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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
----------------------------------
FORM 10-K
Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934For the Fiscal Year Ended March 31, 2002
Commission File No. 1-9114
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MYLAN LABORATORIES INC. (Exact name of registrant as specified in its charter)
Pennsylvania 25-1211621
(State of Incorporation) (IRS Employer Identification No.)
1030 Century Building
130 Seventh Street
Pittsburgh, Pennsylvania 15222(412) 232-0100
(Address, including zip code, and telephone number,
including area code, of principal executive offices)
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. [ X ]
The number of outstanding shares of Common Stock of the registrant as of
June 10, 2002, was 125,591,429. The aggregate market value of voting stock held
by non-affiliates of the registrant as of June 10, 2002, was $ , based upon the
closing price of the Common Stock on that date, as reported by the New York
Stock Exchange. Shares of Common Stock known to be owned by directors and
executive officers of the registrant subject to Section 16 of the Securities
Exchange Act of 1934 are not included in the computation. No determination has
been made that such persons are "affiliates" within the meaning of Rule 12b-2
under the Exchange Act.
DOCUMENTS INCORPORATED BY REFERENCE
Incorporated by reference into this Report is the Proxy Statement for
the 2002 Annual Meeting of Shareholders, Part III, Items 10-13.
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1
MYLAN LABORATORIES INC.
INDEX TO FORM 10-K
For the Fiscal Year Ended March 31, 2002
Page
PART I ----
ITEM 1. Business ------------------------------------------------------- 3
Overview of Our Business ------------------------------------ 3
Generic Segment --------------------------------------------- 3
Brand Segment ----------------------------------------------- 5
Product Development ----------------------------------------- 6
Generic Product Development --------------------------------- 7
Brand Product Development ----------------------------------- 8
Patents, Trademarks and Licenses----------------------------- 10
Customers and Marketing ------------------------------------- 10
Competition ------------------------------------------------- 11
Product Liability ------------------------------------------- 13
Raw Materials ----------------------------------------------- 13
Government Regulation --------------------------------------- 14
Seasonality ------------------------------------------------- 15
Environment ------------------------------------------------- 16
Employees --------------------------------------------------- 16
Backlog ----------------------------------------------------- 16
ITEM 2. Properties ----------------------------------------------------- 17
ITEM 3. Legal Proceedings ---------------------------------------------- 17
ITEM 4. Submission of Matters to a Vote of Security Holders ------------ 20
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder
Matters ------------------------------------------------------- 21
ITEM 6. Selected Financial Data ---------------------------------------- 22
ITEM 7. Management's Discussion and Analysis of
Results of Operations and Financial Condition ----------------- 23
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk --- 36
ITEM 8. Financial Statements and Supplementary Data -------------------- 38
ITEM 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure -------------------------------------- 64
PART III
ITEM 10. Directors and Executive Officers of the Registrant ------------- 65
ITEM 11. Executive Compensation ----------------------------------------- 65
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholders Matters ------------------------------ 65
ITEM 13. Certain Relationships and Related Transactions ----------------- 65
PART IV
ITEM 14. Financial Statement Schedules, Exhibits and Reports on Form 8-K 65
Signatures --------------------------------------------------------------- 68
2
PART I
ITEM 1. Business
Mylan Laboratories Inc. (the Company or Mylan) is engaged in developing,
licensing, manufacturing, marketing and distributing generic and brand
pharmaceutical products. The Company was incorporated in Pennsylvania in 1970.
References herein to a fiscal year shall mean the fiscal year ended March 31.
Overview of Our Business
We conduct business through our generic (Generic Segment) and brand (Brand
Segment) pharmaceutical operating segments. For fiscal 2002, the Generic Segment
represented approximately 88% of net revenues, and the Brand Segment represented
approximately 12% of net revenues. For fiscal 2001 and 2000, the Generic Segment
represented approximately 80% and 82% of net revenues, and the Brand Segment
represented approximately 20% and 18% of net revenues. The financial information
for our operating segments required by this Item is provided in Note 14 to
Consolidated Financial Statements under Part II, Item 8, of this Report.
Prescription pharmaceutical products in the United States (US) are
generally marketed as either brand or generic drugs. Brand products are marketed
under brand names through programs that are designed to generate physician and
consumer loyalty. Brand products generally are patent protected or benefit from
other non-patent, market exclusivities. This market exclusivity generally
provides brand products with the ability to maintain their profitability for
relatively long periods of time. Brand products generally have a significant
role in the market after the end of patent protection or other market
exclusivities due to physician and customer loyalties.
Generic pharmaceutical products are the chemical and therapeutic equivalent
of a reference brand drug, which is an approved drug product listed in the US
Food and Drug Administration (FDA) publication entitled Approved Drug Products
with Therapeutic Equivalence Evaluations, popularly known as the "Orange Book."
The Drug Price Competition and Patent Term Restoration Act of 1984 (Waxman-Hatch
Act) provides that generic drugs may enter the market after the approval of an
Abbreviated New Drug Application (ANDA) and the expiration, invalidation or
circumvention of any patents on the corresponding brand drug or the end of any
other market exclusivity periods related to the brand drug. Generic drugs are
bioequivalent to their brand name counterparts. Accordingly, generic products
provide a safe, effective and cost-efficient alternative to users of these brand
products. Growth in the generic pharmaceutical industry has been driven by the
increased acceptance of generic drugs as bioequivalent substitutes for brand
name products, as well as the number of brand drugs for which patent terms
and/or other market exclusivities have expired.
Generic Segment
We are recognized as a leader in the generic pharmaceutical industry. The
Generic Segment consists of two principal business units, Mylan Pharmaceuticals
Inc. (Mylan Pharm) and UDL Laboratories, Inc.(UDL), which are wholly-owned
subsidiaries. Mylan Pharm is our primary generic pharmaceutical development,
manufacturing, marketing and distribution division. Mylan Pharm's net revenues
are derived primarily from the sale of solid oral dosage products. UDL packages
and markets generic products, either obtained from Mylan Pharm or purchased from
third parties, in unit dose formats, for use primarily in hospitals and other
institutions. The Generic Segment is augmented by transdermal patch products
3
developed and manufactured by Mylan Technologies Inc.(Mylan Tech), a
wholly-owned subsidiary.
We obtain new products primarily through internal product development.
However, we license or co-develop other products through arrangements with other
companies. Generic products are generally introduced to the marketplace at the
expiration of patent protection for the brand product. The FDA may extend the
period of brand product marketing exclusivity under certain circumstances,
primarily through pediatric exclusivity. New generic product approvals are
obtained from the FDA through the ANDA process. The ANDA process requires us to
demonstrate bioequivalence to a reference brand product. In addition, we must
develop formulations of the reference product that will result in demonstrating,
to the FDA's satisfaction, that our product is bioequivalent to the referenced
product. Even with the uncertainties related to formulation development, the
ANDA process often results in the FDA granting a number of ANDA approvals for a
given product at the time the brand product patent or other market exclusivity
expires. Consequently, we often face a number of competitors when we introduce a
new generic product into the market. Additionally, ANDA approvals often continue
to be granted for a given product subsequent to the initial launch of the
generic product. These circumstances generally result in significantly lower
prices, as well as reduced margins, for generic products compared to brand
products. New generic market entrants generally cause continued price and margin
erosion over the generic product life cycle. In part, our continued growth is
dependent upon our ability to successfully develop or acquire profitable new
generic pharmaceuticals.
The Waxman-Hatch Act provides for a period of 180 days of generic marketing
exclusivity for those ANDA applicants that are first to file an ANDA containing
a certification of invalidity, non-infringement or unenforceability with respect
to the listed patent(s). Such certifications are commonly referred to as
Paragraph IV certifications. The 180-day period of generic market exclusivity
generally results in higher market share, net revenues and gross margin. Generic
manufacturers may also enjoy longer periods of relatively high, stable margins
through the introduction of difficult-to-develop generic pharmaceuticals.
We have attained a position of leadership in the generic industry through
our ability to obtain ANDA approvals, our uncompromising quality control and our
devotion to customer service. We have bolstered our traditional solid oral dose
products with unit dose, transdermal and extended release products. We have
entered into strategic alliances with several pharmaceutical companies through
product development, distribution and licensing agreements that provide us with
additional opportunities to broaden our product line.
We manufacture and market approximately 111 generic pharmaceuticals in
capsule or tablet form in an aggregate of approximately 264 dosage strengths. We
also manufacture and distribute two generic transdermal patch pharmaceutical
products in six dosage strengths. In addition, we are marketing 73 generic
products in 130 dosage strengths under supply and distribution agreements with
other pharmaceutical companies. We have been successful in developing a number
of extended-release products with approximately nine extended-release products
in 19 dosage strengths in our portfolio. In fiscal 2002, Mylan held the first or
second market position in new and refilled prescriptions dispensed among all
pharmaceutical companies in the US with respect to 97 of the 126 generic
pharmaceutical products we marketed, excluding unit-dose products.
Sales of our antianxiety products, primarily buspirone in fiscal 2002,
represented approximately 19%, 4% and 14% of our net revenues in fiscal 2002,
2001 and 2000, respectively. Lorazepam and clorazepate represented a significant
portion of our net revenues in fiscal 2000. Approximately 19%, 26% and 9% of our
4
net revenues in fiscal 2002, 2001 and 2000, respectively, were contributed by
calcium channel blockers, primarily nifedipine in fiscal 2002 and 2001.
We expect that the future growth of our Generic Segment will result from:
(1) increasing generic substitution rates for existing products, (2) emphasizing
the development or acquisition of new products that may attain FDA first-to-file
status, (3) targeting products that are difficult to formulate and (4) pursuing
products for which the active pharmaceutical ingredient is difficult to obtain.
In addition, we intend to continue to seek complementary or strategic
acquisitions.
Brand Segment
The Brand Segment consists of two principal business units, Bertek
Pharmaceuticals Inc. (Bertek) and Mylan Tech, which are wholly-owned
subsidiaries. The Brand Segment operations are conducted primarily through
Bertek. Bertek's principal therapeutic areas of concentration include neurology,
dermatology and cardiology. The Brand Segment includes pharmaceutical products
that have patent protection, have achieved brand recognition in the marketplace
or represent branded generic pharmaceutical products that are responsive to
promotional efforts.
In fiscal 2002, the Brand Segment curtailed its end-of-quarter promotional
programs. As our customers adjusted their buying patterns and inventory levels,
the Brand Segment experienced a decrease in net revenues and gross profits.
Customer orders have subsequently become more consistent and predictable.
We expect that the growth of the Brand Segment will be driven through
internal development of unique and innovative products, product or business
acquisitions, licensing arrangements and our ability to increase prescriptions
for our current products. In late fiscal 2002, the Brand Segment launched
Phenytek(R), an internally developed, once-daily form of extended phenytoin
sodium, used in the treatment of seizure disorders. Phenytek(R) is a unique
product in that it may enhance medication compliance.
Bertek anticipates FDA approval for isotretinoin in fiscal 2003. Obtained
through a licensing agreement, isotretinoin is the generic equivalent of
Accutane(R), which is used in the treatment of severe acne. The significant
marketing barriers surrounding this product will require extensive promotional
efforts and are expected to limit the number of competitors who will enter this
market.
Nebivolol, which we licensed in fiscal 2001, is a beta blocker for which we
intend to pursue a New Drug Application (NDA) for the indication of
hypertension. We believe that we will be able to demonstrate clinically the
unique beta 1-receptor blockade selectivity characteristics of this product,
which could result in providing certain competitive advantages. The nebivolol
compound has patent protection in the US through March 2004, which may be
extended under the terms of the Waxman-Hatch Act. An additional patent
application has been filed that, if approved by the FDA, could further extend
patent protection on this compound. We anticipate expending significant funds to
support the nebivolol clinical development program for hypertension through
fiscal 2004.
The Brand Segment sales force consists of approximately 175 sales
representatives who promote our products to primary care physicians,
dermatologists, neurologists and pharmacists. We expect our sales force to
increase as the Brand Segment introduces new products to its product line.
5
Product Development
Our research and development strategy focuses on the following product
development areas:
o development of controlled-release technologies and the application of
these technologies to reference products;
o development of NDA and ANDA transdermal products;
o development of drugs technically difficult to formulate or manufacture
because of unusual factors that affect their bioequivalence or because
of unusually stringent regulatory requirements;
o development of drugs that target smaller, specialized or under-served
markets;
o expansion of our existing solid oral dosage products with respect to
additional dosage strengths; and
o successful completion of nebivolol clinical trials and the filing of
the related NDA.
Our future results of operations will depend in part upon our ability to
develop and successfully commercialize new brand and generic pharmaceutical
products in a timely manner. These new products must be continually developed,
tested and manufactured. In addition, they must meet regulatory standards and
receive regulatory approvals (see "Government Regulation"). The development and
commercialization process is time-consuming and costly. If products that we
develop cannot be successfully or timely launched, our operating results could
be adversely affected.
FDA approval is required before any drug product, including a generic, can
be marketed. The process of obtaining FDA approval to manufacture and market
pharmaceutical products is rigorous, time-consuming, costly and largely
unpredictable. The rate, timing and cost of obtaining FDA approvals can
adversely affect our product introduction plans and results of operations (see
"Government Regulation").
All applications for FDA approval must contain information relating to
product formulation, raw material suppliers, stability, manufacturing processes,
packaging, labeling and quality control. There are generally two types of
applications used for obtaining FDA approval of new products:
New Drug Application (NDA). An NDA is filed when approval is sought to
market a drug with active ingredients that have not been previously approved by
the FDA. NDAs are filed for our newly developed brand products and, in certain
instances, for a new dosage form of previously approved drugs.
Abbreviated New Drug Application (ANDA). An ANDA is filed when approval is
sought to market a generic equivalent of a drug product previously approved
under an NDA.
6
One requirement for FDA approval of ANDAs and NDAs is that our
manufacturing procedures and operations conform to FDA requirements and
guidelines, generally referred to as current Good Manufacturing Practices
(cGMP). The requirements for FDA approval encompass all aspects of the
production process, including validation and record keeping, and involve
changing and evolving standards. Compliance with cGMP regulations requires
substantial expenditures of time, money and effort in such areas as production
and quality control to ensure full technical compliance. The evolving and
complex nature of these regulatory requirements, the broad authority and
discretion of the FDA and the generally high level of regulatory oversight
result in a continuing possibility that we may be adversely affected by
regulatory actions despite our efforts to comply with regulatory requirements.
Research and development expenses were $58.8 million, $64.4 million and
$49.1 million in fiscal 2002, 2001 and 2000, respectively. Research and
development efforts are conducted primarily to enable us to manufacture and
market FDA-approved pharmaceuticals in accordance with FDA regulations.
Typically, research expenses related to the development of innovative compounds
and the filing of NDAs are significantly greater than those expenses associated
with ANDAs. As the Brand Segment continues to develop brand products, our
research expenses will likely increase.
Generic Product Development
FDA approval of an ANDA is required before marketing a generic equivalent
of a drug approved under an NDA or a previously unapproved dosage strength of a
drug approved under an ANDA. The ANDA approval process is generally less
time-consuming and complex than the NDA approval process. It does not require
new preclinical and clinical studies because it relies on the studies
establishing safety and efficacy conducted for the drug previously approved
through the NDA process. The ANDA process does, however, require one or more
bioequivalency studies to show that the ANDA drug is bioequivalent to the
previously approved drug. Bioequivalence compares the bioavailability of one
drug product with that of another formulation containing the same active
ingredient. When established, bioequivalency confirms that the rate of
absorption and levels of concentration in the bloodstream of a formulation of
the previously approved drug and the generic drug are equivalent.
Bioavailability indicates the rate and extent of absorption and levels of
concentration of a drug product in the bloodstream needed to produce the same
therapeutic effect.
Supplemental ANDAs are required for approval of various types of changes to
an approved application, and these supplements may be under review for six
months or more. In addition, certain types of changes may only be approved once
new bioequivalency studies are conducted or other requirements are satisfied.
During fiscal 2002, Mylan received 18 application approvals, including 11
final ANDA approvals: Famotidine Tablets, Buspirone Tablets, Paclitaxel
Injection, Oxaprozin Tablets, Spironolactone Tablets, Enalapril and
Hydrochlorothiazide Tablets, Diclofenac Sodium Extended-Release Tablets,
Lovastatin Tablets, Metformin Tablets, Fluoxetine Capsules, and Ketoprofen
Extended-Release Capsules; two supplemental ANDAs for Extended Phenytoin Sodium
Capsules USP, 200mg and 300mg and Buspirone Tablets, 5mg and 10mg; three
tentative ANDA approvals: Lisinopril Tablets, Lisinopril and Hydrochlorothiazide
Tablets and Mirtazapine Tablets; one approvable ANDA for Tramadol Tablets and
one amendment for additional strengths for Ciprofloxacin.
7
We have a total of 20 ANDAs pending approval, which represent products with
2001 brand sales of approximately $18.0 billion. Eight of these have approvable
or tentative approvable status, representing $6.7 billion in 2001 brand sales.
Over the next few years, patent protection on a large number of brand drugs
are expected to expire. These patent expirations should provide additional
generic product opportunities. We intend to concentrate our generic product
development activities on brand products with significant US sales in
specialized or growing markets, in areas that offer significant opportunities
and other competitive advantages. In addition, we intend to continue to focus
our development efforts on technically difficult-to-formulate products or
products that require advanced manufacturing technology. When evaluating which
drug development projects to undertake, we also consider whether the product
would complement other products in our portfolio or would otherwise assist in
making our product line more complete. During fiscal 2003, we plan to invest in
a significant number of bioequivalency studies for development of generic
products or dosage forms.
Brand Product Development
The process required by the FDA before a previously unapproved
pharmaceutical product may be marketed in the US generally involves the
following:
o laboratory and preclinical tests;
o submission of an investigational new drug application (IND), which
must become effective before clinical trials may begin;
o adequate and well-controlled human clinical trials to establish the
safety and efficacy of the proposed product for its intended use;
o submission of an NDA containing the results of the clinical trials
establishing the safety and efficacy of the proposed product for its
intended use, as well as extensive data addressing such matters as
manufacturing and quality assurance; and
o FDA approval of an NDA.
Preclinical tests include laboratory evaluation of the product, its
chemistry, formulation and stability, as well as toxicology studies to assess
the potential safety and efficacy of the product. The results of these studies
are submitted to the FDA as part of the IND. They must demonstrate that the
product delivers sufficient quantities of the drug to the bloodstream to produce
the desired therapeutic results before human clinical trials may begin. The IND
automatically becomes effective 30 days after receipt by the FDA unless the FDA,
during that 30-day period, raises concerns or questions about the conduct of the
proposed trials as outlined in the IND. In such cases, the IND sponsor and FDA
must resolve any outstanding concerns before clinical trials may begin. In
addition, an independent institutional review board must review and approve any
clinical study prior to initiation.
8
Human clinical trials are typically conducted in three sequential phases,
which may overlap:
o Phase I: The drug is initially introduced into a relatively small
number of healthy human subjects or patients and is tested for safety,
dosage tolerance, absorption, metabolism, distribution and excretion.
o Phase II: Studies are performed with a limited patient population to
identify possible adverse effects and safety risks, to assess the
efficacy of the product for specific targeted diseases or conditions
and to determine dosage tolerance and optimal dosage.
o Phase III: When Phase II evaluations demonstrate that a dosage range
of the product is effective and has an acceptable safety profile,
Phase III trials are undertaken to evaluate further dosage, clinical
efficacy and to test further for safety in an expanded patient
population at geographically dispersed clinical study sites.
The results of the product development, preclinical studies and clinical
studies are then submitted to the FDA as part of the NDA. The NDA drug
development and approval process could take from 3 to 10 or more years.
Our brand product development continues to emphasize areas where we have an
existing sales and marketing presence, namely dermatology, cardiology and
neurology. Products currently in development and/or pending approval include:
Expected
Submission/Submitted
Compound Indication Phase (fiscal year)
________ __________ _____ _____________
Neurology
Apomorphine "Off" or "Freeze" episodes III 2003
in late stage Parkinson's disease
MT110 Pain management I 2005
Dermatology
Topical Butenafine Gel Onychomycosis (nail fungus) III 2003
Topical High Strength Retinoic Acid Actinic keratosis (pre-cancerous II *
skin lesions)
Sertaconazole Tinea pedis (athlete's foot) 2002
Mentax TC Tinea versicolor (skin fungal 2002
infection)
Cardiology
Nebivolol Hypertension (high blood pressure) III 2004
*To be determined
Additionally, we have in development ANDA products, as well as pending
submissions, that upon FDA approval, may require significant promotional efforts
and, therefore, may be marketed by the Brand Segment.
Product development is inherently risky, especially when the development
relates to new products for which safety and efficacy are not established and
the market is not yet proven. The development process also requires substantial
time, effort and financial resources. We cannot be certain that we will be
successful in commercializing any of the products we are developing on a timely
basis, if at all. We also cannot be certain that any investment made in
developing products will be recovered, even if we are successful in
commercialization.
9
The Company owns a 50% interest in Somerset Pharmaceuticals, Inc.
(Somerset), a joint venture with Watson Pharmaceuticals, Inc. Currently,
Somerset's only marketed product is Eldepryl(R), a drug for the treatment of
Parkinson's disease, which lost its Orphan Drug exclusivity in 1996. In recent
years, Somerset has increased its research and development spending to develop
additional indications for selegiline, the active ingredient of Eldepryl(R),
using a transdermal delivery system. Somerset filed an NDA related to a
selegiline transdermal delivery system for the treatment of depression in May
2001. In March 2002, the FDA issued a not-approvable letter citing certain
deficiencies. Somerset is currently working with the FDA to support further this
submission. Any additional requirements by the FDA will determine when, or if,
this application may be approved.
Patents, Trademarks and Licenses
We own or license a number of patents in the US and foreign countries
covering certain products and have also developed brand names and trademarks for
other products. Generally, the brand pharmaceutical business relies upon patent
protection to ensure market exclusivity for the life of the patent. Following
patent expiration, brand products often continue to have market viability based
upon the goodwill of the product name, which typically benefits from trademark
protection. We consider the overall protection of our patents, trademarks and
license rights to be of material value and act to prevent these rights from
infringement; however, our business in the Brand Segment is not dependent upon
any single patent, trademark or license. Our patents on branded products may not
prevent other companies from developing functionally equivalent products or from
challenging the validity of our patents, which could adversely affect our
ability to commercially promote patented products. We could be required to
enforce our patent or other intellectual property rights through litigation,
which can be protracted, involves significant expense and for which the outcome
is inherently uncertain.
Intellectual property rights also affect our generic pharmaceutical
business. Companies that produce branded pharmaceutical products routinely bring
litigation against ANDA applicants seeking approval to manufacture and market
generic forms of their branded products. These companies allege patent
infringement or other violations of intellectual property rights as the basis
for filing suit against the ANDA applicant. Litigation often involves
significant expense and can delay or prevent introduction of generic products.
Patent validity and infringement litigation may also impact the ANDA process, as
discussed under "Government Regulation" in this Item.
Customers and Marketing
We market our generic products directly to wholesalers, distributors,
retail pharmacy chains, mail order pharmacies and group purchasing organizations
within the US. We also market our generic products indirectly to independent
pharmacies, managed care organizations, hospitals, nursing homes and pharmacy
benefit management companies. These indirect customers purchase our products
primarily through our wholesale customers. Approximately 60 employees are
engaged in servicing Generic Segment customers.
Brand pharmaceutical products are marketed directly to healthcare
professionals in order to increase brand awareness and prescriptions written for
the product. However, these products are generally sold through the same
channels and customers as generic products. Approximately 240 employees are
10
engaged in marketing and selling the Brand Segment's products, as well as
servicing Brand Segment customers.
Consistent with industry practice, we have a return policy that allows our
customers to return product within a specified period of the expiration date. We
provide credit, at our discretion, to our customers for decreases that we make
to our selling price for the value of the inventory that is owned by our
customers as of the date of the price reduction. We also have arrangements with
certain customers establishing prices for our products for which they
independently select a wholesaler from which to purchase. Such parties are
referred to as indirect customers. We provide a chargback credit to our
wholesale customers for the difference between our invoice price to the
wholesaler and the indirect customer's contract price.
McKesson Corporation, Cardinal Health, Inc. and AmerisourceBergen
Corporation represented approximately 15%, 14% and 14% of net revenues in fiscal
2002. Two of our customers represented approximately 14% and 11% of net revenues
in fiscal 2001. Four of our customers accounted for approximately 15%, 15%, 11%,
and 10% of net revenues in fiscal 2000.
Competition
The pharmaceutical industry is very competitive. Our competitors vary
depending upon therapeutic and product categories. Primary competitors include
the major manufacturers of brand name and generic pharmaceuticals, including
Bristol-Myers Squibb Company, Eli Lilly and Company, Geneva Pharmaceuticals,
GlaxoSmithKline, IVAX Corporation, Merck & Co., Inc., Novartis Corporation, Teva
Pharmaceutical Industries, Ltd. and Watson Pharmaceuticals, Inc.
The primary means of competition are innovation and development, timely FDA
approval, manufacturing capabilities, product quality, marketing, customer
service, reputation and price. Price is a key competitive factor in the generic
pharmaceutical business. To compete effectively on the basis of price and remain
profitable, a generic drug manufacturer must manufacture its products in a
cost-effective manner. Additionally, we maintain adequate levels of inventories
to meet customer demand. In addition to generic manufacturers, we also have
experienced competition from brand companies that have purchased generic
companies or license their products prior to or as relevant patents expire. No
further regulatory approvals are required for a brand manufacturer to sell its
pharmaceutical products directly or through a third party to the generic market,
nor do such manufacturers face any other significant barriers to entry into such
market.
Our competitors may be able to develop products and processes competitive
with or superior to our own for many reasons, including that they may have:
o significantly greater financial resources;
o larger research and development and marketing staffs;
o larger production capabilities; or
o extensive experience in preclinical testing and human clinical trials.
The pharmaceutical market is undergoing, and is expected to continue to
undergo, rapid and significant technological changes, and we expect competition
to intensify as technological advances are made. We intend to compete in this
marketplace by developing or licensing brand pharmaceutical products that are
11
either patented or proprietary and that are primarily for indications having
relatively large patient populations or that have limited or inadequate
treatments available and by developing therapeutic equivalents to brand products
that offer unique marketing opportunities. Developments by others could make our
pharmaceutical products or technologies obsolete or noncompetitive.
Net revenues and gross profit derived from generic pharmaceutical products
tend to follow regulatory and competitive patterns unique to the generic
pharmaceutical industry. The first generic manufacturer to file an ANDA
containing Paragraph IV certification for a generic equivalent to a brand
product may be entitled to a 180-day period of marketing exclusivity under the
Waxman-Hatch Act. During this exclusivity period, the FDA cannot grant final
approval to any other generic equivalent. The first generic equivalent on the
market is thus able to initially achieve a relatively significant market share.
