- ------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
--------------------------------------------------------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OR THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-9114
MYLAN LABORATORIES INC.
(Exact Name of registrant as specified in its charter)
Pennsylvania 25-1211621
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
130 Seventh Street
1030 Century Building
Pittsburgh, Pennsylvania 15222
(Address of principal executive offices) (Zip Code)
412-232-0100
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve 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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date
Outstanding at
Class of Common Stock July 28, 1998
$.50 par value 122,389,664
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MYLAN LABORATORIES INC. AND SUBSIDIARIES
INDEX
Page
Number
--------
PART I. FINANCIAL INFORMATION
ITEM 1: Financial Statements
Consolidated Balance Sheets - June 30, 1998
and March 31, 1998 2A and 2B
Consolidated Statements of Earnings - Three
Months Ended June 30, 1998 and 1997 3
Consolidated Statements of Cash Flows - Three
Months Ended June 30, 1998 and 1997 4
Notes to Consolidated Financial Statements -
Three Months Ended June 30, 1998 5, 6 and 7
ITEM 2: Management's Discussion and Analysis of
Financial Condition and Results of
Operations 8, 9 and 10
PART II. OTHER INFORMATION 11
MYLAN LABORATORIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
June 30, March 31,
1998 1998
Unaudited Audited
Current Assets:
Cash and cash equivalents $139,111,000 $103,756,000
Marketable securities 17,979,000 20,967,000
Accounts receivable - net 137,229,000 136,864,000
Inventories:
Raw materials 66,358,000 63,308,000
Work in process 27,525,000 27,858,000
Finished goods 56,149,000 54,875,000
------------ ------------
150,032,000 146,041,000
Deferred income tax benefit 9,559,000 7,845,000
Prepaid and refundable income tax 7,890,000 7,946,000
Other current assets 6,198,000 6,679,000
------------ ------------
Total Current Assets 467,998,000 430,098,000
Property, Plant and Equipment - at cost 231,749,000 226,319,000
Less accumulated depreciation 78,542,000 74,907,000
------------ ------------
153,207,000 151,412,000
Marketable Securities - non-current 21,131,000 20,974,000
Investment in and Advances to Somerset 31,801,000 29,721,000
Intangible Assets-net of accumulated amortization 126,855,000 128,745,000
Other Assets 89,907,000 86,803,000
------------ ------------
Total Assets $890,899,000 $847,753,000
============ ============
See Notes to Consolidated Financial Statements
-2A-
LIABILITIES AND SHAREH0LDERS' EQUITY
June 30, March 31,
1998 1998
Unaudited Audited
Current Liabilities:
Trade accounts payable $ 18,817,000 $ 15,957,000
Current portion of long-term obligations 9,118,000 8,477,000
Income taxes payable 18,376,000 5,377,000
Other current liabilities 35,069,000 36,635,000
Cash dividend payable 4,907,000 4,900,000
------------ ------------
Total Current Liabilities 86,287,000 71,346,000
Long-Term Obligations 26,417,000 26,218,000
Deferred Income Tax Liability 3,490,000 5,724,000
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 123,216,807 shares at June 30, 1998 and 123,050,172 shares at
March 31,
1998 61,609,000 61,525,000
Additional paid-in capital 94,778,000 92,405,000
Retained earnings 624,134,000 594,847,000
Accumulated other comprehensive income 78,000 1,570,000
------------
780,599,000 750,347,000
Less Treasury stock - at cost, 850,328
shares at June 30, 1998 and 849,858
shares at March 31, 1998 5,894,000 5,882,000
------------ ------------
Net Worth 774,705,000 744,465,000
------------ ------------
Total Liabilities and Shareholders' Equity $890,899,000 $847,753,000
============ ============
See Notes to Consolidated Financial Statements
-2B-
MYLAN LABORATORIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE THREE MONTHS ENDED JUNE 30, 1998 AND 1997
UNAUDITED
1998 1997
---- ----
NET SALES $166,718,000 $109,188,000
COST AND EXPENSES:
Cost of Sales 81,564,000 61,379,000
Research and Development 14,084,000 11,691,000
Selling and Administrative 25,009,000 19,739,000
------------ ------------
120,657,000 92,809,000
EQUITY IN EARNINGS OF SOMERSET 2,350,000 4,136,000
OTHER INCOME 4,034,000 1,826,000
------------ ------------
EARNINGS BEFORE INCOME TAXES 52,445,000 22,341,000
INCOME TAX RATE 35% 26%
INCOME TAXES 18,263,000 5,743,000
------------ ------------
NET EARNINGS $ 34,182,000 $ 16,598,000
============ ============
EARNINGS PER SHARE:
Basic $ .28 $ .14
============ ============
Diluted $ .28 $ .13
============ ============
Weighted Average Common Shares:
Basic 122,295,000 122,065,000
============ ============
Diluted 124,078,000 123,039,000
============ ============
The Company has paid regular quarterly cash dividends of $.04 per share since
October 1995.
