follows:
Year Ended June 30, ------------------- 2002 2001 2000 ---- ---- ---- Net (loss) gain on sale of assets $ -- $ (302) $ 470 Net gain (loss) on sale of securities -- 6,671 (141) Litigation settlement 2,000 -- -- Bristol-Myers Squibb termination payments 5,600 -- -- Write-off related to Gynetics -- (2,450) -- Other 56 (271) 18 ------- ------- ------- Other income $ 7,656 $ 3,648 $ 347 ======= ======= =======
For the year ended June 30, 2001, the net gain on sale of securities consists primarily of the gain realized on the sale of the investment in Galen Holdings plc, formerly Warner Chilcott plc. For the year ended June 30, 2000, loss on sale of securities included a $343 gain resulting from the receipt of 500,000 warrants from Halsey Drug Company, Inc. in exchange for rights to several pharmaceutical products (see Note 7). (17) MERGER-RELATED COSTS As a result of the acquisition of Duramed discussed in Note 2, the Company incurred pre-tax merger-related expenses for the year ended June 30, 2002 of approximately $31,449, which is included in the Consolidated Statements of Operations as Merger-related costs. Such expenses include approximately $13,000 in direct transaction costs such as investment banking, legal and accounting costs, as well as, approximately $7,000 in costs associated with facility and product rationalization and $11,000 in severance costs. Portions of these expenses are not tax deductible. The severance costs include approximately $7,000 intended to satisfy the change in control payments under certain previously existing employment contracts along with the expected cost associated with terminating approximately 120 former Duramed employees primarily representing certain manufacturing and general and administrative functions. As of June 30, 2002, all of the direct transaction costs and approximately $3,600 in involuntary termination benefits, for approximately 103 people, have been paid and charged against the liability leaving a remaining liability balance of approximately $1,600. Approximately $700 of the remaining $1,600 liability relates to severance and change in control payments which are expected to be paid over the next twelve months. The balance of $900 primarily relates to lease commitments which will be paid over the next two fiscal years. (18) COMMON STOCK REPURCHASE On September 17, 2001, the Securities and Exchange Commission ("SEC") issued an Emergency Order permitting companies to initiate common stock repurchase programs without impacting pooling-of-interests accounting. As a result, the Company's board of directors authorized the Company to spend up to $100,000 for such a common stock repurchase program. Such authorization was limited to the time periods established by the SEC. On October 12, 2001, the SEC's order expired and the Company's repurchase program ended. During the period the Company repurchased 10,000 shares of its common stock at a total cost of approximately $695. (19) COMMITMENTS AND CONTINGENCIES The Company is party to various leases which relate to the rental of office facilities and equipment. The Company believes it will be able to extend such leases, if necessary. Rent expense charged to operations was $1,444, $2,043 and F-29 $2,545 in fiscal 2002, 2001 and 2000, respectively. The table below shows the future minimum rental payments, exclusive of taxes, insurance and other costs under noncancellable long-term lease commitments at June 30, 2002. Such payments total $3,981 for operating leases. The net present value of such payments on capital leases was $6,676 after deducting executory costs and imputed interest of $271 and $1,755, respectively.
Year Ending June 30, -------------------- 2003 2004 2005 2006 2007 Thereafter ---- ---- ---- ---- ---- ---------- Operating leases $1,935 $1,473 $ 570 $ 3 $ -- $ -- Capital leases 2,510 2,207 1,846 1,487 652 -- ------ ------ ------ ------ ------ -------- Minimum lease payments 4,445 3,680 2,416 1,490 652 -- ====== ====== ====== ====== ====== ========
Product Liability The Company maintains primary and excess layers of product liability insurance up to $15,000 and additional excess coverage for claims from $25,000 to $50,000. No significant product liability suit has ever been filed against the Company. However, if one were filed and such a case were successful against the Company, it could have a material adverse effect upon the business and financial condition of the Company to the extent such judgment was not covered by insurance or exceeded the policy limits. Business Development Venture In fiscal 2002, the Company entered into a Loan and Security ("Loan") agreement with Natural Biologics, the raw material supplier of 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). 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 and make payments totaling $35,000 based on achieving certain legal and product approval milestones, including approval of a generic product. The Company expects to loan Natural Biologics approximately $9,200, $8,300 and $2,800 during fiscal 2003, 2004 and 2005, respectively. The Loan agreement also provides for a loan of $10,000 based upon the successful outcome of pending legal proceedings, which could occur in fiscal 2003. The loans mature on June 3, 2007. As of June 30, 2002, the Company had loaned approximately $4,700 under this agreement (See Note 8). Litigation Settlement On October 22, 1999 the Company reached a settlement agreement with Schein Pharmaceutical, Inc. (now part of Watson Pharmaceuticals, Inc.) relating to a 1992 agreement regarding the pursuit of a generic conjugated estrogens product. Under the terms of the settlement, Schein gave up any claim to rights in Cenestin in exchange for a payment of $15,000, which was paid to Schein in 1999. An additional $15,000 payment is required under the terms of the settlement if Cenestin achieves total profits (product sales less product-specific cost of goods sold, sales and marketing and other relevant expenses) of greater than $100,000 over any five year or less period within the next 12 years. Class Action Lawsuits To date, the Company has been named in 38 class action complaints filed in state and federal courts by direct and indirect purchasers of Ciprofloxacin (Cipro(R)) from 1997 to present against the Company, Bayer Corporation, The Rugby Group, Inc. and others. 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. 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 Barr to charge artificially inflated prices for Tamoxifen Citrate. 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 F-30 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 judgement 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. Fluoxetine Hydrochloride Suits On August 1, 2001, aaiPharma Inc. ("AAI") filed a lawsuit in the United States District Court for the Eastern District of North Carolina against Barr and others claiming that the generic versions of Prozac manufactured by those companies infringe AAI's patents. If Barr is found to infringe the AAI patent, Barr may be liable to AAI for damages that may reduce Barr's profits from its generic Prozac product. The Company believes that the suits filed against it by AAI are without merit and intends to vigorously defend its position. 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. 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 judgement, 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 generic Adderall product uses trade dress that is similar in appearance to Shire's Adderall(R) product. Shire is seeking 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. The Company believes that this lawsuit is without merit and opposed Shire's request for a preliminary injunction. On June 3, 2002, the District Court heard oral argument on Shire's preliminary injunction motion and took the matter under advisement. No order has issued to date. The Company does not expect the on-going litigation to cause any disruption in the manufacturing and sale of its generic Adderall product or to affect the status of product currently in the marketplace. However, if the injunction is granted, this could have a material adverse impact on the Company's consolidated financial statements. Termination of Solvay Co-Marketing Relationship On March 31, 2002, Barr gave notice of its intention to terminate on June 30, 2002 the relationship between Barr and Solvay Pharmaceuticals, Inc. ("Solvay") which covered the joint promotion of Barr's Cenestin tablets and Solvay's Prometrium(R) capsules. Solvay has disputed Barr's right to terminate the relationship and claims it is entitled to substantial damages and has notified Barr that it has demanded arbitration of this matter. 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. F-31 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 Barr, involving "machine vision" or "computer image analysis." On March 20, 2002, the court entered on Order of Stay in the Proceedings, pending the resolution of another suit that involves the same patents, but does not involve us. Other Litigation As of June 30, 2002, the Company was involved with other lawsuits incidental to its business, including patent infringement actions. Management of the Company, based on the advice of legal counsel, believes that the ultimate disposition of such other lawsuits will not have 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, that sought 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 Barr, through the settlement and supply agreements, has engaged in activities in violation of the antitrust laws. Barr continues to cooperate with the FTC in this investigation. On May 1, 2001, the Texas Attorney General's Office, as a liaison on behalf of a group of state Attorney Generals, served the Company with a civil investigative demand relating to the settlement of the Ciprofloxacin patent challenge. At the Attorney General's request, Barr entered into an agreement with the states to allow them to investigate the Cipro settlement. In December 2001 Barr was notified that the Attorney Generals closed their investigation. In 1998 and 1999, the Company was contacted by the Department of Justice ("DOJ") regarding the March 1993 settlement of the Tamoxifen patent challenge litigation. On May 6, 2002 Barr received notification that the DOJ had officially closed its investigation of this matter. 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 our settlement of the Tamoxifen patent challenge with AstraZeneca. The investigative demand requests the production of certain information and documents that may assist the Attorney General in its investigation. The Company is reviewing the demand and intends to fully cooperate with the Attorney General's office in its investigation. The Company believes that the patent challenge settlements being investigated represent a pro-consumer and pro-competitive outcome to the patent challenge cases. The Company believes that once all the facts are considered, and the benefits to consumers are assessed, that these investigations will be satisfactorily resolved as they have been by 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 its consolidated financial statements. In the spring of 2001 the FTC issued special orders to approximately 100 pharmaceutical companies related to an inquiry into alleged anti-competitive practices in the entire pharmaceutical industry, including practices relating to patent challenge settlements. Barr received its special order on April 30, 2001 and has provided responses to the FTC. The FTC recently completed the study of patent settlements in the pharmaceutical industry and made recommendatons to Congress to modify Hatch-Waxman in certain respects. The FTC's primary recommendations include permitting only one automatic 30 month stay per drug product per ANDA to resolve infringement disputes over patents listed in the Orange Book prior to this filing date of the generic applicant's ANDA; and, requiring brand-name pharmaceutical companies and first generic applicants to provide copies of certain agreements to the FTC. In May 2001, the Company received a subpoena, issued by the Commonwealth of Massachusetts Office of the Attorney General, for the production of documents related to pricing and Medicaid reimbursement of select products in Massachusetts. Barr is one of a number of pharmaceutical companies that have received such subpoenas. Barr is cooperating with the inquiry and believe that all of its product agreements and pricing decisions have been lawful and proper. F-32 (20) QUARTERLY DATA (UNAUDITED) A summary of the quarterly results of operations is as follows:
THREE MONTH PERIOD ENDED ------------------------ SEPT. 30 DEC. 31 MAR. 31 JUNE 30 -------- ------- ------- ------- FISCAL YEAR 2002: Total revenues $ 352,103 $ 366,090 $ 261,411 $ 209,380 Cost of sales 203,834 227,064 139,142 106,283 Earnings before extraordinary loss on early extinguishment of debt 72,155 42,251 53,107 44,866 Net earnings applicable to common shareholders 70,205 42,091 53,107 44,866 EARNINGS PER COMMON SHARE - ASSUMING DILUTION Earnings before extraordinary loss (1) $ 1.61 $ 0.91 $ 1.17 $ 0.98 =========== =========== =========== =========== Net earnings (1) $ 1.56 $ 0.91 $ 1.17 $ 0.98 =========== =========== =========== =========== PRICE RANGE OF COMMON STOCK (2) High $ 90.60 $ 90.00 $ 80.00 $ 72.35 Low 62.00 59.25 62.15 58.30
SEPT. 30 DEC. 31 MAR. 31 JUNE 30 -------- ------- ------- ------- FISCAL YEAR 2001 (3): Total revenues $ 119,731 $ 148,985 $ 159,781 $ 164,654 Cost of sales 79,254 100,176 106,815 104,864 Net earnings applicable to common shareholders 7,688 16,795 17,974 19,686 EARNINGS PER COMMON SHARE - ASSUMING DILUTION Net earnings (1) $ 0.17 $ 0.38 $ 0.40 $ 0.44 =========== =========== =========== =========== PRICE RANGE OF COMMON STOCK (2) High $ 80.13 $ 77.19 $ 75.59 $ 77.15 Low 43.63 54.19 44.50 48.28
(1) The sum of the individual quarters may not equal the full year amounts due to the effects of the market prices in the application of the treasury stock method. During its two most recent fiscal years, the Company paid no cash dividend. (2) The Company's common stock is listed and traded on the New York Stock Exchange under the symbol "BRL". At June 30, 2002, there were approximately 1,400 shareholders of record of common stock. The Company believes that a significant number of beneficial owners hold their shares in street names. (3) Data for fiscal year June 30, 2001 has been restated to include the effects of the Duramed merger as described in Notes 1 and 2. F-33 SCHEDULE II BARR LABORATORIES, INC. VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED JUNE 30, 2002, 2001 AND 2000 (IN THOUSANDS OF DOLLARS)
BALANCE AT ADDITIONS, RECOVERY BEGINNING COSTS AND AGAINST DEDUCTIONS, POOLING BALANCE AT OF YEAR EXPENSE WRITE-OFFS WRITE-OFFS ADJUSTMENT END OF YEAR ------- ------- ---------- ---------- ---------- ----------- Allowance for doubtful accounts: Year ended June 30, 2000 $ 399 $ 155 $ 4 $ 221 $ -- $ 337 Year ended June 30, 2001 337 80 18 234 -- 201 Year ended June 30, 2002 201 80 -- -- -- 281 Reserve for returns and allowances: Year ended June 30, 2000 3,174 10,079 -- 8,499 4,754 Year ended June 30, 2001 4,754 14,466 -- 9,996 9,224 Year ended June 30, 2002 9,224 76,935 -- 57,136 (44) 28,979 Inventory reserves: Year ended June 30, 2000 15,659 4,912 -- 6,553 14,018 Year ended June 30, 2001 14,018 7,691 -- 9,270 12,439 Year ended June 30, 2002 12,439 12,847 -- 15,364 314 10,236
S-1 EX-2.2 3 y63477exv2w2.txt ASSET PURCHASE AGREEMENT Exhibit 2.2 ASSET PURCHASE AGREEMENT DATED MARCH 16, 2002 BY AND BETWEEN ENHANCE PHARMACEUTICALS, INC., AS SELLER, AND BARR LABORATORIES, INC., AS PURCHASER Table of Contents ----------------- Page ---- ARTICLE I PURCHASE AND SALE, PURCHASE PRICE, CERTAIN PURCHASE PRICE ADJUSTMENTS ASSUMED LIABILITIES, RETAINED ASSETS, TAX PAYMENTS, AND ALLOCATION FOR TAX PURPOSES...................................1 1.1 Purchase and Sale of the Purchased Assets............................1 1.2 Payment of the Purchase Price........................................1 1.3 Assumed Liabilities..................................................2 1.4 Retained Assets......................................................3 1.5 Prorations...........................................................3 1.6 Transfer Tax Payments................................................3 ARTICLE II DEFINITIONS.......................................................4 2.1 General..............................................................4 2.2 Definitions..........................................................4 2.3 Interpretation......................................................11 ARTICLE III REPRESENTATIONS AND WARRANTIES OF SELLER........................11 3.1 Status of Seller; Enforceability; Conflicts; Consents...............11 3.2 Ownership of Seller.................................................12 3.3 Financial Statements................................................13 3.4 Undisclosed Liabilities.............................................13 3.5 Title to Properties.................................................13 3.6 Real Property.......................................................13 3.7 Equipment and Improvements..........................................14 3.8 No Commitments......................................................14 3.9 Continued Use of Real Property......................................14 3.10 Real Estate and Personal Property Taxes; Assessments................14 3.11 Inventory...........................................................14 3.12 Accounts Receivable.................................................14 3.13 Contracts...........................................................15 3.14 Equity Interests....................................................15 3.15 Intellectual Property...............................................15 3.16 Required Assets; Sufficiency of Assets..............................16 3.17 Suppliers...........................................................16 3.18 Personnel Identification and Compensation...........................16 3.19 Existing Employment Related Contracts...............................16 3.20 Compliance with Laws................................................16 3.21 Litigation..........................................................17 3.22 Environmental.......................................................17 3.23 Employee Benefit Plans..............................................19 3.24 Tax Matters.........................................................19 3.25 Consents............................................................20 3.26 Licenses and Permits................................................20 3.27 Occupational Safety and Health......................................21 3.28 Insurance...........................................................21 3.29 Certain Transactions................................................21 i Table of Contents ----------------- (continued) Page ---- 3.30 Regulatory Compliance...............................................22 3.31 Conduct of Business Since Most Recent Balance Sheet Date............23 3.32 Broker's or Consultant's Fees.......................................24 3.33 Claims Against Insiders.............................................24 3.34 Disclosure..........................................................24 3.35 No Other Representations and Warranties.............................24 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PURCHASER......................24 4.1 Status of Purchaser.................................................24 4.2 Authority of Purchaser..............................................24 4.3 Due Authorization...................................................25 4.4 Enforceability......................................................25 4.5 Consents............................................................25 4.6 Broker's or Consultant's Fees.......................................25 ARTICLE V PRE-CLOSING COVENANTS.............................................25 5.1 Ordinary Conduct....................................................25 5.2 Right of Inspection; Access to Books and Personnel..................27 5.3 Notification of Material Events.....................................27 5.4 Supplemental Disclosures............................................27 5.5 Exclusivity.........................................................28 5.6 Publicity...........................................................28 5.7 Preparation of Pre-Closing Estimated Purchase Price Certificate.....28 5.8 Power of Attorney; Right of Endorsement, Etc........................28 5.9 Covenants Not to Compete, Solicit or Disparage......................29 5.10 Post-Closing Confidentiality........................................30 5.11 Performance of Contracts............................................30 5.12 Employees...........................................................30 5.13 Allocation for Tax Purposes.........................................31 5.14 Mitsubishi Agreement................................................31 5.15 Administrative Agreement............................................31 5.16 Assumed Contracts...................................................31 5.17 The Population Council Agreement....................................31 ARTICLE VI CONDITIONS PRECEDENT TO PURCHASER'S OBLIGATIONS..................32 6.1 Obligations to be Satisfied on or Prior to Closing Date.............32 6.2 Procedure for Failure to Satisfy Conditions.........................33 ARTICLE VII CONDITIONS PRECEDENT TO SELLER'S OBLIGATIONS....................34 7.1 Obligations to Be Satisfied on or Prior to Closing Date.............34 7.2 Procedure for Failure to Satisfy Conditions.........................34 ARTICLE VIII CLOSING........................................................35 8.1 Time and Place......................................................35 8.2 Closing Transactions................................................35 8.3 Deliveries by Seller to Purchaser...................................35 8.4 Deliveries by Purchaser to Seller...................................36 8.5 Determination of Final Purchase Price...............................37 ii Table of Contents ----------------- (continued) Page ---- ARTICLE IX OTHER AGREEMENTS.................................................38 9.1 Further Assurances..................................................38 9.2 Access to Records After Closing.....................................38 9.3 Collection of Receivables...........................................38 9.4 Third Party Consents................................................39 9.5 Milestone Payments..................................................39 ARTICLE X INDEMNIFICATION...................................................39 10.1 Survival of Representations, Warranties and Indemnity...............39 10.2 Indemnification by Seller...........................................39 10.3 Limits on Indemnification by Seller.................................40 10.4 Indemnification by Purchaser........................................40 10.5 Specific Breaches...................................................41 10.6 Cross-indemnification for Broker's, Consultant's or Finder's Fees...41 10.7 Procedure for Indemnification.......................................42 10.8 Payment.............................................................42 10.9 Limited Recourse against Seller and its shareholders................43 10.10 Reduction for Insurance and Taxes...................................43 10.11 Remedies Exclusive..................................................43 10.12 No Consequential Damages............................................43 10.13 Escrow..............................................................43 10.14 Bulk Sales..........................................................44 ARTICLE XI TERMINATION......................................................44 11.1 Rights to Terminate.................................................44 11.2 Effects of Termination..............................................44 ARTICLE XII MISCELLANEOUS PROVISIONS........................................45 12.1 Notices.............................................................45 12.2 Assignment..........................................................46 12.3 Benefit of the Agreement............................................46 12.4 Exhibits and Schedules..............................................46 12.5 Headings............................................................46 12.6 Entire Agreement....................................................46 12.7 Modifications and Waivers...........................................46 12.8 Counterparts........................................................47 12.9 Severability........................................................47 12.10 GOVERNING LAW.......................................................47 12.11 Expenses............................................................47 12.12 JURISDICTION; WAIVER OF JURY TRIAL; VENUE...........................47 12.13 Seller Acknowledgement..............................................48 iii EXHIBITS Exhibit A Assumption Agreement Exhibit B Retained Assets Exhibit C Capital Expenditures Exhibit D Non-Competition and Non-Solicitation Agreement Exhibit E Escrow Agreement SCHEDULES Schedule 2.2 Assumed Contracts Schedule 3.1 Status of Seller Schedule 3.2 Ownership Schedule 3.5 Title to Properties Schedule 3.6 Real Property Schedule 3.13 Contracts Schedule 3.15 Intellectual Property Schedule 3.17 Suppliers Schedule 3.18 Personal Identification and Compensation Schedule 3.19 Existing Employment Related Contracts Schedule 3.21 Litigation Schedule 3.22 Environmental Schedule 3.23 Employee Benefit Plans Schedule 3.25 Consents Schedule 3.26 Licenses and Permits Schedule 3.27 Occupational Safety and Health Schedule 3.28 Insurance Schedule 3.29 Certain Transactions Schedule 3.30 Regulatory Compliance Schedule 3.31 Conduct of Business Schedule 5.12 Employees Schedule 6.1(d) Consents to Closing Schedule 6.1(k) Individuals Subject to Non-Competition and Non-Solicitation Agreements Schedule 6.2 Consents iv ASSET PURCHASE AGREEMENT THIS ASSET PURCHASE AGREEMENT is entered into this 16th day of March, 2002, by and between Enhance Pharmaceuticals, Inc., a Delaware corporation ("Seller"), and Barr Laboratories, Inc., a New York corporation ("Purchaser"). RECITALS WHEREAS, (A) Seller is engaged in the business of research and development of silicone elastomer and other polymer-based immediate and sustained release products that deliver one or more drug compounds through either a vaginal or sub-dermal route of administration for application in health care (the "Business"); (B) Seller desires to sell the Business and substantially all of its assets to Purchaser, and Purchaser desires to purchase the Business and substantially all of the assets of Seller; and (C) each term defined in this Agreement shall have the meaning ascribed to it in Article II, NOW, THEREFORE, in consideration of the mutual agreements and covenants contained herein, and for other good and valuable consideration, the receipt and sufficiency of which hereby are acknowledged, Purchaser and Seller hereby agree as follows: ARTICLE I PURCHASE AND SALE, PURCHASE PRICE, CERTAIN PURCHASE PRICE ADJUSTMENTS ASSUMED LIABILITIES, RETAINED ASSETS, TAX PAYMENTS, AND ALLOCATION FOR TAX PURPOSES 1.1 Purchase and Sale of the Purchased Assets. Subject to the terms and conditions of this Agreement, at the Closing, Seller shall sell, assign, convey, transfer and deliver to Purchaser and Purchaser shall purchase from Seller the Purchased Assets, free and clear of all Liens, claims, options, charges, encumbrances and restrictions of any kind, other than those Liens set forth on Schedule 3.5 hereto. 1.2 Payment of the Purchase Price. Subject to the terms and conditions of this Agreement, Purchaser shall, at the Closing, pay (or in the case of the Assumption Agreement referred to below, execute and deliver) the purchase price for the Purchased Assets (the "Purchase Price") consisting of: (a) cash in the amount of Forty-Four Million Dollars ($44,000,000), which amount shall be, subject to the provisions of Section 5.7 and Section 8.5, increased by the amount of the Acquired Working Capital and further increased by the amount of the Unbilled Reimbursable Expenses and decreased by the amount of any Milestone Payments received by Seller after the date hereof and prior to the Closing, of which Purchaser shall remit (i) Forty-One Million Dollars ($41,000,000) (subject to adjustment for Acquired Working Capital, Unbilled Reimbursable Expenses and Milestone Payments as provided in the immediately preceding clause) to a bank account designated in writing by Seller at least three days prior to the Closing and (ii) the sum of Three Million Dollars ($3,000,000) (the "Escrow Amount") to an escrow agent to be agreed upon at or prior to the Closing by Purchaser and Seller (the "Escrow Agent"); and (b) an assumption agreement in the form attached as Exhibit A hereto (the "Assumption Agreement") pursuant to which Purchaser assumes specific liabilities of Seller set forth in Section 1.3(a). 1.3 Assumed Liabilities. (a) Subject to and pursuant to Section 1.5, Purchaser shall, at the Closing, irrevocably and absolutely, assume, agree to perform, and, when due, pay and discharge, only the obligations and liabilities of Seller relating to the Assumed Contracts (excluding any liabilities set forth in Section 1.3(b)), which arise after the Closing Date or are attributable to the period following the Closing Date and only to the extent such obligations and liabilities are not overdue or delinquent on the Closing Date without regard to any grace period and without the incurrence of any increase in amounts due (the "Assumed Liabilities"). (b) Purchaser shall not assume or pay and Seller shall continue to be responsible for any debt, obligation or liability, of any kind or nature (fixed or contingent, known or unknown) of Seller whether or not relating to the Business, not expressly assumed by Purchaser pursuant to Section 1.3(a) (the "Excluded Liabilities"). Without limiting the foregoing, Purchaser shall not assume: (i) any action, suit or proceeding pending as of the Closing Date notwithstanding the disclosure thereof on the Most Recent Balance Sheet, or any subsequent claim, action, suit or proceeding arising out of or relating to such pending matters, any other similar event occurring on or prior to the Closing Date or, resulting from the conduct of the Business by Seller on or prior to the Closing Date; (ii) any liability of Seller for any Taxes for any periods prior to or subsequent to the Closing whether or not relating to the Business and notwithstanding the disclosure thereof on the Most Recent Balance Sheet; (iii) any obligation or liability arising from claims, proceedings or causes of action resulting from property damage or personal injuries (including death) caused by products, materials or services invoiced, sold, performed or shipped by Seller or the Business on or prior to the Closing Date; (iv) any obligation or liability arising from product warranty or product liability claims, with respect to products, materials or services invoiced, sold, performed or shipped by Seller or the Business on or prior to the Closing Date; provided, that the 2 obligation or liability does not arise from acts of commission or omission by Purchaser subsequent to the Closing; (v) any obligation or liability related to any actual or alleged violation or liability arising under any Environmental Laws, including, without limitation, any Release or threatened Release of Hazardous Substances, as those terms are defined herein, occurring prior to or, if as a result of Seller's activities, present, or if, not as a result of Seller's activities, to the extent present, on the Closing Date, regardless of whether such obligations or liabilities relate to Seller's ownership or operation of the Purchased Assets, to any predecessor, owner, tenant, occupant or user of the Purchased Assets, or to any other party unrelated to the Purchased Assets, and any Environmental Claims as herein defined, including, without limitation, any matters disclosed by Seller in Schedule 3.22 and any matters identified in the Phase I Environmental Site Assessments provided by Seller to Purchaser (the "Environmental Reports"); (vi) any obligation or liability of Seller arising from the transactions contemplated by this Agreement, including those (i) relating to the negotiation and preparation of this Agreement and the transactions contemplated herein and (ii) incurred by Seller with respect to its legal counsel, accounting, brokerage and investment advisors fees and expenses; (vii) any obligation or liability arising from or related to the Retained Assets; or (viii) any trade payable or accrued expenses. 1.4 Retained Assets. Seller shall not sell, transfer, convey or deliver to Purchaser, and Purchaser shall not purchase from Seller the assets, properties, interests and rights of Seller set forth on Exhibit B hereto (the "Retained Assets"), except as provided in Section 5.16. 1.5 Prorations. All obligations and liabilities assumed by Purchaser under this Agreement, including payments made by Seller with respect to the promissory notes of Seller payable to General Electric Capital Corporation set forth on Schedule 2.2 ("GE Notes"), shall be prorated as of the close of business on the Closing Date between Purchaser and Seller, whether or not such adjustment would normally be made as of such time. It is the intention of the parties that Seller should operate the Business for its own account pursuant to this Agreement until the close of business on the day immediately prior to the Closing Date, and that Purchaser shall operate the Business, including the Purchased Assets, for its own account from and after the Closing Date. Any overdue or delinquent obligations or liabilities of Seller on the close of business on the day immediately prior to the Closing Date shall not be prorated and shall remain the property of Seller. 1.6 Transfer Tax Payments. Purchaser shall pay any transfer, sales, purchase, use, value added, excise or similar Tax arising out of the transfer of any of the Purchased Assets to Purchaser. 3 ARTICLE II DEFINITIONS 2.1 General. Each term defined in the first Article of this Agreement and in the Recitals shall have the meaning set forth below whenever used herein, unless otherwise expressly provided or unless the context clearly requires otherwise. 2.2 Definitions. As used herein, the following terms shall have the meanings ascribed to them in this Section 2.2: Administrative Services Agreement. The Administrative Services Agreement dated as of October 26, 2001 by and among FEI Products, Inc., FEI Enterprises, Ltd. and Seller. Accounts Receivable. All present and future rights to payment for goods or services rendered whether or not earned by performance, including, without limitation, all accounts or notes receivable owned or held by Seller, but specifically excluding any Billed Reimbursable Expenses or Unbilled Reimbursable Expenses. Acquired Working Capital. The sum of all deposits and prepaid expenses of Seller as of the Closing and the pro rata portion of any payments made by Seller as of the Closing with respect to the GE Notes, other than prepaid insurance premiums, prepaid taxes and deposits on capital expenditures and subject to Section 1.5. Affiliate. As set forth in Rule 12b-2 of the general rules and regulations under the Securities Exchange Act of 1934, as amended. Agreement. This Asset Purchase Agreement, together with all Exhibits and Schedules referred to herein, as amended, modified or supplemented from time to time in accordance with the terms hereof. Assumed Contracts. (i) Contracts listed on Schedule 2.2 hereto as may be supplemented pursuant to Section 5.16, (ii) such Contracts entered into by Seller after the date hereof in the Ordinary Course of Business as Purchaser expressly agrees to assume and (iii) all Contracts entered into by Seller after the date hereof in the Ordinary Course of Business and individually in an amount not in excess of $10,000.00; provided, however, Seller shall have the right to enter into Contracts (and Purchaser shall be deemed to assume such Contracts subject to the immediately following sentence) after the date hereof in the Ordinary Course of Business and individually in an amount in excess of $10,000.00 if Purchaser does not object to Seller's entering into such Contracts within three Business Days following Purchaser's receipt from Seller of the written notification of Seller's intention to enter into such Contracts. Notwithstanding anything in this Agreement to the contrary, it is expressly understood and agreed by the parties hereto that Purchaser will assume Contracts entered into by Seller after the date hereof and all purchase orders only to the extent that the delivery of services, products or other items pursuant to such Contracts or purchase orders is made to Purchaser after the Closing Date. Assumed Liabilities. As defined in Section 1.3. 4 Assumption Agreement. As defined in Section 1.2. Authority. Any governmental, regulatory or administrative body, agency or authority, any court or judicial authority, any arbitrator or any public, private or industry regulatory authority, whether foreign, federal, state or local. Billed Reimbursable Expenses. As of the Closing Date, the sum of all expenses (as calculated in accordance with past practices consistently applied) of Seller theretofore invoiced by Seller to Schering for which Schering is obligated to reimburse Seller pursuant to the Schering Agreement. Business. As defined in the Recitals hereto. Business Day. Any day other than a Saturday, Sunday or a day on which banks in New York are not open for business. CERCLA. Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. Section 9601, et seq., as amended. Closing. The actual sale, conveyance, transfer, assignment and delivery of the Purchased Assets to Purchaser. Closing Date. The date which is the later of: (a) thirty (30) days following the execution of this Agreement or (b) three (3) Business Days following the date on which all closing conditions have been satisfied or waived, or such other date as Seller and Purchaser may mutually agree in writing, and upon which the Closing shall occur. Code. Internal Revenue Code of 1986, as it may be amended from time to time. Contracts. All contracts, leases, subleases, arrangements, commitments and other agreements of Seller relating to the Business or Purchased Assets, including, without limitation, all customer agreements, vendor agreements, purchase orders, installation and maintenance agreements, computer software licenses, hardware lease or rental agreements. Disclosing Party. As defined in Section 5.10. Disputed Items Notice. As defined in Section 8.5. Employees. As defined in Section 5.12. Employee Benefit Plan. Any employee benefit plan within the meaning of Section 3(3) of ERISA which (a) is maintained for employees of Seller or any of its ERISA Affiliates or (b) has at any time within the preceding six (6) years been maintained for employees of Seller or any current or former ERISA Affiliates, and any bonus or other incentive compensation, deferred compensation, salary continuation, sick or disability pay, severance, stock award, stock option, stock purchase, tuition assistance, vacation, vacation pay or other benefit plan or arrangement, and each employment, termination or other compensation 5 arrangement or agreement, in each case with respect to current or former employees or consultants of or to Seller or any ERISA Affiliate, and under which Seller or any ERISA Affiliate could reasonably be expected to have any liability. Employment Agreement. As defined in Section 6.1. Environmental Claims. As defined in Section 3.22. Environmental Laws. As defined in Section 3.22. Environmental Reports. As defined in Section 1.3. Equipment and Improvements. All facilities and structures, buildings, installations, fixtures, improvements, betterments, additions, spare parts, stores, supplies, fuel and lubes, machinery, equipment, cranes, forklifts, platforms, vehicles, trucks, chassis, generators, containers, spare tires and parts, tools, appliances, furniture, office furniture, fixtures, office supplies and office equipment, computers, computer terminals and printers, computer software, telephone systems, telecopiers and photocopiers, and other tangible personal property of every kind and description, which are owned or leased by Seller, or are utilized in connection with Seller's operation other than such assets located at 300 International Drive, Williamsville, New York. ERISA. The Employee Retirement Income Security Act of 1974, as it may be amended from time to time, and the regulations promulgated thereunder. ERISA Affiliate. Any corporation, partnership or trade or business which is a member of a group that includes Seller and is treated as a single employer within the meaning of Section 414(b), (c), (m) or (o) of the Code. Escrow Agent. As defined in Section 1.2. Escrow Agreement. As defined in Section 10.13. Escrow Amount. As defined in Section 1.2(a). Estimated Purchase Price Certificate. As defined in Section 5.7. Excluded Liabilities. As defined in Section 1.3. FDA. The Federal Food and Drug Administration. Final Purchase Price. Forty-Four Million Dollars ($44,000,000) subject to adjustment as provided for in Section 1.2(a) as determined in accordance with Section 8.5. Final Purchase Price Certificate. As defined in Section 8.5. Financial Statements. The financial statements of Seller for the fiscal years ended on September 30, 1999, 2000, and 2001, together with the notes thereto, which are 6 included in the consolidated financial statements of FEI Enterprises, Ltd., in the case of the fiscal years ended on September 30, 1999 and 2000, and in the consolidated financial statements of FEI Shares, Inc., in the case of the fiscal year ended September 30, 2001, each audited by Ernst & Young LLP, independent certified public accountants, and accompanied by the opinion of such accountants relating to such statements. Food and Drug Laws. The Federal Food, Drug, and Cosmetic Act of 1938, as amended, and all similar state, local, and foreign laws or ordinances. GAAP. Generally accepted accounting principles. Galen Agreement. The Subsublease Agreement dated January 7, 1996 between Seller and Galen Advisors L.L.C. Hazardous Substance. As defined in Section 3.22. Indemnified Party. As defined in Section 10.7. Indemnifying Party. As defined in Section 10.7. Indemnity Basket. As defined in Section 10.3. Indemnity Cap. As defined in Section 10.3. Inventories. All of Seller's raw materials, packaging, service parts, supplies, work-in-process and finished goods and any and all other inventories of Seller, plus any replacements for or additions to such inventories acquired on or before the Closing Date, and minus any items of inventory consumed, sold or otherwise disposed of in the Ordinary Course of Business by Seller on or before the Closing Date. IRS. Internal Revenue Service. Law. Any law, statute, regulation, rule, ordinance, requirement, announcement or other binding action or requirement of an Authority. Leased Real Property. The parcels of land more fully described on Schedule 3.6 under the heading "Leased Real Property," together with all rights and privileges under such leases (hereinafter referred to collectively as the "Real Property Leases") to the real property subject to such leases. Legal Provisions. As defined in Section 3.1. Lien. Any lien (statutory or other), mortgage, pledge, hypothecation, assignment, deposit arrangement, encumbrance or preference, priority or security agreement or preferential arrangement of any kind or nature whatsoever (including, without limitation, the interest of a vendor or lessor under any conditional sale, capitalized lease or other title retention agreement). 7 Milestone Payments. As provided for in Article 6.2.1 of the Schering Agreement. Mitsubishi-Tokyo Agreement. The Material Transfer Agreement dated as of November 20, 2000 by and between Mitsubishi-Tokyo Pharmaceuticals, Inc. and Seller. Most Recent Balance Sheet. The balance sheet of Seller dated December 31, 2001. Most Recent Balance Sheet Date. December 31, 2001. Multiemployer Plan. A "multiemployer plan" as defined in Section 4001(a)(3) of ERISA to which Seller or any ERISA Affiliate is making, or is accruing an obligation to make, contributions or has made, or been obligated to make, contributions within the preceding six (6) years. Non-Competition Agreement. As defined in Section 6.1. Nonconsenting Third Party. As defined in Section 5.17. Order. Any decree, order, judgment, writ, award, injunction, stipulation or consent of or by an Authority. Ordinary Course of Business. The ordinary course of business of Seller, in accordance with past custom and practice (including, without limitation, with respect to quantity and frequency). PBGC. The Pension Benefit Guaranty Corporation. Pending Claims. As defined in Section 10.13. Pension Plan. At any time an employee pension benefit plan that is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Code and is maintained either: (i) by Seller or any ERISA Affiliate or (ii) pursuant to a collective bargaining agreement or any other arrangement under which more than one employer makes contributions and, with respect to either (i) or (ii), Seller or any ERISA Affiliate is then making or accruing an obligation to make contributions or has within the preceding six (6) plan years made contributions. Permits. As defined in Section 3.26. Person. Any natural person, corporation, limited liability company, partnership, firm, joint venture, joint-stock company, trust, association, unincorporated entity or organization of any kind, Authority or other entity of any kind. Population. Population Council, Inc., a New York not-for-profit corporation. 8 Population Council Agreement. The Joint Development and Supply Agreement dated as of October 31, 1994 among The Population Council, Inc., FEI Enterprises, Ltd., FEI Products, Inc. and FEI Technologies, Inc. (n/k/a Enhance Pharmaceuticals, Inc.) Purchase Price. As defined in Section 1.2. Purchased Assets. The Business and all assets, rights and properties owned by Seller on the Closing Date, whether or not carried and reflected on the books of Seller (excluding the Retained Assets), including, but not limited to, the following: (a) all Accounts Receivable; (b) all Unbilled Reimbursable Expenses; (c) all deposits (including, without limitation, deposits on capital expenditures) and prepaid expenses, other than prepaid insurance premiums and prepaid taxes; (d) the Inventories; (e) the Equipment and Improvements; (f) the Real Property Leases; (g) the Assumed Contracts; (h) all of the following intellectual property: all trade names (including the name "Enhance" and any similar names used by Seller), trademarks, trademark registrations, trademark applications, service marks, service mark registrations, service mark applications; all copyrights, copyright registrations, copyright applications; all patent rights (including, without limitation, issued patents, applications, divisions, continuations and continuations-in-part, reissues, patents of addition, utility models and inventors' certificates); all licenses with respect to any of the foregoing; all trade secrets, proprietary manufacturing information and know-how; all inventions, inventors' notes, drawings and designs; and, all customer and vendor lists and the goodwill associated with any of the foregoing; (i) any Permits and licenses of Seller to the extent any of the same are transferable or assignable to Purchaser; (j) choses in action, claims and causes of action or rights of recovery or set-off of every kind and character, in each case only to the extent related to the Purchased Assets or the Assumed Liabilities; (k) all of Seller's files, papers, documents and records relating to the Business, and all other miscellaneous assets of Seller relating to the Business wherever located, including, without limitation, credit, sales and accounting records, price sheets, catalogues and sales literature, books, processes, formulae, manufacturing data, 9 advertising material, stationery, office supplies, forms, catalogues, manuals, correspondence, production records, employment records and any other information reduced to writing relating to the Business of Seller; and (l) the Business of Seller as a going concern. Anything to the contrary notwithstanding, neither the term "Purchased Assets" nor any of the defined asset groups nominally comprising "Purchased Assets" shall include any asset specifically referred to in Section 1.4 above; provided, however, that for purposes of this Agreement, the term "Purchased Assets" shall mean all of the goodwill, assets, properties and rights of every nature, kind and description, whether tangible or intangible, real, personal or mixed, wherever located and whether or not carried or reflected on the books and records of the Seller, which are used in, or which were acquired in connection with, the operation of the Business, excepting only the Retained Assets and any of the above which relate exclusively to the Retained Assets. Purchaser. As defined in the heading hereto. Purchaser Losses. As defined in Section 10.2. Real Property. The Leased Real Property. Real Property Leases. As defined in the definition of Leased Real Property. Release. As defined in Section 3.22. Resolved Claims. As defined in Section 10.13. Retained Assets. As defined in Section 1.4. Schering. Schering Aktiengesellschaft, a German corporation. Schering Agreement. The Product Development and Product License Agreement between Seller and Schering dated as of June 5, 2001. Seller. As defined in the heading hereto. Seller Parties. As defined in Section 5.9. Subsidiary. A Subsidiary of any Person means (i) a corporation more than 50% of the combined voting power of the outstanding stock of which is owned, directly or indirectly, by such Person or by one or more other Subsidiaries of such Person or by such Person and one or more Subsidiaries thereof, or (ii) any other Person (other than a corporation) in which such Person, or one or more other Subsidiaries of such Person or such Person and one or more other Subsidiaries thereof, directly or indirectly, has the power to direct the policies, management and affairs thereof. Tail Insurance. As defined in Section 6.1. 10 Taxes. As defined in Section 3.24. Third-Party Claim. As defined in Section 10.7. Third-Party Notice. As defined in Section 10.7. Time Covenant. As defined in Section 5.9. Unbilled Reimbursable Expenses. As of the Closing Date, the sum of all expenses (as calculated in accordance with past practices consistently applied) of Seller not then invoiced by Seller to Schering for which Schering is obligated to reimburse Seller pursuant to the Schering Agreement. Uncontested Claims. As defined in Section 10.13. 2.3 Interpretation. Unless otherwise expressly provided or unless the context requires otherwise, (a) all references in this Agreement to Articles, Sections, Schedules and Exhibits shall mean and refer to Articles, Sections, Schedules and Exhibits of this Agreement; (b) all references to statutes and related regulations shall include all amendments of the same and any successor or replacement statutes and regulations; (c) words using the singular or plural number also shall include the plural and singular number, respectively; (d) references to "hereof," "herein," "hereby" and similar terms shall refer to this entire Agreement (including the Schedules and Exhibits hereto); and (e) references to any Person shall be deemed to mean and include the successors and permitted assigns of such Person (or, in the case of an Authority, Persons succeeding to the relevant functions of such Person). ARTICLE III REPRESENTATIONS AND WARRANTIES OF SELLER As an inducement to Purchaser to enter into and perform this Agreement, and in consideration of the covenants of Purchaser contained herein, Seller represents and warrants to Purchaser (which representations and warranties shall survive the Closing (subject to Section 10.1) regardless of any examinations, inspections, audits and other investigations Purchaser has heretofore made, or may hereafter make, with respect to such representations and warranties) as follows: 3.1 Status of Seller; Enforceability; Conflicts; Consents. (a) Seller is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. Seller has full corporate power and authority and possesses all governmental franchises, licenses, permits, authorizations and approvals necessary to enable it to use its name and to own, lease or otherwise hold its properties and assets and to carry on its business as presently conducted, except where the failure to possess any such franchise, license, permit, authorization or approval would not have a material adverse effect on Seller or the Business. Seller is duly qualified and in good standing to do business in each jurisdiction in which the nature of its business or the ownership, leasing or holding of its 11 properties makes such qualification necessary, except where the failure to be so duly qualified and in good standing would not have a material adverse effect on Seller or the Business. Seller has no Subsidiaries. (b) Seller has the requisite power and authority to execute and deliver this Agreement and to perform its obligations hereunder. The execution and delivery by Seller of this Agreement, and the performance by Seller of its obligations hereunder, have been duly and validly authorized and approved by all necessary action on the part of Seller. (c) This Agreement is binding upon, and enforceable against, Seller in accordance with its terms, subject, as to enforcement, to bankruptcy, insolvency, reorganization and other laws affecting creditors' rights generally and by general principles of equity (whether in a proceeding at law or in equity). (d) Except as set forth on Schedule 3.1, neither the execution or delivery of this Agreement by Seller nor the performance by Seller of its obligations under this Agreement will (assuming the receipt of all consents and approvals referred to in Section 3.25), conflict with or result in a breach of any of the terms or provisions of, or constitute a default under, any contract, lease, license, franchise, permit, indenture, mortgage, deed of trust, note agreement or other agreement or instrument to which Seller is a party or is bound or any judgment, order or decree, statute, law, ordinance, rule or regulation applicable to Seller or the property or assets of Seller (including, without limitation, the Purchased Assets) or the certificate of incorporation or by-laws of Seller, or any applicable Law or Order (collectively, "Legal Provisions"), except for conflicts, breaches or defaults which would not have a material adverse effect on Seller or the Business. (e) No consent, approval, license, Permit, Order or authorization of, or registration, declaration or filing with, any court, administrative agency or commission or other governmental authority or instrumentality, domestic or foreign, is required to be obtained or made by or with respect to Seller in connection with (i) the execution and delivery of this Agreement or the consummation of the transactions contemplated hereby, or (ii) the conduct by Seller of its business following the Closing as conducted on the date hereof other than (A) the consents and approvals referred to in Section 3.25, (B) those that may be required solely by reason of Purchaser's (as opposed to any other third party's) participation in the transactions contemplated hereby, and (C) such other consents or approvals the failure of which to obtain would not have a material adverse effect on Purchaser or the ability of any party to consummate the transactions contemplated hereby. (f) Seller has delivered to Purchaser true and complete copies of its certificate of incorporation and by-laws, as amended to date. 3.2 Ownership of Seller. (a) The sole shareholders of Seller are the Persons set forth on Schedule 3.2 and each such shareholder is the registered and beneficial owner of the number of shares set forth opposite such Person's name free and clear of all Liens of any nature whatsoever; and each such shareholder has the sole right to vote and to sell the shares owned by such shareholder. 