SECURITIES AND EXCHANGE COMMISSION
Wasington, DC 20549
FORM 10-K
Annual Report pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended March 31, 1998 Commission File No. 1-9114
Pennsylvania 25-1211621
(State or other jurisdiction
of incorporation or organization) (IRS Employer Identification 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 non-affiliates of
the registrant, computed by reference to the closing price of such stock as of
May 29, 1998:
$3,554,321,160
The number of shares of Common Stock of the registrant outstanding as of
May 31, 1998:
122,341,004
Documents incorporated by reference into this Report are:
Annual Report to Shareholders for year ended
March 31, 1998... Parts I and II,
Items 1, 5-8
Proxy Statement for 1998 Annual Meeting of
Shareholders... Partrt III, Items 10-13
ITEM 1. Business
Mylan Laboratories Inc., a Pennsylvania corporation incorporated in 1970,
and its subsidiaries (herein referred to collectively as "the Company") are
engaged in developing, licensing, manufacturing, marketing and distributing of
generic and proprietary pharmaceutical and wound care products. References
herein to fiscal 1998, 1997 and 1996 mean the fiscal years ended March 31, 1998,
1997 and 1996, respectively.
Through its subsidiary, Mylan Pharmaceuticals Inc., the Company is
recognized as one of the leaders in the generic pharmaceutical industry.
Pharmaceutical products initially sold on an exclusive basis are known in the
industry as proprietary or branded products. Generic drugs are therapeutically
equivalent to their brand name counterparts and are generally sold at prices
significantly less than branded products. Accordingly, generics provide a safe,
effective and cost efficient alternative to users of these products.
The Company manufactures oral dose products in Mylan Pharmaceuticals Inc.'s
Morgantown, West Virginia facility or Mylan Inc.'s facilities in Caguas and
Cidra, Puerto Rico. To facilitate timely delivery of products to customers in
all fifty states the Company operates distribution centers in Greensboro, North
Carolina and Reno, Nevada.
Due to the non-exclusive nature of generic products, the generic industry
is comprised of numerous competitors including manufacturers that market their
products under their own names, distributors that market products manufactured
by others and brand name companies, that market their products under both the
brand name and as the generic substitute. This diversity provides significant
price competition within the generic pharmaceutical industry which generally
results in decreasing prices of generic products over time to those who supply
such products to the retail market.
The Company has entered into strategic alliances with several
pharmaceutical companies. These alliances through distribution and licensing
agreements provide the Company with additional products to further broaden the
Company's product line. In addition, the Company has entered into product
development and licensing agreements, whereby the Company has obtained, in
exchange for funding of drug development activities, rights to manufacture
and/or distribute additional pharmaceutical products.
The Company entered into an alliance with VivoRx, Inc., a biotechnology
company that is developing pancreatic islet cell implant technology for the
management of diabetes. VivoRx has successfully implanted three patients with
human islets in the United States and two patients with porcine (pancreas)
islets in New Zealand. One patient in New Zealand was not taking
immunosuppressant drugs and has not rejected the porcine islets implanted.
Rejection of the implant is a major hurdle to overcome in all types of implant
operations. In addition, VivoRx has amended its previously accepted
Investigational New Drug Application ("IND") with the United States Food and
Drug Administration
("FDA") for the use of porcine islets to permit the use of proliferated human
islet cells. These proliferated human islets have already been implanted in one
patient in the United States with the same progress profile as the original
transplant patients. VivoRx expects to begin Phase I/II clinical trials by the
end of this calendar year. The Company continues to examine other alliances as a
way to grow and react in the rapidly changing health care arena.
In June 1989, the Company acquired a 50% interest in Somerset
Pharmaceuticals, Inc. ("Somerset"). Pursuant to a license agreement with a
Hungarian pharmaceutical company, Somerset had exclusive marketing rights to the
product Eldepryl(R) in the United States and certain other countries.
Somerset's marketing exclusivity under the Orphan Drug Act relating to the
chemical compound Eldepryl(R) for use as a treatment for late stage Parkinson's
disease expired on June 6, 1996. In May 1996, Somerset received FDA approval to
market an easy to identify capsule which was launched immediately by Somerset.
In August 1996, the FDA granted approval to several companies to market a
generic tablet form of Eldepryl(R). Following this action, Somerset filed suit
against the FDA seeking injunctive and declaratory relief relating to these
approvals. On June 18, 1997, the Court dismissed Somerset's suit.
Somerset is actively involved in research projects regarding additional
uses of this and other chemical compounds. The impact of generic competition and
research and development expenditures by Somerset relating to these research
projects will continue to adversely affect Somerset's contribution to the
Company's net earnings.
In October 1991, a wholly-owned subsidiary of the Company merged with Dow
Hickam Pharmaceuticals, Inc. ("Hickam"), an established branded pharmaceutical
company located in Sugar Land, Texas. Through an internal restructuring Hickam,
which is dedicated to manufacturing and marketing specialty pharmaceutical
products and devices used principally as wound care treatments, now operates as
a division of Bertek Pharmaceuticals Inc. Bertek Pharmaceuticals Inc. operates
as the branded pharmaceutical division of the Company with its foundation built
on selling the antihypertensive drug Maxzide(R) and Maxzide(R)-25MG
("Maxzide(R)") and the nitroglycerin transdermal patch Nitrek(TM). Maxzide(R) is
manufactured by Mylan Inc. while Nitrek(TM) is manufactured by Bertek, Inc.
On February 25, 1993, the Company acquired substantially all of the net
assets of Bertek, Inc. ("Bertek"). Bertek, headquartered in St. Albans, Vermont,
is principally a manufacturer of transdermal drug delivery systems. In August
1996, Bertek received its first Abbreviated New Drug Application ("ANDA")
approval to market a nitroglycerin transdermal patch. Bertek is actively
involved in other development projects to provide new transdermal products. In
addition, Bertek provides components using internally developed technology for
transdermal patches marketed by other companies. In February 1997, Bertek sold
certain assets related to its custom label and printing operations which were
unrelated to the Company's core pharmaceutical business.
On February 28, 1996, a wholly-owned subsidiary of the Company acquired
100% of the outstanding stock of UDL Laboratories, Inc. ("UDL"). UDL is the
premier supplier of unit dose generic pharmaceuticals to the institutional and
long-term care markets. UDL maintains manufacturing and research and development
facilities in Rockford, Illinois as well as Largo, Florida.
On June 14, 1996, the Company executed a series of agreements with American
Home Products Corporation ("AHP") relating to the Maxzide(R) products. Since
1984 these products, which were developed and manufactured by the Company, were
marketed by AHP's Lederle Laboratories Division under a worldwide license
arrangement.
As a result of the AHP agreements, Bertek Pharmaceuticals Inc. is marketing
the products in the United States. AHP retained ownership of certain trademarks
and tradedress which have been licensed to the Company for a period of five
years. At the end of the five year period ownership of these intangibles will be
transferred to the Company.
Products The information on the Company's product line set forth on pages
48-55 of the accompanying Annual Report to Shareholders for the year ended March
31, 1998 is incorporated herein by reference. All pharmaceutical products
presently manufactured by the Company have been previously developed and
marketed by other firms with the exception of the Maxzide(R) products and
Cystagon(TM).
The Company is required to secure and maintain approval from the FDA for
the products and dosage forms which it manufactures. The number of products and
dosage forms for which the Company is an approved manufacturer has expanded in
recent years. See "New Product Approvals".
During fiscal 1998, 1997 and 1996, approximately $46,278,000, $42,633,000
and $38,913,000 were expensed by the Company for the development of formulations
and procedures for products which it desires to produce, use or sell. The
Company's research and development efforts are conducted primarily to qualify
the Company to manufacture ethical pharmaceuticals under FDA standards and
approval. Recently this has included increased spending for transdermal delivery
system technology and innovator compounds including pancreatic islet cell
implant technology. As these products continue to move through the development
process, expenses related to their development will continue to increase.
New Product Approvals
During fiscal 1998, 13 approvals were received from the FDA. The Company
presently has requests for approval pending before the FDA representing 28
products of varying strengths. Subsequent to March 31, 1998, the Company
received two additional ANDA approvals and a New Drug Application approval for
its wound care product, Sulfamylon(R). In addition the Company has five IND
applications filed with the FDA for new innovator compounds.
Customers and Markets
The Company sells its products to proprietary and ethical pharmaceutical
wholesalers and distributors, drug store chains, drug manufacturers and public
and governmental agencies. In fiscal 1998, three customers accounted for
approximately 13%, 12%, and 11% of net sales, respectively. Although no single
customer represented more than 10% of net sales in fiscal 1997 or 1996, four
customers in 1997 represented 36% of net sales.
A majority of the Company's products are marketed to food and drug store
chains and to pharmaceutical distributors and wholesalers, that in turn market
to retailers, managed care entities, hospitals and government agencies. Certain
other products are marketed to institutional accounts that in turn obtain the
products from pharmaceutical distributors and wholesalers. The Company's sales
activities involve limited public promotion of its products. Approximately 205
employees of the Company are engaged full-time in selling products and servicing
customers.
Competition
The Company sells to various markets and classes of customers. With respect
to each of the products it sells, the Company believes it is subject to active
competition from numerous firms. The four primary means of competition are
service, product quality, FDA approval and price. The competition experienced by
the Company varies among the markets and classes of customers. The Company has
experienced additional competition from brand-name competitors that have entered
the generic pharmaceutical industry by creating generic subsidiaries, purchasing
generic companies or licensing their products prior to or as their patents
expire.
In addition to the increase in the number of competitors, the consolidation
of the Company's customers through mergers and acquisitions along with the
emergence of large buying groups representing independent pharmacies and health
maintenance organizations has also contributed to the severe price deterioration
for the Company's generic products. While the Company has increased unit volume
of its generic products through specialized marketing programs, this has not
fully offset the price declines the Company has experienced.
The severe price declines the Company has experienced over the last several
years, along with the increased costs in bringing new products to market, has
led to an extensive evaluation of its operation. This ongoing evaluation
includes assessing the Company's relationship with key customers and suppliers,
production capacity and product level contributions. One of the key conclusions
of this evaluation has been the determination that changes in the Company's
generic pricing practices were needed.
In November 1997, the Company raised prices on three generic products and
in January 1998 announced that it was raising prices in the fourth quarter of
fiscal 1998 on four additional products out of its nearly 100 generic products.
While the price increases initiated in the second half of fiscal 1998 had a
favorable impact on net earnings, such impact, if any in the future, will be
affected by many factors including customer acceptance, and the response by
competitors and suppliers. The Company intends to continue to work closely with
its customers and suppliers to ensure that its full line of generic products
continues to be available as a cost effective alternative to the innovator
products.
Product Liability
Product liability suits by consumers represent a continuing risk to firms
in the pharmaceutical industry. The Company strives to minimize such risks by
stringent quality control procedures. Although the Company carries insurance, it
believes that no reasonable amount of insurance can fully protect it against all
such risks because of the potential liability inherent in the business of
producing pharmaceuticals for human consumption.
Raw Materials
The chemical ingredients and other materials and supplies used in the
Company's pharmaceutical manufacturing operations are generally available and
purchased from many different foreign and domestic suppliers. However, in many
cases, the raw materials needed by the Company to manufacture pharmaceutical
products are available from a single FDA-approved supplier. Even where more than
one supplier exists, a single supplier may be listed in the Company's ANDA's.
New suppliers of the active ingredients in drugs must be approved by the FDA.
Accordingly, any change in a supplier requires FDA approval, which may take
several months. Any interruption of supply could have a material adverse effect
on the Company's ability to manufacture a product or obtain FDA approval of a
new product, or could result in the Company being required to pay higher prices
to a supplier. Conversely, in instances where limitations on raw materials
supply lessen competition in specified drugs and permit higher pricing levels,
the availability of new sources of supply will likely increase competition and
result in lower pricing.
In addition, recent and pending regulatory actions may make it more
difficult for the Company and other generic pharmaceutical manufacturers to
obtain from foreign suppliers commitments for raw materials prior to the
expiration of patents on branded products. The unavailability of such raw
materials could also impede the Company in its efforts to develop, manufacture
and obtain FDA approval to market new generic pharmaceutical products.
Regulation
The Company's operations are subject to regulation under the Federal Food,
Drug and Cosmetic Act, pursuant to which government standards as to "good
manufacturing practice", product content, purity, labeling, effectiveness and
recordkeeping (among other things) must be observed. In this regard, the FDA has
extensive regulatory powers over the activities of pharmaceutical manufacturers
including the power to seize and prohibit the sale of noncomplying products and
to halt operations of noncomplying manufacturers.
In addition to the extensive regulation the Company faces under the Federal
Food, Drug and Cosmetic Act other regulations have also affected the generic
approval process. In June 1995, the Uruguay Round Agreements Act ("URAA") took
effect which extended patent terms pursuant to the General Agreements on Tariffs
and Trade. The extension of patent terms has delayed and is expected in the
future to continue to delay the introduction of products by the Company.
While URAA has already extended patent terms, the brand companies have
further delayed the approval of new generic products by filing patent
infringement suits under the Hatch-Waxman Act. The Company upon filing an ANDA
application with the FDA must make one of five certifications with respect to
patents. If the company certifies that its product is not infringing or that a
patent is invalid, the patentee can file suit. Brand companies now use this
certification process to prevent generic companies from introducing competing
generic products by bringing suit for alleged patent infringement. Once a suit
is filed, no matter how frivolous, the FDA is prohibited from approving the ANDA
for thirty months or until the suit is litigated. Along with delaying the
approval, the cost of bringing a new product to market has risen substantially
as the number of these suits and the cost of defending them continues to
increase. All such suits settled to date have been on terms favorable to the
Company. However, until the laws are changed, the Company expects this type of
suit will continue since it has proven a very effective way for brand companies
to delay generic competition.
The Company is subject to inspection and regulation under other federal and
state legislation relating to drugs, narcotics and alcohol. Many of its
suppliers and customers, as well as the drug industry in general, are subject to
the same or similar governmental regulations. The Company also is subject to
various federal, state, and local environmental protection laws and regulations.
Compliance with current environmental protection laws and regulations has not
had a material effect on the earnings, cash flow or competitive position of the
Company.
It is impossible for the Company to predict the extent to which its
operations will be affected under the regulations discussed above or any new
regulations which may be adopted by regulatory agencies.
Employees
The Company employs approximately 1,946 persons, approximately 959 of whom
serve in clerical, sales and management capacities. The remainder are engaged in
production and maintenance activities.
The production and maintenance employees at the Company's manufacturing
facilities in Morgantown, West Virginia, are represented by the Oil, Chemical
and Atomic Workers International Union (AFL-CIO) and its Local Union 8-957 under
a contract which expires April 5, 2002.
Backlog
At March 31, 1998, the uncompleted portions of the Company's backlog of
orders was approximately $19,899,000 as compared to approximately $10,410,000 at
March 31, 1997 and $9,747,000 at March 31, 1996. Because of the relatively short
lead time required in filling orders for its products, the Company does not
believe these interim backlog amounts bear a significant relationship to sales
or income for any full twelve-month period.