As competing generic products receive regulatory approvals, market share, net
revenues and gross profit typically decline. Accordingly, the level of market
share, net revenues and gross profit attributable to generic products developed
and maintained by us is normally related to:
o our ability to maintain a pipeline of products in development;
o our ability to develop and rapidly introduce new products;
o the timing of regulatory approval for such products;
o the number and timing of regulatory approvals for competing products;
and
o our ability to manufacture such products efficiently.
Because of the regulatory and competitive factors discussed above, our net
revenues and results of operations have historically experienced some
fluctuation from period to period. We expect this fluctuation to continue.
Brand companies also pursue other strategies to prevent or delay generic
competition. These strategies include:
o seeking to establish regulatory and legal obstacles that would make it
more difficult to demonstrate bioequivalence;
o initiating legislative efforts in various states to limit the
substitution of generic versions of certain types of brand
pharmaceuticals;
o instituting legal action that automatically delays approval of generic
products, the approval of which requires certifications that the brand
drug's patents are invalid or unenforceable;
o introducing "second generation" products prior to the expiration of
market exclusivity for the reference product;
o obtaining extensions of market exclusivity by conducting trials of
brand drugs in pediatric populations as discussed below;
o persuading the FDA to withdraw the approval of brand name drugs, for
which the patents are about to expire, thus allowing the brand name
company to obtain new patented products serving as substitutes for the
products withdrawn; and
12
o seeking to obtain new patents on drugs for which patent protection is
about to expire.
The Food and Drug Modernization Act of 1997 includes a pediatric
exclusivity provision that may provide an additional six months of market
exclusivity for indications of new or currently marketed drugs if certain agreed
upon pediatric studies are completed by the applicant. Brand companies are
utilizing this provision to extend periods of market exclusivity.
Some companies have lobbied Congress for amendments to the Waxman-Hatch
legislation that would give them additional advantages over generic competitors.
For example, although the term of a company's drug patent can be extended to
reflect a portion of the time an NDA is under regulatory review, some companies
have proposed extending the patent term by a full year for each year spent in
clinical trials, rather than the one-half year that is currently permitted. If
proposals like these become effective, our entry into the market and our ability
to generate revenues associated with these products will be delayed.
A significant amount of the Generic Segment's sales are made to a
relatively small number of drug wholesalers and retail drug chains. These
customers represent an essential part of the distribution chain of generic
pharmaceutical products. Drug wholesalers and retail drug chains have undergone,
and are continuing to undergo, significant consolidation, which has resulted in
customers gaining more purchasing leverage and consequently increasing the
pricing pressures facing our generic pharmaceutical business. Further
consolidation among our customers may result in even greater pricing pressures
and correspondingly reduce our net revenues and gross margins.
Other competitive factors affecting our business include the emergence of
large buying groups representing independent retail pharmacies and the
prevalence and influence of managed care organizations and similar institutions,
which are able to extract price discounts on pharmaceutical products. The
influence of these entities continues to grow, and we may continue to face
pricing pressure on the products we market.
The Brand Segment, in addition to generic competition, faces competition
from other brand pharmaceutical companies that offer products which, while
having different properties, are intended to provide similar benefits to
consumers. These competitors tend to have more products, a longer history in the
industry, more marketing and sales representatives and significantly more
financial resources than Mylan does. Each of these factors and others could
prevent us from achieving profitable results in the Brand Segment.
Product Liability
Product liability suits represent a continuing risk to firms in the
pharmaceutical industry. We strive to minimize such risks by adherence to
stringent quality control procedures. Although we carry insurance, we believe
that no reasonable amount of insurance can fully protect against all such risks
because of the potential liability inherent in the business of producing
pharmaceuticals for human consumption.
Raw Materials
The active pharmaceutical ingredients and other materials and supplies used
in our pharmaceutical manufacturing operations are generally available and
purchased from many different foreign and domestic suppliers. However, in some
13
cases, the raw materials used to manufacture pharmaceutical products are only
available from a single FDA-approved supplier. Even when more than one supplier
exists, we may elect to list, and in some cases have only listed, one supplier
in our applications with the FDA. Any change in a supplier not previously
approved must then be submitted through a formal approval process with the FDA.
Government Regulation
All pharmaceutical manufacturers are subject to extensive, complex and
evolving regulation by the federal government, principally the FDA, and to a
lesser extent, state government agencies. The Federal Food, Drug and Cosmetic
Act, the Controlled Substances Act, the Waxman-Hatch Act, the Generic Drug
Enforcement Act and other federal government statutes and regulations govern or
influence the testing, manufacturing, packaging, labeling, storing, record
keeping, safety, approval, advertising, promotion, sale and distribution of
products.
FDA approval is required before any new drug can be marketed. The FDA
requires extensive testing of new pharmaceutical products to demonstrate that
such products are both safe and effective in treating the indications for which
approval is sought. Testing in humans may not be commenced until after an IND
exemption is granted by the FDA. An NDA or supplemental NDA must be submitted to
the FDA both for new drugs that have not been previously approved by the FDA and
for new combinations of, new indications of or new delivery methods for
previously approved drugs.
FDA approval of an ANDA is required before a generic equivalent of an
existing or reference brand drug can be marketed. The ANDA process is
abbreviated in that the FDA waives the requirement of conducting complete
preclinical and clinical studies and, instead, relies on bioequivalence studies.
Bioavailability indicates the rate and extent of absorption and levels of
concentration of a drug product in the bloodstream needed to produce the same
therapeutic effect.
A sponsor of an NDA is required to identify in its application any patent
that claims the drug or a use of the drug, which is the subject of the
application. Upon NDA approval, the FDA lists the approved drug product and
these patents in the Orange Book. Any applicant who files an ANDA seeking
approval of a generic equivalent version of a reference brand drug before
expiration of the referenced patent(s) must certify to the FDA that the listed
patent is either not infringed or that it is invalid or unenforceable (a
Paragraph IV certification). If the holder of the NDA sues claiming
infringement, the FDA may not approve the application until a court decision
favorable to the ANDA applicant has been rendered or the expiration of a
30-month period beginning on the date the ANDA applicant is sued for
infringement.
The holder of the NDA for the listed drug may be entitled to a non-patent,
exclusivity period before the FDA can approve an application for a bioequivalent
product. If the listed drug is a new chemical entity, the FDA may not accept an
ANDA for a bioequivalent product before the expiration of five years. If it is
not a new chemical entity but the holder of the NDA conducted clinical trials
essential to approval of the NDA or a supplement thereto, the FDA may not
approve an ANDA for a bioequivalent product before the expiration of three
years. Certain other periods of exclusivity may be available if the listed drug
is indicated for treatment of a rare disease or is studied for pediatric
indications.
14
Facilities, procedures, operations and/or testing of products are subject
to periodic inspection by the FDA, the Drug Enforcement Administration and other
authorities. In addition, the FDA conducts pre-approval and post-approval
reviews and plant inspections to determine whether our systems and processes are
in compliance with cGMP and other FDA regulations. Among other things, the FDA
may withhold approval of NDAs, ANDAs or other product applications of a facility
if deficiencies are found at that facility. Certain suppliers are subject to
similar regulations and periodic inspections.
Failure to comply with FDA and other governmental regulations can result in
fines, unanticipated compliance expenditures, recall or seizure of products,
total or partial suspension of production and/or distribution, suspension of the
FDA's review of NDAs, ANDAs or other product applications, enforcement actions,
injunctions and criminal prosecution. Under certain circumstances, the FDA also
has the authority to revoke previously granted drug approvals. Although we have
internal compliance programs and have had a favorable compliance history, if
these programs were not to meet regulatory agency standards in the future or if
our compliance were deemed deficient in any significant way, it could have a
material adverse effect.
Medicaid, Medicare and other reimbursement legislation or programs govern
reimbursement levels and require all pharmaceutical manufacturers to rebate a
percentage of their revenues arising from Medicaid-reimbursed drug sales to
individual states. The required rebate is currently 11% of the average
manufacturer's price for sales of Medicaid-reimbursed products marketed under
ANDAs. Sales of Medicaid-reimbursed products marketed under NDAs require
manufacturers to rebate the greater of approximately 15% of the average
manufacturer's price or the difference between the average net sales price and
the lowest net sales price during a specific period. We believe that federal or
state governments may continue to enact measures aimed at reducing the cost of
drugs to the public. For example, the extension of prescription drug coverage to
all Medicare recipients has gained significant political support. We cannot
predict the nature of any measures that may be enacted or their impact on our
profitability.
We must also comply with federal, state and local laws of general
applicability, such as laws regulating working conditions. Additionally, we are
subject, as are generally all manufacturers, to various federal, state and local
environmental protection laws and regulations, including those governing the
discharge of materials into the environment. We do not expect the costs of
complying with such environmental provisions to have a material adverse effect
on our earnings, cash requirements or competitive position in the foreseeable
future. However, if changes to such environmental provisions are made that
require significant changes in our operations or the expenditure of significant
funds, such changes could have a material adverse effect on our earnings, cash
requirements or competitive position.
Continuing studies of the proper utilization, safety and efficacy of
pharmaceutical products are being conducted by the industry, government agencies
and others. Such studies, which increasingly employ sophisticated methods and
techniques, can call into question the utilization, safety and efficacy of
previously marketed products. In some cases, these studies have resulted, and
may in the future result, in the discontinuance of product marketing.
Seasonality
Our business is not materially affected by seasonal factors.
15
Environment
We believe that our operations comply in all material respects with
applicable laws and regulations concerning the environment. While it is
impossible to predict accurately the future costs associated with environmental
compliance and potential remediation activities, compliance with environmental
laws is not expected to require significant capital expenditures and has not
had, and is not expected to have, a material adverse effect on our earnings or
competitive position.
Employees
We employ approximately 2,200 persons, approximately 1,150 of whom serve in
clerical, sales and management capacities. The remaining are engaged in
production and maintenance activities.
The production and maintenance employees at our manufacturing facility in
Morgantown, West Virginia, are represented by the Paper, Allied-Industrial
Chemical and Energy Workers International Union (P.A.C.E.)-AFL-CIO and its Local
Union 5-957-AFL-CIO under a contract that expires on April 15, 2007.
Backlog
At March 31, 2002, open orders were approximately $43.9 million as compared
to $22.1 million at March 31, 2001, and $28.2 million at March 31, 2000. Because
of the relatively short lead time required in filling orders for our products,
we do not believe these backlog amounts bear a significant relationship to sales
or income for any full 12-month period.
16
ITEM 2. Properties
We maintain various facilities in the US and Puerto Rico. These facilities
are used for research and development, manufacturing, warehousing, distribution
and administrative functions and consist of both owned and leased properties.
The following summarizes the properties used to conduct our operations:
Primary Segment Location Status Primary Use
--------------- -------- ------ -----------
Generic: North Carolina Own Distribution
Warehousing
West Virginia Own Manufacturing
Warehousing
Research and
Development
Administrative
Illinois Own Manufacturing
Warehousing
Administrative
Lease Warehousing
Puerto Rico Own Manufacturing
Warehousing
Administrative
Brand: North Carolina Lease Administrative
Texas Own Manufacturing
Warehousing
Vermont Own Manufacturing
Research and
Development
Administrative
Lease Warehousing
Corporate/Other: Pennsylvania Lease Administrative
All facilities are in good operating condition. The machinery and equipment
are well maintained, and the facilities are suitable for their intended purposes
and have capacities adequate for current operations.
ITEM 3. Legal Proceedings
Product Litigation
While it is not possible to determine with any degree of certainty the
ultimate outcome of the following legal proceedings, we believe that we have
meritorious defenses with respect to the claims asserted against the Company,
and we intend to defend vigorously our position. An adverse outcome in any one
of these proceedings could have a material adverse effect on our financial
position and results of operations.
17
Paclitaxel
In June 2001, NAPRO Biotherapeutics Inc. (NAPRO) and Abbott Laboratories
Inc. (Abbott) filed suit against the Company in the US District Court for the
Western District of Pennsylvania. Plaintiffs allege the Company's manufacture,
use and sale of its paclitaxel product infringes certain patents owned by NAPRO
and allegedly licensed to Abbott. The Company began selling its paclitaxel
product in July 2001. Abbott's ANDA seeking approval to sell paclitaxel has been
approved.
Verapamil ER
In July 2001, Biovail Laboratories Inc. (Biovail) filed a demand for
arbitration against the Company with the American Arbitration Association. In
response to such demand, the Company filed its answer and counterclaims. The
dispute relates to a supply agreement under which the Company supplied
extended-release verapamil to Biovail. The Company terminated the agreement in
March 2001. Biovail's allegations include breach of contract, breach of implied
covenant of good faith and fair dealing and unfair competition. The Company's
allegations as set forth in its counterclaims include breach of obligations of
good faith and fair dealing, fraud and unjust enrichment. The arbitration
hearing is scheduled to be held in September 2002.
Zagam(R)
The Company filed suit against Aventis Pharmaceuticals, Inc., successor in
interest to Rhone-Poulenc Rorer Pharmaceuticals, Inc.; Rhone-Poulenc Rorer
Pharmaceuticals, LTD.; Rorer Pharmaceutical Products, Inc.; Rhone-Poulenc Rorer,
S.A., and their affiliates in the US Federal District Court for the Western
District of Pennsylvania in May 2001. The complaint sets forth claims of breach
of contract, rescission, breach of implied covenant of good faith and fair
dealing and unjust enrichment. The defendant's answer includes a counterclaim,
which alleges nonpayment of royalties and failure to mitigate.
Nifedipine
In February 2001, Biovail filed suit against the Company and Pfizer Inc.
(Pfizer) in the US District Court for the Eastern District of Virginia alleging
antitrust violations with respect to agreements entered into between the Company
and Pfizer regarding nifedipine. The Company filed a motion to transfer the case
to the US District Court for the Northern District of West Virginia, which was
granted. The Company's motion to dismiss Biovail's complaint was denied, and the
Company's motion to dismiss certain claims by other plaintiffs was granted in
part and denied in part.
The Company has been named as a defendant in five other putative class
action suits alleging antitrust claims based on the settlement entered into by
the Company with Bayer AG, Bayer Corporation and Pfizer regarding nifedipine.
Buspirone
The Company filed an ANDA seeking approval to market buspirone, a generic
equivalent to Bristol-Myers Squibb's (BMS) BuSpar(R). The Company filed the
appropriate certifications relating to the patents for this product that were
then listed in the FDA publication entitled Approved Drug Products with
Therapeutic Equivalence Evaluations, popularly known as the "Orange Book." In
November 2000, a new patent claiming the administration of a metabolite of
buspirone (which BMS claims also covers the administration of buspirone itself)
18
was issued to BMS. The subsequent listing of this patent in the Orange Book
prevented the FDA from granting final approval for the Company's buspirone ANDA.
In November 2000, the Company filed suit against the FDA and BMS in the US
District Court for the District of Columbia. The complaint asked the court to
order the FDA to grant immediately final approval of the Company's ANDA for the
15mg buspirone product and require BMS to request withdrawal of the patent from
the Orange Book. Upon the Company's posting a bond in the amount of $25 million,
the court entered an order granting the Company's motion for a preliminary
injunction. Following a brief stay by the US Court of Appeals for the Federal
Circuit, the FDA granted approval of the Company's ANDA with respect to the 15mg
strength. Upon receiving FDA approval, the Company began marketing and selling
the 15mg tablet in March 2001. The Company has also been selling the 30mg
buspirone tablet since August 2001. BMS appealed the preliminary injunction
order to both the US Court of Appeals for the Federal Circuit and the US Court
of Appeals for the District of Columbia Circuit. The District of Columbia Court
of Appeals denied BMS' application and stayed the Company's motion to dismiss
pending the decision of the Federal Circuit Court of Appeals. The Federal
Circuit heard oral arguments in July 2001.
In October 2001, the Federal Circuit overturned the lower court ruling and
held that the Company did not have a cognizable claim against BMS under the
Declaratory Judgment Act to challenge the listing of BMS' patent, which the
Federal Circuit viewed as an improper effort to enforce the Federal Food, Drug
and Cosmetic Act. The Federal Circuit did not address the lower court's
determination that the BMS patent does not claim buspirone or a method of
administration of the drug. The Company filed a petition with the Federal
Circuit asking that the court reconsider its holding. The petition was denied in
January 2002. A petition for review by the United States Supreme Court is
pending.
In January 2002, the Company filed a motion in the US District Court for
the District of Columbia seeking a preliminary injunction which, if granted,
would require that the FDA refuse to list the BMS patent should BMS submit it
for re-listing in the Orange Book. The District of Columbia Court has entered an
order staying further proceedings in this case pending appeal of the order
entered in the US District Court for the Southern District of New York granting
the Company's motion for summary judgment of non-infringement.
The Company is involved in three other suits related to buspirone. In
November 2000, the Company filed suit against BMS in the US District Court for
the Northern District of West Virginia. The suit seeks a declaratory judgment of
non-infringement and/or invalidity of the BMS patent listed in November 2000. In
January 2001, BMS sued the Company for patent infringement in the US District
Court for the District of Vermont and also in the US District Court for the
Southern District of New York. In each of these cases, BMS asserts that the
Company infringes BMS' patent and seeks to rescind approval of the Company's
ANDA. It is expected that BMS will seek to recover damages equal to the profits
it has lost as a result of the Company's sales of this product.
The Company subsequently filed motions to dismiss the Vermont case and
dismiss and transfer the New York case to the US District Court for the Northern
District of West Virginia. The Judicial Panel on Multi-District Litigation
ordered these cases, along with another patent case and numerous antitrust suits
filed against BMS, be consolidated in the US District Court for the Southern
District of New York. The New York Court has granted the Company's motion for
summary judgment that the BMS patent is not infringed or, alternatively, is
invalid. BMS has appealed this decision to the Court of Appeals for the Federal
Circuit. The New York Court also denied the BMS motion to dismiss the Company's
antitrust counterclaims.
19
Lorazepam and Clorazepate
In December 1998, the Federal Trade Commission (FTC) filed suit in US
District Court for the District of Columbia against the Company. The FTC's
complaint alleged that the Company engaged in restraint of trade,
monopolization, attempted monopolization and conspiracy to monopolize arising
out of certain agreements involving the supply of raw materials used to
manufacture two products, lorazepam and clorazepate.
In July 2000, the Company reached a tentative agreement to settle the
actions brought by the FTC, the States Attorneys General and suits brought by or
on behalf of third party reimbursers. The Company agreed to pay up to $147
million, including attorneys' fees. This tentative settlement became final in
February 2002. Included in this settlement were three companies indemnified by
the Company - Cambrex Corporation, Profarmaco S.r.I. and Gyma Laboratories, Inc.
Lawsuits not included in this settlement principally involve alleged direct
purchasers, such as wholesalers and distributors. In July 2001, the United
States Court for the District of Columbia certified a litigation class
consisting of these direct purchasers. The Company filed a petition with the
United States Court of Appeals for the District of Columbia Circuit seeking
appellate review of the district court's order. The appellate court denied the
Company's appeal of the lower court's class certification order. In addition,
four third party reimbursers opted-out of the class action settlement and have
filed separate, non-class actions against the Company. The Company has filed
motions to dismiss those claims.
Other Litigation
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 other proceedings, it is the opinion of management that
the ultimate outcome of such other proceedings will not have a material adverse
effect on our results of operations or financial position.
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
20
PART II
ITEM 5. Market for Registrant's Common Equity and
Related Stockholder Matters
Our common stock is traded on the New York Stock Exchange under the
symbol MYL. The following table sets forth the quarterly high and low common
share price information for the periods indicated:
Fiscal 2002 High Low
----------- ---- ----
First quarter.........................................$31.81 $24.02
Second quarter........................................ 35.65 28.30
Third quarter......................................... 37.91 31.35
Fourth quarter........................................ 36.20 29.46
Fiscal 2001
-----------
First quarter.........................................$32.25 $17.00
Second quarter........................................ 27.94 18.06
Third quarter......................................... 30.00 22.50
Fourth quarter........................................ 25.85 21.00
As of April 30, 2002, there were approximately 99,021 holders of common
stock, including those who held in street or nominee name.
We have paid dividends since April 1992. For both fiscal 2002 and 2001, we
paid quarterly cash dividends of $.04 per common share. We expect to continue
the practice of paying regular cash dividends.
21
ITEM 6. Selected Financial Data
The selected consolidated financial data set forth below should be read
in conjunction with "Management's Discussion and Analysis of Results of
Operations and Financial Condition," the Consolidated Financial Statements and
the Notes to Consolidated Financial Statements included elsewhere in this
report.
(in thousands, except per share data)
Fiscal year ended March 31, 2002 2001 2000 1999 1998
Statements of Earnings: ---- ---- ---- ---- ----
Net revenues $ 1,104,050 $ 846,696 $ 790,145 $ 721,123 $ 555,423
Cost of sales 480,111 464,521 369,377 339,342 288,290
----------- ----------- ----------- ----------- -----------
Gross profit 623,939 382,175 420,768 381,781 267,133
Operating expenses:
Research and development 58,847 64,385 49,121 61,843 46,278
Selling and administrative 169,913 151,212 148,688 122,468 96,708
Acquired in-process research
and development -- -- -- 29,000 --
Litigation settlement -- 147,000 -- -- --
----------- ----------- ----------- ----------- -----------
Earnings from operations 395,179 19,578 222,959 168,470 124,147
Equity in (loss) earnings of Somerset (4,719) (1,477) (4,193) 5,482 10,282
Other income, net 17,863 39,912 23,977 18,342 13,960
----------- ----------- ----------- ----------- -----------
Earnings before income taxes 408,323 58,013 242,743 192,294 148,389
Provision for income taxes 148,072 20,885 88,497 76,885 47,612
Net earnings =========== =========== =========== =========== ===========
$ 260,251 $ 37,128 $ 154,246 $ 115,409 $ 100,777
At Fiscal Year End
Selected balance sheet data:
Total assets $ 1,616,710 $ 1,469,312 $ 1,342,470 $ 1,207,252 $ 847,748
Working capital 886,935 588,037 598,976 475,398 379,726
Long-term obligations 21,854 23,345 30,630 26,827 26,218
Total shareholders' equity 1,402,239 1,132,536 1,203,722 1,059,905 744,465
Per common share data:
Net earnings
Basic $ 2.07 $ 0.30 $ 1.19 $ 0.92 $ 0.83
Diluted $ 2.04 $ 0.29 $ 1.18 $ 0.91 $ 0.82
Shareholders' equity - diluted $ 11.01 $ 8.94 $ 9.24 $ 8.34 $ 6.05
Cash dividends declared and paid $ $ 0.16 $ 0.16 $ 0.16 $ 0.16 $ 0.16
Weighted average common shares outstanding:
Basic 125,525 125,788 129,220 125,584 122,094
Diluted 127,368 126,749 130,224 127,156 123,043
In July 2000, we reached a tentative settlement with the Federal Trade
Commission, States Attorneys General and certain private parties with
regard to lawsuits filed against the Company relating to pricing issues and
raw material contracts on two products. Excluding the litigation settlement
of $147,000, net earnings for fiscal 2001 were $131,208, or $1.04 per
diluted share. This settlement was approved by the court and made final in
February 2002 (see Note 17 to Consolidated Financial Statements).
In June 2000, we completed the Stock Repurchase Program authorized and
announced by the Board of Directors in April 1997. In fiscal 2001, we
purchased 4,855 shares for $91,456.
In October 1998, we acquired 100% of the common stock of Penederm Inc. The
above financial data reflects Penederm's results of operations from the
date of acquisition.
In fiscal 1998, net revenues include $26,822 relating to a supply agreement
with Genpharm Inc.
22
ITEM 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition
The following discussion and analysis should be read in conjunction with
the fiscal 2002 Consolidated Financial Statements and related Notes to
Consolidated Financial Statements included elsewhere in this report. All
references to fiscal years shall mean the 12-month period ended March 31.
Overview
Mylan Laboratories Inc. and its subsidiaries (the Company or Mylan)
develop, manufacture, market and distribute generic and brand pharmaceutical
products. Fiscal 2002 was the most financially successful year in Mylan's
history. Net revenues exceeded the $1.0 billion mark reaching $1.1 billion
compared to $846.7 million in fiscal 2001. This revenue growth was driven by the
Generic Segment, which represented 88% of total net revenues for fiscal 2002.
The Generic Segment's growth in net revenues, as well as gross profit and
operating income, was primarily driven by the marketing exclusivity for
buspirone, the introduction of new products and a relatively stable pricing
environment for the core generic products. The US Food and Drug Administration
(FDA) withheld competitor approvals for buspirone 15mg until late February 2002.
This delay extended Mylan's original 180-day marketing exclusivity by
approximately five months, which resulted in increased net revenues and gross
profits. With the approval and launch of additional buspirone products, the
Company experienced substantial price erosion by the end of fiscal 2002. Price
and volume erosion are considered normal in the generic industry as competitors
launch their products.
During fiscal 2002, the Generic Segment's net revenues were also enhanced
by certain changes in the competitive environment, which resulted in relatively
stable pricing for the core generic products. These changes, such as the
consolidation in both customer and competitor bases, the withdrawal from the
market of a competitor and the manufacturing and supply issues experienced by
certain competitors, along with Mylan's ability to consistently manufacture and
supply quality products, made a substantial contribution to the Generic
Segment's net revenue growth.
The Brand Segment's product line consists of both brand and branded generic
products which are sensitive to promotional efforts. Mylan continues its efforts
to build upon this platform of products through internal development,
in-licensing agreements and/or acquisitions. With the addition of executive
management and the consolidation of non-manufacturing operations to Research
Triangle Park complete, Mylan remains committed to the implementation and
execution of its brand strategic plan.
23
The following table presents the results of operations for each of our
business segments:
FISCAL CHANGE
--------------------------------------------- -----------------------
(in thousands) 2002 2001 2000 2002/2001 2001/2000
---- ---- ---- --------- ---------
Consolidated:
Net revenues $ 1,104,050 $ 846,696 $ 790,145 30% 7%
Gross profit 623,939 382,175 420,768 63% (9%)
Research and development 58,847 64,385 49,121 (9%) 31%
Selling and marketing 59,913 59,238 56,854 1% 4%
General and administrative 110,000 91,974 91,834 20% 0%
Pretax earnings 408,323 58,013 242,743 604% (76%)
Generic Segment:
Net revenues 971,075 675,118 650,890 44% 4%
Gross profit 552,736 273,111 332,222 102% (18%)
Research and development 33,814 47,204 39,255 (28%) 20%
Selling and marketing 12,430 14,342 18,753 (13%) (24%)
General and administrative 23,424 24,450 26,111 (4%) (6%)
Segment profit 483,068 187,115 248,103 158% (25%)
Brand Segment:
Net revenues 132,975 171,578 139,255 (22%) 23%
Gross profit 71,203 109,064 88,546 (35%) 23%
Research and development 25,033 17,181 9,866 46% 74%
Selling and marketing 47,483 44,896 38,101 6% 18%
General and administrative 14,899 20,841 11,814 (29%) 76%
Segment (loss) profit (16,212) 26,146 28,765 (162%) (9%)
Corporate/Other Segment:
Segment loss (58,533) 155,248 (34,125) 62% (355%)
Segment net revenues represent revenues from unrelated third parties. For
the Generic and Brand Segments, segment profit represents segment gross
profit less direct research and development, selling and marketing and
general and administrative expenses. Segment loss for Corporate/Other
includes legal costs, goodwill amortization, other corporate administrative
expenses and other income and expense.