12 (b) There are no outstanding warrants, options, agreements, convertible or exchangeable securities, phantom stock or other commitments pursuant to which Seller is or may become obligated to issue, sell, purchase, return or redeem any shares of capital stock or other securities of Seller and no equity securities of Seller are reserved for issuance for any purpose. 3.3 Financial Statements. The Financial Statements have been prepared in accordance with GAAP, consistently applied during the periods covered thereby, fairly present in all material respects the financial condition and the results of operations for the periods covered thereby, and are in accordance with the books and records of Seller. Seller has provided Purchaser with the Financial Statements and the Most Recent Balance Sheet. 3.4 Undisclosed Liabilities. On the Most Recent Balance Sheet Date, Seller had no debts, liabilities, Liens, claims, encumbrances or other obligations of any nature (whether accrued, absolute, contingent or otherwise) of the type which should be reflected in balance sheets (including the notes thereto) prepared in accordance with GAAP consistently applied in accordance with the prior Financial Statements of Seller, which were not disclosed, reflected or reserved against on the Financial Statements or the Most Recent Balance Sheet; and, except for liabilities which have been incurred since the Most Recent Balance Sheet Date in the Ordinary Course of Business, since the Most Recent Balance Sheet Date Seller has not incurred any liability of any nature (whether accrued, absolute, contingent or otherwise) of the type which should be reflected on the Most Recent Balance Sheet prepared in accordance with GAAP consistently applied in accordance with the Financial Statements. 3.5 Title to Properties. Except as set forth on Schedule 3.5, Seller has good and marketable title to all of the assets and properties reflected on the Most Recent Balance Sheet or used in the Business constituting Purchased Assets free and clear of all Liens of any nature. 3.6 Real Property. (a) Schedule 3.6 contains accurate descriptions of each parcel of Real Property leased or occupied under Permit by Seller. No other Real Property is used in the Business or occupied by Seller. The Seller owns no real property. All of the Real Property Leases are valid and in full force and effect, and there does not exist any default or event that with notice or lapse of time, or both, would constitute a default by Seller under any of the Real Property Leases, and to the knowledge of Seller, there does not exist any default or event that with notice or lapse of time, or both, would constitute a default by any other party under any of the Real Property Leases. (b) All the buildings, fixtures and leasehold improvements used by Seller in the Business are located on the Real Property and, to Seller's knowledge, none of such buildings, fixtures or improvements encroach on any adjoining property owned by others or public rights of way. Each parcel of Real Property abuts on at least one side a public street or road in a manner so as to permit reasonable, customary and adequate vehicular and pedestrian ingress, egress and access to such parcel, or has adequate easements across intervening property to permit reasonable, customary and adequate vehicular and pedestrian ingress, egress and access to such parcel from a public street or road. There are no restrictions on entrance to or exit from the Real 13 Property to adjacent public streets and, to Seller's knowledge, no conditions which will result in the termination of the present access from the Real Property to existing highways or roads. (c) Seller has good and marketable leasehold interests in the Leased Real Property, free and clear of all Liens, except for Liens for taxes not yet due and payable and any Liens on the underlying fee interest in the Leased Real Property. Subject to the Real Property Leases, Seller has enjoyed the continuous and uninterrupted quiet possession, use and operation of the Real Property without any material complaint or objection by any Person. 3.7 Equipment and Improvements. The Equipment and Improvements located on the Real Property are in compliance with all applicable Laws and Orders, and are in reasonable and serviceable condition and repair, normal wear and tear excepted, except for any such non-compliance which would not have a material adverse effect on Seller or the Business. Neither the Real Property nor the use or occupancy thereof by Seller violates in any way any applicable Laws, Orders, Permits, covenants, conditions and restrictions, whether federal, state, local or, to Seller's knowledge, private, except for any such violation which would not have a material adverse effect on Seller or the Business. 3.8 No Commitments. There are no outstanding, defaulted or unsatisfied contracts, commitments, agreements or understandings which have been made to, with or for the benefit of any utility companies, school districts, water districts, improvement districts or other Authorities which could reasonably be expected to impose any obligation, liability or condition on Seller or, to the knowledge of Seller, the owner of any Leased Real Property to grant any easements or to make any payments, contributions or dedications of money or land or to construct, install or maintain or to contribute to the construction, installation or maintenance of any improvements of a public or private nature, whether on or off the Real Property. 3.9 Continued Use of Real Property. There are no claims, governmental investigations, litigation or proceedings which are pending against Seller, or, to the knowledge of Seller, threatened against Seller, or, to the knowledge of Seller, pending or threatened against the owner of any Leased Real Property which could reasonably be expected to affect the continued use of the Real Property in substantially the same manner as presently used by Seller. 3.10 Real Estate and Personal Property Taxes; Assessments. (a) All obligations of Seller with respect to real estate taxes and personal property taxes and assessments which may be due and payable with respect to the Purchased Assets have been paid. (b) Seller has not received any notice of any special tax assessment affecting any property owned or leased by it, and, to Seller's knowledge, no such assessments are pending or threatened. 3.11 Inventory. Seller owns no Inventory. 3.12 Accounts Receivable. The Accounts Receivable reflected on the Most Recent Balance Sheet: (a) were acquired by Seller in the Ordinary Course of Business and represent 14 fully completed bona fide transactions that require no further act on the part of Seller to make such Accounts Receivable payable by the account debtors; (b) except as reserved against on the Most Recent Balance Sheet, are not subject to any claim, counterclaim, set-off or deduction and are fully collectible at the face amounts thereof; (c) represent valid obligations owing to Seller by account debtors that are not Affiliates of Seller, which are enforceable in accordance with their respective terms; and (d) are owned by Seller free and clear of all Liens. 3.13 Contracts. (a) Schedule 3.13 to this Agreement contains a complete list of all material Contracts (including, without limitation, all Assumed Contracts) entered into or agreed to by Seller or by which Seller is currently bound and true and complete copies of such written Contracts have been provided to Purchaser or its counsel. Identified with an asterisk on Schedule 3.13 are those Contracts which contain a prohibition on assignment. All such Contracts are valid and binding upon Seller, and to Seller's knowledge, the other parties thereto except as limited by bankruptcy and insolvency laws and by other laws affecting the rights of creditors generally. There is no default or event that with notice or lapse of time, or both, would constitute a default by Seller under any of such Contracts, and to the knowledge of Seller, there is no default or event that with notice or lapse of time, or both, would constitute a default by any other party under any of such Contracts. Seller has not received notice that any party to any of such Contracts intends to cancel or terminate any of such agreements or to exercise or not exercise any options under any of such agreements. True, correct and complete copies (or, if oral, written summaries) of each Contract have been delivered to Purchaser, except for purchase orders a complete and accurate list of which is set forth on Schedule 3.13. (b) The Assumed Contracts are adequate and appropriate for the continued conduct of the Business as conducted in the Ordinary Course of Business since January 1, 2001. The purchase commitments and other agreements for the provision of raw materials for use in the manufacture of Business products to be assumed by Purchaser will provide Purchaser with a supply of each raw material necessary in such manufacture which is not materially excessive or materially inadequate for the continued manufacture of such products in the Ordinary Course of Business in the quantities in which they have been produced since January 1, 2001. 3.14 Equity Interests. Seller does not directly or indirectly own any capital stock of, or other equity interests in, any corporation, partnership, joint venture or other entity. 3.15 Intellectual Property. Schedule 3.15 contains a true and complete list and brief description of all patents, trademarks, service marks, trade names, and copyrights (whether or not such trademarks, trade names, service marks and copyrights are registered), and all pending applications therefor, if any, owned by Seller or in which Seller has any rights or licenses. No other patents, trademarks, trade names, service marks or copyrights are reasonably necessary for the conduct of the Business in substantially the same manner as presently operated by Seller. To Seller's knowledge, there is no infringement or alleged infringement by any Person of any such trademark, service mark, trade name, copyright or patent. Seller has not received any notice from any Person alleging Seller is infringing upon, and, to Seller's knowledge, Seller has not infringed and is not now infringing on, any trademark, service mark, trade name, copyright or patent belonging to any other Person. Schedule 3.15 also contains a true and complete list of all agreements between each employee of Seller and Seller relating to confidential information of 15 Seller, including but not limited to patents, trademarks, service marks, trade names, and copyrights, and the ownership of any intellectual property developed by such employee under the scope of his employment. 3.16 Required Assets; Sufficiency of Assets. There are no significant assets used or required by Seller in the conduct of the Business as presently conducted by Seller that are not either owned by it or licensed or leased to it and, in each case conveyed to Purchaser under this Agreement other than insurance, working capital and those assets required to provide accounting services for the Business. The Purchased Assets constitute all of the assets, goodwill, properties and rights of every nature, kind and description, whether tangible or intangible, real, personal or mixed, necessary to conduct the Business in substantially the same manner as presently conducted by Seller other than insurance, working capital and those assets required to provide accounting services for the Business. 3.17 Suppliers. Schedule 3.17 sets forth the lists of all suppliers whose supplies to Seller and the Business as presently conducted exceeded $25,000 during the most recent calendar year of Seller through and including February 28, 2002. During the period from January 1, 2001 through the date hereof, none of such suppliers has canceled or substantially modified its agreement or commitment with Seller to supply products or services (or threatened in writing to do any of the foregoing). To the knowledge of Seller, the relationship of Seller with each of such suppliers of Seller is a good commercial working relationship. Seller has no knowledge that any such supplier intends to cancel or otherwise substantially modify its relationship with Seller or limit materially its services, supplies or materials to Seller either as a result of the transactions contemplated hereby or otherwise, or has any pending or threatened controversy with any Authority with respect to its relationship with Seller, except for such controversy that would not have a material adverse effect on Seller. 3.18 Personnel Identification and Compensation. Schedule 3.18 contains a true and complete list of the names, titles and compensation of all current officers, directors and employees of Seller whose compensation from Seller exceeded $40,000.00 during the most recent calendar year of Seller. 3.19 Existing Employment Related Contracts. Schedule 3.19 contains a list of all written and oral (with a short description thereof) arrangements or contracts relating to employment, compensation, bonuses, severance, pension and other related issues and collective bargaining agreements to which Seller is a party or by which Seller is bound. All these contracts and arrangements are in full force and effect, and neither Seller nor, to Seller's knowledge, any other Person is in default under any such contract or arrangement. There have been no claims of default and there are no facts or conditions which, with the passage of time or upon notice, will result in a default by Seller, or to the knowledge of Seller, any other Person, under these contracts or arrangements. There is no pending or, to Seller's knowledge, threatened labor dispute, strike, or work stoppage affecting Seller or the Business. 3.20 Compliance with Laws. Except as set forth in Schedule 3.21 and subject to the provisions of Sections 3.22, 3.26, 3.27 and 3.30, Seller, all of the products manufactured, tested, and/or distributed by the Seller, and the Purchased Assets have complied with all, and are not in 16 violation of any, applicable Laws, Permits and Orders (including, without limitation, any applicable building, zoning, environmental protection, water use, Food and Drug Laws and related regulations, occupational health and safety, employment, disability rights or food service facilities law, ordinance, or regulation) affecting Seller's properties, the operation of the Business, or the Purchased Assets, except for any such non-compliance or violation which would not have a material adverse effect on Seller or the Business. No material capital expenditures are required for compliance with Laws by Seller in order to conduct the Business as presently conducted by Seller. 3.21 Litigation. Except as set forth in Schedule 3.21, there are no suits, actions, arbitrations, and legal, administrative and other proceedings and governmental investigations, pending or, to Seller's knowledge, threatened, against or, to Seller's knowledge, affecting Seller or the Business, involving $25,000.00 or more in dispute or, if determined adversely to Seller, could result in the expenditure or recovery of $25,000.00 or more by Seller in connection therewith. None of the matters set forth in Schedule 3.21, if decided adversely to Seller would result in a material adverse change, taken individually or in the aggregate, to the Business or Seller. Seller is not presently engaged in any legal action to recover moneys due to it or damages sustained by it. 3.22 Environmental. (a) Definitions. For purposes of this Agreement, the following terms shall have the following meanings: (i) The term "Environmental Law(s)" means each and every Law, Order, Permit, or similar requirement of each and every Authority and common law, pertaining to (A) the protection of human health, safety, the environment, natural resources and wildlife or (B) the management, manufacture, possession, presence, use, generation, transportation, treatment, storage, disposal, Release, threatened Release, abatement, removal, remediation or handling of, or exposure to, any Hazardous Substance or (C) pollution, including without limitation, as amended, CERCLA, the Solid Waste Disposal Act, 42 U.S.C.Section 6901 et seq., the Clean Air Act, 42 U.S.C.Section 7401 et seq. and the Federal Water Pollution Control Act, 33 U.S.C.Section 1251, et seq. (ii) The term "Hazardous Substance" means any substance which is (A) defined as a hazardous substance, hazardous material, hazardous waste, pollutant or contaminant under any Environmental Laws, (B) a petroleum hydrocarbon, including crude oil or any fraction thereof, (C) hazardous, toxic, corrosive, flammable, explosive, infectious, radioactive or carcinogenic or (D) regulated pursuant to any Environmental Laws. (iii) The term "Release" means any spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, dumping, or disposing into the environment (including without limitation the abandonment or discarding of barrels, containers, and other receptacles containing any Hazardous Substance). 17 (b) Compliance with Environmental Laws. Seller, the use by Seller of the Real Property, and the Business have been and are in compliance in all material respects with all applicable Environmental Laws, and there has been and is no liability against Seller under any applicable Environmental Laws. The use by Seller of any real property formerly owned or leased by Seller or otherwise related to the Business was in compliance in all material respects with all applicable Environmental Laws during Seller's period of ownership or operation. Seller has no knowledge of any facts or circumstances concerning any alleged violation or liability arising under any Environmental Law with respect to the Real Property, the Business or any formerly owned or operated real property or any use or condition thereof. (c) No Release of Hazardous Substances. Except in accordance with applicable Environmental Laws, there has been no Release or threatened Release by Seller, or to Seller's knowledge, by any other Person of any Hazardous Substance existing on, beneath or from the surface, subsurface, ground water, sediment, rivers or other bodies of water associated with the Real Property, nor is there or has there been any Release or threatened Release by Seller, or, to the knowledge of Seller, by any other Person, of any Hazardous Substances on, beneath from or in the vicinity of the Real Property currently occurring or, to the knowledge of Seller, occurring at any time in the past. (d) Permits. All Permits required by or issued pursuant to any Environmental Law for the ownership, use or operation of the Real Property by Seller or the Business have been obtained in a timely manner and are presently maintained in full force and effect. Schedule 3.22 contains a true and complete listing of all such Permits. The Real Property and the operations of Seller are in material compliance with all terms and conditions of such Permits. Seller has not received any notice or other communication and has no knowledge of any facts or circumstances concerning any alleged violation of any such Permits. (e) No Proceedings. There exists no Order, notice of violation, nor any suit, claim, proceeding, citation, directive, summons, investigation, information request or other notice pending or, to the knowledge of Seller, threatened pursuant to any Environmental Law relating to (i) Seller's ownership, lease, occupation or use of the Real Property, or any real property formerly owned, leased, occupied or used by Seller or, to Seller's knowledge, any other present or former owner, tenant, occupant or user of the Real Property, (ii) any alleged violation of, or liability under, any Environmental Law by Seller, or (iii) to Seller's knowledge, the suspected presence, Release or threatened Release of any Hazardous Substance on, under, in or from the surface, subsurface, groundwater, sediment, rivers or other bodies of water associated with the Real Property, or any formerly owned, leased, occupied or used real property nor does there exist any valid basis for any such Order, suit, claim, proceeding, citation, directive, summons investigation, information request, notice of violation, or other notice (collectively, the "Environmental Claims"). (f) No Tanks, Asbestos or PCB's. To Seller's knowledge, there are and were no aboveground or underground storage tanks currently or formerly located on the Real Property used or formerly used for the purpose of storing any Hazardous Substance. There is no asbestos-containing building material on the Real Property, and, to Seller's knowledge, no asbestos abatement or remediation work has been performed on the Real Property. To Seller's 18 knowledge, there is no PCB-containing equipment or PCB-containing material located on the Real Property. (g) Documents. Seller has provided Purchaser with all environmental assessment reports in its possession with respect to the Leased Real Property and with copies of all Permits required to conduct the Business as presently conducted by Seller. 3.23 Employee Benefit Plans. (a) Schedule 3.23 contains a true and complete list of all Employee Benefit Plans. There are no Multiemployer Plans. ------------- (b) All obligations of any nature under any Employee Benefit Plan will constitute a Retained Liability, and Purchaser shall have no obligation or duty with respect thereto. 3.24 Tax Matters. (a) The term "Taxes" means all net income, capital gains, gross income, gross receipts, sales, use, transfer, ad valorem, franchise, profits, license, capital, withholding, payroll, employment, excise, goods and services, severance, stamp, occupation, premium, property, assessments, or other governmental charges of any kind whatsoever, together with any interest, fines and any penalties, additions to tax or additional amounts incurred or accrued under applicable federal, state, local or foreign tax law or assessed, charged or imposed by any Authority, domestic or foreign; provided that any interest, penalties, additions to tax or additional amounts that relate to Taxes for any taxable period (including any portion of any taxable period ending on or before the Closing Date) shall be deemed to be Taxes for such period, regardless of when such items are incurred, accrued, assessed or charged. For the purposes of this Section 3.24, Seller shall be deemed to include any predecessor to Seller, or any Person from which Seller incurs a liability for Taxes as a result of transferee liability, joint and several liability, or otherwise. (b) Seller has duly and timely filed (and prior to the Closing Date will duly and timely file) true, correct and complete tax returns, reports or estimates, all prepared in accordance with applicable Laws, for all years and periods (and portions thereof), for all jurisdictions (whether federal, state, local or foreign) in which any such returns, reports or estimates were due, and for all such returns, reports and estimates which are required to be filed by any applicable Law on or prior to the Closing Date. All Taxes shown as due and payable on such returns, reports and estimates have been paid (or will be paid prior to the Closing), and there is no current liability for any Taxes due and payable in connection with any such returns. Any charges, accruals and reserves for Taxes provided for on the Financial Statements are adequate. There are no existing Liens for Taxes upon any of the Purchased Assets. Seller has provided to Purchaser copies of all federal, state and foreign tax returns filed by Seller for the past three (3) years. All applicable sales and transfer taxes with respect to the Purchased Assets, to the extent due, were paid when the Purchased Assets were acquired by Seller. 19 (c) Seller has: (i) withheld all required amounts from its employees, agents, contractors and nonresidents and remitted such amounts to the proper Authorities; (ii) paid all employer contributions and premiums required to be remitted to proper Authorities; and (iii) filed all federal, state, local and foreign returns and reports with respect to withholding taxes, and social security and unemployment Taxes and premiums, all in compliance in all material respects with the withholding provisions of the Code, or any prior provision of the Code and other applicable Laws. (d) None of the Purchased Assets is tax exempt use property under Code Section 168(h). None of the Purchased Assets is property that Seller is required to treat as being owned by any other Person pursuant to the safe harbor lease provision of former Code Section 168(f)(8). (e) No portion of the cost of any Purchased Assets was financed directly or indirectly from the proceeds of any tax exempt state or local government obligation described in Code Section 103(a). (f) Seller has no (and has not previously had any) permanent establishment in any foreign country and Seller does not engage (and has not previously engaged) in a trade or business within the meaning of the Code relating to the creation of a permanent establishment in any foreign country. (g) Seller is not a foreign person within the meaning of Code Section 1445. Neither the Code nor any other provision of Law requires Purchaser to withhold any portion of the Purchase Price. (h) Seller is not a partner in a partnership or joint venture that could be treated as a partnership for federal income tax purposes. (i) Except for consolidated group which includes or has included FEI Enterprises, Ltd., FEI Shares, Inc., FEI Products, Inc. and Seller, Seller has never been a member of any consolidated, combined or unitary group for federal, state, local or foreign Tax purposes. (j) The tax returns of Seller have not been audited for any tax period ending after September 30, 1995 and there are no current proceedings by or discussions with any Authority relating to any Taxes. (k) Seller has not consented to the application of Code section 341(f). 3.25 Consents. Except as disclosed on Schedule 3.25, no consent, approval, order or authorization of, or registration, declaration or filing with, any Authority or any other Person is required to be obtained or made by Seller in connection with the execution and delivery of this Agreement or the performance by Seller of its obligations hereunder other than consents which have been obtained and disclosed on Schedule 3.25. 3.26 Licenses and Permits. Subject to the provisions of Section 3.22 and Section 3.30, Schedule 3.26 lists and describes all qualifications, registrations, filings, privileges, franchises, 20 immunities, licenses, permits, authorizations and approvals of Authorities which are used or required in order for Seller to own and/or operate the Business, including, without limitation, all certificates of occupancy and certificates, licenses and permits relating to building, safety, Environmental Laws, Food and Drug Laws, fire and health (collectively, the "Permits"), other than any such qualification, registration, filing, privilege, franchise, immunity, license, permit, authorization and approval of Authority where the failure of Seller to so possess such qualification, registration, filing, privilege, franchise, immunity, license, permit, authorization and approval of Authority would not have a material adverse effect on Seller or the Business. Except as set forth in Schedule 3.26, each Permit is in good standing, valid and subsisting, and in full force and effect in accordance with its terms. 3.27 Occupational Safety and Health. Except as set forth on Schedule 3.27, Seller has not received any notice, citation, claim, assessment or proposed assessment as to, or alleging, any violation of any federal, state or local occupational safety and health laws by it, nor has Seller, to Seller's knowledge, been subject to any investigation relating to the Business by any federal, state or local occupational safety and health agency within the three (3) years preceding the date hereof, and no such violation exists, other than any such violation which would not have a material adverse effect on Seller or the Business. Seller is not a party to any pending dispute with respect to compliance with any federal, state or local occupational safety and health law. 3.28 Insurance. Schedule 3.28 contains a list of the insurance policies, other than those related to employee benefits, that Seller currently maintains with respect to the Business and its assets and properties and employees as of the date hereof, each of which is in full force and effect and a complete and correct copy of each has been delivered to Purchaser. All insurance premiums currently due with respect to such policies have been paid and Seller is not otherwise in default with respect to any such policy, nor has Seller failed to give any notice or present any claim under any such policy in a due and timely manner. Seller has not received notice of cancellation or non-renewal of any such policy. Such policies are sufficient for compliance with all requirements of law and all agreements to which Seller is a party. All obligations and claims of any nature pertaining to insurance policies, including Employment Practices Liability, Fiduciary and Directors' and Officers' Liability, relating to actions prior to the Closing Date, will constitute a retained liability of Seller, and Purchaser shall have no obligation or duty with respect thereto. 3.29 Certain Transactions. All purchases and sales or other transactions, if any, between Seller, on the one hand, and any officer, director or employee thereof or Affiliate thereof, on the other hand, within the three (3) years immediately preceding the date hereof have been made on the basis of prevailing market rates and terms such that, from the perspective of Seller, all such transactions have been made on terms no less favorable than those which would have been available from unrelated third parties. Except as set forth on Schedule 3.29, neither any officer, director nor employee of Seller, nor any spouse, child or other relative of any of such persons, owns, or has any interest, directly or indirectly, in any of the real or personal property owned by or leased to Seller or any copyrights, patents, trademarks, trade names or trade secrets owned or licensed by Seller. 21 3.30 Regulatory Compliance. (a) Seller has not received any major adverse written notice within the past two years from the FDA or any other Authority (i) regarding the approvability or approval of a Permit concerning, or the labeling of, any products of Seller or (ii) alleging any violation of any Legal Provision by Seller which, in the case of either clause (i) or (ii), individually or in the aggregate has had or would have a material adverse effect on Seller or the Purchased Assets. Schedule 3.30 sets forth (i) all of Seller's regulatory correspondence relating to the Food and Drug Laws received from the FDA or any other similar Authority over the last five years and (ii) all of the Permits issued to Seller by the FDA or any other similar Authority. (b) Except as described in Schedule 3.30, no Permit, permission for clinical testing, or product of Seller has been denied, placed on hold, withdrawn, suspended or discontinued as a result of any action by the FDA or any other similar Authority, by Seller or, to the knowledge of Seller, by any licensee or customer of any product of Seller, in the United States or outside the United States (whether voluntarily or otherwise), in each case within the past five years. No proceedings in the United States or outside of the United States of which Seller has knowledge (whether completed or pending) seeking the withdrawal, suspension or seizure of any Permit, or product of Seller are pending against Seller, Seller's products, or, to the knowledge of Seller, any licensee or customer of any product of Seller, nor have any such proceedings been pending at any prior time, in each case which has had or would have a material adverse effect on Seller or the Purchased Assets. (c) For products that Seller is currently manufacturing, testing, or subjecting to clinical evaluation, each of Seller's applicable Permits under the Food and Drug Laws is complete, accurate, and up to date in all material respects, and the subject of each such Permit can be effectively, efficiently, and legally manufactured, tested, and clinically evaluated in material compliance with the current version of each applicable Permit. (d) Except for instances that have not had and would not have a material adverse effect on Seller, (i) to the knowledge of Seller, during the last five years no officer, employee or agent of Seller, has made an untrue statement of a material fact or fraudulent statement to the FDA or any other Authority, failed to disclose a material fact required to be disclosed to the FDA or any other Authority, or committed an act, made a statement, or failed to make a statement that, at the time such disclosure was made, could reasonably be expected to provide a basis for the FDA or any other Authority to invoke with respect to Seller its policy respecting "Fraud, Untrue Statements of Material Facts, Bribery, and Illegal Gratuities", set forth in 56 Fed. Reg. 46191 (September 10, 1991) or any similar policy, and (ii) nor has, to the knowledge of Seller, any officer, Employee or agent of Seller, has been convicted of any crime or engaged in any conduct for which debarment is mandated by 21 U.S.C. Section 335a(a) or any similar Legal Provision or permitted by 21 U.S.C. Section 335a(b) or any similar Legal Provision. 22 (e) Seller has not received any written notice within the past two years that the FDA or any other Authority has commenced, or overtly threatened to initiate, any action to enjoin production or clinical evaluation of any product included within the Purchased Assets. 3.31 Conduct of Business Since Most Recent Balance Sheet Date. Except as set forth on Schedule 3.31, since the Most Recent Balance Sheet Date: (a) the business of Seller has been conducted only in the Ordinary Course of Business; (b) Seller has neither declared any dividends or distributions nor issued or redeemed any equity securities nor made any payments to any of its shareholders or any Affiliate thereof (other than compensation and expense reimbursement payments made in the Ordinary Course of Business consistent with past practices); (c) except for supplies purchased, sold or otherwise disposed of in the Ordinary Course of the Business, Seller has not purchased, sold, leased, mortgaged, pledged or otherwise acquired or disposed of any properties or assets; (d) Seller has not changed the terms of any receivables or cancelled any debts owed to Seller or entered into, changed, modified, cancelled or terminated any agreement or contract involving the payment by (or to) Seller of more than $25,000 in any twelve- month period other than in the Ordinary Course of Business; (e) Seller has not sustained or incurred any loss or damage (whether or not insured against) on account of fire, flood, accident or other calamity; (f) Seller has not increased the compensation of any employee, officer, director or consultant other than in the Ordinary Course of Business consistent with past practice and has not granted any unusual or extraordinary bonuses, benefits or other forms of direct or indirect compensation to any employee, officer, director or consultant; (g) Seller has not adopted, increased, terminated, amended or otherwise modified any plan for the benefit of any employees other than in the Ordinary Course of Business consistent with past practice. (h) there has been no material adverse change in or with respect to the condition (financial or otherwise), operations, business, prospects, rights, properties, assets or liabilities of Seller; (i) Seller has not changed any accounting methods or practices (including, without limitation, any change in depreciation or amortization policies or rates); and (j) Seller has not agreed to take any of the actions described in paragraphs (b), (c), (d), (f), (g) or (i) above and Seller has not taken any other action proscribed by Section 5.1. 23 3.32 Broker's or Consultant's Fees. Seller has not dealt with any broker, finder or similar consultant other than Burrill & Company and Context Capital Group in connection with any of the transactions contemplated by this Agreement and no other Person is entitled to any commission or finder's fee in connection with the sale of the Purchased Assets to Purchaser. Seller shall pay any compensation and expenses owing to Burrill & Company and Context Capital Group arising out of the transactions contemplated hereby. 3.33 Claims Against Insiders. To the knowledge of Seller, Seller does not have any claim against, debt owing by, or cause of action against, any shareholder, officer or director of Seller. 3.34 Disclosure. None of the representations and warranties made by Seller in this Agreement contains or will contain any untrue statement of a material fact, or omits to state any material fact necessary to make the statements contained in this Agreement not misleading. There is no fact known to Seller which (so far as Seller reasonably foresees) materially adversely affects, or in the future may materially adversely affect, individually or in the aggregate, the condition (financial or otherwise), assets, liabilities, business, operations or prospects of Seller or the ability of Seller to consummate the transactions contemplated hereby that has not been set forth herein or heretofore communicated to Purchaser in writing pursuant hereto. 3.35 No Other Representations and Warranties. Except for the representations and warranties contained in this agreement, Seller makes no other representation and warranty as to any fact or matter, and no party shall be entitled to rely upon any such other representation or warranty. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PURCHASER As an inducement to Seller to enter into and perform this Agreement, and in consideration of the covenants of Seller contained herein, Purchaser represents and warrants to Seller (which representations and warranties shall survive the Closing (subject to Section 10.1) regardless of any examinations, inspections, audits and other investigations Seller have heretofore made, or may hereafter make, with respect to such representations and warranties) as follows: 4.1 Status of Purchaser. Purchaser is a corporation duly organized, validly existing and in good standing under the laws of the State of New York and, at or prior to the Closing, will be duly qualified to do business in each state where Seller is now qualified to do business. Purchaser has full corporate power and authority and possesses all governmental franchises, licenses, permits, authorizations and approvals necessary to enable it to use its name and to own, lease or otherwise hold its properties and assets and to carry on its business as presently conducted, except where the failure to possess any such franchise, license, permit, authorization or approval would not have a material adverse effect on Purchaser. 4.2 Authority of Purchaser. Purchaser has the requisite power and authority to execute and deliver this Agreement and to perform its obligations hereunder. Neither the 24 execution or delivery of this Agreement by Purchaser nor the performance by Purchaser of its obligations under this Agreement will conflict with or result in a breach of any of the terms or provisions of, or constitute a default under, any contract, lease, license, franchise, permit, indenture, mortgage, deed of trust, note agreement or other agreement or instrument to which Purchaser is a party or is bound, its certificate of incorporation or by-laws or any applicable Law or Order. 4.3 Due Authorization. The execution and delivery by Purchaser of this Agreement, and the performance by Purchaser of its obligations hereunder, have been duly and validly authorized and approved by all necessary action on the part of Purchaser. 4.4 Enforceability. This Agreement is binding upon, and enforceable against, Purchaser in accordance with its terms, subject, as to enforcement, to bankruptcy, insolvency, reorganization and other laws affecting creditors' rights generally and by principles of equity (whether in a proceeding at law or in equity). 4.5 Consents. No consent, approval, order or authorization of, or registration, declaration or filing with, any Authority or any other Person is required to be obtained or made by Purchaser in connection with its execution and delivery of this Agreement or the performance by it of its obligations hereunder. 4.6 Broker's or Consultant's Fees. Purchaser has not dealt with any broker, finder or consultant other than Banc of America Securities LLC in connection with any of the transactions contemplated by this Agreement, and no other Person is entitled to any commission or finder's fee in connection with the sale of the Purchased Assets to Purchaser. Purchaser shall pay any compensation and expenses owing to Banc of America Securities LLC arising out of the transactions contemplated hereby. ARTICLE V PRE-CLOSING COVENANTS Seller and Purchaser covenant and agree that from the date hereof through and including the Closing Date: 5.1 Ordinary Conduct. (a) From the date hereof to the Closing, Seller shall conduct the Business in the Ordinary Course of Business. Seller shall use all commercially reasonable efforts to preserve and protect its goodwill, rights, properties, assets and business, to keep available to itself and Purchaser the services of its employees, and to preserve and protect its relationships with its employees, officers, advertisers, suppliers, customers, creditors and others having business relationships with it. In addition, from the date hereof to the Closing, Seller shall not do any of the following without the prior written consent of Purchaser, such consent not to be unreasonably withheld or unreasonably delayed: (i) fail to continue to conduct the Business of Seller in conformity with the representations and warranties set forth in Section 3.31; 25 (ii) amend its certificate of incorporation or by-laws; (iii) incur any liabilities, obligations or indebtedness for borrowed money or guarantee any such liabilities, obligations or indebtedness, or increase (other than increases resulting from the calculation of reserves in the Ordinary Course of Business), or experience any change in any assumptions underlying or methods of calculating, any bad debt, contingency or other reserves; (iv) permit, allow or suffer any of its assets, including, without limitation, the Purchased Assets, to be subjected to any mortgage, pledge, Lien, encumbrance, restriction or charge of any kind which is not disclosed in this Agreement; (v) pay, discharge or satisfy any claims, encumbrances, liabilities or obligations (whether absolute, accrued, contingent or otherwise and whether due or to become due) other than the payment when due in the Ordinary Course of Business of liabilities and obligations reflected or reserved against in the Most Recent Balance Sheet or incurred in the Ordinary Course of Business since the date thereof; (vi) pay, lend or advance any amount to, or sell, transfer or lease any of the Purchased Assets to, or enter into any agreement or arrangement with, any of the officers, directors or equity owners of Seller or any of its Affiliates; (vii) acquire or agree to acquire by merging or consolidating with, or by purchasing a substantial portion of the assets of, or by any other manner, any business or any corporation, partnership, association or other business organization or division thereof or otherwise acquire or agree to acquire any assets (other than Inventory or other assets acquired in the Ordinary Course of Business); (viii) enter into any Contract, except for Contracts entered into in the Ordinary Course of Business and individually in an amount not in excess of $10,000.00 (other than any confidentiality, non-disclosure, non-competition or similar Contract); provided, however, that Seller shall have the right to enter into Contracts in the Ordinary Course of Business and individually in an amount in excess of $10,000.00 (other than any confidentiality, non-disclosure, non-competition or similar Contract) only if Purchaser does not object to Seller's entering into such Contracts within three Business Days following Purchaser's receipt from Seller of the written notification of Seller's intention to enter into such Contracts; (ix) make, or commit to make, any capital expenditures other than those set forth on Exhibit C hereto and not in excess of the amounts set forth on such Exhibit; (x) fail to pay any account payable when due in accordance with its terms unless contested by Seller in good faith; (xi) make any other material change in the Business or the operation of Seller; or 26 (xii) agree, whether in writing or otherwise, to do any of the foregoing. (b) From the date hereof to the Closing, Seller shall not enter into any licensing or similar arrangement with respect to or affecting the Business or the Purchased Assets. (c) From the date hereof to the Closing, subject to the terms and conditions of this Agreement, Seller shall use its reasonable efforts (i) to preserve the Purchased Assets and the Business intact, (ii) to keep available to Purchaser the services of the employees of the Business, and (iii) to preserve the goodwill of customers and others having business relations with Seller to the extent such business relations relate to the Purchased Assets. 5.2 Right of Inspection; Access to Books and Personnel. Seller shall and shall cause each of Seller's officers, directors, employees, auditors and agents to afford to Purchaser and Purchaser's officers, directors, employees, auditors, agents and lenders the right at any time prior to the Closing, on reasonable notice during normal business hours, access to Seller's employees, auditors, agents, facilities, books and records as Purchaser reasonably shall deem necessary or desirable and subject to such reasonable restrictions as Seller may request to maintain the confidentiality of this Agreement and the transactions contemplated hereby and shall furnish such financial and operating data and other information with respect to Seller as Purchaser may reasonably require. Except as otherwise set forth herein, no such access, examination or review shall in any way affect, diminish or terminate any of the representations, warranties or covenants of Seller set forth herein. 5.3 Notification of Material Events. (a) Seller shall promptly notify Purchaser in writing of any event following the date hereof of which Seller is or becomes aware that will or may reasonably be expected to have a material effect, including but not limited to a material adverse effect, on the condition (financial or otherwise), rights, properties, assets or prospects of Seller or the Business or the performance by Seller of its obligations under this Agreement. (b) Each of the parties to this Agreement shall promptly notify the other party to this Agreement of (a) the occurrence or non-occurrence of any fact or event (regardless of the time of the occurrence or non-occurrence of such fact or event) which would be reasonably likely (i) to cause any representation or warranty contained in this Agreement to be untrue or inaccurate in any material respect at any time from the date hereof to the Closing Date or (ii) to cause any material covenant, condition or agreement hereunder not to be complied with or satisfied in all material respects and (b) any failure of any party to this Agreement to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by it hereunder in any material respect. 5.4 Supplemental Disclosures. Seller shall have the continuing obligation to supplement promptly and amend the Schedules as necessary or appropriate with respect to any matter hereafter arising or discovered which, if existing or known at the date of this Agreement, would have been required to be set forth or described in the Schedules; provided, however, that for the purpose of the rights and obligations of the parties hereunder, any such supplemental or 27 amended disclosure shall not, except as Purchaser may otherwise agree in writing, be deemed to have cured any breach of any representation or warranty made in this Agreement. Notwithstanding the foregoing, if Purchaser elects to proceed with the Closing, Purchaser shall be deemed to have waived the right thereafter to assert any claim pursuant to Article X hereunder with respect to any matter specifically and accurately disclosed by Seller in such supplemental or amended disclosure. 5.5 Exclusivity. Until the earlier to occur of (i) the termination of this Agreement in accordance with Article XI or (ii) the Closing, (a) Seller shall not, and shall not permit or authorize, as the case may be, any of Seller's Affiliates, directors, officers, employees, agents or advisors to, initiate, pursue or encourage (by way of furnishing information or otherwise) any inquiries or proposals, or enter into any discussions, negotiations or agreements (whether preliminary or definitive) with any Person, contemplating or providing for any merger, acquisition, purchase or sale of stock or all or substantially all of the assets or any business combination or change in control of Seller or the Business, and (b) Seller shall deal exclusively with Purchaser with respect to the sale of the Purchased Assets or the Business or assets and properties of Seller. 5.6 Publicity. Seller and Purchaser agree that no public release or announcement concerning the transactions contemplated hereby shall be issued by either party without the prior consent (which consent shall not be unreasonably withheld) of the other party, except as such release or announcement may be required by Law or the rules or regulations of any Authority, in which case the party required to make the release or announcement shall allow the other party reasonable time to comment on such release or announcement in advance of such issuance. 5.7 Preparation of Pre-Closing Estimated Purchase Price Certificate. At least two (2) Business Days prior to the Closing, Seller shall furnish to Purchaser a certificate setting forth Seller's estimated calculation of the Final Purchase Price (the "Estimated Purchase Price Certificate"), such calculations to include an itemization of the components of the Acquired Working Capital and Unbilled Reimbursable Expenses as of the Closing Date and a list of those Contracts entered into since the date hereof and which Seller requests Purchaser to assume in each case to be satisfactory to Purchaser. 5.8 Power of Attorney; Right of Endorsement, Etc. Effective as of the Closing, Seller hereby constitutes and appoints Purchaser and its successors and assigns the true and lawful attorney of Seller with full power of substitution, in the name of Purchaser or the name of Seller, on behalf of and for the benefit of Purchaser, (a) to collect all Purchased Assets, (b) to endorse, without recourse, checks, notes and other instruments attributable to the Purchased Assets, (c) to defend and compromise all actions, suits or proceedings with respect to any of the Purchased Assets (subject to Section 10.7) and (d) to do all such reasonable acts and things with respect to the Purchased Assets as Purchaser may deem advisable. Seller agrees that the foregoing powers are coupled with an interest and shall be irrevocable by Seller directly or indirectly by the dissolution of Seller or in any other manner. Purchaser shall retain for its own account any amounts lawfully collected pursuant to the foregoing powers and Seller shall promptly pay to Purchaser any amounts received by Seller after the Closing with respect to the Purchased Assets. 