ITEM 2. Properties
The Company operates from various facilities in the United States and
Puerto Rico having an aggregate of approximately 1,200,000 square feet.
Mylan Pharmaceuticals owns production, warehouse, laboratory and office
facilities in three buildings in Morgantown, West Virginia containing 432,000
square feet. Mylan Pharmaceuticals operates two distribution centers: a new
center in Greensboro, North Carolina containing 166,000 square feet which it
owns and a 38,000 square foot center in Reno, Nevada which it operates under a
lease expiring in 2002. Additional production area of approximately 44,000
square feet is currently under construction in Morgantown, West Virginia.
Mylan Inc. owns a production and office facility in Caguas, Puerto Rico
containing 115,000 square feet and a production facility in Cidra, Puerto Rico
containing 32,000 square feet.
Bertek Pharmaceuticals, Inc. owns production, warehouse and office
facilities in two buildings in Sugar Land, Texas containing 70,000 square feet.
Bertek, Inc. owns production, warehouse, laboratory and office facilities
in three buildings in Swanton and St. Albans, Vermont containing 118,000 square
feet. Bertek, Inc. also operates a coating and extrusion facility in St. Albans
containing 71,000 square feet under a lease expiring in 2015.
UDL owns production, laboratory, warehouse and office facilities in three
buildings in Rockford, Illinois and Largo, Florida containing 123,000 square
feet. UDL also leases a warehouse
facility in Rockford containing 30,000 square feet under a lease expiring in
1999.
The Company's production equipment includes that equipment necessary to
produce and package tablet, capsule, aerosol, liquid, transdermal and powder
dosage forms. The Company maintains six analytical testing laboratories for
quality control.
The Company's production facilities are operated primarily on a two shift
basis. Properties and equipment are well maintained and adequate for present
operations.
The Company's corporate offices, approximately 7,000 square feet, are
located at 130 Seventh Street, 1030 Century Building, Pittsburgh, Pennsylvania,
and are occupied under a lease expiring in 2000.
ITEM 3. Legal Proceedings
In August 1997, Key Pharmaceuticals filed suit in the United States
District Court for the Western District of Pennsylvania against the Company and
certain subsidiaries alleging patent infringement relating to the marketing of
its nitroglycerin transdermal system. The Company received FDA approval for its
nitroglycerin transdermal system in September 1996 and immediately began
marketing the product. The relief sought includes a preliminary and permanent
injunction, treble damages along with interest and attorney's fees and expenses.
The Company believes the suit is without merit and intends to vigorously defend
its position.
In November 1996, Synthecon Inc. filed suit in the Harris County Circuit
Court, Harris County, Texas against the Company, VivoRx Inc., et al., alleging
the Company had conspired with VivoRx Inc. to deprive Synthecon of its rights to
a product under a license agreement acquired from the National Aeronautics and
Space Administration. The suit seeks unspecified damages. The Company believes
the suit is without merit and intends to vigorously defend its position.
The Company is involved in various other 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 of these suits will have no material adverse effect on the Company's
operation, financial position, or liquidity.
ITEM 4. Submission of Matters to a Vote of Security Holders
Not applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT
The names, ages and positions of the Company's executive officers are as
follows:
Milan Puskar 63 Chairman, Chief Executive Officer and
President
Dana G. Barnett 57 Executive Vice President
Louis J. DeBone 52 Vice President-Operations
Roger L. Foster 51 Vice President and General Counsel
Roderick P. Jackson 58 Senior Vice President
Dr. John P. O'Donnell 52 Vice President-Research and
Quality Control
Donald C. Schilling 48 Vice President-Finance
Patricia Sunseri 58 Vice President-Investor and
Public Relations
C.B. Todd 64 Senior Vice President
Robert W. Smiley 76 Secretary
Mr. Puskar was employed by the Company from 1961 to 1972 and served in
various positions, including Secretary-Treasurer, Executive Vice President and a
member of the Board of Directors. From 1972 to 1975, Mr. Puskar served as Vice
President and General Manager of the Cincinnati division of ICN Pharmaceuticals
Inc. In addition, he has served as a partner in several pharmaceutical firms in
foreign countries and is currently a director of VivoRx, Inc., Santa Monica,
California and Duquesne University, Pittsburgh, Pennsylvania. Mr. Puskar has
served as President of the Company since 1976 and as Vice Chairman of the Board
from 1980 to 1993. He was elected Chairman of the Board and Chief Executive
Officer on November 9, 1993.
Mr. Barnett was employed by the Company in 1966. His responsibilities have
covered production, quality control and product development. Mr. Barnett became
Vice President in 1974, Senior Vice President in 1978 and Executive Vice
President in 1987. He was elected President and Chief Executive Officer of
Somerset in June 1991, and in August 1995, he was elevated to Chairman and Chief
Executive Officer.
Mr. DeBone has been employed by the Company since September 1987. Prior to
assuming his present position in November 1991 as Vice President-Operations, he
served as Vice President-Quality Control. Since February 1997, he also serves as
President of Bertek Inc. He was previously employed with the Company from March
1976 until June 1986 and served as Director of Manufacturing.
Mr. Foster has been employed by the Company since May 1984. Prior to
assuming his present position in June 1995 as Vice President and General Counsel
he served as Director of Legal Services and as Director of Governmental Affairs.
Mr. Jackson has been employed by the Company since March 1986. Prior to
assuming his present position in October 1992 as Senior Vice President, he
served as Vice President- Marketing and Sales.
Dr. John O'Donnell has been employed by the Company since 1983. Prior to
assuming his present position in November 1991 as Vice President-Research and
Quality Control, he served as Vice President-Research and Product Development
and as Director of Chemistry and Product Development.
Mr. Donald C. Schilling has been employed by the Company since October
1997. Prior to assuming his present position as Vice President-Finance, he was
Vice President of Finance & Administration for Plastics Manufacturing Inc. in
Harrisburg, NC from 1991 to 1997.
Mrs. Sunseri has served as a Director of the Company since April 1997, as
Vice President-Investor and Public Relations of the Company since 1989 and as
Director of Investor Relations of the Company from 1984 to 1989.
Mr. Todd has been employed by the Company since 1970. Prior to assuming his
present position in October 1987 as Senior Vice President, Mr. Todd served as
Vice President-Quality Control. He also serves as President of Mylan
Pharmaceuticals Inc.
Mr. Smiley has been the Secretary and a member of the Board of
Directors of the Company for over 22 years. He joined the law firm of Doepken
Keevican & Weiss Professional Corporation in October, 1992, which law firm
provided legal services to the Company in fiscal 1998. Previously, he was a
partner of Smiley, McGinty & Steger for more than five years
There is no family relationship between any of the above executive
officers. Officers of the Company serve at the pleasure of the Board of
Directors.
ITEM 5. Market for Registrant's Common Equity and
Related Stockholder Matters
The information required by item 5 is hereby incorporated by reference to
pp. 21 and 47 of the accompanying Annual Report to Shareholders for the year
ended March 31, 1998.
ITEM 6. Selected Financial Data
The information required by item 6 is hereby incorporated by
reference to p. 21 of the accompanying Annual Report to Shareholders for the
year ended March 31, 1998.
ITEM 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations
The information required by item 7 is hereby incorporated by
reference to pp. 22-27 of the accompanying Annual Report to Shareholders for the
year ended March 31, 1998.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
ITEM 8. Financial Statements and Supplementary Data
The information required by item 8 is hereby incorporated by reference to
pp. 28-47 of the accompanying Annual Report to Shareholders for the year ended
March 31, 1998.
ITEM 9. Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure
Not applicable.
ITEM 10. Directors and Executive Officers of the Registrant
The information as to directors required by item 10 is hereby
incorporated by reference to pp. 2 and 3 of the Company's 1998 Proxy Statement.
Information concerning executive officers is provided in Part I of this report
under the caption "Executive Officers of the Registrant".
ITEM 11. Executive Compensation
The information required by item 11 is hereby incorporated by reference to
pp. 6,8,9 and 10 of the Company's 1998 Proxy Statement.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
The information required by item 12 is hereby incorporated by reference to
pp. 10 and 11 of the Company's 1998 Proxy Statement.
ITEM 13. Certain Relationships and Related Transactions
The information required by item 13 is hereby incorporated by reference to
p. 2 of the Company's 1998 Proxy Statement.
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1. List of Financial Statements
Annual Report
Page
Number
INCLUDED IN ANNUAL REPORT TO SHAREHOLDERS:
Consolidated Balance Sheets................................ 28-29
Consolidated Statements of Earnings........................ 30
Consolidated Statements of Shareholders' Equity............ 31
Consolidated Statements of Cash Flows...................... 32-33
Notes to Consolidated Financial Statements................. 34-45
Independent Auditors' Report............................... 46
2. Financial Statement Schedules
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 by the Company as Exhibit 4.2 to the Form S-8
on December 23, 1997 (registration number 333-43081) and
incorporated herein by reference.
(b) By-laws of the registrant, as amended to date, filed by the
Company as Exhibit 4.3 to the Form S-8 on December 23, 1997
(registration number 333-43081) and incorporated herein by
reference.
(4)(a) Rights Agreement dated as of August 22, 1996, between the
Company and American Stock Transfer & Trust Co., filed as Exhibit
4.1 to Form 8-K dated August 30, 1996 and incorporated herein by
reference.
(10)(a) Mylan Laboratories Inc. 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 as Exhibit
10(b) to Form 10-K for fiscal year ended March 31, 1995 and
incorporated herein by reference.
(c) "Salary Continuation Plan" with Roderick P. Jackson and Louis J.
DeBone each dated March 14, 1995 and filed as Exhibit 10(c) to
Form 10-K for fiscal year ended March 31, 1995 and incorporated
herein by reference.
(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) "Service Benefit Agreement" with Laurence S. DeLynn, John C.
Gaisford, M.D., and Robert W. Smiley, Esq. each dated January 27,
1995 and filed as Exhibit 10(g) to Form 10-K for fiscal year
ended March 31, 1995 and incorporated herein by reference.
(g) Split Dollar Life Insurance Arrangement with Milan Puskar
Irrevocable Trust filed as Exhibit 10(h) to Form 10-K for the
fiscal year ended March 31, 1996 and incorporated herein by
reference.
(h) Split Dollar Life Insurance Arrangement with the Todd Family
Irrevocable Trust filed as Exhibit 10(i) to Form 10-K for the
fiscal year ended March 31, 1997 and incorporated herein by
reference.
(i) Split Dollar Life Insurance Arrangement with the Dana G. Barnett
Irrevocable Family Trust filed as Exhibit 10(j) to Form 10-K for
the fiscal year ended March 31, 1997 and incorporated herein by
reference.
(j) "Salary Continuation Plan" with Patricia Sunseri dated March 14,
1995 filed as Exhibit 10(k) to Form 10-K for the fiscal year
ended March 31, 1997 and incorporated herein by reference.
(k) Mylan Laboratories Inc. 1997 Incentive Stock Option Plan filed as
annex A to the 1998 Proxy Statement and incorporated herein by
reference.
(l) Mylan Laboratories Inc. 1992 Nonemployee Director Stock Option
Plan, as amended to date, filed herewith.
MYLAN LABORATORIES INC.
1992 NONEMPLOYEE DIRECTOR STOCK OPTION PLAN
1. PURPOSE
The purpose of this Plan is to provide a means whereby MYLAN LABORATORIES
INC. ("Corporation") may, through the grant of options to purchase Class A
Common Stock, par value $.50 per share ("Common Stock") of the Corporation
("Options") to nonemployee directors of the Corporation and its subsidiaries,
attract and retain persons of ability as directors (including directors who are
also officers, but excluding directors who are also employees) and motivate
those directors to exert their best efforts on behalf of the Corporation and its
subsidiaries. Prior to this Plan's amendment on July 25, 1997 ("Amendment Date")
the Plan was solely a formula plan for purposes of Rule 16b-3 (defined below);
however, as amended, the Plan now permits the Board of Directors, acting as a
committee of the whole, to make discretionary grants of Options to nonemployee
directors from time to time.
2. NUMBER OF SHARES AVAILABLE UNDER PLAN
Options may be granted by the Corporation from time to time to nonemployee
directors of the Corporation and its subsidiaries to purchase an aggregate of
200,000 shares of Common Stock of the Corporation and 200,000 shares of Common
Stock shall be reserved for Options granted under the Plan (subject to
adjustment as provided in paragraph 4(i)). Shares issued upon exercise of
Options granted under the Plan may be authorized and unissued shares or shares
held by the Corporation in its treasury. If any Option granted under the Plan
shall terminate, expire or be canceled as to any shares, new Options may
thereafter be granted covering those shares. After giving effect to stock splits
which occurred on August 1, 1992 and August 15, 1995, and after considering the
grants of options that have occurred, the aggregate number of shares of Common
Stock available under this Plan as of the Amendment Date is 300,000 shares.
3. ADMINISTRATION
(a) STOCK OPTION COMMITTEE. The Plan shall be administered by a Stock
Option Committee ("Committee") consisting of at least two members of the Board
of Directors of the Corporation who shall be appointed by, and serve at the
pleasure of, the Board of Directors. Each member of the Committee must be a
"nonemployee director" within the meaning of Rule 16b-3, as that Rule may be
amended from time to time ("Rule 16b-3"), under the Securities Exchange Act of
1934, as amended.
(b) COMMITTEE ACTION. A majority of the members of the Committee shall
constitute a quorum, and the action (1) of a majority of the members present at
a meeting at which a quorum is present or (2) authorized in writing by all
members, shall be the action of the Committee. A member participating in a
meeting by telephone or similar communications equipment shall be deemed present
for this purpose if the member or members who are present in person can hear him
and he can hear them.
(c) AUTHORITY OF THE COMMITTEE. Prior to the Amendment Date, this Plan
constituted a formula plan for purposes of Rule 16b-3, thus the Committee's
authority was restricted as required to maintain that classification. Upon and
after the Amendment Date, to the extent necessary to apply the provisions of
subparagraph (a)(II) of Section 4, this Plan is deemed not to be a formula plan.
Because only nonemployee directors are eligible to receive a grant of an
Option under this Plan, all Options granted under this Plan shall constitute
options which are not incentive stock options as defined under Section 422(b) of
the Internal Revenue Code of 1986, as amended. (Options which shall be granted
hereunder are hereinafter referred to as "Nonqualified Stock Options".)
The Committee may interpret the Plan, prescribe, amend and rescind any
rules and regulations necessary or appropriate for the administration of the
Plan and make other determinations and take other action as it deems necessary
or advisable. Without limiting the generality of the foregoing sentence the
Committee may, in its discretion, treat all or any portion of any period during
which an Optionee is on military or an approved leave of absence from the
Corporation as a period of employment of the Optionee by the Corporation, as the
case may be, for purpose of accrual of his rights under his Option. An
interpretation, determination or other action made or taken by the Committee
shall be final, binding and conclusive.