Effective April 1, 2001, the Brand Segment assumed responsibility for the
sales and marketing of EX phenytoin 100mg, which were previously included
and evaluated in the operating results of the Generic Segment. Accordingly,
the operating results of the Brand Segment for fiscal 2001 and 2000 have
been revised to include the net revenues of $26,317 and $16,917 and the
corresponding costs of sales of $5,247 and $3,782 for EX phenytoin 100mg
previously included in the Generic Segment.
In fiscal 2001, Corporate/Other includes the expense of $147,000 for the
settlement with the Federal Trade Commission and related litigation (see
Note 17 to Consolidated Financial Statements).
Results of Operations
The following discussion excludes the $147.0 million before tax effect of
the Federal Trade Commission (FTC) settlement recognized in fiscal 2001 (see
Note 17 to Consolidated Financial Statements). Excluding the impact of the FTC
settlement, net earnings for fiscal 2001 were $131.2 million, or $1.04 per
diluted share. Including the FTC settlement, net earnings were $37.1 million, or
$.29 per diluted share.
24
Fiscal 2002 compared to Fiscal 2001
Financial Highlights
o Net revenues increased 30% or $257.4 million to $1.1 billion from
$846.7 million.
o Gross profit increased 63% or $241.7 million to $623.9 million from
$382.2 million.
o Gross margin increased to 57% from 45%.
o Operating income increased 137% or $228.6 million to $395.2 million
from $166.6 million.
o Net earnings increased 98% or $129.1 million to $260.3 million from
$131.2 million.
o Earnings per diluted share increased 96% to $2.04 per share from $1.04
per share.
Net Revenues and Gross Profit
Net revenues for fiscal 2002 were $1.1 billion compared to $846.7 million
for fiscal 2001, an increase of 30% or $257.4 million. This increase in net
revenues is attributed to increased net revenues for the Generic Segment of
$296.0 million, which was partially offset by a decrease in net revenues for the
Brand Segment of $38.6 million.
Generic Segment net revenues for the current year increased 44% to $971.1
million from $675.1 million for fiscal 2001. This increase is primarily
attributed to sales of our buspirone products, as well as the launch of new
products (excluding buspirone 5mg, 10mg and 30mg) in fiscal 2002. The buspirone
products contributed net revenues of $167.7 million or 57% of fiscal 2002's
growth, while new products contributed net revenues of $69.7 million or 24% of
fiscal 2002's growth. The remaining increase is attributed to the growth of core
generic products of $77.8 million, which was partially offset by lost revenues
of $19.2 million due to the sale of the liquids facility in Florida. The growth
of core generic products is partially attributed to the elimination of
end-of-quarter promotional programs in the prior year.
The 180-day market exclusivity period, as provided by the Waxman-Hatch Act,
for buspirone 15mg expired in late September 2001. However, the FDA withheld
additional approvals for generics until late February 2002. Generic Segment net
revenues in fiscal 2002 benefited significantly from the extended exclusivity
period. Since other generic pharmaceutical companies entered the buspirone
market, the Generic Segment has experienced substantial pricing and volume
pressures. See Note 17 to Consolidated Financial Statements regarding litigation
of certain issues relating to our buspirone Abbreviated New Drug Application
(ANDA).
Because of the significant uncertainties surrounding when the FDA would
approve additional buspirone 15mg ANDAs, we could not reasonably estimate the
amount of potential price adjustments that would occur as a result of the
additional approvals. For the quarterly periods ended September 2001 and
December 2001, revenues on certain shipments were deferred until such
25
uncertainties were resolved. Such uncertainties were resolved either upon our
customers' sale of this product or when the FDA approved additional generics in
late February 2002. For the quarterly period ended March 2002, we were able to
estimate potential price adjustments on the remaining deferred shipments and,
therefore, recognized revenue related to such shipments.
Brand Segment net revenues for fiscal 2002 decreased 22% to $133.0 million
from $171.6 million for the prior year. This decrease is primarily attributed to
the decision to discontinue end-of-quarter promotional programs in an effort to
normalize our customer buying patterns and more effectively manage our business.
Given the upward trends in the prescription activity of the Brand Segment's
product line, Brand Segment net revenues for fiscal 2003 are anticipated to
reflect a similar trend.
Gross profit for fiscal 2002 was $623.9 million, or 57% of net revenues,
compared to $382.2 million, or 45% of net revenues, for fiscal 2001. This
increase of 63% or $241.7 million is attributed to increased gross profit for
our Generic Segment of $279.6 million, primarily contributed by buspirone and
new products, which was partially offset by decreased gross profit for our Brand
Segment of $37.9 million.
Research and Development
Research and development expenses for fiscal 2002 were $58.8 million, or 5%
of net revenues, compared to $64.4 million, or 8% of net revenues, in fiscal
2001, a decrease of 9% or $5.6 million. This decrease is largely due to the
timing of projects currently in development by our Generic Segment, as well as a
decrease in in-licensing milestones compared to the prior year.
The Brand Segment is currently incurring significant research and
development expenses related to nebivolol, a hypertension treatment product. As
the clinical development program for nebivolol progresses, we anticipate that
the Brand Segment research and development expenses will continue to increase.
Additionally, potential milestone payments related to this product may
significantly increase Brand Segment research and development expenses in future
periods.
We are actively pursuing, and are involved in, joint development projects
in an effort to broaden our scope of capabilities to market both generic and
brand products. Many of these arrangements provide for payments by us upon the
attainment of specified milestones. While these arrangements help to reduce our
financial risk for unsuccessful projects, fulfillment of milestones or the
occurrence of other obligations may result in fluctuations in research and
development expenses.
Selling and Marketing
Selling and marketing expenses for fiscal 2002 were $59.9 million, or 5% of
net revenues, relatively unchanged compared to $59.2 million, or 7% of net
revenues, in fiscal 2001.
General and Administrative
General and administrative expenses were $110.0 million, or 10% of net
revenues, for fiscal 2002, compared to $92.0 million, or 11% of net revenues,
for fiscal 2001. This increase is attributed to an increase in Corporate general
and administrative expenses of $25.0 million, partially offset by a decrease of
$5.9 million in the Brand Segment general and administrative expenses.
26
Corporate general and administrative expenses for fiscal 2002 were $71.7
million compared to $46.7 million in fiscal 2001. This increase is largely due
to increases in expenses relating to retirement benefits for executives and
management employees of $10.6 million, as well as the expense associated with
the funding of a charitable foundation of $5.0 million. As a result of certain
one-time expenses in fiscal 2002, we anticipate general and administrative
expenses for the Corporate/Other Segment to be lower in fiscal 2003.
Brand general and administrative expenses for fiscal 2002 were $14.9
million compared to $20.8 million in fiscal 2001. This decrease is largely due
to fiscal 2001 including a $7.8 million impairment charge for the intangible
assets associated with our brand product Zagam(R), partially offset by increased
relocation expenses as our Brand Segment completed its move to Research Triangle
Park, North Carolina.
Other Income, Net
Other income, net of other expenses, was $17.9 million in fiscal 2002
compared to $39.9 million in fiscal 2001. This decrease of $22.0 million is
primarily attributed to fiscal 2001 including a $9.2 million favorable
litigation settlement and a $4.4 million gain from the sale of certain
intangible assets. Also contributing to this decrease, investment income from
our limited liability partnership investments decreased $6.8 million in fiscal
2002 compared to income recognized in fiscal 2001. In fiscal 2002 and 2001, we
liquidated $9.5 million and $52.2 million in our investment in a certain limited
liability partnership. In an effort to limit our exposure to market risk, we
intend to continue to liquidate this investment.
Equity in Loss of Somerset
We own a 50% equity interest in Somerset Pharmaceuticals, Inc. (Somerset)
and account for this investment using the equity method of accounting. The
recorded loss in Somerset for fiscal 2002 was $4.7 million compared to a loss of
$1.5 million in fiscal 2001. This $3.2 million increase in loss is primarily
attributed to decreased sales, which were partially offset by reduced operating
expenses, and the prior year loss being reduced by a recapture of income tax
expenses as a result of a favorable Internal Revenue Service (IRS) audit.
Somerset is engaged in the manufacturing and marketing of Eldepryl(R)
(selegiline), its sole commercial product, which is used for the treatment of
Parkinson's disease. Somerset continues to conduct research and development
activities related to new indications and delivery technologies for selegiline
and other products. As Somerset continues these research and development
activities, earnings may continue to be adversely affected.
Income Taxes
The effective tax rate for fiscal 2002 was 36.3% compared to 36.0% for
fiscal 2001. This increase in the effective tax rate was due to increased
domestic taxable income partially offset by favorable increases in certain tax
credits.
For fiscal 2003, we expect the tax rate to decrease slightly due to the
favorable impact Statement of Financial Accounting Standards (SFAS) No. 142,
Goodwill and Other Intangible Assets, will have on tax related purchase
accounting adjustments.
27
Fiscal 2001 compared to Fiscal 2000
Financial Highlights
o Net revenues increased 7% or $56.6 million to $846.7 million from
$790.1 million.
o Gross profit decreased 9% or $38.6 million to $382.2 million from
$420.8 million.
o Gross margin decreased to 45% from 53%.
o Operating income decreased 25% or $56.4 million to $166.6 million from
$223.0 million.
o Net earnings decreased 15% or $23.0 million to $131.2 million from
$154.2 million.
o Earnings per diluted share decreased 12% to $1.04 per share from $1.18
per share.
Net Revenues and Gross Profit
Net revenues for fiscal 2001 were $846.7 million compared to $790.1 million
for fiscal 2000, an increase of $56.6 million. This 7% increase in net revenues
is attributable to increased net revenues for both the Generic and Brand
Segments, with 43% or $24.2 million of the growth from the Generic Segment and
57% or $32.4 million of the increase contributed by the Brand Segment.
Fiscal 2001 Generic Segment net revenues benefited from the addition of
eight new products to the generic product line that resulted in an aggregate net
revenue increase of $22.9 million. Nifedipine, launched in late fiscal 2000
through a license and supply agreement, increased net revenues by $136.3 million
in fiscal 2001 as compared to fiscal 2000. Additional net revenue increases were
derived from sales of carbidopa/levodopa, which increased by $36.9 million as
compared to the prior year. The net revenue increase provided from these and
other products was partially offset by reduced prices and volumes related to
sales of lorazepam and clorazepate, which declined $82.7 million as compared to
fiscal 2000. Other products for which we had increased prices in prior years had
price and volume erosion that totaled $27.6 million in fiscal 2001 compared to
fiscal 2000.
Brand Segment net revenues increased largely due to the result of increases
from clozapine, Kristalose(R), Digitek(R), Avita(R) and Mentax(R) as compared to
fiscal 2000. No individual product represented a significant portion of the net
revenue increase. These increases in net revenues were partially offset by a
$6.0 million decrease in Zagam(R) sales due to product supply issues resulting
from our contract supplier, as well as decreases in various nonpromoted brand
products, including the wound and burn care product line. The Zagam(R) supply
issues impaired our ability to market this product. Consequently, related
inventories were reduced to net realizable value and the related product license
intangible was written off.
Gross profit for fiscal 2001 was $382.2 million, or 45% of net revenues,
compared to $420.8 million, or 53% of net revenues, for fiscal 2000, a $38.6
28
million or 9% decrease. Generic Segment gross profit decreased largely due to
both price and volume erosion on lorazepam and clorazepate, as well as decreases
related to other products that also had price increases in prior years. These
decreases, coupled with the lower gross profit resulting from contractual
obligations associated with nifedipine, resulted in a lower overall generic
gross profit in fiscal 2001. Brand Segment gross profit was also lower due to
the absence of Zagam(R) sales, a $2.4 million write-down of Zagam(R) inventories
and an overall change in product sales mix.
Research and Development
Research and development expenses for fiscal 2001 were $64.4 million, or 8%
of net revenues, compared to $49.1 million, or 6% of net revenues in fiscal
2000. The increase of $15.3 million is primarily attributed to increased studies
expenses for both generic and brand product development projects, as well as
increased licensing expenses associated with joint development opportunities.
Generic Segment research and development expenses increased $7.9 million to
$47.2 million in fiscal 2001 compared to fiscal 2000. The increase was primarily
due to milestone payments for in-licensed products and increased expenses due to
biostudies and raw materials, as well as payroll and payroll related expenses.
Brand Segment research and development expenses were $17.2 million in
fiscal 2001, an increase of $7.3 million as compared to fiscal 2000. The
increase was due largely to additional clinical trial expenses and milestone
payments under product licensing arrangements. In the latter part of fiscal
2001, we obtained the rights to develop and, upon FDA approval, to market
nebivolol in the US and Canada.
Selling and Marketing
Selling and marketing expenses for fiscal 2001 were $59.2 million, or 7% of
net revenues, relatively unchanged compared to $56.9 million, or 7% of net
revenues, in fiscal 2000.
Generic Segment selling and marketing expenses were $14.3 million in fiscal
2001, which represented a $4.4 million decrease from the prior year. The
decrease was primarily due to lower promotions and advertising expenses.
Brand Segment selling and marketing expenses increased $6.8 million to
$44.9 million in fiscal 2001 compared to fiscal 2000. This increase was
primarily due to increased payroll and payroll related expenses, product sample
expenses and expenses associated with the consolidation of the Brand Segment
non-manufacturing operations.
General and Administrative
General and administrative expenses for fiscal 2001 were $92.0 million, or
11% of net revenues, relatively unchanged from $91.8 million, or 12% of net
revenues, in fiscal 2000.
Generic Segment general and administrative expenses were $24.5 million in
fiscal 2001, compared to $26.1 million in fiscal 2000. The decrease was
primarily due to lower professional service fees.
Brand Segment general and administrative expenses increased $9.0 million to
$20.8 million in fiscal 2001 from $11.8 million in fiscal 2000. The increase was
largely the result of a $7.8 million write-off of the Zagam(R) product license
intangible.
29
Corporate administrative expenses for fiscal 2001 were $46.7 million
compared to $53.9 million for fiscal 2000, a decrease of $7.2 million. Lower
legal expenses accounted for the majority of the decrease.
Litigation Settlement
In July 2000, a settlement was reached with the FTC, States Attorneys
General and certain private parties with regard to lawsuits filed against the
Company relating to pricing issues and raw material contracts on two products.
As a result, a litigation settlement charge of $147.0 million was recognized.
This settlement was approved by the court and made final in February 2002 (see
Note 17 to Consolidated Financial Statements).
Equity in Loss of Somerset
In fiscal 2001, equity in the loss of Somerset was $1.5 million compared to
a loss of $4.2 million in fiscal 2000. The decrease in fiscal 2001 is primarily
attributable to decreased research and development expenses and the favorable
outcome of an IRS audit.
Other Income, Net
Other income for fiscal 2001 was $39.9 million compared to $24.0 million
for fiscal 2000. The $15.9 million increase is primarily attributed to gains of
$9.2 million and $4.4 million related to a litigation settlement and the sale of
certain intangible assets. Other income recognized in fiscal 2001 also included
income from our investment in a certain limited liability partnership of $14.9
million as compared to $15.4 million in fiscal 2000.
Income Taxes
The effective tax rate for fiscal 2001 was 36.0%, relatively unchanged from
36.5% for fiscal 2000.
Liquidity and Capital Resources
Cash provided from operations continues to be the primary source of funds
to operate and expand our business. This is reflected in cash flows from
operations that reached $346.5 million during fiscal 2002. Our business relies
on new product approvals to generate significant future cash flows. An inability
to introduce new products to the marketplace could cause a decline in operating
cash flows.
As a result of our cash flows from operations during fiscal 2002, working
capital increased $298.9 million to $886.9 million from $588.0 million in fiscal
2001. We believe that our working capital and cash provided by operating
activities are sufficient to meet operating needs. Of the $1.6 billion in total
assets, 38% or $617.1 million is held in cash, cash equivalents and marketable
securities. The table below summarizes cash and cash equivalents and marketable
securities at March 31, 2002 and 2001:
(in thousands) 2002 2001
---- ----
Cash and cash equivalents $ 160,790 $ 229,183
Marketable securities 456,266 55,715
----------- -----------
$ 617,056 $ 284,898
=========== ===========
30
Investments in marketable securities are primarily high quality government
and commercial paper that generally mature within one year. These investments
are highly liquid and available for operating needs. Upon maturity, they are
generally reinvested in instruments with similar characteristics.
In fiscal 2001, a deposit of $135.0 million was placed into escrow and a
liability of $147.0 million was recorded as a result of a tentative settlement
of the FTC litigation. With the final court approval in February 2002, the
amount held in escrow and the liability were relieved from the consolidated
balance sheet. Final payments representing attorneys' fees of $8.0 million and
$4.0 million were made in March 2002 and May 2002 (see Note 17 to Consolidated
Financial Statements).
In May 2002, the Board of Directors (Board) approved a Stock Repurchase
Program that authorized the purchase of up to 10,000,000 shares of the Company's
outstanding common stock. Such purchases could have a material effect on cash,
cash equivalents and marketable securities. Through May 29, 2002, 1,000,000
shares of common stock have been purchased for $29.0 million. In fiscal 2001,
4,855,100 shares of common stock were purchased for $91.5 million under a
program approved by the Board in April 1997.
In fiscal 2002, payments of $8.1 million were made on long-term
obligations. However, to provide additional operating leverage if necessary, a
commercial bank has extended a revolving line of credit of up to $50.0 million
(see Note 8 to Consolidated Financial Statements). As of March 31, 2002, no
funds have been advanced under this line of credit. Additionally, the
acquisition of new products, as well as other companies, will play a strategic
role in our growth. Consequently, such acquisitions may require additional
indebtedness which would impact future liquidity.
Capital expenditures during fiscal 2002 were $20.6 million compared to
$24.7 million during fiscal 2001. These expenditures in the current year were
primarily made to acquire machinery and equipment for our production facilities.
Fiscal 2001 payments were made to expand the manufacturing facility in Puerto
Rico and finalize the construction of a sales and administration building in
Morgantown, West Virginia. Also, during the quarter ended December 31, 2001, we
completed the sale of our liquid pharmaceutical manufacturing facility and
warehouse in Largo, Florida. In fiscal 2003, capital expenditures, primarily for
the expansion of our manufacturing capacity, are anticipated to approximate
amounts expended in previous years.
A limited liability partnership investment is being liquidated in an effort
to reduce market risk. In fiscal 2002 and 2001, $9.5 million and $52.2 million
were liquidated. This liquidation is expected to continue.
The Company continues to pay quarterly cash dividends of $.04 per common
share. Dividend payments totaled $20.2 million during fiscal 2002 and $20.1
million during fiscal 2001. In fiscal 2002, we received $20.9 million from the
exercise of stock options issued through our stock option plans compared to $5.7
million in fiscal 2001.
Payments for state and federal income taxes increased to $152.1 million
during fiscal 2002 compared to $20.1 million for fiscal 2001. Payments during
fiscal 2001 were lower as a result of lower taxable income resulting from the
FTC settlement.
The Company is involved in various legal proceedings (see Note 17 to
Consolidated Financial Statements). While it is not feasible to predict the
31
outcome of such proceedings, an adverse outcome in any of these proceedings
could materially affect our cash flows.
Critical Accounting Policies
Our significant accounting policies are described in Note 2 to Consolidated
Financial Statements, which were prepared in accordance with accounting
principles generally accepted in the United States. Included within these
policies are our "critical accounting policies." Critical accounting policies
are those policies that are most important to the preparation of our
consolidated financial statements and require management's subjective and
complex judgments due to the need to make estimates about the effect of matters
that are inherently uncertain. The Company's critical accounting policies are
the determination of revenue provisions, useful lives and impairment of
intangibles and the impact of existing legal matters. These critical accounting
policies affect each of the operating segments. The application of these
accounting policies involves the exercise of judgment and the use of assumptions
as to future uncertainties and, as a result, actual results could differ
materially from these estimates. We are currently not aware of any reasonably
likely event or circumstance which would result in different amounts being
reported that would have a material impact on our results of operations or
financial condition.
The development and selection of these critical accounting policies have
been discussed with the Audit Committee. Such policies are reviewed quarterly by
the Audit Committee.
Revenue Provisions
Revenue is recognized for product sales upon shipment when title and risk
of loss has transferred to the customer and when provisions for estimates,
including discounts, rebates, price adjustments, returns, chargebacks,
promotional and other potential adjustments are reasonably determinable.
Accruals for these provisions are presented in the consolidated financial
statements as reductions to net revenues and accounts receivable and within
other current liabilities. Accounts receivable are presented net of allowances
relating to these provisions, which were $221.3 million and $132.4 million at
March 31, 2002 and 2001. Other current accrued liabilities include approximately
$21.6 million and $13.1 million at March 31, 2002 and 2001, for certain rebates
and other adjustments that are paid to indirect customers.
Provisions for estimated discounts, returns, rebates, promotional and other
credits require a limited degree of subjectivity and are simple in nature, yet
combined represent a significant portion of the provisions. These provisions are
estimated based on historical payment experience, historical relationship to
revenues, estimated customer inventory levels and contract terms. Such
provisions are determinable due to the limited number of assumptions and
consistency of historical experience.
The provisions for chargebacks are the most significant and complex
estimates used in the recognition of revenue. The Company is a party to
arrangements with other parties establishing prices for products for which they
independently select a wholesaler from which to purchase. Such parties are
referred to as indirect customers. A chargeback represents the difference
between our invoice price to the wholesaler and the indirect customer's contract
price. Provisions for estimating chargebacks are calculated primarily using
historical chargeback experience and estimated wholesaler inventory levels. We
continually monitor our assumptions giving consideration to wholesaler buying
patterns and current pricing trends and make adjustments to these provisions
when we believe that the actual chargeback credits will differ from the
estimated provisions.
32
Useful Lives and Impairment of Intangibles
As of March 31, 2002 and 2001, recorded goodwill, net of accumulated
amortization, was $100.9 million and $107.3 million. Goodwill is reviewed for
impairment when events or other changes in circumstances may indicate that the
carrying amount of the goodwill may not be recoverable. Goodwill associated with
the Brand Segment was reviewed in fiscal 2002. Impairment is determined when the
undiscounted future cash flows, based on estimated sales volumes, pricing and
the anticipated cost environment, are less than the carrying value of the
goodwill. The carrying value of the goodwill reviewed was not impaired. If these
projections do not properly reflect future activity, results of operations could
be negatively impacted.
As of March 31, 2002 and 2001, recorded intangible assets, excluding
goodwill, net of accumulated amortization, were $171.6 million and $187.1
million. Other intangible assets consist of product rights purchased from other
companies, product rights acquired through acquisition and internally developed
patents and technologies. Amortization periods for these assets were established
based on estimates of the periods the assets would generate revenue, not to
exceed 20 years. Intangible assets are reviewed for impairment when the carrying
amount of an asset may not be recoverable. Certain product rights associated
with the Brand Segment were reviewed for impairment in fiscal 2002. Impairment
is determined when the undiscounted cash flow value, based on estimated sales
volume, anticipated pricing and estimated product costs, is less than the
carrying value of the intangible asset. The carrying values of the product
rights reviewed were not impaired. If these projections do not properly reflect
future activity, results of operations could be negatively impacted.
Legal Matters
The Company is involved in various legal proceedings, some of which involve
claims for substantial amounts. An accrual for a loss contingency relating to
any of these legal proceedings is made if it is probable that a liability was
incurred at the date of the financial statements and the amount of loss can be
reasonably estimated. After review, it was determined, at March 31, 2002, that
for each of the various legal proceedings in which we are involved, the
conditions mentioned above were not met. However, if any of these legal
proceedings would result in an adverse outcome for the Company, the impact could
have a material adverse effect on our financial position and results of
operations.
Recent Accounting Pronouncements
In April 2001, we adopted Statement of Financial Accounting Standards
(SFAS) No. 133, as amended, Accounting for Derivative Instruments and Hedging
Activities, issued by the Financial Accounting Standards Board (FASB) in June
1998. SFAS No. 133 requires an entity to recognize all derivative instruments as
either assets or liabilities on the balance sheet at fair value and those
changes in fair value to be recognized currently in earnings, unless specific
hedge accounting criteria are met. The adoption of SFAS No. 133 had no material
impact on our results of operations or financial position.
In June 2001, the FASB issued SFAS No. 141, Business Combinations,
effective for fiscal years beginning after December 15, 2001. SFAS No. 141
requires that all business combinations initiated after June 30, 2001, be
accounted for using the purchase method of accounting. We adopted the provisions
of SFAS No. 141 as of July 1, 2001, and, accordingly, all future business
33
combinations consummated by us must be recorded at fair value using the purchase
method of accounting.
In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets, effective for fiscal years beginning after December 15, 2001. SFAS No.
142 provides that goodwill and intangible assets with indefinite lives will no
longer be amortized, but will be subject to at least annual impairment tests.
Intangible assets with finite lives will continue to be amortized over their
useful lives. Furthermore, SFAS No. 142 requires that the useful lives of
intangible assets acquired before June 30, 2001, be reassessed and the remaining
amortization periods adjusted accordingly.
We are required to adopt the provisions of SFAS No. 142 effective April 1,
2002, and are in the process of preparing for its adoption. This process
includes evaluating the useful lives of assets, making determinations as to what
reporting units are and what amounts of goodwill, intangible assets, other
assets and liabilities should be allocated to those reporting units. We will no
longer record approximately $6.4 million in annual amortization of goodwill.
Until the above process, including the required initial impairment evaluation,
is complete, we are unable to determine any further impact SFAS No. 142 will
have on our consolidated financial position and results of operations.
The FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations.
This statement establishes standards for accounting for obligations associated
with the retirement of tangible long-lived assets. This statement is effective
for us on April 1, 2003. We are currently evaluating the impact, if any, this
statement will have on our financial position and results of operations.
SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, was issued by the FASB in August 2001. This statement addresses
financial accounting and reporting for the impairment and disposal of long-lived
assets. For long-lived assets to be held and used, the new rules continue
previous guidance to recognize impairment when the undiscounted future cash
flows do not exceed the asset's carrying amount. The impairment to be recognized
will continue to be measured as the difference between the carrying amount and
fair value of the asset. The computation of fair value now removes goodwill from
consideration. Assets that are to be disposed of by sale are required to be
evaluated using the same measurement approach as those assets to be held and
used. Additionally, assets qualifying for discontinued operations treatment have
been expanded beyond the former operating segment approach. We will now
recognize impairment of long-lived assets to be disposed by other than sale at
the date of disposal, but will consider such assets to be held and used until
that time. This statement is effective for us as of April 1, 2002, and we
believe that the adoption of SFAS No. 144 will not have a material impact on our
financial position and results of operations.