28 5.9 Covenants Not to Compete, Solicit or Disparage. (a) For the period of three years after the Closing Date (the "Time Covenant"), Seller covenants that neither it, FEI Enterprises, Ltd. nor FEI Shares, Inc. (collectively, for purposes of this Section 5.9 only, "Seller Parties") shall, either individually or as a partner, joint venturer, consultant, shareholder, member or representative of another Person or otherwise, directly or indirectly, participate in, engage in, or have a financial or management interest in, or assist any other Person in any business operation or any enterprise if such business operation or enterprise engages, or would engage, in the Business anywhere in the world, provided, however, that the foregoing shall not prohibit a Seller Party from owning up to five percent (5%) of a publicly traded company. (b) During the Time Covenant, each of Seller Parties shall not, directly or indirectly, whether for its own account or for the account of any Person (other than Purchaser) that is in competition with Purchaser (A) solicit, recruit, hire, engage in any activity that would cause any Person who is as of the Closing Date, or was during the 12 months prior to the Closing Date, employed by Seller to violate any agreement with Purchaser, endeavor to entice away any such Person from Purchaser, interfere with the relationship of Purchaser with such Person or induce any such Person to reject any employment offer by Purchaser or (B) solicit, entice or induce any Person who is, or was a Customer or Supplier to (i) become a Customer or Supplier of any other Person engaged in any business activity that competes with the Business, (ii) cease doing business with Purchaser or (iii) otherwise interfere with the relationship of Purchaser with any such person, team, Customer or Supplier. For purposes of this Section 5.9, a "Customer" means any Person which has been during the 12-month period prior to the Closing Date a customer, distributor or agent of Seller or shall have been contacted by Seller in the six-month period prior to the Closing for the purpose of soliciting it to become a customer, distributor or agent of Seller; and a "Supplier" means any Person which has been during the 12-month period prior to the Closing Date a supplier, vendor, manufacturer or developer of Seller for any product or service or significant component used in any product or service. Seller covenants that it will not, directly or indirectly, in any capacity whatsoever, make any statement, written or oral, or perform any other act or omission that is intended to be materially detrimental to the goodwill of the business of Seller, except as compelled by judicial or administrative process. (c) If, during the Time Covenant, Seller Parties subject to the aforementioned restrictions are not in compliance with such restrictions, then Purchaser shall be entitled, among other remedies, to compliance by the breaching Seller Party with the terms of such provisions for an additional number of days that equals the number of days during which such noncompliance occurred. (d) The parties hereby agree that all restrictions and agreements contained in this Section 5.9, including, without limitation, those relating to the Time Covenant, are necessary and fundamental to the protection of the Business and any objections or reservations to such restrictions or agreements are hereby waived. Seller Parties hereby agree that the remedy at law for any breach of this Agreement will be inadequate, and that the damages flowing from such breach are not readily susceptible to being measured in monetary terms. Accordingly, the parties agree that upon any Seller Party's breach of this Section 5.9, Purchaser shall be entitled to 29 immediate injunctive relief and may obtain a temporary order restraining any threatened further breach. Nothing in this Agreement shall be deemed to limit Purchaser's remedies at law or in equity for any breach by any Seller Party of any of the provisions of this Agreement that may be pursued by or made available to Purchaser. (e) Each of the foregoing agreements and covenants is in addition to any other similar agreement and covenant contained in any other document entered into in connection herewith and is not intended in any way, form or fashion to limit the applicability of such other agreement or covenant. 5.10 Post-Closing Confidentiality. From and after the Closing, Seller will, and will cause each of its Affiliates which it controls to, hold in strict confidence and not use to the detriment of Purchaser or any of its Affiliates, all information with respect to the Business and the Purchased Assets. Without limiting the generality of the foregoing, Seller agrees, covenants and acknowledges that, from and after the Closing Date, Seller will not, and will cause its Affiliates which it controls not to, disclose, give, sell, use, or otherwise divulge any confidential or secret information (including but not limited to any technology, process, trade secrets, know-how, other intellectual property rights, strategies, financial statements or other financial information not otherwise publicly available, forecasts, operations, business plans, prices, discounts, products, product specifications, designs, plans, data or ideas). Notwithstanding the foregoing, Seller may disclose such information (i) if compelled to disclose the same by judicial or administrative process or by other requirements of applicable Law or of any national securities exchange (but subject to the following provisions of this Section 5.10), (ii) if the same currently is, or hereafter is, in the public domain through no fault of Seller, or (iii) if the same is later acquired by Seller from another source and Seller is not aware that such source is under an obligation to another Person to keep such information confidential. If Seller or any of its Affiliates (the "Disclosing Party") is requested or required (by oral questions, interrogatories, requests for information or documents in legal proceedings, subpoena, civil investigative demand or other similar process) to disclose any such information, the Disclosing Party shall provide Purchaser with prompt written notice of any such request or requirement so that Purchaser may seek, at its expense, a protective order or other appropriate remedy and/or waive compliance with the provisions of this Section 5.10. If, in the absence of a protective order or other remedy or the receipt of a waiver by Purchaser, the Disclosing Party nonetheless, based on the advice of counsel, is required to disclose such information to any tribunal, the Disclosing Party, without liability hereunder, may disclose that portion of such information which such counsel advises the Disclosing Party it is legally required to disclose. 5.11 Performance of Contracts. With respect to each Contract, Seller shall duly perform and comply with all covenants, agreements and conditions required thereby to be performed or complied with by it prior to or on the Closing Date. 5.12 Employees. Upon the Closing, Seller shall terminate the employment of each employee who is listed on Schedule 5.12 hereto (the "Employees"). The Purchaser shall offer employment to all the Employees on such terms as Purchaser, in its sole discretion, shall determine; provided, however, that Purchaser shall provide all such Employees who accept such employment with group health insurance immediately upon such employment. 30 5.13 Allocation for Tax Purposes. The parties shall cooperate in good faith to agree on the allocation of the Purchase Price prior to the Closing and, subsequent to the Closing, shall file all federal, state and local tax returns consistent with such allocation. The parties shall complete and separately file Form 8594 with their federal income tax years for the tax year in which the Closing occurs in accordance with such allocation, and no party hereto shall have any liability to the other arising out of any challenge to such tax allocation by any federal or state taxing authority so long as the party does not take a position inconsistent with such allocation in any tax filing or administrative or judicial proceeding. 5.14 Mitsubishi Agreement. The parties shall use their reasonable best efforts to enter into an agreement with respect to the custody and confidentiality of the results of the feasibility study developed by Seller pursuant to the Mitsubishi-Tokyo Agreement. 5.15 Administrative Agreement. The parties shall use their reasonable best efforts to cooperate in order for Purchaser to enter into an agreement to obtain services similar to those provided pursuant to the Administrative Services Agreement. 5.16 Assumed Contracts. If after the date hereof and prior to the Closing Date, Purchaser determines that a Contract not listed on Schedule 2.2 (other than the Administrative Services Agreement, the Mitsubishi-Tokyo Agreement, the Population Council Agreement, Seller's insurance Contracts, Seller's Contracts relating to employee benefits and the Confidential Non Disclosure Agreement, dated as November 8, 1999, between Seloc France, on one part, and Seller and Interchem Corporation, on the other part) shall constitute an Assumed Contract, Purchaser shall have the right, in its sole and absolute discretion, to assume such Contract and to treat such Contract as an Assumed Contract without any adjustment of the Purchase Price or the Final Purchase Price. Seller shall use its reasonable best efforts to obtain any necessary consent for the assignment of such Contract to Purchaser. 5.17 The Population Council Agreement. Seller shall use its reasonable best efforts to terminate the Population Council Agreement prior to the Closing. The parties agree that, if Seller determines in its reasonable judgment that monetary compensation to Population will be required in order to obtain Population's agreement to terminate of the Population Council Agreement, Seller shall be authorized and required to offer Population an amount up to $1,000,000 to compensate Population for its agreement to terminate the Population Council Agreement. In addition, if Seller determines in its reasonable judgment that it is necessary in order to obtain Population's agreement to terminate of the Population Council Agreement, Seller shall be authorized to offer Population in consideration of the termination of the Population Council Agreement a non-exclusive royalty-free license to Seller's intellectual property rights in the technology to be acquired by Purchaser under this Agreement, such license to be explicitly limited to uses contemplated in Section 4.2 and Section 7.1 of the Population Council Agreement and further limited to territories outside Europe, North America and South America. Purchaser shall reimburse Seller for fifty (50%) percent of any amounts paid by Seller to Population in connection with the termination of the Population Council Agreement, up to a maximum reimbursement of $500,000. 31 ARTICLE VI CONDITIONS PRECEDENT TO PURCHASER'S OBLIGATIONS 6.1 Obligations to be Satisfied on or Prior to Closing Date. The obligation of Purchaser to purchase the Purchased Assets under this Agreement is subject to the satisfaction (or waiver by Purchaser), on or prior to the Closing Date, of the following conditions: (a) Accuracy of Representations and Warranties. Each of the representations and warranties made by Seller in this Agreement that is qualified as to materiality shall be true, correct and complete in all respects and those that are not so qualified shall be true, correct and complete in all material respects as of the date hereof and on the Closing Date as though made on such date. (b) Compliance with Agreement. Seller shall have performed or complied in all material respects with the covenants, agreements and obligations required by this Agreement to be performed or complied with by Seller on or prior to the Closing Date. (c) Investigation. Each of Purchaser and Purchaser's agents shall have been afforded access to Seller's books and records, officers, employees, agents, facilities and personnel, as provided in Section 5.2. (d) Consents. All consents, approvals, orders, authorizations, registrations, declarations, agreements and filings of any Person and Authorities set forth on Schedule 6.1(d) shall have been obtained or made by Seller in a form reasonably satisfactory to Purchaser and delivered to Purchaser and shall be in full force and effect as of the Closing Date, and no such authorizations, agreements and consents shall impose any burdensome or, in Purchaser's reasonable determination, unsatisfactory conditions or requirements on Purchaser. (e) No Adverse Proceedings. No Law shall have been enacted or promulgated, and no investigation, action, suit or proceeding shall have been threatened or instituted against Seller or Purchaser as of the Closing Date, which, in any such case, in the reasonable judgment of Purchaser, challenges, or might result in a challenge to, the consummation of the transactions contemplated hereby, or which claims, or might give rise to a claim for, damages against Purchaser as a result of the consummation of such transactions. (f) No Material Adverse Change. There shall have occurred no material adverse change in or with respect to the condition (financial or otherwise), business, rights, prospects, properties or assets or supplier, customer or employee relationships of Seller or the Business since the Most Recent Balance Sheet Date. (g) Schedules. All amendments or supplements to the Schedules made by Seller pursuant to Section 5.4 shall be reasonably acceptable to Purchaser. (h) Closing Documents. Seller shall have delivered all reports, agreements, certificates, instruments, opinions and other documents required to be delivered by Seller on the Closing Date pursuant to Section 8.3, and the form and substance of all such reports, agreements, 32 certificates, instruments, opinions and other documents shall be reasonably satisfactory to Purchaser. (i) UCC, Tax Lien and Judgment Search Results. Purchaser shall have obtained, at Seller's sole cost and expense, a report, in form and substance satisfactory to Purchaser, as to the results of an examination of financing statements filed under the Uniform Commercial Code, and tax lien and judgment records, in each office in each such jurisdiction as Purchaser shall require, and such report shall indicate no material security interests, tax liens, judgments or other Liens not previously disclosed in writing to Purchaser. (j) Environmental Matters. Purchaser shall have completed such environmental audits and investigations, at Purchaser's sole cost and expense, as Purchaser may require with respect to the properties and operations of Seller, and such audits and investigations shall not have uncovered any condition or conditions which could have a material adverse effect on the Business or properties of Seller. (k) Non-Competition. Each Person listed in Schedule 6.1(k) shall have executed and delivered to Purchaser a non-competition and non-solicitation agreement in the form of Exhibit D (the "Non-Competition Agreement"). (l) Employment Agreement. Mr. Lance J. Bronnenkant shall have executed and delivered to Purchaser an employment agreement with Purchaser on terms and conditions substantially similar to those terms and conditions set forth in that certain offer letter of Purchaser to Mr. Lance J. Bronnenkant dated as of March 13, 2002 (the "Employment Agreement"). (m) Additional Insurance. Seller shall have acquired and delivered to Purchaser a five year "tail" insurance policy with a minimum acceptable limit of liability equal to $5,000,000 (the "Tail Insurance"). (n) Termination of Certain Agreements. Seller shall have delivered to Purchaser evidence reasonably satisfactory to Purchaser of the termination of the Population Council Agreement and the Galen Agreement. (o) Intellectual Property. Seller shall have delivered to Purchaser evidence reasonably satisfactory to Purchaser of the assignment to Purchaser of certain intellectual property rights of Seller. 6.2 Procedure for Failure to Satisfy Conditions. In the event that any of the conditions precedent set forth above in Section 6.1 have not been satisfied, Purchaser shall notify Seller in writing indicating its election to (a) waive such condition precedent, (b) terminate this Agreement pursuant to Section 11.1, or (c) close the transactions contemplated by this Agreement, reserving its rights and remedies, without waiving such conditions precedent. In lieu of the foregoing, Purchaser and Seller may agree to consummate the transactions contemplated by this Agreement on such additional terms as are agreed to by Purchaser and Seller in writing. If, despite Seller's commercially reasonable best efforts, a third party that is not an Affiliate of Seller (the "Nonconsenting Third Party") refuses to grant any consent necessary for Purchaser to 33 assume Seller's rights and obligations under a Contract listed on Schedule 6.2 hereof, Seller shall promptly notify Purchaser of its inability to obtain such consent and shall designate Purchaser as its agent for purposes of obtaining such consent. Purchaser shall reimburse Seller for any consideration that Purchaser, in its capacity as Seller's agent, obligates Seller to pay the Nonconsenting Third Party to obtain such consent. If Purchaser elects to close the transactions contemplated under this Agreement in the absence of such consent, then Purchaser shall indemnify Seller for any liability of Seller to the Nonconsenting Third Party under that Contract that arises after the Closing Date or is attributable to the period following the Closing Date or from Purchaser's decision to close in the absence of such consent. ARTICLE VII CONDITIONS PRECEDENT TO SELLER'S OBLIGATIONS 7.1 Obligations to Be Satisfied on or Prior to Closing Date. The obligations of Seller to sell the Purchased Assets under this Agreement are subject to the satisfaction (or waiver by Seller), on or prior to the Closing Date, of the following conditions: (a) Accuracy of Representations and Warranties. Each of the representations and warranties made by Purchaser in this Agreement that is qualified as to materiality shall be true, correct and complete in all respects and those that are not so qualified shall be true, correct and complete in all material respects as of the date hereof and on the Closing Date as though made on such date. (b) Compliance with Agreement. Purchaser shall have performed or complied in all material respects with the covenants, agreements and obligations required by this Agreement to be performed or complied with by it on or prior to the Closing Date. (c) No Adverse Proceedings. No Law shall have been enacted or promulgated, and no investigation, action, suit or proceeding shall have been threatened or instituted against Seller or Purchaser as of the Closing Date, which, in any such case, in the reasonable judgment of Seller, challenges, or might result in a challenge to, the consummation of the transactions contemplated hereby, or which claims, or might give rise to a claim for, damages against Seller as a result of the consummation of such transactions. (d) Closing Documents. Purchaser shall have delivered all reports, agreements, certificates, instruments, opinions and other documents required to be delivered by it on the Closing Date pursuant to Section 8.4, and the form and substance of all such certificates, instruments, opinions and other documents shall be reasonably satisfactory to Seller. (e) Termination of the Population Council Agreement. Seller shall have obtained the termination of the Population Council Agreement. 7.2 Procedure for Failure to Satisfy Conditions. In the event that any of the conditions precedent set forth above in Section 7.1 have not been satisfied, Seller shall notify Purchaser in writing indicating its election to (a) waive such condition precedent, (b) terminate this Agreement pursuant to Section 11.1 or (c) close the transactions contemplated by this 34 Agreement, reserving their rights and remedies, without waiving such condition precedent. In lieu of the foregoing, Purchaser and Seller may agree to consummate the transactions contemplated by this Agreement on such additional terms as are agreed to by Purchaser and Seller in writing. ARTICLE VIII CLOSING 8.1 Time and Place. The Closing shall take place at 10:00 a.m. on the Closing Date at the offices of Winston & Strawn, 200 Park Avenue, New York, New York 10166 or at such other time and place as Seller and Purchaser may mutually agree. 8.2 Closing Transactions. All documents and other instruments required to be delivered at the Closing shall be regarded as having been delivered simultaneously, and no document or other instrument shall be regarded as having been delivered until all have been delivered. 8.3 Deliveries by Seller to Purchaser. At the Closing, Seller shall deliver or cause to be delivered to Purchaser (except insofar as the conditions related to such delivery have been waived by Purchaser): (a) all such certificates, assignments and other documents and instruments of sale, assignment, conveyance and transfer, as Purchaser or its counsel may reasonably deem necessary or desirable to effect the transfer of the Purchased Assets to Purchaser; (b) the certificate of incorporation of Seller, as amended, certified as of a date not earlier than twenty (20) days prior to the Closing Date by the Secretary of State of the State of Delaware; (c) a certificate of the Secretary or an Assistant Secretary of Seller certifying to: (i) the by-laws, as amended, of Seller; (ii) resolutions of the board of directors of Seller authorizing and approving the execution, delivery and performance by Seller of this Agreement and any agreements, instruments, certificates or other documents executed by Seller pursuant to this Agreement; and (iii) incumbency and signatures of the officers of Seller; (d) certificates of good standing, dated as of a recent date, for Seller from any state where Seller is required to be qualified to do business and bring down certificates of good standing in each of such jurisdictions dated the Closing Date; (e) a certificate executed by Seller dated as of the Closing Date, certifying that all representations and warranties of Seller herein contained that are qualified as to materiality were true, correct and complete in all respects when made and are true, correct and complete in all respects as of the Closing Date as if made thereon (and to the extent that any representation or warranty herein contained refers to "the date hereof," such date shall be deemed to be the Closing Date) and those not so qualified were true, correct and complete in all material respects when made and are true, correct and complete in all material respects as of the 35 Closing Date as if made thereon (and to the extent that any representation or warranty herein contained refers to "the date hereof," such date shall be deemed to be the Closing Date), and that Seller has performed or complied in all material respects with all of the covenants and obligations required by this Agreement to be performed or complied with by Seller on or prior to the Closing Date; (f) an executed original of each consent required to be obtained pursuant to Section 6.1(d); (g) all amendments or supplements to the schedules made by Seller pursuant to Section 5.4; (h) the Non-Competition Agreements; (i) the Employment Agreement; (j) the Tail Insurance; (k) a certificate executed by the Chief Executive Officer of Seller certifying that Seller has not received, or, if received, the amount of, the Milestone Payments; (l) an instrument or document evidencing the termination of the Population Council Agreement; and (m) such other instruments and documents as are required by any other provisions of this Agreement to be delivered on the Closing Date by Seller to Purchaser. The foregoing shall not be construed to require Seller to use other than commercially reasonable best efforts to deliver or cause to be delivered the documents and instruments set forth in Section 8.3(f), Section 8.3(h), Section 8.3(i), Section 8.3(j) and Section 8.3(l); provided, however, that notwithstanding the foregoing, the obligations of Purchaser to purchase the Purchased Assets is subject to the delivery of each of the documents and instruments set forth in this Section 8.3. 8.4 Deliveries by Purchaser to Seller. At the Closing, Purchaser shall deliver or cause to be delivered to Seller (except insofar as the conditions related to such delivery have been waived by Seller): (a) the cash portion of the Purchase Price in accordance with Section 1.2(a); (b) a certificate executed by an officer of Purchaser, dated as of the Closing Date, certifying that all representations and warranties of Purchaser herein contained that are qualified as to materiality were true, correct and complete in all respects when made and are true, correct and complete in all respects as of the Closing Date as if made thereon and those not so qualified were true, correct and complete in all material respects when made and are true, correct and complete in all material respect as of the Closing Date as if made thereon, and that Purchaser has performed or complied in all material respects with all of the covenants and obligations 36 required by this Agreement to be performed or complied with by Purchaser on or prior to the Closing Date; (c) the Non-Competition Agreements; (d) the Employment Agreement; and (e) such other instruments and documents as are required by any other provisions of this Agreement to be delivered on the Closing Date by Purchaser to Seller. The foregoing shall not be construed to require Purchaser to use other than commercially reasonable best efforts to deliver or cause to be delivered the documents and instruments set forth in Section 8.4(c) and Section 8.4(d); provided, however, that notwithstanding the foregoing, the obligations of Seller to sell the Purchased Assets are subject to the delivery of each of the documents and instruments set forth in this Section 8.4. 8.5 Determination of Final Purchase Price. (a) Within 75 days after the Closing Date, Purchaser shall deliver to Seller a certificate (the "Final Purchase Price Certificate"), executed by Purchaser setting forth the calculation of the Final Purchase Price, including Acquired Working Capital and the Unbilled Reimbursable Expenses. (b) If Seller delivers written notice (the "Disputed Items Notice") to Purchaser within 15 days after receipt by Seller of the Final Purchase Price Certificate, stating that Seller objects to any items on the Final Purchase Price Certificate, specifying the basis for such objection and setting forth Seller's proposed modification to the Final Purchase Price, Seller and Purchaser shall attempt to resolve and finally determine and agree upon the Final Purchase Price as promptly as practicable. (c) If Seller and Purchaser are unable to agree upon the Final Purchase Price within 15 days after delivery of the Disputed Items Notice, Seller and Purchaser will select an independent accounting firm to resolve the disputed items and make a determination of the Final Purchase Price. Such determination will be made within 30 days after such selection and will be binding upon the parties. The fees, costs and expenses of the accounting firm so selected will be borne by the party whose positions generally did not prevail in such determination, or if the accounting firm determines that neither party could be fairly found to be the prevailing party, then such fees, costs and expenses will be borne 50% by Seller and 50% by Purchaser. (d) If Seller does not deliver the Disputed Items Notice to Purchaser within 15 days after receipt by Seller of the Final Purchase Price Certificate, the Final Purchase Price specified in the Final Purchase Price Certificate will be conclusively presumed to be true and correct in all respects and will be binding upon the parties. (e) At such time as the Final Purchase Price is finally determined, either (i) Purchaser shall pay Seller in cash, an aggregate amount equal to the Final Purchase Price less the amount paid at Closing under Section 1.2(a) or (ii) Seller shall pay Purchaser in cash an 37 aggregate amount equal to the excess of the amount paid at Closing under Section 1.2(a) over the Final Purchase Price. ARTICLE IX OTHER AGREEMENTS 9.1 Further Assurances. At any time and from time to time from and after the Closing, Seller and Purchaser shall, at the request of the other, execute, acknowledge and deliver, or cause to be executed, acknowledged and delivered, such instruments and other documents and perform or cause to be performed such acts and provide such information, as may reasonably be required to evidence or effectuate the sale, conveyance, transfer, assignment and delivery to Purchaser of the Purchased Assets or for the performance by Seller or Purchaser of any of their other respective obligations under this Agreement. 9.2 Access to Records After Closing. From and after the Closing Date, each party hereto and its representatives shall have reasonable access to inspect and copy all books and records relating to Seller or the Business that the other parties hereto or their respective Affiliates may retain after the Closing Date. Such access shall be afforded by the party maintaining such records upon receipt of reasonable advance notice and during normal business hours. Nothing contained in this Section 9.2 shall require Purchaser or Seller to retain any books or records longer than such books or records would otherwise have been retained in the Ordinary Course of Business but for the transactions contemplated by this Agreement; provided, however, that if the party maintaining such records shall desire to dispose of any of such books and records, such party shall, prior to such disposition, give the other party hereto a reasonable opportunity, at such other party's expense, to segregate and remove such books and records as such other party may select. 9.3 Collection of Receivables. From and after the Closing, Purchaser shall have the right and authority to collect for its own account all Accounts Receivable and other items that are included in the Purchased Assets and to endorse with the name of Seller, as applicable, any checks or drafts received with respect to any such Accounts Receivable or other items and Seller agrees promptly to deliver to Purchaser any cash or other property received directly or indirectly by it with respect to such Account Receivables and other items, including any amounts payable as interest. If any Accounts Receivable included in the Purchased Assets shall not have been collected by Purchaser within 120 days after the Closing Date, Purchaser shall have the option so to advise Seller and to assign any or all such Accounts Receivable to Seller without recourse. Promptly after any such assignment, Seller shall pay to Purchaser an amount equal to the aggregate uncollected amount of such assigned Accounts Receivable by wire transfer to an account to be specified by Purchaser. From and after the Closing, Purchaser agrees that if it receives any payments with respect to any Billed Reimbursable Expenses, Purchaser shall promptly, and in any event within fourteen (14) days after receipt thereof by Purchaser, remit such amounts to Seller. From and after the Closing, Seller agrees that if it receives any payments with respect to any Unbilled Reimbursable Expenses, Seller shall promptly, and in any case within fourteen (14) days after receipt thereof by Seller, remit such amounts to Purchaser. 38 9.4 Third Party Consents. To the extent that Seller's rights under any Assumed Contract may not be assigned without the consent of another Person which has not been obtained as of the Closing Date, this Agreement shall not constitute an agreement to assign the same if an attempted assignment would constitute a breach thereof or be unlawful. If any such consent shall not be obtained or if any attempted assignment would be ineffective or would impair Purchaser's rights under the Purchased Assets such that Purchaser would not in effect acquire the benefit of all such rights, then, Seller, to the maximum extent permitted by law and the Purchased Assets, shall act after the Closing Date as Purchaser's agent in order to obtain for it the benefits thereunder and shall cooperate with Purchaser in any other arrangement designated to provide such benefits to Purchaser. 9.5 Milestone Payments. From and after the Closing, Purchaser shall have the right and authority to collect for its own account all Milestone Payments and to endorse with the name of Seller any checks or drafts received with respect to any such Milestone Payments, and Seller agrees promptly, but not later than fourteen (14) days after receipt thereof by Seller, to notify Purchaser of such Milestone Payments and to remit to Purchaser any cash or other property received directly or indirectly by Seller with respect to such Milestone Payments, including any amounts payable as interest. ARTICLE X INDEMNIFICATION 10.1 Survival of Representations, Warranties and Indemnity. The representations and warranties of the parties hereto contained in Articles III and IV and the indemnification obligations contained in this Article X shall survive the Closing and expire two years following the Closing Date; provided, however, that Purchaser's indemnification obligations pursuant to Section 10.4(a)(ii) and Section 10.4(b) shall not expire and shall survive the Closing indefinitely; and provided, further, that any claims which involve fraud or intentional misrepresentation shall survive the Closing indefinitely; and provided, further, that if at the stated expiration of any indemnification obligation there shall be pending any indemnification claim by a Person pursuant to which notice has been given pursuant to Section 10.7, such Person shall continue to have the right to seek such indemnification with respect to such claim notwithstanding such expiration. 10.2 Indemnification by Seller. Seller shall indemnify, defend and hold harmless Purchaser, its members, officers, directors, employees and agents after the Closing Date from and against any loss, liability, obligation, Lien, damage, cost and expense (including reasonable legal and accounting fees incurred in defending or prosecuting any claim for any such liability, loss or damage) ("Purchaser Losses") arising out of or resulting from: (a) the untruth or inaccuracy as of the date hereof or on the Closing Date of any representation or warranty of Seller contained in this Agreement or the Schedules hereto (or in any document, writing, or certificate delivered by Seller under Article VIII of this Agreement); 39 (b) any Excluded Liability; (c) whether or not disclosed by Seller in this Agreement or on Schedule 3.22, any obligation or liability of Seller related to any actual or alleged violation or liability arising under any Environmental Laws, including, without limitation, any Release or threatened Release of Hazardous Substances occurring prior to, or if as a result of Seller's activities, present, or if, not as a result of Seller's activities, to the extent present on, the Closing Date, and any Environmental Claims arising out of events or circumstances occurring prior to or continuing on the Closing Date; (d) any obligation or liability arising from claims, proceedings or causes of action arising from product warranty or product liability claims with respect to products, materials or services produced, invoiced, sold, performed or shipped by Seller on or prior to the Closing Date; (e) any action, suit or proceeding pending on the Closing Date, notwithstanding disclosure thereof in this Agreement or on the Most Recent Balance Sheet or any subsequent claim, action, suit or proceeding arising out of or relating to such pending matters; (f) the failure by Seller to perform any of its covenants or obligations hereunder; or (g) the failure of Schering to fully reimburse Purchaser for any Unbilled Reimbursable Expenses. 10.3 Limits on Indemnification by Seller. The amount of liability of Seller for the Purchaser Losses shall be subject to the following limitations: (a) Indemnity Basket. Except as otherwise provided in Section 10.3(c), Seller shall have no liability under Section 10.2(a), (c), (d) or (e) until the aggregate amount of all Purchaser Losses for which Seller would, but for this Section 10.3(a), be liable exceeds $250,000 (the "Indemnity Basket"), in which event Seller shall, subject to Section 10.3(b), be liable for the total amount of all Purchaser Losses to the extent such Purchaser Losses exceed $250,000. (b) Limit of Liability. Except as provided in Section 10.3(c), the aggregate liability of Seller under Section 10.2 (after giving effect to the application of Section 10.3(a)), shall not exceed the amount of the Escrow Account (the "Indemnity Cap"). (c) The Indemnity Basket shall not be applicable to Purchaser Losses (i) arising or resulting from the untruth or inaccuracy of the representations made in Sections 3.1 3.2, 3.22 or 3.24, (ii) arising or relating to any breach or violation of any agreement or covenant contained in this Agreement or other documents contemplated hereby, or (iii) arising or resulting from Seller's violation of bulk sales laws. 10.4 Indemnification by Purchaser. (a) Purchaser shall indemnify, defend and hold harmless Seller, its directors, officers, employees and agents after the Closing Date from and 40 against any liability, obligation, loss, Lien, cost, damage and expense (including reasonable legal and accounting fees incurred in defending or prosecuting any claim for any such liability, loss or damage) arising out of or resulting from: (i) the untruth or inaccuracy as of the date hereof or on the Closing Date of any representation or warranty of Purchaser contained in this Agreement (or in any document, writing or certificate delivered by Purchaser under this Agreement), or the failure by Purchaser to perform any of its covenants or obligations hereunder; (ii) any liability of Seller assumed by Purchaser hereunder and/or pursuant to the Assumption Agreement; or (iii) the operation of Purchaser and conduct of Purchaser's business following the Closing, including, without limitation, any loss, liability, obligation, Lien, damage, cost or expense arising from products produced or processed by Purchaser after the Closing. (b) Purchaser shall indemnify, defend and hold harmless Seller Parties after the Closing Date from and against any liability, obligation, loss, Lien, cost, damage and expense (including reasonable legal fees incurred in defending or prosecuting any claim for any such liability, loss or damage) arising out of or resulting from the use or operation by Purchaser of the Purchased Assets from the Closing Date until October 25, 2005 which use or operation of the Purchased Assets directly causes any liability of the Seller Parties by reason of Seller's obligations described in Section 2 of that certain Non-Competition, Non-Solicitation and Non-Disclosure Agreement dated as of October 26, 2000 by and between Seller and FEI Acquisition Corp. 10.5 Specific Breaches. The breach of a specific representation, warranty, or agreement by Seller or Purchaser, as applicable, shall be determined independently of any other representation, warranty or agreement made by Seller or Purchaser, as applicable, whether or not, apart from such specific representation, warranty or agreement, the transactions provided for in this Agreement prove to be more favorable to Purchaser or Seller, as applicable, and whether or not the facts and circumstances covered by any one or more of the other representations, warranties or agreements made by Seller or Purchaser, as applicable, prove to be more favorable than so represented and warranted. 10.6 Cross-indemnification for Broker's, Consultant's or Finder's Fees. Subject to the provisions of Section 3.31 and Section 4.6, Purchaser and Seller each agree to indemnify and hold harmless the other from and against any and all losses, liabilities, obligations, Liens, damages, costs and expenses of any kind or character arising from any claims for broker's, consultant's or finder's fees or commissions or other similar fees in connection with the transactions covered by this Agreement, insofar as such claims shall be based upon alleged arrangements or agreements made by such party or on its behalf, which indemnity expressly shall survive any termination of this Agreement or any Closing hereunder. 41 10.7 Procedure for Indemnification. (a) If any Person shall claim indemnification (the "Indemnified Party") hereunder for any claim other than a third party claim, the Indemnified Party shall promptly give written notice to the other party from whom indemnification is sought (the "Indemnifying Party") of the nature of the claim in detail and amount of the claim. If an Indemnified Party shall claim indemnification hereunder arising from any claim or demand of a third party (a "Third-Party Claim"), the Indemnified Party shall promptly give written notice (a "Third-Party Notice") to the Indemnifying Party of the basis for such claim or demand, setting forth the nature of the claim or demand in detail and the amount of the claim. (b) In the event that an Indemnifying Party which receives notice of an indemnification claim contests its liability for such indemnification claim, such party shall send written notice to the Indemnified Party of its dispute of indemnification within 15 days thereof. If the parties are unable to resolve such dispute of indemnification within 60 days after the date of the notice of dispute, the Indemnified Party may bring an action against the Indemnifying Party to enforce such indemnification claim. (c) The Indemnifying Party shall have the right to compromise or, if appropriate, defend at its own cost and through counsel of its own choosing, any claim or demand giving rise to any such claim for indemnification. In the event the Indemnifying Party undertakes to compromise or defend any such claim or demand, it shall promptly (and in any event, no later than fifteen (15) days after receipt of a Third-Party Notice) notify the Indemnified Party in writing of its intention to do so. The Indemnified Party shall fully cooperate with the Indemnifying Party and its counsel in the defense or compromise of such claim or demand. After the assumption of the defense by the Indemnifying Party, the Indemnified Party shall not be liable for any legal or other expenses subsequently incurred by the Indemnifying Party, in connection with such defense (unless the Indemnifying Party disputes its liability for such indemnification claim and an arbitration pursuant to Section 12.12 determines that the Indemnifying Party is not liable to indemnify the Indemnified Party), but the Indemnified Party may participate in such defense at its own expense. No settlement of a Third-Party Claim defended by the Indemnifying Party shall be made without the written consent of the Indemnified Party, such consent not to be unreasonably withheld. The Indemnifying Party shall not, except with the written consent of the Indemnified Party, consent to the entry of a judgment or settlement of a Third-Party Claim which does not include as an unconditional term thereof, the giving by the claimant or plaintiff to the Indemnified Party of an unconditional release from all liability in respect of such Third-Party Claim. 10.8 Payment. Except for Third-Party Claims being defended in good faith by the Indemnifying Party in accordance with Section 10.7, the Indemnifying Party shall satisfy its obligations hereunder within fifteen (15) days after receipt of notice of a claim, unless the Indemnifying Party has contested its liability for indemnification pursuant to Section 10.7(b) in which case no payment shall be due from the Indemnifying Party unless its liability therefor is established by final nonappealable court order or judgment and fifteen (15) days have passed since the entry of such order or judgment. Any amount not paid to the Indemnified Party by such date shall bear interest at a rate equal to the prime as announced by Bank of America, N.A., 42 or, if Bank of America, N.A. ceases to exist, any other major New York bank reasonably selected by the Indemnified Party. 10.9 Limited Recourse against Seller and its shareholders. Any claims for indemnification or damages against Seller which arise after the Closing shall be satisfied solely from funds contained in the escrow provided for in Section 10.13; provided, however, there shall be no limitations and the Seller and its Affiliates shall remain liable for any claims involving fraud or willful misrepresentation. 10.10 Reduction for Insurance and Taxes. The amount of any payment to any Indemnified Party pursuant to this Article X shall be reduced by the amount of any insurance proceeds actually received by or on behalf of the Indemnified Party in reduction of the related indemnifiable loss. An Indemnified Party which subsequently receives insurance proceeds in respect of the related indemnifiable loss shall pay to the Indemnifying Party the amount of such actually received insurance proceeds. Where any tax benefit is available to the Indemnified Party with respect to an indemnifiable event, the amount of any payment with respect to such indemnifiable loss shall be reduced dollar for dollar by the amount of such tax benefit actually received. 10.11 Remedies Exclusive. The remedies provided in this Article X shall be the exclusive remedies of the parties hereto after the Closing in connection with any breach of a representation or warranty, non-performance, partial or total, of any covenant or agreement contained herein or any other matter relating to the transactions contemplated hereby. Purchaser agrees to pursue all claims for Purchaser Losses solely against Seller as provided in this Agreement. Nothing contained herein, however, shall preclude a party from seeking injunctive relief or specific performance, under circumstances where such relief might be appropriate, provided that the moving party shall not be entitled to ancillary relief in the nature of damages or fee awards unless specifically so provided for herein. 10.12 No Consequential Damages. The Indemnifying Party shall not be liable to the Indemnified Party for consequential, enhanced, punitive or special damages or the like unless such damages are included in a Third-Party Claim and the Indemnified Party is liable to the third party claimant for such damages. 10.13 Escrow. (a) As provided for in Section 1.2, on the Closing Date, the Purchaser shall pay the Escrow Amount to the Escrow Agent. The Escrow Agent shall retain, invest and disburse such funds pursuant to the escrow agreement attached as Exhibit E hereto (the "Escrow Agreement"). Any interest or earnings on such funds shall be for the account of Seller. (b) The Escrow Agreement shall provide that the funds retained pursuant thereto shall be applied, subject to the conditions provided for in Article X, to pay claims for Purchaser Losses that have not been contested as provided for in Section 10.7(b) ("Uncontested Claims") and claims for Purchaser Losses that have been resolved in favor of Purchaser (to the extent so resolved) pursuant to a final nonappealable court judgment or by agreement of Seller and Purchaser ("Resolved Claims") and to secure claims for the Purchaser Losses as to which 43 Purchaser shall have notified Seller (pursuant to Section 10.7(a)) and the Escrow Agent and which are neither Uncontested Claims nor Resolved Claims ("Pending Claims"). Upon the expiration of two (2) years following the Closing Date, Escrow Agent shall release to Seller an amount equal to all of the funds then held in the escrow account, less the aggregate amount of the then Pending Claims and shall continue thereafter to retain funds equal to the amount of the Pending Claims until directed otherwise by agreement of Purchaser and Seller or by court order. 10.14 Bulk Sales. Notwithstanding anything herein to the contrary, Seller will indemnify and hold harmless Purchaser and the other Purchaser Indemnities from and against any and all Losses resulting from or arising out of any noncompliance or alleged noncompliance by Purchaser or Seller with bulk sales laws. ARTICLE XI TERMINATION 11.1 Rights to Terminate. This Agreement may be terminated at any time prior to the Closing only as follows: (a) by mutual written consent of Seller and Purchaser; (b) by Seller if Purchaser is in material breach of any representation, warranty or covenant under this Agreement (and Seller is not then in material breach of any representation, warranty or covenant); (c) by Purchaser if Seller is in material breach of any representation, warranty or covenant under this Agreement (and Purchaser is not then in material breach of any representation, warranty or covenant); (d) by Seller or by Purchaser if, at or before the Closing Date, any condition set forth herein for the benefit of Seller or Purchaser, respectively, shall not have been timely met and cannot be met on or before the Closing Date and has not been waived; or (e) by Purchaser or Seller if the Closing shall not have occurred on or before June 30, 2002. Each party's right of termination hereunder is in addition to any of the rights it may have hereunder. 11.2 Effects of Termination. Notwithstanding any other provision of this Agreement, no termination of this Agreement shall release any party of any liabilities or obligations arising hereunder for any pre-termination breaches hereof or misrepresentations made herein. 44 ARTICLE XII MISCELLANEOUS PROVISIONS 12.1 Notices. All notices or other communications required or permitted by this Agreement shall be in writing and shall be deemed to have been duly received (a) if given by telecopier, when transmitted and the appropriate telephonic confirmation received if transmitted on a business day and during normal business hours of the recipient, and otherwise on the next Business Day following transmission, (b) if given by certified or registered mail, return receipt requested, postage prepaid, three Business Days after being deposited in the U.S. mails and (c) if given by courier or other means, when received or personally delivered, and, in any such case, addressed as follows: (i) if to Purchaser: Barr Laboratories, Inc. 2 Quaker Road P.O. Box 2900 Pomona, New York 10970-0519 Attention: General Counsel Telephone: (845) 362-1100 Facsimile: (845) 353-3476 and Winston & Strawn 200 Park Avenue New York, New York 10166 Attention: Robert Ericson Telephone: (212) 294-6730 Facsimile: (212) 294-4700 (ii) if to Seller: c/o FEI Enterprises, Ltd. 300 International Drive Suite 100 Williamsville, New York 14221 Attention: President Telephone: (716) 626-3660 Facsimile: (716) 626-3662 45 with a copy to: Phillips, Lytle, Hitchcock, Blaine & Huber LLP 3400 HSBC Center Buffalo, New York 14203 Attention: David C. Horan Telephone: (716) 847-8400 Facsimile: (716) 852-6100 or to such other addresses as may be specified by any such Persons to the other Persons, pursuant to notice given by such Person in accordance with the provisions of this Section 12.1. 12.2 Assignment. No party may assign or transfer any or all of its rights or obligations under this Agreement without the prior written approval of the other party; provided, however, that Purchaser may assign or transfer all (but not less than all) of its rights and obligations under this Agreement (a) to any Person that is wholly-owned, directly or indirectly, by Purchaser or is an Affiliate of Purchaser or (b) after the Closing, to any Person to whom Purchaser sells all or substantially all the Purchased Assets, provided further, that at any time Purchaser may collaterally assign its rights hereunder to any Person or Persons providing financing to Purchaser in connection with the transactions contemplated hereby. 12.3 Benefit of the Agreement. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns. Except as set forth in Article X with respect to indemnification of indemnified parties hereunder, nothing in this Agreement shall confer any rights upon any Person other than the parties hereto and their respective successors and assigns. 12.4 Exhibits and Schedules. The Exhibits and Schedules hereto shall be construed with and as an integral part of this Agreement to the same effect as if the contents thereof had been set forth verbatim herein. References in this Agreement and in the Schedules are made for convenient reference only, and all matters disclosed in any Schedule shall be deemed to be disclosed in each Schedule. 12.5 Headings. The headings used in this Agreement are for convenience of reference only and shall not be deemed to limit, characterize or in any way affect the interpretation of any provision of this Agreement. 12.6 Entire Agreement. This Agreement contains the entire agreement and understanding of the parties with respect to the subject matter hereof, and no other representations, promises, agreements or understandings regarding the subject matter hereof shall be of any force or effect unless in writing, executed by the party to be bound thereby and dated on or after the date hereof. 12.7 Modifications and Waivers. No change, modification or waiver of any provision of this Agreement shall be valid or binding unless it is in writing, dated subsequent to the date hereof and signed by Purchaser and Seller. No waiver of any breach, term or condition of this 46 Agreement by any party shall constitute a subsequent waiver of the same or any other breach, term or condition. 12.8 Counterparts. This Agreement may be executed in counterparts (including by facsimile transmission), each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 12.9 Severability. In case any one or more of the provisions contained herein for any reason shall be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision of this Agreement, but this Agreement shall be construed as if such invalid, illegal or unenforceable provision or provisions had never been contained herein. 12.10 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK (EXCLUSIVE OF THE CONFLICT OF LAW PROVISIONS THEREOF). 12.11 Expenses. Other than as specifically provided in this Agreement, each party hereto shall pay all of its own costs and expenses incurred or to be incurred in negotiating and preparing this Agreement and in closing and carrying out the transactions contemplated by this Agreement. 12.12 JURISDICTION; WAIVER OF JURY TRIAL; VENUE. (a) EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY AND UNCONDITIONALLY SUBMITS, FOR ITSELF AND ITS PROPERTY, TO THE NONEXCLUSIVE JURISDICTION OF ANY NEW YORK STATE COURT OR FEDERAL COURT OF THE UNITED STATES OF AMERICA SITTING IN NEW YORK COUNTY, NEW YORK, AND ANY APPELLATE COURT FROM ANY THEREOF, IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR FOR RECOGNITION OR ENFORCEMENT OF ANY JUDGMENT, AND EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY AND UNCONDITIONALLY AGREES THAT ALL CLAIMS IN RESPECT OF ANY SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCH NEW YORK STATE COURT OR, TO THE EXTENT PERMITTED BY LAW, IN SUCH FEDERAL COURT. EACH OF THE PARTIES HERETO AGREES THAT A FINAL JUDGMENT IN ANY SUCH ACTION OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON THE JUDGMENT OR IN ANY OTHER MANNER PROVIDED BY LAW. NOTHING IN THIS AGREEMENT SHALL AFFECT ANY RIGHT THAT ANY PARTY MAY OTHERWISE HAVE TO BRING ANY ACTION OR PROCEEDING RELATING TO THIS AGREEMENT IN THE COURTS OF ANY OTHER JURISDICTION. (b) EACH OF THE PARTIES HERETO IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR RELATING TO THIS AGREEMENT. 47 (c) EACH OF THE PARTIES HERETO IRREVOCABLY AND UNCONDITIONALLY WAIVES, TO THE FULLEST EXTENT IT MAY LEGALLY AND EFFECTIVELY DO SO, ANY OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT IN ANY NEW YORK STATE OR FEDERAL COURT SITTING IN NEW YORK COUNTY, NEW YORK. EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, THE DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF SUCH ACTION OR PROCEEDING IN ANY SUCH COURT. 