SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K/A Ammendment No. 1 Equity in Earnings of Somerset Somerset's contribution to the Company's pretax earnings (in thousands) and net earnings per share are as follows:
Annual Report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended March 31, 1995 Commission File No. 1-9114 MYLAN LABORATORIES INC. (Exact name of registrant as specified in its charter) Pennsylvania 25-1211621 (State or other jurisdiction of incorporation or organization) (IRS EmployerIdentification No.) 130 Seventh Street 1030 Century Building Pittsburgh, Pennsylvania 15222 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 412-232-0100 Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange Title of Each Class on Which Registered Common Stock, par value $.50 per share New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by checkmark 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 checkmark 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.[ ] The aggregate market value of voting stock held by persons other than Directors and Officers of the registrant computed by reference to the closing price of such stock as of May 31, 1995: $2,200,910,441 The number of shares of Common Stock of the registrant outstanding as of May 31, 1995: 79,514,544 Documents incorporated by reference into this Report are: Annual Report to Shareholders for year ended March 31, 1995. . . . . . . . Parts I and II, Items 1, 5-8 Proxy Statement for 1995 Annual Meeting of Shareholders. . . . . . . . . . Part III, Items 10-13 -1- ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview By any measure fiscal 1995 was a rewarding year for the Company and our shareholders. Years of commitment to Mylan's standards of quality manufacturing, customer service and product development all contributed to the significant growth in net sales and net earnings. The Company's premier position in the generic industry provided a platform for unprecedented success in new product launches in fiscal 1995, including five products developed internally and five products licensed from brand name manufacturers. Additionally the strength of the Company's distribution capabilities was a key factor in the establishment of an arrangement with a subsidiary of Eli Lilly and Company relating to cefaclor. While the Company recognized revenue on a fee for services basis and not to the extent of actual sales to customers, this arrangement provides a significant enhancement to the Mylan product line. The extraordinary growth in sales and gross profits has enabled the Company to accelerate and expand our investment into new product development and solidify our infrastructure. During fiscal 1995 the Company broke ground on a 150,000 square foot research and development facility. Scheduled for completion in late 1995, this state-of-the-art facility will not only enhance our product development effort, but will also provide for expansion of our manufacturing and administrative facilities. These steps will help the Company to meet the many challenges which lie ahead in the constantly changing pharmaceutical industry. Mylan shareholders realized significant rewards from the Company's financial results in fiscal 1995. The Company declared dividends of just over $23 million during the year, a 94% increase over the previous year and the market price for the Company's common stock appreciated significantly. Results of Operations Net Sales and Gross Margin The following table outlines net sales, gross margins and the corresponding increase over the previous year. (dollars in millions) Year Ended Net Sales Gross Margin Gross Margin as March 31, Dollars Change Dollars Change % of Net Sales - --------- -------- ------ -------- ------ -------------- 1995 $ 396.1 57% $ 226.5 80% 57% 1994 $ 251.8 19% $ 126.1 3% 50% 1993 $ 212.0 61% $ 122.6 97% 58% The changes in net sales, gross margins and gross margin as a % of net sales are indicative of the highly competitive nature of the generic pharmaceutical industry and the Company's history of obtaining new product approvals. Generic products generally yield higher gross margins as a percent of sales in the short term period after introduction, and are subject to, sometimes severe, pricing deterioration as other competitors enter the market. -2- With respect to the Company's generic product line, the Company added 11 products in fiscal 1995 which accounted for $151.5 million of net sales in fiscal 1995, added eight products in fiscal 1994 which accounted for $25.8 million of net sales in fiscal 1994 and added four products in fiscal 1993 which accounted for $50.8 million of net sales in fiscal 1993. The Company experienced increased price competition on new products during the fourth quarter of fiscal 1995 and expects continued competition throughout fiscal 1996. In addition to new generic products the changes in sales and gross margins from 1993 to 1994 were affected by sales from Bertek (acquired in February 1993) which generally provides lower gross margin rates. Due to the competitive nature of the generic pharmaceutical industry, net sales and gross margin percentages recognized in fiscal 1995 are not necessarily indicative of the results to be expected in future periods. Research and Development Research and Development expenses were $30,533,000 compared to $21,648,000 in 1994 and $13,524,000 in 1993. These amounts represent approximately 8% of corresponding net sales in 1995, 9% in 1994 and 6% in 1993. Fiscal 1994 and 1995 expenditures include amounts for transdermal delivery system development in addition to increased expenditures for ongoing research and development of both innovative and generic products. The Company continues its commitment to new and increased product development. Selling and Administrative Selling and Administrative expenses were $58,035,000 in fiscal 1995 compared to $49,173,000 in fiscal 1994 and $36,714,000 in fiscal 1993, which represents approximately 15%, 20% and 17% of corresponding net sales. The fiscal 1994 and 1995 amounts include approximately $3,143,000 each year in amortization of intangible assets associated with the Bertek acquisition. In 1994, $3,229,000 was expensed resulting from the death of Mr. McKnight the former Chairman and Chief Executive Officer of the Company. Other changes from 1994 to 1995 and from 1993 to 1994 are attributable in large part to compensation and related expenses, selling/marketing expenses associated with new products including sales commissions and legal and professional fees associated with the various court actions to which the Company has been involved. -4-
1995 1994 1993 Net Net Net Quarter Pretax Earnings Pretax Earnings Pretax Earnings Ended Earnings Per Share Earnings Per Share Earnings Per Share - -------- --------- ---------- ----------- ---------- --------- ----------- 6/30 $ 5,348 $ .06 $ 5,682 $ .06 $ 4,309 $ .05 9/30 6,141 .07 5,727 .07 5,101 .06 12/31 8,330 .09 6,841 .08 6,120 .07 3/31 5,587 .06 5,346 .06 5,606 .06 - ---------------------------------------------------------------------------------------------------------- Fiscal Year $25,406 $ .28 $ 23,596 $ .27 $ 21,136 $ .24 - ---------------------------------------------------------------------------------------------------------- Under the Orphan Drug Act, Somerset has exclusivity relating to marketing the chemical compound Eldepryl(R) for use as a treatment for late stage Parkinson's disease through June of 1996. Under the Waxman Hatch Act, Somerset had exclusivity for all uses of the chemical compound through June of 1994. Somerset is actively involved in research projects regarding additional uses of this chemical compound, and other potential products. -3- Other Income Other income for the year ended March 31, 1995 was $7,958,000 compared to $8,148,000 in 1994 and $3,879,000 in 1993. The 1994 amount includes $3,375,000 in