Emerging Issues Task Force (EITF) Issue No. 00-25, Vendor Income Statement
Characterization of Consideration Paid to a Reseller of the Vendor's Products,
became effective for us as of January 1, 2002. It states that consideration paid
by a vendor to a reseller is to be classified as a reduction of revenue in the
income statement unless an identifiable benefit is or will be received from the
reseller that is sufficiently separable from the purchase of the vendor's
products and the vendor can reasonably estimate the fair value of the benefit.
We have adopted the provisions of EITF Issue No. 00-25, and it had no material
effect on our financial statements.
EITF Issue No. 01-09, Accounting for Consideration Given to a Customer or a
Reseller of a Vendor's Products, reconciles EITF Issue No. 00-14, Issue No. 3 of
EITF Issue No. 00-22 and EITF Issue No. 00-25. EITF Issue No. 01-09 became
34
effective for us as of January 1, 2002, and it had no material effect on our
financial statements.
Fluctuating Results of Operations and Liquidity
In the past, results of operations have fluctuated on both an annual and a
quarterly basis. These fluctuations have resulted from several timing factors,
including, among others, new product approvals, new product launches, as well as
those of our competitors, product and business acquisitions, in-house research
and development projects, milestone payments related to in-licensing of research
and development projects and litigation settlements.
We believe we will continue to experience fluctuations in net revenues,
gross profit, net earnings and liquidity. Such fluctuations will result from,
among other things, the timing of regulatory approvals and market introduction
of our new products, as well as those of our competitors, downward pricing
pressure on products available from multiple approved sources and the timing of
milestone payments related to in-licensing of research and development projects.
Risk of Product Liability Claims
The testing, manufacturing and marketing of pharmaceutical products subject
the Company to the risk of product liability claims. The Company is a defendant
in a number of product liability cases, none of which we believe will have a
material adverse effect on our business, results of operations or financial
condition. We believe that we maintain an adequate amount of product liability
insurance, but no assurance can be given that our insurance will cover all
existing and future claims or that we will be able to maintain existing coverage
or obtain additional coverage at reasonable rates.
Forward-Looking Statements
The statements set forth in this Annual Report concerning the manner in
which we intend to conduct our future operations, potential trends that may
impact future results of operations, and our beliefs or expectations about
future operations are forward-looking statements. The following statements that
we make in this Annual Report, in other filings made with the SEC, in press
releases, on our website, or in other contexts (including statements made by our
authorized representatives, either orally or in writing), are or may constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995:
(i) any statement regarding possible or assumed future results of
operations of our business, the markets for our products, anticipated
expenditures, regulatory developments or competition;
(ii) any statement preceded by, followed by or that includes the words
"intends," "estimates," "believes," "expects," "anticipates,"
"should," "could," or the negative or other variations of these or
other similar expressions; and
(iii) other statements regarding matters that are not historical facts.
Because such statements are subject to risks and uncertainties, actual
results may differ materially from those expressed or implied by such
forward-looking statements. Factors that could cause actual results to differ
materially include, but are not limited to:
35
o uncertainties regarding our ability to successfully develop and
introduce new products on a timely basis in relation to competing
product introductions;
o our ability to obtain required FDA approvals for new products on a
timely basis;
o the affects of vigorous competition on commercial acceptance of our
products and their pricing;
o uncertainties regarding continued market acceptance of and demand for
our core products;
o potential legislative or regulatory changes affecting the
pharmaceutical industry;
o uncertainties associated with the licensing of products developed by
others and the successful integration of acquired businesses;
o our periodic dependence on one or a few products as a significant
source of our revenues;
o the periodic expiration of patent or regulatory market exclusivity on
some of our products;
o the effects of consolidation of our customer base;
o uncertainties regarding patent and other intellectual property
protection of our proprietary products;
o the cost and management time associated with litigation involving
patent or other intellectual property protection of competing
products;
o our exposure to product liability and other lawsuits and contingencies
associated with our products;
o our ability to attract and retain key personnel; and
o changes in accounting and related standards promulgated by the
accounting profession or regulatory agencies.
The cautionary statements contained or referred to above should be
considered in connection with any subsequent written or oral forward-looking
statements that may be made by us or by persons acting on our behalf. We
undertake no duty to update these forward-looking statements, even though our
situation may change in the future.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company is subject to market risk primarily from changes in the
market values on investments in marketable debt and equity securities, including
marketable securities owned indirectly through pooled asset funds that are
classified as other assets on our balance sheet. Additional investments are made
in overnight deposits, money market funds and marketable securities with
maturities of less than three months. These instruments are classified as cash
equivalents for financial reporting purposes and have minimal or no interest
rate risk due to their short-term nature. Professional portfolio managers manage
36
the majority of our investments. We also invest in nonpublic securities that are
classified as other assets on our balance sheet and do not consider these
investments to be market risk sensitive.
The following table summarizes the investments which subject the
Company to market risk at March 31, 2002 and 2001:
(in thousands) 2002 2001
-------- --------
Marketable debt securities $435,499 $ 46,019
Marketable equity securities 20,767 9,696
Pooled asset funds 26,144 29,065
-------- --------
$482,410 $ 84,780
======== ========
Marketable Debt Securities
The primary objectives for the marketable debt securities investment
portfolio are liquidity and safety of principal. Investments are made to achieve
the highest rate of return while retaining principal. The investment policy
limits investments to certain types of instruments issued by institutions and
government agencies with investment grade credit ratings. These investments
increased significantly during fiscal 2002 due to cash flows generated from
operations. Of the $435.5 million invested in marketable debt securities at
March 31, 2002, $417.1 million will mature within one year. This short duration
to maturity creates minimal exposure to fluctuations in market values for these
investments. A significant change in current interest rates could affect the
market value of the remaining $18.4 million of marketable debt securities that
mature after one year. A 5% change in the market value of the marketable debt
securities that mature after one year would result in a $0.9 million change in
our balance of marketable debt securities.
Marketable Equity Securities
Marketable equity securities are primarily managed by professional
portfolio managers whose investment objective is to increase fund value through
purchasing undervalued common stocks and holding these securities for a period
of time. These portfolio managers are continually evaluating the portfolio to
ensure that it meets our investment objectives. As of March 31, 2002, a 10%
change in the market value of these investments would result in a $2.1 million
change in marketable equity securities.
Pooled Asset Funds
Pooled asset funds consist of investments in limited liability
partnerships. The assets of these funds are typically actively traded and are
exposed to market fluctuations. Unlike investments in marketable debt and equity
securities, the changes in the market values of these investments are recognized
as other income or loss in the Consolidated Statements of Earnings. A 20% change
in the market value of the pooled asset funds would result in a $5.2 million
change in other assets and a corresponding change to other income or expense.
37
ITEM 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements and
Supplementary Financial Information
Page
----
Consolidated Balance Sheets as of March 31, 2002 and 2001 39
Consolidated Statements of Earnings for the fiscal years
ended March 31, 2002, 2001 and 2000 40
Consolidated Statements of Shareholders' Equity for the
fiscal years ended March 31, 2002, 2001 and 2000 41
Consolidated Statements of Cash Flows for the fiscal years
ended March 31, 2002, 2001 and 2000 42
Notes to Consolidated Financial Statements 43
Independent Auditors' Report 63
Supplementary Financial Information 64
38
Mylan Laboratories Inc.
Consolidated Balance Sheets
(in thousands, except share and per share data)
March 31, 2002 2001
- --------- ---- ----
Assets
Current assets:
Cash and cash equivalents $ 160,790 $ 229,183
Marketable securities 456,266 55,715
Accounts receivable, net 145,491 235,938
Inventories 195,074 161,810
Deferred income tax benefit 92,642 59,474
Deposit - litigation settlement - 135,000
Other current assets 11,819 5,443
----------- -----------
Total current assets 1,062,082 882,563
Property, plant and equipment, net 166,531 170,193
Intangible assets, net 272,511 294,384
Investment in and advances to Somerset 22,720 27,621
Other assets 92,866 94,551
----------- -----------
Total assets $ 1,616,710 $ 1,469,312
=========== ===========
Liabilities and shareholders' equity
Liabilities
Current liabilities:
Trade accounts payable $ 36,534 $ 48,928
Income taxes payable 63,826 34,348
Current portion of long-term obligations 16 5,245
Cash dividends payable 5,067 5,007
Litigation settlement 4,014 147,000
Other current liabilities 65,690 53,998
----------- -----------
Total current liabilities 175,147 294,526
Long-term obligations 21,854 23,345
Deferred income tax liability 17,470 18,905
----------- -----------
Total liabilities 214,471 336,776
----------- -----------
Shareholders' equity
Preferred stock - par value $.50 per share
Shares authorized: 5,000,000
Shares issued: none - -
Common stock - par value $.50 per share
Shares authorized: 300,000,000
Shares issued: 132,200,528 in 2002
and 130,689,762 in 2001 66,100 65,345
Additional paid-in capital 349,719 322,987
Retained earnings 1,080,736 840,741
Accumulated other comprehensive earnings 7,920 2,983
----------- -----------
1,504,475 1,232,056
Less treasury stock - at cost
Shares: 5,813,033 in 2002
and 5,731,913 in 2001 102,236 99,520
----------- -----------
Total shareholders' equity 1,402,239 1,132,536
----------- -----------
Total liabilities and shareholders' equity $ 1,616,710 $ 1,469,312
=========== ===========
See Notes to Consolidated Financial Statements.
39
Mylan Laboratories Inc.
Consolidated Statements of Earnings
(in thousands, except per share data)
Fiscal year ended March 31, 2002 2001 2000
- --------------------------- ---- ---- ----
Net revenues $ 1,104,050 $ 846,696 $ 790,145
Cost of sales 480,111 464,521 369,377
----------- --------- ----------
Gross profit 623,939 382,175 420,768
Operating expenses:
Research and development 58,847 64,385 49,121
Selling and marketing 59,913 59,238 56,854
General and administrative 110,000 91,974 91,834
Litigation settlement - 147,000 -
----------- --------- ----------
Earnings from operations 395,179 19,578 222,959
Equity in loss of Somerset (4,719) (1,477) (4,193)
Other income, net 17,863 39,912 23,977
----------- --------- ----------
Earnings before income taxes 408,323 58,013 242,743
Provision for income taxes 148,072 20,885 88,497
----------- --------- ----------
Net earnings $ 260,251 $ 37,128 $ 154,246
=========== ========= ==========
Earnings per common share:
Basic $ 2.07 $ 0.30 $ 1.19
=========== ========= ==========
Diluted $ 2.04 $ 0.29 $ 1.18
=========== ========= ==========
Weighted average common shares
outstanding:
Basic $ 125,525 $ 125,788 $ 129,220
=========== ========= ==========
Diluted $ 127,368 $ 126,749 $ 130,224
=========== ========= ==========
See Notes to Consolidated Financial Statements.
40
Mylan Laboratories Inc.
Consolidated Statements of Shareholders' Equity
(in thousands, except share and per share data)
Fiscal year ended March 31, 2002 2001 2000
---- ---- ----
Common stock - shares issued:
Shares at beginning of year 130,689,762 130,277,568 129,968,514
Stock options exercised 1,510,766 412,194 309,054
------------- ------------- -------------
Shares at end of year 132,200,528 130,689,762 130,277,568
------------- ------------- -------------
Treasury stock:
Shares at beginning of year (5,731,913) (893,498) (888,578)
Shares acquired upon the
exercise of stock options (81,120) (4,165) (4,920)
Issuance of treasury stock - 20,850 -
Stock purchases - (4,855,100) -
------------- ------------- -------------
Shares at end of year (5,813,033) (5,731,913) (893,498)
------------- ------------- -------------
Common shares outstanding 126,387,495 124,957,849 129,384,070
============= ============= =============
Common stock, $0.50 par:
Balance at beginning of year $ 65,345 $ 65,139 $ 64,984
Stock options exercised 755 206 155
------------- ------------- -------------
Balance at end of year 66,100 65,345 65,139
------------- ------------- -------------
Additional paid-in capital:
Balance at beginning of year 322,987 316,393 311,995
Stock options exercised 23,023 5,392 3,679
Reissuance of treasury shares - 102 -
Tax benefit of stock option plans 3,709 1,100 719
------------- ------------- -------------
Balance at end of year 349,719 322,987 316,393
------------- ------------- -------------
Retained earnings:
Balance at beginning of year 840,741 823,570 690,003
Net earnings 260,251 37,128 154,246
Dividends declared($0.16 per share) (20,256) (19,957) (20,679)
------------- ------------- -------------
Balance at end of year 1,080,736 840,741 823,570
------------- ------------- -------------
Accumulated other comprehensive earnings:
Balance at beginning of year 2,983 6,936 1,105
Net unrealized gain (loss)
on marketable securities 4,937 (3,953) 5,831
------------- ------------- -------------
Balance at end of year 7,920 2,983 6,936
------------- ------------- -------------
Treasury stock, at cost:
Balance at beginning of year (99,520) (8,316) (8,182)
Shares acquired upon the exercise
of stock options (2,716) (109) (134)
Reissuance of treasury stock - 361 -
Stock purchases - (91,456) -
------------- ------------- -------------
Balance at end of year (102,236) (99,520) (8,316)
------------- ------------- -------------
Total shareholders' equity $ 1,402,239 $ 1,132,536 $ 1,203,722
============= ============= =============
Comprehensive earnings:
Net earnings $ 260,251 $ 37,128 $ 154,246
Other comprehensive earnings
(loss), net of tax:
Net unrealized holding gains
(losses) on securities 5,195 (2,863) 7,826
Reclassification for gains
included in net earnings (258) (1,090) (1,995)
------------- ------------- -------------
Other comprehensive earnings
(loss), net of tax 4,937 (3,953) 5,831
------------- ------------- -------------
Comprehensive earnings $ 265,188 $ 33,175 $ 160,077
============= ============= =============
See Notes to Consolidated Financial Statements.
41
Mylan Laboratories Inc.
Consolidated Statements of Cash Flows
(in thousands)
Fiscal year ended March 31, 2002 2001 2000
- --------------------------- ---- ---- ----
Cash flows from operating activities:
Net earnings $ 260,251 $ 37,128 $ 154,246
Adjustments to reconcile net
earnings to net cash
provided from operating activities:
Depreciation and amortization 46,111 42,392 35,706
Gain on disposal/sale of equipment (240) (157) (84)
Gain on sale of certain intangible
assets - (4,367) -
Deferred income tax benefit (37,262) (28,222) (23,267)
Equity in loss of Somerset 4,719 1,477 4,193
Cash received from Somerset 182 363 460
Adjustments to estimated accounts
receivable credits 88,831 38,485 37,581
Write-down of investments and
intangible assets 2,982 11,131 9,450
Litigation settlement - 147,000 -
Litigation settlement deposits (7,986) (135,000) -
Other noncash items (7,502) (12,945) (2,575)
Changes in operating assets and
liabilities:
Accounts receivable 1,616 (73,238) (86,694)
Inventories (30,696) (17,203) (9,534)
Trade accounts payable (12,394) 30,947 5,839
Income taxes 33,187 29,064 11,389
Other operating assets and
liabilities, net 4,672 (914) (17,578)
---------- ---------- ----------
Net cash provided from operating
activities 346,471 65,941 119,132
---------- ---------- ----------
Cash flows from investing activities:
Proceeds from (purchase of):
Capital assets (20,621) (24,651) (29,841)
Reduction of investment in a
limited liability partership 9,535 52,207 -
Sale of certain intangible assets - 12,800 -
Sale of fixed assets 4,848 1,076 1,137
Other and intangible assets (8,195) (7,520) (23,779)
Marketable securities (819,038) (104,029) (200,939)
Sale of marketable securities 426,045 141,782 180,706
---------- ---------- ----------
Net cash (used in) provided from
investing activities (407,426) 71,665 (72,716)
---------- ---------- ----------
Cash flows from financing activities:
Payments on long-term obligations (8,095) (5,987) (15,696)
Cash dividends paid (20,195) (20,144) (20,663)
Purchase of common stock - (91,456) -
Proceeds from exercise of stock
options 20,852 5,671 3,587
---------- ---------- ----------
Net cash used in financing activities (7,438) (111,916) (32,772)
---------- ---------- ----------
Net (decrease) increase in cash and
cash equivalents (68,393) 25,690 13,644
Cash and cash equivalents - beginning
of year 229,183 203,493 189,849
---------- ------------ -------------
Cash and cash equivalents - end
of year $ 160,790 $ 229,183 $ 203,493
========== ========== ==========
Cash paid during the year for:
Interest $ 238 $ 867 $ 1,418
========== ========== ==========
Income taxes $ 152,145 $ 20,052 $ 100,374
========== ========== ==========
See Notes to Consolidated Financial Statements.
42
Mylan Laboratories Inc.
Notes to Consolidated Financial Statements
Note 1. Nature of Operations
Mylan Laboratories Inc. and its subsidiaries (the Company or Mylan) are
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, institutions, and public and governmental agencies
within the United States.
Note 2. Summary of Significant Accounting Policies
Principles of Consolidation. The consolidated financial statements include
the accounts of Mylan Laboratories Inc. and those of its wholly-owned and
majority-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Cash Equivalents. Cash equivalents are composed of highly liquid
investments with an original maturity of three months or less at the date of
purchase.
Marketable Securities. Marketable securities are classified as
available for sale and are recorded at fair value based on quoted market prices,
with net unrealized gains and losses, net of income taxes, reflected in
accumulated other comprehensive earnings as a component of shareholders' equity.
Net gains and losses on sales of securities available for sale are computed on a
specific security basis and included in other income.
Concentrations of Credit Risk. Financial instruments that potentially
subject us to credit risk consist principally of interest-bearing investments
and accounts receivable.
We invest our excess cash in deposits primarily 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. We maintain deposit balances
at banks in excess of federally insured amounts.
We perform ongoing credit evaluations of our customers and generally do
not require collateral. Approximately 64% and 60% of the accounts receivable
balances represent amounts due from four customers at March 31, 2002 and 2001.
Total allowances for doubtful accounts were $6,480,000 and $5,049,000 at March
31, 2002 and 2001.
Inventories. Inventories are stated at the lower of cost (first-in,
first-out) or market. Provisions for potentially obsolete or slow moving
inventory are made based on our analysis of inventory levels and future sales
forecasts.
Property, Plant and Equipment. Property, plant and equipment are stated at
cost less accumulated depreciation. Depreciation, computed on a straight-line
basis, is provided in amounts sufficient to relate the cost of depreciable
assets to operations over their estimated service lives (3 to 10 years for
machinery and equipment and 15 to 39 years for buildings and improvements).
Interest related to the construction of qualifying assets is capitalized as part
of the construction cost. Interest expense capitalized in fiscal 2002, 2001 and
2000 was $119,000, $614,000 and $1,108,000, respectively.
43
Intangible Assets. Intangible assets are stated at cost less
accumulated amortization. Amortization is recorded on a straight-line basis over
estimated useful lives ranging from 2 to 20 years. We periodically review the
original estimated useful lives of assets and make adjustments when appropriate.
Intangible assets are also periodically reviewed to determine recoverability by
comparing carrying value to expected future cash flows. Adjustments are made in
the event estimated undiscounted net cash flows are less than the carrying
value.
Other Assets. Investments in business entities in which we have the ability
to exert significant influence over operating and financial policies (generally
20% to 50% ownership) are accounted for using the equity method. Under the
equity method, investments are recorded at cost and adjusted for dividends and
undistributed earnings and losses.
Non-marketable equity investments for which we do not have the ability to
exercise significant influence are accounted for using the cost method. Such
investments are included in other assets on the balance sheet. Under the cost
method of accounting, investments in private companies are carried at cost and
are adjusted only for other-than-temporary declines in fair value, distributions
of earnings and additional investments.
Other assets are periodically reviewed for other-than-temporary declines in
fair value. Other-than-temporary declines in fair value are identified by
evaluating market conditions, the entity's ability to achieve forecast and
regulatory submission guidelines, as well as the entity's overall financial
condition.
Revenue Recognition. We recognize revenue for product sales upon shipment
when title and risk of loss pass to our customers and when provisions for
estimates, including discounts, rebates, price adjustments, returns,
chargebacks, and other promotional programs are reasonably determinable. The
following briefly describes the nature of each provision and how such provisions
are estimated.
Discounts are reductions to invoiced amounts offered to our customers for
payment within a specified period and are estimated upon shipment utilizing
historical customer payment experience.
Rebates are offered to our key customers to promote customer loyalty and
encourage greater product sales. These rebate programs provide that, upon the
attainment of pre-established volumes or the attainment of revenue milestones
for a specified period, the customer receives credit against purchases. Other
promotional programs are incentive programs periodically offered to our
customers. Due to the nature of these programs, we are able to estimate
provisions for rebates and other promotional programs based on the specific
terms in each agreement at the time of shipment.
We have agreed to terms with our customers, consistent with common industry
practices, to allow our customers to return product that is within a certain
time period of the expiration date. Upon shipment of product to our customers,
we provide for an estimate of product to be returned. This estimate is
determined by applying a historical relationship of customer returns to amounts
invoiced.
We also generally provide credits to our customers for decreases that we
make to our selling prices for the value of inventory that is owned by our
customers at the date of the price reduction. We have not contractually agreed
to provide price adjustment credits to our customers; instead, we issue price
adjustment credits at our discretion. We estimate price adjustment credits at
44
the time the price reduction occurs. The amount is calculated based on an
estimate of our customers' inventory levels.
We have arrangements with certain parties establishing prices for our
products for which they independently select a wholesaler from which to
purchase. Such parties are referred to as indirect customers. A chargeback
represents the difference between our invoice price to the wholesaler and the
indirect customer's contract price. Provisions for estimating chargebacks are
calculated primarily using historical chargeback experience and estimated
wholesaler inventory levels.
Accounts receivable are presented net of allowances relating to the above
provisions, which were $221,259,000 and $132,428,000 at March 31, 2002 and 2001.
Other current accrued liabilities include approximately $21,577,000 and
$13,107,000 at March 31, 2002 and 2001, for certain rebates and other
adjustments that are paid to indirect customers.
Three of our customers accounted for 15%, 14% and 14% of net revenues in
fiscal 2002. Two of our customers accounted for 14% and 11% of net revenues in
fiscal 2001, and four of our customers accounted for 15%, 15%, 11% and 10% of
net revenues in fiscal 2000.
Research and Development. Research and development expenses are charged to
operations as incurred.
Advertising Costs. Advertising costs are expensed as incurred and amounted
to $7,315,000, $7,250,000 and $6,063,000 in fiscal 2002, 2001 and 2000,
respectively.
Income Taxes. Income taxes have been provided for using an asset and
liability approach in which deferred income taxes reflect the tax consequences
on future years of events that we have already 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 new
tax law is enacted.
Earnings per Common Share. Basic earnings per common share is computed by
dividing net earnings by the weighted average common shares outstanding for the
period. Diluted earnings per common share is computed by dividing net earnings
by the weighted average common shares outstanding adjusted for the dilutive
effect of stock options granted, excluding antidilutive shares, under our stock
option plans (see Note 12). Antidilutive shares of 130,000, 3,589,953 and
1,194,454 were excluded from the diluted earnings per common share calculation
for fiscal 2002, 2001 and 2000, respectively.
45
A reconciliation of basic and diluted earnings per common share is as
follows:
(in thousands, except per share data)
Fiscal 2002 2001 2000
- ------ ---- ---- ----
Net earnings $ 260,251 $ 37,128 $ 154,246
Weighted average common shares outstanding 125,525 125,788 129,220
Assumed exercise of dilutive stock options 1,843 961 1,004
--------- -------- ---------
Diluted weighted average common shares
outstanding 127,368 126,749 130,224
========= ======== =========
Earnings per common share:
Basic $ 2.07 $ 0.30 $ 1.19
Diluted $ 2.04 $ 0.29 $ 1.18
Use of Estimates in the Preparation of Financial Statements. The
preparation of financial statements, in conformity with accounting principles
generally accepted in the US, requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reported period. Estimates are used in determining such
items as, but not limited to, discounts, rebates, price adjustments, returns,
chargebacks, other promotional programs, depreciable/amortizable lives, other
postretirement benefit plan assumptions, fair value of other assets, projected
cash flows, amounts recorded for contingencies and other potential adjustments.
Because of the uncertainty inherent in such estimates, actual results could
differ from those estimates.
Reclassification. The presentation of certain prior year amounts were
reclassified to conform to the fiscal 2002 presentation.
Fiscal Year. Our fiscal year ends on March 31. All references to fiscal
year shall mean the 12 months ended March 31.
Recent Accounting Pronouncements. In April 2001, we adopted Statement of
Financial Accounting Standards (SFAS) No. 133, as amended, Accounting for
Derivative Instruments and Hedging Activities, issued by the Financial
Accounting Standards Board (FASB) in June 1998. SFAS No. 133 requires an entity
to recognize all derivative instruments as either assets or liabilities on the
balance sheet at fair value and those changes in fair value to be recognized
currently in earnings, unless specific hedge accounting criteria are met. The
adoption of SFAS No. 133 had no material impact on our results of operations or
financial position.
In June 2001, the FASB issued SFAS No. 141, Business Combinations,
effective for fiscal years beginning after December 15, 2001. SFAS No. 141
requires that all business combinations initiated after June 30, 2001, be
accounted for using the purchase method of accounting. We adopted the provisions
of SFAS No. 141 as of July 1, 2001, and, accordingly, all future business
combinations consummated by us must be recorded at fair value using the purchase
method of accounting.
In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets, effective for fiscal years beginning after December 15, 2001. SFAS No.
142 provides that goodwill and intangible assets with indefinite lives will no
longer be amortized, but will be subject to at least annual impairment tests.
46
Intangible assets with finite lives will continue to be amortized over their
useful lives. Furthermore, SFAS No. 142 requires that the useful lives of
intangible assets acquired before June 30, 2001, be reassessed and the remaining
amortization periods adjusted accordingly.
We are required to adopt the provisions of SFAS No. 142 effective April
1, 2002, and are in the process of preparing for its adoption. This process
includes evaluating the useful lives of assets, making determinations as to what
reporting units are and what amounts of goodwill, intangible assets, other
assets and liabilities should be allocated to those reporting units. We will no
longer record approximately $6.4 million in annual amortization of goodwill.
Until the above process, including the required initial impairment evaluation,
is complete, we are unable to determine any further impact SFAS No. 142 will
have on our consolidated financial position and results of operations.
The FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. This statement establishes standards for accounting for obligations
associated with the retirement of tangible long-lived assets. This statement is
effective for us on April 1, 2003. We are currently evaluating the impact, if
any, this statement will have on our financial position and results of
operations.
SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, was issued by the FASB in August 2001. This statement addresses
financial accounting and reporting for the impairment and disposal of long-lived
assets. For long-lived assets to be held and used, the new rules continue
previous guidance to recognize impairment when the undiscounted future cash
flows do not exceed the asset's carrying amount. The impairment to be recognized
will continue to be measured as the difference between the carrying amount and
fair value of the asset. The computation of fair value now removes goodwill from
consideration. Assets that are to be disposed of by sale are required to be
evaluated using the same measurement approach as those assets to be held and
used. Additionally, assets qualifying for discontinued operations treatment have
been expanded beyond the former operating segment approach. We will now
recognize impairment of long-lived assets to be disposed by other than sale at
the date of disposal, but will consider such assets to be held and used until
that time. This statement is effective for us as of April 1, 2002, and we
believe that the adoption of SFAS No. 144 will not have a material impact on our
financial position and results of operations.
Emerging Issues Task Force (EITF) Issue No. 00-25, Vendor Income
Statement Characterization of Consideration Paid to a Reseller of the Vendor's
Products, became effective for us as of January 1, 2002. It states that
consideration paid by a vendor to a reseller is to be classified as a reduction
of revenue in the income statement unless an identifiable benefit is or will be
received from the reseller that is sufficiently separable from the purchase of
the vendor's products and the vendor can reasonably estimate the fair value of
the benefit. We have adopted the provisions of EITF Issue No. 00-25, and it had
no material effect on our financial statements.
EITF Issue No. 01-09, Accounting for Consideration Given to a Customer or a
Reseller of a Vendor's Products, reconciles EITF Issue No. 00-14, Issue No. 3 of
EITF Issue No. 00-22 and EITF Issue No. 00-25. EITF Issue No. 01-09 became
effective for us as of January 1, 2002, and it had no material effect on our
financial statements.
47
Note 3. Balance Sheet Components
Selected balance sheet components consist of the following at March 31,
2002 and 2001:
(in thousands) 2002 2001
---- ----
Inventories:
Raw materials $ 74,782 $ 57,825
Work in process 31,056 23,752
Finished goods 89,236 80,233
------------- -------------
$ 195,074 $ 161,810
------------- -------------
Property, plant and equipment:
Land and improvements $ 9,039 $ 9,154
Buildings and improvements 108,363 106,653
Machinery and equipment 174,080 168,963
Construction in progress 10,731 9,671
------------- -------------
302,213 294,441
Less accumulated depreciation 135,682 124,248
------------- -------------
$ 166,531 $ 170,193
============= =============
Other current liabilities:
Payroll and employee benefit plan
accruals $ 20,965 $ 12,542
Accrued rebates 21,577 13,107
Royalties and product license fees 12,363 12,490
Other 10,785 15,859
------------- -------------
$ 65,690 $ 53,998
============= =============
Note 4. Investment in and Advances to Somerset
We acquired 50% of the outstanding common stock of Somerset
Pharmaceuticals, Inc. (Somerset) in November 1988. We account for this
investment using the equity method of accounting.
Equity in loss of Somerset includes our 50% portion of Somerset's financial
results, as well as expense for amortization of intangible assets resulting from
the acquisition of Somerset. Such intangible assets are being amortized using
the straight-line basis over 15 years. Amortization expense was $924,000 in each
of fiscal 2002, 2001 and 2000.
48
Note 5. Marketable Securities
The amortized cost and estimated market values of marketable securities
are as follows:
Gross Gross
Amortized Unrealized Unrealized Market
(in thousands) Cost Gains Losses Value
------------- -------------- ------------- ----------
March 31, 2002
- --------------
Debt securities $ 435,592 $ 567 $ 660 $ 435,499
Equity securities 8,535 13,219 987 20,767
--------- --------- --------- ---------
$ 444,127 $ 13,786 $ 1,647 $ 456,266
========= ========= ========= =========
March 31, 2001
- --------------
Debt securities $ 45,371 $ 698 $ 50 $ 46,019
Equity securities 5,762 4,684 750 9,696
--------- --------- --------- ---------
$ 51,133 $ 5,382 $ 800 $ 55,715
========= ========= ========= =========
Net unrealized gains on marketable securities are reported net of tax
of $4,219,000 and $1,599,000 in fiscal 2002 and 2001.
Maturities of debt securities at market value as of March 31, 2002, are
as follows:
(in thousands)
Mature within one year $ 417,087
Mature in one to five years 2,061
Mature in five years and later 16,351
---------
$ 435,499
=========
Gross gains of $1,263,000, $2,732,000 and $4,504,000 and gross losses of
$865,000, $1,056,000 and $1,414,000 were realized during fiscal 2002, 2001 and
2000, respectively.
Note 6. Intangible Assets
Intangible assets consist of the following components at March 31, 2002 and
2001:
(in thousands) 2002 2001
---- ----
Patents and technologies $ 119,663 $ 120,739
License fees and agreements 43,540 38,671
Maxzide(r) intangibles 69,666 69,666
Goodwill 128,008 128,008
Other 26,091 26,091
--------- ---------
386,968 383,175
Less accumulated amortization 114,457 88,791
--------- ---------
$ 272,511 $ 294,384
========= =========
49
The Maxzide(R) intangibles relate to trademark, tradedress and
marketing rights. Other consists principally of an assembled workforce,
non-compete agreements, customer lists and contracts.
During fiscal 1999, we executed a product license agreement for the
product Zagam(R) and recorded a corresponding intangible asset. This intangible
asset was initially recorded in the amount of the initial cash payments and
future contract commitments.
During fiscal 2001, we experienced significant product supply issues
resulting from our contract supplier (such supplier is also the owner of the
Zagam(R) patent) that significantly impaired our ability to market the product.
As a result, the intangible asset was determined to have no value and its
carrying value was reduced to zero during the year ended March 31, 2001.
We reduced the carrying value of the intangible asset by recording a
$7,770,000 charge to general and administrative expenses, representing the
portion of the unamortized intangible asset created from the initial payments.
The remaining $4,000,000 carrying value of the intangible asset was offset
against the liability initially established for the future contract commitments.
As a result of our inability to market the licensed product, we believe that the
future contract commitments initially established will not be earned and will
not become payable.
In connection with certain product license agreements, we recorded
intangible assets and the related obligations, in excess of amounts paid, of
$2,250,000 in noncash transactions in fiscal 2000.
Note 7. Other Assets
Other assets consist of the following components at March 31, 2002 and
2001:
(in thousands) 2002 2001
---- ----
Pooled asset funds $ 26,144 $ 29,065
Cash surrender value 35,825 32,991
Other investments 30,897 32,495
-------- --------
$ 92,866 $ 94,551
======== ========
Pooled asset funds primarily include our interest in limited liability
partnership funds that invest in common and preferred stocks, bonds and money
market funds. In fiscal 2001, we began to liquidate a certain fund in an effort
to reduce the impact of market fluctuations. The total amounts liquidated in
fiscal 2002 and 2001 were $9,535,000 and $52,207,000. The investments in these
limited liability partnership funds are accounted for using the equity method.
We record our share of earnings or losses as other income or expense with the
offsetting entry to the corresponding investment account. Earnings on the pooled
asset funds included in other income amounted to $7,113,000, $13,957,000 and
$15,378,000 in fiscal 2002, 2001 and 2000, respectively. At March 31, 2002 and
2001, the carrying amounts of these investments approximated fair value.
Cash surrender value is related to insurance policies on certain officers
and key employees and the value of split dollar life insurance agreements with
certain executive officers.
Other investments principally consist of an equity investment in a foreign
entity and a building held for sale. Our equity investment in a foreign entity
50
is accounted for using the cost method of accounting and was $20,000,000 as of
March 31, 2002 and 2001. As a result of a settlement, in August 2000, we
received the rights to an office building in Santa Monica, California. The
building is currently being leased to the former owner under an operating lease
that expires in October 2003. The lease agreement allows the former owner to
purchase the building upon expiration of the lease.
Based on a periodic review of other investments for other-than-temporary
declines in fair value, we recorded adjustments of $1,821,000, $2,670,000 and
$9,450,000 in fiscal 2002, 2001 and 2000, respectively, to reduce the carrying
value of other assets to their estimated fair value. Such adjustments were
recorded as reductions to other income.
Note 8. Revolving Line of Credit
In March 2002, we renewed our agreement with a commercial bank for a
revolving line of credit. This one-year line of credit allows Mylan to borrow up
to $50,000,000, on an unsecured basis, at a monthly adjusted rate of 0.75% per
annum (1.25% per annum should the balance of our trust account be less than
$50,000,000) in excess of the 30-day London InterBank Offered Rate (LIBOR). The
agreement does not contain any significant financial covenants. At March 31,
2002 and 2001, we had no outstanding borrowings under this line of credit.
Note 9. Long-Term Obligations
Long-term obligations consist of the following components at March 31, 2002
and 2001:
(in thousands) 2002 2001
---- ----
Deferred compensation $ 19,682 $ 16,512
Deferred revenue 1,948 5,845
Product acquisitions - 3,142
Other 240 3,091
-------- --------
Total long-term obligations 21,870 28,590
Less: Current portion of long-term obligations 16 5,245
Long-term obligations, net of current -------- --------
Portion $ 21,854 $ 23,345
======== ========
Deferred compensation consists of the discounted future payments under
individually negotiated agreements with certain key employees and directors.
Individual agreements for certain key employees were amended in fiscal 2002 to
provide additional benefits. The agreements with certain key employees provide
for annual payments ranging from $60,000 to $1,000,000 to be paid over periods
commencing at retirement and ranging from ten years to life. The agreements with
certain outside directors include annual payments of $18,000 over ten years
beginning at retirement.
In fiscal 2000, we recorded $9,238,000 in deferred revenue relating to a
license and supply agreement. Revenue recognized relating to this agreement in
fiscal 2002 and 2001 was $3,897,000 and $3,393,000.
In fiscal 2001, other consisted primarily of a 10.5% senior promissory
note, paid in full in July 2001, related to the acquisition of UDL.
51
Note 10. Income Taxes
Income taxes consist of the following components:
(in thousands)
Fiscal 2002 2001 2000
====== ==== ==== ====
Federal:
Current $ 161,977 $ 45,463 $ 97,957
Deferred (32,150) (26,100) (21,596)
------------ ----------- -----------
129,827 19,363 76,361
State and Puerto Rico:
Current 20,809 3,772 13,807
Deferred (2,564) (2,250) (1,671)
------------ ----------- -----------
18,245 1,522 12,136
Income taxes $ 148,072 $ 20,885 $ 88,497
============ =========== ===========
Pre-tax earnings $ 408,323 $ 58,013 $ 242,743
============ =========== ===========
Effective tax rate 36.3% 36.0% 36.5%
============= ============ ============
Temporary differences and carryforwards that result in the deferred tax
assets and liabilities are as follows at March 31, 2002 and 2001:
(in thousands) 2002 2001
==== ====
Deferred tax assets:
Employee benefits $ 9,630 $ 10,239
Contractual agreements 7,248 8,924
Intangible assets 8,780 5,450
Accounts receivable allowances 84,440 47,500
Inventories 3,191 3,844
Investments 8,271 7,802
Tax loss carryforwards 5,025 8,773
Tax credit carryforwards 8,080 5,813
Other - 146
Total deferred tax assets ----------- -----------
134,665 98,491
----------- -----------
Deferred tax liabilities:
Plant and equipment 12,515 9,917
Intangible assets 36,912 39,287
Investments 10,008 8,718
Other 58 -
----------- -----------
Total deferred tax liabilities 59,493 57,922
----------- -----------
Deferred tax asset, net $ 75,172 $ 40,569
=========== ===========
Classification in the consolidated balance sheets:
Deferred income tax benefit - current $ 92,642 $ 59,474
Deferred income tax liability - noncurrent 17,470 18,905
----------- -----------
Deferred tax asset, net $ 75,172 $ 40,569
=========== ===========
52
Deferred tax assets relating to net operating loss carryforwards and
research and development tax credit carryforwards were acquired in fiscal 1999
with the acquisition of Penederm. The utilization of these assets is subject to
certain limitations set forth in the Internal Revenue Code. In fiscal 2002, we
utilized approximately $10,709,000 of the acquired net operating loss
carryforwards to reduce our current tax liability by approximately $3,748,000.
As of March 31, 2002, we have approximately $13,415,000 of acquired federal tax
loss carryforwards of which $11,353,000 will expire in fiscal 2012 and the
remaining amount will expire in fiscal 2013. Additionally, at March 31, 2002,
acquired federal tax credit carryforwards of $2,151,000 will expire in fiscal
years 2003 through 2013.
We also have $2,743,000 of federal research and development tax credits
that are deferred until fiscal 2003 due to recent tax law changes. A $3,004,000
tax credit against Puerto Rican local income tax is also available for future
years.
A reconciliation of the statutory tax rate to the effective tax rate is as
follows:
Fiscal 2002 2001 2000
- ------ ---- ---- ----
Statutory tax rate 35.0% 35.0% 35.0%
State and Puerto Rico income
taxes, net 2.8% 2.4% 3.1%
Nondeductible amortization 0.6% 4.0% 1.0%
Tax credits (2.1%) (6.5%) (2.7%)
Other items 0.0% 1.1% 0.1%
--- --- ---
Effective tax rate 36.3% 36.0% 36.5%
==== ==== ====
Tax credits result principally from operations in Puerto Rico and from
qualified research and development expenditures, including orphan drug research.
State income taxes are shown net of the federal deduction benefit.
Operations in Puerto Rico benefit from Puerto Rican incentive grants, which
partially exempt the Company from income, property and municipal taxes. In
fiscal 2001, a new tax grant was negotiated with the Government of Puerto Rico
extending our tax incentives until fiscal 2010. This grant exempts all earnings
during this grant period from tollgate tax upon repatriation to the US. In
fiscal 2001, approximately $109,000,000 of cash was repatriated for pre-fiscal
2001 earnings from Puerto Rico to the US. Prepaid tollgate tax of $1,508,000 was
credited to the Government of Puerto Rico to cover the tax due upon this
repatriation. Under Section 936 of the US Internal Revenue Code, Mylan is a
"grandfathered" entity and is entitled to the benefits under such statute
through fiscal 2006.
In April 2002, the Internal Revenue Service (IRS) completed the examination
of fiscal years 1998 through 2000. The adjustments noted by the IRS had no
effect on the current year tax rate.
Note 11. Preferred and Common Stock
In fiscal 1985, the Board of Directors (Board) authorized 5,000,000 shares
of $.50 par value preferred stock. No shares of the preferred stock have been
issued.
The Board adopted a Shareholder Rights Plan (the Rights Plan) in fiscal
1996. The Rights Plan was adopted to provide our Board with sufficient time to
53
assess and evaluate any takeover bid and explore and develop a reasonable
response. Effective November 1999, the Rights Plan was amended to eliminate the
special rights held by continuing directors. The Rights Plan will expire on
September 5, 2006, unless it is extended or such rights are earlier redeemed or
exchanged.
In May 2002, the Board approved a Stock Repurchase Program to purchase up
to 10,000,000 shares of our outstanding common stock. This Stock Repurchase
Program will be administered through open market or privately negotiated
transactions. The purchase of common stock under this program will be at market
prices. Through May 29, 2002, we have purchased 1,000,000 shares of common stock
for approximately $29,006,000. In fiscal 2001, we completed a previously
approved program with the purchase of 4,855,100 shares for $91,456,000.
Note 12. Stock Option Plan
In January 1997, the Board adopted the Mylan Laboratories Inc. 1997
Incentive Stock Option Plan (the Plan), as amended, which was approved by the
shareholders in July 1997. Under the Plan, up to 10,000,000 shares of the
Company's common stock may be granted to officers, employees, and non-employee
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 option grants generally vest on the date of grant or equally
on the anniversary date of the grant for the first three years. Incentive stock
option grants generally have one of the following two vesting schedules: 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 or 33% one year after grant date, 33% after year two and
33% after year three. As of March 31, 2002, 1,502,725 shares are available for
future grants.
In June 1992, the Board adopted the 1992 Non-employee Director Stock Option
Plan (the Directors' Plan) which was approved by the shareholders in April 1993.
A total of 600,000 shares of the Company's common stock are reserved for
issuance upon the exercise of stock options which vest at grant and 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, 2002, 187,500
shares are available for future grants.
Additional stock options are outstanding from the expired 1986 Incentive
Stock Option Plan and other plans assumed through acquisitions.
54
The following table summarizes stock option activity:
Weighted average
Number of shares exercise price
under option per share
-------------- -----------------
Outstanding at April 1, 1999 3,549,154 $ 15.11
Options granted 1,410,100 25.50
Options exercised (309,054) 12.04
Options cancelled (53,419) 18.34
--------------
Outstanding at March 31, 2000 4,596,781 18.44
Options granted 3,255,700 24.38
Options exercised (412,194) 13.06
Options cancelled (260,699) 24.40
--------------
Outstanding at March 31, 2001 7,179,588 21.23
Options granted 3,672,999 26.42
Options exercised (1,510,766) 15.60
Options cancelled (779,647) 25.29
--------------
Outstanding at March 31, 2002 8,562,174 24.07
==============
The following table summarizes information about stock options outstanding
as of March 31, 2002:
Options outstanding Options exercisable
-------------------------------------- --------------------------
Range of exercise Number Average Average Number Average
price per share of shares life (1) price (2) of shares price (2)
- ------------------ ---------- -------- -------- ------------ ----------
$ 2.35 - $ 20.96 1,271,763 4.19 $ 15.71 1,271,763 $ 15.71
21.38 - 23.15 1,335,408 8.09 21.95 956,201 21.60
24.32 - 25.51 1,642,231 8.85 24.87 625,567 24.96
25.82 - 25.82 2,405,500 9.20 25.82 - -
26.06 - 27.90 922,700 8.05 26.25 278,125 26.44
28.06 - 37.02 984,572 9.07 30.06 367,072 29.67
---------- ----------
$ 2.35 - $ 37.02 8,562,174 8.08 24.07 3,498,728 21.29
========== ==========
(1) Weighted average contractual life remaining in years.
(2) Weighted average exercise price per share.
The number of shares exercisable and the associated weighted average
exercise price as of March 31, 2001 and 2000, were 3,408,639 shares at $17.25
per share and 2,623,182 shares at $14.76 per share.
In accordance with the provisions of SFAS No. 123, Accounting for
Stock-Based Compensation, we account for our stock option plans under the
intrinsic-value-based method as defined in Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees. Accordingly, no compensation
expense has been recognized for our existing employee and non-employee director
stock option plans. If we had elected to recognize compensation costs based on
the alternative fair-value-based method prescribed by SFAS No. 123, net earnings
and earnings per share (on both a basic and diluted basis) would have been
reduced by $20,284,000, or $.16 per share, $11,308,000, or $.09 per share and
$1,430,000 or $.01 per share for fiscal 2002, 2001 and 2000, respectively.
55
The fair value of options granted in fiscal 2002, 2001 and 2000, using the
Black-Scholes option pricing model, and the assumptions used are as follows:
Fiscal 2002 2001 2000
- ------- ---- ----- -----
Volatility 48% 36% 34%
Risk-free interest rate 4.8% 5.5% 6.2%
Dividend yield 0.6% 0.6% 0.6%
Expected term of options (in years) 5.4 5.8 5.2
Weighted average fair value per option $ 12.51 $ 9.99 $ 9.93
In consideration for the exercise of stock options, we received and
recorded into treasury stock 81,120 shares valued at $2,716,000 in fiscal 2002,
4,165 shares valued at $109,000 in fiscal 2001 and 4,920 shares valued at
$134,000 in fiscal 2000.
Note 13. Employee Benefits
The Company has a plan covering substantially all employees to provide for
limited reimbursement of supplemental medical coverage. In December 2001, the
Supplemental Health Insurance Program for Certain Officers of Mylan Laboratories
Inc. was adopted to provide full post-retirement medical coverage to certain
officers and their spouse and dependents. These plans generally provide benefits
to employees who meet minimum age and service requirements. We account for these
benefits under SFAS No. 106, Employers' Accounting for Postretirement Benefits
Other Than Pensions. We have provided for the costs and related liability of
these benefits, which are not material.
We have defined contribution plans covering essentially all of our
employees. Our defined contribution plans consist primarily of a 401(k)
retirement plan with a profit sharing component for non-union employees and a
401(k) retirement plan for union employees. Profit sharing contributions are
made at the discretion of the Board. The 401(k) company matching contributions
are based upon employee contributions or service hours, depending upon the plan.
Total employer contributions to all plans for fiscal 2002, 2001 and 2000 were
$9,756,000, $4,784,000 and $6,342,000, respectively.
We provide supplemental life insurance benefits to certain management
employees. Such benefits require annual funding and may require accelerated
funding in the event that we would experience a change in control.
The production and maintenance employees at the Company's manufacturing
facilities in Morgantown, West Virginia, are covered under a collective
bargaining agreement which expires in April 2007. These employees represent
approximately 26% of the Company's total workforce at March 31, 2002.
Note 14. Segment Reporting
We have two reportable operating segments, a Generic Segment and a Brand
Segment, based on differences in products, marketing and regulatory approval.
Additionally, we have a Corporate/Other Segment, which includes general and
administrative expenses, such as legal expenditures, litigation settlements and
goodwill amortization, offset by non-operating income and expense.
Generic pharmaceutical products are therapeutically equivalent to a brand
name product and marketed primarily to wholesalers, retail pharmacy chains,
mail-order pharmacies and group purchasing organizations. These products are
56
approved for distribution by the US Food and Drug Administration (FDA) through
the Abbreviated New Drug Application (ANDA) process.
Brand pharmaceutical products are generally, when new, patent protected
products marketed directly to health care professionals by a single provider.
These products are approved by the FDA primarily through the New Drug
Application process. Our Brand Segment also includes off-patent brand products,
which have prescriber and customer loyalties and brand recognition, as well as
branded generics which are responsive to promotional efforts.
The accounting policies of the operating segments are the same as those
described in Note 2. The table below presents segment information for the fiscal
years identified. For the Generic and Brand Segments, segment profit represents
segment gross profit less direct research and development, selling and marketing
and general and administrative expenses. Generic and Brand Segment assets
include property, plant and equipment, trade accounts receivable, inventory and
intangible assets other than goodwill. Corporate/Other Segment assets include
consolidated cash, cash equivalents, marketable securities, investments in
Somerset and other assets, goodwill and all income tax related assets.
57
The following table provides a reconciliation of segment information to
total consolidated information:
(in thousands)
Fiscal 2002 2001 2000
---- ---- ----
Net revenues
Generic $ 971,075 $ 675,118 $ 650,890
Brand 132,975 171,578 139,255
------------ ------------ ------------
Consolidated $ 1,104,050 $ 846,696 $ 790,145
============ ============ ============
Depreciation and amortization expense
Generic $ 20,365 $ 19,772 $ 12,919
Brand 17,336 16,037 15,540
Corporate/Other 8,410 6,583 7,247
------------ ------------ ------------
Consolidated $ 46,111 $ 42,392 $ 35,706
============ ============ ============
Segment profit (loss)
Generic $ 483,068 $ 187,115 $ 248,103
Brand (16,212) 26,146 28,765
Corporate/Other (58,533) (155,248) (34,125)
------------ ------------ ------------
Consolidated $ 408,323 $ 58,013 $ 242,743
============ ============ ============
Property, plant and equipment additions
Generic $ 14,313 $ 18,883 $ 24,418
Brand 5,369 5,231 5,168
Corporate/Other 939 537 255
------------ ------------ ------------
Consolidated $ 20,621 $ 24,651 $ 29,841
============ ============ ============
March 31,
- ----------
Segment assets
Generic $ 466,311 $ 628,441 $ 463,311
Brand 209,603 251,801 261,402
Corporate/Other 940,796 589,070 617,757
------------ ------------ -------------
Consolidated $ 1,616,710 $ 1,469,312 $ 1,342,470
============ ============ =============
Effective April 1, 2001, the Brand Segment assumed responsibility for the
sales and marketing of EX phenytoin 100mg, which were previously included
and evaluated in the operating results of the Generic Segment. Accordingly,
the operating results of the Brand Segment for fiscal 2001 and 2000, have
been revised to include the net revenues of $26,317 and $16,917 and the
corresponding costs of sales of $5,247 and $3,782 for EX phenytoin 100mg
previously included in the Generic Segment.
In fiscal 2001, Corporate/Other includes the expense of $147,000 for the
settlement with the Federal Trade Commission and related litigation (see
Note 17).
Note 15. Commitments
We lease certain real property, primarily an office complex in Research
Triangle Park, North Carolina, and several warehousing facilities, under various
operating lease arrangements that expire over the next nine years. These leases
generally provide us with the option to renew the lease at the end of the lease
term. We have also entered into agreements to lease vehicles, which are
typically 24 to 36 months, for use by our sales force and key employees. For
fiscal 2002, 2001 and 2000, we made lease payments of $4,812,000, $4,301,000 and
$3,667,000, respectively.
58
Future minimum lease payments under these commitments are as follows:
(in thousands) Operating
Fiscal Leases
------ -----------
2003 $ 5,673
2004 3,082
2005 2,025
2006 1,676
2007 1,672
Thereafter 1,850
----------
$ 15,978
==========
We have entered into various product licensing and development agreements.
In some of these arrangements, we provide funding for the development of the
product or to obtain rights to the use of the patent, through milestone
payments, in exchange for marketing and distribution rights to the product.
Milestones represent the completion of specific contractual events and it is
uncertain if and when these milestones will be achieved. In the event that all
projects are successful, milestone and development payments of approximately
$14,000,000 would be paid over the next four years.
We have entered into employment agreements with certain executives that
provide for compensation and certain other benefits. These agreements provide
for severance payments under certain circumstances.
Note 16. Related Parties
In July 2000, we entered into an agreement with a consulting firm to
provide advice and recommendations to us relating to strategic and operational
matters. A director of the Company owns directly or indirectly all of the equity
interests in this consulting firm. The agreement, as amended, is in effect until
December 31, 2003, and provides for a monthly consulting fee of $75,000, the
potential for a discretionary performance bonus, reimbursement of reasonable
out-of-pocket expenses and a grant of a vested option covering 100,000 shares of
our common stock at an exercise price of $21.88 per share. Fees paid to this
firm in fiscal 2002 and 2001 were $1,565,000 and $125,000. We are obligated
under the agreement to pay a fee equal to one-tenth of one percent of the
aggregate value of any major business transaction in which the consultant
participates and which is announced during the term of the agreement or within
12 months after its termination. We are entitled to terminate the agreement for
cause under certain specified circumstances.
A director of the Company is the chief executive officer of a bank in which
the Company had on deposit $7,155,000 and $10,557,000 in a money market account
representing 5% and 14% of the bank's total deposits at March 31, 2002 and 2001.
A director of the Company, who also became an officer of the Company in
March 2002, was a member of a law firm that provided legal services to the
Company. The fees paid to such law firm amounted to $3,325,000, $1,218,000 and
$386,000 in fiscal 2002, 2001 and 2000, respectively.