12.13 Seller Acknowledgement. Seller acknowledges that the representations and warranties contained in this Agreement and in any document or instrument delivered to Purchaser pursuant hereto or in connection herewith shall not be deemed waived or otherwise affected by any investigation by Purchaser, its officers, directors, employees, counsel, accountants, advisors, representatives and agents. [SIGNATURE PAGE FOLLOWS] 48 IN WITNESS WHEREOF, the parties hereto have executed this Asset Purchase Agreement the date first written above. ENHANCE PHARMACEUTICALS, INC. By: ----------------------------------- Title: -------------------------------- BARR LABORATORIES, INC. By: ----------------------------------- Title: -------------------------------- EX-10.7 4 y63477exv10w7.txt AGREEMENT WITH BRUCE L. DOWNEY Exhibit 10.7 AMENDED AND RESTATED EMPLOYMENT AGREEMENT AGREEMENT dated as of the 16th day of August, 2002 between Barr Laboratories, Inc., a New York corporation having its principal executive offices at 300 Corporate Drive, Building #10, Bradley Corporate Park, Blauvelt, New York 10913 (the "Company"), and Bruce L. Downey (the "Employee"). WITNESSETH: WHEREAS, the Company and the Employee entered into an employment agreement dated as of January 4, 1993, the term of which has been extended annually pursuant to Section 2 of that agreement so that it is presently scheduled to expire on January 4, 2005 (the "Employment Agreement"); and WHEREAS, the Company and the Employee wish to amend and restate the Employment Agreement in its entirety; NOW, THEREFORE, the Company and the Employee hereby agree that, effective as of August 16, 2002, the Employment Agreement is amended and restated in its entirety to read as follows: 1. Employment. The Company agrees to employ the Employee, and the Employee agrees to remain in the employ of the Company, during the term of this Agreement and on the other terms and conditions hereafter set forth. 2. Term. The term of this Agreement shall commence on August 16, 2002 (the "Commencement Date") and shall terminate at the close of business on the third anniversary of the Commencement Date unless sooner terminated in accordance with the terms of this Agreement or extended as hereinafter provided. The term of this Agreement shall be extended, without further action by the Company or the Employee, on the second anniversary of the Commencement Date (the "Extension Effective Date") and on each subsequent anniversary of the Commencement Date (each also an "Extension Effective Date"), for successive periods of twelve months each, unless either party shall have given written notice to the other party, in the manner set forth in paragraph 13(e) or (f) below, prior to the Extension Effective Date in question, that the term of this Agreement that is in effect at the time such written notice is given is not to be extended or further extended, as the case may be. Examples that illustrate the intended operation of the preceding sentence appear in the Appendix to this Agreement. 3. Positions and Responsibilities; Place of Performance. (a) Throughout the term of this Agreement, the Employee agrees to remain in the employ of the Company, and the Company agrees to employ the Employee, as the Chief Executive Officer of the Company, reporting only to the Board of Directors of the Company (the "Board"). As the Chief Executive Officer of the Company, the Employee shall be the most senior officer of the Company and its subsidiaries, shall have effective supervision, control and policy-making authority over, and responsibility for, the strategic direction and general leadership and management of the business and affairs of the Company and its subsidiaries, subject only to the authority of the Board, and shall have all of the powers, authority, duties and responsibilities he has had prior to the Commencement Date and all of the powers, authority, duties and responsibilities usually incident to the position and role of Chief Executive Officer in public companies that are comparable in size, character and performance to the Company. All employees of the Company and its subsidiaries shall report, directly or indirectly, to the Employee. The Company agrees to use its best efforts to secure the Employee's election as a member and Chairman of the Board during the term of this Agreement, and the Employee agrees to serve as such without additional compensation beyond that provided in this Agreement. (b) In connection with his employment by the Company, the Employee shall be based at a location of his choosing in the greater Washington, D.C. metropolitan area or at any other Company location, as he may determine to be appropriate for the performance of his duties, and he agrees to travel, to the extent reasonably necessary to perform his duties and obligations under this Agreement, to Company facilities and other destinations elsewhere. (c) During the term of this Agreement, the Employee shall serve the Company on an exclusive basis and shall devote all his business time, attention, skill and efforts to the faithful performance of his duties hereunder; provided that the Employee may engage in community service and charitable activities and, with the approval of the Board, may serve as a member of the board of directors of other companies (and retain remuneration for such service) if such activities and service do not materially interfere with the performance of his duties and responsibilities hereunder. 4. Compensation. For all services rendered by the Employee in any capacity during the term of this Agreement, and for his undertakings with respect to confidential information, non-solicitation and disparaging remarks set forth in sections 6 and 7 below, the Employee shall be entitled to the following: (a) a salary, payable in installments not less frequent than monthly, at the annual rate of eight hundred and fifty thousand dollars ($850,000), with such increases in such rate, if any, as the Compensation Committee of the Board may approve from time to time during the term of this Agreement (the annual salary rate as increased from time to time during the term of this Agreement being hereafter referred to as the "Base Salary"); (b) participation in the Company's annual executive incentive or bonus plan as in effect from time to time, with the opportunity to receive an award in accordance with the terms and conditions of such plan, for each fiscal year of the Company that commences or terminates during the term of this Agreement, of up to 50% of the Base Salary earned during such year (or such higher percentage as the Board or a committee of the Board may allow from time to time during the term of this Agreement), it being understood that any award for the fiscal year of the Company in which the term page 2 of 19 of this Agreement terminates pursuant to the terms hereof shall be prorated based on the portion of such fiscal year that coincides with the term of this Agreement and shall be made at the same time as awards (if any) are made to other participants with respect to such fiscal year. The Employee recognizes and agrees that the Board may defer the payment of any portion of his annual bonus to the extent that, and for such period of time as, may be reasonably necessary to avoid a loss of the Company's tax deduction with respect to such portion of his annual bonus under section 162(m) of the Internal Revenue Code. Any such deferred amount shall be non-forfeitable, shall constitute an unfunded, unsecured obligation of the Company, and until paid shall be deemed invested in such hypothetical investments as the Employee may select from among the hypothetical investment options that are available from time to time during the deferral period under the Company's excess 401(k) plan or, if no such investment options are available at the time in question under that plan, then from among the same hypothetical investment options that are available under such plan on the date of this Agreement or a reasonable facsimile thereof; (c) participation in the Company's stock incentive plan as from time to time in effect, subject to the terms and conditions of such plan; (d) the business and personal use of an automobile at Company expense including, without limitation, payment or reimbursement of automobile insurance and maintenance expenses in accordance with the Company's automobile policy applicable to senior officers on the Commencement Date; and (e) participation in all Company health, welfare, savings and other employee benefit and fringe benefit plans (including vacation pay plans or policies and life and disability insurance plans) in which other senior officers of the Company participate during the term of this Agreement, subject in all events to the terms and conditions of such plans as in effect from time to time. Nothing in this paragraph (e) shall preclude the Company from amending or terminating any such plan at any time. The plans covered by this paragraph (e) shall not include the annual incentive or stock incentive plans, which are covered by paragraphs (b) and (c) above. 5. Termination of Employment. (a) Termination by the Company without Good Cause or by the Employee for Good Reason. (i) If the Employee's employment with the Company is terminated by the Company without Good Cause or is terminated by the Employee for Good Reason during the term of this Agreement and other than at or after the expiration of the term of this Agreement as the same may have been extended in accordance with the provisions of section 2 above (any such employment termination being hereafter referred to as a "Compensable Termination"), the Company shall pay the Employee the portion of his Base Salary accrued through the date of the Compensable Termination and any other amounts to which he is entitled by law or pursuant to the terms of any page 3 of 19 compensation or benefit plan or arrangement in which he participated prior to the Compensable Termination and, in addition, subject to compliance by the Employee with the provisions of sections 6 and 7 below, relating to confidential information, non-solicitation and disparaging remarks, the Company shall, as liquidated damages or severance pay or both (whichever characterization(s) will serve to validate the payments), and as additional consideration for the Employee's undertakings under sections 6 and 7 below, pay the Employee the following: (A) his annual bonus for the fiscal year of the Company preceding the fiscal year of the Company in which the Compensable Termination occurs, if unpaid at the time of the Compensable Termination, the amount of such bonus to be determined by the Compensation Committee of the Board on a basis consistent with its prior bonus determinations with respect to the Employee during the term of this Agreement and, in the event a Change in Control or Potential Change in Control (as defined in section 11 below) occurred before the Compensable Termination, consistent with its bonus determinations with respect to the Employee prior to the Change in Control or Potential Change in Control; (B) a prorated annual bonus for the fiscal year of the Company in which the Compensable Termination occurs, such prorated annual bonus to be determined by multiplying the "Applicable Average Bonus" as defined below in this subparagraph 5(a)(i)(B) by a fraction the numerator of which shall be the number of days elapsed in such fiscal year through (and including) the date on which the Compensable Termination occurs and the denominator of which shall be the number 365. For purposes of this Agreement, the "Applicable Average Bonus" means the higher of (I) the average annual bonus (including any deferred bonus) awarded to the Employee during the three year period immediately preceding the Compensable Termination, or (II) the average annual bonus (including any deferred bonus) awarded to the Employee during the three fiscal years of the Company preceding the fiscal year in which the Compensable Termination occurs; provided that, if the Compensable Termination occurs after a Change in Control or Potential Change in Control, the Applicable Average Bonus shall not be less than the average annual bonus (including any deferred bonus) awarded to the Employee during the three years preceding the date on which the Change in Control or Potential Change in Control occurred; and (C) an amount of money (the "Severance Payment") equal to three (3) times the Employee's "Annual Cash Compensation" as hereafter defined, unless the Employee attained age 65 but not age 70 (or such later age or ages as the Board may in its discretion determine) prior to the Compensable Termination, in which case the Severance Payment shall be equal to two (2) times such Annual Cash Compensation, or unless the Employee attained age 70 (or such later age as the Board may in its discretion determine) prior to the Compensable Termination, in which case the Severance Payment shall be equal to one (1) times such Annual Cash Compensation. Except as otherwise provided hereafter in this subparagraph 5(a)(i)(C), the Severance Payment shall be paid as follows: fifty percent (50%) of the Severance Payment (or, if the Employee attained age 65 but not age 70 (or such later age or ages as the Board may in page 4 of 19 its discretion determine) prior to the Compensable Termination, seventy-five percent (75%) of the Severance Payment, or if the Employee attained age 70 prior to the Compensable Termination, one hundred percent (100%) of the Severance Payment) shall be paid in a lump sum within ten days after the date of the Compensable Termination. Any balance of the Severance Payment shall be paid in eighteen (18) equal monthly installments one of which shall be paid at the end of each of the first eighteen (18) months after the date of the Compensable Termination, provided, in the case of each of the final 12 of such 18 installments, that the Employee has not accepted full-time or regular part-time employment with or regularly served as a consultant to a for-profit pharmaceutical company prior to the date for payment of such installment, it being understood and agreed that the foregoing condition shall not be violated by the Employee's serving as a member of a board of directors of a for-profit pharmaceutical company or by his performing consulting services on an ad hoc basis for such a company. However, if the Employee attained age 65 (or such later age as the Board may in its discretion determine) prior to the date of the Compensable Termination, then any balance of the Severance Payment shall be paid in six equal monthly installments one of which shall be paid at the end of each of the first six months after the date of the Compensable Termination, and the preceding sentence shall not apply. If a Change in Control or Potential Change in Control as defined in section 11 below occurs (either before or after the Compensable Termination), the Severance Payment (or, in the case of a Change in Control or Potential Change in Control that occurs after the Compensable Termination, any portion thereof that remains unpaid at the time such Change in Control or Potential Change in Control occurs) shall be paid in a lump sum within ten days after the Compensable Termination (or, in the case of a Change in Control or Potential Change in Control that occurs after the Compensable Termination, within ten days after the Change in Control or Potential Change in Control occurs), and the two preceding sentences of this subparagraph shall not apply. During the 18 month period following a Compensable Termination, the Company shall also provide the Employee with COBRA coverage at its expense. For purposes of this section 5, the Employee's "Annual Cash Compensation" shall mean the sum of (I) the Employee's highest Base Salary (i.e., one year's salary at its highest rate), plus (II) the "Applicable Average Bonus" as defined in subparagraph 5(a)(i)(B) above. (ii) If the term of this Agreement as the same may have been extended in accordance with the provisions of section 2 above is not extended or further extended because the Company gives written notice of non-extension to the Employee as provided in section 2 above, and the Company does not have Good Cause for termination of the Employee's employment at the time of giving such notice, and the Employee does not thereafter resign for Good Reason during the term of this Agreement as permitted by paragraph 5(d)(v) below, then the Company, subject to fulfillment by the Employee of his obligations under this Agreement during the balance of the term and his compliance with the provisions of sections 6 and 7 below, relating to confidential information, non-solicitation and disparaging remarks, shall, as non-renewal compensation, and as additional consideration for the Employee's undertakings under this Agreement including sections 6 and 7 below, pay the Employee an amount of money (the "Non-Renewal Payment") equal to two (2) times the Employee's Annual Cash Compensation as defined page 5 of 19 in subparagraph 5(a)(i)(C) above (unless the Employee has attained age 70 (or such later age as the Board may in its discretion determine) prior to the termination date, in which case the Non-Renewal Payment shall be equal to one (1) times the Employee's Annual Cash Compensation), in addition to any other amounts to which the Employee may be entitled hereunder (including without limitation his annual bonus pursuant to paragraph 4(b) above for the fiscal year of the Company in which his employment terminates and any amounts to which he may be entitled under section 8, 9 or 10 below) or by law or pursuant to the terms of any compensation or benefit plan or arrangement in which he participated before his employment terminated. Except as otherwise provided hereafter in this subparagraph 5(a)(ii), the Non-Renewal Payment shall be paid as follows: seventy-five percent (75%) of the Non-Renewal Payment, or if the Employee attained age 70 prior to the termination of his employment, one hundred percent (100%) of the Non-Renewal Payment, shall be paid in a lump sum within ten days after the date on which the Employee's employment terminates. Any balance of the Non-Renewal Payment shall be paid in six (6) equal monthly installments one of which shall be paid at the end of each of the first six months after the date on which the Employee's employment terminates. If a Change in Control or Potential Change in Control as defined in section 11 below occurs (either before or after the termination of his employment), the Non-Renewal Payment (or, in the case of a Change in Control or Potential Change in Control that occurs after the employment termination, any portion thereof that remains unpaid at the time such Change in Control or Potential Change in Control occurs) shall be paid in a lump sum within ten days after the employment termination (or, in the case of a Change in Control or Potential Change in Control that occurs after the employment termination, within ten days after the Change in Control or Potential Change in Control occurs). During the 18 month period following the termination of his employment, the Company shall also provide the Employee with COBRA coverage at its expense. (iii) The foregoing provisions of (including any payments under) this paragraph 5(a) shall be in lieu of any severance pay that may be payable under any plan or practice of the Company, but shall be in addition to (and not in lieu of) any payments to which the Employee may be entitled under sections 8, 9 and 10 below. Subparagraphs 5(a)(i) and 5(a)(ii) above are intended to be mutually exclusive, and in no event shall such subparagraphs, either individually or collectively, be construed to require the Company to pay an amount of money in excess of three (3) times the Employee's Annual Cash Compensation under such subparagraphs, either individually or collectively. The Employee shall not be required to mitigate the amount of any payment or benefit provided for in this Agreement (including but not limited to any payment provided for above in this paragraph 5(a)) by seeking other employment or otherwise, nor shall any compensation earned by the Employee in other employment or otherwise reduce the amount of any payment or benefit provided for in this Agreement. (b) Termination by the Company for Good Cause or by the Employee without Good Reason. If, during the term of this Agreement, the Employee's employment by the Company is terminated by the Company for Good Cause or by the Employee without Good Reason, the Employee shall not be entitled to receive any page 6 of 19 compensation under section 4 above acruing after the date of such termination or any payment under paragraph 5(a) above. However, the Company's obligations under sections 8, 9 and 10 shall not be affected by such termination of employment. The provisions of this paragraph 6(b) shall be in addition to, and not in lieu of, any other rights and remedies the Company may have at law or in equity or under any other provision of this Agreement in respect of such termination of employment. However, if during the term of this Agreement the Employee's employment is terminated by the Employee without Good Reason and the Employee gives the Company at least 120 days' advance notice of such termination, then the Employee shall not have any obligation or liability to the Company under this Agreement in respect of such termination of employment, but his obligations under Section 6 and 7 hereof shall not be affected by such termination of employment. (c) Good Cause Defined. For purposes of this Agreement, the Company shall have "Good Cause" to terminate the Employee's employment during the term of this Agreement only if: (i) the Employee fails to substantially perform his duties hereunder for any reason or fails to devote substantially all his business time exclusively to the affairs of the Company or fails to obtain the consent of the Board to his service on the board of directors of another company, and such failure is not discontinued within a reasonable period of time, in no event to exceed 30 days, after the Employee receives written notice from the Company of such failure; or (ii) the Employee commits an act of dishonesty resulting or intended to result directly or indirectly in gain or personal enrichment at the expense of the Company; or (iii) the Employee is grossly negligent or engages in willful misconduct or insubordination in the performance of his duties hereunder; or (iv) the Employee materially breaches his obligations under section 6 or paragraph 7(a) below, relating to confidential information and non-solicitation. Any foregoing provision of this paragraph 5(c) to the contrary notwithstanding, the Company shall not have "Good Cause" to terminate the Employee's employment within three years after a Change in Control or Potential Change in Control (as such terms are defined in section 11 below) unless (A) the Employee's act or omission is willful and has a material adverse effect upon the Company, (B) the Board of Directors gives the Employee (I) written notice warning of its intention to terminate the Employee for Good Cause if the specified act or omission alleged to constitute Good Cause is not discontinued and, if curable, cured, and (II) a reasonable opportunity after receipt of such written notice, but in no event less than two weeks, to discontinue and, if curable, cure the conduct alleged to constitute Good Cause, and (C) the Employee fails to discontinue and, if curable, cure the act or omission in question; provided that clauses (B) and (C) of page 7 of 19 this sentence shall not apply with respect to misconduct on the part of the Employee that constitutes a felony in the jurisdiction in which the Employee engages in such misconduct, and, provided further, that this sentence shall not apply to conduct involving moral turpitude. For all purposes of this Agreement, no act, or failure to act, on the Employee's part shall be deemed "willful" unless done, or omitted to be done, by him intentionally and in bad faith (i.e., without reasonable belief that his action or omission was in furtherance of the interests of the Company or a subsidiary of the Company). (d) Good Reason Defined. For purposes of this Agreement, the Employee shall have "Good Reason" to terminate his employment during the term of this Agreement only if: (i) the Company fails to pay or provide any amount or benefit that the Company is obligated to pay or provide under section 4 above or section 8, 9 or 10 below and the failure is not remedied within 30 days after the Company receives written notice from the Employee of such failure; or (ii) the Company assigns the Employee duties, responsibilities or reporting relationships not contemplated by section 3 above without his consent, or limits his duties or responsibilities or power or authority contemplated by section 3 above in any respect materially detrimental to him, and in either case the situation is not remedied within 30 days after the Company receives written notice from the Employee of the situation; or (iii) he is removed from, or not elected or reelected to, the Board of Directors of the Company or the office, title and position of Chairman of the Board and Chief Executive Officer of the Company, and the Company does not have Good Cause for doing so; or (iv) the Company relocates his office outside of either (A) the greater Washington, D.C. metropolitan area, or (B) such other Company location as he may determine to be appropriate for the performance of his duties, in either case (A) or (B) without his written consent (given in a personal rather than representative capacity), and the situation is not remedied within 30 days after the Company receives written notice from the Employee of the situation; or (v) the Company gives the Employee written notice, in the manner set forth in paragraph 13(e) or (f) below, prior to any Extension Effective Date, that the term of this Agreement that is in effect at the time such written notice is given is not to be extended or further extended, as the case may be; provided that the giving of such written notice to the Employee shall constitute Good Reason only if and when the Employee shall have performed such of his duties and responsibilities for such period of time, in no event to exceed six months after the giving of such notice, as the Board may reasonably request in writing to transition his duties and responsibilities; or page 8 of 19 (vi) a Change in Control occurs and as a result thereof either (A) equity securities of the Company cease to be publicly-traded, or (B) the Employee is not elected or designated to serve as the sole Chief Executive Officer of the surviving company; or (vii) a Change in Control or Potential Change in Control occurs and (A) the dollar value of the stock optioned to the Employee annually thereafter is less than the average annual dollar value of the stock that was optioned to the Employee during the four years prior to the Change in Control or Potential Change in Control, or (B) the material terms of such options (including without limitation vesting schedules) are less favorable to the Employee than the material terms of the options that were granted to the Employee during the four years prior to the Change in Control or Potential Change in Control, and in either case (A) or (B) the situation is not remedied within 30 days after the Company receives written notice from the Employee of the situation. In no event shall the Employee's continued employment after any of the foregoing constitute his consent to the act or omission in question, or a waiver of his right to terminate his employment for Good Reason hereunder on account of such act or omission. 6. Confidential Information. The Employee agrees not to disclose, either while in the Company's employ or at any time thereafter, to any person not employed by the Company, or not engaged to render services to the Company, except with the prior written consent of an authorized officer of the Company or as necessary or appropriate for the performance of his duties hereunder, any confidential information obtained by him while in the employ of the Company, including, without limitation, information relating to any of the inventions, processes, formulae, plans, devices, compilations of information, research, methods of distribution, suppliers, customers, client relationships, marketing strategies or trade secrets of the Company or any subsidiary thereof; provided, however, that this provision shall not preclude the Employee from use or disclosure of information known generally to the public or of information not considered confidential by persons engaged in the businesses conducted by the Company or any subsidiary thereof, or from disclosure required by law or court order. The Employee also agrees that upon leaving the Company's employ he will not take with him, without the prior written consent of an authorized officer of the Company, and he will surrender to the Company, any record, list, drawing, blueprint, specification or other document or property of the Company or any subsidiary thereof, together with any copy or reproduction thereof, mechanical or otherwise, which is of a confidential nature relating to the Company or any subsidiary thereof, or without limitation, relating to its or their methods of distribution, suppliers, customers, client relationships, marketing strategies or any description of any formulae or secret processes, or which was obtained by him or entrusted to him during the course of his employment with the Company. page 9 of 19 7. Restrictive Covenants (a) Non-Solicitation. Employee covenants and agrees that, during his employment by the Company and during the one year period immediately following the termination of his employment with the Company for any reason (including, without limitation, a termination of employment by the Company without cause and a voluntary termination of employment by the Employee, in either case whether during the term of this Agreement, at the expiration of the term of this Agreement or at any time thereafter), he will not solicit or attempt to persuade any employee of the Company, its subsidiaries or affiliates (except the Employee's personal secretary or administrative assistant), or any other person who performs services for the Company, its subsidiaries or affiliates at the time the Employee's employment terminates or at any time within one year thereafter, to terminate or reduce or refrain from engaging in his or her employment or other service relationship with the Company, its subsidiaries or affiliates; provided, however, that responding to inquiries from any such employees or other persons that are not initiated by the Employee, and subsequently hiring such employees or other persons following the termination of their employment with the Company, its subsidiaries and affiliates shall be permitted. (b) Specific Enforcement. Employee recognizes and agrees that, by reason of his knowledge, experience, skill and abilities, his services are extraordinary and unique, that the breach or attempted breach of any of the restrictions set forth above in this section 7 will result in immediate and irreparable injury for which the Company will not have an adequate remedy at law, and that the Company shall be entitled to a decree of specific performance of those restrictions and to a temporary and permanent injunction enjoining the breach thereof, and to seek any and all other remedies to which the Company may be entitled, including, without limitation, monetary damages, without posting bond or furnishing security of any kind. (c) Restrictions Reasonable. Employee specifically and expressly represents and warrants that (i) he has reviewed and agreed to the restrictive covenants contained in this section 7 and their contemplated operation after receiving the advice of counsel of his choosing; (ii) he believes, after receiving such advice, that the restrictive covenants and their contemplated operation are fair and reasonable; (iii) he will not seek or attempt to seek to have the restrictive covenants declared invalid, and, after receiving the advice of counsel, expressly waives any right to do so; and (iv) if the full breadth of any restrictive covenant and/or its contemplated operation shall be held in any fashion to be too broad, such covenant or its contemplated operation, as the case may be, shall be interpreted in a manner as broadly in favor of the beneficiary of such covenant as is legally permissible. Employee recognizes and agrees that the restrictions on his activities contained in this section 7 are required for the reasonable protection of the Company and its investments; and that the restriction on his activities set forth in paragraph 7(a) will not deprive the Employee of the ability to earn a livelihood. (d) Non-Disparagement. Employee covenants and agrees that, during the one year period immediately following the termination of his employment with the page 10 of 19 Company for any reason (including, without limitation, a termination of employment by the Company without cause and a voluntary termination of employment by the Employee, in either case whether during the term of this Agreement, at the expiration of the term of this Agreement or at any time thereafter), he will not make disparaging remarks about the Company, its subsidiaries or affiliates or any of their officers, directors or employees, unless required by law or reasonably necessary to assert or defend his position in a bona fide dispute arising out of or relating to this Agreement or the breach thereof. (e) Effect on Termination Payments. The Employee recognizes and agrees that the Company shall not be obligated to make any payments provided for in paragraph 5(a) above if the Employee violates the provisions of section 6 or paragraph 7(a) or 7(d) above during the one year period immediately following the termination for any reason of his employment with the Company. In addition, the Employee recognizes and agrees that, if the Employee violates such provisions, the Company may recoup any payments the Company may have theretofore made pursuant to paragraph 5(a) above and any payments the Company may thereafter make under paragraph 5(a). The foregoing provisions of this paragraph 7(e) shall be in addition to and not by way of limitation of any other rights and remedies the Company may have in respect of the violation in question. 8. Indemnification To the fullest extent permitted by applicable law, the Company shall indemnify, defend and hold harmless the Employee from and against any and all claims, demands, actions, causes of action, liabilities, losses, judgments, fines, costs and expenses (including reasonable attorneys' fees and settlement expenses) arising from or relating to his service or status as an officer, director, employee, agent or representative of the Company or any subsidiary of the Company or in any other capacity in which the Employee serves or has served at the request of, or for the benefit of, the Company or its subsidiaries. The Company's obligations under this section 8 shall be in addition to, and not in derogation of, any other rights the Employee may have against the Company to indemnification or advancement of expenses, whether by statute, contract or otherwise. 9. Certain Additional Payments by the Company (a) Anything in this Agreement (other than the second sentence of this paragraph 9(a)) to the contrary notwithstanding, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of the Employee (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this section 9) (a "Payment"), would be subject to the excise tax imposed by Section 4999 of the United States Internal Revenue Code (the "Code") or any interest or penalties are incurred by the Employee with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Employee shall be entitled to receive an additional page 11 of 19 payment (an "Gross-Up Payment") in an amount such that after payment by the Employee of all taxes and any benefits that result from the deductibility by the Employee of such taxes (including, in each case, any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Employee retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. However, if it shall be determined that none of the Payments would be subject to the Excise Tax if the total Payments were reduced in the aggregate by $50,000 or less, then in that event the total Payments shall be reduced by the smallest amount (in no event to exceed $50,000 in the aggregate) necessary to ensure that none of the Payments will be subject to the Excise Tax. The decision as to which Payments shall be so reduced shall be made by the Employee. (b) Subject to the provisions of paragraph 9(a) above and 9(c) below, all determinations required to be made under this section 9, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, and whether Payments are to be reduced pursuant to the second sentence of paragraph 9(a) above, shall be made by Deloitte & Touche or such other certified public accounting firm as may be designated by the Employee (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and the Employee within 15 business days of the receipt of notice from the Employee that there has been a Payment, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the "change in ownership or effective control" or "change in the ownership of a substantial portion of assets" (within the meaning of Code section 280G(b)(2)(A)) that gives rise to the Excise Tax, the Employee shall appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this section 9, shall be paid by the Company to the Employee within five days of the receipt of the Accounting Firm's determination. Any determination by the Accounting Firm shall be binding upon the Company and the Employee. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made (an "Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to paragraph 9(c) and the Employee thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment, along with any penalty and interest imposed with respect to such Underpayment, shall be promptly paid by the Company to or for the benefit of the Employee. (c) The Employee shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require either the payment by the Company of the Gross-Up Payment or the reduction of Payments pursuant to the second page 12 of 19 sentence of paragraph 9(a) above. Such notification shall be given as soon as practicable but no later than ten business days after the Employee is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Employee shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Employee in writing prior to the expiration of such period that it desires to contest such claim, the Employee shall: (i) give the Company any information reasonably requested by the Company relating to such claim, (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (iii) cooperate with the Company in good faith in order effectively to contest such claim, and (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Employee harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this paragraph 9(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Employee to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Employee agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine, provided, however, that if the Company directs the Employee to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Employee, on an interest-free basis and shall indemnify and hold the Employee harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Employee with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the page 13 of 19 Employee shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Employee of an amount advanced by the Company pursuant to paragraph 9(a) or 9(c), the Employee becomes entitled to receive any refund with respect to such claim, the Employee shall (subject to the Company's complying with the requirements of paragraph 9(c)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Employee of an amount advanced by the Company pursuant to paragraph 9(c), a determination is made that the Employee shall not be entitled to any refund with respect to such claim and the Company does not notify the Employee in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 10. Certain Enforcement Matters (a) If, after a Change in Control or Potential Change in Control, a dispute arises (i) with respect to this Agreement or the breach thereof, or (ii) with respect to the Employee's or the Company's rights or obligations under this Agreement, including but not limited to any such dispute between the Employee and the Company, the Company shall pay or reimburse the Employee for all reasonable costs and expenses (including court costs, arbitrators' fees and reasonable attorneys' fees and disbursements) the Employee incurs in connection with such dispute, including without limitation costs and expenses he incurs to obtain payment or otherwise enforce his rights under this Agreement, or to obtain payment of costs and expenses due under this paragraph 10(a). In addition, the Company shall pay the Employee such additional amount (a "Gross Up") as will be sufficient, after the Employee pays his tax liability with respect to the Gross Up from the Gross Up, to pay all of his federal, state and local tax liability with respect to any costs and expenses that are paid by the Company pursuant to this paragraph 10(a). The Company shall promptly pay or reimburse the Employee for all such costs and expenses as he incurs them, upon presentation of reasonable documentation of such costs and expenses, and shall promptly pay the related Gross Up as and when it pays or reimburses costs and expenses. The Employee shall not be obligated to repay any such costs, expenses or Gross Up unless it is finally determined by the trier of fact in a non-appealable judicial or arbitral decision or ruling (as applicable) that the Employee's principal positions with respect to the principal matter(s) in dispute were unreasonable and pursued in bad faith. (b) Any payments to which the Employee may be entitled under this Agreement, including, without limitation, under section 5, 8, 9 or 10 hereof, shall be made forthwith on the applicable date(s) for payment specified in this Agreement. If for any reason the amount of any payment due to the Employee cannot be finally determined on that date, such amount shall be estimated on a good faith basis by the Company and the estimated amount shall be paid no later than within 10 days after such date. As soon page 14 of 19 as practicable thereafter, the final determination of the amount due shall be made and any adjustment requiring a payment to or from the Employee shall be made as promptly as practicable. (c) Any controversy or claim arising, after a Change in Control or Potential Change in Control, out of or related to this Agreement or the breach thereof, shall be settled by binding arbitration in the City of New York, in accordance with the employment dispute arbitration rules of the American Arbitration Association then in effect, and the arbitrator's decision shall be binding and final and judgment upon the award rendered may be entered in any court having jurisdiction thereof, except that the Employee may elect to have any such controversy or claim settled by judicial determination in lieu of arbitration by bringing a court action, if he is the plaintiff or, if he is not the plaintiff, demanding such judicial determination within the time to answer any complaint in any arbitration action that may be commenced. 11. Change in Control (a) The term "Change in Control" as used in this Agreement means a change of control of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), whether or not the Company is then subject to such reporting requirement; provided that, whether or not any of the following events would constitute a change of control of such a nature, a Change in Control shall be deemed to occur for purposes of this Agreement if and when any of the following events occur: (i) any "person" (as such term is used in Sections 13(d) and 14(d)(2) of the Exchange Act), other than-- (A) the Company, (B) a Subsidiary, (C) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or a Subsidiary, or (D) an underwriter engaged in a distribution of Company stock to the public with the Company's written consent, becomes the beneficial owner (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of Voting Securities that meet two tests: (I) they represent more than thirty percent (30%) of the combined voting power of the then outstanding Voting Securities, and (II) they also represent more than the percentage of the combined voting power of the then outstanding Voting Securities beneficially owned, directly or indirectly, at that time by Bernard C. Sherman and his affiliates (as defined in Rule 12b-2 under the Exchange Act). However, the second test stated in clause (II) above shall not apply if the "person" in question is Bernard C. Sherman and/or his affiliates (as defined in Rule 12b-2 under the Exchange Act). In addition, if the "person" in question is an institutional investor whose investment in Voting Securities is purely passive when such page 15 of 19 person becomes the beneficial owner of Voting Securities that meet the tests set forth in clause (I) and, if applicable, (II) above, then such event (i.e., such person's becoming the beneficial owner of such Voting Securities) shall not be deemed to constitute a Change in Control under this subparagraph 11(a)(i) for so long as (and only for so long as) such person's investment in Voting Securities remains purely passive; or (ii) the stockholders of the Company approve a merger, consolidation, recapitalization or reorganization of the Company or a Subsidiary, reverse split of any class of Voting Securities, or an acquisition of securities or assets by the Company or a Subsidiary, or consummation of any such transaction if stockholder approval is not obtained, other than (A) any such transaction in which the holders of outstanding Voting Securities immediately prior to the transaction receive, with respect to such Voting Securities (or, in the case of a transaction in which the Company is the surviving corporation or a transaction involving a Subsidiary, retain), voting securities of the surviving or transferee entity representing more than fifty percent (50%) of the total voting power outstanding immediately after such transaction, with the voting power of each such continuing holder relative to other such continuing holders not substantially altered in the transaction, or (B) any such transaction which would result in a Related Party beneficially owning more than 50 percent of the voting securities of the surviving entity outstanding immediately after such transaction; or (iii) the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets other than any such transaction which would result in a Related Party owning or acquiring more than 50 percent of the assets owned by the Company immediately prior to the transaction; or (iv) the persons who were members of the Board of Directors of the Company immediately before a tender or exchange offer for shares of Common Stock by any person other than the Company or a Related Party, or before a merger or consolidation of the Company or a Subsidiary, or contested election of the Board of Directors of the Company, or before any combination of such transactions, cease to constitute a majority of the Board of Directors of the Company as a result of such transaction or transactions. (b) For purposes of paragraph 11(a) above: (i) the term "Related Party" shall mean (A) a Subsidiary, (B) an employee or group of employees of the Company or any Subsidiary, (C) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any Subsidiary, or (D) a corporation or other form of business entity owned directly or indirectly by the stockholders of the Company in substantially the same proportion as their ownership of Voting Securities; (ii) the term "Subsidiary means a corporation or other form of business association of which shares (or other ownership interests) having more than 50% page 16 of 19 of the voting power are, or in the future become, owned or controlled, directly or indirectly, by the Company; and (iii) the term "Voting Securities" shall mean any securities of the Company which carry the right to vote generally in the election of directors. (c) For purposes of this Agreement, a "Potential Change in Control" means that (i) the Company enters into an agreement, the consummation of which would result in the occurrence of a Change of Control; or (ii) the Board adopts a resolution to the effect that, for purposes of this Agreement, a potential change in control of the Company has occurred. 12. Severability; Survival (a) In the event that any provision of this Agreement shall be determined to be invalid or unenforceable for any reason, the remaining provisions of this Agreement not so invalid or unenforceable shall be unaffected thereby and shall remain in full force and effect to the fullest extent permitted by law; and (b) Any provision of this Agreement which may for any reason be invalid or unenforceable in any jurisdiction shall remain in effect and be enforceable in any jurisdiction in which such provision shall be valid and enforceable. (c) The provisions of sections 6, 7, 8, 9 and 10 of this Agreement, and any other provision of this Agreement which is intended to apply, operate or have effect after the expiration or termination of the term of this Agreement, or at a time when the term of this Agreement may have expired or terminated, shall survive the expiration or termination of the term of this Agreement for any reason. 13. General Provisions (a) No right or interest to or in any payments to be made under this Agreement shall be subject to anticipation, alienation, sale, assignment, encumbrance, pledge, charge or hypothecation or to execution, attachment, levy or similar process, or assignment by operation of law. All payments to be made by the Company hereunder shall be subject to the withholding of such amounts as the Company may determine it is required to withhold under the laws or regulations of any governmental authority, whether foreign, federal, state or local. (b) To the extent that the Employee acquires a right to receive payments from the Company under this Agreement, such right shall be no greater than the right of an unsecured general creditor of the Company. All payments to be made hereunder shall be paid from the general funds of the Company and no special or separate fund shall be established and no segregation of assets shall be made to assure payment of any amount hereunder. page 17 of 19 (c) This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of New York, without giving effect to the principles of conflicts of laws of that State. (d) This Agreement shall be binding upon and inure to the benefit of the Company, its successors and assigns, and the Employee, his heirs, devisees, distributees and legal representatives. (e) Any notice or other communication to the Company pursuant to any provision of this Agreement shall be given in writing and will be deemed to have been delivered: (i) when delivered in person to the Corporate Secretary or General Counsel of the Company; or (ii) one week after it is deposited in the United States certified or registered mail, postage prepaid, addressed to the Corporate Secretary of the Company at 300 Corporate Drive, Building #10, Bradley Corporate Park, Blauvelt, New York 10913 or at such other address of which the Company may from time to time give the Employee written notice in accordance with paragraph 13(f) below. (f) Any notice or other communication to the Employee pursuant to any provision of the Agreement shall be given in writing and will be deemed to have been delivered: (i) when delivered to the Employee in person, or (ii) one week after it is deposited in the United States certified or registered mail, postage prepaid, addressed to the Employee at his address as it appears on the records of the Company or at such other address of which the Employee may from time to time give the Company written notice in accordance with paragraph 13(e) above. (g) No provision of this Agreement may be amended, modified or waived unless such amendment, modification or waiver shall be agreed to in a writing signed by the Employee and an authorized officer of the Company. (h) This instrument contains the entire agreement of the parties relating to the subject matter of this Agreement and supersedes and replaces all prior agreements and understandings with respect to such subject matter, and the parties have made no agreements, representations or warranties relating to the subject matter of this Agreement which are not set forth herein. page 18 of 19 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. BARR LABORATORIES, INC. By:_______________________ [SEAL] Attest: __________________ Secretary __________________________ Employee page 19 of 19 APPENDIX EXAMPLES ILLUSTRATING INTENDED OPERATION OF EXTENSION PROVISIONS OF PARAGRAPH 2 Example 1: Facts: Neither the Company nor the Employee gives the other party written notice of non-extension before the second anniversary of the Commencement Date. Result: Effective as of the second anniversary of the Commencement Date, the term of the Agreement is extended 12 months, so that it will expire on the fourth anniversary of the Commencement Date unless further extended in accordance with the provisions of Paragraph 2 of the Agreement. Example 2: Facts: Either the Company or the Employee gives the other party written notice of non-extension before the second anniversary of the Commencement Date. Result: The term of the Agreement is not extended, and expires on the third anniversary of the Commencement Date. Example 3: Facts: Neither the Company nor the Employee gives the other party written notice of non-extension before the third anniversary of the Commencement Date. Result: Effective as of the third anniversary of the Commencement Date, the term of the Agreement as extended in accordance with Example 1 above is further extended 12 months, so that it will expire on the fifth anniversary of the Commencement Date unless further extended in accordance with the provisions of Paragraph 2 of the Agreement. Example 4: Facts: Either the Company or the Employee gives the other party written notice of non-extension on or after the third anniversary of the Commencement Date and before the fourth anniversary of the Commencement Date. Result: The term of the Agreement as extended is not further extended, and expires on the fifth anniversary of the Commencement Date. page 20 of 19 EX-10.18 5 y63477exv10w18.txt AGREEMENT WITH PAUL M. BISARO EXHIBIT 10.18 AMENDED AND RESTATED EMPLOYMENT AGREEMENT AGREEMENT dated as of the 16th day of August, 2002 between Barr Laboratories, Inc., a New York corporation having its principal executive offices at 300 Corporate Drive, Building #10, Bradley Corporate Park, Blauvelt, New York 10913 (the "Company"), and Paul Bisaro (the "Employee"). WITNESSETH: WHEREAS, the Company and the Employee entered into an employment agreement dated as of October 28, 1999, the term of which has been extended pursuant to Section 2 of that agreement so that it is presently scheduled to expire on October 28, 2003 (the "Employment Agreement"); and WHEREAS, the Company and the Employee wish to amend and restate the Employment Agreement in its entirety; NOW, THEREFORE, the Company and the Employee hereby agree that, effective as of August 16, 2002, the Employment Agreement is amended and restated in its entirety to read as follows: 1. Employment. The Company agrees to employ the Employee, and the Employee agrees to remain in the employ of the Company, during the term of this Agreement and on the other terms and conditions hereafter set forth. 