-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AeruDpjexf/8pGptAk0rsKYfeEZtmuk2JvaM6nG4BF3SEg9/C9Cb0jLcVjkIyxHz 4PaUAmHVsjYHJYrKBm+sng== 0000069499-99-000003.txt : 19990309 0000069499-99-000003.hdr.sgml : 19990309 ACCESSION NUMBER: 0000069499-99-000003 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990216 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MYLAN LABORATORIES INC CENTRAL INDEX KEY: 0000069499 STANDARD INDUSTRIAL CLASSIFICATION: 2834 IRS NUMBER: 251211621 STATE OF INCORPORATION: PA FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-09114 FILM NUMBER: 99540884 BUSINESS ADDRESS: STREET 1: 130 SEVENTH ST STREET 2: 1030 CENTURY BLDG CITY: PITTSBURGH STATE: PA ZIP: 15222 BUSINESS PHONE: 4122320100 MAIL ADDRESS: STREET 1: 1030 CENTURY BUILDING STREET 2: 130 SEVENTH STREET CITY: PITTSBURGH STATE: PA ZIP: 15222 FORMER COMPANY: FORMER CONFORMED NAME: FRM CORP DATE OF NAME CHANGE: 19711003 10-Q 1 MYLAN LABORATORIES INC. THIRD QUARTER 10Q 1999 - - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q -------------------------------------------------------------- [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OR THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 1-9114 MYLAN LABORATORIES INC. (Exact Name of registrant as specified in its charter) Pennsylvania 25-1211621 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 130 Seventh Street 1030 Century Building Pittsburgh, Pennsylvania 15222 (Address of principal executive offices) (Zip Code) 412-232-0100 (Registrant's telephone number, including area code) Not Applicable (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: YES X NO Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date Outstanding at Class of Common Stock February 11, 1999 --------------------- ----------------- $ .50 par value 128,990,169 ------------------------------------------------------------------------------- MYLAN LABORATORIES INC. AND SUBSIDIARIES INDEX Page Number -------- PART I. FINANCIAL INFORMATION ITEM 1: Financial Statements Consolidated Statements of Earnings - Three and Nine Months Ended December 31, 1998 and 1997 2 Consolidated Balance Sheets - December 31, 1998 and March 31, 1998 3 Consolidated Statements of Cash Flows - Nine Months Ended December 31, 1998 and 1997 4 Notes to Consolidated Financial Statements - Nine Months Ended December 31, 1998 5 - 8 ITEM 2: Management's Discussion and Analysis of Financial Condition and Results of Operations 9 - 14 PART II. OTHER INFORMATION ITEM 1: Legal Proceedings 14 - 16 ITEM 6: Exhibits and Reports on Form 8-K 16 SIGNATURES 16 MYLAN LABORATORIES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (In thousands except per share amounts) UNAUDITED Three Months Ended December 31, Nine Months Ended December 31, 1998 1997 1998 1997 ---- ---- ---- ---- REVENUES: Net Sales $186,195 $129,517 530,505 $365,838 Other Revenues - - - 26,822 -------- -------- ------- -------- 186,195 129,517 30,505 392,660 COST AND EXPENSES: Cost of Sales 86,479 75,077 253,591 207,657 Research and Development 12,274 7,891 39,740 31,707 Acquired In-Process Research and Development 29,000 - 29,000 - Selling and Administrative 35,987 21,239 89,431 72,460 -------- -------- -------- -------- 163,740 104,207 411,762 311,824 EQUITY IN EARNINGS OF SOMERSET 1,113 1,839 5,605 8,431 OTHER INCOME 4,275 3,923 12,387 10,186 -------- -------- -------- -------- EARNINGS BEFORE INCOME TAXES 27,843 31,072 136,735 99,453 INCOME TAXES 19,689 9,089 57,184 30,482 -------- -------- -------- -------- NET EARNINGS $ 8,154 $ 21,983 $ 79,551 $ 68,971 ======== ======== ======== ======== EARNINGS PER COMMON SHARE: Basic $ .06 $ .18 $ .64 $ .57 ======== ======== ======== ======== Diluted $ .06 $ .18 $ .63 $ .56 ======== ======== ======== ======== WEIGHTED AVERAGE COMMON SHARES: Basic 128,644 122,127 124,449 122,074 ======== ======== ======== ======== Diluted 130,339 123,413 126,075 123,185 ======== ======== ======== ======== The Company has paid regular quarterly cash dividends of $.04 per share since October 1995. See Notes to Consolidated Financial Statements