(d) INDEMNIFICATION OF COMMITTEE. In addition to other rights that they may
have as Directors or as members of the Committee, the members of the Committee
shall be indemnified by the Corporation against the reasonable expenses,
including attorney's fees actually and necessarily incurred in connection with
the defense of any action, suit or proceeding, or in connection with any appeal
therein, to which they or any of them may be a party by reason of any action
taken or failure to act under or in connection with the Plan or any Option
granted thereunder, and against all amounts paid by them in settlement thereof
or paid by them in satisfaction of a judgment in any such action, suit or
proceeding, except in relation to matters as to which it shall be adjudged in
the action, suit or proceeding that the Committee member's action or failure to
act constituted self-dealing, willful misconduct or recklessness; provided that
within sixty (60) days after institution of any action, suit or proceeding a
Committee member shall in writing offer the Corporation the opportunity, at its
own expense, to handle and defend same.
4. TERMS AND CONDITIONS
Each Option granted under the Plan shall be evidenced by an agreement, in
form approved by the Committee, which shall be subject to the following
expressed terms and conditions and to other terms and conditions as the
Committee may deem appropriate, including those imposed by Section 6 following
amendment of the Plan requiring shareholder approval.
2.
(a) GRANT OF OPTION.
(I) FORMULA OPTIONS. Subject to the limitations provided under this
subparagraph (a)(I) of this Section 4, Options shall be granted to each
nonemployee director as follows: (i) an Option for 1,000 shares of Common
Stock upon the initial election of the nonemployee to the Board of
Directors of the Corporation and (ii) an Option for 2,000 shares of Common
Stock upon each annual re-election of the nonemployee to the Board of
Directors of the Corporation. On the date this Plan is adopted, subject to
restrictions provided at Section 6, each current nonemployee director shall
be granted an Option for shares of Common Stock in an amount to be
determined using the same formula as is provided for under the preceding
sentence but based upon all election and re-elections of that nonemployee
to the Board of Directors of the Corporation which occurred prior to the
adoption of this Plan. Future grants shall be made annually on the same
date as the annual meeting of the shareholders of the Corporation. The
maximum aggregate number of shares of Common Stock which shall be granted
under all Options granted under this subparagraph (a)(I) of this Section 4
to any individual nonemployee director is 20,000. Further, no Option shall
be granted after June 22, 2002, the tenth (10th) anniversary of the
effective date of this Plan.
(II) DISCRETIONARY OPTIONS. In addition to the grants of options
provided for in subparagraph (a)(I) of this Section 4, the Board of
Directors, acting as a committee of the whole, may from time to time act to
grant options to nonemployee directors upon the terms and conditions of
this Plan. Subject to the total number of shares available under the Plan
pursuant to Section 2, the maximum number of options that can be granted to
any nonemployee director in any single grant shall not exceed 20,000
shares. Further, no Option shall be granted after June 22, 2002, the tenth
(10th) anniversary of the effective date of this Plan.
(b) OPTION PERIOD. Each Option agreement shall specify that the period for
which the Option is granted is Ten (10) years from the date of grant and shall
provide that the Option shall expire at the end of that period.
(c) OPTION PRICE. The Option price per share of Common Stock shall be the
fair market value of that stock on the date the Option is granted (but in no
event less than the par value if any). For purposes of this paragraph 4(c), fair
market value shall be the closing price per share of Common Stock (as listed on
the New York Stock Exchange) on the date that an Option is granted.
(d) EXERCISE OF OPTION. Subject in each case to the provisions of
paragraphs (b), (c), (e) and (f) of this Section 4, an Option may be exercised
at any time, or from time to time (50 share increments) throughout the Option
period applicable to the Option.
(e) PAYMENT OF PURCHASE PRICE UPON EXERCISE. The purchase price of the
Common Stock as to which an Option shall be exercised shall be paid to the
Corporation in cash or in stock of the Corporation at the time of exercise.
3.
(f) EXERCISE IN THE EVENT OF DEATH OR TERMINATION OF EMPLOYMENT. (1) If any
Optionee shall die (i) while a nonemployee director of the Corporation or its
subsidiaries (ii) within three (3) months of ceasing to be a member of the Board
of Directors of the Corporation or its subsidiaries other than for cause, or
(iii) within three (3) months after his resignation or removal as a nonemployee
director of the Corporation or its subsidiaries because he is permanently and
totally disabled (within the meaning of Section 22(e)(3) of the Internal Revenue
Code of 1986, as amended) ("Permanent Disability"), his Option may be exercised
by the person or persons to whom the Optionee's rights under the Option pass by
will or applicable law or if no person has that right, by his executors or
administrators, at any time, or from time to time (50 share increments), within
one (1) year of the date of his death if (f)(1)(i) of this Section 4 is
applicable and within one (1) year of the date of his resignation or removal if
(f)(1)(ii) or (iii) of this Section 4 is applicable, but in no event later than
the expiration date specified in paragraph (b) of this Section 4. (2) If an
Optionee (i) resigns or is removed by the Corporation or its subsidiaries
because of his Permanent Disability, or (ii) resigns because of retirement (the
Optionee would be eligible for retirement under any federal tax qualified
employee pension benefit plan of the Corporation or one of its subsidiaries if
the Optionee were deemed to be an employee and a participant under the pension
plan), he may exercise his Option at any time, or from time to time (50 share
increments), within one (1) year of the date of his resignation or removal, but
in no event later than the expiration date specified in paragraph (b) of this
Section 4. (3) Except as provided by (1) and (2) of this paragraph (f) of
Section 4, if an Optionee voluntarily resigns without cause or is involuntary
removed without cause, he may exercise his Option at any time, or from time to
time (50 share increments), within three (3) months of the date of his
resignation or removal, but in no event later than the expiration date specified
in paragraph (b) of this Section 4. (4) If an Optionee voluntarily resigns for
cause or is involuntary removed for cause, his Option shall terminate
immediately.
(g) NONTRANSFERABILITY. No Option granted under the Plan shall be
transferable other than by will or by the laws of descent and distribution.
During the lifetime of the Optionee, an Option shall be exercisable only by him,
his guardian or legal representative.
(h) INVESTMENT REPRESENTATION. Each Option agreement shall provide that
upon demand by the Committee, the Optionee (or any person acting under paragraph
4(f)) shall deliver to the Committee at the time of any exercise of an Option a
written representation that the shares to be acquired upon the exercise are to
be acquired for investment and not for resale or with a view to the distribution
thereof. Upon demand, delivery of the representation prior to the delivery of
any shares to be issued upon exercise of an Option and prior to the expiration
of the Option period shall be a condition precedent to the right of the Optionee
or other person to purchase any shares.
(i) ADJUSTMENTS. In the event of any change in the Common Stock of the
Corporation by reason of any stock dividend, recapitalization, reorganization,
merger, consolidation, split-up, combination, or exchange of shares, or rights
offering to purchase Common Stock at a price substantially below fair market
value, or any similar change affecting
4.
the Common Stock, the number and kind of shares which thereafter may be optioned
and sold under the Plan and the number and kind of shares subject to option in
outstanding Option agreements and the purchase price per share thereof shall be
appropriately adjusted consistent with the change in a manner as the Committee
may deem equitable to prevent substantial dilution or enlargement of the rights
granted to, or available for, participants in the Plan.
(j) NO RIGHTS AS SHAREHOLDERS. No Optionee shall have any rights as a
shareholder with respect to any shares subject to his Option prior to the date
of issuance to him of a certificate or certificates for the shares.
(k) NO ADDITIONAL RIGHTS. The Plan and any Option granted under the Plan
shall not confer upon any Optionee any right with respect to continued
membership on the Board of Directors of the Corporation or any subsidiary of the
Corporation, nor any other position with the Corporation or its subsidiaries.
5. COMPLIANCE WITH OTHER LAWS AND REGULATIONS
The Plan, the grant and exercise of Options thereunder, and the obligation
of the Corporation to sell and deliver shares under Options, shall be subject to
all applicable Federal and state laws, rules and regulations and to required
approvals of any government or regulatory agency. The Corporation shall not be
required to issue or deliver any certificates for shares of Common Stock prior
to the completion of any registration or qualification of the shares under any
Federal or state law, or any ruling or regulation of any government body which
the Corporation shall, in its sole discretion, determine to be necessary or
advisable.
6. ADOPTION, AMENDMENT AND DISCONTINUANCE
Subject to the limitations provided in this Section 6 of the Plan, the
Board of Directors of the Corporation may from time to time amend, suspend or
discontinue the Plan. Subject to the provisions of paragraph 4(i) or the
approval of the Corporation's shareholders no action of the Board of Directors
of the Corporation or of the Committee may (a) materially increase the number of
shares reserved for Options pursuant to Section 2, (b) permit the granting of
any Option at an Option price less than that determined in accordance with
paragraph 4(c), (c) permit the granting of Options which expire beyond the
period provided for in paragraph 4(b), (d) materially increase the benefits
accruing to participants in the Plan, (e) materially modify the requirements for
eligibility for participation in the Plan, or (f) otherwise cause Rule 16b-3 to
become inapplicable. Without the written consent of an Optionee, no amendment or
suspension of the Plan shall diminish or impair any Option previously granted to
him under the Plan. Notwithstanding any other provision of the Plan, every
Option (and the rights in every share issued upon an exercise of the Option)
granted after the initial adoption of this Plan or following any amendment of
this Plan which requires the approval of the Corporation's shareholders, shall
be conditional and contingent upon the approval of the Corporation's
shareholders. Further, those Options (and shares issued under those options)
shall not be subject to sale or transfer unless and until
5.
shareholder approval is obtained. The Committee shall implement procedures for
compliance with these restrictions when applicable.
7. EFFECTIVE DATE
The effective date of the Plan shall be June 23, 1992. The effective date
of the amendment to the Plan is July 25, 1997.
8. NAME
The Plan shall be known as the "MYLAN LABORATORIES INC. 1992 NONEMPLOYEE
DIRECTOR STOCK OPTION PLAN."
6.
(13) Fiscal 1998 Annual Report to the Shareholders (only those portions
which are incorporated in this Report by reference are being filed
herewith).
Selected Financial Data MYLAN LABORATORIES INC.
Year ended March 31 1998 1997 1996 1995 1994 1993 1992 1991
- - - - - -------------------------- ------- ------ ------ ------ ----- ------ ----- -----
Total revenues .................... $555,423 $440,192 $392,860 $396,120 $251,773 $211,964 $131,936 $104,524
Net earnings ...................... $100,777 $ 63,127 $102,325 $120,869 $ 73,067 $ 70,621 $ 40,114 $ 32,952
Earnings per common share-basic ... $ .83 $ .52 $ .86 $ 1.02 $ .62 $ .61 $ .35 $ .29
Earnings per common share-diluted . $ .82 $ .51 $ .85 $ 1.01 $ .61 $ .60 $ .35 $ .29
Shares used in computation-basic .. 122,094 121,926 119,530 118,963 118,423 115,651 114,726 114,552
Shares used in computation-diluted 123,043 122,727 120,706 119,912 119,502 116,986 115,927 115,332
At year end
Working capital ................... $358,752 $300,274 $330,733 $275,032 $191,647 $154,000 $102,105 $ 81,571
Total assets ...................... $847,753 $777,580 $692,009 $546,201 $403,325 $351,105 $226,720 $186,955
Long-term obligations ............. $ 26,218 $ 32,593 $ 18,002 $ 7,122 $ 4,609 $ 5,125 $ 3,600 $ 3,398
Shareholders' equity .............. $744,465 $659,740 $616,441 $482,728 $379,969 $295,972 $203,452 $167,531
Book value per share-diluted ...... $ 6.05 $ 5.38 $ 5.11 $ 4.03 $ 3.18 $ 2.53 $ 1.76 $ 1.45
- - - - - -------------------------------------------------------------------------------------------------------------------------------
Numbers in thousands except per share amounts.
From June of 1990 through July of 1992 the Company had a quarterly dividend
program totaling $.067 per share per year. From October of 1992 to July of 1993
the Company had a quarterly dividend program totaling $.08 per share per year.
From October of 1993 to July of 1994 the Company had a quarterly dividend
program totaling $.107 per share per year. From October of 1994 to July of 1995
the Company had a quarterly dividend program totaling $.133 per share per year.
Since October of 1995 the Company has had a quarterly dividend program totaling
$.16 per share per year. In addition, the Company paid a special one-time
dividend of $.067 per share on January 13, 1995. The above financial data gives
retroactive effect to the October 30, 1991 business combination of Mylan
Laboratories Inc. and Dow Hickam Pharmaceuticals Inc., the two-for-one stock
split effective August 1, 1992 and the three-for-two stock split effective
August 15, 1995.
21
Management's Discussion and Analysis of Operations and Financial
Position MYLAN LABORATORIES INC.
Overview
Mylan Laboratories Inc. ("the Company" or "Mylan") recorded net earnings of
$100.8 million for the year ended March 31, 1998 compared to $63.1 million in
fiscal 1997 and $102.3 million in fiscal 1996. The results for the current year
reflect the Company's leadership roll in the generic pharmaceutical industry and
its ability to act proactively in the face of ongoing challenges in the
marketplace.
Historically, earnings from new product approvals and expansion of market
share more than offset the loss in net earnings resulting from price
deterioration in the generic market. Beginning in fiscal 1996 however, an
increasingly difficult regulatory environment was compounded by a new wave of
patent litigation by branded pharmaceutical companies under the Drug Price
Competition and Patent Term Restoration Act of 1984 (the "Hatch-Waxman Act").
These two factors significantly increased the cost of bringing new products to
market and have in many cases diminished the eventual commercial success of new
products by delaying their introduction.
In addition to the uncertainty of new product approvals, price
deterioration during fiscal 1996 and 1997 was more severe than at any other time
in the Company's history. The Company estimates that price deterioration in the
generic industry reduced net earnings by approximately $55 million in fiscal
1996 and $75 million in fiscal 1997.
Against this backdrop, the Company was optimistic entering fiscal 1998 due
to its strong history and extensive list of products pending approval at the
FDA, but cautious because of obvious uncertainties of the marketplace.
The frustration caused by regulatory and legal issues surrounding generics
can best be illustrated by ranitidine, the most promising new generic product
for fiscal 1998. Ranitidine is the generic version of ZantacRegistration Mark,
an anti-ulcer medication developed by Glaxo Wellcome Inc. ("Glaxo") with annual
sales in excess of one billion dollars. Initially the product had a patent
expiration date of December 5, 1995.
In 1995, an Act of Congress extended the patent protection for this product
until July 25, 1997.
The Company received a tentative approval for its generic version of
ZantacRegistration Mark in January of 1997. Glaxo brought suit against Mylan
alleging that the product infringed a process patent, and accordingly the FDA
was prevented from approving Mylan's product until the suit was settled or until
May of 1999.
In June of 1997 Mylan entered into a distribution arrangement with Genpharm
Inc., ("Genpharm"), whereby the Company would distribute Genpharm's generic
ranitidine in the United States. The FDA determined that Genpharm was entitled
to exclusivity on generic ranitidine through August 29, 1997, by virtue of being
the first to file an application for the product. Genpharm, however, was also
sued by Glaxo relating to a process patent, thus preventing the FDA from
approving Genpharm's version of the product.