See Notes to Consolidated Financial Statements
-3-
MYLAN LABORATORIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED JUNE 30, 1998 AND 1997
UNAUDITED
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net Earnings $ 34,182,000 $ 16,598,000
Adjustments to reconcile net earnings to net
cash provided from operating activities:
Depreciation and amortization 5,528,000 5,146,000
Deferred income taxes (3,145,000) 871,000
Equity in the earnings of Somerset (2,350,000) (4,136,000)
Cash received from Somerset 270,000 4,556,000
Allowances on accounts receivable 1,042,000 (4,199,000)
Other non-cash items (250,000) 1,538,000
Changes in operating assets and liabilities:
Accounts receivable (1,407,000) 12,223,000
Inventories (4,018,000) (20,396,000)
Trade accounts payable 2,860,000 (1,183,000)
Income taxes payable 13,055,000 (6,911,000)
Other operating assets and liabilities (1,084,000) (6,526,000)
------------- -------------
Net cash provided from(used in)operating activities 44,683,000 (2,419,000)
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (5,430,000) (6,327,000)
Increase in intangible and other assets (1,516,000) (4,307,000)
Proceeds from investment securities 6,318,000 3,005,000
Purchase of investment securities (5,782,000) (2,303,000)
------------- -------------
Net cash used in investing activities (6,410,000) (9,932,000)
CASH FLOWS FROM FINANCING ACTIVITIES
Cash dividend paid (4,888,000) (4,882,000)
Payments on long-term obligations (15,000) (8,000)
Proceeds from exercise of stock options 1,985,000 80,000
------------- ------------
Net cash used in financing activities (2,918,000) (4,810,000)
------------- -------------
Net Increase(Decrease) in Cash and Cash Equivalents 35,355,000 (17,161,000)
Cash and Cash Equivalents - Beginning of Period 103,756,000 126,156,000
------------- ------------
Cash and Cash Equivalents - End of Period $139,111,000 $108,995,000
============- ============
CASH PAID DURING THE PERIOD FOR:
Interest $ 4,000 $ 5,000
Income Taxes $ 8,354,000 $ 15,698,000
See Notes to Consolidated Financial Statements
-4-
MYLAN LABORATORIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTH PERIOD ENDED
JUNE 30, 1998
Unaudited
A. In the opinion of management, the accompanying unaudited financial
statements contain all adjustments (consisting of only normal recurring
accruals) necessary to present fairly the financial position of the
Company as of June 30, 1998 and March 31, 1998 together with the results
of operations and cash flows for the interim periods ended June 30, 1998
and 1997. The consolidated results of operations for the three months
ended June 30, 1998 and 1997 are not necessarily indicative of the results
to be expected for the full year.
B. These interim financial statements should be read in conjunction with the
consolidated financial statements and notes thereto in the Company's 1998
Annual Report and Report on Form 10-K.
C. Equity in Earnings of Somerset includes the Company's 50% portion of the
net earnings of Somerset Pharmaceuticals Inc. ("Somerset"), certain
management fees and amortization of intangible assets resulting from the
acquisition of Somerset. Such intangible assets are being amortized over a
15 year period using the straight line method.