2. Term. The term of this Agreement shall commence on August 16, 2002 (the "Commencement Date") and shall terminate at the close of business on the third anniversary of the Commencement Date unless sooner terminated in accordance with the terms of this Agreement or extended as hereinafter provided. The term of this Agreement shall be extended, without further action by the Company or the Employee, on the date (the "Extension Effective Date") which is six months before the third anniversary of the Commencement Date and on the date (also an "Extension Effective Date") which is six months before each subsequent anniversary of the Commencement Date, for successive periods of twelve months each, unless either party shall have given written notice to the other party, in the manner set forth in paragraph 13(e) or (f) below, prior to the Extension Effective Date in question, that the term of this Agreement that is in effect at the time such written notice is given is not to be extended or further extended, as the case may be. Examples that illustrate the intended operation of the preceding sentence appear in the Appendix to this Agreement. 3. Positions and Responsibilities; Place of Performance. (a) Throughout the term of this Agreement, the Employee agrees to remain in the employ of the Company, and the Company agrees to employ the Employee, as the President and Chief Operating Officer of the Company, reporting to the Chairman and Chief Executive Officer of the Company (the "CEO"). As the President and Chief Operating Officer of the Company, the Employee shall be responsible for managing and supervising, and shall have responsibility for, the day-to-day management of the business operations of the Company and its subsidiaries, subject only to the authority of the CEO and the Board of Directors of the Company (the "Board"), and shall have all of the powers, authority, duties and responsibilities he has had prior to the Commencement Date and all of the powers, authority, duties and responsibilities usually incident to the position and role of President and Chief Operating Officer in public companies that are comparable in size, character and performance to the Company and such other reasonable duties, consistent with the position of President and Chief Operating Officer, as may be lawfully assigned to him by the CEO or the Board. The Company agrees to use reasonable efforts to secure the Employee's election as a member of the Board during the term of this Agreement, and the Employee agrees to serve as such without additional compensation beyond that provided in this Agreement. (b) In connection with his employment by the Company, the Employee shall be based at the principal executive offices of the Company in Blauvelt, New York, and he agrees to travel, to the extent reasonably necessary to perform his duties and obligations under this Agreement, to Company facilities and other destinations elsewhere. (c) During the term of this Agreement, the Employee shall serve the Company on an exclusive basis and shall devote all his business time, attention, skill and efforts to the faithful performance of his duties hereunder; provided that the Employee may engage in community service and charitable activities and, with the approval of the Board, may serve as a member of the board of directors of other companies (and retain remuneration for such service) if such activities and service do not materially interfere with the performance of his duties and responsibilities hereunder. 4. Compensation. For all services rendered by the Employee in any capacity during the term of this Agreement, and for his undertakings with respect to confidential information, non-solicitation and disparaging remarks set forth in sections 6 and 7 below, the Employee shall be entitled to the following: (a) a salary, payable in installments not less frequent than monthly, at the annual rate of four hundred and fifty thousand dollars ($450,000), with such increases in such rate, if any, as the Compensation Committee of the Board may approve from time to time during the term of this Agreement in accordance with the Company's regular administrative practices applicable to senior officers from time to time during the term of this Agreement (the annual salary rate as increased from time to time during the term of this Agreement being hereafter referred to as the "Base Salary"); (b) participation in the Company's annual executive incentive or bonus plan as in effect from time to time, with the opportunity to receive an award in accordance with the terms and conditions of such plan, for each fiscal year of the Company that commences or terminates during the term of this Agreement, of up to 50% of the Base Salary earned during such year (or such higher percentage as the Board or a page 2 of 18 committee of the Board may allow from time to time during the term of this Agreement), it being understood that any award for the fiscal year of the Company in which the term of this Agreement terminates pursuant to the terms hereof shall be prorated based on the portion of such fiscal year that coincides with the term of this Agreement and shall be made at the same time as awards (if any) are made to other participants with respect to such fiscal year. The Employee recognizes and agrees that the Board may defer the payment of any portion of his annual bonus to the extent that, and for such period of time as, may be reasonably necessary to avoid a loss of the Company's tax deduction with respect to such portion of his annual bonus under section 162(m) of the Internal Revenue Code. Any such deferred amount shall be non-forfeitable, shall constitute an unfunded, unsecured obligation of the Company, and until paid shall be deemed invested in such hypothetical investments as the Employee may select from among the hypothetical investment options that are available from time to time during the deferral period under the Company's excess 401(k) plan or, if no such investment options are available at the time in question under that plan, then from among the same hypothetical investment options that are available under such plan on the date of this Agreement or a reasonable facsimile thereof; (c) participation in the Company's stock incentive plan as from time to time in effect, subject to the terms and conditions of such plan; (d) the business and personal use of an automobile at Company expense including, without limitation, payment or reimbursement of automobile insurance and maintenance expenses in accordance with the Company's automobile policy applicable to senior officers on the Commencement Date; and (e) participation in all Company health, welfare, savings and other employee benefit and fringe benefit plans (including vacation pay plans or policies and life and disability insurance plans) in which other senior officers of the Company participate during the term of this Agreement, subject in all events to the terms and conditions of such plans as in effect from time to time. Nothing in this paragraph (e) shall preclude the Company from amending or terminating any such plan at any time. The plans covered by this paragraph (e) shall not include the annual incentive or stock incentive plans, which are covered by paragraphs (b) and (c) above. 5. Termination of Employment. (a) Termination by the Company without Good Cause or by the Employee for Good Reason. (i) If the Employee's employment with the Company is terminated by the Company without Good Cause or is terminated by the Employee for Good Reason during the term of this Agreement and other than at or after the expiration of the term of this Agreement as the same may have been extended in accordance with the provisions of section 2 above (any such employment termination being hereafter referred to as a "Compensable Termination"), the Company shall pay the Employee the page 3 of 18 portion of his Base Salary accrued through the date of the Compensable Termination and any other amounts to which he is entitled by law or pursuant to the terms of any compensation or benefit plan or arrangement in which he participated prior to the Compensable Termination and, in addition, subject to compliance by the Employee with the provisions of sections 6 and 7 below, relating to confidential information, non-solicitation and disparaging remarks, the Company shall, as liquidated damages or severance pay or both (whichever characterization(s) will serve to validate the payments), and as additional consideration for the Employee's undertakings under sections 6 and 7 below, pay the Employee the following: (A) his annual bonus for the fiscal year of the Company preceding the fiscal year of the Company in which the Compensable Termination occurs, if unpaid at the time of the Compensable Termination, the amount of such bonus to be determined by the Compensation Committee of the Board on a basis consistent with its prior bonus determinations with respect to the Employee during the term of this Agreement and, in the event a Change in Control or Potential Change in Control (as defined in section 11 below) occurred before the Compensable Termination, consistent with its bonus determinations with respect to the Employee prior to the Change in Control or Potential Change in Control; (B) a prorated annual bonus for the fiscal year of the Company in which the Compensable Termination occurs, such prorated annual bonus to be determined by multiplying the "Applicable Average Bonus" as defined below in this subparagraph 5(a)(i)(B) by a fraction the numerator of which shall be the number of days elapsed in such fiscal year through (and including) the date on which the Compensable Termination occurs and the denominator of which shall be the number 365. For purposes of this Agreement, the "Applicable Average Bonus" means the higher of (I) the average annual bonus (including any deferred bonus) awarded to the Employee during the three year period immediately preceding the Compensable Termination, or (II) the average annual bonus (including any deferred bonus) awarded to the Employee during the three fiscal years of the Company preceding the fiscal year in which the Compensable Termination occurs; provided that, if the Compensable Termination occurs after a Change in Control or Potential Change in Control, the Applicable Average Bonus shall not be less than the average annual bonus (including any deferred bonus) awarded to the Employee during the three years preceding the date on which the Change in Control or Potential Change in Control occurred; and (C) an amount of money (the "Severance Payment") equal to two and one-half (2-1/2) times the Employee's "Annual Cash Compensation" as hereafter defined, unless the Severance Payment is payable solely on account of the Employee's resignation for Good Reason pursuant to subparagraph 5(d)(v) below (relating to the Company's giving the Employee notice of non-extension), in which case the Severance Payment shall be equal to one and one-quarter (1-1/4) times the Employee's "Annual Cash Compensation" as hereafter defined. Except as otherwise provided hereafter in this subparagraph 5(a)(i)(C), sixty percent (60%) of the Severance Payment shall be paid in a lump sum within ten days after the date of the Compensable page 4 of 18 Termination. The forty percent (40%) balance of the Severance Payment shall be paid in twelve (12) equal monthly installments one of which shall be paid at the end of each of the first twelve (12) months after the date of the Compensable Termination, provided, in the case of each of such 12 installments, that the Employee has not accepted full-time or regular part-time employment with or regularly served as a consultant to a for-profit pharmaceutical company prior to the date for payment of such installment, it being understood and agreed that the foregoing condition shall not be violated by the Employee's serving as a member of a board of directors of a for-profit pharmaceutical company or by his performing consulting services on an ad hoc basis for such a company. If a Change in Control or Potential Change in Control as defined in section 11 below occurs (either before or after the Compensable Termination), the Severance Payment (or, in the case of a Change in Control or Potential Change in Control that occurs after the Compensable Termination, any portion thereof that remains unpaid at the time such Change in Control or Potential Change in Control occurs) shall be paid in a lump sum within ten days after the Compensable Termination (or, in the case of a Change in Control or Potential Change in Control that occurs after the Compensable Termination, within ten days after the Change in Control or Potential Change in Control occurs), and the two preceding sentences of this subparagraph shall not apply. In addition, if the Severance Payment is payable solely on account of the Employee's resignation for Good Reason pursuant to subparagraph 5(d)(v) below (relating to the Company's giving the Employee notice of non-extension), the Severance Payment shall be paid in a lump sum within ten days after the Employee resigns for such Good Reason, and the second and third preceding sentences of this subparagraph shall not apply. During the 18 month period following a Compensable Termination, the Company shall also provide the Employee with COBRA coverage at its expense. For purposes of this section 5, the Employee's "Annual Cash Compensation" shall mean the sum of (I) the Employee's highest Base Salary (i.e., one year's salary at its highest rate), plus (II) the "Applicable Average Bonus" as defined in subparagraph 5(a)(i)(B) above. (ii) If the term of this Agreement as the same may have been extended in accordance with the provisions of section 2 above is not extended or further extended because the Company gives written notice of non-extension to the Employee as provided in section 2 above, and the Company does not have Good Cause for termination of the Employee's employment at the time of giving such notice, and the Employee does not thereafter resign for Good Reason during the term of this Agreement as permitted by paragraph 5(d)(v) below, then the Company, subject to fulfillment by the Employee of his obligations under this Agreement during the balance of the term and his compliance with the provisions of sections 6 and 7 below, relating to confidential information, non-solicitation and disparaging remarks, shall, as non-renewal compensation, and as additional consideration for the Employee's undertakings under this Agreement including sections 6 and 7 below, pay the Employee an amount of money (the "Non-Renewal Payment") equal to the Employee's Annual Cash Compensation as defined in subparagraph 5(a)(i)(C) above, in addition to any other amounts to which the Employee may be entitled hereunder (including without limitation his annual bonus pursuant to paragraph 4(b) above for the fiscal year of the Company in which his employment terminates and any amounts to which he may be entitled under section 8, 9 or 10 below) page 5 of 18 or by law or pursuant to the terms of any compensation or benefit plan or arrangement in which he participated before his employment terminated. The Non-Renewal Payment shall be paid in a lump sum within ten days after the date on which the Employee's employment terminates. During the 18 month period following the termination of his employment, the Company shall also provide the Employee with COBRA coverage at its expense. (iii) The foregoing provisions of (including any payments under) this paragraph 5(a) shall be in lieu of any severance pay that may be payable under any plan or practice of the Company, but shall be in addition to (and not in lieu of) any payments to which the Employee may be entitled under sections 8, 9 and 10 below. Subparagraphs 5(a)(i) and 5(a)(ii) above are intended to be mutually exclusive, and in no event shall such subparagraphs, either individually or collectively, be construed to require the Company to pay an amount of money in excess of two and one-half (2-1/2) times the Employee's Annual Cash Compensation under such subparagraphs, either individually or collectively. The Employee shall not be required to mitigate the amount of any payment or benefit provided for in this Agreement (including but not limited to any payment provided for above in this paragraph 5(a)) by seeking other employment or otherwise, nor shall any compensation earned by the Employee in other employment or otherwise reduce the amount of any payment or benefit provided for in this Agreement. (b) Termination by the Company for Good Cause or by the Employee without Good Reason. If, during the term of this Agreement, the Employee's employment by the Company is terminated by the Company for Good Cause or by the Employee without Good Reason, the Employee shall not be entitled to receive any compensation under section 4 above accruing after the date of such termination or any payment under paragraph 5(a) above. However, the Company's obligations under sections 8, 9 and 10 shall not be affected by such termination of employment. The provisions of this paragraph 6(b) shall be in addition to, and not in lieu of, any other rights and remedies the Company may have at law or in equity or under any other provision of this Agreement in respect of such termination of employment. However, if during the term of this Agreement the Employee's employment is terminated by the Employee without Good Reason and the Employee gives the Company at least 120 days' advance notice of such termination, then the Employee shall not have any obligation or liability to the Company under this Agreement in respect of such termination of employment, but his obligations under Section 6 and 7 hereof shall not be affected by such termination of employment. (c) Good Cause Defined. For purposes of this Agreement, the Company shall have "Good Cause" to terminate the Employee's employment during the term of this Agreement only if: (i) the Employee fails to substantially perform his duties hereunder for any reason or fails to devote substantially all his business time exclusively to the affairs of the Company or fails to obtain the consent of the Board to his service on the board of directors of another company, and such failure is not discontinued within a page 6 of 18 reasonable period of time, in no event to exceed 30 days, after the Employee receives written notice from the Company of such failure; or (ii) the Employee commits an act of dishonesty resulting or intended to result directly or indirectly in gain or personal enrichment at the expense of the Company; or (iii) the Employee is grossly negligent or engages in willful misconduct or insubordination in the performance of his duties hereunder; or (iv) the Employee materially breaches his obligations under section 6 or paragraph 7(a) below, relating to confidential information and non-solicitation. Any foregoing provision of this paragraph 5(c) to the contrary notwithstanding, the Company shall not have "Good Cause" to terminate the Employee's employment within three years after a Change in Control or Potential Change in Control (as such terms are defined in section 11 below) unless (A) the Employee's act or omission is willful and has a material adverse effect upon the Company, (B) the Board of Directors gives the Employee (I) written notice warning of its intention to terminate the Employee for Good Cause if the specified act or omission alleged to constitute Good Cause is not discontinued and, if curable, cured, and (II) a reasonable opportunity after receipt of such written notice, but in no event less than two weeks, to discontinue and, if curable, cure the conduct alleged to constitute Good Cause, and (C) the Employee fails to discontinue and, if curable, cure the act or omission in question; provided that clauses (B) and (C) of this sentence shall not apply with respect to misconduct on the part of the Employee that constitutes a felony in the jurisdiction in which the Employee engages in such misconduct, and, provided further, that this sentence shall not apply to conduct involving moral turpitude. For all purposes of this Agreement, no act, or failure to act, on the Employee's part shall be deemed "willful" unless done, or omitted to be done, by him intentionally and in bad faith (i.e., without reasonable belief that his action or omission was in furtherance of the interests of the Company or a subsidiary of the Company). (d) Good Reason Defined. For purposes of this Agreement, the Employee shall have "Good Reason" to terminate his employment during the term of this Agreement only if: (i) the Company fails to pay or provide any amount or benefit that the Company is obligated to pay or provide under section 4 above or section 8, 9 or 10 below and the failure is not remedied within 30 days after the Company receives written notice from the Employee of such failure; or (ii) the Company assigns the Employee duties, responsibilities or reporting relationships not contemplated by section 3 above without his consent, or limits his duties or responsibilities or power or authority contemplated by section 3 above in any respect materially detrimental to him, and in either case the situation is not page 7 of 18 remedied within 30 days after the Company receives written notice from the Employee of the situation; or (iii) he is removed from, or not elected or reelected to, the Board or the office, title or position of President and Chief Operating Officer of the Company, and the Company does not have Good Cause for doing so; or (iv) the Company relocates his office outside of either (A) the principal executive offices of the Company, or (B) Rockland County, New York, in either case (A) or (B) without his written consent (given in a personal rather than representative capacity), and the situation is not remedied within 30 days after the Company receives written notice from the Employee of the situation; or (v) the Company gives the Employee written notice, in the manner set forth in paragraph 13(e) or (f) below, prior to any Extension Effective Date, that the term of this Agreement that is in effect at the time such written notice is given is not to be extended or further extended, as the case may be; provided that the giving of such written notice to the Employee shall constitute Good Reason only if and when the Employee shall have performed such of his duties and responsibilities for such period of time, in no event to exceed ninety (90) days after the giving of such notice, as the CEO or the Board may reasonably request in writing to transition his duties and responsibilities; or (vi) a Change in Control occurs and as a result thereof either (A) equity securities of the Company cease to be publicly-traded, or (B) the Employee is not elected or designated to serve as the sole President and Chief Operating Officer of the surviving company; or (vii) a Change in Control or Potential Change in Control occurs and (A) the dollar value of the stock optioned to the Employee annually thereafter is less than the average annual dollar value of the stock that was optioned to the Employee during the four years prior to the Change in Control or Potential Change in Control, or (B) the material terms of such options (including without limitation vesting schedules) are less favorable to the Employee than the material terms of the options that were granted to the Employee during the four years prior to the Change in Control or Potential Change in Control, and in either case (A) or (B) the situation is not remedied within 30 days after the Company receives written notice from the Employee of the situation. In no event shall the Employee's continued employment after any of the foregoing constitute his consent to the act or omission in question, or a waiver of his right to terminate his employment for Good Reason hereunder on account of such act or omission. 6. Confidential Information. The Employee agrees not to disclose, either while in the Company's employ or at any time thereafter, to any person not employed by the Company, or not engaged to render services to the Company, except with the prior page 8 of 18 written consent of an authorized officer of the Company or as necessary or appropriate for the performance of his duties hereunder, any confidential information obtained by him while in the employ of the Company, including, without limitation, information relating to any of the inventions, processes, formulae, plans, devices, compilations of information, research, methods of distribution, suppliers, customers, client relationships, marketing strategies or trade secrets of the Company or any subsidiary thereof; provided, however, that this provision shall not preclude the Employee from use or disclosure of information known generally to the public or of information not considered confidential by persons engaged in the businesses conducted by the Company or any subsidiary thereof, or from disclosure required by law or court order. The Employee also agrees that upon leaving the Company's employ he will not take with him, without the prior written consent of an authorized officer of the Company, and he will surrender to the Company, any record, list, drawing, blueprint, specification or other document or property of the Company or any subsidiary thereof, together with any copy or reproduction thereof, mechanical or otherwise, which is of a confidential nature relating to the Company or any subsidiary thereof, or without limitation, relating to its or their methods of distribution, suppliers, customers, client relationships, marketing strategies or any description of any formulae or secret processes, or which was obtained by him or entrusted to him during the course of his employment with the Company. 7. Restrictive Covenants (a) Non-Solicitation. Employee covenants and agrees that, during his employment by the Company and during the one year period immediately following the termination of his employment with the Company for any reason (including, without limitation, a termination of employment by the Company without cause and a voluntary termination of employment by the Employee, in either case whether during the term of this Agreement, at the expiration of the term of this Agreement or at any time thereafter), he will not solicit or attempt to persuade any employee of the Company, its subsidiaries or affiliates (except the Employee's personal secretary or administrative assistant), or any other person who performs services for the Company, its subsidiaries or affiliates at the time the Employee's employment terminates or at any time within one year thereafter, to terminate or reduce or refrain from engaging in his or her employment or other service relationship with the Company, its subsidiaries or affiliates; provided, however, that responding to inquiries from any such employees or other persons that are not initiated by the Employee, and subsequently hiring such employees or other persons following the termination of their employment with the Company, its subsidiaries and affiliates shall be permitted. (b) Specific Enforcement. Employee recognizes and agrees that, by reason of his knowledge, experience, skill and abilities, his services are extraordinary and unique, that the breach or attempted breach of any of the restrictions set forth above in this section 7 will result in immediate and irreparable injury for which the Company will not have an adequate remedy at law, and that the Company shall be entitled to a decree of specific performance of those restrictions and to a temporary and permanent injunction enjoining the breach thereof, and to seek any and all other remedies to which the page 9 of 18 Company may be entitled, including, without limitation, monetary damages, without posting bond or furnishing security of any kind. (c) Restrictions Reasonable. Employee specifically and expressly represents and warrants that (i) he has reviewed and agreed to the restrictive covenants contained in this section 7 and their contemplated operation after receiving the advice of counsel of his choosing; (ii) he believes, after receiving such advice, that the restrictive covenants and their contemplated operation are fair and reasonable; (iii) he will not seek or attempt to seek to have the restrictive covenants declared invalid, and, after receiving the advice of counsel, expressly waives any right to do so; and (iv) if the full breadth of any restrictive covenant and/or its contemplated operation shall be held in any fashion to be too broad, such covenant or its contemplated operation, as the case may be, shall be interpreted in a manner as broadly in favor of the beneficiary of such covenant as is legally permissible. Employee recognizes and agrees that the restrictions on his activities contained in this section 7 are required for the reasonable protection of the Company and its investments; and that the restriction on his activities set forth in paragraph 7(a) will not deprive the Employee of the ability to earn a livelihood. (d) Non-Disparagement. Employee covenants and agrees that, during the one year period immediately following the termination of his employment with the Company for any reason (including, without limitation, a termination of employment by the Company without cause and a voluntary termination of employment by the Employee, in either case whether during the term of this Agreement, at the expiration of the term of this Agreement or at any time thereafter), he will not make disparaging remarks about the Company, its subsidiaries or affiliates or any of their officers, directors or employees, unless required by law or reasonably necessary to assert or defend his position in a bona fide dispute arising out of or relating to this Agreement or the breach thereof. (e) Effect on Termination Payments. The Employee recognizes and agrees that the Company shall not be obligated to make any payments provided for in paragraph 5(a) above if the Employee violates the provisions of section 6 or paragraph 7(a) or 7(d) above during the one year period immediately following the termination for any reason of his employment with the Company. In addition, the Employee recognizes and agrees that, if the Employee violates such provisions, the Company may recoup any payments the Company may have theretofore made pursuant to paragraph 5(a) above and any payments the Company may thereafter make under paragraph 5(a). The foregoing provisions of this paragraph 7(e) shall be in addition to and not by way of limitation of any other rights and remedies the Company may have in respect of the violation in question. 8. Indemnification To the fullest extent permitted by applicable law, the Company shall indemnify, defend and hold harmless the Employee from and against any and all claims, demands, actions, causes of action, liabilities, losses, judgments, fines, costs and expenses page 10 of 18 (including reasonable attorneys' fees and settlement expenses) arising from or relating to his service or status as an officer, director, employee, agent or representative of the Company or any subsidiary of the Company or in any other capacity in which the Employee serves or has served at the request of, or for the benefit of, the Company or its subsidiaries. The Company's obligations under this section 8 shall be in addition to, and not in derogation of, any other rights the Employee may have against the Company to indemnification or advancement of expenses, whether by statute, contract or otherwise. 9. Certain Additional Payments by the Company (a) Anything in this Agreement (other than the second sentence of this paragraph 9(a)) to the contrary notwithstanding, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of the Employee (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this section 9) (a "Payment"), would be subject to the excise tax imposed by Section 4999 of the United States Internal Revenue Code (the "Code") or any interest or penalties are incurred by the Employee with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Employee shall be entitled to receive an additional payment (an "Gross-Up Payment") in an amount such that after payment by the Employee of all taxes and any benefits that result from the deductibility by the Employee of such taxes (including, in each case, any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Employee retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. However, if it shall be determined that none of the Payments would be subject to the Excise Tax if the total Payments were reduced in the aggregate by $25,000 or less, then in that event the total Payments shall be reduced by the smallest amount (in no event to exceed $25,000 in the aggregate) necessary to ensure that none of the Payments will be subject to the Excise Tax. The decision as to which Payments shall be so reduced shall be made by the Employee. (b) Subject to the provisions of paragraph 9(a) above and 9(c) below, all determinations required to be made under this section 9, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, and whether Payments are to be reduced pursuant to the second sentence of paragraph 9(a) above, shall be made by Deloitte & Touche or such other certified public accounting firm as may be designated by the Employee (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and the Employee within 15 business days of the receipt of notice from the Employee that there has been a Payment, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the "change in ownership or effective control" or "change in the ownership of a substantial portion of assets" (within the meaning of Code section 280G(b)(2)(A)) that gives rise to the Excise page 11 of 18 Tax, the Employee shall appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this section 9, shall be paid by the Company to the Employee within five days of the receipt of the Accounting Firm's determination. Any determination by the Accounting Firm shall be binding upon the Company and the Employee. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made (an "Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to paragraph 9(c) and the Employee thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment, along with any penalty and interest imposed with respect to such Underpayment, shall be promptly paid by the Company to or for the benefit of the Employee. (c) The Employee shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require either the payment by the Company of the Gross-Up Payment or the reduction of Payments pursuant to the second sentence of paragraph 9(a) above. Such notification shall be given as soon as practicable but no later than ten business days after the Employee is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Employee shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Employee in writing prior to the expiration of such period that it desires to contest such claim, the Employee shall: (i) give the Company any information reasonably requested by the Company relating to such claim, (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (iii) cooperate with the Company in good faith in order effectively to contest such claim, and (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Employee harmless, on an after-tax basis, for any Excise page 12 of 18 Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this paragraph 9(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Employee to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Employee agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine, provided, however, that if the Company directs the Employee to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Employee, on an interest-free basis and shall indemnify and hold the Employee harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Employee with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Employee shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Employee of an amount advanced by the Company pursuant to paragraph 9(a) or 9(c), the Employee becomes entitled to receive any refund with respect to such claim, the Employee shall (subject to the Company's complying with the requirements of paragraph 9(c)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Employee of an amount advanced by the Company pursuant to paragraph 9(c), a determination is made that the Employee shall not be entitled to any refund with respect to such claim and the Company does not notify the Employee in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 10. Certain Enforcement Matters (a) If, after a Change in Control or Potential Change in Control, a dispute arises (i) with respect to this Agreement or the breach thereof, or (ii) with respect to the Employee's or the Company's rights or obligations under this Agreement, including but not limited to any such dispute between the Employee and the Company, the Company shall pay or reimburse the Employee for all reasonable costs and expenses (including court costs, arbitrators' fees and reasonable attorneys' fees and disbursements) the Employee incurs in connection with such dispute, including without limitation costs and expenses he incurs to obtain payment or otherwise enforce his rights under this Agreement, or to obtain payment of costs and expenses due under this paragraph 10(a). page 13 of 18 In addition, the Company shall pay the Employee such additional amount (a "Gross Up") as will be sufficient, after the Employee pays his tax liability with respect to the Gross Up from the Gross Up, to pay all of his federal, state and local tax liability with respect to any costs and expenses that are paid by the Company pursuant to this paragraph 10(a). The Company shall promptly pay or reimburse the Employee for all such costs and expenses as he incurs them, upon presentation of reasonable documentation of such costs and expenses, and shall promptly pay the related Gross Up as and when it pays or reimburses costs and expenses. The Employee shall not be obligated to repay any such costs, expenses or Gross Up unless it is finally determined by the trier of fact in a non-appealable judicial or arbitral decision or ruling (as applicable) that the Employee's principal positions with respect to the principal matter(s) in dispute were unreasonable and pursued in bad faith. (b) Any payments to which the Employee may be entitled under this Agreement, including, without limitation, under section 5, 8, 9 or 10 hereof, shall be made forthwith on the applicable date(s) for payment specified in this Agreement. If for any reason the amount of any payment due to the Employee cannot be finally determined on that date, such amount shall be estimated on a good faith basis by the Company and the estimated amount shall be paid no later than within 10 days after such date. As soon as practicable thereafter, the final determination of the amount due shall be made and any adjustment requiring a payment to or from the Employee shall be made as promptly as practicable. (c) Any controversy or claim arising, after a Change in Control or Potential Change in Control, out of or related to this Agreement or the breach thereof, shall be settled by binding arbitration in the City of New York, in accordance with the employment dispute arbitration rules of the American Arbitration Association then in effect, and the arbitrator's decision shall be binding and final and judgment upon the award rendered may be entered in any court having jurisdiction thereof, except that the Employee may elect to have any such controversy or claim settled by judicial determination in lieu of arbitration by bringing a court action, if he is the plaintiff or, if he is not the plaintiff, demanding such judicial determination within the time to answer any complaint in any arbitration action that may be commenced. 11. Change in Control (a) The term "Change in Control" as used in this Agreement means a change of control of the Company of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), whether or not the Company is then subject to such reporting requirement; provided that, whether or not any of the following events would constitute a change of control of such a nature, a Change in Control shall be deemed to occur for purposes of this Agreement if and when any of the following events occur: page 14 of 18 (i) any "person" (as such term is used in Sections 13(d) and 14(d)(2) of the Exchange Act), other than-- (A) the Company, (B) a Subsidiary, (C) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or a Subsidiary, or (D) an underwriter engaged in a distribution of Company stock to the public with the Company's written consent, becomes the beneficial owner (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of Voting Securities that meet two tests: (I) they represent more than thirty percent (30%) of the combined voting power of the then outstanding Voting Securities, and (II) they also represent more than the percentage of the combined voting power of the then outstanding Voting Securities beneficially owned, directly or indirectly, at that time by Bernard C. Sherman and his affiliates (as defined in Rule 12b-2 under the Exchange Act). However, the second test stated in clause (II) above shall not apply if the "person" in question is Bernard C. Sherman and/or his affiliates (as defined in Rule 12b-2 under the Exchange Act). In addition, if the "person" in question is an institutional investor whose investment in Voting Securities is purely passive when such person becomes the beneficial owner of Voting Securities that meet the tests set forth in clause (I) and, if applicable, (II) above, then such event (i.e., such person's becoming the beneficial owner of such Voting Securities) shall not be deemed to constitute a Change in Control under this subparagraph 11(a)(i) for so long as (and only for so long as) such person's investment in Voting Securities remains purely passive; or (ii) the stockholders of the Company approve a merger, consolidation, recapitalization or reorganization of the Company or a Subsidiary, reverse split of any class of Voting Securities, or an acquisition of securities or assets by the Company or a Subsidiary, or consummation of any such transaction if stockholder approval is not obtained, other than (A) any such transaction in which the holders of outstanding Voting Securities immediately prior to the transaction receive, with respect to such Voting Securities (or, in the case of a transaction in which the Company is the surviving corporation or a transaction involving a Subsidiary, retain), voting securities of the surviving or transferee entity representing more than fifty percent (50%) of the total voting power outstanding immediately after such transaction, with the voting power of each such continuing holder relative to other such continuing holders not substantially altered in the transaction, or (B) any such transaction which would result in a Related Party beneficially owning more than 50 percent of the voting securities of the surviving entity outstanding immediately after such transaction; or (iii) the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets other than any such transaction which would result in a Related Party owning or acquiring more than 50 percent of the assets owned by the Company immediately prior to the transaction; or page 15 of 18 (iv) the persons who were members of the Board of Directors of the Company immediately before a tender or exchange offer for shares of Common Stock by any person other than the Company or a Related Party, or before a merger or consolidation of the Company or a Subsidiary, or contested election of the Board of Directors of the Company, or before any combination of such transactions, cease to constitute a majority of the Board of Directors of the Company as a result of such transaction or transactions. (b) For purposes of paragraph 11(a) above: (i) the term "Related Party" shall mean (A) a Subsidiary, (B) an employee or group of employees of the Company or any Subsidiary, (C) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any Subsidiary, or (D) a corporation or other form of business entity owned directly or indirectly by the stockholders of the Company in substantially the same proportion as their ownership of Voting Securities; (ii) the term "Subsidiary means a corporation or other form of business association of which shares (or other ownership interests) having more than 50% of the voting power are, or in the future become, owned or controlled, directly or indirectly, by the Company; and (iii) the term "Voting Securities" shall mean any securities of the Company which carry the right to vote generally in the election of directors. (c) For purposes of this Agreement, a "Potential Change in Control" means that (i) the Company enters into an agreement, the consummation of which would result in the occurrence of a Change of Control; or (ii) the Board adopts a resolution to the effect that, for purposes of this Agreement, a potential change in control of the Company has occurred. 12. Severability; Survival (a) In the event that any provision of this Agreement shall be determined to be invalid or unenforceable for any reason, the remaining provisions of this Agreement not so invalid or unenforceable shall be unaffected thereby and shall remain in full force and effect to the fullest extent permitted by law; and (b) Any provision of this Agreement which may for any reason be invalid or unenforceable in any jurisdiction shall remain in effect and be enforceable in any jurisdiction in which such provision shall be valid and enforceable. (c) The provisions of sections 6, 7, 8, 9 and 10 of this Agreement, and any other provision of this Agreement which is intended to apply, operate or have effect after the expiration or termination of the term of this Agreement, or at a time when the page 16 of 18 term of this Agreement may have expired or terminated, shall survive the expiration or termination of the term of this Agreement for any reason. 13. General Provisions (a) No right or interest to or in any payments to be made under this Agreement shall be subject to anticipation, alienation, sale, assignment, encumbrance, pledge, charge or hypothecation or to execution, attachment, levy or similar process, or assignment by operation of law. All payments to be made by the Company hereunder shall be subject to the withholding of such amounts as the Company may determine it is required to withhold under the laws or regulations of any governmental authority, whether foreign, federal, state or local. (b) To the extent that the Employee acquires a right to receive payments from the Company under this Agreement, such right shall be no greater than the right of an unsecured general creditor of the Company. All payments to be made hereunder shall be paid from the general funds of the Company and no special or separate fund shall be established and no segregation of assets shall be made to assure payment of any amount hereunder. (c) This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of New York, without giving effect to the principles of conflicts of laws of that State. (d) This Agreement shall be binding upon and inure to the benefit of the Company, its successors and assigns, and the Employee, his heirs, devisees, distributees and legal representatives. (e) Any notice or other communication to the Company pursuant to any provision of this Agreement shall be given in writing and will be deemed to have been delivered: (i) when delivered in person to the Corporate Secretary or General Counsel of the Company; or (ii) one week after it is deposited in the United States certified or registered mail, postage prepaid, addressed to the Corporate Secretary of the Company at 300 Corporate Drive, Building #10, Bradley Corporate Park, Blauvelt, New York 10913 or at such other address of which the Company may from time to time give the Employee written notice in accordance with paragraph 13(f) below. (f) Any notice or other communication to the Employee pursuant to any provision of the Agreement shall be given in writing and will be deemed to have been delivered: (i) when delivered to the Employee in person, or page 17 of 18 (ii) one week after it is deposited in the United States certified or registered mail, postage prepaid, addressed to the Employee at his address as it appears on the records of the Company or at such other address of which the Employee may from time to time give the Company written notice in accordance with paragraph 13(e) above. (g) No provision of this Agreement may be amended, modified or waived unless such amendment, modification or waiver shall be agreed to in a writing signed by the Employee and an authorized officer of the Company. (h) This instrument contains the entire agreement of the parties relating to the subject matter of this Agreement and supersedes and replaces all prior agreements and understandings with respect to such subject matter, and the parties have made no agreements, representations or warranties relating to the subject matter of this Agreement which are not set forth herein. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. BARR LABORATORIES, INC. By:_______________________ [SEAL] Attest: _______________________ Secretary __________________________ Employee page 18 of 18 APPENDIX EXAMPLES ILLUSTRATING INTENDED OPERATION OF EXTENSION PROVISIONS OF PARAGRAPH 2 Example 1: Facts: Neither the Company nor the Employee gives the other party written notice of non-extension before the date that is six months before the third anniversary of the Commencement Date. Result: Effective as of the date that is six months before the third anniversary of the Commencement Date, the term of the Agreement is extended 12 months, so that it will expire on the fourth anniversary of the Commencement Date unless further extended in accordance with the provisions of Paragraph 2 of the Agreement. Example 2: Facts: Either the Company or the Employee gives the other party written notice of non-extension before the date that is six months before the third anniversary of the Commencement Date. Result: The term of the Agreement is not extended, and expires on the third anniversary of the Commencement Date. Example 3: Facts: Neither the Company nor the Employee gives the other party written notice of non-extension before the date that is six months before the fourth anniversary of the Commencement Date. Result: Effective as of the date that is six months before the fourth anniversary of the Commencement Date, the term of the Agreement as extended in accordance with Example 1 above is further extended 12 months, so that it will expire on the fifth anniversary of the Commencement Date unless further extended in accordance with the provisions of Paragraph 2 of the Agreement. Example 4: Facts: Either the Company or the Employee gives the other party written notice of non-extension on or after the date that is six months before the fourth anniversary of the Commencement Date and before the date that is six months before the fifth anniversary of the Commencement Date. page 19 of 18 Result: The term of the Agreement as extended is not further extended, and expires on the fifth anniversary of the Commencement Date. page 20 of 18 EX-10.19 6 y63477exv10w19.txt AGREEMENT WITH CAROLE S. BEN-MAIMON EXHIBIT 10.19 AMENDED AND RESTATED EMPLOYMENT AGREEMENT AGREEMENT dated as of the 19th day of August, 2002 between Barr Laboratories, Inc., a New York corporation having its principal executive offices at 300 Corporate Drive, Building #10, Bradley Corporate Park, Blauvelt, New York 10913 (the "Company"), on its own behalf and on behalf of its subsidiary BRL Incorporated, a Delaware corporation doing business in Pennsylvania as Barr Research ("Barr Research"), as a third party beneficiary of this Agreement (the Company and/or Barr Research being hereafter referred to as the "Corporation"), and Carole Ben-Maimon (the "Employee"). WITNESSETH: WHEREAS, the Company and the Employee entered into an employment agreement dated as of January 10, 2001 (the "Employment Agreement"); and WHEREAS, the Company and the Employee wish to amend and restate the Employment Agreement in its entirety; NOW, THEREFORE, the Company and the Employee hereby agree that, effective as of August 19, 2002, the Employment Agreement is amended and restated in its entirety to read as follows: 1. Employment. The Corporation agrees to employ the Employee, and the Employee agrees to remain in the employ of the Corporation, during the term of this Agreement and on the other terms and conditions hereafter set forth. 2. Term. The term of this Agreement shall commence on August 19, 2002 (the "Commencement Date") and shall terminate at the close of business on the third anniversary of the Commencement Date unless sooner terminated in accordance with the terms of this Agreement or extended as hereinafter provided. The term of this Agreement shall be extended, without further action by the Company or the Employee, on the date (the "Extension Effective Date") which is six months before the third anniversary of the Commencement Date and on the date (also an "Extension Effective Date") which is six months before each subsequent anniversary of the Commencement Date, for successive periods of twelve months each, unless either party shall have given written notice to the other party, in the manner set forth in paragraph 13(e) or (f) below, prior to the Extension Effective Date in question, that the term of this Agreement that is in effect at the time such written notice is given is not to be extended or further extended, as the case may be. Examples that illustrate the intended operation of the preceding sentence appear in the Appendix to this Agreement. 3. Positions and Responsibilities; Place of Performance. (a) Throughout the term of this Agreement, the Employee agrees to remain in the employ of the Corporation, and the Corporation agrees to employ the Employee, as the President of Barr Research, reporting to the Chairman and Chief Executive Officer of the Company (the "CEO"). As the President of Barr Research, the Employee shall be responsible for directing, managing and overseeing all new proprietary drug discovery and development studies and activities, including clinical trials and medical affairs and regulatory affairs related to such activities, and shall have all of the powers, authority, duties and responsibilities she has had prior to the Commencement Date and such other reasonable duties, consistent with the position of President of Barr Research, as may be lawfully assigned to her by the CEO or the Board of Directors of the Company (the "Board"). The Company agrees to use reasonable efforts to secure the Employee's election as a member of the Board during the term of this Agreement, and the Employee agrees to serve as such without additional compensation beyond that provided in this Agreement. (b) In connection with her employment by the Corporation, the Employee shall be based in the metropolitan Philadelphia, Pennsylvania area but agrees to travel, to the extent reasonably necessary to perform her duties and obligations under this Agreement, to Company facilities and other destinations elsewhere. (c) During the term of this Agreement, the Employee shall serve the Corporation on an exclusive basis and shall devote all her business time, attention, skill and efforts to the faithful performance of her duties hereunder; provided that the Employee may engage in community service and charitable activities and, with the approval of the Board, may serve as a member of the board of directors of other companies (and retain remuneration for such service) if such activities and service do not materially interfere with the performance of her duties and responsibilities hereunder and, provided further, that the Employee may continue to serve as the Chairperson of the Generic Pharmaceutical Association during the first 18 months of the term of this Agreement. 