-2- MYLAN LABORATORIES INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Amounts in thousands) ASSETS December 31, March 31, 1998 1998 Unaudited Audited ------------ ----------- Current Assets: Cash and cash equivalents $ 188,114 $ 103,756 Marketable securities 17,061 20,967 Accounts receivable - net 150,760 136,864 Inventories: Raw materials 62,563 63,308 Work in process 18,285 27,858 Finished goods 66,141 54,875 ---------- ---------- 146,989 146,041 Deferred income tax benefit 15,636 7,845 Prepaid and refundable income tax 154 7,946 Other current assets 12,612 6,679 --------- ---------- Total Current Assets 531,326 430,098 Property, Plant and Equipment - at cost 239,324 226,319 Less accumulated depreciation 86,828 74,907 ---------- ---------- 152,496 151,412 Marketable Securities, non-current 21,270 20,974 Investment in and Advances to Somerset 32,192 29,721 Intangible Assets-net of accumulated amortization 328,217 128,745 Other Assets 92,812 86,803 ---------- ---------- Total Assets $1,158,313 $ 847,753 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Trade accounts payable $ 12,086 $ 15,957 Current portion of long-term obligations 19,195 8,477 Income taxes payable 3,247 5,377 Other current liabilities 50,354 36,635 Cash dividend payable 5,205 4,900 ---------- ---------- Total Current Liabilities 90,087 71,346 Long-Term Obligations 25,545 26,218 Deferred Income Tax Liability 18,731 5,724 Shareholders' Equity: Preferred stock, par value $.50 per share, authorized 5,000,000 shares, issued and outstanding - none Common stock, par value - - $.50 per share, authorized 300,000,000 shares, issued 129,768,394 shares at December 31, 1998 and 123,050,172 shares at March 31,1998 64,884 61,525 Additional paid-in capital 308,423 92,405 Retained earnings 659,272 594,847 Accumulated other comprehensive (expense)income (653) 1,570 ---------- ---------- 1,031,926 750,347 Less Treasury stock - at cost, 881,723 shares at December 31, 1998 and 849,858 shares at March 31, 1998 7,976 5,882 ---------- ---------- Net Worth 1,023,950 744,465 ----------- ---------- Total Liabilities and Shareholders' Equity $1,158,313 $ 847,753 =========== ========== See Notes to Consolidated Financial Statements -3- MYLAN LABORATORIES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED DECEMBER 31, 1998 AND 1997 (Amounts in thousands) UNAUDITED 1998 1997 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net earnings $ 79,551 $ 68,971 Adjustments to reconcile net earnings to net cash provided from operating activities: Depreciation and amortization 18,995 15,983 Deferred income tax benefit (10,531) (2,243) Equity in the earnings of Somerset (5,606) (8,431) Cash received from Somerset 3,135 5,366 Allowances on accounts receivable 13,954 2,967 Acquired in-process research and development 29,000 - Other non-cash items 154 (401) Changes in operating assets and liabilities: Accounts receivable (27,029) 4,042 Inventories 1,049 (34,567) Trade accounts payable (4,338) (3,043) Income taxes payable 9,561 (11,316) Other operating assets and liabilities 256 (2,450) -------- -------- Net cash provided from operating activities 108,151 34,878 CASH FLOWS FROM INVESTING ACTIVITIES Additions to property, plant and equipment (11,267) (19,703) Increase in intangible and other assets (3,397) (6,760) Proceeds from investment securities 22,801 12,086 Purchase of investment securities (20,611) (12,489) Cost of acquisition net of cash acquired 1,467 - -------- ------ Net cash used in investing activities (11,007) (26,866) CASH FLOWS FROM FINANCING ACTIVITIES Payments on long-term obligations (6,673) (4,187) Cash dividends paid (14,679) (14,651) Repurchase of common stock - (2,459) Proceeds from exercise of stock options 8,566 2,259 -------- -------- Net cash used in financing activities (12,786) (19,038) -------- -------- Net Increase(Decrease)in Cash and Cash Equivalents 84,358 (11,026) Cash and Cash Equivalents - Beginning of Period 103,756 126,156 -------- -------- Cash and Cash Equivalents - End of Period $188,114 $115,130 ======== ======== CASH PAID DURING THE PERIOD FOR: Interest $ 279 $ 1,187 Income Taxes $ 58,157 $ 44,015 See Notes to Consolidated Financial Statements -4- MYLAN LABORATORIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NINE MONTH PERIOD ENDED DECEMBER 31, 1998 Unaudited A. In the opinion of management, the accompanying unaudited financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position of the Company as of December 31, 1998 and March 31, 1998 together with the results of operations and cash flows for the interim periods ended December 31, 1998 and 1997. The consolidated results of operations for the three and nine months ended December 31, 1998 and 1997 are not necessarily indicative of the results to be expected for the full year. B. These interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto in the Company's 1998 Annual Report and Report on Form 10-K. C. Diluted earnings per common share is computed by dividing net earnings available to common shareholders by the weighted average common shares outstanding adjusted for the dilutive effect of options granted under the Company's stock option plans. The