On July 31, 1997, Genpharm waived its exclusivity in favor of Novopharm
Limited, and its United States subsidiary Granutec Inc. ("Novopharm"), who had
previously settled its patent issues with Glaxo. On August 1, 1997, nearly 20
months after the product patent was originally scheduled to expire, a generic
version of ZantacRegistration Mark was offered to the American public. The
profits recognized by Novopharm during the exclusivity period were to be shared
among three companies, including Mylan.
By mid-September, five manufacturers had received approval to market a
generic version of the product, including Genpharm, which had settled its legal
issues with Glaxo and whose product was being distributed by Mylan.
According to independently compiled market information, by the end of
September the average selling price of generic ranitidine had dropped by almost
30%. Six months after the introduction of generic ranitidine, 71% of
prescriptions written were being filled with generic product. The average
selling price for generic ranitidine was now less than half of the introductory
price with some product being sold at 18% of the brand product price. On an
annualized basis, generic ranitidine was saving the American public almost $500
million.
22
Management's Discussion and Analysis of Operations and Financial
Position MYLAN LABORATORIES INC.
In March of 1998, the Company resolved its legal issues with Glaxo opening
the door to FDA approval of the Company's generic product.
Though the case of ranitidine was the most dramatic, other new product
introductions experienced similar difficulties throughout fiscal 1998, including
rapid price deterioration and the introduction of stocking allowances for
generic products. Accordingly, while the Company added more new products in
fiscal 1998 than in any year in recent history, the net sales and gross profits
derived from these products fell short of Company expectations.
As a result of the continued pricing deterioration the Company has
experienced since fiscal 1996, and the increase in litigation under the
Hatch-Waxman Act and in an effort to meet its corporate objectives, the Company
began an extensive evaluation of its operations. This ongoing evaluation
includes assessing the Company's relationships with key customers and suppliers,
production capacity and product level contribution. One of the key conclusions
of this evaluation has been the determination that changes in Mylan's generic
pricing practices were needed.
In November of 1997, the Company raised prices on three generic products
and in January of 1998 announced that it was raising prices on four additional
products out of its nearly 100 product generic line during the fourth quarter of
fiscal 1998. Increases on four additional products have been announced for the
first quarter of fiscal 1999, and other products are being reviewed as part of
the ongoing evaluation.
The price increases initiated in the second half of the fiscal year had a
favorable impact on the fourth quarter net earnings. While Mylan anticipates
continued benefits from price increases in the near future, the continuation of
this trend and any resulting benefits depend on several factors, some of which
are beyond the Company's control. See "Forward Looking Statements" in this
"Management's Discussion and Analysis of Operations and Financial Position." The
Company intends to continue to work closely with its customers and suppliers to
ensure that Mylan's full line of generic products continue to be available to
the American public as a cost effective alternative to the innovator products.
The Company remains committed to expanding its branded pharmaceutical
operations, by bringing to market products that satisfy unmet needs in the
medical community. In February 1998, the Company added two products to its
branded portfolio, MentaxRegistration Mark and Clorprestrademark . While they
did not contribute significantly to net earnings in the current year they along
with MAXZIDERegistration Mark and NITREKtrademark are helping to establish
Bertek Pharmaceuticals Inc. as a recognized name in the branded pharmaceutical
industry. It is upon this platform that the Company intends to launch several
branded products, either developed internally or obtained by acquisition, in the
near and extended future.
Results of Operations
Net Sales and Gross Margin
The following table outlines net sales, gross margin (net sales less
cost of sales ) and the corresponding change from the previous year:
(dollars in millions)
Year Ended Net Sales Gross Margin Gross Margin
March 31, Dollars Change Dollars Change as % of Sales
- - - - - ----------------- -------- ------ ------- ------ ------------
1998 $528.6 20% $240.3 33% 45%
1997 440.2 12% 180.5 - 8% 41%
1996 392.9 - 1% 195.2 -14% 50%
The changes in net sales, gross margins and gross margins as a percent of
net sales are primarily indicative of the highly competitive nature of the
generic pharmaceutical industry, the Company's history of obtaining new product
approvals and in fiscal 1998 the impact of price increases and strategic
alliances on certain products. Changes from fiscal 1996 to fiscal 1997 were also
impacted by the acquisition of UDL in February of 1996 (See note B to the
Financial Statements) and the termination of the Company's license agreement
with Lederle Laboratories relating to MAXZIDE(R) and MAXZIDE(R)-25MG in August
of 1996 (See note B to the Financial Statements).
23
Management's Discussion and Analysis of Operations and Financial
Position MYLAN LABORATORIES INC.
With regard to the Company's generic product line, four products were added
in fiscal 1996 accounting for $10.3 million in net sales in fiscal 1996 and nine
products were added in fiscal 1997 accounting for $34.1 million in net sales in
fiscal 1997. In fiscal 1998 the Company added 13 products with aggregate net
sales of $61.5 million.
Two of the fiscal 1998 new products, ranitidine and acyclovir, are
manufactured by other companies and distributed by the Company under
distribution arrangements. Under the terms of the distribution arrangement on
ranitidine, the Company also recognized $26.8 million recorded under the caption
"Other Revenues" (See note N to the Financial Statements).
The Company estimates that price deterioration in the generic industry
resulted in reductions in net sales and gross profits of approximately $77
million in fiscal 1996, $104 million in fiscal 1997 and $32 million in fiscal
1998. The 1998 reduction was offset by pricing actions as previously discussed.
Total unit volume of generic product shipments, excluding unit-dose
shipments, increased by 8% in fiscal 1998, 18% in fiscal 1997 and 17% in fiscal
1996 over the respective preceding years. The higher levels of volumes create
manufacturing efficiencies which were realized in all three of the past fiscal
years.
Net sales and gross margin percentages recognized in prior periods are not
necessarily indicative of the results to be expected in future periods.
Research and Development
Research and development expenses were $46.3 million in fiscal 1998, $42.6
million in fiscal 1997 and $38.9 million in fiscal 1996. These amounts represent
approximately 9% of net sales in fiscal 1998 and 10% of net sales in both fiscal
1997 and 1996.
The following table outlines the approximate allocation of research and
development expenditures: (dollars in millions)
Year ended March 31, 1998 1997 1996
- - - - - ------------------- ------- ------- -------
Generic related projects $ 22.0 $ 20.5 $ 18.0
Innovative compound projects 18.4 16.1 14.5
Transdermal patch related 5.9 6.0 6.4
During fiscal 1997 the Company completed construction of a 150,000 square
foot facility in Morgantown, West Virginia, which houses the Company's
state-of-the-art research and development facility. The facility provides the
Company with the ability to perform research and development activities of both
innovative and generic compounds including sustained release compounds.
Selling and Administrative
Selling and administrative expenses were $96.7 million in fiscal 1998,
$79.9 million in fiscal 1997 and $56.1 million in fiscal 1996 representing
approximately 18% of net sales in each of the past two years and 14% of net
sales in fiscal 1996.
Fiscal 1998 expense includes $12.8 million of costs associated with the
launch of new generic products including ranitidine. Such costs included
payments of stocking fees to customers to assist in the conversion and promotion
of the new generic products. In prior years such costs were insignificant. Costs
incurred defending patent related lawsuits in fiscal 1998 increased over the
previous year by approximately $5.5 million principally as a result of increased
litigation under the Hatch-Waxman Act. Increased legal costs were partially
offset by reaching favorable settlements on various legal matters in fiscal
1998. Payroll and related expenses increased by approximately $4.7 million over
the previous year.
24
Management's Discussion and Analysis of Operations and Financial
Position MYLAN LABORATORIES INC.
Approximately $12 million of the increase from fiscal 1996 to fiscal 1997
was attributable to UDL, including amortization expense of approximately $3.0
million which resulted from the acquisition of UDL in February of 1996. Another
$4.5 million of the increase was attributable to incremental marketing,
promotion and interest expense related to MAXZIDE(R) products. Also in fiscal
1997, the Company recorded provisions for certain legal matters as well as bad
debt expense relating to the Foxmeyer bankruptcy, which aggregated approximately
$8.0 million.
Equity in Earnings of Somerset
Equity in earnings of Somerset was $10.3 million in fiscal 1998, $18.8
million in fiscal 1997 and $25.0 million in fiscal 1996. Somerset's contribution
to the Company's net earnings per share (basic) was $.07 in fiscal 1998, $.14 in
fiscal 1997 and $.19 in fiscal 1996.
Under the Orphan Drug Act, Somerset had exclusivity relating to marketing
the chemical compound Eldepryl(R) for use as a treatment for late stage
Parkinson's disease through June of 1996. Somerset filed a complaint against the
FDA requesting injunctive and declaratory relief, review of agency action, and a
temporary restraining order in connection with three generic approvals granted
by the FDA in August 1996. All such actions have been denied.
Somerset continues research efforts to discover alternative indications for
Eldepryl(R) and the development of other compounds. Unless such
new indications or compounds are approved for commercialization the impact of
generic competition will continue to adversely affect Somerset's contribution to
the Company's net earnings. Other Income
Other income, derived principally from investment earnings, was $14.0
million in fiscal 1998, $10.4 million in fiscal 1997 and $16.6 million in fiscal
1996. The fiscal 1997 amount includes a $1.2 million loss incurred by the
Company in connection with the sale of certain assets relating to the custom
label and printing operations of Bertek, Inc. which were sold in February of
1997. Other year to year changes result primarily from changes in the levels of
assets available for investment and investment market conditions.
Income Taxes
The effective tax rate for fiscal 1998 was 32% compared to 28% for both
fiscal 1997 and 1996. Approximately half of the increase in the rate was
attributable to the recognition of "Other Revenue" which was subject to full
Federal and State taxes. The remainder of the change is attributable to a
decrease in income from Somerset, a change in the proportion of income
attributable to Puerto Rican operations versus domestic operations and the
utilization of state tax credits resulting primarily from facility expansion
projects.
During fiscal 1998, the Company reached a negotiated settlement with the
Internal Revenue Service regarding audits of the Company's income tax returns
for the years 1992 through 1996. The settlement of prior years had no impact on
the amount of income tax expense recognized in the current year. As part of the
settlement, the Company agreed to change the method employed for determining
taxable income of its Puerto Rican operations from the cost sharing method to
the profit-split method for all years after 1996.
25
Management's Discussion and Analysis of Operations and Financial
Position MYLAN LABORATORIES INC.
Changes in the Federal Tax Code enacted in 1993 reduced tax credits
previously available from operating in Puerto Rico by up to 55% through fiscal
1998 with an additional 5% reduction to occur in fiscal 1999. Thereafter, the
amount of income subject to the Puerto Rican tax credit will be limited for a
period of four years before complete termination of the credits.
Liquidity and Capital Resources
The Company's balance sheet remains strong with total assets of $847.8
million at March 31, 1998 compared to $777.6 million at March 31, 1997. As a
result of strong operating results working capital increased from $300.3 million
in 1997 to $358.8 million in 1998, and the ratio of current assets to current
liabilities also increased from 4.8 to 1 to 6.0 to 1.
Net cash provided from operating activities was $52.7 million in 1998,
$46.5 million in 1997 and $75.6 million in 1996. The improvement in operating
results from 1997 to 1998 was partially offset by the increase in accounts
receivable and inventory which reflects the increased demand and sales of the
Company's products. In addition, the Company had higher income tax payments
which included the settlements of tax audits during the fiscal year.
The Company continues to expend funds to increase manufacturing capacity,
upgrade current facilities and provide the latest technologically advanced
production and research equipment available. The Company's net investment in
property, plant and equipment was $28.9 million in 1998, $26.9 million in 1997
and $31.4 million in 1996. Major investments during the current year included
expansion of additional manufacturing capacity to its present facility in
Morgantown, West Virginia, completion of its state-of-the- art distribution
facility in Greensboro, North Carolina and completion of a sustained release
facility also in Morgantown, West Virginia. All of these capital expenditures
were made with the general funds of the Company and without any bank financing.
Cash used to increase intangible and other assets relates principally to
payments made to entities with which the Company is jointly developing new
products and in 1997, the initial payment to American Home Products in
connection with the MAXZIDE(R) products.
Payments on long-term obligations include obligations assumed in connection
with the acquisition of UDL and installment payments in 1998 and 1997 in
connection with the MAXZIDE(R) products. The Company paid cash dividends of $.16
per share in 1998 and 1997 totaling $19.5 million and $.15 per share totaling
$17.5 million in 1996. Year 2000
The Company has performed a review of its critical information and
operation systems for Year 2000 compliance. A project team has identified
systems critical to our business and for systems non-Year 2000 compliant program
modifications or replacement programs are planned. Contact has been initiated
with customers, vendors, service suppliers and banks to verify their Year 2000
readiness and testing is planned where appropriate. External and internal costs
specifically associated with modifying internal use software for Year 2000
compliance are expensed when incurred. The Company does not believe the cost of
such remedial corrective actions will be material to the Company's financial
position, results of operations or cash flows. While the Company continues to
address the Year 2000 compliance issue there can be no guarantee that all
problems both internal and external will be foreseen and corrected or that no
material disruption of our business will occur.
26
Management's Discussion and Analysis of Operations and Financial
Position MYLAN LABORATORIES INC.
Other Matters
The financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" and No. 131,
"Disclosure about Segments of an Enterprise and Related Information." Both of
these standards are effective for financial statements for years beginning after
December 15, 1997. Management believes the adoption of these standards will not
have any effect on the Company's financial position or results of operations.
Forward Looking Statements
Various statements in this Report indicate that the Company expects to
increase revenues and to continue to be profitable in the future by employing
various strategies which include, among other things, entering into alliances
with other manufacturers, strengthening development of branded products, seeking
opportunities for acquisitions and seeking to realize operating efficiencies.
These are forward-looking statements. The Company's actual results could differ
materially from those projected or suggested in any forward-looking statement
due to various important factors, including, but not limited to, the following:
The Company's results of operations depend to a significant extent on its
ability to develop and bring to the market new generic equivalent drugs.
Generally, following the expiration of patents and other market exclusivity
periods, the first manufacturers to bring a generic equivalent to the market
achieve higher revenues and gross profits than competitors that subsequently
enter the market. As competing products enter the market, prices, sales volume
and profit margins of the first generic equivalents decline significantly. In
fiscal 1998, the Company's expectations for revenues and gross margins on new
products were not met, principally due to litigation initiated by branded
manufacturers under the Hatch-Waxman Act to extend the exclusivity periods on
drugs on which patents were expiring. The failure of Congress or the courts to
address the present abuses of the Hatch-Waxman Act could diminish the commercial
success of new products introduced by the Company, resulting in both lower
revenues and gross margins.