4. Compensation. For all services rendered by the Employee in any capacity during the term of this Agreement, and for her undertakings with respect to confidential information, non-solicitation and disparaging remarks set forth in sections 6 and 7 below, the Employee shall be entitled to the following: (a) a salary, payable in installments not less frequent than monthly, at the annual rate of four hundred thousand dollars ($400,000), with such increases in such rate, if any, as the Compensation Committee of the Board may approve from time to time during the term of this Agreement in accordance with the Company's regular administrative practices applicable to senior officers from time to time during the term of this Agreement (the annual salary rate as increased from time to time during the term of this Agreement being hereafter referred to as the "Base Salary"); (b) participation in the Company's annual executive incentive or bonus plan as in effect from time to time, with the opportunity to receive an award in accordance with the terms and conditions of such plan, for each fiscal year of the Company that commences or terminates during the term of this Agreement, of up to 50% page 2 of 19 of the Base Salary earned during such year (or such higher percentage as the Board or a committee of the Board may allow from time to time during the term of this Agreement), it being understood that any award for the fiscal year of the Company in which the term of this Agreement terminates pursuant to the terms hereof shall be prorated based on the portion of such fiscal year that coincides with the term of this Agreement and shall be made at the same time as awards (if any) are made to other participants with respect to such fiscal year. The Employee recognizes and agrees that the Board may defer the payment of any portion of her annual bonus to the extent that, and for such period of time as, may be reasonably necessary to avoid a loss of the Company's tax deduction with respect to such portion of his annual bonus under section 162(m) of the Internal Revenue Code. Any such deferred amount shall be non-forfeitable, shall constitute an unfunded, unsecured obligation of the Company, and until paid shall be deemed invested in such hypothetical investments as the Employee may select from among the hypothetical investment options that are available from time to time during the deferral period under the Company's excess 401(k) plan or, if no such investment options are available at the time in question under that plan, then from among the same hypothetical investment options that are available under such plan on the date of this Agreement or a reasonable facsimile thereof; (c) participation in the Company's stock incentive plan as from time to time in effect, subject to the terms and conditions of such plan; (d) the business and personal use of an automobile at Corporation expense including, without limitation, payment or reimbursement of automobile insurance and maintenance expenses in accordance with the Company's automobile policy applicable to senior officers on the Commencement Date; (e) participation in all Company health, welfare, savings and other employee benefit and fringe benefit plans (including vacation pay plans or policies and life and disability insurance plans) in which other senior officers of the Corporation participate during the term of this Agreement, subject in all events to the terms and conditions of such plans as in effect from time to time. Nothing in this paragraph (e) shall preclude the Corporation from amending or terminating any such plan at any time. The plans covered by this paragraph (e) shall not include the annual incentive or stock incentive plans, which are covered by paragraphs (b) and (c) above; and (f) the Corporation shall pay, or reimburse the Employee for, the premiums she incurs to maintain her current medical malpractice insurance coverage (or equivalent coverage) during the term, such premiums payable or reimburseable by the Corporation in no event to exceed $15,000 per year of the term. 5. Termination of Employment. (a) Termination by the Company without Good Cause or by the Employee for Good Reason. page 3 of 19 (i) If the Employee's employment with the Company and its subsidiaries is terminated by the Company without Good Cause or is terminated by the Employee for Good Reason during the term of this Agreement and other than at or after the expiration of the term of this Agreement as the same may have been extended in accordance with the provisions of section 2 above (any such employment termination being hereafter referred to as a "Compensable Termination"), the Company shall pay the Employee the portion of her Base Salary accrued through the date of the Compensable Termination and any other amounts to which she is entitled by law or pursuant to the terms of any compensation or benefit plan or arrangement in which she participated prior to the Compensable Termination and, in addition, subject to compliance by the Employee with the provisions of sections 6 and 7 below, relating to confidential information, non-solicitation and disparaging remarks, the Company shall, as liquidated damages or severance pay or both (whichever characterization(s) will serve to validate the payments), and as additional consideration for the Employee's undertakings under sections 6 and 7 below, pay the Employee the following: (A) her annual bonus for the fiscal year of the Company preceding the fiscal year of the Company in which the Compensable Termination occurs, if unpaid at the time of the Compensable Termination, the amount of such bonus to be determined by the Compensation Committee of the Board on a basis consistent with its prior bonus determinations with respect to the Employee during the term of this Agreement and, in the event a Change in Control or Potential Change in Control (as defined in section 11 below) occurred before the Compensable Termination, consistent with its bonus determinations with respect to the Employee prior to the Change in Control or Potential Change in Control; (B) a prorated annual bonus for the fiscal year of the Company in which the Compensable Termination occurs, such prorated annual bonus to be determined by multiplying the "Applicable Average Bonus" as defined below in this subparagraph 5(a)(i)(B) by a fraction the numerator of which shall be the number of days elapsed in such fiscal year through (and including) the date on which the Compensable Termination occurs and the denominator of which shall be the number 365. For purposes of this Agreement, the "Applicable Average Bonus" means the higher of (I) the average annual bonus (including any deferred bonus) awarded to the Employee during the three year period immediately preceding the Compensable Termination or, if the Employee was employed by the Corporation for less than three years before the Compensable Termination, during the period of her employment by the Corporation prior to the Compensable Termination, or (II) the average annual bonus (including any deferred bonus) awarded to the Employee during the three fiscal years of the Company preceding the fiscal year in which the Compensable Termination occurs or during the portion of such three fiscal years in which she was employed by the Corporation; provided that, if the Compensable Termination occurs after a Change in Control or Potential Change in Control, the Applicable Average Bonus shall not be less than the average annual bonus (including any deferred bonus) awarded to the Employee during the three years preceding the date on which the Change in Control or Potential Change in Control occurred or page 4 of 19 during the portion of such three years in which she was employed by the Corporation; and (C) an amount of money (the "Severance Payment") equal to two and one-half (2-1/2) times the Employee's "Annual Cash Compensation" as hereafter defined, unless the Severance Payment is payable solely on account of the Employee's resignation for Good Reason pursuant to subparagraph 5(d)(v) below (relating to the Company's giving the Employee notice of non-extension), in which case the Severance Payment shall be equal to one and one-quarter (1-1/4) times the Employee's "Annual Cash Compensation" as hereafter defined. Except as otherwise provided hereafter in this subparagraph 5(a)(i)(C), sixty percent (60%) of the Severance Payment shall be paid in a lump sum within ten days after the date of the Compensable Termination. The forty percent (40%) balance of the Severance Payment shall be paid in twelve (12) equal monthly installments one of which shall be paid at the end of each of the first twelve (12) months after the date of the Compensable Termination, provided, in the case of each of such 12 installments, that the Employee has not accepted full-time or regular part-time employment with or regularly served as a consultant to a for-profit pharmaceutical company prior to the date for payment of such installment, it being understood and agreed that the foregoing condition shall not be violated by the Employee's serving as a member of a board of directors of a for-profit pharmaceutical company or by her performing consulting services on an ad hoc basis for such a company. If a Change in Control or Potential Change in Control as defined in section 11 below occurs (either before or after the Compensable Termination), the Severance Payment (or, in the case of a Change in Control or Potential Change in Control that occurs after the Compensable Termination, any portion thereof that remains unpaid at the time such Change in Control or Potential Change in Control occurs) shall be paid in a lump sum within ten days after the Compensable Termination (or, in the case of a Change in Control or Potential Change in Control that occurs after the Compensable Termination, within ten days after the Change in Control or Potential Change in Control occurs), and the two preceding sentences of this subparagraph shall not apply. In addition, if the Severance Payment is payable solely on account of the Employee's resignation for Good Reason pursuant to subparagraph 5(d)(v) below (relating to the Company's giving the Employee notice of non-extension), the Severance Payment shall be paid in a lump sum within ten days after the Employee resigns for such Good Reason, and the second and third preceding sentences of this subparagraph shall not apply. During the 18 month period following a Compensable Termination, the Company shall also provide the Employee with COBRA coverage at its expense. For purposes of this section 5, the Employee's "Annual Cash Compensation" shall mean the sum of (I) the Employee's highest Base Salary (i.e., one year's salary at its highest rate), plus (II) the "Applicable Average Bonus" as defined in subparagraph 5(a)(i)(B) above. (ii) If the term of this Agreement as the same may have been extended in accordance with the provisions of section 2 above is not extended or further extended because the Company gives written notice of non-extension to the Employee as provided in section 2 above, and the Company does not have Good Cause for termination of the Employee's employment at the time of giving such notice, and the Employee does page 5 of 19 not thereafter resign for Good Reason during the term of this Agreement as permitted by paragraph 5(d)(v) below, then the Company, subject to fulfillment by the Employee of her obligations under this Agreement during the balance of the term and her compliance with the provisions of sections 6 and 7 below, relating to confidential information, non-solicitation and disparaging remarks, shall, as non-renewal compensation, and as additional consideration for the Employee's undertakings under this Agreement including sections 6 and 7 below, pay the Employee an amount of money (the "Non-Renewal Payment") equal to the Employee's Annual Cash Compensation as defined in subparagraph 5(a)(i)(C) above, in addition to any other amounts to which the Employee may be entitled hereunder (including without limitation her annual bonus pursuant to paragraph 4(b) above for the fiscal year of the Company in which her employment terminates and any amounts to which she may be entitled under section 8, 9 or 10 below) or by law or pursuant to the terms of any compensation or benefit plan or arrangement in which she participated before her employment terminated. The Non-Renewal Payment shall be paid in a lump sum within ten days after the date on which the Employee's employment terminates. During the 18 month period following the termination of her employment, the Company shall also provide the Employee with COBRA coverage at its expense. (iii) The foregoing provisions of (including any payments under) this paragraph 5(a) shall be in lieu of any severance pay that may be payable under any plan or practice of the Corporation, but shall be in addition to (and not in lieu of) any payments to which the Employee may be entitled under sections 8, 9 and 10 below. Subparagraphs 5(a)(i) and 5(a)(ii) above are intended to be mutually exclusive, and in no event shall such subparagraphs, either individually or collectively, be construed to require the Company to pay an amount of money in excess of two and one-half (2-1/2) times the Employee's Annual Cash Compensation under such subparagraphs, either individually or collectively. The Employee shall not be required to mitigate the amount of any payment or benefit provided for in this Agreement (including but not limited to any payment provided for above in this paragraph 5(a)) by seeking other employment or otherwise, nor shall any compensation earned by the Employee in other employment or otherwise reduce the amount of any payment or benefit provided for in this Agreement. (b) Termination by the Company for Good Cause or by the Employee without Good Reason. If, during the term of this Agreement, the Employee's employment by the Company and its subsidiaries is terminated by the Company for Good Cause or by the Employee without Good Reason, the Employee shall not be entitled to receive any compensation under section 4 above accruing after the date of such termination or any payment under paragraph 5(a) above. However, the Company's obligations under sections 8, 9 and 10 shall not be affected by such termination of employment. The provisions of this paragraph 6(b) shall be in addition to, and not in lieu of, any other rights and remedies the Corporation may have at law or in equity or under any other provision of this Agreement in respect of such termination of employment. However, if during the term of this Agreement the Employee's employment is terminated by the Employee without Good Reason and the Employee gives the Company at least 120 days' advance notice of such termination, then the Employee shall not have any page 6 of 19 obligation or liability to the Corporation under this Agreement in respect of such termination of employment, but her obligations under Section 6 and 7 hereof and the next sentence shall not be affected by such termination of employment. If the Employee's full-time employment by the Company and its subsidiaries is terminated on or before January 29, 2003 for any reason other than (i) death, (ii) a disability that entitles the Employee to Social Security disability benefits (or that will entitle the Employee to Social Security disability benefits after any applicable waiting period), (iii) termination of employment by the Company without Good Cause (as defined in paragraph 5(c) below) or (iv) termination of employment by the Employee for Good Reason (as defined in paragraph 5(d) below), the Employee shall repay to the Company the Retention Payment that she received pursuant to paragraph 4(c) of the Employment Agreement as in effect prior to its amendment and restatement hereby. (c) Good Cause Defined. For purposes of this Agreement, the Company shall have "Good Cause" to terminate the Employee's employment during the term of this Agreement only if: (i) the Employee fails to substantially perform her duties hereunder for any reason or fails to devote substantially all her business time exclusively to the affairs of the Corporation or fails to obtain the consent of the Board to her service on the board of directors of another company, and such failure is not discontinued within a reasonable period of time, in no event to exceed 30 days, after the Employee receives written notice from the Corporation of such failure; or (ii) the Employee commits an act of dishonesty resulting or intended to result directly or indirectly in gain or personal enrichment at the expense of the Corporation; or (iii) the Employee is grossly negligent or engages in willful misconduct or insubordination in the performance of her duties hereunder; or (iv) the Employee materially breaches her obligations under section 6 or paragraph 7(a) below, relating to confidential information and non-solicitation. Any foregoing provision of this paragraph 5(c) to the contrary notwithstanding, the Company shall not have "Good Cause" to terminate the Employee's employment within three years after a Change in Control or Potential Change in Control (as such terms are defined in section 11 below) unless (A) the Employee's act or omission is willful and has a material adverse effect upon the Company, (B) the Board of Directors gives the Employee (I) written notice warning of its intention to terminate the Employee for Good Cause if the specified act or omission alleged to constitute Good Cause is not discontinued and, if curable, cured, and (II) a reasonable opportunity after receipt of such written notice, but in no event less than two weeks, to discontinue and, if curable, cure the conduct alleged to constitute Good Cause, and (C) the Employee fails to discontinue and, if curable, cure the act or omission in question; provided that clauses (B) and (C) of page 7 of 19 this sentence shall not apply with respect to misconduct on the part of the Employee that constitutes a felony in the jurisdiction in which the Employee engages in such misconduct, and, provided further, that this sentence shall not apply to conduct involving moral turpitude. For all purposes of this Agreement, no act, or failure to act, on the Employee's part shall be deemed "willful" unless done, or omitted to be done, by her intentionally and in bad faith (i.e., without reasonable belief that her action or omission was in furtherance of the interests of the Company or a subsidiary of the Company). (d) Good Reason Defined. For purposes of this Agreement, the Employee shall have "Good Reason" to terminate her employment during the term of this Agreement only if: (i) the Corporation fails to pay or provide any amount or benefit that the Corporation is obligated to pay or provide under section 4 above or section 8, 9 or 10 below and the failure is not remedied within 30 days after the Company receives written notice from the Employee of such failure; or (ii) the Corporation assigns the Employee duties, responsibilities or reporting relationships not contemplated by section 3 above without her consent, or limits her duties or responsibilities or power or authority contemplated by section 3 above in any respect materially detrimental to her, and in either case the situation is not remedied within 30 days after the Company receives written notice from the Employee of the situation; or (iii) she is removed from, or not elected or reelected to, the Board or the office, title or position of President of Barr Research, and the Company does not have Good Cause for doing so; or (iv) the Corporation relocates her office outside of a forty (40) mile radius from her residence on the date of this Agreement without her written consent (given in a personal rather than representative capacity), and the situation is not remedied within 30 days after the Company receives written notice from the Employee of the situation; or (v) the Company gives the Employee written notice, in the manner set forth in paragraph 13(e) or (f) below, prior to any Extension Effective Date, that the term of this Agreement that is in effect at the time such written notice is given is not to be extended or further extended, as the case may be; provided that the giving of such written notice to the Employee shall constitute Good Reason only if and when the Employee shall have performed such of her duties and responsibilities for such period of time, in no event to exceed ninety (90) days after the giving of such notice, as the CEO or the Board may reasonably request in writing to transition her duties and responsibilities; or page 8 of 19 (vi) a Change in Control occurs and as a result thereof either (A) equity securities of the Company cease to be publicly-traded, or (B) the Employee is not elected or designated to serve as the sole President of Barr Research; or (vii) a Change in Control or Potential Change in Control occurs and (A) the dollar value of the stock optioned to the Employee annually thereafter is less than the average annual dollar value of the stock that was optioned to the Employee during the four years prior to the Change in Control or Potential Change in Control, or (B) the material terms of such options (including without limitation vesting schedules) are less favorable to the Employee than the material terms of the options that were granted to the Employee during the four years prior to the Change in Control or Potential Change in Control, and in either case (A) or (B) the situation is not remedied within 30 days after the Company receives written notice from the Employee of the situation. In no event shall the Employee's continued employment after any of the foregoing constitute her consent to the act or omission in question, or a waiver of her right to terminate her employment for Good Reason hereunder on account of such act or omission. 6. Confidential Information. The Employee agrees not to disclose, either while in the Corporation's employ or at any time thereafter, to any person not employed by the Company or a subsidiary of the Company, or not engaged to render services to the Company or a subsidiary of the Company, except with the prior written consent of an authorized officer of the Company or as necessary or appropriate for the performance of her duties hereunder, any confidential information obtained by her while in the employ of the Corporation, including, without limitation, information relating to any of the inventions, processes, formulae, plans, devices, compilations of information, research, methods of distribution, suppliers, customers, client relationships, marketing strategies or trade secrets of the Company or any subsidiary thereof; provided, however, that this provision shall not preclude the Employee from use or disclosure of information known generally to the public or of information not considered confidential by persons engaged in the businesses conducted by the Company or any subsidiary thereof, or from disclosure required by law or court order. The Employee also agrees that upon leaving the Corporation's employ she will not take with her, without the prior written consent of an authorized officer of the Company, and she will surrender to the Company, any record, list, drawing, blueprint, specification or other document or property of the Company or any subsidiary thereof, together with any copy or reproduction thereof, mechanical or otherwise, which is of a confidential nature relating to the Company or any subsidiary thereof, or without limitation, relating to its or their methods of distribution, suppliers, customers, client relationships, marketing strategies or any description of any formulae or secret processes, or which was obtained by her or entrusted to her during the course of her employment with the Corporation. page 9 of 19 7. Restrictive Covenants (a) Non-Solicitation. Employee covenants and agrees that, during her employment by the Corporation and during the one year period immediately following the termination of her employment with the Corporation for any reason (including, without limitation, a termination of employment by the Company without cause and a voluntary termination of employment by the Employee, in either case whether during the term of this Agreement, at the expiration of the term of this Agreement or at any time thereafter), she will not solicit or attempt to persuade any employee of the Company, its subsidiaries or affiliates (except the Employee's personal secretary or administrative assistant), or any other person who performs services for the Company, its subsidiaries or affiliates at the time the Employee's employment terminates or at any time within one year thereafter, to terminate or reduce or refrain from engaging in his or her employment or other service relationship with the Company, its subsidiaries or affiliates; provided, however, that responding to inquiries from any such employees or other persons that are not initiated by the Employee, and subsequently hiring such employees or other persons following the termination of their employment with the Company, its subsidiaries and affiliates shall be permitted. (b) Specific Enforcement. Employee recognizes and agrees that, by reason of her knowledge, experience, skill and abilities, her services are extraordinary and unique, that the breach or attempted breach of any of the restrictions set forth above in this section 7 will result in immediate and irreparable injury for which the Corporation will not have an adequate remedy at law, and that the Corporation shall be entitled to a decree of specific performance of those restrictions and to a temporary and permanent injunction enjoining the breach thereof, and to seek any and all other remedies to which the Corporation may be entitled, including, without limitation, monetary damages, without posting bond or furnishing security of any kind. (c) Restrictions Reasonable. Employee specifically and expressly represents and warrants that (i) she has reviewed and agreed to the restrictive covenants contained in this section 7 and their contemplated operation after receiving the advice of counsel of her choosing; (ii) she believes, after receiving such advice, that the restrictive covenants and their contemplated operation are fair and reasonable; (iii) she will not seek or attempt to seek to have the restrictive covenants declared invalid, and, after receiving the advice of counsel, expressly waives any right to do so; and (iv) if the full breadth of any restrictive covenant and/or its contemplated operation shall be held in any fashion to be too broad, such covenant or its contemplated operation, as the case may be, shall be interpreted in a manner as broadly in favor of the beneficiary of such covenant as is legally permissible. Employee recognizes and agrees that the restrictions on her activities contained in this section 7 are required for the reasonable protection of the Company and its investments; and that the restriction on his activities set forth in paragraph 7(a) will not deprive the Employee of the ability to earn a livelihood. (d) Non-Disparagement. Employee covenants and agrees that, during the one year period immediately following the termination of her employment with the page 10 of 19 Corporation for any reason (including, without limitation, a termination of employment by the Company without cause and a voluntary termination of employment by the Employee, in either case whether during the term of this Agreement, at the expiration of the term of this Agreement or at any time thereafter), she will not make disparaging remarks about the Company, its subsidiaries or affiliates or any of their officers, directors or employees, unless required by law or reasonably necessary to assert or defend her position in a bona fide dispute arising out of or relating to this Agreement or the breach thereof. (e) Effect on Termination Payments. The Employee recognizes and agrees that the Company shall not be obligated to make any payments provided for in paragraph 5(a) above if the Employee violates the provisions of section 6 or paragraph 7(a) or 7(d) above during the one year period immediately following the termination for any reason of her employment with the Corporation. In addition, the Employee recognizes and agrees that, if the Employee violates such provisions, the Company may recoup any payments the Company may have theretofore made pursuant to paragraph 5(a) above and any payments the Company may thereafter make under paragraph 5(a). The foregoing provisions of this paragraph 7(e) shall be in addition to and not by way of limitation of any other rights and remedies the Company may have in respect of the violation in question. 8. Indemnification To the fullest extent permitted by applicable law, the Company shall indemnify, defend and hold harmless the Employee from and against any and all claims, demands, actions, causes of action, liabilities, losses, judgments, fines, costs and expenses (including reasonable attorneys' fees and settlement expenses) arising from or relating to her service or status as an officer, director, employee, agent or representative of the Company or any subsidiary of the Company or in any other capacity in which the Employee serves or has served at the request of, or for the benefit of, the Company or its subsidiaries. The Company's obligations under this section 8 shall be in addition to, and not in derogation of, any other rights the Employee may have against the Company to indemnification or advancement of expenses, whether by statute, contract or otherwise. 9. Certain Additional Payments by the Company (a) Anything in this Agreement (other than the second sentence of this paragraph 9(a)) to the contrary notwithstanding, in the event it shall be determined that any payment or distribution by the Corporation to or for the benefit of the Employee (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this section 9) (a "Payment"), would be subject to the excise tax imposed by Section 4999 of the United States Internal Revenue Code (the "Code") or any interest or penalties are incurred by the Employee with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Employee shall be entitled to receive an additional page 11 of 19 payment (an "Gross-Up Payment") in an amount such that after payment by the Employee of all taxes and any benefits that result from the deductibility by the Employee of such taxes (including, in each case, any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Employee retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. However, if it shall be determined that none of the Payments would be subject to the Excise Tax if the total Payments were reduced in the aggregate by $25,000 or less, then in that event the total Payments shall be reduced by the smallest amount (in no event to exceed $25,000 in the aggregate) necessary to ensure that none of the Payments will be subject to the Excise Tax. The decision as to which Payments shall be so reduced shall be made by the Employee. (b) Subject to the provisions of paragraph 9(a) above and 9(c) below, all determinations required to be made under this section 9, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, and whether Payments are to be reduced pursuant to the second sentence of paragraph 9(a) above, shall be made by Deloitte & Touche or such other certified public accounting firm as may be designated by the Employee (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and the Employee within 15 business days of the receipt of notice from the Employee that there has been a Payment, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the "change in ownership or effective control" or "change in the ownership of a substantial portion of assets" (within the meaning of Code section 280G(b)(2)(A)) that gives rise to the Excise Tax, the Employee shall appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this section 9, shall be paid by the Company to the Employee within five days of the receipt of the Accounting Firm's determination. Any determination by the Accounting Firm shall be binding upon the Company and the Employee. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made (an "Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to paragraph 9(c) and the Employee thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment, along with any penalty and interest imposed with respect to such Underpayment, shall be promptly paid by the Company to or for the benefit of the Employee. (c) The Employee shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require either the payment by the Company of the Gross-Up Payment or the reduction of Payments pursuant to the second page 12 of 19 sentence of paragraph 9(a) above. Such notification shall be given as soon as practicable but no later than ten business days after the Employee is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Employee shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Employee in writing prior to the expiration of such period that it desires to contest such claim, the Employee shall: (i) give the Company any information reasonably requested by the Company relating to such claim, (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (iii) cooperate with the Company in good faith in order effectively to contest such claim, and (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Employee harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this paragraph 9(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Employee to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Employee agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine, provided, however, that if the Company directs the Employee to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Employee, on an interest-free basis and shall indemnify and hold the Employee harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Employee with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the page 13 of 19 Employee shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Employee of an amount advanced by the Company pursuant to paragraph 9(a) or 9(c), the Employee becomes entitled to receive any refund with respect to such claim, the Employee shall (subject to the Company's complying with the requirements of paragraph 9(c)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Employee of an amount advanced by the Company pursuant to paragraph 9(c), a determination is made that the Employee shall not be entitled to any refund with respect to such claim and the Company does not notify the Employee in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 10. Certain Enforcement Matters (a) If, after a Change in Control or Potential Change in Control, a dispute arises (i) with respect to this Agreement or the breach thereof, or (ii) with respect to the Employee's or the Corporation's rights or obligations under this Agreement, including but not limited to any such dispute between the Employee and the Company, the Company shall pay or reimburse the Employee for all reasonable costs and expenses (including court costs, arbitrators' fees and reasonable attorneys' fees and disbursements) the Employee incurs in connection with such dispute, including without limitation costs and expenses she incurs to obtain payment or otherwise enforce her rights under this Agreement, or to obtain payment of costs and expenses due under this paragraph 10(a). In addition, the Company shall pay the Employee such additional amount (a "Gross Up") as will be sufficient, after the Employee pays her tax liability with respect to the Gross Up from the Gross Up, to pay all of her federal, state and local tax liability with respect to any costs and expenses that are paid by the Company pursuant to this paragraph 10(a). The Company shall promptly pay or reimburse the Employee for all such costs and expenses as she incurs them, upon presentation of reasonable documentation of such costs and expenses, and shall promptly pay the related Gross Up as and when it pays or reimburses costs and expenses. The Employee shall not be obligated to repay any such costs, expenses or Gross Up unless it is finally determined by the trier of fact in a non-appealable judicial or arbitral decision or ruling (as applicable) that the Employee's principal positions with respect to the principal matter(s) in dispute were unreasonable and pursued in bad faith. (b) Any payments to which the Employee may be entitled under this Agreement, including, without limitation, under section 5, 8, 9 or 10 hereof, shall be made forthwith on the applicable date(s) for payment specified in this Agreement. If for any reason the amount of any payment due to the Employee cannot be finally determined on that date, such amount shall be estimated on a good faith basis by the Company and the estimated amount shall be paid no later than within 10 days after such date. As soon page 14 of 19 as practicable thereafter, the final determination of the amount due shall be made and any adjustment requiring a payment to or from the Employee shall be made as promptly as practicable. (c) Any controversy or claim arising, after a Change in Control or Potential Change in Control, out of or related to this Agreement or the breach thereof, shall be settled by binding arbitration in the City of New York, in accordance with the employment dispute arbitration rules of the American Arbitration Association then in effect, and the arbitrator's decision shall be binding and final and judgment upon the award rendered may be entered in any court having jurisdiction thereof, except that the Employee may elect to have any such controversy or claim settled by judicial determination in lieu of arbitration by bringing a court action, if she is the plaintiff or, if she is not the plaintiff, demanding such judicial determination within the time to answer any complaint in any arbitration action that may be commenced. 11. Change in Control (a) The term "Change in Control" as used in this Agreement means a change of control of the Company of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), whether or not the Company is then subject to such reporting requirement; provided that, whether or not any of the following events would constitute a change of control of such a nature, a Change in Control shall be deemed to occur for purposes of this Agreement if and when any of the following events occur: (i) any "person" (as such term is used in Sections 13(d) and 14(d)(2) of the Exchange Act), other than-- (A) the Company, (B) a Subsidiary, (C) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or a Subsidiary, or (D) an underwriter engaged in a distribution of Company stock to the public with the Company's written consent, becomes the beneficial owner (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of Voting Securities that meet two tests: (I) they represent more than thirty percent (30%) of the combined voting power of the then outstanding Voting Securities, and (II) they also represent more than the percentage of the combined voting power of the then outstanding Voting Securities beneficially owned, directly or indirectly, at that time by Bernard C. Sherman and his affiliates (as defined in Rule 12b-2 under the Exchange Act). However, the second test stated in clause (II) above shall not apply if the "person" in question is Bernard C. Sherman and/or his affiliates (as defined in Rule 12b-2 under the Exchange Act). In addition, if the "person" in question is an institutional investor whose investment in Voting Securities is purely passive when such page 15 of 19 person becomes the beneficial owner of Voting Securities that meet the tests set forth in clause (I) and, if applicable, (II) above, then such event (i.e., such person's becoming the beneficial owner of such Voting Securities) shall not be deemed to constitute a Change in Control under this subparagraph 11(a)(i) for so long as (and only for so long as) such person's investment in Voting Securities remains purely passive; or (ii) the stockholders of the Company approve a merger, consolidation, recapitalization or reorganization of the Company or a Subsidiary, reverse split of any class of Voting Securities, or an acquisition of securities or assets by the Company or a Subsidiary, or consummation of any such transaction if stockholder approval is not obtained, other than (A) any such transaction in which the holders of outstanding Voting Securities immediately prior to the transaction receive, with respect to such Voting Securities (or, in the case of a transaction in which the Company is the surviving corporation or a transaction involving a Subsidiary, retain), voting securities of the surviving or transferee entity representing more than fifty percent (50%) of the total voting power outstanding immediately after such transaction, with the voting power of each such continuing holder relative to other such continuing holders not substantially altered in the transaction, or (B) any such transaction which would result in a Related Party beneficially owning more than 50 percent of the voting securities of the surviving entity outstanding immediately after such transaction; or (iii) the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets other than any such transaction which would result in a Related Party owning or acquiring more than 50 percent of the assets owned by the Company immediately prior to the transaction; or (iv) the persons who were members of the Board of Directors of the Company immediately before a tender or exchange offer for shares of Common Stock by any person other than the Company or a Related Party, or before a merger or consolidation of the Company or a Subsidiary, or contested election of the Board of Directors of the Company, or before any combination of such transactions, cease to constitute a majority of the Board of Directors of the Company as a result of such transaction or transactions. (b) For purposes of paragraph 11(a) above: (i) the term "Related Party" shall mean (A) a Subsidiary, (B) an employee or group of employees of the Company or any Subsidiary, (C) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any Subsidiary, or (D) a corporation or other form of business entity owned directly or indirectly by the stockholders of the Company in substantially the same proportion as their ownership of Voting Securities; (ii) the term "Subsidiary means a corporation or other form of business association of which shares (or other ownership interests) having more than 50% page 16 of 19 of the voting power are, or in the future become, owned or controlled, directly or indirectly, by the Company; and (iii) the term "Voting Securities" shall mean any securities of the Company which carry the right to vote generally in the election of directors. (c) For purposes of this Agreement, a "Potential Change in Control" means that (i) the Company enters into an agreement, the consummation of which would result in the occurrence of a Change of Control; or (ii) the Board adopts a resolution to the effect that, for purposes of this Agreement, a potential change in control of the Company has occurred. 12. Severability; Survival (a) In the event that any provision of this Agreement shall be determined to be invalid or unenforceable for any reason, the remaining provisions of this Agreement not so invalid or unenforceable shall be unaffected thereby and shall remain in full force and effect to the fullest extent permitted by law; and (b) Any provision of this Agreement which may for any reason be invalid or unenforceable in any jurisdiction shall remain in effect and be enforceable in any jurisdiction in which such provision shall be valid and enforceable. (c) The provisions of sections 6, 7, 8, 9 and 10 of this Agreement, and any other provision of this Agreement which is intended to apply, operate or have effect after the expiration or termination of the term of this Agreement, or at a time when the term of this Agreement may have expired or terminated, shall survive the expiration or termination of the term of this Agreement for any reason. 13. General Provisions (a) No right or interest to or in any payments to be made under this Agreement shall be subject to anticipation, alienation, sale, assignment, encumbrance, pledge, charge or hypothecation or to execution, attachment, levy or similar process, or assignment by operation of law. All payments to be made by the Corporation hereunder shall be subject to the withholding of such amounts as the Corporation may determine it is required to withhold under the laws or regulations of any governmental authority, whether foreign, federal, state or local. (b) To the extent that the Employee acquires a right to receive payments from the Corporation under this Agreement, such right shall be no greater than the right of an unsecured general creditor of the Corporation. All payments to be made hereunder shall be paid from the general funds of the Corporation and no special or separate fund shall be established and no segregation of assets shall be made to assure payment of any amount hereunder. page 17 of 19 (c) This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of New York, without giving effect to the principles of conflicts of laws of that State. (d) This Agreement shall be binding upon and inure to the benefit of the Company, Barr Research, and their successors and assigns, and the Employee, her heirs, devisees, distributees and legal representatives. (e) Any notice or other communication to the Corporation pursuant to any provision of this Agreement shall be given in writing and will be deemed to have been delivered: (i) when delivered in person to the Corporate Secretary or General Counsel of the Company; or (ii) one week after it is deposited in the United States certified or registered mail, postage prepaid, addressed to the Corporate Secretary of the Company at 300 Corporate Drive, Building #10, Bradley Corporate Park, Blauvelt, New York 10913 or at such other address of which the Company may from time to time give the Employee written notice in accordance with paragraph 13(f) below. (f) Any notice or other communication to the Employee pursuant to any provision of the Agreement shall be given in writing and will be deemed to have been delivered: (i) when delivered to the Employee in person, or (ii) one week after it is deposited in the United States certified or registered mail, postage prepaid, addressed to the Employee at her address as it appears on the records of the Corporation or at such other address of which the Employee may from time to time give the Corporation written notice in accordance with paragraph 13(e) above. (g) No provision of this Agreement may be amended, modified or waived unless such amendment, modification or waiver shall be agreed to in a writing signed by the Employee and an authorized officer of the Company. (h) This instrument contains the entire agreement of the parties relating to the subject matter of this Agreement and supersedes and replaces all prior agreements and understandings with respect to such subject matter, and the parties have made no agreements, representations or warranties relating to the subject matter of this Agreement which are not set forth herein. page 18 of 19 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. BARR LABORATORIES, INC., on its own behalf and on behalf of its subsidiary, BRL Incorporated, as third party beneficiary By:_______________________ [SEAL] Attest: __________________________ Secretary __________________________ Employee page 19 of 19 APPENDIX EXAMPLES ILLUSTRATING INTENDED OPERATION OF EXTENSION PROVISIONS OF PARAGRAPH 2 Example 1: Facts: Neither the Company nor the Employee gives the other party written notice of non-extension before the date that is six months before the third anniversary of the Commencement Date. Result: Effective as of the date that is six months before the third anniversary of the Commencement Date, the term of the Agreement is extended 12 months, so that it will expire on the fourth anniversary of the Commencement Date unless further extended in accordance with the provisions of Paragraph 2 of the Agreement. Example 2: Facts: Either the Company or the Employee gives the other party written notice of non-extension before the date that is six months before the third anniversary of the Commencement Date. Result: The term of the Agreement is not extended, and expires on the third anniversary of the Commencement Date. Example 3: Facts: Neither the Company nor the Employee gives the other party written notice of non-extension before the date that is six months before the fourth anniversary of the Commencement Date. Result: Effective as of the date that is six months before the fourth anniversary of the Commencement Date, the term of the Agreement as extended in accordance with Example 1 above is further extended 12 months, so that it will expire on the fifth anniversary of the Commencement Date unless further extended in accordance with the provisions of Paragraph 2 of the Agreement. Example 4: Facts: Either the Company or the Employee gives the other party written notice of non-extension on or after the date that is six months before the fourth anniversary of the Commencement Date and before the date that is six months before the fifth anniversary of the Commencement Date. Result: The term of the Agreement as extended is not further extended, and expires on the fifth anniversary of the Commencement page 20 of 19 EX-10.23 7 y63477exv10w23.txt AGREEMENT WITH FREDRICK J. KILLION Exhibit 10.23 EMPLOYMENT AGREEMENT AGREEMENT dated as of the 8th day of February, 2002 between Barr Laboratories, Inc., a New York corporation having its principal executive offices at 300 Corporate Drive, Building #10, Bradley Corporate Park, Blauvelt, New York 10913 (the "Company"), and Frederick J. Killion (the "Employee"). WITNESSETH: WHEREAS, the Company wishes to assure itself of the services of the Employee and provide an inducement for the Employee to enter into its employ; and WHEREAS, the Employee is willing to serve in the employ of the Company for the period and on the other terms and conditions hereafter set forth; NOW, THEREFORE, the Company and the Employee hereby agree as follows: 1. Employment. The Company agrees to employ the Employee, and the Employee agrees to enter into and remain in the employ of the Company, during the term of this Agreement and on the other terms and conditions hereafter set forth. 2. Term. The term of this Agreement shall commence on March 1, 2002, (the Commencement Date") and shall terminate at the close of business on the third anniversary of the Commencement Date unless sooner terminated in accordance with the terms of this Agreement or extended as hereinafter provided. The term of this Agreement shall be extended, without further action by the Company or the Employee, on the date (the "Extension Effective Date") which is six months before the third anniversary of the Commencement Date and on the date (also an "Extension Effective Date") which is six months before each subsequent anniversary of the Commencement Date, for successive periods of twelve months each, unless either party shall have given written notice to the other party, in the manner set forth in paragraph 8(e) or (f) below, prior to the Extension Effective Date in question, that the term of this Agreement that is in effect at the time such written notice is given is not to be extended or further extended, as the case may be. 3. Positions and Responsibilities; Place of Performance. (a) Throughout the term of this Agreement, the Employee agrees to enter into and remain in the employ of the Company, and the Company agrees to employ the Employee, as its Senior Vice President and General Counsel, reporting to the Chairman and Chief Executive Officer of the Company (the "CEO"). As the Senior Vice President and General Counsel of the Company, the Employee shall be responsible for managing and supervising, and shall have responsibility for the day-to-day conduct of, the legal affairs of the Company, including managing and supervising internal and external counsel, subject to the authority of the Board of Directors of the Company (the "Board"), the CEO and the Chief Operating Officer (the "COO"), and shall have all of the powers, authority, duties and responsibilities usually incident to the position and role of Senior Vice President and General Counsel in public companies that are comparable in size and character to the Company, and shall perform such other reasonable duties, consistent with the position of Senior Vice President and General Counsel, as may lawfully be assigned to him by the Board, the CEO or the COO. (b) In connection with his employment by the Company, the Employee shall be based at the principal executive offices of the Company in Washington, D.C. but agrees to travel, to the extent reasonably necessary to perform his duties and obligations under this Agreement, to Company facilities and other destinations elsewhere. (c) During the term of this Agreement, the Employee shall serve the Company on an exclusive basis and shall devote all his business time, attention, skill and efforts to the faithful performance of his duties hereunder; provided that the Employee may engage in community service and charitable activities that do not interfere with the performance of his duties and responsibilities hereunder. 