Condensed unaudited financial information of Somerset for the three month
periods ended June 30, 1998 and 1997 are as follows: (in thousands)
June 30, June 30,
1998 1997
Net Sales $12,630 $17,273
Costs and Expenses (4,902) (5,247)
Income Taxes (3,175) (4,155)
------- ------
Net Earnings $ 4,553 $ 7,871
======= =======
The above information represents 100% of Somerset's operations of which
the Company has a 50% interest.
D. Under the terms of the Company's supply and distribution agreement with
Genpharm Inc. ("Genpharm") relating to sales of ranitidine HCL tablets
("ranitidine") the Company is to share in any benefit that Genpharm
receives from its agreement with Novopharm Limited ("Novopharm"). The
Company recognized revenue of $26,822,000 in the quarter ended September
30, 1997 in connection with the Genpharm Novopharm arrangement. However,
as a result of a dispute between Genpharm and Novopharm relating to
-5-
MYLAN LABORATORIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTH PERIOD ENDED
JUNE 30, 1998
Unaudited
contract interpretation, the Company has not recognized any additional
revenue. Based upon an independent audit, Genpharm has recently initiated
suit against Novopharm to resolve and collect any additional funds due.
E. As a result of price increases initiated by the Company during the past
six months, the Company has received notification from the Federal Trade
Commission that it is investigating whether the Company and others have
engaged in activities restricting competition in the manufacture or sale
of pharmaceutical ingredients or products. The Company is cooperating
fully with the review and is providing all the information requested by
the Commission. As with all governmental inquiries the process is
inherently uncertain. However, management believes that the Company has
acted properly and in full compliance with the Federal Trade Commission
Act and all other laws and regulations governing trade and competition in
the marketplace, and that the ultimate resolution of this matter will not
have a material adverse effect on the Company's financial position or
results of operations.
F. For the quarter ended June 30, 1998, the Company adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS 130"). SFAS 130 establishes new rules for recording and disclosing
comprehensive income and its components in the financial statements.
Comprehensive income includes all changes in equity except those resulting
from investments by owners and distributions to owners. The Company's
comprehensive income is compromised of net earnings and the unrealized
gain or loss on marketable securities net of tax. The adoption of SFAS
130 had no effect on the Company's consolidated results of operations,
financial position or cash flows. The components of comprehensive income
during the three months ended June 30, 1998 and 1997 were: (in thousands)
Three Months Ended
une 30,
1998 1997
---- ----
Net earnings $34,182 $16,598
Unrealized (loss)gain on
marketable securities, net of tax (1,492) 1,091
Comprehensive Income $32,690 $17,689
======= =======
-6-
MYLAN LABORATORIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTH PERIOD ENDED
JUNE 30, 1998
Unaudited
G. On June 24, 1998 the Company entered into a definitive agreement to
acquire Penederm Inc. of Foster City, California. Penederm develops and
markets patented topical prescription products.
The transaction, which is expected to be completed by November 1998, will
be accounted for under the purchase method of accounting. Payment of
approximately $205,000,000 (based on the closing price of the Company's
common stock on June 23, 1998) will be made through the issuance of newly
registered common stock of the Company. The transaction is subject to
various conditions and regulatory requirements and no assurances can be
given that it will be consummated upon the terms proposed, if at all.
H. 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. Key Pharmaceuticals'
request for a preliminary injunction has been denied. The Company
believes the suit is without merit and intends to vigorously defend its
position.
-7-
PART 1 - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Net earnings for the quarter ended June 30, 1998 were $34,182,000,
representing a 106% increase over the prior year's first quarter. Diluted
earnings per share were $.28 for the quarter ended June 30, 1998 compared to
$.13 for the prior year's first quarter. Net sales increased 53% to $166,718,000
and gross profit dollars increased by 78% to $85,154,000. Gross profit as a
percent of net sales was 51% for the current quarter compared to 44% for the
quarter ended June 30, 1997.
While the improvement from the prior year's first quarter net sales and
gross profit was primarily attributable to the Company's core generic product
line, the branded and unit dose product lines also realized marked growth. Net
sales for Bertek Pharmaceuticals Inc., the Company's branded division, increased
by almost 30% from a year ago and unit dose sales increased by almost 40%.