legal settlements. Other changes are indicative of market fluctuations effecting the yields on investments, and changes in assets available for investment. Income Taxes The effective tax rates for 1995, 1994 and 1993 were 29%, 16% and 27% respectively. The 1994 effective tax rate was reduced by 5% as a result of recording the cumulative effects of changes in financial reporting requirements and changes in the federal tax code. The Company recognized tax credits which reduced the effective tax rates by approximately 5% in 1995, 8% in 1994 and 2% in 1993. The tax credits result principally from operations in Puerto Rico and also from credits for increasing research and development activities. Changes in the Federal Tax Code enacted in 1993 reduced tax credits otherwise available for operating in Puerto Rico by 40% in fiscal 1995 with additional 5% reductions in the next four fiscal years. In addition recent tax rulings may reduce the amount of credit otherwise available to the Company for research and development activities. Liquidity and Capital Resources The Company's balance sheet remains strong with total assets increasing by 35% to $546,201,000 at March 31, 1995. Working capital of $275,032,000 represents 57% of net worth at March 31, 1995 versus $191,647,000 or 50% of net worth at March 31, 1994. The ratio of current assets to current liabilities was 5.9 to 1 at March 31, 1995 versus 11.7 to 1 at March 31, 1994. Cash flows from operating activities increased significantly from fiscal 1994 to 1995 due principally to the higher level of net earnings and also to the timing of collections of accounts receivable and payment of income taxes. The Company invested $17,485,000 in 1995 and $20,164,000 in 1994 for facilities expansion, including relocation of our Greensboro distribution center, and expansion and renovation of facilities in Puerto Rico and Vermont. During fiscal 1994, the Company also acquired aircraft which were previously leased on a flight by flight basis. All capital expenditures during fiscal years 1995 and 1994 were made with the general funds of the Company without incurring bank financing. As of March 31, 1995 the Company has commitments for future capital expenditures of approximately $10,828,000, including the construction of a 150,000 square foot research and development facility in Morgantown, WV. In addition to investing in property, plant and equipment, the Company has invested considerable amounts over the past two years into marketable securities, principally tax exempt instruments. Increases in intangible and other assets includes equity investments and payments for long-term licenses to entities with which the Company is jointly developing new products. Payments of long-term obligations in 1994 represents a final settlement with the estate of Roy McKnight in connection with Mr. McKnight's salary continuation agreement. Prior year payments were for obligations assumed in the business combination of Bertek in 1993. The Company paid cash dividends of $.28 per share in 1995 totaling $22,208,0000 compared to $.14 per share in 1994 which totaled $11,026,000. ITEM 8. Financial Statements and Supplementary Data Consolidated Balance Sheets -5-
March 31 1995 1994 Assets Current Assets Cash and cash equivalents $ 127,280,000 $ 75,526,000 Marketable securities 52,575,000 12,925,000 Accounts receivable - net 58,343,000 55,430,000 Inventories 78,205,000 57,996,000 Prepaid income taxes - 1,265,000 Deferred income tax benefit 10,545,000 2,082,000 Other current assets 4,435,000 4,349,000 Total Current Assets 331,383,000 209,573,000 Property, Plant and Equipment-net of accumulated depreciation 92,299,000 82,514,000 Deferred income tax benefit, non-current 1,043,000 - Marketable Securities, Non-Current 21,958,000 12,125,000 Intangible Assets-Net of accumulated amortization 28,518,000 33,228,000 Other Assets 48,945,000 48,122,000 Investment In and Advances to Somerset 22,055,000 17,763,000 - --------------------------------------------------------------------------------------------------- Total Assets $ 546,201,000 $ 403,325,000 See notes to consolidated Financial statements. Consolidated Balance Sheets -6-
March 31 1995 1994 Liabilities and Shareholders' Equity - ---------------------------------------------------------------------------------------------------------------------------------- Current Liabilities Trade accounts payable $ 10,466,000 $ 6,699,000 Income taxes payable 24,019,000 - Other current liabilities 17,890,000 8,056,000 Cash dividend payable 3,976,000 3,171,000 Total Current Liabilities 56,351,000 17,926,000 Long-Term Obligations 7,122,000 4,609,000 Deferred Income Tax Liability - 821,000 Shareholders' Equity Preferred stock, par value $.50 per share, authorized 5,000,000 shares, issued and outstanding - none - - Common stock, par value $.50 per share, authorized 300,000,000 shares, issued 79,972,248 shares at March 31, 1995 and 79,697,295 shares at March 31, 1994 39,986,000 39,849,000 Additional paid-in capital 57,577,000 54,272,000 Retained earnings 386,212,000 288,357,000 Unrealized gain on investments 1,374,000 - 485,149,000 382,478,000 Less treasury stock at cost - 476,523 shares at March 31, 1995 and 495,864 shares at March 31, 1994 2,421,000 2,509,000 Net Worth 482,728,000 379,969,000 - ----------------------------------------------------------------------------------------------------------------------------------- Total Liabilities and Shareholders' Equity $ 546,201,000 $ 403,325,000 - ----------------------------------------------------------------------------------------------------------------------------------- Consolidated Statements of Earnings -7-
Year ended March 31 1995 1994 1993 Net Sales $ 396,120,000 $ 251,773,000 $ 211,964,000 Cost and Expenses Cost of Sales 169,590,000 125,631,000 89,400,000 Research and Development 30,533,000 21,648,000 13,524,000 Selling and Administrative 58,035,000 49,173,000 36,714,000 258,158,000 196,452,000 139,638,000 Equity in Earnings of Somerset 25,406,000 23,596,000 21,136,000 Other Income 7,958,000 8,148,000 3,879,000 Earnings Before income Taxes 171,326,000 87,065,000 97,341,000 Income Taxes 50,457,000 13,998,000 26,720,000 Net Earnings $ 120,869,000 $ 73,067,000 $ 70,621,000 - --------------------------------------------------------------------------------------------------------------------- Earnings Per Share $ 1.52 $ .93 $ .92 - --------------------------------------------------------------------------------------------------------------------- Weighted Average Common Shares 79,309,000 78,949,000 77,101,000 - --------------------------------------------------------------------------------------------------------------------- See notes to consolidated financial statements. Consolidated Statements of Shareholders' Equity -8-
Common Stock Common Stock Additional Retained Unrealized Gain Shares Amount Paid-In Capital Earnings on Investments ------------- ---------------- ----------------- ----------- ----------------- April 1, 1992 38,631,373 $ 19,317,000 $ 7,699,000 $ 176,789,000 $ - Stock options exercised 713,857 357,000 12,732,000 - - Cash dividend $.115 per share - - - (8,902,000) - Stock split (2 for 1) 38,654,343 19,327,000 (7,958,000) (11,369,000) - Bertek acquisition 615,880 308,000 17,393,000 - - Net earnings - - - 70,621,000 - March 31, 1993 78,615,453 $ 39,309,000 $ 29,866,000 $ 227,139,000 $ - Stock options exercised 347,747 173,000 4,447,000 - - Cash dividend $.15 per share - - - (11,849,000) - Bertek acquisition 734,095 367,000 19,959,000 - - Net earnings - - - 73,067,000 - March 31, 1994 79,697,295 $ 39,849,000 $ 54,272,000 $ 288,357,000 $ - Stock options exercised 274,953 137,000 3,305,000 - - Cash dividend $.29 per share - - - (23,014,000) - Net earnings - - - 120,869,000 - Change in unrealized gain on investments - - - - 1,374,000 - --------------------------------------------------------------------------------------------------------------------------------- March 31, 1995 79,972,248 $ 39,986,000 $ 57,577,000 $ 386,212,000 $ 1,374,000 - --------------------------------------------------------------------------------------------------------------------------------- See notes to consolidated Financial statements. Consolidated Statements of Cash Flows -9-