Many of the raw materials needed by the Company to manufacture
pharmaceutical products are available from a single FDA-approved supplier. Even
where more than one supplier exists, a single supplier may be listed in the
Company's ANDAs. New suppliers of the active ingredients in drugs must be
approved by the FDA. Accordingly, any change in a supplier requires FDA
approval, which may take several months. Any interruption of supply could have a
material adverse effect on the Company's ability to manufacture a product or
obtain FDA approval of a new product, or could result in the Company being
required to pay higher prices to another supplier. Conversely, in instances
where limitations on the availability of raw materials lessen competition in
specified drugs and permit higher pricing levels, the availability of new
sources of supply will likely increase competition and result in lower pricing.
The Company's principal customers include wholesale drug distributors and
major drug store chains. A continuation of the consolidation which has been
experienced in these pharmaceutical distribution networks in recent years is
likely to result in an increase in pricing pressures on pharmaceutical
manufacturers.
See also the discussion of the Company's business, including the regulatory
environment, customers, markets, competitive conditions and raw materials
included in Item 1 of the Company's Annual Report on Form 10-K.
27
Consolidated Balance Sheets MYLAN LABORATORIES INC.
March 31 1998 1997
Assets
Current assets
Cash and cash equivalents $103,756,000 $126,156,000
Marketable securities 20,967,000 13,876,000
Accounts receivable 136,864,000 115,303,000
Inventories 146,041,000 100,890,000
Deferred income tax benefit 7,845,000 13,532,000
Prepaid and refundable income tax 7,946,000 --
Other current assetsn 6,679,000 9,263,000
Total current assets 430,098,000 379,020,000
Property, plant and equipment -
net of accumulated depreciation 151,412,000 135,829,000
Marketable securities, non-current 20,974,000 23,668,000
Intangible assets -
net of accumulated amortization 128,745,000 137,062,000
Other assets 86,803,000 76,888,000
Investment in and advances to Somerset 29,721,000 25,113,000
Total assets $847,753,000 $777,580,000
See notes to consolidated financial statements.
28
Consolidated Balance Sheets MYLAN LABORATORIES INC.
March 31 1998 1997
Liabilities and shareholders' equity
Current liabilities
Trade accounts payable $15,957,000 $18,039,000
Current portion of long-term debt 8,477,000 17,453,000
Income taxes payable 5,377,000 13,795,000
Other current liabilities 36,635,000 24,566,000
Cash dividend payable 4,900,000 4,893,000
Total current liabilities 71,346,000 78,746,000
Long-term obligations 26,218,000 32,593,000
Deferred income tax liability 5,724,000 6,501,000
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
123,050,172 at March 31, 1998 and 122,814,956
at March 31, 1997 61,525,000 61,407,000
Additional paid-in capital 92,405,000 89,262,000
Retained earnings 594,847,000 513,750,000
Unrealized gain (loss) on investments 1,570,000 (947,000)
----------- ------------
750,347,000 663,472,000
Less treasury stock at cost -
849,858 shares at March 31, 1998 and
752,950 shares at March 31, 1997 5,882,000 3,732,000
Net worth 744,465,000 659,740,000
Total liabilities and shareholders' equity $ 847,753,000 $ 777,580,000
29
Consolidated Statements of Earnings MYLAN LABORATORIES INC.
Year ended March 31 1998 1997 1996
------ ------ ------
Net sales $528,601,000 $440,192,000 $392,860,000
Other revenues 26,822,000 -- --
total revenues 555,423,000 440,192,000 392,860,000
Cost and expenses
Cost of sales 288,290,000 259,666,000 197,697,000
Research and development 46,278,000 42,633,000 38,913,000
Selling and administrative 96,708,000 79,948,000 56,073,000
431,276,000 382,247,000 292,683,000
Equity in earnings of Somerset 10,282,000 18,814,000 24,968,000
Other income 13,960,000 10,436,000 16,612,000
Earnings before income taxes 148,389,000 87,195,000 141,757,000
Income taxes 47,612,000 24,068,000 39,432,000
Net earnings $100,777,000 $ 63,127,000 $102,325,000
Earnings per common share
Basic $ .83 $ .52 $ .86
Diluted $ .82 $ .51 $ .85
Weighted average common shares
Basic 122,094,000 121,926,000 119,530,000
Diluted 123,043,000 122,727,000 120,706,000
See notes to consolidated financial statements
30
Consolidated Statements of Shareholders' Equity MYLAN LABORATORIES INC.
Unrealized
Common Stock Common Stock Additional Retained Gain/(Loss)
Shares Amount Paid-In Capital Earnings Marketable Securities
- - - - - ---------------------------------------------------------------------------------------------------------------------------------
March 31, 1995 79,972,248 $39,986,000 $57,577,000 $386,212,000 $1,374,000
Stock options exercised 206,708 104,000 3,103,000 -- --
Cash dividend $.15 per share -- -- -- (18,401,000) --
Net earnings -- -- -- 102,325,000 --
Stock split (3 for 2) 40,008,219 20,004,000 (20,010,000) -- --
UDL acquisition 2,337,614 1,168,000 45,326,000 -- --
Unrealized gain on marketable securities -- -- -- -- 201,000
- - - - - ---------------------------------------------------------------------------------------------------------------------------------
March 31, 1996 122,524,789 $61,262,000 $85,996,000 $470,136,000 $1,575,000
Stock options exercised 290,167 145,000 3,266,000 -- --
Cash dividend $.16 per share -- -- -- (19,513,000) --
Net earnings -- -- 63,127,000 --
Unrealized loss on marketable securities -- -- -- -- (2,522,000)
- - - - - ---------------------------------------------------------------------------------------------------------------------------------
March 31, 1997 122,814,956 $61,407,000 $89,262,000 $513,750,000 $ (947,000)
Stock options exercised 235,216 118,000 3,143,000 (141,000) --
Cash dividend $.16 per share -- -- -- (19,539,000) --
Net earnings -- -- -- 100,777,000 --
Unrealized gain on marketable securities -- -- -- -- 2,517,000
- - - - - ---------------------------------------------------------------------------------------------------------------------------------
March 31, 1998 123,050,172 $61,525,000 $92,405,000 $594,847,000 $1,570,000
- - - - - ---------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements
31
Consolidated Statements of Cash Flows MYLAN LABORATORIES INC.
Year ended March 31 1998 1997 1996
- - - - - ---------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities
Net earnings $ 100,777,000 63,127,000 $ 102,325,000
Adjustments to reconcile net earnings to net cash
provided from operating activities:
Depreciation and amortization 21,708,000 17,347,000 13,450,000
Deferred income tax (benefit) expense (3,207,000) 47,000 1,236,000
Equity in earnings of Somerset (10,282,000) (18,814,000) (24,968,000)
Cash received from Somerset 5,674,000 20,038,000 20,686,000
Allowances on accounts receivable 8,754,000 2,422,000 (4,141,000)
Loss on sale of assets -- 1,171,000 --
Other noncash expenses 1,574,000 290,000 516,000
Changes in operating assets and liabilities:
Accounts receivable (30,565,000) (45,198,000) (4,013,000)
Inventories (45,007,000) (1,495,000) (11,148,000)
Trade accounts payable (2,082,000) 4,000,000 (2,463,000)
Income taxes (8,949,000) 773,000 (12,468,000)
Other operating assets and liabilities 14,255,000 2,829,000 (3,442,000)
Net cash provided from operating activities 52,650,000 46,537,000 75,570,000
- - - - - ---------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Additions to property, plant and equipment (28,853,000) (26,854,000) (31,419,000)
Increase in intangible and other assets (7,984,000) (30,674,000) (16,970,000)
Purchase of investment securities (16,785,000) (23,221,000) (27,169,000)
Proceeds from investment securities 17,309,000 18,060,000 68,753,000
Proceeds from sale of assets -- 3,500,000 --
Acquisitions net of cash acquired -- -- (520,000)
Net cash used in investing activities (36,313,000) (59,189,000) (7,325,000)
- - - - - ---------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated nancial statements.
32
Consolidated Statements of Cash Flows MYLAN LABORATORIES INC.
Year ended March 31 1998 1997 1996
- - - - - ---------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Payments on long-term obligations $ (19,198,000) $ (19,788,000) $ (2,879,000)
Cash dividends paid (19,525,000) (19,491,000) (17,502,000)
Repurchase of common stock (2,459,000) -- --
Proceeds from exercise of stock options 2,445,000 1,107,000 1,836,000
Net cash used in financing activities (38,737,000) (38,172,000) (18,545,000)
Net (decrease) increase in cash and cash equivalents (22,400,000) (50,824,000) 49,700,000
Cash and cash equivalents-beginning of year 126,156,000 176,980,000 127,280,000
- - - - - ---------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents-end of year $ 103,756,000 $ 126,156,000 $ 176,980,000
For purposes of presentation in the statements of cash flows, cash,
overnight deposits and 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 $3,426,000 in 1998, $1,977,000 in 1997 and
$22,000 in 1996. Cash payments for income taxes were $59,770,000 in 1998,
$23,245,000 in 1997 and $50,665,000 in 1996.
During fiscal 1996 the Company acquired all of the outstanding stock of UDL
(see note B). The purchase price of approximately $47,500,000 was satisfied
through the issuance of the Company's common stock.
Certain stock option transactions result in a reduction of income taxes
payable and a corresponding increase in additional paid in capital. The amount
for the years ended March 31, 1998, 1997 and 1996 were $652,000, $205,000, and
$1,155,000 respectively.
During fiscal 1996 the Company declared a 3 for 2 stock split effected in
the form of a stock dividend (see note L).
In consideration for the exercise of stock options, the Company received
and recorded into treasury stock 513 shares valued at $12,000 in fiscal 1998,
53,333 shares valued at $900,000 in fiscal 1997 and 10,166 shares valued at
$209,000 in fiscal 1996.
33
Notes to Consolidated Financial Statements
MYLAN LABORATORIES INC.
Note A. Summary of Significant Accounting Policies
1. Nature of Operations and 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 is
engaged in the development, manufacture and distribution of pharmaceutical
products for resale by others. The principal markets for these products are
proprietary and ethical pharmaceutical wholesalers and distributors, drug store
chains, drug manufacturers and public and governmenta l agencies within the
United States.
2. Marketable Securities
The Company accounts for investments in marketable securities in accordance with
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." The Company's investments are
classified as "available for sale" and, accordingly, are recorded at current
market value with offsetting adjustments to shareholders' equity, net of income
taxes.
3. Accounts Receivable and Revenue Recognition
The Company recognizes revenue from product sales upon shipment to customers.
Provisions for estimated discounts, rebates, price adjustments, 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 $23,385,000 at March 31, 1998 and $14,631,000 at March 31, 1997.
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. Intangible Assets
Intangible assets are stated at cost. Amortization is provided for on a
straight-line basis over their estimated useful lives not to exceed forty years.
Intangible assets are periodically reviewed to determine recoverability by
comparing their carrying value to expected future cash flows.
7. Research and Development
Research and development expenses are charged to operations as incurred.
8. Income Taxes
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for 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.
34
9. Earnings per Share
During the year the Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings per Share." This statement establishes standards
for computing and presenting basic and diluted earnings per share. Basic
earnings per share is computed by dividing net earnings available to common
shareholders by the weighted average common shares outstanding for the
period. Diluted earnings per share is computed by dividing net earnings
available to common shareholders by the weighted average common shares
outstanding adjusted for the dilutive effect of options granted under the
Company's stock option plans. Prior periods have been restated to reflect
this new statement. The effect of dilutive stock options on the weighted
average shares outstanding was 949,000, 801,000, and 1,176,000 for fiscal
1998, 1997 and 1996.
10. Concentrations of Credit 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 and generally does
not require collateral. Three of the Company's customers accounted for 13%, 12%
and 11% of net sales in fiscal 1998. No single customer represented more than
10% of net sales in fiscal 1997 and 1996.
The Company invests its excess cash in deposits with major banks and other high
quality short-term liquid money market instruments (commercial paper, government
and government agency notes and bills, etc.). These investments generally mature
within twelve months.
11. Accounting Standards
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." This standard
is effective for financial statements for years beginning after December 15,
1997. The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise
and Related Information." This standard is effective for financial statements
for years beginning after December 15, 1997. The Company is currently
evaluating the disclosure effects of these statements on its financial
statements.
12. Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosures of
contingent assets and liabilities at the date of the financial statements, as
well as the reported amounts of income and expenses during the reporting period.
Actual results could differ from those estimates.
13. Reclassification
Certain prior year amounts have been reclassified to conform to the 1998
presentation.
35
Note B. Business and Product Acquisitions
UDL Laboratories, Inc.
On February 28, 1996, a wholly-owned subsidiary of the Company acquired 100% of
the outstanding stock of UDL Laboratories, Inc. ("UDL"). UDL is the premier
supplier of unit-dose generic pharmaceuticals to the institutional and long term
care markets. UDL has its corporate headquarters in Rockford, Illinois and
maintains manufacturing and research and development facilities in Rockford as
well as Largo, Florida.
The business combination has been accounted for under the purchase method of
accounting. Payment of approximately $47,500,000 was made through the issuance
of 2,337,614 shares of newly registered common stock of the Company. Goodwill of
approximately $29,038,000 resulting from the acquisition is being amortized on a
straight-line basis over a 20 year period.
MAXZIDE(R) AND MAXZIDE(R)-25MG
On June 14, 1996 the Company executed a series of agreements with American Home
Products Corporation ("AHP"), relating to the products Maxzide(R) and
Maxzide(R)-25MG. These agreements were subject to regulatory approval which was
received on August 2, 1996. Since 1984, these products, which were developed and
manufactured by Mylan, were marketed by AHP's Lederle Laboratories Division
under a worldwide license arrangement.
Under the terms of the new agreements the Company is now marketing the products
in the United States. AHP retained ownership of certain trademarks and
tradedress which have been licensed to the Company for a period of five years.
At the end of the five year period ownership of these intangibles will be
transferred to the Company.
As a result of the transaction the Company recorded an intangible asset of
approximately $69,666,000 which represent the present value of the minimum
payments due to AHP (see note J) and recognized amortization expense of
$2,786,000 and $1,742,000 and interest expense of $2,230,000 and $2,170,000 in
fiscal 1998 and 1997, respectively.
Note C. Inventories
Inventories consist of the following components: (in thousands)
March 31, 1998 1997
- - - - - ---------------- ---------- -----------
Raw materials $63,308 $51,796
Work in process 27,858 20,843
Finished goods 54,875 28,251
$146,041 $100,890
Note D. Property, Plant and Equipment
Property, plant and equipment consists of the following components:
(in thousands)
March 31, Useful Lives 1998 1997
- - - - - -------------------------- ------------ -------- --------
Land and land improvements -- $ 6,909 $ 6,734
Buildings and improvements 20 - 40 72,893 66,530
Machinery and equipment 5 - 10 122,572 104,566
Construction in progress -- 23,945 19,636
226,319 197,466
Less accumulated depreciation 74,907 61,637
--------- ---------
$151,412 $135,829
Note 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 fiscal 1998, 1997, and
1996. 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, 1997 1996 1995
- - - - - ------------------ -------- ------- -------
Current assets $53,973 $45,871 $43,993
Non-current assets 3,466 7,006 7,127
Current liabilities 15,660 19,075 17,057
Payable to owners 1,433 1,621 2,075
Other liabilities -- -- 63
Condensed audited income statement information of Somerset is as
follows: (in thousands)
Year ended December 31, 1997 1996 1995
- - - - - ------------------ -------- ------- -------
Net sales $66,956 $101,512 $107,365
Cost and expenses 30,055 46,895 42,812
Income taxes 12,924 18,815 20,200
Net earnings $23,977 $35,802 $44,353
The above information represents 100% of Somerset's operations of which the
Company has a 50% interest.