The most significant improvements came from the Company's core generic
product line as a result of 1) higher overall shipment volumes (1.91 billion
units versus 1.57 billion units for the same period in the prior year), 2)
thirteen product line additions since June 30, 1997, including four new products
additions and the reintroduction of glyburide since March 31, 1998, and 3) the
favorable impact of selective price increases on fourteen products, seven of
which were implemented in the last half of fiscal 1998 and seven more which were
implemented during the June 1998 quarter.
The decision to increase prices was made in light of continued price
deterioration and increased costs involved in bringing new products to market,
primarily resulting from legal challenges under the Hatch-Waxman Act. The
products selected for increase and the amount of the increases were based on
numerous factors including, product line contribution, market size, competition,
raw material suppliers and manufacturing capacity. The Company has chosen to
increase prices in order to ensure the Company's full line of low-cost,
effective, quality generic alternatives continues to be available to the
American public.
While these price increases have favorably impacted earnings in the current
quarter, the extent if any in future quarters depends upon several factors, some
of which are beyond the Company's control. During the quarter ended June 30,
1998, the Company received notice that the Federal Trade Commission (the "FTC"),
in light of the price increases, was investigating whether the Company and
others had engaged in activities restricting competition in the manufacture or
sale of pharmaceutical ingredients or products. The Company is cooperating fully
with this investigation and is supplying the documents requested. Management
believes that the Company has acted properly and in full compliance with the
Federal Trade Commission Act and all other laws and regulations governing trade
and competition in the
-8-
marktetplace. The Company fully intends to (1) assert its positions vigorously
with the FTC, (2) fulfill its contractual obligations under existing supply
agreements for pharmaceutical ingredients, (3) maintain its current pricing
levels for products for which prices have recently been increased, and (4)
continue to examine other products to determine if price increases are
appropriate. The Company believes the ultimate resolution of this matter will
not have a material adverse effect on the Company's financial position or
results of operations.
Research and development expenses were $14,084,000 for the quarter ended
June 30, 1998, which represents a 20% increase over the first quarter of the
prior year. Increased spending was realized in all areas of research:
transdermal, innovative compounds and generic.
The Company is currently in litigation with respect to its previous equity
and funding investments in VivoRx, Inc. ("VI") and VivoRx Diabetes, Inc. ("VDI")
based upon certain improprieties of which the Company was made aware during the
quarter ended June 30, 1998. The Company is continuing to evaluate its options
regarding the future funding of certain diabetes research by VDI pursuant to its
Exclusive License Agreement with VDI.
Selling and administrative expenses were $25,009,000 for the quarter ended
June 30, 1998, which represents a 27% increase over the first quarter of the
prior year. Reflected as a percentage of net sales, these expenses amounted to
15% this quarter and 18% for the quarter ended June 30, 1997. The significant
dollar change from the June 1997 quarter is related primarily to 1) advertising
and promotions including shelf-stocking programs on generic products which began
in the September 1997 quarter, 2) higher legal fees due to patent challenges and
3) payroll and related expenses, principally incentive programs, which are
higher than last year given the improvements in operating results.
Investment and other income was $4,034,000 for the quarter ended June 30,
1998, an increase of $2,208,000 over the prior year's first quarter. The
increase is primarily attributable to the increase in cash and short term
investments and the earnings related to pooled asset funds.
The increase in the effective tax rate to 35% for the quarter ended June
30, 1998 from 26% at June 30, 1997 is primarily attributable to the increase in
domestic earnings versus Puerto Rico earnings. The Company expects the tax rate
to remain relatively unchanged through fiscal 1999.
Liquidity and Capital Resources and Financial Condition
Working capital increased from $358,752,000 at March 31, 1998 to
$381,711,000 at June 30, 1998. The ratio of current assets to current
liabilities was 5.4 to 1 at June 30, 1998 compared to 6.0 to 1 at March 31,
1998.
-9-
Net cash provided from operating activities was $44,683,000 for the three
months ended June 30, 1998 compared to net cash used in operating activities of
$2,419,000 for the three months ended June 30, 1997. This significant change
primarily resulted from improved operating results in the current year period
and the settlement of the Internal Revenue Service audit and the increase in
inventory levels to meet the increase in demand for the Company's products
in the prior year period.