Year ended March 31 1995 1994 1993 Cash flows from operating activities Net earnings $ 120,869,000 $ 73,067,000 $ 70,621,000 Adjustments to reconcile net earnings to net cash provided from operating activities: Depreciation and amortization 12,700,000 11,154,000 5,089,000 Deferred income tax benefit (10,427,000) (656,000) (888,000) Equity in earnings of Somerset (25,406,000) (23,596,000) (21,136,000) Cash received from Somerset 21,114,000 20,676,000 19,966,000 Other noncash expenses 13,252,000 4,192,000 3,758,000 Changes in operating assets and liabilities: Accounts receivable (14,240,000) (23,485,000) (9,073,000) Inventories (19,590,000) (12,002,000) (9,825,000) Trade accounts payable 3,410,000 207,000 1,911,000 Income taxes payable 25,060,000 (11,111,000) 6,263,000 Other operating assets and liabilities 9,789,000 (2,813,000) 1,651,000 Net cash provided from operating activities 136,531,000 35,633,000 68,337,000 Cash Flows from Investing Activities Additions to property, plant and equipment (17,485,000) (20,164,000) (12,294,000) Increase in intangible and other assets (8,238,000) (15,147,000) (10,833,000) Purchase of marketable securities (58,491,000) (12,925,000) - Proceeds from sales and maturities of marketable securities 25,482,000 4,800,000 - Acquisition-net of cash acquired (6,432,000) - - Net cash used in investing activities (65,164,000) (43,436,000) (23,127,000) See notes to consolidated Financial statements. Consolidated Statements of Cash Flows C. Inventories Inventories consist of the following components: (in thousands)
Year ended March 31 1995 1994 1993 Cash flows from Financing activities Payments on long-term obligations $ (451,000) $ (4,320,000) $ (8,373,000) Cash dividend paid (22,208,000) (11,026,000) (8,476,000) Payments on acquisition obligation - (977,000) - Proceeds from exercise of stock options 3,046,000 1,406,000 9,561,000 Net cash used in financing activities (19,613,000) (14,917,000) (7,288,000) - -------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Cash and Cash Equivalents 51,754,000 (22,720,000) 37,922,000 - -------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents-Beginning of Year 75,526,000 98,246,000 60,324,000 - -------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents-End of Year $ 127,280,000 $ 75,526,000 $ 98,246,000 - -------------------------------------------------------------------------------------------------------------- For purposes of presentation in the statements of cash flows, cash, overnight deposits, certificates of deposit, money market funds and marketable securities with original maturities of less than three months have been classified as cash and cash equivalents. The carrying value of these items approximates fair value. Cash payments for interest were $25,000 in 1995, $30,000 in 1994 and $64,000 in 1993. Cash payments for income taxes were $35,822,000 in 1995, $27,055,000 in 1994 and $21,345,000 in 1993. During fiscal 1993 the Company acquired substantially all of the assets of Bertek, Inc. (Bertek) (see note B) for approximately $39,112,000 and assumed liabilities of approximately $10,090,000. During the years ended March 31, 1994 and 1993 $20,326,000 and $17,701,000 of the purchase price was satisfied through the issuance of the Company's common stock. At the closing of this transaction, the Company repaid with cash approximately $8,293,000 in long-term debt obligations assumed. During fiscal 1993 the Company declared a 2 for 1 stock split effected in the form of a stock dividend (see note M). Certain stock option transactions result in a reduction of income taxes payable and a corresponding increase in additional paid-in capital. The amounts for the years ended March 31, 1995, 1994 and 1993 were $396,000, $1,040,000 and $3,528,000 respectively. During fiscal 1995 and 1994 the Company received and recorded into treasury stock 659 and 75,658 shares of common stock valued at $14,000 and $ 2,174,000 respectively in consideration for the exercise of stock options. -10- Notes to Consolidated Financial Statements A. Summary of Significant Accounting Policies 1. Principles of Consolidation The consolidated financial statements include the accounts of Mylan Laboratories Inc. (the Company) and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. The Company's principal line of business is the manufacturing and distribution of pharmaceutical products. The Company had sales to one customer which represented 12% of net sales in 1993. 2. Marketable Securities Effective April 1, 1994, the Company adopted Statement of Financial Accounting Standards No. 115 (SFAS No. 115), "Accounting for Certain Investments in Debt and Equity Securities." Under this Statement, the Company's investments classified as "available for sale" are recorded at current market value with offsetting adjustments to shareholders' equity, net of income taxes. At March 31, 1994, investments were stated at the lower of aggregate cost or market. The adoption of SFAS No. 115 did not have a material impact on the financial position of the Company. 3. Accounts Receivable and Revenue Recognition The Company recognizes revenue from product sales upon shipment to customers. Provisions for discounts, rebates, returns and other adjustments are provided for in the same period as the related sales are recorded. Accounts receivable are presented net of such provisions which amounted to $14,777,000 at March 31, 1995 and $3,449,000 at March 31, 1994. 4. Inventories Inventories are stated at the lower of cost (principally, first-in, first-out) or market. 5. Property, Plant and Equipment Property, plant and equipment are stated at cost. Depreciation is provided in amounts sufficient to relate cost of depreciable assets to operations over the estimated service lives, principally on a straight-line basis. 6. Research and Development Research and development expenses are charged to operations as incurred. 7. Income Taxes Deferred income taxes reflect the tax consequences on future years of events that have already been recognized by the Company in the financial statements or tax returns. Prior to April 1, 1993 deferred income taxes were provided for the difference between income and expense recognition for financial reporting purposes and income tax purposes. 8. Earnings Per Share Earnings per share of common stock are based on the weighted average number of shares outstanding during each year. The effect on earnings per share, resulting from the assumed exercise of outstanding stock options, is not material. 9. Reclassification Certain prior year amounts have been reclassified to conform to the 1995 presentation. B. Business Combinations American Triumvirate Insurance Company On December 21, 1994 the Company acquired the 50% interest in American Triumvirate Insurance Company (ATIC) that it did not previously own. ATIC is a captive insurance company located in Burlington, Vermont. The business combination has been accounted for under the purchase method of accounting. The Company paid $8,166,000 which equaled 50% of the net book value of ATIC as of December 31, 1994. -11- Bertek - ----------- On February 25, 1993 a wholly-owned subsidiary of the Company acquired substantially all of the net assets of Bertek, Inc. (Bertek). Bertek, headquartered in St. Albans, Vermont, is a manufacturer of transdermal drug delivery systems and also has operations in laminating and label manufacturing. The business combination has been accounted for under the purchase method of accounting. Goodwill of approximately $2,686,000 resulting from the acquisition is being amortized on a straight-line basis over a 20 year period. D. Property, Plant and Equipment Property, plant and equipment consist of the following components: (in thousands)