Somerset's marketing exclusivity for EldeprylRegistration Mark under the Orphan
Drug Act expired on June 6, 1996. Somerset has experienced increased competition
since August 1996, due to the approval of several generic tablet forms of
EldeprylRegistration Mark by the United States Food and Drug Administration
("FDA"). This has resulted in a decrease in sales and net earnings since 1996.
In 1997 Somerset was notified by the Internal Revenue Service ("IRS") that it
had initiated a challenge related to issues concerning Somerset's Code Section
936 credit for tax years 1993 through 1995. As of December 31, 1997, the
proposed adjustments by the IRS amounted to approximately $13,000,000 of
additional income tax and interest charges over amounts accrued. Management of
Somerset believes it has appropriately claimed the Code Section 936 credit and
intends to vigorously defend its position on this matter.
37
Note F. Marketable Securities
The amortized cost and estimated market values at March 31, 1998 and 1997 are
as follows: (in thousands)
Gross Gross
Amortized Unrealized Unrealize Market
March 31, 1998 Cost Gains Losses Value
- - - - - ---------------------- --------- ---------- --------- ----------
Debt securities:
U.S. Government obligations $ 5,161 $ 69 $ 16 $ 5,214
Municipal obligations ..... 20,581 259 -- 20,840
Corporate bonds ........... 3,200 52 16 3,236
Total debt securities ....... 28,942 380 32 29,290
Equity securities ........... 10,584 3,852 1,785 12,651
- - - - - ---------------------------------------------------------------------------
Total securities ............ $39,526 $4,232 $1,817 $41,941
Gross Gross
Amortized Unrealized Unrealized Market
March 31, 1997 Cost Gains Losses Value
- - - - - ----------------------- --------- --------- -------- ---------
Debt securities:
U.S. Government obligations .........$ 4,871 $ 5 $ 99 $ 4,777
Municipal obligations ............... 22,629 123 47 22,705
Corporate bonds ..................... 2,407 11 36 2,382
Total debt securities ................. 29,907 139 182 29,864
Equity securities ..................... 9,095 1,112 2,527 7,680
- - - - - ---------------------------------------------------------------------------
Total securities ......................$39,002 $ 1,251 $2,709 $ 37,544
Maturities of debt securities at market value at March 31, 1998 are as
follows: (in thousands)
Mature in one year or less ........................$ 8,820
Mature after one year through five years .......... 10,590
Mature after five years ........................... 9,880
Total ...........................................$29,290
Proceeds from sales of marketable securities were $17,233,000, $11,369,000
and $27,667,000 during 1998, 1997 and 1996 Gross gains of $767,000, $565,000 and
$617,000 and gross losses of $82,000, $271,000 and $39,000 were realized on
those sales during 1998, 1997 and 1996. The cost of investments sold is
determined by the specific identification method.
Note G. Intangible Assets
Intangible assets consist of the following components: (in thousands)
March 31, Useful Lives 1998 1997
- - - - - --------------------- ------------ -------- --------
Patents and technologies 10 - 20 $27,281 $27,165
License fees and agreements 2 - 12 7,587 7,587
MaxzideRegistration Mark intangibles 25 69,666 69,666
Goodwill 20 - 40 31,732 31,732
Other 5 - 20 25,719 25,715
--------- ---------
161,985 161,865
Less accumulated amortization 33,240 24,803
--------- ---------
$128,745 $137,062
38
The Maxzide(R) intangibles relate to trademark, tradedress and marketing
rights acquired in the transaction described in note B. The balance in Other
consists principally of non-compete agreements, an assembled workforce, customer
lists and contracts.
Note H. Other Assets
Other assets consist of the following components: (in thousands) March 31, 1998
1997 ------------------ -------- ------- Pooled asset funds $25,368 $18,795 Cash
surrender value 26,569 23,342 Other investments 34,866 34,751 -------- -------
$86,803 $76,888 Pooled asset funds include the Company's interest in various
limited partnership funds which consist of common and preferred stocks, bonds,
and money market funds. Earnings on these investments included under the caption
"Other Income" amounted to $6,572,000 in 1998, $1,184,000 in 1997, and
$3,888,000 in 1996. At March 31, 1998 and 1997 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 split dollar life insurance agreements with certain
current and former executive officers of the Company.
Other investments are comprised principally of investments in non-publicly
traded equity securities and are accounted for under the cost method.
Note I. Other Current Liabilities
Other current liabilities includes payroll and employee benefit plan accruals
which amounted to $16,726,000 and $10,300,000 and accruals for Medicaid
reimbursements of $4,412,000 and $3,821,000 at March 31, 1998 and 1997. In
addition $6,164,000 was accrued for product royalties at March 31, 1998.
Note J. Long-Term Obligations
Long-term obligations include accruals for post-retirement compensation pursuant
to agreements with certain key employees and directors of approximately
$11,494,000 and $9,805,000 at March 31, 1998 and 1997. Under these agreements,
benefits are to be paid over periods of 10 to 15 years commencing at retirement.
The Company's obligation on the 10.5% senior promissory notes assumed with the
acquisition of UDL is $5,100,000 and $6,500,000 at March 31, 1998 and 1997.
Future principal payments on these notes are in amounts ranging from $1,000,000
to $2,000,000 per year through 2002. At March 31, 1998 and 1997, the Company was
in compliance with all of its debt covenants.
At March 31, 1998 and 1997 the net present value of the Company's outstanding
obligation for the acquisition of Maxzide(R) and Max zide(R)-25MG is $16,316,000
and $31,836,000 (see note B). Required payments are as follows: 1999 --
$6,000,000 and 2000 -- $5,000,000. In addition the Company will make minimum
annual royalty payments of $2,000,000 through 2001.
39
Note K. Income Taxes
Income taxes consist of the following components: (in thousands)
Year ended March 31, 1998 1997 1996
- - - - - --------------------- ------ ------ ------
Federal
Current $ 45,601 $19,176 $ 30,490
Deferred (2,993) 68 1,323
42,608 19,244 31,813
State
Current 5,218 4,845 7,706
Deferred (214) (21) (87)
5,004 4,824 7,619
Income taxes $ 47,612 $24,068 $ 39,432
Pre-tax earnings $148,389 $87,195 $141,757
Effective tax rate 32.1% 27.6% 27.8%
The Company uses the asset and liability approach to account 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 assets or liabilities in the period that the tax law is enacted.
Temporary differences and carryforwards which give rise to the deferred income
tax assets and liabilities are as follows: (in thousands)
March 31, 1998 1997
- - - - - ---------------------- -------- -------
Deferred Tax Assets:
Employee benefits $ 4,397 $ 3,785
Intangible assets 4,080 5,455
Asset allowances 8,230 3,775
Inventory 411 8,369
Investments 4,188 2,660
Other (69) 940
Total Deferred Tax Assets 21,237 24,984
Deferred Tax Liabilities:
Plant and equipment 8,702 8,127
Intangible assets 6,829 7,621
Investments 3,585 2,205
Total Deferred Tax Liabilities 19,116 17,953
Deferred Tax Assets - Net $ 2,121 $ 7,031
Classification in the Consolidated Balance Sheet:
Deferred Tax Benefit - Current $ 7,845 $ 13,532
Deferred Tax Liability - Non-Current 5,724 6,501
Deferred Tax Assets - Net $ 2,121 $ 7,031
40
A reconciliation of the statutory tax rate to the effective tax rate is as
follows:
Year Ended March 31, 1998 1997 1996
----------------------- ------ ------ ------
Statutory tax rate 35.0% 35.0% 35.0%
State income taxes-net 2.3% 4.8% 5.0%
Tax exempt earnings-primarily dividends (2.4%) (6.4%) (6.6%)
Tax credits (3.0%) (5.9%) (5.8%)
Other items 0.2% 0.1% 0.2%
Effective tax rate 32.1% 27.6% 27.8%
Tax credits result principally from operations in Puerto Rico.
State income taxes include provisions for tollgate tax resulting from the future
repatriation of funds from Puerto Rico to the United States. Such provisions
have been made to the minimum extent provided under Puerto Rican tax law based
on the Company's intent to reinvest Puerto Rican source earnings in qualifying
investments within Puerto Rico.
The Company's federal tax returns have been audited by the IRS through March 31,
1996. As part of the recently settled IRS audit, the Company has changed to the
profit-split tax accounting method for the computation of tax credits from
operations in Puerto Rico.
Note L. Common Stock
On April 5, 1997, the Company's Board of Directors authorized a Stock
Repurchase Program under which the Company may repurchase up to five million
shares of its outstanding common stock. The purchases will be made on the
open market or in privately negotiated transactions using currently available
funds. Repurchased shares will be held in treasury and available for general
corporate purposes. Through March 31, 1998 the Company had repurchased
144,900 shares for approximately $2,459,000.
On August 23, 1996, the Company's Board of Directors adopted a Shareholder
Rights Plan ("the Rights Plan"). A dividend distribution was made to
Shareholders of record on September 5, 1996 of a Preferred Share Purchase Right
("the Right") on each outstanding share of the Company's common stock. The
Rights Plan was adopted to provide the Company's Directors with sufficient time
to assess and evaluate any takeover bid, and explore and develop a reasonable
response. The Company is entitled to redeem the Rights at $.001 per Right at any
time prior to ten days after the time any person acquires 15% or more of the
Company's common stock. The Rights will expire on September 5, 2006 unless
previously redeemed or exercised.
During fiscal 1996 the Company declared a 3 for 2 stock split effected in the
form of a stock dividend. The par value of the new shares issued totaled
$20,004,000 and was transferred from additional paid-in capital to the common
stock account. Per share amounts and stock options have been adjusted for the
stock split.
41
Note M. Commitments
The Company has entered into various contractual agreements, principally
licensing arrangements, whereby the Company has obtained, in exchange for
funding of drug development activities, rights to manufacture and/or distribute
certain drugs, which are presently in various stages of development. In the
event that all projects are successful, payments totaling $25,625,000 would be
made over the next five years. Approximately ninety percent of this total is due
upon the filing and approval of an Abbreviated New Drug Application or New Drug
Application with the FDA.
In addition, under the Company's license agreement with VivoRx Inc. the Company
continues to fund research and development expenditures related to pancreatic
islet cell implant technology for the treatment of diabetes. This funding is at
the discretion of the Company.
Note N. License Agreement
In June 1997, the Company's subsidiary Mylan Pharmaceuticals Inc. ("Mylan")
entered into an exclusive supply and distribution agreement with Genpharm Inc.
("Genpharm"), a Canadian corporation, relating to the sale of ranitidine HCL
tablets ("ranitidine") in the United States. Ranitidine is the generic version
of Glaxo Wellcome Inc.'s ("Glaxo") Zantac(R).
Under the terms of the agreement Mylan and Genpharm will share in the combined
profits resulting from the sale, by Mylan, of ranitidine tablets manufactured by
either Mylan or Genpharm. In addition, the agreement provides that Mylan shall
be entitled to share in any benefit received by Genpharm as a result of Genpharm
entering into any other third party agreement which would affect the marketing
of ranitidine.
Due to unresolved legal matters with Glaxo, on July 31, 1997, Genpharm entered
into an agreement with Novopharm Limited, a Canadian Corporation, and its United
States subsidiary Granutec Inc. ("Novopharm"). Under the terms of the agreement
between Genpharm and Novopharm, Genpharm is entitled to receive compensation
from Novopharm predicated upon Novopharm's sales of the product through December
31, 1997 and a profit allocation factor which is significantly reduced after the
exclusivity period which expired on August 29, 1997. Under the terms of the
agreement between Mylan and Genpharm, Mylan is entitled to share in the
compensation received by Genpharm from Novopharm.
During the quarter ended September 30, 1997 the Company recognized income of
$26,822,000 related to the Genpharm Novopharm agreement. Such income was
recorded under the caption "Other Revenues" and increased net earnings for the
quarter ended September 30, 1997 by approximately $16,388,000 or $.13 per share.
The Company collected the entire receivable recorded as of September 30, 1997
during the quarter ended December 31, 1997.
As a result of a dispute between Genpharm and Novopharm relating to contract
interpretation, the Company has not recognized any additional revenue. Separate
audits are being performed at the request of Genpharm and Novopharm to determine
the amount of sales and expenses incurred by Novopharm during the contract
period in accordance with the agreement. The amount of revenue to be recognized
by the Company in the future will be determined by this final accounting and
resolution of the dispute between Genpharm and Novopharm.
42
Note O. Fair Value of Financial Instruments
The carrying values of cash and cash equivalents, accounts receivable (net of
provisions) and trade accounts payable approximate fair value due to the
short-term maturity of these instruments. Current and non-current marketable
securities are recorded at fair value based on quoted market prices. The
carrying value of long-term obligations approximates their fair value based on
discounted future cash flows using interest rates currently available to the
Company.
Note P. Stock Option Plans
On January 23, 1997, the Board of Directors adopted the "Mylan Laboratories Inc.
1997 Incentive Stock Option Plan" ("the Plan") which was approved by the
shareholders on July 24, 1997. Under the Plan the Company may grant up to
10,000,000 shares of its common stock to officers, employees and nonemployee
consultants and agents as either incentive stock options or nonqualified stock
options. Options, which may be granted at not less than fair market value on the
date of the grant may be exercised within ten years from the date of grant.
Nonqualified stock options generally vest on date of grant. Incentive stock
options granted have the following vesting schedule: 25% two years from the date
of grant, 25% at the end of year three and the remaining 50% at the end of year
four.
On June 23, 1992, the Board of Directors adopted the "1992 Nonemployee Director
Stock Option Plan" ("the Directors' Plan") which was approved by the
shareholders on April 7, 1993. A total of 600,000 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. Options may be
exercised within ten years from the date of grant. As of March 31, 1998, 348,000
shares have been granted pursuant to the Directors' Plan.