An officer of the Company is a consultant to a company that provides
services to assist Mylan with its biostudies. Such officer is currently a
minority shareholder of this company; however, in prior years, this officer was
59
the principal owner. The officer's son is the owner of a company that performs
registry services for a product marketed by the Company. These agreements have
varying terms, with the latest expiring in 2010, and provide for the
reimbursement of services on a cost-plus basis. The officer is also an investor
in a company that provides on-site medical units to certain subsidiaries and
whose son is a principal officer. Total expenses for all the services provided
under these related party arrangements were $8,356,000, $9,405,000 and
$7,272,000 in fiscal 2002, 2001 and 2000, respectively.
Note 17. Contingencies
Product Litigation
While it is not possible to determine with any degree of certainty the
ultimate outcome of the following legal proceedings, we believe that we have
meritorious defenses with respect to the claims asserted against the Company and
we intend to defend vigorously our position. An adverse outcome in any one of
these proceedings could have a material adverse effect on our financial position
and results of operations.
Paclitaxel
NAPRO Biotherapeutics Inc. (NAPRO) and Abbott Laboratories Inc. (Abbott)
filed suit against the Company in the US District Court for the Western District
of Pennsylvania. Plaintiffs allege the Company's manufacture, use and sale of
its paclitaxel product infringes certain patents owned by NAPRO and allegedly
licensed to Abbott. The Company began selling its paclitaxel product on July 25,
2001. Abbott's ANDA seeking approval to sell paclitaxel has been approved.
Verapamil ER
Biovail Laboratories Inc. (Biovail) has filed a demand for arbitration
against the Company with the American Arbitration Association. In response to
such demand, the Company filed its answer and counterclaims. The dispute relates
to a supply agreement under which the Company supplied extended-release
verapamil to Biovail. The Company terminated the agreement in March 2001.
Biovail's allegations include breach of contract, breach of implied covenant of
good faith and fair dealing and unfair competition. The Company's allegations as
set forth in its counterclaims include breach of obligations of good faith and
fair dealing, fraud and unjust enrichment. The arbitration hearing is scheduled
to be held in September 2002.
Zagam(R)
The Company filed suit against Aventis Pharmaceuticals, Inc., successor in
interest to Rhone-Poulenc Rorer Pharmaceuticals, Inc.; Rhone-Poulenc Rorer
Pharmaceuticals, LTD.; Rorer Pharmaceutical Products, Inc.; Rhone-Poulenc Rorer,
S.A., and their affiliates in the US Federal District Court for the Western
District of Pennsylvania on May 23, 2001. The complaint sets forth claims of
breach of contract, rescission, breach of implied covenant of good faith and
fair dealing and unjust enrichment. The defendant's answer includes a
counterclaim which alleges nonpayment of royalties and failure to mitigate.
Nifedipine
In February 2001, Biovail filed suit against the Company and Pfizer Inc.
(Pfizer) in the US District Court for the Eastern District of Virginia alleging
antitrust violations with respect to agreements entered into between the Company
and Pfizer regarding nifedipine. The Company filed a motion to transfer the case
60
to the US District Court for the Northern District of West Virginia, which was
granted. The Company's motion to dismiss Biovail's complaint was denied and the
Company's motion to dismiss certain claims by other plaintiffs was granted in
part and denied in part.
The Company has been named as a defendant in five other putative class
action suits alleging antitrust claims based on the settlement entered into by
the Company with Bayer AG, Bayer Corporation and Pfizer regarding nifedipine.
Buspirone
The Company filed an ANDA seeking approval to market buspirone, a generic
equivalent to Bristol-Myers Squibb's (BMS) BuSpar(R). The Company filed the
appropriate certifications relating to the patents for this product, which were
then listed in the FDA publication entitled Approved Drug Products with
Therapeutic Equivalence Evaluations, popularly known as the "Orange Book." On
November 21, 2000, a new patent claiming the administration of a metabolite of
buspirone (which BMS claims also covers the administration of buspirone itself)
was issued to BMS. The subsequent listing of this patent in the Orange Book
prevented the FDA from granting final approval for the Company's buspirone ANDA.
On November 30, 2000, the Company filed suit against the FDA and BMS in the US
District Court for the District of Columbia. The complaint asked the court to
order the FDA to grant immediately final approval of the Company's ANDA for the
15mg buspirone product and require BMS to request withdrawal of the patent from
the Orange Book. Upon the Company's posting a bond in the amount of $25,000,000,
the court entered an order granting the Company's motion for a preliminary
injunction. Following a brief stay by the US Court of Appeals for the Federal
Circuit, the FDA granted approval of the Company's ANDA with respect to the 15mg
strength. Upon receiving FDA approval, the Company began marketing and selling
the 15mg tablet in March 2001. The Company has also been selling the 30mg
buspirone tablet since August 2001. BMS appealed the preliminary injunction
order to both the US Court of Appeals for the Federal Circuit and the US Court
of Appeals for the District of Columbia Circuit. The District of Columbia Court
of Appeals denied BMS' application and stayed the Company's motion to dismiss
pending the decision of the Federal Circuit Court of Appeals. The Federal
Circuit heard oral arguments on July 12, 2001.
On October 12, 2001, the Federal Circuit overturned the lower court ruling
and held that the Company did not have a cognizable claim against BMS under the
Declaratory Judgment Act to challenge the listing of BMS' patent, which the
Federal Circuit viewed as an improper effort to enforce the Federal Food, Drug
and Cosmetic Act. The Federal Circuit did not address the lower court's
determination that the BMS patent does not claim buspirone or a method of
administration of the drug. The Company filed a petition with the Federal
Circuit asking that the court reconsider its holding. The petition was denied on
January 9, 2002. A petition for review by the United States Supreme Court is
pending.
On January 16, 2002, the Company filed a motion in the US District Court
for the District of Columbia seeking a preliminary injunction which, if granted,
would require that the FDA refuse to list the BMS patent should BMS submit it
for re-listing in the Orange Book. The District of Columbia Court has entered an
order staying further proceedings in this case pending appeal of the order
entered in the US District Court for the Southern District of New York granting
the Company's motion for summary judgment of non-infringement.
The Company is involved in three other suits related to buspirone. In
November 2000, the Company filed suit against BMS in the US District Court for
the Northern District of West Virginia. The suit seeks a declaratory judgment of
non-infringement and/or invalidity of the BMS patent listed in November 2000. In
61
January 2001, BMS sued the Company for patent infringement in the US District
Court for the District of Vermont and also in the US District Court for the
Southern District of New York. In each of these cases, BMS asserts that the
Company infringes BMS' patent and seeks to rescind approval of the Company's
ANDA. It is expected that BMS will seek to recover damages equal to the profits
it has lost as a result of the Company's sales of this product.
The Company subsequently filed motions to dismiss the Vermont case and
dismiss and transfer the New York case to the US District Court for the Northern
District of West Virginia. The Judicial Panel on Multi-District Litigation
ordered these cases, along with another patent case and numerous antitrust suits
filed against BMS, be consolidated in the US District Court for the Southern
District of New York. The New York Court has granted the Company's motion for
summary judgment that the BMS patent is not infringed or alternatively is
invalid. BMS has appealed this decision to the Court of Appeals for the Federal
Circuit. The New York Court also denied the BMS motion to dismiss the Company's
antitrust counterclaims.
Lorazepam and Clorazepate
In December 1998, the Federal Trade Commission (FTC) filed suit in US
District Court for the District of Columbia against the Company. The FTC's
complaint alleged that the Company engaged in restraint of trade,
monopolization, attempted monopolization and conspiracy to monopolize arising
out of certain agreements involving the supply of raw materials used to
manufacture two products, lorazepam and clorazepate.
In July 2000, the Company reached a tentative agreement to settle the
actions brought by the FTC, the States Attorneys General and suits brought by or
on behalf of third party reimbursers. The Company agreed to pay up to
$147,000,000, including attorneys' fees. This tentative settlement became final
in February 2002. Included in this settlement were three companies indemnified
by the Company -- Cambrex Corporation, Profarmaco S.r.I. and Gyma Laboratories,
Inc.
Lawsuits not included in this settlement principally involve alleged direct
purchasers such as wholesalers and distributors. In July 2001, the United States
Court for the District of Columbia certified a litigation class consisting of
these direct purchasers. The Company filed a petition with the United States
Court of Appeals for the District of Columbia Circuit seeking appellate review
of the district court's order. The appellate court denied the Company's appeal
of the lower court's class certification order. In addition, four third party
reimbursers opted-out of the class action settlement and have filed separate,
non-class actions against the Company. The Company has filed motions to dismiss
those claims.
Other Litigation
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 other proceedings, it is the opinion of management that
the ultimate outcome of such other proceedings will not have a material adverse
effect on our results of operations or financial position.
62
Mylan Laboratories Inc.
Independent Auditors' Report
Board of Directors and Shareholders
Mylan Laboratories Inc.:
We have audited the accompanying consolidated balance sheets of Mylan
Laboratories Inc. and subsidiaries as of March 31, 2002 and 2001, and the
related consolidated statements of earnings, shareholders' equity, and cash
flows for each of the three years in the period ended March 31, 2002. Our audits
also included the financial statement schedule listed in the Index in Item 14.
These financial statements and financial statement schedule are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on the financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits 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, 2002 and 2001, and the results of their operations
and their cash flows for each of the three years in the period ended March 31,
2002, in conformity with accounting principles generally accepted in the United
States of America. Also, in our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presented fairly in all material respects the information set forth
therein.
Deloitte & Touche LLP
Pittsburgh, Pennsylvania
May 6, 2002 (May 29, 2002, as to Note 11)
Mylan Laboratories Inc.
Supplementary Financial Information
Quarterly Financial Data
(in thousands, except per share data)
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter Year(1)
------- ------- ------- ------- -------
Fiscal 2002
- -----------
Net revenues $ 237,933 $ 286,328 $ 297,191 $ 282,598 $ 1,104,050
Gross profit 121,859 163,777 177,372 160,931 623,939
Net earnings 50,648 64,136 78,176 67,291 260,251
Earnings per share:
Basic $ 0.41 $ 0.51 $ 0.62 $ 0.53 $ 2.07
Diluted $ 0.40 $ 0.50 $ 0.61 $ 0.53 $ 2.04
Share prices(2):
High $ 31.81 $ 35.65 $ 37.91 $ 36.20 $ 37.91
Low $ 24.02 $ 28.30 $ 31.35 $ 29.46 $ 24.02
Fiscal 2001
- -----------
Net revenues $ 167,255 $ 207,555 $ 223,238 $ 248,648 $ 846,696
Gross profit 73,753 93,996 102,268 112,158 382,175
Net earnings(3) (76,089) 33,509 37,645 42,062 37,128
Earnings per share:
Basic $ (0.59) $ 0.27 $ 0.30 $ 0.34 $ 0.30
Diluted $ (0.59) $ 0.27 $ 0.30 $ 0.33 $ 0.29
Share prices(2):
High $ 32.25 $ 27.94 $ 30.00 $ 25.85 $ 32.25
Low $ 17.00 $ 18.06 $ 22.50 $ 21.00 $ 17.00
(1) The sum of earnings per share for the four quarters may not equal
earnings per share for the total year due to changes in the average
number of common shares outstanding.
(2) New York Stock Exchange symbol: MYL
(3) In July 2000, we reached a tentative settlement with the Federal Trade
Commission, States Attorneys General and certain private parties with
regard to lawsuits filed against the Company relating to pricing
issues and raw material contracts on two of our products. Excluding
the litigation settlement of $147,000, net earnings for fiscal 2001
were $131,208, or $1.04 per basic and diluted share. This settlement
was approved by the court and made final in February 2002.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
64
PART III
ITEM 10. Directors and Executive Officers of the Registrant
The information required by this Item is set forth in our 2002 Proxy
Statement and is incorporated herein by reference.
ITEM 11. Executive Compensation
The information required by this Item is set forth in our 2002 Proxy
Statement and is incorporated herein by reference.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The information required by this Item is set forth in our 2002 Proxy
Statement and is incorporated herein by reference.
ITEM 13. Certain Relationships and Related Transactions
The information required by this Item is set forth in our 2002 Proxy
Statement and is incorporated herein by reference.
PART IV
ITEM 14. Financial Statement Schedules, Exhibits and Reports on Form 8-K
(a) 1. Consolidated Financial Statements
The Consolidated Financial Statements listed in the Index to Consolidated
Financial Statements are filed as part of this Report.
2. Financial Statement Schedules
MYLAN LABORATORIES INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Additions
charged to
Beginning costs and Ending
Description Balance expenses Deduction Balance
----------- ----------- ---------- ---------- -------
Allowance for Doubtful Accounts:
Fiscal Year Ended
March 31, 2002 $5,049 $4,128 $2,697 $6,480
March 31, 2001 3,614 1,610 175 5,049
March 31, 2000 1,908 1,749 43 3,614
65
3. Exhibits
3.1 Amended and Restated Articles of Incorporation of the registrant,
filed as Exhibit 4.2 to the Form S-8 on December 23, 1997,
(registration number 333-43081) and incorporated herein by
reference.
3.2 By-laws of the registrant, as amended to date, filed as Exhibit
3.2 to the Form 10-K for the fiscal year ended March 31, 2001, and
incorporated herein by reference.
4.1 Rights Agreement, as amended to date, 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.
Amendment is incorporated herein by reference to Exhibit 1 to Form
8-A/A dated March 31, 2000.
10.1 Mylan Laboratories Inc. 1986 Incentive Stock Option Plan, as
amended to date, filed as Exhibit 10(b) to Form 10-K for the
fiscal year ended March 31, 1993, and incorporated herein by
reference.
10.2 Mylan Laboratories Inc. 1997 Incentive Stock Option Plan, as
amended to date, filed as Exhibit 10.2 to Form 10-K for the fiscal
year ended March 31, 2001, and incorporated herein by reference.
10.3 Mylan Laboratories Inc. 1992 Nonemployee Director Stock Option
Plan, as amended to date, filed as Exhibit 10(l) to Form 10-K for
the fiscal year ended March 31, 1998, and incorporated herein by
reference.
10.4 Employment contract with Milan Puskar dated April 28, 1983, as
amended to date, filed as Exhibit 10(e) to Form 10-K for the
fiscal year ended March 31, 1993, and incorporated herein by
reference.
10.5 Executive Employment Agreement with Stuart A. Williams dated March
1, 2002, filed herewith.
10.6 Executive Employment Agreement with Edward J. Borkowski dated
March 4, 2002, filed herewith.
10.7 Salary Continuation Plan with C.B. Todd dated January 27, 1995,
filed as Exhibit 10(b) to Form 10-K for the fiscal year ended
March 31, 1995, and incorporated herein by reference.
10.8 Salary Continuation Plan with Louis J. DeBone dated March 14,
1995, filed as Exhibit 10(c) to Form 10-K for the fiscal year
ended March 31, 1995, and incorporated herein by reference.
10.9 Salary Continuation Plan with Roderick P. Jackson dated March 14,
1995, as amended to date, filed as Exhibit 10(m) to Form 10-K for
fiscal year ended March 31, 1999, and incorporated herein by
reference.
66
10.10 Salary Continuation Plan with John P. O'Donnell dated March 14,
1995, as amended to date, filed as Exhibit 10.9 to Form 10-K for
the fiscal year ended March 31, 2001, and incorporated herein by
reference.
10.11 Salary Continuation Plan with Milan Puskar dated January 27, 1995,
as amended, and Patricia Sunseri dated March 14, 1995, as amended,
filed as Exhibit 10.1 to Form 10-Q for the quarterly period ended
September 30, 2001, and incorporated herein by reference.
10.12 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.
10.13 Service Benefit Agreement with Laurence S. DeLynn and John C.
Gaisford, M.D., 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.
10.14 Transition and Succession Agreement dated November 10, 1999, as
amended to date, with Milan Puskar, Patricia Sunseri, Roderick P.
Jackson, Louis J. DeBone and John P. O'Donnell, filed as Exhibit
10.2 to Form 10-Q for the quarterly period ended December 31,
2001, and incorporated herein by reference.
10.15 Executives' Retirement Savings Plan, filed as Exhibit 10.14 to
Form 10-K for the fiscal year ended March 31, 2001, and
incorporated herein by reference.
10.16 Supplemental Health Insurance Program For Certain Officers of
Mylan Laboratories Inc., effective December 15, 2001, filed as
Exhibit 10.1 to Form 10-Q for the quarterly period ended December
31, 2001, and incorporated herein by reference.
10.17 Consulting Agreement with Coury Consulting, L.P. dated July 27,
2000, as amended to date, filed herewith.
21.1 Subsidiaries of the registrant, filed herewith.
23.1 Independent Auditors' consents, filed herewith.
(b) Reports on Form 8-K
None.
67
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 on June 14, 2002.
Mylan Laboratories Inc.
by /S/ MILAN PUSKAR
Milan Puskar
Chairman and Chief Executive Officer
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 indicated as of June 14, 2002.
Signature Title
/S/ MILAN PUSKAR Chairman, Chief Executive Officer and Director Milan Puskar
(Principal executive officer)
/S/ EDWARD J. BORKOWSKI Chief Financial Officer
Edward J. Borkowski (Principal financial officer)
/S/ GARY E. SPHAR V.P. - Finance, Mylan Pharmaceuticals Inc.
GARY E. SPHAR (Principal accounting officer)
/S/ ROBERT J. COURY Vice Chairman and Director
Robert J. Coury
/S/ WENDY CAMERON Director
Wendy Cameron
/S/ LESLIE B. DANIELS Director
Leslie B. Daniels
/S/ LAURENCE S. DELYNN Director
Laurence S. DeLynn
/S/ JOHN C. GAISFORD, M.D. Director
John C. Gaisford, M.D.
/S/ DOUGLAS J. LEECH Director
Douglas J. Leech
/S/ PATRICIA A. SUNSERI Senior Vice President and Director
Patricia A. Sunseri
68
/S/ C.B. TODD President, Chief Operating Officer and Director
C.B. Todd
/S/ DR. R.L. VANDERVEEN Director
R.L. Vanderveen, Ph.D.
/S/ STUART A. WILLIAMS Chief Legal Officer and Director
Stuart A. Williams, Esq.
69
EXHIBIT 21.1
Subsidiaries
Name State of Incorporation - ---- ------------------------- Mylan Pharmaceuticals Inc. West Virginia Milan Holding, Inc. Delaware Bertek Pharmaceuticals Inc. Texas Mylan Inc. Delaware UDL Laboratories, Inc. Illinois Mylan Technologies Inc. West Virginia American Triumvirate Insurance Company Vermont Mylan International Holdings, Inc. Vermont Mylan Caribe Inc. Vermont
Exhibits 23.1
INDEPENDENT AUDITORS’ CONSENT
We consent to the incorporation by reference in Registration Statement Nos. 333-65329, 333-65327, 333-35887, 333-65916, 33-65918 and 333-42182 of Mylan Laboratories Inc. on Form S-8 of our report dated May 6, 2002 (May 29, 2002 as to Note 11), appearing in this Annual Report on Form 10-K of Mylan Laboratories Inc. for the year ended March 31, 2002.