March 31, 1995 1994 - -------------- ------------- --------------- Raw materials $ 29,795 $ 26,138 Work in process 17,539 14,978 Finished goods 30,871 16,880 $ 78,205 $ 57,996
March 31, 1995 1994 - --------------------------- ---------- ------------ Land and land improvements $ 5,767 $ 5,088 Buildings and improvements 48,674 41,705 Machinery and equipment 69,626 59,178 Construction in progress 8,532 9,143 - -------------------------------------------------------------------------------------- 132,599 115,114 Less accumulated depreciation 40,300 32,600 - -------------------------------------------------------------------------------------- $ 92,299 $ 82,514
E. Investment in and Advances to Somerset The Company owns 50% of all the outstanding common stock of Somerset Pharmaceuticals Inc. (Somerset) and uses the equity method of accounting for its investment. Equity in Earnings of Somerset includes the Company's 50% portion of Somerset's net earnings and expense for amortization of intangible assets resulting from the acquisition of Somerset. Such intangible assets are amortized over a 15 year period. Amortization expense amounted to $924,000 in 1995, 1994 and 1993. Additionally, the Company's charges to Somerset for management services and product development activities are included in Equity in Earnings of Somerset. These charges have been recorded by Somerset as a reduction of its net earnings. Condensed audited balance sheet information of Somerset is as follows: (in thousands)
December 31, 1994 1993 1992 - ------------------------------------------------------------------------------- Current assets $ 48,770 $ 35,248 $ 30,016 Non-current assets 6,380 6,165 2,692 Current liabilities 29,211 23,417 28,585 Payable to Owners 2,318 2,063 10,585 Other liabilities 292 458 625 Condensed audited income statement information of Somerset is as follows: (in thousands) Year ended December 31, 1994 1993 1992 - -------------------------------------------------------------------------------- Net sales $ 124,566 $ 118,998 $ 104,071 Costs and expenses 59,557 55,825 47,266 Income taxes 20,900 21,408 20,736 - ------------------------------------------------------------------------------ Net earnings $ 44,109 $ 41,765 $ 36,069 - ------------------------------------------------------------------------------
The above information represents 100% of Somerset's operations of which the Company has a 50% interest. Under the Orphan Drug Act, Somerset has exclusivity relating to marketing the chemical compound Eldepryl(R) for use as a treatment for late stage Parkinson's disease through June of 1996. -12- F. Marketable Securities Effective April 1, 1994 the Company adopted Statement of Financial Accounting Standards No. 115 (SFAS No. 115), "Accounting for Certain Investments in Debt and Equity Securities". Prior years' financial statements have not been restated to apply the provisions of SFAS No. 115. This Standard changes the manner in which certain investments are valued and affects the way in which unrealized gains and losses are recognized for financial reporting purposes. The Company has classified its portfolio of marketable securities as "available for sale". Such securities are recorded at market value with unrealized gains and losses being recognized as a separate component of shareholders' equity, net of income taxes. The amortized cost and estimated market values at March 31, 1995 are as follows: (in thousands) L. Income Taxes Income taxes consist of the following components: (in thousands)
Gross Gross Amortized Unrealized Unrealized Market Cost Gains Losses Value ------------ ----------- ----------- ------------- Debt securities: U.S. Government obligations $ 17,083 $ 262 $ 22 $ 17,323 Municipal obligations 33,047 95 10 33,132 Corporate bonds 3,090 69 75 3,084 Certificates of deposit 15,804 - - 15,804 Total debt securities 69,024 426 107 69,343 Equity securities 3,400 1,868 78 5,190 Maturities of debt securities at market value are as follows: (in thousands) Due in one year or less $ 47,384 Due after one year through five years 16,553 Due after five years 5,406 Total $ 69,343 Proceeds from sales of marketable securities were $5,068,000 during 1995. Gross gains of $14,000 and gross losses of $142,000 were realized on those sales during 1995. The cost of investments sold is determined by the specific identification method. G. Intangible Assets Intangible assets are stated net of accumulated amortization of $13,874,000 and $8,874,000 at March 31, 1995 and 1994 respectively. Amortization is provided for on a straight-line basis over periods ranging from 14 to 17 years for patents and technology and 2 to 20 years for other intangible assets. Values assigned to patents and technology at March 31, 1995 and 1994, were $20,945,000 and $22,324,000 respectively. The remaining amounts consist principally of values assigned to licenses, agreements and goodwill. H. Other Assets Other assets consist of the following components: (in thousands) March 31, 1995 1994 - --------------------- Pooled asset funds $ 14,587 $ 13,758 Cash surrender value 16,377 16,254 Captive insurance company - 7,712 Other investments 17,981 10,398 $ 48,945 $ 48,122 Pooled asset funds are carried at the lower of cost or market and include the Company's interest in various funds which invest in common and preferred stocks, bonds, and money market funds. Earnings on these investments included under the caption "Other Income" amounted to $829,000 in 1995, $402,000 in 1994 and ($645,000) in 1993. At March 31, 1995 and 1994 the carrying amounts of these investments approximated fair value. Cash surrender value represents insurance policies on certain officers and key employees and the value of a split dollar life insurance arrangement with the estate of the former Chairman and Chief Executive Officer of the Company (see note P). Other investments are comprised principally of equity investments in non-publically traded entities. Such investments are accounted for under the cost method. Prior to December 21, 1994 the Company's interest in a captive insurance company was accounted for using the equity method of accounting (see note B). Earnings from this investment included under the caption "Other Income" amounted to $454,000 in 1995 prior to acquisition, $937,000 in 1994 and $940,000 in 1993. -13- I. Other Current Liabilities Other current liabilities includes payroll and employee benefit plan accruals which amounted to $6,103,000 at March 31, 1995 and $5,388,000 at March 31, 1994, accruals for Medicaid reimbursements of $3,640,000 at March 31, 1995 and $1,479,000 at March 31, 1994 and deferred revenue related to a distribution agreement (see note K) of $3,500,000 at March 31, 1995. J. Long-Term Obligations Long-term obligations represent accruals for post-retirement compensation pursuant to agreements with certain key employees and directors. Under these agreements, benefits are to be paid over periods of 10 to 15 years commencing at retirement. K. Distribution Agreement On October 10, 1994 the Company entered into a distribution agreement with STC Pharmaceuticals, Inc. (STC), a wholly owned subsidiary of Eli Lilly and Company (Lilly). Under the terms of the agreement the Company is distributing a generic form of Lilly's oral antibiotic Ceclor(R) on behalf of STC. The Company is being paid a fixed monthly fee for distributing the product. Upon certain events, as defined in the agreement, the fixed monthly fee will convert to a variable amount predicated upon STC's net sales of the product. Revenues and gross profits resulting from this agreement did not have a material impact on operations.