A summary of the activity resulting from all plans adjusted for the
stock split is as follows:
Weighted average
Number of shares exercise
under option price per share
Outstanding
- - - - - ----------------------------- ------------- ----------------
April 1, 1995 2,656,011 $ 10.72
Options granted 345,000 18.53
Options exercised (229,142) 8.96
Options cancelled or forfeited (51,855) 10.50
Outstanding
March 31, 1996 2,720,014 $ 11.87
Options granted 217,000 14.75
Options exercised (290,167) 11.05
Options cancelled or forfeited (75,970) 15.70
Outstanding
March 31, 1997 2,570,877 $ 12.10
Options granted 1,322,000 17.08
Options exercised (235,216) 11.09
Options cancelled or forfeited (41,175) 14.17
Outstanding
- - - - - -------------------------- ------------ -------------
March 31, 1998 3,616,486 $ 13.96
43
Options Outstanding Options Exercisable
------------------------------------------------- ---------------------------------
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Price Outstanding Contractual Life Exercise Price Exercisable Exercise Price
Per Share As of 3/31/98 (years) Per Share As of 3/31/98 Per Share
- - - - - --------------- ------------- ---------------- -------------- -------------------- -----------
$ 3.65-$ 4.67 215,733 2.06 $ 4.19 215,733 $ 4.19
$10.58-$14.87 1,789,378 5.00 $12.08 1,457,496 $11.98
$16.68-$20.41 1,611,375 9.09 $17.35 884,627 $17.39
$ 3.65-$20.41 3,616,486 6.65 $13.96 2,557,856 $13.20
At March 31, 1998, options were exercisable for 2,557,856 shares at a weighted
average exercise price of $13.20 per share. The corresponding amounts were
1,831,061 shares at $11.06 per share at March 31, 1997 and 1,833,658 shares at
$10.92 per share at March 31, 1996.
In accordance with the provisions of Statement of Financial Standards No. 123
("SFAS No. 123"), "Accounting for Stock-Based Compensation," the Company will
continue to apply the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and, accordingly, does not recognize
compensation costs for its existing stock option plans. If the Company had
elected to recognize compensation costs based on the alternative fair value
method prescribed by SFAS No. 123, net earnings and earnings per share (on both
a basic and diluted basis) would have been reduced by $6,489,000, or $.04 per
share and $1,174,000, or $.01 per share at March 31, 1998 and 1997. There was no
effect on earnings per share for fiscal 1996. These calculations only take into
account options issued since April 1, 1995.
The average fair value of options granted during the years ended
March 31, 1998, 1997 and 1996 was $6.47, $6.15 and $7.79. The fair value was
estimated using the Black-Scholes option pricing model based on the following
assumptions:
March 31, 1998 1997 1996
- - - - - ----------------------- ------- ------- --------
Volatility 35% 35% 35%
Risk-free interest rate 6.07% 6.73% 6.23%
Dividend yield 1.0% 1.1% 1.0%
Expected term of options (in years) 5.4 6.1 6.2
Note Q. 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 profit sharing
plan with a 401(k) provision covering all employees of Bertek Inc. and UDL and
401(k) plans covering Bertek Pharmaceuticals Inc. (formerly Dow Hickam
Pharmaceuticals) and all bargaining unit employees.
Contributions to the profit sharing plans are made at the discretion of the
Board of Directors. Contributions to the Bertek Pharmaceuticals Inc. and UDL
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, 1998, 1997 and
1996 were $3,889,000, $3,620,000 and $2,959,000 respectively.
44
Note R. Contingencies
The Company is involved in various legal proceedings that are considered
normal to its business. The majority of these proceedings involve
intellectual property rights related to products under development and prior
to FDA approval. These proceedings are initiated by branded pharmaceutical
companies and often result in delaying the introduction of generic products.
As more of these suits have been initiated against the Company the cost to
defend these suits in outside legal fees and internal resource commitments
has risen dramatically. While it is not feasible to predict the ultimate
outcome of such proceedings it is the opinion of management that the ultimate
outcome will have no material adverse effect on the Company's operations or
financial position.
During the year ended March 31, 1998, the Company settled several legal matters
receiving an aggregate amount of approximately $5,000,000 including
reimbursement of certain legal fees.
In August 1997, Key Pharmaceuticals filed suit against the Company and certain
subsidiaries claiming patent infringement relating to the marketing of its
nitroglycerin transdermal system. The Company had received FDA approval for its
nitroglycerin transdermal system in September 1996 and immediately began
marketing the product. The relief sought includes a preliminary and permanent
injunction, treble damages along with interest and attorneys fees and expenses.
The Company believes the suit is without merit and intends to vigorously defend
its position.
Note S. Other Matters
On April 5, 1998, the Company entered into a four year collective bargaining
agreement with the Oil, Chemical and Atomic Workers International Union and its
Local Union 8-957. The agreement provides wage and benefit increases for the
approximately four hundred and eighty production and maintenance employees at
the Company's manufacturing facilities in Morgantown, West Virginia. The
agreement also provides for partial reimbursement of post retirement medical
benefits.
45
Independent Auditors' Report
MYLAN LABORATORIES INC.
Board of Directors and Shareholders
Mylan Laboratories Inc.
Pittsburgh, Pennsylvania
We have audited the accompanying consolidated balance sheets of Mylan
Laboratories Inc. and subsidiaries as of March 31, 1998 and 1997, and the
related consolidated statements of earnings, shareholders' equity, and cash
flows for each of the three years in the period ended March 31, 1998, appearing
on pages 28 through 45. 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 overal l 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, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended March 31,
1998, in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Pittsburgh, Pennsylvania
May 7, 1998
46
Market Information
Quarterly Financial Data
(Amounts in thousands, 1st 2nd 3rd 4th
except per share amounts) Quarter Quarter Quarter Quarter Year
- - - - - --------------------------- --------- --------- --------- --------- ---------
Fiscal 1998
- - - - - ---------------------------
Total revenues $ 109,188 $ 153,955 $ 129,517 $ 162,763 $ 555,423
Gross profit 47,809 55,932 54,440 82,130 240,311
Net earnings 16,598 30,390 21,983 31,806 100,777
Earnings per share-basic .14 .25 .18 .26 .83
Earnings per share-diluted .13 .25 .18 .26 .82
Fiscal 1997
- - - - - ----------------------------
Total revenues $ 98,543 $ 108,981 $ 113,981 $ 118,687 $ 440,192
Gross profit 42,764 45,145 47,252 45,365 180,526
Net earnings 14,011 17,348 18,081 13,687 63,127
Earnings per share-basic .12 .14 .15 .11 .52
Earnings per share-diluted .11 .14 .15 .11 .51
Total revenues for fiscal 1998 includes $26,822,000 recognized in the 2nd
quarter relating to the Genpharm License Agreement (see note N to the Financial
Statements).
During the latter part of calendar 1996, the volume of sales by wholesalers
exceeded the Company's estimates and resulted in the Company recording increased
provisions for price adjustment credits for such sales in the fourth quarter of
fiscal 1997. The Company estimates that increased provisions relating to prior
quarters' sales reduced fourth quarter net earnings by approximately $4.0
million.
The fourth quarter of fiscal 1997 also includes a pre-tax charge of
approximately $1.2 million, approximately $800,000 after taxes, resulting from
the sale of certain assets relating to the Company's custom label and printing
operations in Vermont. These operations were acquired in connection with the
acquisition of Bertek, Inc. and did not contribute to the Company's strategic
objectives.
Market Prices
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
Fiscal 1998
High 16 7/8 24 3/4 25 1/4 24 5/16
Low 11 1/2 14 5/8 17 7/16 17 1/16
Fiscal 1997
High 21 5/8 17 1/2 17 1/2 18 1/4
Low 16 1/4 14 1/4 14 14 3/8
New York Stock Exchange Symbol: MYL
On May 1, 1998 the Company had approximately 93,200 shareholders.
Stock Splits
Split Date Amount Split Price Presplit Price
- - - - - --------------- -------- ----------- --------------
July 20, 1979 5/4 103/4 131/2
Nov. 13, 1981 2/1 131/2 271/8
June 30, 1983 2/1 161/4 321/2
March 1, 1984 3/2 14 21
July 31, 1984 3/2 197/8 293/4
Feb. 15, 1985 2/1 177/8 353/4
Aug. 1, 1986 3/2 14 21
Aug. 1, 1992 2/1 213/4 431/2
Aug. 15, 1995 3/2 21 311/2
47
(21) Subsidiaries of the registrant, filed herewith.
(23) Consents of Independent Auditors, filed herewith.
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
333-35887, 333-43081, 33-65916 and 33-65918 of Mylan Laboratories Inc. on Form
S-8 of our report dated May 7, 1998, incorporated by reference in this Annual
Report on Form 10-K of Mylan Laboratories Inc. for the year ended March 31,
1998.
Deloitte & Touche LLP
Pittsburgh, Pennsylvania
June 18, 1998
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
333-35887, 333-43081, 33-65916 and 33-65918 of Mylan Laboratories Inc. on Form
S-8 of our report dated February 4, 1998 relating to the consolidated financial
statements of Somerset Pharmaceuticals, Inc. and subsidiaries for each of the
three years in the period ended December 31, 1997, included in the Annual Report
on Form 10-K of Mylan Laboratories Inc. for the year ended March 31, 1998.
Deloitte & Touche LLP
Pittsburgh, Pennsylvania
June 18, 1998
(27) (a)Financial Data Schedule, filed herewith.
(b-d) Restated Financial Data Schedules, filed herewith.
(99) Consolidated financial statements of Somerset Pharmaceuticals, Inc.
for years ended December 31, 1997, 1996 and 1995, filed herewith.
SOMERSET PHARMACEUTICALS, INC. AND SUBSIDIARIES
Consolidated Financial Statements for the
Years Ended December 31, 1997, 1996 and 1995, and
Independent Auditors' Report
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Somerset Pharmaceuticals, Inc.:
We have audited the accompanying consolidated balance sheets of Somerset
Pharmaceuticals, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the three years in the period ended December 31, 1997. 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, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
February 4, 1998
SOMERSET PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
- - - - - ------------------------------------------------------------------------------
ASSETS 1997 1996
CURRENT ASSETS:
Cash and cash equivalents $ 32,141,000 $ 33,477,000
Investment securities 15,963,000 1,008,000
Accounts receivable (net of allowance for doubtful
accounts of $250,000 and $100,000, respectively) 3,526,000 6,172,000
Inventories 1,077,000 1,704,000
Prepaid expenses and other current assets 1,266,000 3,510,000
Total current assets 53,973,000 45,871,000
PROPERTY AND EQUIPMENT - Net 752,000 4,891,000
INTANGIBLE ASSETS - Net 1,066,000 1,259,000
OTHER ASSETS 1,648,000 856,000
---------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
CURRENT LIABILITIES:
Accounts payable $ 516,000 $ 651,000
Royalty payable 1,172,000 1,626,000
Medicaid payable 687,000 1,039,000
Other accrued expenses 853,000 1,454,000
Accrued research and development 4,394,000 4,578,000
Income taxes payable 5,099,000 6,032,000
Accrued sales returns 906,000 580,000
Accrued compensation 600,000 1,494,000
Amounts due to related parties 1,433,000 1,621,000
Total current liabilities 15,660,000 19,075,000
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; 13,719
shares authorized, 11,297 shares issued - -
Retained earnings 42,231,000 34,254,000
Less treasury stock, 644 shares at cost (452,000) (452,000)
Total stockholders' equity 41,779,000 33,802,000
------------ -------------
$57,439,000 $52,877,000
2
SOMERSET PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- - - - - ------------------------------------------------------------------------------
1997 1996 1995
NET SALES $ 66,956,000 $ 101,512,000 $ 107,365,000
------------- -------------- -------------
COSTS AND EXPENSES:
Cost of sales 6,622,000 12,672,000 13,617,000
Marketing 5,757,000 6,263,000 4,862,000
Research and development 13,073,000 20,118,000 17,904,000
Administrative 7,338,000 9,574,000 8,601,000
---------- ---------- ---------
32,790,000 48,627,000 44,984,000
----------- ----------- ----------
34,166,000 52,885,000 62,381,000
OTHER INCOME - Net 2,735,000 1,732,000 2,172,000
---------- ---------- ---------
INCOME BEFORE INCOME TAXES 36,901,000 54,617,000 64,553,000
PROVISION FOR INCOME TAXES 12,924,000 18,815,000 20,200,000
----------- ----------- ----------
NET INCOME $ 23,977,000 $ 35,802,000 $ 44,353,000
============= ============= ============
3
SOMERSET PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- - - - - ----------------------------------------------------------------------------------------------------------------------------------
Common Stock Treasury Stock Retained Stockholders'
------------------------------ ----------------------------
Shares Amount Shares Amount Earnings Equity
BALANCE, DECEMBER 31, 1994 11,297 $ - 644 $ (452,000) $ 26,099,000 $ 25,647,000
Net income - - - - 44,353,000 44,353,000
Dividends - - - - (36,000,000) (36,000,000)
----------- ---------------- -------------- ------------ ------------- ------------
BALANCE, DECEMBER 31, 1995 11,297 - 644 (452,000) 34,452,000 34,000,000
Net income - - - - 35,802,000 35,802,000
Dividends - - - - (36,000,000) (36,000,000)
----------- ---------------- -------------- ------------- -------------
BALANCE, DECEMBER 31, 1996 11,297 - 644 (452,000) 34,254,000 33,802,000
Net income - - - - 23,977,000 23,977,000
Dividends - - - - (16,000,000) (16,000,000)
----------- ---------------- -------------- ------------- ------------- ------------
BALANCE, DECEMBER 31, 1997 11,297 $ - 644 $ (452,000) $ 42,231,000 $ 41,779,000
=========== ================ ============== ============= ============= ============
See notes to consolidated financial statements.
4
SOMERSET PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- - - - - -----------------------------------------------------------------------------------------------------------------------
1997 1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 23,977,000 $ 35,802,000 $ 44,353,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 952,000 1,048,000 847,000
Deferred tax expense (benefit) (8,000) (736,000) 283,000
Loss on sale of property and equipment 422,000 - -
Deferred revenue - (63,000) (229,000)
Changes in operating assets and liabilities:
Accounts receivable 2,646,000 7,703,000 6,778,000
Inventories 627,000 4,847,000 (1,258,000)
Prepaid expenses and other current assets 2,415,000 (1,438,000) (398,000)
Accounts payable (135,000) (861,000) 1,220,000
Royalty payable (454,000) (3,050,000) (1,174,000)
Accrued marketing costs - - (11,000,000)
Accrued research and development (184,000) 2,657,000 20,000
Other accrued expenses (1,521,000) 2,084,000 (350,000)
Income taxes payable (933,000) 1,642,000 (627,000)
Amounts due to related parties (188,000) (454,000) (243,000)
---------- ---------- ---------
Net cash provided by operating activities 27,616,000 49,181,000 38,222,000
----------- ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in investment securities (14,955,000) (828,000) 3,158,000
Purchases of property and equipment (42,000) (251,000) (1,884,000)
Proceeds from sale of property and equipment 2,000,000 - -
Decrease in other assets 45,000 60,000 290,000
------- ------- -------
Net cash (used in) provided by investing activities (12,952,000) (1,019,000) 1,564,000
------------- ------------ ---------
(Continued)
5
SOMERSET PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- - - - - --------------------------------------------------------------------------------------------------------
1997 1996 1995
CASH FLOWS FROM FINANCING ACTIVITIES -
Dividends paid on common stock $ (16,000,000) $ (36,000,000) $ (36,000,000)
--------------- --------------- --------------
Cash used in financing activities (16,000,000) (36,000,000) (36,000,000)
------------- ------------- ------------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (1,336,000) 12,162,000 3,786,000
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 33,477,000 21,315,000 17,529,000
----------- ----------- ----------
CASH AND CASH EQUIVALENTS,
END OF YEAR $ 32,141,000 $ 33,477,000 $ 21,315,000
============= ============= ============
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION -
Cash paid during the year for income taxes $ 12,092,000 $ 20,409,000 $ 22,074,000
============= ============= ============
See notes to consolidated financial statements.