4. Compensation. For all services rendered by the Employee in any capacity during the term of this Agreement, and for his undertakings with respect to confidential information set forth in paragraph 6 below, the Employee shall be entitled to the following: (a) a salary, payable in installments not less frequent than monthly, at the annual rate of three hundred and twenty-five thousand dollars ($325,000), with such increases in such rate, if any, as the Compensation Committee of the Board may approve from time to time during the term of this Agreement (the annual salary rate as increased from time to time during the term of this Agreement being hereafter referred to as the "Base Salary"); (b) participation in the Company's annual executive incentive or bonus plan as in effect from time to time, with the opportunity to receive an award in accordance with the terms and conditions of such plan, for each fiscal year of the Company that commences or terminates during the term of this Agreement, of up to 40% of the Base Salary earned during such year (or such higher percentage as the Board or a committee of the Board may prescribe from time to time during the term of this Agreement), it being understood that (i) any award for the fiscal year of the Company in which the term of this Agreement commences or terminates pursuant to the terms hereof shall be prorated based on the portion of such fiscal year that coincides with the term of this Agreement, (ii) notwithstanding clause (i) of this paragraph 4(b), the award for the fiscal year of the Company in which the term of this Agreement commences shall not be less than sixty-five thousand dollars ($65,000), and (iii) any award for the fiscal year of the Company in which the term of this Agreement terminates pursuant to the terms hereof shall be made at the same time as awards (if any) are made to other participants with respect to such fiscal year; (c) a sign-on bonus of $125,000 which shall be due and payable on the Commencement Date, plus an additional payment of $125,000 (the "Retention Payment") which shall be paid on January 3, 2003 if the Employee is then in the employ of the Company; (d) options to purchase a total of 50,000 shares of the Company's common stock, subject to the terms and conditions of any stock option or stock incentive plan of the Company under which the options may be granted, such other terms and conditions consistent with the terms of such plan as the Board or a committee of the Board granting the options (the Administrator") may impose, and the following terms and conditions: (i) the price at which shares may be purchased under the options shall be the fair market value of the shares on the date on which the options are granted (the "Grant Date"); and (ii) the options shall become exercisable in five equal annual installments of 10,000 shares each commencing on the first anniversary of the Grant Date and continuing on each of the four succeeding anniversaries of the Grant Date, provided in the case of each such installment that the Employee's full-time employment by the Company continues until the anniversary date in question; and (iii) to the extent not therefore exercisable, the options shall become exercisable on the date, if any, on which a Change in Control (as defined in the Company's 1993 Stock Incentive Plan as in effect on the date of this Agreement) occurs, if the Employee's full-time employment by the Company continues until that date, provided that, if such Change in Control occurs less than six months after the Grant Date, the Employee agrees in writing (if requested to do so by the Administrator) to remain in the employ of the Company or a subsidiary at least through the date which is six months after the Grant Date with substantially the same title, duties, authority, reporting relationships and compensation as on the day immediately preceding such Change in Control; and (iv) the options shall expire on the tenth anniversary of the Grant Date unless the Employee's employment terminates before that date, in which case the options shall expire upon such termination of employment or within such period of time thereafter as the Administrator may specify in the instrument evidencing the grant of the options; (e) the business and personal use of an automobile at Company expense including, without limitation, payment or reimbursement of automobile insurance and maintenance expenses in accordance with the Company's automobile policy applicable to senior officers on the date of this Agreement; and (f) participation in all Company health, welfare, savings and other employee benefit and fringe benefit plans (including vacation pay plans or policies and life and disability insurance plans) in which other senior officers of the Company participate during the term of this Agreement, including without limitation the Company's 401(k) Savings and Retirement Plan, its supplemental 401(k) plan, its employee stock purchase plan, the CIGNA medical and dental plan, its supplemental medical reimbursement program, its group term life insurance and supplemental life insurance plan, its flexible spending account plan and its long term care insurance plan, subject in all events to the terms and conditions of such plans as in effect from time to time. Nothing in this paragraph (f) shall preclude the Company from amending or terminating any such plan at any time; provided that in no event shall the Employee be entitled to less than four weeks of vacation with pay per year of employment. The plans covered by this paragraph (f) shall not include the annual incentive or stock option plans, which are covered by paragraphs (b) and (d) above. 5. Termination of Employment. (a) Termination by the Company without Good Cause or by the Employee for Good Reason. (i) If during the term of this Agreement the Employee's employment with the Company is terminated by the Company without Good Cause or is terminated by the Employee for Good Reason other than at or after the expiration of the term of this Agreement as the same may have been extended in accordance with the provisions of paragraph 2 above, the Company, subject to compliance by the Employee with the provisions of paragraph 6 below, relating to confidential information, shall, as liquidated damages or severance pay or both (whichever characterization will serve to validate the payments), and as additional consideration for the Employee's undertakings under paragraph 6 below, (A) pay the Employee a lump sum amount of money equal to two (2) times the Employee's Base Salary, and (B) if such employment termination occurs before the Retention Payment referred to in paragraph 4(c) above has been paid to the Employee, pay the Retention Payment. (ii) If the term of this Agreement as the same may have been extended in accordance with the provisions of paragraph 2 above is not extended or further extended because the Company gives written notice of non-extension to the Employee as provided in paragraph 2 above, and the Company does not have Good Cause for termination of the Employee's employment at the time of giving such notice, then the Company, subject to fulfillment by the Employee of his obligations under this Agreement during the balance of the term and his compliance with the provisions of paragraph 6 below, relating to confidential information, shall, as non-renewal compensation, and as additional consideration for the Employee's undertakings under this Agreement including paragraph 6 below, pay the Employee a lump sum amount of money equal to 1.5 times the Employee's Base Salary. The Company shall pay such amount upon the expiration of the term that is in effect at the time the Company gives such written notice of non-extension to the Employee. (iii) The foregoing provisions of this paragraph 5(a) shall be in lieu of any severance pay that may be payable under any plan or practice of the Company , but shall be in addition to (and not in lieu of) any payments to which the Employee may be entitled under Section 6A below. (b) Termination by the Company for Good Cause or by the Employee without Good Reason. If, during the term of this Agreement, the Employee's employment by the Company is terminated by the Company for Good Cause or by the Employee without Good Reason, the Employee shall not be entitled to receive any compensation under paragraph 4 above acruing after the date of such termination or any payment under paragraph 5(a) above. However, the Company's obligations under Section 6A below shall not be affected by such termination of employment. The provisions of this paragraph 6(b) shall be in addition to, and not in lieu of, any other rights and remedies the Company may have at law or in equity or under any other provision of this Agreement in respect of such termination of employment. (c) Good Cause Defined. For purposes of this Agreement, the Company shall have "Good Cause" to terminate the Employee's employment during the term of this Agreement if: (i) the Employee fails to substantially perform his duties hereunder for any reason or fails to devote substantially all his business time exclusively to the affairs of the Company, and such failure is not discontinued within a reasonable period of time, in no event to exceed 30 days, after the Employee receives written notice from the Company of such failure; or (ii) the Employee commits an act of dishonesty resulting or intended to result directly or indirectly in gain or personal enrichment at the expense of the Company; or (iii) the Employee is grossly negligent or engages in willful misconduct or insubordination in the performance of his duties hereunder; or (iv) the Employee breaches his obligations under paragraph 6 below, relating to confidential information. (d) Good Reason Defined. For purposes of this Agreement, the Employee shall have "Good Reason" to terminate his employment during the term of this Agreement only if: (i) the Company fails to provide compensation or benefits or indemnification that the Company is obligated to provide under paragraph 4 above or Section 6A below and the failure is not remedied within 30 days after the Company receives written notice from the Employee of such failure; or (ii) the Company assigns the Employee duties, responsibilities or reporting relationships not contemplated by paragraph 3 above without his consent, or limits his duties or responsibilities contemplated by paragraph 3 above in any respect materially detrimental to him, and in either case the situation is not remedied within 30 days after the Company receives written notice from the Employee of the situation; or (iii) he is removed from, or not elected or reelected to, the position of Senior Vice President and General Counsel, and the Company does not have Good Cause for doing so; or (iv) the Company relocates his office outside of Washington, D.C. or the Company's principal executive offices in Washington, D.C. without his consent and the situation is not remedied within 30 days after the Company receives written notice from the Employee of the situation. 6. Confidential Information. The Employee agrees not to disclose, either while in the Company's employ or at any time thereafter, to any person not employed by the Company, or not engaged to render services to the Company, except with the prior written consent of an authorized officer of the Company or as necessary or appropriate for the performance of his duties hereunder, any confidential information obtained by him while in the employ of the Company, including, without limitation, information relating to any of the inventions, processes, formulae, plans, devices, compilations of information, research, methods of distribution, suppliers, customers, client relationships, marketing strategies or trade secrets of the Company or any subsidiary thereof; provided, however, that this provision shall not preclude the Employee from use or disclosure of information known generally to the public or of information not considered confidential by persons engaged in the businesses conducted by the Company or any subsidiary thereof, or from disclosure required by law or court order. The Employee also agrees that upon leaving the Company's employ he will not take with him, without the prior written consent of an authorized officer of the Company, and he will surrender to the Company, any record, list, drawing, blueprint, specification or other document or property of the Company or any subsidiary thereof, together with any copy or reproduction thereof, mechanical or otherwise, which is of a confidential nature relating to the Company or any subsidiary thereof, or without limitation, relating to its or their methods of distribution, suppliers, customers, client relationships, marketing strategies or any description of any formulae or secret processes, or which was obtained by him or entrusted to him during the course of his employment with the Company. 6A. Indemnification To the fullest extent permitted by applicable law, the Company shall indemnify, defend and hold harmless the Employee from and against any and all claims, demands, actions, causes of action, liabilities, losses, judgments, fines, costs and expenses (including reasonable attorneys' fees and settlement expenses) arising from or relating to his service or status as an officer, director, employee, agent or representative of the Company or any subsidiary of the Company or in any other capacity in which the Employee serves or has served at the request of, or for the benefit of, the Company or its subsidiaries. The Company's obligations under this Section 6A shall be in addition to, and not in derogation of, any other rights the Employee may have against the Company to indemnification or advancement of expenses, whether by statute, contract or otherwise, and shall survive the expiration or termination of the term of this Agreement for any reason. 7. Severability (a) In the event that any provision of this Agreement shall be determined to be invalid or unenforceable for any reason, the remaining provisions of this Agreement not so invalid or unenforceable shall be unaffected thereby and shall remain in full force and effect to the fullest extent permitted by law; and (b) Any provision of the Agreement which may for any reason be invalid or unenforceable in any jurisdiction shall remain in effect and be enforceable in any jurisdiction in which such provision shall be valid and enforceable. 8. General Provisions. (a) No right or interest to or in any payments to be made under this Agreement shall be subject to anticipation, alienation, sale, assignment, encumbrance, pledge, charge or hypothecation or to execution, attachment, levy or similar process, or assignment by operation of law. All payments to be made by the Company hereunder, including the sign-on bonus and Retention Payment referred to in paragraph 4(c) above, shall be subject to the withholding of such amounts as the Company may determine it is required to withhold under the laws or regulations of any governmental authority, whether foreign, federal, state or local. (b) To the extent that the Employee acquires a right to receive payments from the Company under this Agreement, such right shall be no greater than the right of an unsecured general creditor of the Company. All payments to be made hereunder shall be paid from the general funds of the Company and no special or separate fund shall be established and no segregation of assets shall be made to assure payment of any amount hereunder. (c) This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of New York, without giving effect to the principles of conflicts of laws of that State. (d) This Agreement shall be binding upon and inure to the benefit of the Company, its successors and assigns, and the Employee, his heirs, devisees, distributees and legal representatives. (e) Any notice or other communication to the Company pursuant to any provision of this Agreement shall be given in writing and will be deemed to have been delivered: (i) when delivered in person to the Corporate Secretary or Chief Executive Officer of the Company; or (ii) one week after it is deposited in the United States certified or registered mail, postage prepaid, addressed to the Corporate Secretary of the Company at 300 Corporate Drive, Building #10, Bradley Corporate Park, Blauvelt, New York 10913 or at such other address of which the Company may from time to time give the Employee written notice in accordance with paragraph 8(f) below. (f) Any notice or other communication to the Employee pursuant to any provision of the Agreement shall be given in writing and will be deemed to have been delivered: (i) when delivered to the Employee in person, or (ii) one week after it is deposited in the United States certified or registered mail, postage prepaid, addressed to the Employee at his address as it appears on the records of the Company or at such other address of which the Employee may from time to time give the Company written notice in accordance with paragraph 8(e) above. (g) No provision of this Agreement may be amended, modified or waived unless such amendment, modification or waiver shall be agreed to in a writing signed by the Employee and an authorized officer of the Company. (h) This instrument contains the entire agreement of the parties relating to the subject matter of this Agreement and supersedes and replaces all prior agreements and understandings with respect to such subject matter, and the parties have made no agreements, representations or warranties relating to the subject matter of this Agreement which are not set forth herein. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. BARR LABORATORIES, INC. By: ----------------------- [SEAL] Attest: - ----------------------- Secretary -------------------------- EX-10.24 8 y63477exv10w24.txt AGREEMENT WITH E.THOMAS ARINGTON EXHIBIT 10.24 Thomas Arington execution copy 0020924000 AMENDED AND RESTATED EMPLOYMENT AGREEMENT THIS AMENDED AND RESTATED AGREEMENT, made as of the 29th day of March, 2002, by and between Duramed Pharmaceuticals, Inc., a Delaware corporation (the "Company"), and E. Thomas Arington (the "Employee"), W I T N E S S E T H: WHEREAS, an Amended and Restated Employment Agreement was entered into between the Company and the Employee on July 18, 2000 (the "Agreement"); and WHEREAS, following the change in control that occurred on October 24, 2001, pursuant to the Agreement and Plan of Merger dated June 29, 2001, by and among Barr Laboratories, Inc. ("Barr") and the Company ("Merger"), the Company and Employee desire to further amend and restate the Agreement (the Agreement as amended and restated herein being hereafter referred to as the "Amended Agreement"); and WHEREAS, the Company is prepared to pay the Employee a sum of Five Hundred Thousand Dollars ($500,000) in order to incent him to further defer the exercise of his right to terminate his employment pursuant to the last sentence of Section 6(d) of the Agreement until after June 30, 2002, a sum of Two Million Dollars ($2,000,000) for entering into this Amended Agreement and in lieu of severance pay otherwise payable under the Agreement, and a sum of One Million Two Hundred Thousand Dollars ($1,200,000) to agree to certain restrictions on his activities during the Employment Period and thereafter that are contained herein; NOW THEREFORE, in consideration of the foregoing premises and the mutual covenants hereinafter set forth, IT IS AGREED that the Agreement is hereby amended and restated in its entirety to read as follows: Page 1 of 23 Thomas Arington execution copy 0020924000 (1) Continued Employment. The Company recognizes that, under Section 6(d) of the Agreement as modified by that certain letter agreement dated June 29, 2001 between the Employee and Barr, the Employee has the right to terminate his employment for any reason during the six month period beginning on April 1, 2002 and receive certain payments and benefits in connection with such employment termination. The Company wishes to induce the Employee to both (a) further defer any termination by him of his employment until after June 30, 2002 at the earliest, and (b) remain in the employ of the Company thereafter until June 30, 2004. To those ends, (i) the Company agrees to pay the Employee $500,000 immediately upon signing this Amended Agreement and the Employee hereby agrees to remain an employee of the Company through June 30, 2002 on the terms provided herein, and (ii) the Company hereby agrees to continue the employment of Employee pursuant to the terms provided herein until June 30, 2004 (the period of time from the date of this Amended Agreement to June 30, 2004 being hereafter referred to as the "Employment Period", whether or not the Employee in fact remains employed by the Company throughout that period). The Employee recognizes and agrees that the aforementioned payment is being made in consideration of his continued employment through June 30, 2002 and that if he terminates his employment on or prior to that date, or if his employment shall be terminated for Cause on or prior to that date, he will be obligated to repay the portion of such payment that has not been earned in accordance with paragraph 7(b) below. (2) Duties. Under this Amended Agreement the Employee shall be employed in the position of Special Transition Employee. In such employment, the Employee's duties shall consist of aiding in the facilitation of the Merger, including in particular facilitating the transition to Barr executives of responsibility for, and facilitating the resolution of, matters that commenced prior to the Merger and other matters concerning which the Employee possesses special knowledge, assisting in litigation, and all other things reasonably requested by the Company. However, no change in the Employee's location of employment to outside the Cincinnati, Ohio Page 2 of 23 Thomas Arington execution copy 0020924000 area, or in the Employee's title, shall be made without the prior written consent of the Employee. The Employee shall have the powers necessary to perform the duties assigned and shall be provided such supporting staff, secretarial (including the services of Susan Falick until June 30, 2002) and other assistance, office space and accouterments as shall be necessary and appropriate in light of the duties assigned. After the Employment Period, Employee shall make himself available to the Company as a consultant on an as needed basis for specific projects related solely to the transition following the Merger, provided such consulting does not interfere with his other business and employment commitments at the time, with any compensation for such consultation to be determined by mutual agreement of the parties. The Employee shall be entitled to a minimum of paid vacation annually equal to that which he was entitled immediately prior to the Change in Control, and shall take any vacation accrued during the Employment Period prior to terminating employment. Subject to the foregoing, the Employee shall have the sole discretion to determine the time and intervals of such vacations. (3) Compensation. During the Employment Period, the Employee shall be compensated as follows: (a) The Employee shall receive a salary at the annual rate of Four Hundred Thousand Dollars ($400,000) ("Base Salary") payable ratably in arrears not less often than twice per month. (b) The Employee shall be reimbursed for any and all monies advanced in connection with his employment for reasonable and necessary expenses incurred on behalf of the Company, in accordance with and subject to the substantiation and other terms and conditions of the Company's business expense reimbursement policy applicable to other employees of comparable rank. (c) The Company is party to a Split Dollar Insurance Agreement dated December 8, 1999 pertaining to a $1,275,000 life insurance policy on the life of Employee (Phoenix 2657322) and in connection with which the cash value and death benefit of such Page 3 of 23 Thomas Arington execution copy 0020924000 policy was collaterally assigned back to the Company to the extent of $192,894. The Company agrees to refrain from exercising its right to terminate said Split Dollar Insurance Agreement pursuant to paragraph 7 thereof until September 5, 2016, provided that the foregoing shall not prevent the Company from enforcing its rights under such collateral assignment before that date if any circumstances described in Section 2 of said collateral assignment (other than termination of said Split Dollar Insurance Agreement by the Company) occur before that date. The Company is also party to a Split Dollar Insurance Agreement dated December 8, 1999 pertaining to a $3,000,000 second-to-die policy on the lives of Employee and his wife (Phoenix 2764238) and in connection with which the cash value and death benefit of such policy was collaterally assigned back to the Company to the extent of its cumulative premiums paid on such policy. Prior to the date of this Amended Agreement, the Company has funded such policy, on a split dollar basis, to the extent of $51,000 per year. The Company agrees to continue to fund such policy on a split dollar basis to the extent of $51,000 per year for the duration of the Employment Period but not beyond the date, if any, on which the Employee's employment by the Company is voluntarily terminated by the Employee, other than for Good Reason, or is terminated by the Company for Cause, and agrees to refrain from exercising its right to terminate said Split Dollar Insurance Agreement pursuant to paragraph 7 thereof until September 5, 2008, provided that the foregoing shall not prevent the Company from enforcing its rights under such collateral assignment before September 5, 2008 if any circumstances described in Section 2 of such collateral assignment (other than termination of said Split Dollar Insurance Agreement by the Company) occur before that date. In addition, the Employee shall be included to the extent eligible thereunder in the Company's life insurance and supplemental life insurance plans, business travel accident plan, short term and long term disability plan, Humana medical plan, Delta dental plan, flexible spending account/cafeteria plan, long term care insurance plan and employee assistance program, at the expense of the Company on a comparable basis as other employees of comparable rank, it being understood that (i) the Page 4 of 23 Thomas Arington execution copy 0020924000 Company will not pay employee contributions for the Employee under any such plan unless it pays such employee contributions for other employees of comparable rank under such plan, (ii) the Employee may be ineligible to participate in such plans during part of the Employment Period if he did not elect to participate in such plans during the applicable enrollment periods that closed prior to the Employee's signing this Amended Agreement, and (iii) nothing herein shall prevent the Company or Barr from amending, modifying, terminating or replacing any of such plans during the Employment Period, provided that the Employee is included in any such replacement plan to the extent eligible thereunder and on the other terms and conditions of this paragraph (c). (d) The Employee shall be eligible to participate in the Company's 401(k) and excess 401(k) plans and shall be fully vested under each of those plans. In addition, the Employee shall be eligible to participate in the Employee Stock Purchase Plan, on the same terms and conditions applicable to other employees of comparable rank, provided that the Employee will be eligible to participate in the cycle that is in progress under such Plan on the date of this Amended Agreement only if he elected to participate in such Plan during the applicable enrollment period that closed prior to the Employee's signing this Amended Agreement. (e) The Employee and Company acknowledge and agree that his options to purchase shares of Common Stock of the Company ("Duramed Options") did not vest at the Merger; that since the Merger his duties and responsibilities have consisted of those described in Section 2 above; that such duties and responsibilities represent a diminution in the Employee's position, authority, duties and responsibilities within the meaning of Section 6(d)(i) of the Agreement that entitled the Employee, under the Agreement as in effect prior to its being superseded by this Amended Agreement, to receive the benefits stated in Section 7(a) of such Agreement, including the immediate vesting of all unvested options to purchase shares of Common Stock of the Company then held by the Employee, upon any termination of Page 5 of 23 Thomas Arington execution copy 0020924000 employment by the Employee until December 31, 2005; and that, until the Employee terminated employment under the Agreement, such options would have continued to vest pursuant to the terms of the original grant. The parties do not intend to alter the vesting of such options. Accordingly, the parties acknowledge and agree that, any provision of this Amended Agreement to the contrary notwithstanding, the options will continue to vest pursuant to the terms of the original grant or will immediately vest in their entirety upon any termination of employment by the Employee until December 31, 2005, it being understood and acknowledged by the Company that a termination of employment at the expiration of the Employment Period as defined in Section 1 above shall be deemed to be a termination of employment by the Employee for this purpose. No provision of this Section (3)(e) is intended to extend the expiration date of any Duramed Option or alter the terms on which any Duramed Option will continue to vest pursuant to the original grant. (f) The Employee shall be entitled to an additional sum of Two Million Dollars ($2,000,000), payable upon signing this Amended Agreement, in consideration of his signing this Amended Agreement and in lieu of his participating in any compensation, employee benefit or fringe benefit plans (including but not limited to any stock incentive plan) during the Employment Period other than those specifically provided for in paragraphs 3(c) and 3(d) above and in full satisfaction of any accrued vacation pay and in lieu of any amounts which would have been paid under the Agreement or under any other plan or arrangement in the event of termination of the Employee's employment for Good Reason as defined in the Agreement but which are not payable under any other provision of this Amended Agreement. (g) The Employee shall be entitled to an additional sum of One Million Two Hundred Thousand Dollars ($1,200,000), payable upon signing this Amended Agreement, in consideration of his special undertakings under Section 10 of this Amended Agreement. The Employee recognizes and agrees that the aforementioned payment is being made in consideration of his special undertakings under Section 10 and, especially, paragraph 10(f) Page 6 of 23 Thomas Arington execution copy 0020924000 below, and that if he fails to comply with his obligations thereunder, he will be obligated to repay the portion of such payment that has not been earned in accordance with paragraph 10(f) below. (4) Intentionally left blank. (5) Indemnification. To the extent permitted by law, the Company shall pay, indemnify and hold the Employee harmless from any liability, cost or expense (including, without limitation, reasonable attorney's fees) incurred by the Employee in the defense of any claim, proceeding or action arising out of his performance of services for the Company or out of his status as an officer or director of the Company or while serving at the request of the Company as an officer, director, partner or employee of any other entity. Notwithstanding the foregoing, the Company shall not indemnify the Employee against any act or omission by the Employee constituting fraud, willful misconduct or gross negligence. In addition, if the Company terminates the Employee for Cause and it is subsequently determined in a non-appealable judicial decision that the Company did not have Cause for terminating the Employee, the Company will reimburse the Employee for reasonable attorney's fees and expenses he incurs as a result of such termination. (6) Termination. The following provisions of this Section 6 shall apply only during the Employment Period: (a) Disability. For purposes of this Amended Agreement, the term "permanent disability" shall be defined as a physical or mental disability or disease which, in the opinion of an independent qualified physician appointed by the Company, prevents the Employee from discharging the customary normal duties of his employment with the Company. (b) Cause. The Company may terminate the Employee's employment for Cause. For purposes of this Amended Agreement, "Cause" shall mean the willful engaging by the Employee in illegal conduct which is materially and demonstrably injurious to the Company. Page 7 of 23 Thomas Arington execution copy 0020924000 For purposes of this provision, no act or failure to act, on the part of the Employee, shall be considered "willful" unless it is done, or omitted to be done, by the Employee in bad faith or without reasonable belief that his action or omission was in the best interests of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by the Employee in good faith and in the best interests of the Company. (c) Good Reason. The Employee's employment may be terminated by the Employee for Good Reason at any time after the effective date of this Amended Agreement. For purposes of this Amended Agreement, "Good Reason" shall mean: (i) the assignment to the Employee of any duties inconsistent with the Employee's position, duties or responsibilities as contemplated by Section 2 of this Amended Agreement, or any other action by the Company which results in a change in such position, duties or responsibilities; (ii) any failure by the Company to comply with any of the provisions of Section 3 of this Amended Agreement; (iii) the Company's requiring the Employee to be based at any office or location other than within twenty-five miles of Cincinnati, Ohio or the Company's requiring the Employee to travel on Company business to a substantially greater extent than required immediately prior to the date of this Amended Agreement; or (iv) any purported termination by the Company of the Employee's employment otherwise than as expressly permitted by this Amended Agreement; or (v) the continued failure of the Company to perform substantially its obligations under this Amended Agreement after a written demand for substantial performance is delivered by the Employee to Barr's Chief Executive Officer which Page 8 of 23 Thomas Arington execution copy 0020924000 specifically identifies the manner in which the Employee believes the Company has not substantially carried out its obligations. Notwithstanding the above, "Good Reason" shall exclude an isolated, insubstantial and inadvertent action or failure to act not taken or occurring in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Employee. For purposes of this Section 6(c), any good faith determination of "Good Reason" by the Employee shall be conclusive. (d) Notice of Termination. Any termination by the Company for Cause, or by the Employee, shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 15 of this Amended Agreement. For purposes of this Amended Agreement, a Notice of Termination means a written notice which (i) indicates the specific termination provision in this Amended Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Employee's employment under the provision so indicated and (iii) if the Date of Termination (as defined below) is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than thirty days after the giving of such notice). The failure by the Employee or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause, respectively, shall not preclude the Employee or the Company, respectively, from asserting such fact or circumstance in enforcing the Employee's or the Company's rights hereunder. (e) Date of Termination. "Date of Termination" means the earlier of (i) if the Employee's employment is terminated by the Company for Cause, or by the Employee, the date of receipt of the Notice of Termination or any later date specified therein, as the case may be; (ii) if the Employee's employment is terminated by the Company other than for Cause, the Date of Termination shall be the date on which the Company notifies him of such Page 9 of 23 Thomas Arington execution copy 0020924000 termination; (iii) if the Employee's employment is terminated by reason of death or disability, the Date of Termination shall be the date of death of the Employee or the disability, as the case may be; and (iv) termination of the Employment Period. (7) Obligations of the Company upon Termination. The following provisions of this Section 7 shall apply only in the event of termination during the Employment Period: (a) Death; Disability; Good Reason; Other Than for Cause/ Employment Period Expiration. If the Employee dies, suffers a permanent disability or if the Company terminates the Employee's employment during the Employment Period other than for Cause or death or disability or the Employee terminates employment for Good Reason or the Employment Period expires, then in full discharge and settlement of any and all obligations of the Company and/or its affiliates, including Barr, to the Employee for compensation, benefits or emoluments of any kind (including but not limited to accrued vacation pay but excluding amounts payable pursuant to Section 8 hereof): (i) the Company shall pay to the Employee in a lump sum in cash within 30 days after the Date of Termination the sum of (1) the Employee's Base Salary through the end of the Employment Period, to the extent not theretofore paid, and (2) any unpaid compensation previously deferred by the Employee (together with any vested accrued interest or earnings net of losses thereon) under any plan other than the 401(k) plan, any other tax-qualified plan or the excess 401(k) plan (with respect to which plans payments if any shall be made at the time or times and on the terms and subject to the conditions set forth in the applicable plan documents)(the sum of the amounts described in clause (2) shall be hereinafter referred to as the "Accrued Obligations"); and (ii) to the extent not theretofore paid or provided, the Company shall timely pay or provide to the Employee when due any other amounts or benefits required to be paid or provided or which the Employee is entitled to receive under any plan, program, policy or practice or contract or agreement of the Company and its affiliated Page 10 of 23 Thomas Arington execution copy 0020924000 companies as a result of his participation therein prior to the Employment Period (all such other amounts and benefits being itemized on Schedule A hereto) or, in the case of the plans specifically provided for in paragraphs 3(c) and 3(d) above, as a result of his participation therein during the Employment Period (such other amounts and benefits shall be hereinafter referred to as the "Other Benefits"), it being understood and agreed, however, that, any provision of this Agreement or of any plan, program, policy or practice or contract or agreement of the Company and/or its affiliated companies to the contrary notwithstanding: A. the $500,000 amount payable pursuant to Section 1 above, the $2,000,000 amount payable pursuant to Section 3(f) above and the $1,200,000 amount payable pursuant to Section 3(g) above shall not be treated as cognizable compensation under any such plan, program, policy or practice or contract or agreement of the Company and/or its affiliated companies (each a "Plan" and, collectively, "Plans"), including without limitation any 401(k) plan and any excess or non-qualified 401(k) plan, and thus shall not give rise to any benefit obligation under any such Plan on the part of the Company or any affiliated company, including without limitation Barr, or any other person or entity, nor to any benefit entitlement under any such Plan or otherwise on the part of the Employee, and if, notwithstanding the foregoing provisions of this Section 7(a)(ii)(A), any Plan shall treat any of such amounts as cognizable compensation under any such Plan, the Employee hereby irrevocably waives and foregoes any benefit or increase in benefits resulting therefrom; and B. the $2,000,000 amount payable pursuant to Section 3(f) above shall be in lieu of and in full discharge of any severance pay obligation under any and all of the Plans (other than amounts payable pursuant to Section 8 hereof). (iii) as provided in Section 3(e) above, all unvested options to purchase shares of Common Stock of the Company then held by the Employee shall vest immediately. Page 11 of 23 Thomas Arington execution copy 0020924000 (b) Cause; other than for Good Reason. If the Employee's employment shall be terminated during the Employment Period for Cause, this Amended Agreement shall terminate without further obligations to the Employee other than the obligation to pay to the Employee (x) his Base Salary through the Date of Termination and (y) the amount of any compensation previously deferred by the Employee and referred to in Section 7(a)(i)(2) above in each case to the extent theretofore unpaid. If the Employee voluntarily terminates employment during the Employment Period, excluding a termination for Good Reason, this Amended Agreement shall terminate without further obligations to the Employee, other than for his Base Salary through the Date of Termination, the Accrued Obligations, and the timely payment or provision of Other Benefits, the immediate vesting of any options to purchase Common Stock of the Company then held by him, and the payment of any benefits payable pursuant to Section 8 hereof. In such case, all Accrued Obligations shall be paid to the Employee in a lump sum in cash within 30 days of the Date of Termination. If the Employee's employment shall be terminated on or before June 30, 2002 for Cause, or if the Employee terminates employment on or before that date, the Employee shall immediately repay to the Company the unearned portion of the $500,000 payment made pursuant to Section 1 above. The unearned portion of such payment shall be deemed to be equal to a fraction of such payment, the numerator of which shall be the number of full or partial calendar days in the period from the date of the employment termination through (and including) June 30, 2002 and the denominator of which shall be the number ninety-one (91). (8) Certain Additional Payments by the Company. (a) Anything in this Amended Agreement to the contrary notwithstanding, in the event it shall be determined at any time after the execution of this Amended Agreement that any payment or distribution by the Company to or for the benefit of the Employee (whether paid or payable or distributed or distributable pursuant to the terms of this Amended Agreement or otherwise, but determined without regard to any additional Page 12 of 23 Thomas Arington execution copy 0020924000 payments required under this Section 8) (a "Payment") would be subject to the excise tax imposed by Section 4999 or its equivalent or any successor provision of the United States Internal Revenue Code (the "Code") or any interest or penalties are incurred by the Employee with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Employee shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Employee of all taxes and any benefits that result from the deductibility by the Employee of such taxes (including, in each case, any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Employee retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. (b) Subject to the provisions of Section 8(c), all determinations required to be made under this Section 8, including whether and when a Gross-up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by the Company's certified public accounting firm (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and the Employee within 15 business days of the receipt of notice from the Employee that there has been a Payment, or such earlier time as is requested by the Company; provided however that the Accounting Firm must determine that a Gross-Up Payment is immediately required following a final determination by a court of competent jurisdiction that a Payment to or for the benefit of the Employee is subject to the Excise Tax. All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 8, shall be paid by the Company to the Employee within five days of the receipt of the Accounting Firm's determination. As a result of the uncertainty in the application of section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Page 13 of 23 Thomas Arington execution copy 0020924000 Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 8(c) and the Employee thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Employee. (c) The Employee shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten business days after the Employee is informed in writing of such claim and shall apprize the Company of the nature of such claim and the date on which such claim is requested to be paid. The Employee shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Employee in writing prior to the expiration of such period that it desires to contest such claim, the Employee shall: (i) give the Company any information reasonably requested by the Company relating to such claim, (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (iii) cooperate with the Company in good faith in order effectively to contest such claim, and (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all Page 14 of 23 Thomas Arington execution copy 0020924000 costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Employee harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 8(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Employee to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Employee agrees to prosecute such contest to a determination before any administrative tribunal, in courts, as the Company shall determine; provided, however, that if the Company directs the Employee to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Employee, on an interest-free basis and shall indemnify and hold the Employee harmless, on an after-tax basis from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Employee with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Employee shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Employee of an amount advanced by the Company pursuant to Section 8(a) or 8(c), the Employee becomes entitled to receive any refund with respect to such claim, the Employee shall (subject to the Company's complying with the requirements of Section 8(c)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the Page 15 of 23 Thomas Arington execution copy 0020924000 receipt by the Employee of an amount advanced by the Company pursuant to Section 8(c), a determination is made that the Employee shall not be entitled to any refund with respect to such claim and the Company does not notify the Employee in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. (e) The Company's obligations provided in this Section 8 shall survive until all applicable statutes of limitation with respect to the subject matter have terminated. (9) Confidentiality. The Employee will not at any time during the term of this Amended Agreement or thereafter, except as authorized by the Company, divulge, furnish or make accessible to any person, firm, corporation or other entity, any confidential information or any other information that is otherwise not publicly available which he presently possesses or which he may obtain during the course of his employment with respect to the business, customers or affairs of the Company or any subsidiary or affiliate of the Company or trade secrets, developments, know-how, methods or other information or data pertaining to practices, equipment, developments or any confidential or secret aspect of the business of the Company or any subsidiary or affiliate of the Company, and agrees that all such matters and information shall be kept strictly and absolutely confidential. The Employee, upon termination of his employment, irrespective of the time, manner or cause of termination, will surrender and deliver to the Company all lists, books, records and data of every kind relating to or in connection with the business of the Company or any subsidiary or affiliate of the Company, and all property belonging to the Company and any subsidiary or affiliate of the Company. (10) Special Undertakings. (a) The Employee agrees that any and all notes and records kept or made in connection with his employment shall be and are the sole and exclusive property of the Company; and the Employee further agrees that upon leaving the employment of the Page 16 of 23 Thomas Arington execution copy 0020924000 Company, he will place all such notes and records in the Company's possession, and will not take with him, without the consent of the Company's Board of Directors, any notes and records relating to or connected with the business, work or investigations of the Company, its affiliates and subsidiaries, or any of them, including drawings, blueprints or other reproduction. (b) The Employee further agrees that any secret apparatus, secret equipment, secret formula, secret method or process of the Company, that the Employee is aware of because of his employment with the Company, whether or not developed by the Employee, will not be disclosed to any third party or used by the Employee except in connection with his duties to the Company or unless the Employee shall first secure the consent of the Company's Board of Directors, either during his employment or after his employment by the Company shall have terminated. (c) Employee agrees that, during the Employment Period as defined in Section 1 above and during the one year period immediately following the Employment Period, he will not solicit or attempt to persuade any employee of the Company, its subsidiaries or affiliates, or any other person who performs services for the Company, its subsidiaries or affiliates at any time during the Employment Period or at any time within one year thereafter, to terminate or reduce or refrain from engaging in his or her employment or other service relationship with the Company, its subsidiaries or affiliates. Provided, however, that responding to inquiries and subsequently hiring such employees following their termination of employment with the Company shall be permitted. (d) Employee agrees that, during the Employment Period and the one year period immediately following the Employment Period, he will not make disparaging remarks about the Company, its subsidiaries or affiliates or any of their officers, directors or employees. (e) The Employee also agrees to cooperate with the Company and Barr in any legal action for which his participation is needed during the Employment Period or the one year period thereafter. The Company agrees to try to schedule all such participation so Page 17 of 23 Thomas Arington execution copy 0020924000 that it does not unduly interfere with the Employee's pursuits after he is no longer in the Company's employ. The Employee also hereby agrees not to communicate with anyone (other than the Employee's own attorneys) with respect to the facts or subject matter of any pending or potential litigation, or regulatory or administrative proceeding involving the Company, its subsidiaries or affiliates known or which becomes known to the Employee, other than any litigation or proceeding in which the Employee is a party-in-opposition, without giving prior notice to the Company and its legal counsel, and in the event that any other party attempts to obtain information or documents from the Employee with respect to matters possibly related to such litigation or proceeding, the Employee shall promptly notify the Company and its legal counsel. However, the Employee shall not be required to comply with the preceding sentence if and to the extent that doing so would violate the law. (f) The Employee agrees that, during the Employment Period as defined in Section 1 above and the one year period following the Employment Period (collectively, the "Restricted Period"), including but not limited to any portion of the Restricted Period that follows the termination of his employment with the Company for any reason (whether by the Company or the Employee and whether or not for Cause or Good Reason), he will not engage in competition with the Company as defined in the next sentence. For this purpose, "engage in competition with the Company" means manufacturing of any product, or causing a manufacturer to develop any product, being sold or to be sold in the United States (i) that on June 27, 2001 was being manufactured by the Company or Barr or any subsidiary of the Company or Barr ("Group"), or (ii) for which the Group had filed a NDA or an ANDA on or before June 27, 2001 seeking FDA approval to manufacture such product; provided that in no event shall passive ownership of less than 5% of any class of securities which are registered under section 12 of the Securities Exchange Act of 1934, as amended, by itself be deemed to constitute competition within the meaning of this sentence. If the Employee fails to comply with his obligations under this paragraph 10(f), the Employee shall immediately repay to the Page 18 of 23 Thomas Arington execution copy 0020924000 Company the unearned portion of the $1,200,000 payment made pursuant to paragraph 3(g) above. For this purpose, the unearned portion of such payment shall be deemed to be equal to a fraction of such payment, the numerator of which shall be the number of calendar days remaining in the Restricted Period after the first date of noncompliance and the denominator of which shall be the total number of calendar days in the Restricted Period. The parties recognize and agree that the foregoing permits the Employee during the Restricted Period to, among other matters, (A) engage in a business that manufactures any product that is not manufactured by any member of the Group on June 27, 2001 and for which no member of the Group had filed a NDA or an ANDA seeking FDA approval to manufacture such product, and (B) engage in the business of selling and distributing all multisource products that are normally available for sale in a broad based generic distributorship. (11) Enforceability. The parties agrees that nothing in this Amended Agreement shall in any way abrogate the right of the Company and the Employee to enforce by injunction or otherwise the due and proper performance and observance of the several covenants herein contained to be performed by the Employee or the Company or to recover damages for breach thereof. (12) Successors and Assigns. If the Company sells, assigns or transfers all or substantially all of its business and assets to any person, excluding affiliates of the Company, or if the Company merges into or consolidates or otherwise combines with any person which is a continuing or successor entity, then the Company shall assign all of its right, title and interest in this Amended Agreement as of the date of such event to the person which is either the acquiring or successor corporation, and such person(s) shall assume and perform from and after the date of such assignment all of the terms, conditions and provisions imposed by this Amended Agreement upon the Company. In case of such assignment by the Company and of assumption and agreement by such person(s), all further rights as well as all other obligations of Page 19 of 23 Thomas Arington execution copy 0020924000 the Company under this Agreement thenceforth shall cease and terminate and thereafter the expression "the Company" wherever used herein shall be deemed to mean such person(s). (13) Supplemental Compensation. This Amended Agreement supersedes and replaces the Agreement and any other employment agreement or Change in Control Contingent Employment Agreement between the Employee and the Company. By executing this Amended Agreement, each party irrevocably waives and releases the other party hereto from any claims and liabilities arising under the Agreement prior to the effective date of this Amended Agreement. No person, other than such person as may be designated by the Board of Directors of the Company, shall have any authority on behalf of the Company to agree to modify or change this Amended Agreement. This Amended Agreement sets forth all of the agreements and understandings of the parties and Barr relating to the subject matter of this Amended Agreement, and there are no agreements or understandings relating to such subject matter that are not set forth herein. No provision of this Amended Agreement may be amended, modified or waived unless such amendment, modification or waiver shall be agreed to in a writing signed by the Employee and a representative of the Company duly authorized to do so. (14) Severability. This Amended Agreement is to be governed by and construed under the laws of the State of Ohio. If any provision of this Amended Agreement shall be held invalid and unenforceable for any reason, such provision shall be interpreted in such a manner that will make it valid and enforceable and if such provision cannot be so interpreted then in that event such provision shall be deemed deleted and the remainder of the Amended Agreement shall be valid and enforceable without such provision. (15) Notice. Any notice required or permitted hereunder shall be given in writing and delivered to the other party either in person or by U.S. registered or certified mail; if to the Company, at 5040 Duramed Drive, Cincinnati, Ohio 45213, with a copy to Barr Laboratories, Inc., 300 Corporate Drive, Building #10, Bradley Corporate Park, Blauvelt, New York 10913, Page 20 of 23 Thomas Arington execution copy 0020924000 Attention: General Counsel; and if to the Employee, at his address as it appears on the books and records of the Company, or in each case at such other address provided in writing to the other party. (16) Headings. The Section headings used in this Amended Agreement are for convenience only and shall not affect the construction or interpretation of this Amended Agreement. (17) Withholding. Any provision of this Amended Agreement to the contrary notwithstanding, (i) all amounts payable or credited to the Employee under this Amended Agreement shall be subject to the withholding of such amounts as the Company may determine it is required to withhold under the laws or regulations of any governmental authority, and (ii) the Company shall have the right to deduct and offset from any amounts payable by the Company to the Employee hereunder any such withholding amounts and any amounts that are due to the Company from the Employee hereunder, including any amounts that may be repayable to the Company pursuant to paragraph 7(b) or 10(f) above. IN WITNESS WHEREOF, the Company has caused this Amended and Restated Employment Agreement to be executed and attested by its duly authorized officers, and the Employee has hereunto set his hand as of the first date written above. DURAMED PHARMACEUTICALS, INC. Employer By_________________________________ ___________________________________ ___________________________________ E. Thomas Arington, Employee Page 21 of 23 Thomas Arington execution copy 0020924000 GUARANTY Barr Laboratories, Inc. hereby guarantees the punctual payment of all obligations of Duramed Pharmaceuticals, Inc. under the foregoing Amended and Restated Employment Agreement dated ________, 2002. BARR LABORATORIES, INC. By _________________________________ Page 22 of 23 Thomas Arington execution copy 0020924000 Attachment A Amounts and Benefits to be Itemized under Section 7(a)(ii) Page 23 of 23 EX-10.25 9 y63477exv10w25.txt AGREEMENT WITH SALAH U. AHMED Exhibit 10.25 EMPLOYMENT AGREEMENT AGREEMENT dated as of the 7th day of February, 2001 between Barr Laboratories, Inc., a New York corporation having its principal executive offices at 300 Corporate Drive, Building #10, Bradley Corporate Park, Blauvelt, New York 10913 (the "Company"), and Salah U. Ahmed (the "Employee"). WITNESSETH: WHEREAS, the Company wishes to assure itself of the services of the Employee and provide an inducement for the Employee to remain in its employ; and WHEREAS, the Employee is willing to remain in the employ of the Company for the period and on the other terms and conditions hereafter set forth; NOW, THEREFORE, the Company and the Employee hereby agree as follows: 1. Employment. The Company agrees to employ the Employee, and the Employee agrees to remain in the employ of the Company, during the term of this Agreement and on the other terms and conditions hereafter set forth. 