Year ended March 31, 1995 1994 1993 - ----------------------- ------------ ----------- ------------ Federal Current $ 48,851 $ 11,888 $ 25,325 Deferred (8,111) 61 (888) 40,740 11,949 24,437 State Current 12,033 2,766 2,283 Deferred (2,316) (717) - 9,717 2,049 2,283 Income taxes $ 50,457 $ 13,998 $ 26,720 - ---------------------------------------------------------------------------------- Pre-tax earnings $ 171,326 $ 87,065 $ 97,341 - ---------------------------------------------------------------------------------- Effective tax rate 29.5% 16.1% 27.4% - ---------------------------------------------------------------------------------- Effective April 1, 1993 the Company adopted Statement of Financial Accounting Standards No. 109 (SFAS No. 109), "Accounting for Income Taxes". The prior year's financial statements have not been restated to apply the provisions of SFAS No. 109. The cumulative effect of adopting this Standard resulted in an increase in net earnings of $1,124,000 or $.01 per share in the 1994 Consolidated Statement of Earnings. There was no cash flow impact. This Standard requires an asset and liability approach to accounting for income taxes. Deferred income tax assets and liabilities reflect the future tax consequences of events that have already been recognized in the financial statements or tax returns. Changes in enacted tax rates or laws will result in adjustments to the recorded tax asset or liabilities in the period that the tax law is enacted. -14- Temporary differences and carryforwards which give rise to the deferred income tax assets and liabilities are as follows: (in thousands) Number of shares Option price under option per share - ----------------------------------------------------------------------------- Outstanding April 1, 1992 1,120,504 $ 4.125-16.00 Options granted 1,778,000 18.00 Options exercised (713,857) 4.125-18.00 Options cancelled or surrendered (64,398) 4.75-16.00 - ----------------------------------------------------------------------------- Outstanding March 31, 1993 2,120,249 $ 4.125-18.00 Options granted 6,000 26.125-28.125 Options exercised (347,747) 4.125-18.00 Options cancelled or surrendered (6,875) 16.00 - ----------------------------------------------------------------------------- Outstanding March 31, 1994 1,771,627 $ 4.24-28.125 Options granted 296,000 15.875-22.00 Options exercised (274,953) 4.125-18.00 Options cancelled or surrendered (22,000) 7.25-18.00 - ----------------------------------------------------------------------------- Outstanding March 31, 1995 1,770,674 $ 4.24-28.125 - -----------------------------------------------------------------------------
March 31, 1995 1994 - -------------------------- ------------ ----------- Deferred Tax Assets: Employee benefits $ 2,758 $ 1,745 Deferred revenue 1,881 868 Asset allowances 5,785 1,279 Inventory 5,378 829 Investments 634 1,022 - ------------------------------------------------------------------------------------------------ Total Deferred Tax Assets 16,436 5,743 Deferred Tax Liabilities: Property 2,642 3,379 Investments 2,206 1,103 - ------------------------------------------------------------------------------------------------ Total Deferred Tax Liabilities 4,848 4,482 - ------------------------------------------------------------------------------------------------ Deferred Tax Assets - Net $ 11,588 $ 1,261 Classification in the Consolidated Balance Sheet: Deferred Income Tax Benefit - Current $ 10,545 $ 2,082 Deferred Income Tax Benefit - Non-Current 1,043 - Deferred Income Tax Liability - Non-Current - (821) - ------------------------------------------------------------------------------------------------ Deferred Tax Assets - Net $ 11,588 $ 1,261 - ------------------------------------------------------------------------------------------------ A reconciliation of the statutory tax rate to the effective tax rate is as follows: Year Ended March 31, 1995 1994 1993 - --------------------- ------ -------- -------- Statutory tax rate 35.0% 35.0% 34.0% State income taxes-net 4.2% 1.7% 1.5% Tax exempt earnings- primarily dividend exclusion (4.8%) (7.7%) (5.9%) Tax credits (4.9%) (7.6%) (2.2%) SFAS 109 - (1.3%) - Changes in tax code - (3.7%) - Other items - (0.3%) - - ----------------------------------------------------------------------------------------------------- Effective tax rate 29.5% 16.1% 27.4% - ----------------------------------------------------------------------------------------------------- Tax credits result principally from operations in Puerto Rico. In August of 1993, President Clinton signed into law the Omnibus Budget Reconciliation Act of 1993 ("the Act"). The Act has several provisions which affect the Company's income tax expense including a change in the Federal corporate tax rate and significant changes relating to tax credits for operations in Puerto Rico. As a direct result of the changes in the tax code, the Company reassessed its position on the filing alternatives available under the tax code. Based on the new tax code provisions, the Company made a decision which resulted in a reduction of income tax expense of $3,225,000. This amount represents management's estimate of the cumulative effect of this change. M. Common Stock During fiscal year 1993 the company declared a 2 for 1 stock split effected in the form of a stock dividend. The par value of the new shares issued totaled $19,327,000 and has been transferred from additional paid-in capital and retained earnings to the common stock account. Per share amounts and stock options have been adjusted for the stock split. On April 7, 1993, the shareholders of the Company approved an increase in the number of shares of common stock authorized to 300,000,000. N. Stock Option Plans On December 1, 1986 the Board of Directors adopted the "Mylan Laboratories Inc. 1986 Incentive Stock Option Plan" ("the Plan") which was approved by the shareholders on June 24, 1987. A total of 6,000,000 shares of the Company's common stock are reserved for issuance upon exercise of stock options. Options, which may be granted at not less than fair market value on the date of the grant may be excercised within ten years from the date of grant. As of March 31, 1995 options for 3,040,300 shares have been granted pursuant to the Plan. On June 23, 1992 the Board of Directors adopted the "1992 Nonemployee Director Stock Option Plan" (the "Directors' Plan") subject to shareholder approval, which was obtained on April 7, 1993. A total of 400,000 shares of the Company's common stock are reserved for issuance upon exercise of stock options which may be granted at not less than fair market value on the date of grant. -15- Shares are granted, based on a formula as described in the Directors' Plan, upon the nonemployee director's initial and subsequent election to the Board of Directors. Options may be exercised within ten years from the date of grant. As of March 31, 1995, 170,000 shares have been granted pursuant to the Directors' Plan. As of March 31, 1995 options for 1,212,299 shares are exercisable under all plans at option prices ranging from $4.24 to $28.125 per share. A summary of the activity resulting from all plans adjusted for the stock split is as follows:
O. Profit Sharing and 401(K) Plans The Company has a noncontributory trusteed profit sharing plan covering essentially all employees who are not covered by 401(k) plans, a 401(k) plan covering essentially all Hickam employees, a profit sharing plan with a 401(k) provision covering all employees of Bertek and a 401(k) plan covering all employees of the bargaining unit. Contributions to the profit sharing plan and the Bertek plan are made at the discretion of the Board of Directors. Contributions to the Hickam plan are based upon a formula matching the employees salary deferral. Contributions to the bargaining unit plan are based upon the union agreement. Total contributions to all plans for the years ended March 31, 1995, 1994 and 1993 were $3,060,000, $2,300,000 and $1,860,000 respectively. P. Related Party Transactions Pursuant to a salary continuation agreement between Mr. McKnight, former Chairman and Chief Executive Officer, and the Company, a one time payment of $4,306,000 was made on March 31, 1994 of which $2,861,000 was expensed during 1994. The Company also purchased aircraft, which it previously leased on a flight by flight basis, from the estate of Mr. McKnight for $5,900,000. In addition, the Company will continue to fund life insurance premiums pursuant to a split-dollar life insurance agreement whereby the Company has rights to the cash surrender value of the insurance policies. Q. Legal Matters The Company is involved in various legal proceedings that are considered normal to its business. While it is not feasible to predict the ultimate outcome of such proceedings it is the opinion of management that the outcome will have no material adverse effect on the Company's operations or financial position. During fiscal 1994 the Company settled certain legal matters relating to the Company's suit filed under the Federal Antitrust Laws and the Racketeer Influence and Corrupt Organization Act (RICO), for approximately $3,375,000. Additionally during fiscal 1994 the jury in the Company's lawsuit against American Cyanamid ruled in favor of Cyanamid on the company's claims and in favor of the Company on Cyanamid's counterclaims. No money damages were awarded to either party. The U.S. Court of Appeals for the Fourth Circuit upheld the jury verdicts on all claims. -16- Independent Auditors' Report Board of Directors and Shareholders Mylan Laboratories Inc. Pittsburgh, Pennsylvania
2. Financial Statement SchedulesWe have audited the accompanying consolidated balance sheets of Mylan Laboratories Inc. and subsidiaries as of March 31, 1995 and 1994, and the related consolidated statements of earnings, shareholders' equity, and cash flows for each of the three years in the period ended March 31, 1995, appearing on pages 40 through 51. These fiancial 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 generally accepted auditing standards. 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, such consolidated financial statements present fairly, in all material respects, the financial position of Mylan Laboratories Inc. and subsidiaries as of March 31, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 1995, in conformity with generally accepted accounting principles. /s/ Deloitte & Touche LLP Pittsburgh, Pennsylvania April 28, 1995 -17- ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) 1. List of Financial Statements Page Included in Item 8 herein: Number Consolidated Balance Sheets . . . . . . . . . . . . . . 5-6 Consolidated Statements of Earnings . . . . . . . . . . 7 Consolidated Statements of Shareholders' Equity . . . . 8 Consolidated Statements of Cash Flows . . . . . . . . . 9-10 Notes to Consolidated Financial Statements. . . . . . . 11-16 Independent Auditors' Report. . . . . . . . . . . . . . 17 (c) "Salary Continuation Plan" with Roderick P. Jackson and Louis J. DeBone each dated March 14, 1995 and filed herewith *.