6
SOMERSET PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
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 Watson
Pharmaceuticals, Inc. ("Watson"), with each owning 50% of the outstanding
common stock of the Company. All significant intercompany accounts and
transactions have been eliminated in consolidation. The Company,
incorporate 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 (at its facility in Puerto Rico),
markets and sells Eldepryl, which is used as a treatment for Parkinson's
Disease. The Company had exclusivity relating to the chemical compound
Eldepryl for use as a treatment for late stage Parkinson's Disease through
June of 1996. In May 1996, the Company received approval from the Food and
Drug Administration for Eldepryl capsules and withdrew the tablet form from
the marketplace. Competitors entered the marketplace with a generic version
of the tablet in August 1996. The loss of exclusivity and the introduction
of competitive products could have a material impact on the Company's
future operating results.
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 required the Company to pay royalties equal to 7% of net
sales of Eldepryl including sub-license revenues. During 1996, the license
agreement was amended to reduce the Eldepryl royalties to 3.5% o net sales
subsequent to May 31, 1996. The Company incurred royalty expense of
approximately $2,716,000, $5,917,000, and $8,473,000 for the years ended
December 31, 1997, 1996 and 1995, respectively. The license agreement also
requires the Company to purchase the main raw material used in the
manufacture of Eldepryl from Chinoin through 1999.
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 and
investments in money market accounts to be cash equivalents.
b. Investment Securities - The Company accounts for investment securities
in accordance with Statement of Financial Accounting Standards
("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." At December 31, 1997 and 1996, the investment
securities were available-for-sale, and there were no material
unrealized gains or losses. Proceeds from sales and maturities of
investments were $44,973,000 and $4,968,000, respectively, in 1997 and
1995 and realized gains or losses were not material. There were no
sales or maturities of investments in 1996. The gain or loss on sale
is based on the specific identification method.
c. Inventories - Inventories are stated at the lower-of-cost or market,
with cost determined on a first-in, first-out basis.
7
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 furniture and fixtures and was
35 years for the building.
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.
g. Concentration of Credit Risk - The Company's product is sold
throughout the United States principally to distributors and
wholesalers in the pharmaceutical industry. The Company performs
ongoing credit evaluation of its customers' financial condition and
generally requires no collateral from its customers.
h. Use of Estimates in the Preparation of Financial Statements - The
preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at
the date of the financial statements, as well as the reported amounts
of income and expenses during the reporting period. Actual results
could differ from those estimates.
i. Reclassifications - Certain reclassifications have been made to the
1996 financial statements to conform to the 1997 presentation.
3. INVENTORIES
Inventories consist of the following at December 31, 1997 and 1996:
1997 1998
Raw material $ 461,000 $ 1,083,000
Work in Process 1,000 373,000
Finished goods 615,000 248,000
---------- -----------
Total 1,077,000 1,704,000
========== ===========
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31, 1997 and 1996:
1997 1996
Land $ - $ 300,000
Building - 2,255,000
Machinery and equipment 1,263,000 4,281,000
Furniture and fixtures 97,000 153,000
------- -------
1,360,000 6,989,000
Less accumulated depreciation 608,000 2,098,000
-------- ---------
Property and equipment - net $ 752,000 $ 4,891,000
========== ===========
8
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, net of related royalty expense payable to Chinoin, included
in other income for the years ended December 31, 1997, 1996 and 1995 was
approximately $261,000, $175,000 and $197,000, respectively.
6. INTANGIBLE ASSETS
Intangible assets primarily represent the cost of a modification to the
terms of the Chinoin Agreement, less accumulated amortization of
$1,639,000, and $1,446,000 at December 31, 1997 and 1996, respectively.
7. CO-PROMOTIONAL AGREEMENT
In 1990, the Company entered into an agreement with Sandoz Pharmaceuticals
Corporation ("Sandoz") to co-promote the product Eldepryl. The agreement
required Sandoz, among other things, to expend, at a minimum, a
predetermined amount for advertising during each year of the agreement. 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 required certain payments to be made to the
Company if a predetermined level of sales was not achieved.
During 1995 the Company entered into an agreement with CoCensys, Inc.
("CoCensys") for the promotion of Elderpryl. The agreement was effective
January 1, 1996 and had an initial term of two years. Under the terms of
the original agreement, the Company would have compensated CoCensys, based
on a predetermined formula that considered both the number of new
prescriptions written and the net sales dollars achieved in each quarter.
During 1996 and 1997, the agreement was modified with respect to term, new
prescriptions and detail calls. During 1997, CoCensys was acquired by
Watson. In January 1998, the Company entered into an agreement to pay
Watson $4.8 million for the promotion and marketing of Elderpryl during
1998.
During 1997, 1996 and 1995, the Company expensed (net of any payments
required to be made to the Company by Sandoz in 1995) $3,800,000,
$1,230,000 and $5,304,000, respectively, pursuant to these agreements.
Additionally, certain co-promotional fees paid by Sandoz at the
commencement of the 1990 agreement were recognized ratably by the Company
during the term of the agreement (six years, expiring on March 31, 1996),
and certain costs associated with the procurement, negotiating and
execution of the agreement by the owners of the Company were incurred by
the Company in approximately the same amount.
8. OTHER INCOME
In November 1994, the Company prevailed in litigation it brought against
foreign defendants who were selling and marketing chemical compounds
similar to Eldepryl without FDA approval. In late 1997, a final judgment
was rendered by the United States Federal District Court. In November 1997,
the Company received and recorded as other income approximately $1,225,000
for settlement of the litigation and reimbursement of related costs.
9
During November 1997, the Company sold its research and development
facility and related equipment with a net book value of approximately
$3,422,000 for $3,000,000. The resulting loss of $422,000 is recorded as a
reduction in other income. The Company financed in the form of a note
$1,000,000 of the sales price. The note receivable is collateralized by the
facility and will be collected in 60 monthly installments bearing interest
at 8%. Current and non-current portions are included with prepaid expenses
and other current assets and other assets, respectively, in the
consolidated balance sheet at December 31, 1997.
9. INCOME TAXES
The income tax provision consists of the following for the years ended
December 31, 1997, 1996 and 1995:
1997 1996 1995
Current tax expense:
Federal $ 10,283,000 $ 15,257,000 $ 15,625,000
State 2,549,000 4,194,000 4,177,000
Foreign 100,000 100,000 115,000
-------- -------- --------
12,932,000 19,551,000 19,917,000
----------- ----------- ----------
Deferred tax expense (benefit):
Federal (7,000) (669,000) 256,000
State (1,000) (67,000) 27,000
------- --------- ------
(8,000) (736,000) 283,000
------- ---------- -------
Total provision for income taxes $ 12,924,000 $ 18,815,000 $ 20,200,000
============ ============ ============
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) at December 31, 1997
and 1996 are as follows:
1997 1996
Deferred tax assets:
Deferred compensation $ 223,000 $ 557,000
Inventory valuation allowance 243,000 230,000
Chargeback and rebate allowances 593,000 216,000
Other 95,000 37,000
------- ------
1,154,000 1,040,000
Deferred tax liabilities - different methods
of accounting between financial and income
tax reporting for amortization 326,000 220,000
Net deferred tax assets $ 828,000 $ 820,000
========== =========
10
The statutory federal income tax rate is reconciled to the effective tax
rate as follows for the years ended December 31, 1997, 1996 and 1995:
1997 1996 1995
Tax at statutory rate 35.0 % 35.0 % 35.0 %
State income tax (net of federal benefit) 3.8 3.6 2.8
Tax credits (7.9) (9.5) (9.4)
Tollgate tax 3.4 4.0 3.9
Other 0.7 1.3 (1.0)
---------- ---------- ---------
Effective tax rate 35.0 % 34.4 % 31.3 %
====== ====== ======
Tax credits result principally from operations in Puerto Rico. See Note 13.
10. RELATED PARTY TRANSACTIONS
The Company incurs expenses for ongoing management services and over a
six-year period (which ended March 31, 1996) for specific services related
to the procurement, negotiation and execution of the original co-promotion
agreement by the owners of the Company. The Company also has other
transactions with one or both of its owners as detailed below for the years
ended December 31, 1997, 1996 and 1995:
1997 1996 1995
Management fees $ 3,348,000 $ 5,076,000 $ 5,370,000
Marketing and advertising 775,000 - -
Research and development 90,000 1,250,000 -
Inventory handling and distribution fees 465,000 519,000 415,000
Rent - equipment and facilities 640,000 1,217,000 1,416,000
11. SIGNIFICANT CUSTOMERS
The Company had sales to certain customers which individually exceeded 10%
of sales. In 1997 sales to five major customers were $15,878,000,
$13,498,000, $11,427,000, $8,658,000 and $7,746,000, respectively. In 1996
sales to three major customers were $23,200,000, $21,259,000 and
$18,692,000, respectively. In 1995 sales to four major customers were of
$23,986,000, $23,467,000, $15,733,000 and $13,111,000, respectively.
12. 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 certain key employees. During 1997, the
Company terminated the deferred compensation plan. During 1997, 1996 and
1995, the Company recorded expense of $-0-, $954,000 and $83,000,
respectively, under these plans. The Company expects to terminate the
defined contribution profit sharing plan during 1998 without significant
impact on 1998 operating results.
12
13. CONTINGENCY
In connection with an examination of the Company's Federal tax returns for
the three years ended December 31, 1995, representatives of the Internal
Revenue Service (the "Service"), in June 1997, issued to the Company a
report that contains proposed adjustments to the Company's use of tax
credits under Internal Revenue Code section 936.
Under the proposed adjustments, the Company could be subject to
approximately $13 million of additional income tax and interest charges
that have not been accrued at December 31, 1997.
Management believes that the Company has met all of the requirements to
qualify for the tax credits available under Internal Revenue Code section
936, and intends to vigorously defend its position on this matter.
* * * * * *
(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, 1998.
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.
Date: June 19, 1998
by /S/ MILAN PUSKAR
Milan Puskar
Chairman, Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/S/ MILAN PUSKAR June 19, 1998 /S/ DANA G. BARNETT June 19, 1998
Milan Puskar Dana G. Barnett
Chairman, Chief Executive Officer and Executive Vice President and Director
President
(Principal executive officer)
/S/ LAURENCE S. DELYNN June 19, 1998 /S/ ROBERT W. SMILEY June 19, 1998
Laurence S. DeLynn Robert W. Smiley
Director Secretary and Director
/S/ PATRICIA A. SUNSERI June 19, 1998 /S/ JOHN C. GAISFORD, M.D. June 19, 1998
Patricia A Sunseri John C. Gaisford, M.D.
Vice President and Director Director
/S/ C.B. TODD June 19, 1998 /S/ DONALD C. SCHILLING
C.B. Todd Donald C. Schilling
Senior Vice President and Director Vice President-Finance
(Principal financial officer)
/S/ FRANK DEGEORGE June 19, 1998
Frank DeGeorge
Director of Corporate Finance
(Principal accounting officer)
EXHIBIT 21
Subsidiaries
Name State of Incorporation
- - - - - ---- ----------------------
Milan Holding, Inc. Delaware
Mylan Inc. Delaware
Mylan Pharmaceuticals Inc. West Virginia
Mylan Caribe Inc. Vermont
Bertek Pharmaceuticals, Inc. Texas
Bertek, Inc. West Virginia
American Triumvirate Insurance Company Vermont
Roderick Corporation Delaware
UDL Laboratories, Inc. Illinois
5
0000069499
Exhibit 27(a)
1,000
12-MOS
MAR-31-1998
MAR-31-1998
103,756
20,967
160,249
23,385
146,041
430,098
226,319
74,907
847,753
71,346
0
0
0
61,525
682,940
847,753
528,601
555,423
288,290
288,290
142,986
0
2,665
148,389
47,612
100,777
0
0
0
100,777
0.83
0.82
5
0000069499
Exhibit 27(b)
1,000
12-MOS 12-mos
MAR-31-1997 Mar-31-1996
MAR-31-1997 Mar-31-1996
126,156 176,980
13,876 12,460
129,934 84,556
14,631 12,559
100,890 100,616
379,020 379,328
197,467 173,445
61,638 51,652
777,580 692,009
78,746 48,595
0 0
0 0
0 0
61,407 61,262
598,333 555,179
777,580 692,009
440,192 392,860
440,192 392,860
259,666 197,697
259,666 197,697
122,581 94,986
0 0
2,927 22
87,195 141,757
24,068 39,432
63,127 102,325
0 0
0 0
0 0
63,127 102,325
0.52 0.86
0.51 0.85
5
0000069499
Exhibit 27(c)
1,000
9-MOS 6-mos 3-mos
MAR-31-1998 Mar-31-1998 Mar-31-1998
Dec-31-1997 Sep-30-1997 Jun-30-1997
115,130 93,062 108,995
18,492 18,774 15,062
125,642 137,666 117,461
17,598 20,131 10,432
135,601 132,458 121,274
398,961 408,361 380,301
217,169 208,662 203,793
71,329 67,972 64,686
814,983 815,759 787,492
66,809 84,110 81,929
36,767 38,929 39,744
0 0 0
0 0 0
61,511 61,467 61,412
654,667 638,007 611,215
814,983 815,759 787,492
365,838 236,321 109,188
392,660 263,143 109,188
207,657 132,580 61,379
207,657 132,580 61,379
104,167 75,036 31,429
0 0 0
2,243 1,508 758
99,453 68,382 22,341
30,482 21,393 5,743
68,971 46,989 16,598
0 0 0
0 0 0
0 0 0
68,971 46,989 16,598
0.57 0.39 0.14
0.56 0.38 0.13
5
0000069499
Exhibit 27(d)
1,000
9-MOS 6-mos 3-mos
MAR-31-1997 Mar-31-1997 Mar-31-1997
Dec-31-1996 Sep-30-1996 Jun-30-1996
154,723 148,979 186,710
12,069 9,985 10,633
108,835 98,059 77,009
11,754 10,506 12,545
97,268 100,422 102,777
380,302 361,735 384,521
193,539 187,668 181,959
60,282 57,360 54,467
780,464 764,888 711,741
74,015 70,523 59,370
0 0 0
0 0 0
0 0 0
61,321 61,295 61,289
589,548 576,517 564,259
780,464 764,888 711,741
321,505 207,524 98,543
321,505 207,524 98,543
186,344 119,615 55,779
186,344 119,615 55,779
91,843 61,502 31,782
0 0 0
433,000 425,000 5,000
68,091 44,213 20,017
18,651 12,854 6,006
49,440 31,359 14,011
0 0 0
0 0 0
0 0 0
49,440 31,359 14,011
0.41 0.26 .12
0.40 0.25 .11