DELOITTE & TOUCHE LLP Pittsburgh, Pennsylvania June 13, 2002EXECUTIVE EMPLOYMENT AGREEMENTThis Executive Employment Agreement (the "Agreement"), is dated as of March 1, 2002, by and between Mylan Laboratories Inc. (the "Company") and Stuart A. Williams ("Executive"). RECITALS: WHEREAS, the Company wishes to employ Executive as Chief Legal Officer but may be interested in utilizing Executive in capacities other than as Chief Legal Officer in order to avail itself of Executive's skills and abilities in light of the Company's business needs; and WHEREAS, Executive is desirous of assisting the Company in whatever manner the Chairman, Chief Executive Officer, and/or Board of Directors deem appropriate; NOW, THEREFORE, in consideration of the promises and mutual obligations of the parties contained herein, and for other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and Executive agree as follows: 1. Employment of Executive. The Company agrees to employ Executive, and Executive accepts employment by the Company, during the term of this Agreement for the consideration and on the terms and conditions provided herein. 2. Effective Date: Term of Employment. This Agreement shall commence and be effective for all purposes as of March 1, 2002 and shall remain in effect, unless earlier terminated, or extended or renewed, as provided in Section 8 of this Agreement, through December 31, 2004. 3. Executive's Compensation. Executive's "Compensation" shall include the following: (a) Base Salary. During the term of this Agreement, as Executive's base compensation for all services to be performed, the Company shall pay Executive an annual salary of $350,000.00 (the "Base Salary"), payable in accordance with the Company's normal payroll practices for its executive officers. This base salary may be increased from time to time at the discretion of the Board of Directors of the Company or any committee thereof having authority over executive compensation. (b) Bonus. During the term of this Agreement, Executive shall be eligible to receive an annual discretionary bonus up to seventy-five percent (75%) of Executive's Base Salary. (c) Non-Qualified Stock Options. Executive shall receive non-qualified options to purchase up to 200,000 shares of Mylan Laboratories Inc. common stock under the 1997 Mylan Laboratories Inc. Incentive Stock Option Plan (the "Plan") in accordance with the following vesting schedule, provided that Executive remains employed by the Company on the following vesting dates: on March 1, 2002, Executive shall receive an option to purchase 100,000 shares; on March 1, 2003, Executive shall receive an option to purchase an additional 50,000 shares; and on March 1, 2004, Executive shall receive an option to purchase an additional 50,000 shares. These options will be subject to all terms of the Plan, as amended and the applicable stock option agreement. (d) Fringe Benefits and Other Agreements. During the term of Employment, Executive shall receive such benefits of employment as are granted senior executive employees at the Chief Legal Officer level, including but not limited to, health insurance coverage, profit-sharing, participation in the Company's 401(k) plan, short-term disability benefits, 25 vacation days, expense reimbursement, and automobile usage in accordance with the plan documents or policies that govern such benefits. The Company will also pay for or reimburse Executive for professional fees and/or dues including fees and travel expenses associated with continuing legal education requirements. Executive shall also be considered eligible under such other agreements as are available to senior executives at the Chief Legal Officer level such as the change in control agreement. 4. Confidentiality. Executive recognizes and acknowledges that the business interests of the Company and its subsidiaries, parents and affiliates (collectively the "Mylan Companies") require a confidential relationship between the Company and Executive and the fullest protection and confidential treatment of the financial data, customer information, supplier information, market information, marketing and/or promotional techniques and methods, pricing information, purchase information, sales policies, employee lists, policy and procedure information, records, advertising information, computer records, trade secrets, know how, plans and programs, sources of supply, and other knowledge of the business of the Mylan Companies (all of which are hereinafter jointly termed "Confidential Information") which have or may in whole or in part be conceived, learned or obtained by Executive in the course of Executive's employment with the Company. Accordingly, Executive agrees to keep secret and treat as confidential all Confidential Information whether or not copyrightable or patentable, and agrees not to use or aid others in learning of or using any Confidential Information except in the ordinary course of business and in furtherance of the Company's interests. During the term of this Agreement and at all times thereafter, except insofar as is necessary disclosure consistent with the Company's business interests: (a) Executive will not, directly or indirectly, disclose any Confidential Information to anyone outside the Mylan Companies; (b) Executive will not make copies of or otherwise disclose the contents of documents containing or constituting Confidential Information; (c) As to documents which are delivered to Executive or which are made available to him as a necessary part of the working relationships and duties of Executive within the business of the Company, Executive will treat such documents confidentially and will treat such documents as proprietary and confidential, not to be reproduced, disclosed or used without appropriate authority of the Company; (d) Executive will not advise others that the information and/or know how included in Confidential Information is known to or used by the Company; and (e) Executive will not in any manner disclose or use Confidential Information for Executive's own account and will not aid, assist or abet others in the use of Confidential Information for their account or benefit, or for the account or benefit of any person or entity other than the Company. The obligations set forth in this paragraph are in addition to any other agreements the Executive may have with the Company and any and all rights the Company may have under state or federal statutes or common law. 5. Non-Competition and Non-Solicitation. Executive agrees that during the term of this Agreement and for a period ending two (2) years after termination of Executive's employment with the Company for any reason: (a) Executive shall not, directly or indirectly, whether for himself or for any other person, company, corporation or other entity be or become associated in any way (including but not limited to the association set forth in i-vii of this subsection) with any business or organization which is directly or indirectly engaged in the research, development, manufacture, production, marketing, promotion or sale of any product the same as or similar to those of the Mylan Companies, or which competes or intends to compete in any line of business with the Mylan Companies within North America. Notwithstanding the foregoing, Executive may during the period in which this paragraph is in effect own stock or other interests in corporations or other entities that engage in businesses the same or substantially similar to those engaged in by the Mylan Companies, provided that Executive does not, directly or indirectly (including without limitation as the result of ownership or control of another corporation or other entity), individually or as part of a group (as that term is defined in Section 13 (d) of the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder) (i) control or have the ability to control the corporation or other entity, (ii) provide to the corporation or entity, whether as an Executive, consultant or otherwise, advice or consultation, (iii) provide to the corporation or entity any confidential or proprietary information regarding the Mylan Companies or its businesses or regarding the conduct of businesses similar to those of the Mylan Companies, (iv) hold or have the right by contract or arrangement or understanding with other parties to hold a position on the board of directors or other governing body of the corporation or entity or have the right by contract or arrangement or understanding with other parties to elect one or more persons to any such position, (v) hold a position as an officer of the corporation or entity, (vi) have the purpose to change or influence the control of the corporation or entity (other than solely by the voting of his shares or ownership interest) or (vii) have a business or other relationship, by contract or otherwise, with the corporation or entity other than as a passive investor in it; provided, however, that Executive may vote his shares or ownership interest in such manner as he chooses provided that such action does not otherwise violate the prohibitions set forth in this sentence. (b) Executive will not, either directly or indirectly, either for himself or for any other person, partnership, firm, company, corporation or other entity, contact, solicit, divert, or take away any of the customers or suppliers of the Mylan Companies. (c) Executive will not solicit, entice or otherwise induce any employee of the Mylan Companies to leave the employ of the Mylan Companies for any reason whatsoever; nor will Executive directly or indirectly aid, assist or abet any other person or entity in soliciting or hiring any employee of the Mylan Companies, nor will Executive otherwise interfere with any contractual or other business relationships between the Mylan Companies and its employees. 6. Severability. Should a court of competent jurisdiction determine that any section or sub-section of this Agreement is unenforceable because one or all of them are vague or overly broad, the parties agree that this Agreement may and shall be enforced to the maximum extent permitted by law. It is the intent of the parties that each section and sub-section of this Agreement be a separate and distinct promise and that unenforceability of any one subsection shall have no effect on the enforceability of another. 7. Injunctive Relief. The parties agree that in the event of Executive's violation of sections 4 and/or 5 of this Agreement or any subsection thereunder, that the damage to the Company will be irreparable and that money damages will be difficult or impossible to ascertain. Accordingly, in addition to whatever other remedies the Company may have at law or in equity, Executive recognizes and agrees that the Company shall be entitled to a temporary restraining order and a temporary and permanent injunction enjoining and prohibiting any acts not permissible pursuant to this Agreement. Executive agrees that should either party seek to enforce or determine its rights because of an act of Executive which the Company believes to be in contravention of sections 4 and/or 5 of this Agreement or any subsection thereunder, the duration of the restrictions imposed thereby shall be extended for a time period equal to the period necessary to obtain judicial enforcement of the Company's rights. 8. Termination of Employment. (a) Resignation Without Good Reason. Executive may resign from employment at any time upon 90 days written notice to the Company. During the 90 days notice period Executive will continue to perform duties and abide by all other terms and conditions of this Agreement. Additionally, Executive will use his best efforts to effect a smooth and effective transition to whomever will replace Executive. The Company reserves the right to accelerate the effective date of Executive's resignation. If Executive resigns without "Good Reason" (as defined below), the Company shall have no liability to Executive under this Agreement other than that the Company shall pay Executive's wages and benefits through the effective date of Executive's resignation. Executive, however, will continue to be bound by all provisions of this Agreement that survive termination of employment. For purposes of this Agreement, "Good Reason" shall mean a reduction of Executive's Compensation or responsibilities, unless all other similarly situated senior executives of the Company are required to accept a similar reduction, or a relocation of Executive's principal place of work to a location more than thirty miles from Morgantown, West Virginia (with the exception of a relocation within 30 miles of Pittsburgh, PA which would be permissible unless and until Executive moves to Morgantown, West Virginia). If Executive resigns with Good Reason and complies in all respects with his obligations hereunder, the Company will continue to pay Executive his Compensation including bonuses commensurate with the bonuses, if any, awarded to other similarly situated senior executives of the Company, for twenty-four (24) months following expiration of the 90 days notice period provided, however, that in the case of health insurance continuation, the Company's obligation to provide health insurance benefits shall end at such time as Executive, at his option, voluntarily obtains health insurance benefits through another employer or otherwise in connection with rendering services for a third party. Executive shall also be entitled one hundred percent (100%) vesting of all stock options described in this Agreement in the event of a Resignation with Good Reason. (b) Termination for Cause. The Company agrees not to terminate Executive's employment during the term of this Agreement except for Cause, as defined herein, and agrees to give Executive written notice of its belief that acts or events constituting Cause exist. Executive has the right to cure within fourteen (14) days of the Company's giving of such notice, the acts, events or conditions which led to such notice being given. For purposes of this Agreement, "Cause" shall mean: (i) Executive's willful and substantial misconduct with respect to the Company's business or affairs; (ii) Executive's gross neglect of duties, (iii) Executive's conviction of a crime involving moral turpitude; (iv) Executive's conviction of any felony; or (v) Executive's death. If the Company terminates Executive's employment for Cause, the Company shall have no liability to Executive other than to pay Executive's wages and benefits through the effective date of Executive's termination. Executive, however, will continue to be bound by all provisions of this Agreement that survive termination of employment. (c) Termination Without Cause. If the Company discharges Executive without Cause, the Company will continue to pay Executive his Compensation including bonuses commensurate with the bonuses, if any, awarded to other similarly situated senior executives of the Company, for twenty four (24) months provided, however, that in the case of health insurance continuation, the Company's obligation to provide health insurance benefits shall end at such time as Executive, at his option, voluntarily obtains health insurance benefits through another employer or otherwise in connection with rendering services for a third party. Executive shall also be entitled to one hundred percent (100%) vesting of all stock options described in this Agreement in the event of a Termination Without Cause. Executive, however, will continue to be bound by all provisions of this Agreement that survive termination of employment. (d) Extension or Renewal. The Term of Employment may be extended or renewed upon mutual agreement of Executive and the Company. If the Term of Employment is not extended or renewed on terms mutually acceptable to Executive and the Company, and if this Agreement has not been already terminated for reasons stated in Section 9 (a), (b), or (c) of this Agreement, Executive shall be paid severance in an amount equal to Executive's Base Salary, less applicable withholding, through normal payroll procedures in equal monthly installments, and shall pay the cost of continuing Executive's health insurance benefits in both cases for twenty four (24) months provided, however, that in the case of health insurance continuation, the Company's obligation to provide health insurance benefits shall end at such time as Executive, at his option, voluntarily obtains health insurance benefits through another employer or otherwise in connection with rendering services for a third party. Executive, however, will continue to be bound by all provisions of this Agreement that survive termination of employment. (e) Return of Company Property. Upon the termination of Executive's employment for any reason, Executive shall immediately return to the Company all records, memoranda, files, notes, papers, correspondence, reports, documents, books, diskettes, hard drives, electronic files, and all copies or abstracts thereof that Executive has concerning the Company's business. Executive shall also immediately return all keys, identification cards or badges and other Company property. 9. Indemnification. In the event that Executive is made a party or is threatened to be made a party to or is involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative ("proceeding"), by reason of the fact that he is or was an officer, employee or agent of or is or was serving at the request of the Company as a director or officer, employee or agent or another corporation, or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, whether the basis of such proceeding is alleged action in an official capacity as a director, officer, employee or agent or in any other capacity while serving as a director, officer, employee or agent, Executive shall be indemnified and held harmless by the Company to the fullest extent authorized by law against all expenses, liabilities and losses (including attorneys fees, judgments, fines, ERISA excise taxes or penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by Executive in connection therewith. Such right shall be a contract right and shall include the right to be paid by the Company expenses incurred in defending any such proceeding in advance of its final disposition; provided, however, that the payment of such expenses incurred by Executive in his capacity as a director or officer (and not in any other capacity in which service was or is rendered by Executive while a director or officer, including, without limitation, service to an employee benefit plan) in advance of the final disposition of such proceeding will be made only upon delivery to the Company of an undertaking, by or on behalf of Executive, to repay all amounts to so advanced if it should be determined ultimately that Executive is not entitled to be indemnified under this section or otherwise. Promptly after receipt by Executive of notice of the commencement of any action, suit or proceeding for which Executive may be entitled to be indemnified, Executive shall notify the Company in writing of the commencement thereof (but the failure to notify the Company shall not relieve it from any liability which it may have under this Section 10 unless and to the extent that it has been prejudiced in a material respect by such failure or from the forfeiture of substantial rights and defenses). If any such action, suit or proceeding is brought against Executive and he notifies the Company of the commencement thereof, the Company will be entitled to participate therein, and, to the extent it may elect by written notice delivered to Executive promptly after receiving the aforesaid notice from Executive, to assume the defense thereof with counsel reasonably satisfactory to Executive, which may be the same counsel as counsel to the Company. Notwithstanding the foregoing, Executive shall have the right to employ his own counsel in any such case, but the fees and expenses of such counsel shall be at the expense of Executive unless (i) the employment of such counsel shall have been authorized in writing by the Company, (ii) the Company shall not have employed counsel reasonably satisfactory to Executive to take charge of the defense of such action within a reasonable time after notice of commencement of the action or (iii) Executive shall have reasonably concluded, after consultation with counsel to Executive, that a conflict of interest exists which makes representation by counsel chosen by the Company not advisable (in which case the Company shall not have the right to direct the defense of such action on behalf of Executive), in any of which events such fees and expenses of one additional counsel shall be borne by the Company. Anything in this Section 11 to the contrary notwithstanding, the Company shall not be liable for any settlement of any claim or action effected without its written consent. 10. Efforts and Transition. During the Term of Employment, Executive shall: serve the Company to the best of his ability, and use his best efforts to promote the interests of the Company. In furtherance of this objective the Company expects and understands that Executive will maintain an "of counsel" relationship with his former firm under the terms and conditions set forth in the agreement dated as of March 1, 2002 (attached hereto as Exhibit A) or maintain an of counsel relationship with another private law firm under substantially similar terms. The Company also recognizes that Executive is engaged in certain legal representations that will need to be transitional over time. Said legal representations may not affect performance of Executive's obligations under this Agreement. 11. Other Agreements. The rights and obligations contained in this Agreement are in addition to and not in place of any rights or obligations contained in any other agreements between the Executive and the Company. 12. Notices. All notices hereunder to the parties hereto shall be in writing sent by certified mail, return receipt requested, postage prepaid, and by fax, addressed to the respective parties at the following addresses:
MYLAN: Mylan Laboratories Inc. 781 Chestnut Ridge Road Morgantown, West Virginia 26504-4310 Attention: Chairman of the Board EXECUTIVE: Stuart A. Williams 2189 Meadowmont Drive Pittsburgh, PA 15241 Either party may, by written notice complying with the requirements of this section, specify another or different person or address for the purpose of notification hereunder. All notices shall be deemed to have been given and received on the day a fax is sent or, if mailed only, on the third business day following such mailing. 13. Withholding. All payments required to be made by the Company hereunder to Executive or his dependents, beneficiaries, or estate will be subject to the withholding of such amounts relating to tax and/or other payroll deductions as may be required by law. 14. Modification and Waiver. This Agreement may not be changed or terminated orally, nor shall any change, termination or attempted waiver of any of the provisions contained in this Agreement be binding unless in writing and signed by the party against whom the same is sought to be enforced, nor shall this section itself by waived verbally. This Agreement may be amended only by a written instrument duly executed by or on behalf of the parties hereto. 15. Construction of Agreement. This Agreement and all of its provisions were subject to negotiation and shall not be construed more strictly against one party than against another party regardless of which party drafted any particular provision. 16. Successors and Assigns. This Agreement and all of its provisions, rights and obligations shall be binding upon and inure to the benefit of the parties hereto and the Company's successors and assigns. This Agreement may be assigned by the Company to any person, firm or corporation which shall become the owner of substantially all of the assets of the Company or which shall succeed to the business of the Company; provided, however, that in the event of any such assignment the Company shall obtain an instrument in writing from the assignee in which such assignee assumes the obligations of the Company hereunder and shall deliver an executed copy thereof to Executive. No right or interest to or in any payments or benefits hereunder shall be assignable by Executive; provided, however, that this provision shall not preclude him from designating one or more beneficiaries to receive any amount that may be payable after his death and shall not preclude the legal representative of his estate from assigning any right hereunder to the person or persons entitled thereto under his will or, in the case of intestacy, to the person or persons entitled thereto under the laws of intestacy applicable to his estate. The term "beneficiaries" as used in this Agreement shall mean a beneficiary or beneficiary or beneficiaries so designated to receive any such amount, or if no beneficiary has been so designated, the legal representative of the Executive's estate. No right, benefit, or interest hereunder, shall be subject to anticipation, alienation, sale, assignment, encumbrance, charge, pledge, hypothecation, or set-off in respect of any claim, debt, or obligation, or to execution, attachment, levy, or similar process, or assignment by operation of law. Any attempt, voluntary or involuntary, to effect any action specified in the immediately preceding sentence shall, to the full extent permitted by law, be null, void, and of no effect. 17. Choice of Law and Forum. This Agreement shall be construed and enforced according to, and the rights and obligations of the parties shall be governed in all respects by, the laws of the Commonwealth of Pennsylvania. Any controversy, dispute or claim arising out of or relating to this Agreement, or the breach hereof, including a claim for injunctive relief, or any claim which, in any way arises out of or relates to, Executive's employment with the Company or the termination of said employment, including but not limited to statutory claims for discrimination, shall be resolved by arbitration in accordance with the then current rules of the American Arbitration Association respecting employment disputes. The hearing of any such dispute will be held in Pittsburgh, Pennsylvania, and the parties shall bear their own costs, expenses and counsel fees. The decision of the arbitrator(s) will be final and binding on all parties. Executive and the Company expressly consent to the jurisdiction of any such arbitrator over them. 18. Headings. The headings of the sections of this Agreement have been inserted for convenience of reference only and shall in no way affect the interpretation of any of the terms or conditions of this Agreement. 19. Execution in Counterparts.This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the day and year first above mentioned. MYLAN LABORATORIES INC. EXECUTIVE: By:_____________________________ \s\ Stuart A. Williams Stuart A. Williams Its:_____________________________
CONSULTING AGREEMENT THIS AGREEMENT, made and entered into as of July 27, 2000 by and between MYLAN LABORATORIES INC., a Pennsylvania corporation having an address at 1030 Century Building, 130 Seventh Street, Pittsburgh, PA 15222 ("Consultee"), and COURY CONSULTING, L.P., a Pennsylvania limited partnership, having an address at USX Tower, 30th Floor, 600 Grant Street, Pittsburgh, Pennsylvania 15219 ("Consultant"). W I T N E S S E T H: - - - - - - - - - - WHEREAS, Consultee desires to retain the unique consulting services of Consultant ("Services"); and WHEREAS, Consultant is willing to provide such unique Services based on the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the mutual promises contained herein and intending to be legally bound hereby, the parties covenant and agree as follows: Section 1. Engagement. Consultee hereby engages Consultant, and Consultant hereby accepts such engagement, to evaluate and make recommendations to Consultee with respect to methods and procedures that are intended to protect and maximize shareholder value. Additionally, Consultant will, at the Consultee's request, provide guidance and counsel with respect to business combinations and commercial business transactions, and any and all other activities and services incidental thereto provided, however, that nothing contained in this Agreement shall be construed to include the provision of any securities investment advice or related service. Consultant shall report to Milan Puskar in his capacity as Chief Executive Officer of the Consultee and/or Dana Barnett in his capacity as Executive Vice President of the Consultee and to no other person or officer of the Consultee. Section 2. Term and Termination. Subject to an earlier termination of this Agreement pursuant to subsections (a) (b) and (c) below, the term of this Agreement shall be for a period of three (3) years from the date set forth above. Consultee or Consultant may terminate this Agreement prior to expiration of the term hereof as follows: (a) Termination Without Cause. Consultee or Consultant may terminate this Agreement at any time, effective thirty (30) days after delivery of written notice of termination to the other. In such event, Consultant shall continue to render Services if requested by Consultee until the effective date of termination, and Consultant shall be paid its regular monthly compensation until such date. 1(b) Termination For Cause. Consultee may terminate this Agreement for Cause (as hereinafter defined) at any time, effective upon delivery of written notice to Consultant. In such event, Consultant shall be entitled to its regular monthly compensation up to the date of termination, and in no event shall Consultant be entitled to additional compensation or bonuses after the effective date of such termination. (c) Termination Due to a Change in Control. Consultant may terminate this Agreement due to a Change in Control (as hereinafter defined), upon written notice to the Consultee delivered within sixty (60) days of such Change In Control. Such termination shall be effective thirty (30) days after delivery of such written notice. In such event, Consultant shall continue to render Services if requested by Consultee until the effective date of termination, and Consultant shall be paid its regular monthly compensation until such date. In no event shall a termination due to a Change of Control be deemed to be a Termination Without Cause. Section 3. Death or Disability. If Robert J. Coury ("Coury") dies or becomes mentally or physically disabled during the term of this Agreement, Consultee shall nonetheless pay to Consultant the compensation which would otherwise be payable hereunder through the date of Coury's death or disability, and the term of this Agreement shall be deemed to have expired on the date of Coury's death or disability. Section 4. Confidentiality. Consultant hereby agrees that all information of whatsoever character either delivered to Consultant by Consultee or acquired by Consultant in the course of performing Services for Consultee shall be maintained in strictest confidence and shall not be disclosed to third parties without the written consent of Consultee, except to the extent Consultant deems necessary to obtain the advice of attorneys, accountants, investment bankers and/or other consultants in connection with the performance of Services hereunder. Consultant further agrees not to make any use of such information unless expressly authorized to do so by Consultee, and shall take no action which in any way is detrimental to the interests of Consultee in respect of such information. No license or right of any nature is expressly or impliedly granted to Consultant for the use of any intellectual property owned or utilized by Consultee. Section 5. Personal Service. Consultant's Services to be provided pursuant to this Agreement shall be performed personally by Coury, and no other person shall be engaged in the performance of such Services without the prior written consent of Consultee; provided, however, the foregoing shall not apply to assistance rendered by accountants, attorneys, investment bankers secretaries, clerical personnel and other similar professionals and support services required by Consultant in the performance of Services. 2
Section 6. Compensation. Consultee shall pay Consultant the following compensation: (a) Signing Bonus. In order to induce the Consultant to enter into this Agreement, Consultee grants to the Consultant an option to acquire One Hundred Thousand (100,000) shares of the Consultee's common stock ("Option") such Option to be vested immediately upon the execution of this agreement. Additional provisions governing the terms of this Option are contained in an Option Agreement attached as Exhibit A to this Agreement. (b) Monthly Compensation. On the first occurring monthly anniversary of this Agreement and on each subsequent monthly anniversary through the termination of this Agreement, Consultee agrees to pay the Consultant the sum of fifteen thousand dollars ($15,000). (c) Performance Bonus. In its sole and absolute discretion Consultee may pay the Consultant a performance bonus in such amount, at such times and based upon such performance as Puskar and Barnett or their successors may deem appropriate. (d) Transaction Fee. Consultee agrees to pay the Consultant a fee equal to one-tenth of one percent (.1%) of the Aggregate Value (as hereinafter defined) of any Major Transaction (as hereinafter defined) involving the Consultee (including any transaction in which the Consultee is the surviving entity); provided, however, that (i) the Consultant participated or provided services in connection with such Major Transaction, (ii) such Major Transaction was announced during the period commencing on the effective date of this Agreement and ending twelve (12) months after the termination of this Agreement, and (iii) the Consultant has neither voluntarily terminated this Agreement (i.e., the Consultant did not initiate a Termination Without Cause) nor been Terminated for Cause. In addition to the foregoing, Consultee agrees to reimburse Consultant upon request for all expenses reasonably incurred by Consultant in performing Services pursuant to this Agreement including, without limitation, travel, lodging, food and third-party professional expenses. Section 7. Consultant Representations. Consultant hereby represents and warrants as follows: (a) Good Standing. Consultant is a Pennsylvania limited partnership duly organized, validly existing and in good standing under the laws of the Commonwealth of Pennsylvania. (b) Authority. Consultant is duly authorized to enter into this Agreement, and to perform its obligations hereunder in accordance with the terms and conditions contained herein. 3
(c) Conflict. Neither the execution of this Agreement, nor the performance of Services hereunder, will conflict with, constitute a breach of, or cause a default under any agreement, understanding, deed of trust, loan agreement or other contract, statute or ordinance to which Consultant is a party, bound or subject. (d) Enforceability. When executed by Consultant, this Agreement shall constitute a legally binding obligation of Consultant, enforceable in accordance with the terms and conditions contained herein. Section 8. Consultant Obligations. Consultant warrants that it shall render Services pursuant to this Agreement in a professional manner, and will at all times endeavor to provide sound and reasonable recommendations to Consultee in performing such Services. Except as otherwise expressly stated herein, Consultant makes no representations, warranties or covenants with respect to its performance of Services. THE PARTIES ACKNOWLEDGE AND AGREE THAT CONSULTANT'S SERVICES SHALL NOT INCLUDE RESPONSIBILITY FOR MAKING ANY FINAL DECISIONS ON CONSULTEE'S BEHALF. THEREFORE, CONSULTANT EXPRESSLY DISCLAIMS ANY LIABILITY ARISING FROM ANY DECISION MADE ON THE BASIS OF CONSULTANT'S SERVICES OR RECOMMENDATIONS INCLUDING, WITHOUT LIMITATION, CONSEQUENTIAL DAMAGES DERIVING THEREFROM. CONSULTEE ACKNOWLEDGES AND AGREES THAT NEITHER CONSULTANT NOR COURY SHALL BE HELD RESPONSIBLE OR LIABLE FOR THE MAKING OF ANY DECISION BASED ON CONSULTANT'S OR COURY'S SERVICES OR RECOMMENDATIONS, AND CONSULTEE HEREBY WAIVES AND RELINQUISHES ANY CAUSE OF ACTION IT NOW HAS OR MAY IN THE FUTURE ACQUIRE AGAINST CONSULTANT OR COURY BASED ON OR RELATING TO ANY SERVICES OR RECOMMENDATIONS RENDERED BY EITHER. Section 9. Independent Contractor. In the performance of Services hereunder, Consultant shall act at all times solely as an independent contractor, and nothing herein shall at any time be construed so as to create the relationship of employer and employee, partnership, principal and agent or joint venture as between Consultee and Consultant. Section 10. Service To Other Clients. Consultee acknowledges and agrees that its engagement of Consultant's Services pursuant to this Agreement shall not be an exclusive engagement, and that Coury's employment by Consultant shall not be exclusive of other activities engaged in by Coury. Consultee further acknowledges and agrees that during the term of this Agreement, Consultant shall have clients in addition to Consultee, and that Consultant may be obligated to perform services for such other clients during said term. 4
Section 11. Assignment. Neither this Agreement nor any interest herein or obligation hereunder may be assigned by either of the parties hereto without the express written consent of the other. Section 12. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania. Section 13. Successors and Assigns. Except as otherwise contained herein, this Agreement shall be binding upon, and will inure to the benefit of, the successors and permitted assigns of the parties hereto. Section 14. Notices. Any notices required to be made under the terms of this Agreement shall be made to the parties at the addresses listed above subject to each party's right to change the address for such notification by registered mail or similar service and shall be deemed to be received three (3) days after the posting thereof. Section 15. Definitions. For purposes of this Agreement, the following terms shall have the meanings assigned to them: (a) Termination for Cause. In the event that the Consultant has (i) committed an act of dishonesty, fraud, theft, misappropriation, embezzlement or breach of trust against the Consultee or an act which the Consultant knew to be in violation of the duties to the Consultee (including the unauthorized disclosure of proprietary information); (ii) willfully or grossly neglected its duties and other obligations hereunder or continually failed to render services or perform its obligations to the Consultee, which neglect or failure is not remedied within 10 days after written notice thereof by the Consultee; or (iii) been convicted of a felony (by trial or plea), the Consultee shall be entitled to terminate this Agreement and the relationship established hereby immediately upon the giving of written notice to the Consultant of such termination specifying the grounds therefor. Any such termination shall be a "Termination for Cause." Without limiting the generality of the foregoing, the following specific instances of conduct shall give rise to the right of the Consultee to terminate the Consultant for cause: (A) a violation of the confidentiality obligations of the Consultee herein or a confidentiality obligation to which the Consultee or any affiliate is bound; (B) misappropriation of Consultee's property or the property of affiliate of the Consultee; and (C) falsification of Consultee's records. (b) Change in Control. (i) Change Of Control shall mean a change of control of a nature that would be required to be reported in response to Item 6 (e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as 5