The information required by this item is incorporated herein by reference to Exhibit 99. All other schedules have been omitted because they are not required. 3. Exhibits (3)(a) Amended and Restated Articles of Incorporation of the registrant, filed as Exhibit (3)(a) to Form 10-Q for quarter ended June 30, 1992 and incorporated herein by reference. (b) By-laws of the registrant, as amended to date, filed as Exhibit 3(b) to Form 10-Q for the quarter ended June 30, 1992 and incorporated herein by reference. (10)(a) 1986 Incentive Stock Option Plan, as amended to date, filed as Exhibit 10(b) to Form 10-K for fiscal year ended March 31, 1993 and incorporated herein by reference. (b) "Salary Continuation Plan" with Milan Puskar, Dana G. Barnett and C.B. Todd each dated as of January 27, 1995 and filed herewith *. (13) Fiscal 1995 Annual Report to the Shareholders (only those portions which are incorporated in this Report by reference are being filed herewith *).
(d) Employment contract with Milan Puskar dated April 28, 1983, as amended to date, filed as Exhibit 10(e) to Form 10-K for fiscal year ended March 31, 1993 and incorporated herein by reference. (e) Split Dollar Life Insurance Arrangement with McKnight Irrevocable Trust filed as Exhibit 10(g) to Form 10-K for fiscal year ended March 31, 1994 and incorporated herein by reference. (f) 1992 Nonemployee Director Stock Option Plan filed as Exhibit 10(g) to Form 10-K for fiscal year ended March 31, 1993 and incorporated herein by reference. (g) "Service Benefit Agreement" with Laurence S. DeLynn, John C. Gaisford, M.D., Richard A. Graciano and Robert W. Smiley, Esq. each dated January 27, 1995 and filed herewith *.
(21) Subsidiaries of the registrant, filed herewith. * (23) Consents of Independent Auditors, filed herewith. (27) Financial Data Schedule, filed herewith. * (99) Consolidated financial statements of Somerset Pharmaceuticals, Inc. for Years ended December 31, 1994, 1993 and 1992, filed herewith. SOMERSET PHARMACEUTICALS, INC. AND SUBSIDIARIES Consolidated Financial Statements for the Years Ended December 31, 1994, 1993 and 1992, and Independent Auditors' Report INDEPENDENT AUDITORS' REPORT To the Board of Directors of Somerset Pharmaceuticals, Inc.:
Exhibit 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statements No. 33-65916 and No. 33-65918 of Mylan Laboratories Inc. on Form S-8 of our report dated April 28, 1995, included in this Amendment No. 1 on Form 10-K/A of Mylan Laboratories Inc. for the year ended March 31, 1995. /s/Deloitte & Touche LLP Deloitte & Touche LLP Pittsburgh, Pennsylvania February 5, 1996 Exhibit 23 (cont.) INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statements No. 33-65916 and No. 33-65918 of Mylan Laboratories Inc. on Form S-8 of our report dated February 3, 1995 relating to the consolidated financial statements of Somerset Pharmaceuticals, Inc. and subsidiaries for the year ended December 31, 1994, included as an exhibit to Amendment No. 1 on Form 10-K/A of Mylan Laboratories Inc. for the year ended March 31, 1995. /s/ Deloitte & Touche LLP Deloitte & Touche LLP Pittsburgh, Pennsylvania February 5, 1996 -1-
We have audited the accompanying consolidated balance sheets of Somerset Pharmaceuticals, Inc. and subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1994. 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 generally accepted auditing standards. 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, such consolidated financial statements present fairly, in all material respects, the financial position of Somerset Pharmaceuticals, Inc. and subsidiaries as of December 31, 1994 and 1993, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1994 in conformity with generally accepted accounting principles. /s/ Deloitte & Touche Pittsburgh, Pennsylvania February 3, 1995 SOMERSET PHARMACEUTICALS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992 SOMERSET PHARMACEUTICALS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1994 AND 1993 See notes to consolidated financial statements. -2-
ASSETS 1994 1993 CURRENT ASSETS: Cash and cash equivalents $17,529,000 $10,281,000 Investment securities 3,338,000 3,470,000 Accounts receivable (net of allowance for doubtful accounts of $100,000) 20,653,000 16,095,000 Inventories 5,293,000 3,820,000 Prepaid expenses and other current assets 1,957,000 1,582,000 Total current assets 48,770,000 35,248,000 PROPERTY AND EQUIPMENT - Net 4,266,000 2,762,000 INTANGIBLE ASSETS - Net 1,644,000 1,987,000 OTHER ASSETS 470,000 1,416,000 $55,150,000 $41,413,000 Liabilities and Stock holder's Equity 1994 1993 Current Liabilities: Accounts payable $ 292,000 $ 205,000 Note payable - 253,000 Accrued marketing costs 11,000,000 9,100,000 Royalty payable 5,850,000 4,780,000 Other accrued expenses 2,833,000 2,070,000 Accrued research and development 1,901,000 2,046,000 Income taxes payable 5,017,000 2,900,000 Amounts due to related paries 2,318,000 2,063,000 Total current liabilities 29,211,000 23,417,000 Deferred revenue 292,000 458,000 Stockholder's Equity: Common stock, $.01 par value; 13,719 shares authorized, 11,297 shared issued - - Retained earnings 26,099,000 17,990,000 Less treasury stock, 644 shares at cost (452,000) (452,000) Total stockholder's equity 25,647,000 17,538,000 $55,150,000 $41,413,000 SOMERSET PHARMACEUTICALS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31,1994, 1993 AND 1992 See notes to consolidated financial statements. -3-
1994 1993 1992 NET SALES $124,566,000 $118,998,000 $104,071,000 COSTS AND EXPENSES: Cost of sales 16,399,000 13,991,000 12,552,000 Marketing 23,457,000 25,826,000 23,415,000 Research and development 10,424,000 9,134,000 5,580,000 Administrative 9,845,000 8,005,000 6,736,000 60,125,000 56,956,000 48,283,000 64,441,000 62,042,000 55,788,000 OTHER INCOME 568,000 1,131,000 1,017,000 INCOME BEFORE INCOME TAXES 65,009,000 63,173,000 56,805,000 PROVISION FOR INCOME TAXES 20,900,000 21,408,000 20,736,000 NET INCOME $ 44,109,000 $ 41,765,000 $ 36,069,000 SOMERSET PHARMACEUTICALS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992 See notes to consolidated financial statements. -4-
Common Stock Treasury Stock Retained Stockholders' Shares Amount Shares Amount Earnings Equity -------- --------- ------- ---------- ------------ ---------------- BALANCE, DECEMBER 31, 1991 11,297 $ - 644 $ (452,000) $ 7,900,000 $ 7,448,000 Accretion of the carrying value of the redeemable preferred stock - - - - (122,000) (122,000) Dividends - - - - (41,207,000) (41,207,000) Net income - - - - 36,069,000 36,069,000 BALANCE, DECEMBER 31, 1992 11,297 - 644 (452,000) 2,640,000 2,188,000 Accretion of the carrying value of the redeemable preferred stock - - - - (15,000) (15,000) Dividends - - - - (26,400,000) (26,400,000) Net income - - - - 41,765,000 41,765,000 BALANCE, DECEMBER 31, 1993 11,297 - 644 (452,000) 17,990,000 17,538,000 Dividends - - - - (36,000,000) (36,000,000) Net income - - - - 44,109,000 44,109,000 BALANCE, DECEMBER 31, 1994 11,297 $ - 644 $ (452,000) $ 26,099,000 $ 25,647,000 SOMERSET PHARMACEUTICALS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992 -5-