2. Term. The term of this Agreement shall commence on February 7, 2001, (the "Commencement Date") and shall terminate at the close of business on the third anniversary of the Commencement Date unless sooner terminated in accordance with the terms of this Agreement or extended as hereinafter provided. The term of this Agreement shall be extended, without further action by the Company or the Employee, on the date (the "Extension Effective Date") which is six months before the third anniversary of the Commencement Date and on the date (also an "Extension Effective Date") which is six months before each subsequent anniversary of the Commencement Date, for successive periods of twelve months each, unless either party shall have given written notice to the other party, in the manner set forth in paragraph 8(e) or (f) below, prior to the Extension Effective Date in question, that the term of this Agreement that is in effect at the time such written notice is given is not to be extended or further extended, as the case may be. 3. Positions and Responsibilities; Place of Performance. (a) Throughout the term of this Agreement, the Employee agrees to remain in the employ of the Company, and the Company agrees to employ the Employee, as its Senior Vice President, Research & Development, reporting to the Chief Executive Officer of the Company (the "CEO"), and /or the President and Chief Executive Officer (the "COO"). As the Senior Vice President, Research & Development of the Company, the Employee shall be responsible for managing and supervising, and shall have responsibility for the day-to-day conduct of, the research and development activities of the Company, other than new proprietary drug discovery and development activities, subject to the authority of the Board of Directors of the Company (the "Board) and the CEO and the COO, and shall have all of the powers, authority, duties and responsibilities usually incident to the position and role of Senior Vice President, Research & Development (other than with respect to new proprietary drug discovery and development activities), and shall perform such other reasonable duties, consistent with the position of Senior Vice President, Research & Development, as may lawfully be assigned to him by the Board or the CEO or the COO. (b) In connection with his employment by the Company, the Employee shall be based at the principal executive offices of the Company in Rockland County, New York and agrees to travel, to the extent reasonably necessary to perform his duties and obligations under this Agreement, to Company facilities and other destinations elsewhere. (c) During the term of this Agreement, the Employee shall serve the Company on an exclusive basis and shall devote all his business time, attention, skill and efforts to the faithful performance of his duties hereunder; provided that the Employee may engage in community service and charitable activities that do not interfere with the performance of his duties and responsibilities hereunder. 4. Compensation. For all services rendered by the Employee in any capacity during the term of this Agreement, and for his undertakings with respect to confidential information set forth in paragraph 6 below, the Employee shall be entitled to the following: (a) a salary, payable in installments not less frequent than monthly, at the annual rate of two hundred and twenty thousand dollars ($220,000.00), with such increases in such rate, if any, as the Compensation Committee of the Board may approve from time to time during the term of this Agreement (the annual salary rate as increased from time to time during the term of this Agreement being hereafter referred to as the "Base Salary"); (b) participation in the Company's annual executive incentive or bonus plan as in effect from time to time, with the opportunity to receive an award in accordance with the terms and conditions of such plan, for each fiscal year of the Company that commences or terminates during the term of this Agreement, of up to 40% of the Base Salary earned during such year (or such higher percentage as the Board or a committee of the Board may prescribe from time to time during the term of this Agreement), it being understood that any award for the fiscal year of the Company in which the term of this Agreement commences or terminates pursuant to the terms hereof shall be prorated based on the portion of such fiscal year that coincides with the term of this Agreement, and that any award for the fiscal year of the Company in which the term of this Agreement terminates pursuant to the terms hereof shall be made at the same time as awards (if any) are made to other participants with respect to such fiscal year; (c) participation in the Company's stock incentive plan as from time to time in effect, subject to the terms and conditions of such plan; (d) the business and personal use of an automobile at Company expense including, without limitation, payment or reimbursement of automobile insurance and maintenance expenses in accordance with the Company's automobile policy applicable to senior officers on the date of this Agreement; (e) participation in all Company health, welfare, savings and other employee benefit and fringe benefit plans (including vacation pay plans or policies and life and disability insurance plans) in which other senior officers of the Company participate during the term of this Agreement, subject in all events to the terms and conditions of such plans as in effect from time to time. Nothing in this paragraph (e) shall preclude the Company from amending or terminating any such plan at any time. The plans covered by this paragraph (e) shall not include the annual incentive or stock incentive plans, which are covered by paragraphs (b) and (c) above. 5.Termination of Employment. (a) Termination by the Company without Good Cause or by the Employee for Good Reason. (i) If during the term of this Agreement the Employee's employment with the Company is terminated by the Company without Good Cause or is terminated by the Employee for Good Reason other than at or after the expiration of the term of this Agreement as the same may have been extended in accordance with the provisions of paragraph 2 above, the Company, subject to compliance by the Employee with the provisions of paragraph 6 below, relating to confidential information, shall, as liquidated damages, and as additional consideration for the Employee's undertakings under paragraph 6 below, pay the Employee a lump sum amount of money equal to 1.5 times the Employee's Base Salary. (ii) If the term of this Agreement as the same may have been extended in accordance with the provisions of paragraph 2 above is not extended or further extended because the Company gives written notice of non-extension to the Employee as provided in paragraph 2 above, and the Company does not have Good Cause for termination of the Employee's employment at the time of giving such notice, then the Company, subject to fulfillment by the Employee of his obligations under this Agreement during the balance of the term and his compliance with the provisions of paragraph 6 below, relating to confidential information, shall, as non-renewal compensation, and as additional consideration for the Employee's undertakings under this Agreement including paragraph 6 below, pay the Employee a lump sum amount of money equal to 1.0 times the Employee's Base Salary. The Company shall pay such amount upon the expiration of the term that is in effect at the time the Company gives such written notice of non-extension to the Employee. (iii) The foregoing provisions of (including any payments under) this paragraph 5(a) shall be in lieu of any severance pay that may be payable under any plan or practice of the Company. Subparagraphs 5(a)(i) and 5(a)(ii) above are intended to be mutually exclusive, and in no event shall such subparagraphs, either individually or collectively, be construed to require the Company to pay an amount of money in excess of 1.5 times the Employee's Base Salary under such subparagraphs, either individually or collectively. (b) Termination by the Company for Good Cause or by the Employee without Good Reason. If, during the term of this Agreement, the Employee's employment by the Company is terminated by the Company for Good Cause or by the Employee without Good Reason, the Employee shall not be entitled to receive any compensation under paragraph 4 above acruing after the date of such termination or any payment under paragraph 5(a) above. The provisions of this paragraph 6(b) shall be in addition to, and not in lieu of, any other rights and remedies the Company may have at law or in equity or under any other provision of this Agreement in respect of such termination of employment. (c) Good Cause Defined. For purposes of this Agreement, the Company shall have "Good Cause" to terminate the Employee's employment during the term of this Agreement if: (i) the Employee fails to substantially perform his duties hereunder for any reason or fails to devote substantially all his business time exclusively to the affairs of the Company, and such failure is not discontinued within a reasonable period of time, in no event to exceed 30 days, after the Employee receives written notice from the Company of such failure; or (ii) the Employee commits an act of dishonesty resulting or intended to result directly or indirectly in gain or personal enrichment at the expense of the Company; or (iii) the Employee is grossly negligent or engages in willful misconduct or insubordination in the performance of his duties hereunder; or (iv) the Employee breaches his obligations under paragraph 6 below, relating to confidential information. (d) Good Reason Defined. For purposes of this Agreement, the Employee shall have "Good Reason" to terminate his employment during the term of this Agreement only if: (i) the Company fails to provide compensation or benefits that the Company is obligated to provide under paragraph 4 above and the failure is not remedied within 30 days after the Company receives written notice from the Employee of such failure; or (ii) the Company assigns the Employee duties, responsibilities or reporting relationships not contemplated by paragraph 3 above without his consent, or limits his duties or responsibilities contemplated by paragraph 3 above in any respect materially detrimental to him, and in either case the situation is not remedied within 30 days after the Company receives written notice from the Employee of the situation; or (iii) he is removed from, or not elected or reelected to, the position of Senior Vice President, Research & Development of the Company, and the Company does not have Good Cause for doing so; or (iv) the Company relocates his office outside of either the Company's principal executive offices or the greater New York City metropolitan area without his written consent (given in a personal rather than representative capacity) and the situation is not remedied within 30 days after the Company receives written notice from the Employee of the situation. 6. Confidential Information. The Employee agrees not to disclose, either while in the Company's employ or at any time thereafter, to any person not employed by the Company, or not engaged to render services to the Company, except with the prior written consent of an authorized officer of the Company or as necessary or appropriate for the performance of his duties hereunder, any confidential information obtained by him while in the employ of the Company, including, without limitation, information relating to any of the inventions, processes, formulae, plans, devices, compilations of information, research, methods of distribution, suppliers, customers, client relationships, marketing strategies or trade secrets of the Company or any subsidiary thereof; provided, however, that this provision shall not preclude the Employee from use or disclosure of information known generally to the public or of information not considered confidential by persons engaged in the businesses conducted by the Company or any subsidiary thereof, or from disclosure required by law or court order. The Employee also agrees that upon leaving the Company's employ he will not take with him, without the prior written consent of an authorized officer of the Company, and he will surrender to the Company, any record, list, drawing, blueprint, specification or other document or property of the Company or any subsidiary thereof, together with any copy or reproduction thereof, mechanical or otherwise, which is of a confidential nature relating to the Company or any subsidiary thereof, or without limitation, relating to its or their methods of distribution, suppliers, customers, client relationships, marketing strategies or any description of any formulae or secret processes, or which was obtained by him or entrusted to him during the course of his employment with the Company. 7. Severability (a) In the event that any provision of this Agreement shall be determined to be invalid or unenforceable for any reason, the remaining provisions of this Agreement not so invalid or unenforceable shall be unaffected thereby and shall remain in full force and effect to the fullest extent permitted by law; and (b) Any provision of this Agreement which may for any reason be invalid or unenforceable in any jurisdiction shall remain in effect and be enforceable in any jurisdiction in which such provision shall be valid and enforceable. 8. General Provisions. (a) No right or interest to or in any payments to be made under this Agreement shall be subject to anticipation, alienation, sale, assignment, encumbrance, pledge, charge or hypothecation or to execution, attachment, levy or similar process, or assignment by operation of law. All payments to be made by the Company hereunder shall be subject to the withholding of such amounts as the Company may determine it is required to withhold under the laws or regulations of any governmental authority, whether foreign, federal, state or local. (b) To the extent that the Employee acquires a right to receive payments from the Company under this Agreement, such right shall be no greater than the right of an unsecured general creditor of the Company. All payments to be made hereunder shall be paid from the general funds of the Company and no special or separate fund shall be established and no segregation of assets shall be made to assure payment of any amount hereunder. (c) This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of New York, without giving effect to the principles of conflicts of laws of that State. (d) This Agreement shall be binding upon and inure to the benefit of the Company, its successors and assigns, and the Employee, his heirs, devisees, distributees and legal representatives. (e) Any notice or other communication to the Company pursuant to any provision of this Agreement shall be given in writing and will be deemed to have been delivered: (i) when delivered in person to the Corporate Secretary or Chief Executive Officer of the Company; or (ii) one week after it is deposited in the United States certified or registered mail, postage prepaid, addressed to the Corporate Secretary of the Company at 300 Corporate Drive, Building #10, Bradley Corporate Park, Blauvelt, New York 10913 or at such other address of which the Company may from time to time give the Employee written notice in accordance with paragraph 8(f) below. (f) Any notice or other communication to the Employee pursuant to any provision of the Agreement shall be given in writing and will be deemed to have been delivered: (i) when delivered to the Employee in person, or (ii) one week after it is deposited in the United States certified or registered mail, postage prepaid, addressed to the Employee at his address as it appears on the records of the Company or at such other address of which the Employee may from time to time give the Company written notice in accordance with paragraph 8(e) above. (g) No provision of this Agreement may be amended, modified or waived unless such amendment, modification or waiver shall be agreed to in a writing signed by the Employee and an authorized officer of the Company. (h) This instrument contains the entire agreement of the parties relating to the subject matter of this Agreement and supersedes and replaces all prior agreements and understandings with respect to such subject matter, and the parties have made no agreements, representations or warranties relating to the subject matter of this Agreement which are not set forth herein. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. BARR LABORATORIES, INC. By: ----------------------- [SEAL] Attest: - ----------------------- Secretary -------------------------- Employee EX-10.26 10 y63477exv10w26.txt AGREEMENT WITH CHRISTINE MUNDKUR Exhibit 10.26 EMPLOYMENT AGREEMENT AGREEMENT dated as of the 1st day of February, 2000 between Barr Laboratories, Inc., a New York corporation having its principal executive offices at Two Quaker Road, Pomona, New York 10970 (the "Company"), and Christine A. Mundkur (the "Employee"). WITNESSETH: WHEREAS, the Company wishes to assure itself of the services of the Employee and provide an inducement for the Employee to enter into its employ; and WHEREAS, the Employee is willing to serve in the employ of the Company for the period and on the other terms and conditions hereafter set forth; NOW, THEREFORE, the Company and the Employee hereby agree as follows: 1. Employment. The Company agrees to employ the Employee, and the Employee agrees to enter into and remain in the employ of the Company, during the term of this Agreement and on the other terms and conditions hereafter set forth. 2. Term. The term of this Agreement shall commence on February 1, 2000, (the "Commencement Date") and shall terminate at the close of business on the third anniversary of the Commencement Date unless sooner terminated in accordance with the terms of this Agreement or extended as hereinafter provided. The term of this Agreement shall be extended automatically, without further action by the Company or the Employee, on the date which is six months before the third anniversary of the Commencement Date and on the date which is six months before each subsequent anniversary of the Commencement Date (the "Extension Date") for successive periods of twelve months each, unless either party shall have given written notice to the other party, in the manner set forth in paragraph 8(e) or (f) below, prior to the Extension Date in question, that the term then in effect is not to be extended or further extended, as the case may be. 3. Positions and Responsibilities; Place of Performance. During the term of this Agreement, the Employee agrees to serve the Company and the Company agrees to employ the Employee as its Vice President, Quality and Regulatory Counsel, reporting to the President and Chief Operating Office ("COO") . In that capacity, she shall be responsible for managing and supervising, and shall have responsibility for, the day-to-day management of the quality program of the Company, subject to the authority of the COO, and the Board, and shall have all the powers, authority, duties and responsibilities usually incident to the position and role of Vice President, Quality and Regulatory Counsel, including but not limited to responsibility for and authority with respect to and performing such other reasonable duties, consistent with the position of Vice President, Quality and Regulatory Counsel, as may lawfully be assigned to her by the COO, or the Board of Directors of the Company (the "Board"). In connection with her employment by the Company, the Employee shall be based at the principal executive offices of the Company in Blauvelt, New York. During the term of this Agreement, the Employee shall devote all her business time, attention, skill and efforts to the faithful performance of her duties hereunder. 4. Compensation. For all services rendered by the Employee in any capacity during the term of this Agreement, and for her undertakings with respect to confidential information set forth in paragraph 6 below, the Employee shall be entitled to the following: (a) a salary, payable in installments not less frequent than monthly, at the annual rate of $180,000.00, with increases in such rate in accordance with the Company's regular administrative practices applicable to senior officers from time to time during the term of this Agreement (the annual salary rate as increased from time to time during the term of this Agreement being hereafter referred to as the "Base Salary"); and (b) participation in the Company's annual executive incentive or bonus plan as in effect from time to time, with the opportunity to receive an award in accordance with the terms and conditions of such plan, for each fiscal year of the Company that commences or terminates during the term of this Agreement, of up to 40% of the Base Salary earned during such year (or such higher percentage as the Board or a committee of the Board may prescribe from time to time during the term of this Agreement), it being understood that any award for the fiscal year of the Company in which the term of this Agreement commences or terminates pursuant to the terms hereof shall be prorated based on the portion of such fiscal year that coincides with the term of this Agreement, and that any award for the fiscal year of the Company in which the term of this Agreement terminates pursuant to the terms hereof shall be made at the same time as awards (if any) are made to other participants with respect to such fiscal year; and (c) participation in the Company's stock incentive plan as from time to time in effect, subject to the terms and conditions of such plan; (d) the business and personal use of an automobile at Company expense including, without limitation, payment or reimbursement of automobile insurance and maintenance expenses in accordance with the Company's automobile policy applicable to senior officers on the date of this Agreement; and (e) participation in all Company health, welfare, savings and other employee benefit and fringe benefit plans (including vacation pay plans or policies and life and disability insurance plans) in which other senior officers of the Company participate during the term of this Agreement, subject in all events to the terms and conditions of such plans as in effect from time to time. Nothing in this paragraph (e) 2 shall preclude the Company from amending or terminating any such plan at any time. The plans covered by this paragraph (e) shall not include the annual incentive or stock option plans, which are covered by paragraphs (b) and (c) above. 5. Termination of Employment. (a) Termination by the Company without Good Cause or by the Employee for Good Reason. If during the term of this Agreement the Employee's employment with the Company is terminated by the Company without Good Cause or is terminated by the Employee for Good Reason other than at the expiration of the original or any extended term of this Agreement, the Company, subject to compliance by the Employee with the provisions of paragraph 6 below, relating to confidential information, shall pay the Employee, as liquidated damages, and as additional consideration for the Employee's undertakings under paragraph 6 below, a lump sum amount of money equal to 1.5 times her Base Salary. Payment under this paragraph (a) shall be in lieu of any severance pay that may be payable under any plan or practice of the Company. (b) Termination by the Company for Good Cause or by the Employee without Good Reason. If, during the term of this Agreement, the Employee's employment by the Company is terminated by the Company for Good Cause or by the Employee without Good Reason, the Employee shall not be entitled to receive any compensation under paragraph 4 above acruing after the date of such termination or any payment under paragraph 5(a) above. The provisions of this paragraph 5(b) shall be in addition to, and not in lieu of, any other rights and remedies the Company may have at law or in equity in respect of such termination of employment. (c) Good Cause Defined. For purposes of this Agreement, the Company shall have "Good Cause" to terminate the Employee's employment during the term of this Agreement if: (i) the Employee materially fails to substantially perform her duties hereunder for any reason or fails to devote substantially all her business time to the affairs of the Company, and such failure is not discontinued within a reasonable period of time, in no event to exceed 30 days, after the Employee receives written notice from the Company of such failure; or (ii) the Employee commits a material act of dishonesty resulting or intended to result directly or indirectly in gain or personal enrichment at the expense of the Company; or (iii) the Employee is grossly negligent or engages in willful misconduct or insubordination in the performance of her duties hereunder; or (iv) the Employee breaches her obligations under paragraph 6 below, relating to confidential information. 3 (d) Good Reason Defined. For purposes of this Agreement, the Employee shall have "Good Reason" to terminate her employment during the term of this Agreement if: (i) the Company fails to provide compensation or benefits that the Company is obligated to provide under paragraph 4 above and the failure is not remedied within 30 days after the Company receives written notice from the Employee of such failure; or (ii) the Company assigns the Employee duties, responsibilities or reporting relationships not contemplated by paragraph 3 above without her consent, or limits her duties or responsibilities contemplated by paragraph 3 above in any respect materially detrimental to her, and in either case the situation is not remedied within 30 days after the Company receives written notice from the Employee of the situation; (iii) she is removed from, or not elected or reelected to, the office of Vice President, Quality or Regulatory Counsel, or (iv) the Company requires the Employee to relocate outside the Metropolitan area of New York City and the Employee declines to do so. 6. Confidential Information. The Employee agrees not to disclose, either while in the Company's employ or at any time thereafter, to any person not employed by the Company, or not engaged to render services to the Company, except with the prior written consent of an authorized officer of the Company or as necessary or appropriate for the performance of her duties hereunder, any material confidential information obtained by her while in the employ of the Company, including, without limitation, information relating to any of the inventions, processes, formulae, plans, devices, compilations of information, research, methods of distribution, suppliers, customers, client relationships, marketing strategies or trade secrets of the Company or any subsidiary thereof; provided, however, that this provision shall not preclude the Employee from use or disclosure of information known generally to the public or of information not considered confidential by persons engaged in the businesses conducted by the Company, or otherwise disclosed by the Company to any third parties, any subsidiary of the Company, or from disclosure required by law or court order. The Employee also agrees that upon leaving the Company's employ she will not take with her, without the prior written consent of an authorized officer of the Company, and she will surrender to the Company, any record, list, drawing, blueprint, specification or other document or property of the Company or any subsidiary thereof, together with any copy or reproduction thereof, mechanical or otherwise, which is of a confidential nature relating to the Company or any subsidiary thereof, or without limitation, relating to its or their methods of distribution, suppliers, customers, client relationships, marketing strategies or any description of any formulae or secret processes, or which was obtained by her or entrusted to her during the course of her employment with the Company. 7. Severability 4 (a) In the event that any provision of this Agreement shall be determined to be invalid or unenforceable for any reason, the remaining provisions of this Agreement not so invalid or unenforceable shall be unaffected thereby and shall remain in full force and effect to the fullest extent permitted by law; and (b) Any provision of the Agreement which may for any reason be invalid or unenforceable in any jurisdiction shall remain in effect and be enforceable in any jurisdiction in which such provision shall be valid and enforceable. 8. General Provisions. (a) No right or interest to or in any payments to be made under this Agreement shall be subject to anticipation, alienation, sale, assignment, encumbrance, pledge, charge or hypothecation or to execution, attachment, levy or similar process, or assignment by operation of law. (b) To the extent that the Employee acquires a right to receive payments from the Company under this Agreement, such right shall be no greater than the right of an unsecured general creditor of the Company. All payments to be made hereunder shall be paid from the general funds of the Company and no special or separate fund shall be established and no segregation of assets shall be made to assure payment of any amount hereunder. (c) This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of New York applicable to contracts performed wholly within the State of New York, without giving effect to the principles of conflicts of laws of that State. (d) This Agreement shall be binding upon and inure to the benefit of the Company, its successors and assigns, and the Employee, her heirs, legatees, distributees and legal representatives. (e) Any notice or other communication to the Company pursuant to any provision of this Agreement shall be given in writing and will be deemed to have been delivered: (i) when delivered in person to the Corporate Secretary or Chief Executive Officer of the Company; or (ii) one week after it is deposited in the United States certified or registered mail, postage prepaid, addressed to the Corporate Secretary of the Company at Two Quaker Road, Pomona, New York 10970 or at such other address of which the Company may from time to time give the Employee written notice in accordance with paragraph 8(f) below. 5 (f) Any notice or other communication to the Employee pursuant to any provision of the Agreement shall be given in writing and will be deemed to have been delivered: (i) when delivered to the Employee in person, or (ii) one week after it is deposited in the United States certified or registered mail, postage prepaid, addressed to the Employee at 150 Grant Street, Ridgewood, New Jersey 07450 or at such other address of which the Employee may from time to time give the Company written notice in accordance with paragraph 8(e) above. (g) No provision of this Agreement may be amended, modified or waived unless such amendment, modification or waiver shall be agreed to in a writing signed by the Employee and an authorized officer of the Company. (h) This instrument contains the entire agreement of the parties relating to the subject matter of this Agreement and supersedes and replaces all prior agreements and understandings with respect to such subject matter, and the parties have made no agreements, representations or warranties relating to the subject matter of this Agreement which are not set forth herein. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. BARR LABORATORIES, INC. By: ----------------------- [SEAL] Attest: - ----------------------- Secretary ------------------------ Employee 6 EX-10.27 11 y63477exv10w27.txt AGREEMENT WITH CATHERINE F. HIGGINS Exhibit 10.27 EMPLOYMENT AGREEMENT AGREEMENT dated as of the 7th day of February, 2001 between Barr Laboratories, Inc., a New York corporation having its principal executive offices at 300 Corporate Drive, Building #10, Bradley Corporate Park, Blauvelt, New York 10913 (the "Company"), and Catherine F. Higgins (the "Employee"). WITNESSETH: WHEREAS, the Company wishes to assure itself of the services of the Employee and provide an inducement for the Employee to remain in its employ; and WHEREAS, the Employee is willing to remain in the employ of the Company for the period and on the other terms and conditions hereafter set forth; NOW, THEREFORE, the Company and the Employee hereby agree as follows: 1. Employment. The Company agrees to employ the Employee, and the Employee agrees to remain in the employ of the Company, during the term of this Agreement and on the other terms and conditions hereafter set forth. 2. Term. The term of this Agreement shall commence on February 7, 2001 (the "Commencement Date") and shall terminate at the close of business on the third anniversary of the Commencement Date unless sooner terminated in accordance with the terms of this Agreement or extended as hereinafter provided. The term of this Agreement shall be extended, without further action by the Company or the Employee, on the date (the "Extension Effective Date") which is six months before the third anniversary of the Commencement Date and on the date (also an "Extension Effective Date") which is six months before each subsequent anniversary of the Commencement Date, for successive periods of twelve months each, unless either party shall have given written notice to the other party, in the manner set forth in paragraph 8(e) or (f) below, prior to the Extension Effective Date in question, that the term of this Agreement that is in effect at the time such written notice is given is not to be extended or further extended, as the case may be. 3. Positions and Responsibilities; Place of Performance. (a) Throughout the term of this Agreement, the Employee agrees to remain in the employ of the Company, and the Company agrees to employ the Employee, as its Vice President, Human Resources, reporting to the Chief Executive Officer of the Company (the "CEO") and/or the President and Chief Operations Officer of the Company (the "COO"). As the Vice President, Human Resources of the Company, the Employee shall be responsible for managing and supervising, and shall have responsibility for the day-to-day conduct of, the human resources function of the Company, including labor relations, subject to the authority of the Board of Directors of the Company (the "Board), the Chief Executive Officer of the Company (the "CEO") and the COO, and shall have all of the powers, authority, duties and responsibilities usually incident to the position and role of Vice President, Human Resources, and shall perform such other reasonable duties, consistent with the position of Vice President, Human Resources, as may lawfully be assigned to her by the Board, the CEO and the COO. (b) In connection with her employment by the Company, the Employee shall be based at the principal executive offices of the Company in Rockland County, New York and agrees to travel, to the extent reasonably necessary to perform her duties and obligations under this Agreement, to Company facilities and other destinations elsewhere. (c) During the term of this Agreement, the Employee shall serve the Company on an exclusive basis and shall devote all her business time, attention, skill and efforts to the faithful performance of her duties hereunder; provided that the Employee may engage in community service and charitable activities that do not interfere with the performance of her duties and responsibilities hereunder. 4. Compensation. For all services rendered by the Employee in any capacity during the term of this Agreement, and for her undertakings with respect to confidential information set forth in paragraph 6 below, the Employee shall be entitled to the following: (a) a salary, payable in installments not less frequent than monthly, at the annual rate of one hundred and eighty thousand dollars ($180,000.00), with such increases in such rate, if any, as the Compensation Committee of the Board may approve from time to time during the term of this Agreement (the annual salary rate as increased from time to time during the term of this Agreement being hereafter referred to as the "Base Salary"); (b) participation in the Company's annual executive incentive or bonus plan as in effect from time to time, with the opportunity to receive an award in accordance with the terms and conditions of such plan, for each fiscal year of the Company that commences or terminates during the term of this Agreement, of up to 40% of the Base Salary earned during such year (or such higher percentage as the Board or a committee of the Board may prescribe from time to time during the term of this Agreement), it being understood that any award for the fiscal year of the Company in which the term of this Agreement commences or terminates pursuant to the terms hereof shall be prorated based on the portion of such fiscal year that coincides with the term of this Agreement, and that any award for the fiscal year of the Company in which the term of this Agreement terminates pursuant to the terms 2 hereof shall be made at the same time as awards (if any) are made to other participants with respect to such fiscal year; (c) participation in the Company's stock incentive plan as from time to time in effect, subject to the terms and conditions of such plan; (d) the business and personal use of an automobile at Company expense including, without limitation, payment or reimbursement of automobile insurance and maintenance expenses in accordance with the Company's automobile policy applicable to officers on the date of this Agreement; (e) participation in all Company health, welfare, savings and other employee benefit and fringe benefit plans (including vacation pay plans or policies and life and disability insurance plans) in which other officers of the Company participate during the term of this Agreement, subject in all events to the terms and conditions of such plans as in effect from time to time. Nothing in this paragraph (e) shall preclude the Company from amending or terminating any such plan at any time. The plans covered by this paragraph (e) shall not include the annual incentive or stock incentive plans, which are covered by paragraphs (b) and (c) above. 5. Termination of Employment. (a) Termination by the Company without Good Cause or by the Employee for Good Reason. (i) If during the term of this Agreement the Employee's employment with the Company is terminated by the Company without Good Cause or is terminated by the Employee for Good Reason other than at or after the expiration of the term of this Agreement as the same may have been extended in accordance with the provisions of paragraph 2 above, the Company, subject to compliance by the Employee with the provisions of paragraph 6 below, relating to confidential information, shall, as liquidated damages, and as additional consideration for the Employee's undertakings under paragraph 6 below, pay the Employee a lump sum amount of money equal to 1.5 times the Employee's Base Salary. (ii) If the term of this Agreement as the same may have been extended in accordance with the provisions of paragraph 2 above is not extended or further extended because the Company gives written notice of non-extension to the Employee as provided in paragraph 2 above, and the Company does not have Good Cause for termination of the Employee's employment at the time of giving such notice, then the Company, subject to fulfillment by the Employee of her obligations under this Agreement during the balance of the term and her compliance with the provisions of paragraph 6 3 below, relating to confidential information, shall, as non-renewal compensation, and as additional consideration for the Employee's undertakings under this Agreement including paragraph 6 below, pay the Employee a lump sum amount of money equal to 1.0 times the Employee's Base Salary. The Company shall pay such amount upon the expiration of the term that is in effect at the time the Company gives such written notice of non-extension to the Employee. (iii) The foregoing provisions of (including any payments under) this paragraph 5(a) shall be in lieu of any severance pay that may be payable under any plan or practice of the Company. Subparagraphs 5(a)(i) and 5(a)(ii) above are intended to be mutually exclusive, and in no event shall such subparagraphs, either individually or collectively, be construed to require the Company to pay an amount of money in excess of 1.5 times the Employee's Base Salary under such subparagraphs, either individually or collectively. (b) Termination by the Company for Good Cause or by the Employee without Good Reason. If, during the term of this Agreement, the Employee's employment by the Company is terminated by the Company for Good Cause or by the Employee without Good Reason, the Employee shall not be entitled to receive any compensation under paragraph 4 above acruing after the date of such termination or any payment under paragraph 5(a) above. The provisions of this paragraph 6(b) shall be in addition to, and not in lieu of, any other rights and remedies the Company may have at law or in equity or under any other provision of this Agreement in respect of such termination of employment. (c) Good Cause Defined. For purposes of this Agreement, the Company shall have "Good Cause" to terminate the Employee's employment during the term of this Agreement if: (i) the Employee fails to substantially perform her duties hereunder for any reason or fails to devote substantially all her business time exclusively to the affairs of the Company, and such failure is not discontinued within a reasonable period of time, in no event to exceed 30 days, after the Employee receives written notice from the Company of such failure; or (ii) the Employee commits an act of dishonesty resulting or intended to result directly or indirectly in gain or personal enrichment at the expense of the Company; or (iii) the Employee is grossly negligent or engages in willful misconduct or insubordination in the performance of her duties hereunder; or (iv) the Employee breaches her obligations under paragraph 6 below, relating to confidential information. (d) Good Reason Defined. For purposes of this Agreement, the Employee shall have "Good Reason" to terminate her employment during the term of this Agreement only if: 4 (i) the Company fails to provide compensation or benefits that the Company is obligated to provide under paragraph 4 above and the failure is not remedied within 30 days after the Company receives written notice from the Employee of such failure; or (ii) the Company assigns the Employee duties, responsibilities or reporting relationships not contemplated by paragraph 3 above without her consent, or limits her duties or responsibilities contemplated by paragraph 3 above in any respect materially detrimental to her, and in either case the situation is not remedied within 30 days after the Company receives written notice from the Employee of the situation; or (iii) she is removed from, or not elected or reelected to, the position of Vice President, Human Resources of the Company, and the Company does not have Good Cause for doing so; or (iv) the Company relocates her office outside of either the Company's principal executive offices or the greater New York City metropolitan area without her written consent (given in a personal rather than representative capacity) and the situation is not remedied within 30 days after the Company receives written notice from the Employee of the situation. 6. Confidential Information. The Employee agrees not to disclose, either while in the Company's employ or at any time thereafter, to any person not employed by the Company, or not engaged to render services to the Company, except with the prior written consent of an authorized officer of the Company or as necessary or appropriate for the performance of her duties hereunder, any confidential information obtained by her while in the employ of the Company, including, without limitation, information relating to any of the inventions, processes, formulae, plans, devices, compilations of information, research, methods of distribution, suppliers, customers, client relationships, marketing strategies or trade secrets of the Company or any subsidiary thereof; provided, however, that this provision shall not preclude the Employee from use or disclosure of information known generally to the public or of information not considered confidential by persons engaged in the businesses conducted by the Company or any subsidiary thereof, or from disclosure required by law or court order. The Employee also agrees that upon leaving the Company's employ she will not take with her, without the prior written consent of an authorized officer of the Company, and he will surrender to the Company, any record, list, drawing, blueprint, specification or other document or property of the Company or any subsidiary thereof, together with any copy or reproduction thereof, mechanical or otherwise, which is of a confidential nature relating to the Company or any subsidiary thereof, or without limitation, relating to its or their methods of distribution, suppliers, customers, client relationships, marketing strategies or any description of any formulae or 5 secret processes, or which was obtained by her or entrusted to her during the course of her employment with the Company. 7. Severability (a) In the event that any provision of this Agreement shall be determined to be invalid or unenforceable for any reason, the remaining provisions of this Agreement not so invalid or unenforceable shall be unaffected thereby and shall remain in full force and effect to the fullest extent permitted by law; and (b) Any provision of this Agreement which may for any reason be invalid or unenforceable in any jurisdiction shall remain in effect and be enforceable in any jurisdiction in which such provision shall be valid and enforceable. 8. General Provisions. (a) No right or interest to or in any payments to be made under this Agreement shall be subject to anticipation, alienation, sale, assignment, encumbrance, pledge, charge or hypothecation or to execution, attachment, levy or similar process, or assignment by operation of law. All payments to be made by the Company hereunder shall be subject to the withholding of such amounts as the Company may determine it is required to withhold under the laws or regulations of any governmental authority, whether foreign, federal, state or local. (b) To the extent that the Employee acquires a right to receive payments from the Company under this Agreement, such right shall be no greater than the right of an unsecured general creditor of the Company. All payments to be made hereunder shall be paid from the general funds of the Company and no special or separate fund shall be established and no segregation of assets shall be made to assure payment of any amount hereunder. (c) This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of New York, without giving effect to the principles of conflicts of laws of that State. (d) This Agreement shall be binding upon and inure to the benefit of the Company, its successors and assigns, and the Employee, her heirs, devisees, distributees and legal representatives. (e) Any notice or other communication to the Company pursuant to any provision of this Agreement shall be given in writing and will be deemed to have been delivered: (i) when delivered in person to the Corporate Secretary or Chief Executive Officer of the Company; or 6 (ii) one week after it is deposited in the United States certified or registered mail, postage prepaid, addressed to the Corporate Secretary of the Company at 300 Corporate Drive, Building #10, Bradley Corporate Park, Blauvelt, New York 10913 or at such other address of which the Company may from time to time give the Employee written notice in accordance with paragraph 8(f) below. (f) Any notice or other communication to the Employee pursuant to any provision of the Agreement shall be given in writing and will be deemed to have been delivered: (i) when delivered to the Employee in person, or (ii) one week after it is deposited in the United States certified or registered mail, postage prepaid, addressed to the Employee at her address as it appears on the records of the Company or at such other address of which the Employee may from time to time give the Company written notice in accordance with paragraph 8(e) above. (g) No provision of this Agreement may be amended, modified or waived unless such amendment, modification or waiver shall be agreed to in a writing signed by the Employee and an authorized officer of the Company. (h) This instrument contains the entire agreement of the parties relating to the subject matter of this Agreement and supersedes and replaces all prior agreements and understandings with respect to such subject matter, and the parties have made no agreements, representations or warranties relating to the subject matter of this Agreement which are not set forth herein. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. BARR LABORATORIES, INC. By: [SEAL] ----------------------- Attest: - ----------------------- Secretary -------------------------- Employee 7 EX-21.0 12 y63477exv21w0.txt SUBSIDIARIES OF THE COMPANY EXHIBIT 21.0 SUBSIDIARIES OF REGISTRANT - - 2 Quaker Road Corp., a New York Corporation - - 2 Quaker Road, LLC, a Delaware Limited Liability Company - - 265 Livingston Street Corp., a New Jersey Corporation - - Barrcip Inc., a Delaware Corporation - - Barr Pharmaceuticals, Inc., a New York Corporation - - BRL, Inc. d/b/a Barr Research, a Delaware Corporation - - Duramed Pharmaceuticals, Inc., a Delaware Corporation - - Marketmaster, Inc., an Ohio Corporation - - Duramed Reasearch and Development Corporation, a New York Corporation - - Duramed Europe, Ltd., a UK Corporation EX-23.0 13 y63477exv23w0.txt CONSENT OF DELOITTE & TOUCHE LLP EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in the Post-Effective Amendment to Registration Statement No. 33-13901, and in Registration Statement Nos. 33-73696, 33-73698, 33-73700, 333-17349, 333-17351, 333-50356, 333-75388 and 333-75391 of Barr Laboratories, Inc. on Form S-8 of our report dated August 9, 2002, appearing in this Annual Report on Form 10-K of Barr Laboratories, Inc. for the year ended June 30, 2002. DELOITTE & TOUCHE LLP Stamford, Connecticut August 26, 2002 -----END PRIVACY-ENHANCED MESSAGE-----