amended (the "Exchange Act"), whether or not the Consultee is then subject to such reporting requirement; provided that, without limitation, such a Change of Control shall be deemed to have occurred if (A) any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as determined for purposes of Regulation 13D-G under the Exchange Act as currently in effect), other than a Consultee-sponsored employee benefit plan, directly or indirectly, of securities of the Consultee representing twenty percent (20%) or more of the combined voting power of the Consultee 's then outstanding securities; or (B) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board and any new director, whose election to the Board or nomination for election to the Board by the Consultee's stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election to the Board or nomination for election to the Board by the Consultee 's stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority of the Board; or (C) the stockholders of the Consultee approve (1) a merger or consolidation of the Consultee with any corporation or other entity other than a merger or consolidation which would result in the holders of the voting securities of the Consultee outstanding immediately prior thereto holding immediately thereafter securities representing more than eighty percent (80%) of the combined voting power of the voting securities of the Consultee or such surviving entity outstanding immediately after such merger or consolidation (2) a plan of complete liquidation of the Consultee or (3) an agreement for the sale or disposition by the Consultee of all or substantially all of the Consultee's assets; PROVIDED, HOWEVER, that if such a merger, consolidation, plan of liquidation or sale of substantially all assets is not consummated following such stockholder approval and the transaction is abandoned, then the Change of Control shall be deemed not to have occurred. Notwithstanding the foregoing, in no event shall a Change of Control be deemed to occur as the result of the formation of a holding company; (ii) Change in Control shall also mean the termination of employment (including a termination due to death, disability or retirement) or demotion of Milan Puskar and Dana Barnett, or a change in the Consultant's reporting responsibility such that the Consultant must report to someone other than Milan Puskar or Dana Barnett. (c) Major Transaction. For purposes of this agreement, the term "Major Transaction" shall include, without limitation, any sale (whether in one or a series of transactions) of all or a substantial amount of the assets or the capital stock of the Company, any sale, merger, or joint venture combination involving the Company, any recapitalization, restructuring or liquidation of the Company or any combination thereof, or any other form of transaction or disposition which results in the effective sale of the principal business and operations of the Company by the current owners, and shall also include a material acquisition of 6
a business or business line. The term "Major Transaction" shall not include the acquisition of a product or a product line or strategic alliances or other similar transactions which are in the ordinary course of the business of the Company, nor shall it include an investment in the Company by one or more institutional investors who do not actively control the Company following such investment. (d) The "Aggregate Value" of a Major Transaction shall equal the value of all consideration received or to be received per share of common stock (the "Per Share Consideration") pursuant to the Major Transaction multiplied by the Fully Diluted shares outstanding (or in the case of a sale of assets, the consideration received for such assets), plus the value of any debt, capital lease, and preferred stock obligations of the entity or business acquired directly or indirectly assumed, retired, or defeased in connection with the Major Transaction or remaining on the financial statements of the entity or business at the closing of the Major Transaction. "Fully Diluted" shares outstanding shall be defined as the total number of common shares outstanding plus the total number of common shares that would be issued upon conversion of any securities convertible into common shares including, but not limited to, all outstanding convertible preferred stock and stock options. In the case of a Major Transaction in which the Per Share Consideration consists of publicly traded common stock, the Per Share Consideration shall be computed based on the average closing price of such common stock over the 10 consecutive trading days up to and including the second trading day immediately preceding the closing of the Major Transaction. The Aggregate Value of a Major Transaction shall include any break-up or similar fee received by the Consultee with respect to a Major Transaction that is not consummated. Section 16. Captions. Section captions used in this Agreement are for convenience only, and shall not be utilized in the construction or interpretation of this Agreement. Section 17. Entire Agreement. This Agreement sets forth the entire agreement and understanding between the parties as to the subject matter hereof, and supersedes all prior discussions between them concerning such matters. This Agreement shall not be subject to change, alteration or amendment other than by an instrument in writing duly executed by the parties hereto. 7
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. CONSULTANT: CONSULTEE: COURTY CONSULTING, L.P. MYLAN LABORATORIES INC. By: Coury Consulting, Inc. Sole General Partner By: /s/ Robert J. Coury By:/s/Milan Puskar ------------------- -------------------- Robert J. Coury Milan Puskar President Chairman and Chief Executive Officer By: /s/ Dana G. Barnett -------------------- Dana Barnett Executive Vice President AMENDMENT TO CONSULTING AGREEMENT THIS AMENDMENT is made this 27th day of April, 2001 to that certain CONSULTING AGREEMENT, made and entered into as of July 27, 2000 by and between MYLAN LABORATORIES INC., a Pennsylvania corporation having an address at 1030 Century Building, 130 Seventh Street, Pittsburgh, PA 15222 ("Consultee"), and COURY CONSULTING, L.P., a Pennsylvania limited partnership, having an address at USX Tower, 30th Floor, 600 Grant Street, Pittsburgh, Pennsylvania 15219 ("Consultant"). W I T N E S S E T H: WHEREAS, Consultee and Consultant desire to amend the Consulting Agreement; and WHEREAS, all capitalized terms contained herein that are not clearly defined herein shall have the meanings assigned to them under the Consulting Agreement. NOW, THEREFORE, in consideration of the services Consultant has rendered since the Consulting Agreement was first effective and in anticipation of future services to be rendered by the Consultant and in consideration of the mutual promises contained herein and intending to be legally bound hereby, the parties covenant and agree as follows: I. Effective April 27, 2001 Section 2(a) is deleted in its entirety and the following is substituted therefor: (a) Termination Without Cause. Consultant may terminate this Agreement at any time, effective thirty (30) days after delivery of written notice of termination to the Consultee. In such event, Consultant shall continue to render Services if requested by Consultee until the effective date of termination, and Consultant shall be paid its regular monthly compensation and performance bonus until such date. If the Consultee desires to terminate this Agreement without Cause, then the Consultant shall be entitled to receive its monthly compensation and performance bonus as described in Section 6 (a) and (b) for the remainder of the term of this Agreement. II. Effective April 27, 2001 Section 6(c) is deleted in its entirety and the following is substituted therefor: (c) Performance Bonus. In its sole and absolute discretion Consultee may pay the Consultant a performance bonus in such amount, at such times and based upon such performance as Puskar and Barnett or their successors may deem appropriate. Effective April 27, 2001 the parties have agreed that a performance bonus of ten thousand dollars ($10,000) per month shall be paid to the Consultant. This performance bonus shall be paid over the remaining term of this Agreement by increasing the Monthly Compensation payable to the Consultant. II. Effective upon the execution of this Amendment, Section 6(d) is deleted in its entirety and the following is substituted therefor: (d) Major Transaction. Consultee agrees that the Consultant shall participate in any Major Transaction (as hereinafter defined) including any transaction in which the Consultee is the surviving entity; provided, however, that (i) such Major Transaction was announced during the period commencing on the effective date of the amendment to this Agreement and ending twelve (12) months after the termination of this Agreement, and (ii) the Consultant has neither voluntarily terminated this Agreement (i.e., the Consultant did not initiate a Termination Without Cause) nor been Terminated For Cause. Consultee agrees to pay to, or cause to be paid to, the Consultant a fee equal to one-tenth of one percent (.1%) of the Aggregate Value (as hereinafter defined) of any Major Transaction. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. CONSULTANT: CONSULTEE: COURTY CONSULTING, L.P. MYLAN LABORATORIES INC. By: Coury Consulting, Inc. Sole General Partner By: /s/ Robert J. Coury By: /s/ Milan Puskar ------------------- ------------------------- Robert J. Coury Milan Puskar President Chairman and Chief Executive Officer By: /s/ Dana G. Barnett ------------------------- Dana Barnett Executive Vice President AMENDMENT TO CONSULTING AGREEMENT THIS AMENDMENT is made this 19th day of November, 2001 to that certain CONSULTING AGREEMENT, made and entered into as of the 27th day of July, 2000 and amended as of the 27th day of April, 2001 by and between MYLAN LABORATORIES INC., a Pennsylvania corporation having an address at 1030 Century Building, 130 Seventh Street, Pittsburgh, PA 15222 ("Consultee"), and COURY CONSULTING, L.P., a Pennsylvania limited partnership, having an address at USX Tower, 30th Floor, 600 Grant Street, Pittsburgh, Pennsylvania 15219 ("Consultant"). W I T N E S S E T H: WHEREAS, Consultee and Consultant desire to amend the Consulting Agreement effective December 1, 2001; and WHEREAS, all capitalized terms contained herein that are not clearly defined herein shall have the meanings assigned to them under the Consulting Agreement. NOW, THEREFORE, in consideration of the services Consultant has rendered since the Consulting Agreement was first effective and in anticipation of future services to be rendered by the Consultant and in consideration of the mutual promises contained herein and intending to be legally bound hereby, the parties covenant and agree as follows: I. The first sentence of Section 2 is deleted in its entirety and the following is substituted therefor: Subject to an earlier termination of this Agreement pursuant to subsections (a) (b) and (c) below, the term of this Agreement shall commence December 1, 2001 and shall terminate December 31, 2003. II. Section 2(c) is deleted in its entirety and the following is substituted therefor: (c) Termination Due to a Change In Control. Consultant may terminate this Agreement due to a Change In Control (as hereinafter defined), upon written notice to the Consultee delivered within sixty (60) days of such Change In Control. Such termination shall be effective thirty (30) days after delivery of such written notice. In such event, Consultant shall continue 1
to render Services if requested by Consultee until the effective date of termination, and Consultant shall be entitled to receive its monthly compensation as described in subsections 6(b) & (c) for the remainder of the term of this Agreement. If the Company desires to terminate this Agreement after a Change In Control, then the Consultant shall be entitled to receive its monthly compensation as described in subsections 6(b) & (c) for the remainder of the term of this Agreement. In no event shall a termination due to a Change In Control be deemed to be a Termination Without Cause by the Consultant. II. Section 6(b) is deleted in its entirety and the following is substituted therefor: (b) Monthly Compensation. Effective December 1, 2001 and on the first day of each succeeding calendar month during which this Agreement is in effect, Consultee shall pay the Consultant the sum of seventy-five thousand dollars ($75,000). III. Section 6(c) is deleted in its entirety and the following is substituted therefor: (c) Performance Bonus. In its sole and absolute discretion Consultee may pay the Consultant a performance bonus in such amount, at such times and based upon such performance as Puskar and Barnett or their successors may deem appropriate. Note: The prior Performance Bonus of $10,000 per month terminates with the payment due on November 27, 2001. III. Section 15(a) is deleted in its entirety and the following is substituted therefor: (a) Termination for Cause. In the event that the Consultant has (i) committed fraud, theft, misappropriation or embezzlement against the Consultee; (ii) willfully or grossly neglected its duties and other obligations hereunder or continually failed to render services or perform its obligations to the Consultee, which neglect or failure is not remedied within 10 days after written notice thereof by the Consultee; or (iii) been convicted of a felony (by trial or plea), the Consultee shall be entitled to terminate this Agreement and the relationship established hereby immediately upon the giving of written notice to the Consultant of such termination specifying the grounds therefor. Any such termination shall be a "Termination for Cause." IV. Section 15(b) is deleted in its entirety and the following is substituted therefor: (b) Change In Control. (1) Change In Control shall mean the acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (A) the then-outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (B) the combined voting power of the then-outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that, for purposes of this Section 1(d), the following acquisitions shall not constitute a Change of Control: (i) any acquisition directly from the Company, (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any Affiliated Company or (iv) any acquisition by any corporation pursuant to a transaction that complies with Sections 15(b)(3)(A), 15(b)(3)(B) and 15(b)(3)(C). (2) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board. (3) Consummation of a reorganization, merger, statutory share exchange or consolidation or similar corporate transaction involving the Company or any of its subsidiaries, a sale or other disposition of all or substantially all of the assets of the Company, or the acquisition of assets or stock of another entity by the Company or any of its subsidiaries (each, a "Business Combination"), in each case unless, following such Business Combination, (A) all or substantially all of the individuals and entities that were the beneficial owners of the Outstanding Company Common Stock and the Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 65% of the then-outstanding shares of common stock and the combined voting power of the then-outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation that, as a result of such transaction, owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership immediately prior to such Business Combination of the Outstanding Company Common Stock and the Outstanding Company Voting Securities, as the case may be, (B) no Person (excluding any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then-outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then-outstanding voting securities of such corporation, except to the extent that such ownership existed prior to the Business Combination, and (C) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement or of the action of the Board providing for such Business Combination; or Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company. Change in Control shall also mean the termination of employment (including a termination due to death, disability or retirement) or demotion of Milan Puskar and Dana Barnett, or a change in the Consultant's reporting responsibility such that the Consultant must report to someone other than Milan Puskar or Dana Barnett. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. CONSULTANT: CONSULTEE: COURY CONSULTING, L.P. MYLAN LABORATORIES INC. By: Coury Consulting, Inc. Sole General Partner By: /s/ Robert J. Coury By: /s/ Milan Puskar ------------------------ ----------------------- Robert J. Coury Milan Puskar President Chairman and Chief Executive Officer By: /s/ C.B. Todd ----------------------- C. B. Todd President and Chief Operating Officer EDWARD J. BORKOWSKI EXECUTIVE EMPLOYMENT AGREEMENT This Executive Employment Agreement (the "Agreement"), is dated as March 4, 2002, by and between Mylan Laboratories Inc. ("Mylan" or "Company") and Edward J. Borkowski ("Executive"). In consideration of the promises and mutual obligations of the parties contained herein, and for other valuable considerations, the receipt and sufficiency of which are hereby acknowledged, Mylan and Executive agree as follows: 1. Employment of Executive. Mylan agrees to employ Executive as Chief Financial Officer, and Executive accepts employment by Mylan during the term of this Agreement for the consideration and on the terms and conditions provided herein. 2. Effective Date: Term of Employment. This Agreement shall commence and be effective for all purposes as of March 4, 2002, and shall remain in effect through March 4, 2005, unless earlier terminated as provided in Section 9 of this Agreement. 3. Best Efforts. During the Term of this agreement, Executive shall devote his full working time and attention to the business and affairs of Mylan and the performance of his duties hereunder, serve Mylan faithfully and to the best of his ability, and use his best efforts to promote Mylan's interests. During the term of this Agreement, Executive agrees to promptly and fully disclose to Mylan, and not to divert to Executive's own use or benefit or the use or benefit of others, any business opportunities involving any existing or prospective line of business, supplier, product or activity of Mylan or any business opportunities which otherwise should rightfully be afforded to Mylan. 4. Executive's Compensation. (a) Base Salary. As Executive's base compensation for all services to be performed, Mylan shall pay Executive an annual salary of three hundred thousand dollars ($300,000) (the "Base Salary"), payable in accordance with Mylan's normal payroll practices for its executive officers. This Base Salary may be increased from time to time at the discretion of the Board of Directors or any committee thereof having authority over executive compensation. (b) Discretionary Bonus. Executive shall be eligible to receive an annual discretionary bonus up to seventy-five percent (75%) of Executive's Base Salary. Executive's eligibility for a bonus and the amount of the bonus, if any, shall be determined by the Board of Directors in its sole discretion, or by any committee thereof having authority over executive compensation. (C) Non-Qualified Stock Options. Subject to approval of the Stock Option Committee, Executive shall receive non-qualified options to purchase up to one hundred fifty thousand (150,000) shares of Mylan Laboratories Inc. common stock under the 1997 Mylan Laboratories Inc. Incentive Stock Option Plan (the "Plan") in accordance with the following vesting schedule, provided that Executive remains employed by Mylan on the following vesting dates: on March 4, 2003, Executive shall vest in the first 50,000 shares; on March 4, 2004, Executive shall vest an additional 50,000 shares; and on March 4, 2005 Executive shall vest in the remaining 50,000 shares. These options will be subject to all terms of the P1BD, as amended and the applicable stock option agreement. Notwithstanding any term or provision to the contrary set forth elsewhere herein, Executive shall be entitled to one hundred percent (100%) vesting of the above-referenced option in the event Executive resigns for Good Reason or is Terminated Without Cause as provided in Section 9 herein. (d) Fringe Benefits. Executive shall receive fringe benefits of employment, such as health insurance coverage, profit-sharing, short-term disability benefits, 25 days vacation, expense reimbursement, and participation in a 401(k) plan, as are customarily provided to other senior executive employees of Mylan in accordance with the plan documents or policies that govern such benefits. Mylan reserves the right to unilaterally modify or terminate benefits provided under any plan, and the Executive is entitled only to such benefits as are available under the then-effective plan. S. Confidentiality. Executive recognizes and acknowledges that the business interests of Mylan and its subsidiaries, parents and affiliates (collectively the "Mylan Companies") require a confidential relationship between the Company and Executive and the fullest protection and confidential treatment of the financia1 data, customer information, supplier information, market information, marketing and/or promotional techniques and methods, pricing information, purchase information, sales policies, employee lists, policy and procedure information, records, advertising information, computer records, trade secrets, know how, plans and programs, sources of supply, and other knowledge of the business of the Mylan Companies (all of which are hereinafter jointly termed "Confidential Information") which have or may in whole or in part be conceived, learned or obtained by Executive in the course of Executive's emp1Oyment with the Mylan Companies. Accordingly, Executive agrees to keep secret and treat as confidential all Confidential Information whether or not copyrightable or patentable, and agrees not to use or aid others in learning of or using any Confidential Information except in the ordinary course of business and in furtherance of the Mylan Companies' interests. During the term of this Agreement and at all times thereafter: (a) Executive will not, directly or indirectly, disclose any Confidential Information to anyone outside the Mylan Companies, without the approval of the individual to whom Executive reports, (b) Executive will not make copies of or otherwise disclose the contents of documents containing or constituting Confidential Information; (c) As to documents which are delivered to Executive or which are made available to him as a necessary part of the working relationships and duties of Executive within the business of the Mylan Companies, Executive will treat such documents confidentially and will treat such documents as proprietary and confidential, not to be reproduced, disclosed or used without the approval of the individual to whom Executive reports; (d) Executive will not advise others that the information and/or know how included in Confidential Information is known to or used by the Mylan Companies; and (e) Executive will not in any manner disclose or use Confidential Information for Executive's own account and will not aid, assist or abet others in the use of Confidential Information for their account or benefit, or for the account or benefit of any person or entity other than the Mylan Companies. The obligations set forth in this paragraph are in addition to any other agreements the Executive may have with any of the Mylan Companies and any and all rights the Mylan Companies may have under state or federal statutes or common law. 6. Non-Competition and Non-Solicitation. Executive agrees that during the term of this Agreement and for a period ending one (1) year after termination of Executive's employment for any reason: (a) Executive shall not, directly or indirectly, whether for himself or for any other person, company, corporation or other entity be or become associated in any way (including but not limited to the association set forth in i-vii of this subsection) with any business or organization which is directly or indirectly engaged in the research, development, manufacture, production, marketing, promotion or sale of any product the same as or similar to those of the Mylan Companies, or which competes or intends to compete in any line of business with the Mylan Companies. Notwithstanding the foregoing, Executive may during the period in which this paragraph is in effect own stock or other interests in corporations or other entities that engage in businesses the same or substantia11y similar to those engaged in by the Mylan Companies provided that Executive does not, directly or indirectly (including without limitation as the result of ownership or control of another corporation or other entity), individually or as part of a group (as that term is defined in Section 13 (d) of the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder) (i) control or have the ability to control the corporation or other entity, (ii) provide to the corporation or entity, whether as an Executive, consultant or otherwise, advice or consultation, (iii) provide to the corporation or entity any confidential or proprietary information regarding the Mylan Companies or its businesses or regarding the conduct of businesses similar to those of the Mylan Companies, (iv) hold or have the right by contract or arrangement or understanding with other parties to hold a position on the board of directors or other governing body of the corporation or entity or have the right by contract or arrangement or understanding with other parties to elect one or more persons to any such position, (v) hold a position as an officer of the corporation or entity, (vi) have the purpose to change or influence the control of the corporation or entity (other than solely by the voting of his shares or ownership interest) or (vii) have a business or other relationship, by contract or otherwise, with the corporation or entity other than as a passive investor in it; provided, however, that Executive may vote his shares or ownership interest in such manner as he chooses provided that such action does not otherwise violate the prohibitions set forth in this sentence. (b) Executive will not, either directly or indirectly, either for himself or for any other person, partnership, firm, company, corporation or other entity, contact, solicit, divert, or take away any of the customers or suppliers of the Mylan Companies. (c) Executive will not solicit, entice or otherwise induce any employee of the Mylan Companies to leave the employ of the Mylan Companies for any reason whatsoever; nor will Executive directly or indirectly aid, assist or abet any other person or entity in soliciting or hiring any employee of the Mylan Companies, nor will Executive otherwise interfere with any contractua1 or other business relationships between the Mylan Companies and its employees. 7. Severability. Should a court of competent jurisdiction determine that any section or sub-section of this Agreement is unenforceable because one or all of them are vague or overly broad, the parties agree that this Agreement may and shall be enforced to the maximum extent permitted by law. It is the intent of the parties that each section and sub-section of this Agreement be a separate and distinct promise and that unenforceability of any one subsection shall have no effect on the enforceability of another. 8. Injunctive Relief. The parties agree that in the event of Executive's violation of sections 5 and/or 6 of this Agreement or any subsection thereunder, that the damage to Mylan will be irreparable and that money damages will be difficult or impossible to ascertain Accordingly, in addition to whatever other remedies Mylan may have at law or in equity, Executive recognizes and agrees that Mylan shall be entitled to a temporary restraining order and a temporary and permanent injunction enjoining and prohibiting any acts not permissible pursuant to this Agreement. 9. Termination of Employment. (a) Resignation. (i) Executive may resign from employment at any time upon 90 days written notice to the Chairman of the Board of Directors and the Chief Executive Officer. During the 90 days notice period Executive will continue to perform duties and abide by all other terms and conditions of this Agreement. Additionally, Executive will use his best efforts to effect a smooth and effective transition to whomever will replace Executive. Mylan reserves the right to accelerate the effective date of Executive's resignation, provided that Executive sha11 receive Executive's salary and benefits through the ninety (90) day period. (ii) If Executive resigns without "Good Reason" (as defined below), Mylan shall have no liability to Executive under this Agreement other than that the Company shall pay Executive's wages and benefits through the effective date of Executive's resignation. Executive, however, will continue to be bound by all provisions of this Agreement that survive termination of employment. For purposes of this Agreemer4 "Good Reason" shall mean a reduction of Executive's Base Salary below the Base Salary stipulated in this Agreement, unless other similarly situated senior executives of Mylan are required to accept a similar reduction, or the assignment of duties to the Executive which are inconsistent with those of an executive officer. (iii) If Executive resigns with Good Reason and complies in all respects with his obligations hereunder, Mylan will continue to pay Executive his Base Salary, less applicable withholding, through normal payroll procedures in equal monthly installments, and shall pay the cost of continuing Executive's health insurance benefits, in both cases for the six (6) months following expiration of the 90 days notice period provided, however, that in the case of health insurance continuation, Mylan's obligation to provide health insurance benefits shall end at such time as Executive obtains health insurance benefits through another employer or otherwise in connection with rendering services for a third party. Should Executive remain employed on September 4, 2002, the six months shall be extended an additional six months and Executive will also be entitled to a bonus, commensurate with the average bonus (if any), awarded to other similarly situated senior executives of Company. Executive will continue to be bound by all provisions of this Agreement that survive termination of employment. (b) Termination for Cause. Mylan agrees not to terminate Executive's employment during the term of this Agreement except for Cause, as defined herein, and agrees to give Executive written notice of its belief that acts or events constituting Cause exist. Executive has the right to cure within five (5) days of Mylan's giving of such notice, the acts, events or conditions which led to such notice being given. For purposes of this Agreement, "Cause" shall mean: (i) Executive's willful and gross misconduct with respect to Mylan's business or affairs; (ii) Executive's gross neglect of duties, dishonesty or deliberate disregard of any material rule or policy of Mylan, (iii) Executive's conviction of a crime involving moral turpitude; (iv) Executive's conviction of any felony; or (v) Executive's death or inability to perform the essential functions of his position, with or without reasonable accommodation. If Mylan terminates Executive's employment for Cause, the Company shall have no liability to Executive other than to pay Executive's wages and benefits through the effective date of Executive's termination. Executive, however, will continue to be bound by all provisions of this Agreement that survive termination of employment. (c) Termination Without Cause. If Mylan discharges Executive without Cause before March 4, 2005, Mylan will continue to pay Executive his Base Salary, less applicable withholding, through normal payroll procedures in equal monthly installments, and shall pay the cost of continuing Executive's health insurance benefits in both cases for the six (6) months following such termination without Cause; provided, however, that in the case of health insurance continuation, Mylan's obligation to provide health insurance benefits shall end at such time as Executive obtains health insurance benefits through another employer or otherwise in connection with rendering services for a third party. Should Executive remain employed on September 4, 2002, the six months shall be extended an additional six months and Executive will also be entitled to a bonus, commensurate with the average bonus (if any), awarded to other similarly situated senior executives of Company. Executive will continue to be bound by all provisions of this Agreement that survive termination of employment. (d) Death or Incapacity. The employment of Executive shall automatically terminate upon Executive's death or upon the occurrence of a disability that renders Executive incapable of performing the essential functions of his position within the meaning of the Americans With Disabilities Act of 1990. Upon such termination, Executive or his estate shall receive only such amounts as are earned and due to Executive under this Agreement as the result of Executive's activities prior to Executive's death or disability, and thereafter no further consideration or compensation shall be owed by Mylan to Executive or to Executive's estate. (e) Return of Company Property. Upon the termination of Executive's employment for any reason, Executive shall immediately return to Mylan all records, memoranda, files, notes, papers, correspondence, reports, documents, books, diskettes, hard drives, electronic files, and all copies or abstracts thereof that Executive has concerning any or all of the Mylan Companies' business. Executive shall also immediately return all keys, identification cards or badges and other company property. 10. Indemnification. In the event that Executive is made a party or is threatened to be made a party to or is involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative ~proceeding"), by reason of the fact that he is or was an officer, employee or agent of or is or was serving at the request of Mylan as a director or officer, employee or agent or another corporation, or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, whether the basis of such proceeding is alleged action in an official capacity as a director, officer, employee or agent or in any other capacity while serving as a director, officer, employee or agent, Executive shall be indemnified and held harmless by Mylan to the fullest extent authorized by law against all expenses, liabilities and losses (including attorneys fees, judgments, fines, ERISA excise taxes or penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by Executive in connection therewith. Such right shall be a contract right and shall include the right to be paid by Mylan expenses incurred in defending any such proceeding in advance of its final disposition; provided, however, that the payment of such expenses incurred by Executive in his capacity as a director or officer (and not in any other capacity in which service was or is rendered by Executive while a director or officer, including, without limitation, service to an employee benefit plan) in advance of the final disposition of such proceeding will be made only upon delivery to Mylan of an understanding, by or on behalf of Executive, to repay all amounts to so advanced if it should be determined ultimately that Executive is not entitled to be indemnified under this section or otherwise. Promptly after receipt by Executive of notice of the commencement of any action, suit or proceeding for which Executive may be entitled to be indemnified, Executive shall notify Mylan in writing of the commencement thereof (but the failure to notify Mylan shall not relieve it from any liability which it may have under this Section 10 unless and to the extent that it has been prejudiced in a material respect by such failure or from the forfeiture of substantial rights and defenses). If any such action, suit or proceeding is brought against Executive and he notifies Mylan of the commencement thereof, Mylan will be entitled to participate therein, and, to the extent it may elect by written notice delivered to Executive promptly after receiving the aforesaid notice from Executive, to assume the defense thereof with counsel of its choosing, which may be the same counsel as counsel to Mylan. Mylan shall not be liable for any settlement of any claim or action effected without its written consent. 11. Notices. All notices hereunder to the parties hereto shall be in writing sent by certified mail, return receipt requested, postage prepaid, and by fax, addressed to the respective parties at the following addresses: MYLAN: Mylan Laboratories Inc. 781 Chestnut Ridge Road Morgantown, West Virginia 26504-4310 Attention: Chairman of the Board With a noted copy to the Chief Executive Officer EXECUTIVE: Edward J. Borkowski Either party may, by written notice complying with the requirements of this section, specify another or different person or address for the purpose of notification hereunder. A11 notices shall be deemed to have been given and received on the day a fax is sent or, if mailed only, on the third business day following such mailing. 12. Withholding. All payments required to be made by Mylan hereunder to Executive or his dependents, beneficiaries, or estate will be subject to the withholding of such amounts relating to tax and/or other payroll deductions as may be required by law. 13. Modification and Waiver. This Agreement may not be changed or terminated orally, nor shall any change, termination or attempted waiver of any of the provisions contained in this Agreement be binding unless in writing and signed by the party against whom the same is sought to be enforced, nor shall this section itself by waived verbally. This Agreement may be amended only by a written instrument duly executed by or on behalf of the parties hereto. 14. Construction of Agreement. This Agreement and all of its provisions were subject to negotiation and shall not be construed more strictly against one party than against another party regardless of which party drafted any particular provision. 15. Successors and Assigns. This Agreement and all of its provisions, rights and obligations shall be binding upon and inure to the benefit of the parties hereto and Mylan's successors and assigns. This Agreement may be assigned by Mylan to any person, firm or corporation which shall become the owner of substantially all of the assets of Mylan or which shall succeed to the business of Mylan. No right or interest to or in any payments or benefits hereunder shall be assignable by Executive; provided, however, that this provision shall not preclude him from designating one or more beneficiaries to receive any amount that may be payable after his death and shall not preclude the legal representative of his estate from assigning any right hereunder to the person or persons entitled thereto under his will or, in the case of intestacy, to the person or persons entitled thereto under the laws of intestacy applicable to his estate. The term 'beneficiaries" as used in this Agreement shall mean a beneficiary or beneficiary or beneficiaries so designated to receive any such amount, or if no beneficiary has been so designated, the legal representative of the Executive's estate. No right, benefit, or interest hereunder, shall be subject to anticipation, alienation, sale, assignment, encumbrance, charge, pledge, hypothecation, or set-off in respect of any claim, debt, or obligation, or to execution, attachment, levy, or similar process, or assignment by operation of law. Any attempt, voluntary or involuntary, to effect any action specified in the immediately preceding sentence shall, to the full extent permitted by law, be null, void, and of no effect. 16. Choice of Law and Forum. This Agreement shall be construed and enforced according to, and the rights and obligations of the parties shall be governed in all respects by, the laws of the State of Pennsylvania. Any controversy, dispute or claim arising out of or relating to this Agreement, or the breach hereof, including a claim for injunctive relief, or any claim which, in any way arises out of or relates to, Executive's employment with Mylan or the termination of said employment, including but not limited to statutory claims for discrimination, shall be resolved by arbitration in accordance with the then current rules of the American Arbitration Association respecting employment disputes. The hearing of any such dispute will be held in Morgantown, West Virginia, or Pittsburgh, Pennsylvania, at Mylan's discretion and the parties shall bear their own costs, expenses and counsel fees. The decision of the arbitrator(s) will be final and binding on all parties and any award rendered shall be enforceable upon confirmation by a court of competent jurisdiction. Executive and Mylan expressly consent to the jurisdiction of any such arbitrator over them. 17. Headings. The headings of the sections of this Agreement have been inserted for convenience of reference only and shall in no way affect the interpretation of any of the terms or conditions of this Agreement. 18. Execution in Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the day and year first above mentioned. MYLAN LABORATORIES INC. EXECUTIVE: /s/ Edward J. Borkowski By: ------------------------ its: Edward J. Borkowski