1994 1993 1992 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $44,109,000 $41,765,000 $36,069,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 587,000 285,000 229,000 Deferred tax expense (benefit) 862,000 (800,000) 20,000 Deferred revenue (166,000) (167,000) (166,000) Changes in operating assets and liabilities: Accounts receivable (4,558,000) (1,872,000) (3,989,000) Inventories (1,473,000) (1,578,000) 614,000 Prepaid expenses and other current assets (375,000) 352,000 (249,000) Accounts payable 87,000 (227,000) (1,121,000) Royalty payable 1,070,000 190,000 901,000 Accrued marketing costs 1,900,000 1,386,000 2,074,000 Accrued research and development (145,000) 981,000 - Other accrued expenses 763,000 201,000 1,338,000 Income taxes payable 2,117,000 570,000 (177,000) Amounts due to related parties 255,000 278,000 542,000 Net cash provided by operating activities 45,033,000 41,364,000 36,085,000 CASH FLOWS FROM INVESTING ACTIVITIES: Net decrease (increase) in investment securities 132,000 2,006,000 (1,685,000) Purchase of property and equipment (1,898,000) (2,690,000) (127,000) Decrease (increase) in other assets 234,000 (268,000) 23,000 Net cash used in investing activities (1,532,000) (952,000) (1,789,000) (Continued) SOMERSET PHARMACEUTICALS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992 SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES: During 1992, the Company recorded $8,800,000 of dividends payable on common stock which had not been paid as of the end of that year. See notes to consolidated financial statements. -6-
1994 1993 1992 CASH FLOWS FROM FINANCING ACTIVITIES: Redemption of preferred stock $ - $ (1,149,000) $ (1,149,000) Dividends paid on preferred stock - (176,000) (85,000) Dividends paid on common stock (36,000,000) (35,200,000) (36,300,000) Net (decrease) increase in note payable (253,000) 253,000 - Net cash used in financing activities (36,253,000) (36,272,000) (37,534,000) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 7,248,000 4,140,000 (3,238,000) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 10,281,000 6,141,000 9,379,000 CASH AND CASH EQUIVALENTS, END OF YEAR $ 17,529,000 $ 10,281,000 $ 6,141,000 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for: Interest $ 7,000 $ 5,000 $ - Income taxes $ 17,683,000 $ 21,259,000 $ 20,992,000 The income tax provision consists of the following for the years ended December 31:
1. PRINCIPLES OF CONSOLIDATION AND OPERATIONS The consolidated financial statements include the accounts of Somerset Pharmaceuticals, Inc. (the Company) and its wholly owned subsidiaries, Somerset Pharmaceuticals Holding Company and Somerset Caribe, Inc. The Company is jointly owned by Mylan Laboratories, Inc. and Circa Pharmaceuticals, Inc., with each owning 50% of all the outstanding common stock of the Company. All significant intercompany accounts and transactions have been eliminated in consolidation. The Company, incorporated in February 1986, is engaged in the development, testing and marketing of drugs to be used in the treatment of various human disorders. Currently, the Company manufactures, markets and sells Eldepryl, which is used as a treatment for Parkinson's Disease. The Company is party to an exclusive 14-year agreement (through November 22, 2003) with Chinoin Pharmaceutical Company (Chinoin) of Budapest, Hungary under which Eldepryl and other new potential drugs resulting from Chinoin research are made available for licensing by the Company. The license agreement requires the Company to pay royalties equal to 7% of net sales of Eldepryl including sub-license revenues. The Company incurred royalty expense of approximately $9,983,000, $8,383,000 and $8,105,000 for the years ended December 31, 1994, 1993 and 1992, respectively. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a. Cash and Cash Equivalents - The Company generally considers debt instruments purchased with a maturity of three months or less to be cash equivalents. b. Investment Securities - Effective January 1, 1994, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities." The effect of adopting SFAS No. 115 on the Company's financial statements was not material. During the current year, gross proceeds from sales and maturities of investments approximated $797,000 and $750,000, respectively, and realized gains or losses were not material. At December 31, 1994, the investment securities were available for sale, and there were no material unrealized gains or losses. At December 31, 1993, investment securities included both debt and equity instruments which were valued at the lower of cost or market with cost approximating market. c. Inventories - Inventory is stated at the lower of cost or market, with cost determined on a first-in, first-out basis. d. Property and Equipment - Property and equipment are stated at cost. Depreciation is provided over the estimated useful lives of the assets by the straight-line method. Estimated useful lives are five to seven years for machinery and equipment and thirty-five years for the building. -7- e. Intangible Assets - Intangible assets are amortized on a straight-line basis over 14 years. f. Research and Development - Research and development costs are expensed as incurred. 3. INVENTORY Inventory consists of the following at December 31: 1994 1993 -------------- -------------- Raw material $ 4,686,000 $ 2,864,000 Work in process 375,000 470,000 Finished goods 232,000 486,000 Total $ 5,293,000 $ 3,820,000 4. PROPERTY AND EQUIPMENT Property and equipment consist of the following at December 31: 1994 1993 ------------ ------------ Land $ 300,000 $ 300,000 Building 2,067,000 1,638,000 Machinery and equipment 2,410,000 963,000 Furniture and fixtures 87,000 65,000 4,864,000 2,966,000 Less accumulated depreciation (598,000) (204,000) Property and equipment - net $ 4,266,000 $ 2,762,000 5. SUB-LICENSE OF RIGHTS On February 9, 1988, the Company granted a sub-license to its exclusive right and license to use its technology to Draxis Health Inc. (formerly Deprenyl Research Limited) to commercialize certain drugs in Canada for 15 years. The Company receives a royalty of 11% of Draxis Health Inc.'s net sales over the license period. Royalty income, less related royalty expense to Chinoin, included in other income for the years ended December 31, 1994, 1993 and 1992 was approximately $199,000, $357,000 and $414,000, respectively. 