Proposed Penederm Merger
On June 24, 1998, the Company entered into an Agreement and Plan of Merger
(the "Merger Agreement") with Penederm Incorporated ("Penederm") and the
Company's wholly-owned subsidiary, MLI ("MLI"). The Merger Agreement provides
for the merger of MLI into Penederm, with Penederm to survive the merger ("the
Merger") as a wholly-owned subsidiary of the Company. If the Merger is
consummated in accordance with the terms set forth in the Merger Agreement, each
share of common stock of Penederm will be exchanged for 0.68 shares of common
stock of the Company. Based upon the closing market price of the Company's
common stock on June 23, 1998, this transaction is valued at approximately
$205,000,000. It is anticipated that a portion of the purchase price will be
allocated (upon receipt of a final independent valuation) to in-process research
and development and accordingly will result in a charge to earnings upon
consummation of the transaction. The Merger, which is expected to close in the
third quarter, is subject to the satisfaction of various conditions, including,
without limitation, that Penederm's stockholders approve the transaction, that
any required regulatory consents or approvals are received, that the
registration statement for the registration of the Company's shares to be issued
to the Penederm stockholders is declared effective by the Securities and
Exchange Commission and that there are no material adverse changes in the
business or affairs of either party through the closing date.
Forward Looking Statements
The statements set forth in this Item 2 under "Results of Operations"
concerning the manner in which the Company intends to respond to the FTC
investigation and to conduct its operations in the face of this investigation
are forward-looking statements. The Company may be unable to realize the plans
and objectives described therein due to various important factors, including,
but not limited to, the factors described under "Forward Looking Statements" in
Item 7 of the Company's Annual Report on Form 10-K for the year ended March 31,
1998, or if the FTC concludes, on the basis of its investigation, that the
Company has acted improperly.
-10-
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) 2.1 Agreement and Plan of Merger dated June 24, 1998 by and among
the Company, Penederm Incorporated and MLI Acquisition Corp.,
included as Exhibit 2.1 to the Company's Current Report on Form
8-K filed on June 30, 1998 and incorporated herein by reference.
10.1 Stock Option Agreement dated June 24, 1998 between the
Company and Penederm Incorporated, included as Exhibit 99.1 to
the Company's Current Report on Form 8-K filed on June 30, 1998
and incorporated herein by reference.
10.2 Voting Agreement dated June 24, 1998 among the Company,
Gerald and Marcia Weinstein, David Collins, Harvey S. Sadow,
Lloyd Malchow, Robert R. Allnut, William Bergman and Joseph E.
Smith, included as Exhibit 99.2 to the Company's Current Report
on Form 8-K filed on June 30, 1998 and incorporated herein by
reference.
10.3 Alternate Voting Agreement dated June 24, 1998 between the
Company and Prince Venture Partners III L.P., included as Exhibit
99.3 to the Company's Current Report on Form 8-K filed on June
30, 1998 and incorporated herein by reference.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K - On June 30, 1998 the Company filed a report
on Form 8-K dated June 24, 1998 covering Item 5 thereof regarding
the announcement of the acquisition of Penederm Inc.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Mylan Laboratories Inc.
(Registrant)
DATE 7/4/98 /s/ Milan Puskar
----------------- -------------------------------------------
Milan Puskar
Chairman of the Board, Chief
Executive Officer and President
(Principal executive officer)
DATE 8/4/98 /s/ Donald Schilling
----------------- --------------------------------------------
Donald C. Schilling
Vice President of Corporate Finance
(Principal financial officer)
-11-
5
0000069499
none
3-MOS
MAR-31-1999
JUN-30-1998
139,111,000
17,979,000
112,802,000
24,427,000
150,032,000
467,998,000
231,749,000
78,542,000
890,899,000
86,287,000
22,327,000
0
0
61,609,000
78,000
890,899,000
166,718,000
166,718,000
81,564,000
81,564,000
39,093,000
151,000
416,000
52,445,000
18,263,000
34,182,000
0
0
0
34,182,000
.28
.28