6. INTANGIBLE ASSETS Intangible assets primarily represent the cost of a modification to the terms of the Chinoin Agreement, less accumulated amortization of $1,061,000 and $868,000 at December 31, 1994 and 1993, respectively. -8- 7. CO-PROMOTIONAL AGREEMENT Effective October 1, 1990, the Company entered into an agreement with Sandoz Pharmaceuticals Corporation (Sandoz) to co-promote the product Eldepryl. Under the terms of the agreement, the Company is required to make certain payments to Sandoz in the event sales of Eldepryl exceed certain predefined minimums. The agreement requires Sandoz, among other things, to expend, at a minimum, a predetermined amount for advertising during each year of the agreement. Once the predetermined levels of sales are exceeded, the Company is required to pay Sandoz for advertising expenditures made on behalf of the Company. After Sandoz's advertising expenses are reimbursed, any additional amounts are shared by Sandoz and the Company based upon the terms of the agreement. During 1994, 1993 and 1992, the Company expensed approximately $22,360,000, $24,260,000 and $22,321,000, respectively, pursuant to the agreement. Additionally, certain co-promotional fees paid by Sandoz at the commencement of the agreement are being recognized ratably by the Company during the term of the agreement (six years), and certain costs associated with the procurement, negotiation and execution of the agreement by the owners of the Company are being incurred by the Company in approximately the same amount. In December 1994, the Company amended its co-promotional agreement with Sandoz. The amended agreement eliminated certain residual period payments to Sandoz, shortened the term to March 31, 1996, eliminated certain sales force detail requirements and requires certain payments to be made to the Company if a predetermined level of sales is not achieved. 8. NOTE PAYABLE On June 30, 1993, the Company entered into a one-year $1,500,000 line of credit agreement with a bank in conjunction with the renovation of the Company's research facility. Interest on amounts drawn on the line of credit was payable monthly at the bank's prime rate (6% at December 31, 1993) less 0.25%. Pursuant to the agreement, all borrowings under this line of credit were paid off in 1994. 9. REDEEMABLE PREFERRED STOCK The Class A and B redeemable preferred stock were fully redeemed during 1993. The Class A stock, ($.10 par value, 1,950 shares authorized and 488 shares outstanding at December 31, 1992) was carried at redemption value plus undeclared dividends. The Class B stock ($.10 par value, 2,850 shares authorized and issued and 661 shares outstanding at December 31, 1992) was convertible into common stock based on a conversion price set by the Board of Directors and subject to adjustment from time to time. -9- 10. INCOME TAXES The Company adopted Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes" effective January 1, 1993. As permitted by SFAS No. 109, prior-year financial statements have not been restated to reflect the change in accounting method. The cumulative effect of adopting SFAS No. 109 on the Company's financial statements was not material. Deferred tax assets: Deferred revenue $ 110,000 Deferred compensation 228,000 Chargeback allowance 152,000 Other 42,000 ------------- 532,000 Deferred tax liabilities: Excess of tax amortization over reporting amortization 165,000 ------------ Net deferred tax assets $ 367,000 ============ The statutory federal income tax rate is reconciled to the effective tax rate as follows for the years ended December 31: -10-
1994 1993 1992 Current tax expense: Federal $ 15,025,000 $ 17,938,000 $ 18,540,000 State 4,899,000 4,124,000 2,050,000 Foreign 114,000 146,000 126,000 --------------- --------------- --------------- 20,038,000 22,208,000 20,716,000 Deferred tax expense (benefit): Federal 754,000 (700,000) 20,000 State 108,000 (100,000) - ---------------- ---------------- -------------- 862,000 (800,000) 20,000 ---------------- ---------------- -------------- Total provision for income taxes $ 20,900,000 $ 21,408,000 $ 20,736,000 ================ ================ ============== Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The tax effects of significant items comprising the Company's deferred taxes (which are included in "Other Assets" in the balance sheet) as of December 31, 1994 are as follows: 1994 1993 1992 ------- ------- ------- Tax at statutory rate 35.0% 35.0% 34.0% State income tax (net of federal benefit) 3.5 4.1 2.4 Tax credits (9.9) (7.2) (.2) Tollgate tax 3.9 2.0 - Other (.4) - .3 ------- ------ ------- Effective tax rate 32.1% 33.9% 36.5% ======= ====== ======= Tax credits result principally from operations in Puerto Rico. 11. RELATED PARTY TRANSACTIONS The Company incurs expenses for ongoing management services and over a six year period for specific services related to the procurement, negotiation and execution of the co-promotion agreement by the owners of the Company. The Company also incurs other expenses from one or both of its owners as detailed below for the years ended December 31: [/TABLE] (b) Reports on Form 8-K The Company was not required to file a report on Form 8-K during the quarter ended March 31, 1995. * Filed with original of this 10-K on June 21, 1995. -18-
1994 1993 1992 Management fees $ 6,228,000 $ 5,950,000 $ 5,204,000 Research and development 1,020,000 835,000 239,000 Inventory handling and distribution fees 650,000 750,000 331,000 Rent - equipment and facilities 1,065,000 647,000 - Product liability insurance 618,000 675,000 675,000 During 1993, the Company purchased $696,000 of equipment from one of its owners. At December 31, 1994 and 1993 the balance of amounts due to related parties represents rent, research and development, distribution and management fees payable to the owners of the Company. 12. SIGNIFICANT CUSTOMERS The Company had sales to certain customers which individually exceeded 10% of net sales. Three customers represented 57% of net sales for the year ended December 31, 1994 and two customers represented 45% and 41% of net sales for the years ended December 31, 1993 and 1992, respectively. 13. COMMITMENTS As of December 31, 1994, the Company is committed to fund approximately $5,160,000 for various research and development studies through 1995. 14. EMPLOYEE BENEFIT PLANS The Company has a defined contribution profit sharing plan covering substantially all employees. Contributions are made at the discretion of the Board of Directors. Additionally, during 1994, the Company initiated a deferred compensation plan for select key employees. Contributions are based on profitability levels for the year. During 1994, 1993 and 1992, the Company recorded expense of $755,000, $100,000 and $-0- for these plans, respectively. * * * * * * SIGNATURE ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this amendment to be signed on its behalf by the undersigned thereunto duly authorized. Mylan Laboratories Inc. (Registrant) DATE February 5, 1996 /s/ Milan Puskar ------------------ --------------------------------------- Milan Puskar Chairman of the Board, Chief Executive Officer and President -19-