effect of dilutive stock options on the weighted average shares outstanding was 1,695,000 and 1,286,000 for the three months ended December 31, 1998 and 1997 and 1,626,000 and 1,111,000 for the nine months ended December 31, 1998 and 1997. D. Total comprehensive income for the three and nine months ended December 31, 1998 and 1997 is as follows: (in thousands) Three Months Nine Months Ended Ended December 31, December 31, ------------ ------------ 1998 1997 1998 1997 ---- ---- ---- ---- Net earnings $ 8,154 $21,983 $79,551 $68,971 Other comprehensive income, net of tax: Unrealized (loss)/gain on marketable securities (14) (1,080) (2,015) 1,684 Adjustment for gains included in net earnings (169) (43) (208) (91) ------- ------- ------- ------- Comprehensive income $ 7,971 $20,860 $77,328 $70,564 ======= ======= ======= ======= Accumulated other comprehensive expense/income, as reflected on the balance sheet, is comprised solely of the unrealized loss or gain on marketable securities, net of income tax. -5- MYLAN LABORATORIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NINE MONTH PERIOD ENDED DECEMBER 31, 1998 Unaudited E. On October 2, 1998, a wholly owned subsidiary of the Company acquired 100% of the outstanding stock of Penederm Inc.("Penederm"). Penederm primarily develops and markets patented topical prescription products. Penederm maintains administrative and research and development facilities in Foster City, California. The business combination has been accounted for under the purchase method of accounting. Payment of approximately $207,236,000 was made through the issuance of 5,905,029 shares of the Company's common stock and the assumption of approximately 877,000 stock options granted prior to the transaction. Goodwill and various intangibles acquired total approximately $192,000,000 and are being amortized on a straight-line basis over periods not to exceed 20 years. As previously reported, the Company expected to record a one-time charge estimated at $150,000,000 for acquired in-process research and development ("IPR&D") based on a preliminary valuation by an independent expert. However, the Securities and Exchange Commission subsequently issued new guidance relating to the methodology used in determining the value of IPR&D. Based on this new guidance, the Company received a substantially lower final independent valuation for Penederm's IPR&D, which was used as the basis for the one-time charge of $29,000,000 recorded for the quarter ended December 31, 1998. The results of Penederm's operations have been included in the Company's Consolidated Statement of Earnings from the date of acquisition. Unaudited pro forma information assuming the acquisition had occurred on April 1, 1997 is as follows, excluding the one-time charge of the $29,000,000 relating to acquired IPR&D: (in thousands except per share data) Nine Months Ended December 31, 1998 1997 ---- ---- Total revenue $541,022 $398,764 Net earnings $105,089 $ 56,492 Diluted earnings per common share $ .81 $ .44 Diluted weighted average common shares 130,188 129,032 The pro forma financial information is presented for comparative purposes only and does not purport to be indicative of the operating results or financial position that would have occurred had the merger been consummated at the beginning of the periods presented, nor is such information necessarily indicative of the future operating results or financial position of the combined company after the merger. -6- MYLAN LABORATORIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NINE MONTH PERIOD ENDED DECEMBER 31, 1998 Unaudited F. Equity in Earnings of Somerset includes the Company's 50% portion of the net earnings of Somerset Pharmaceuticals Inc. ("Somerset"), certain management fees and amortization of intangible assets resulting from the acquisition of Somerset. Condensed unaudited financial information of Somerset for the three and nine month periods ended December 31, 1998 and 1997 are as follows: (in thousands) Three Months Ended Nine Months Ended December 31, December 31, ------------ ------------ 1998 1997 1998 1997 ---- ---- ---- ---- Net sales $ 7,146 $12,301 $32,774 $44,684 Cost and expenses 3,383 6,865 14,282 20,119 Income taxes 1,432 1,910 7,511 8,550 ------- ------- ------- ------- Net earnings $ 2,331 $ 3,526 $10,981 $16,015 ======= ======= ======= ======= The above information represents 100% of Somerset's operations of which the Company has a 50% interest. G. In August 1997, Key Pharmaceuticals ("Key") filed suit in the United States District Court for the Western District of Pennsylvania against the Company and certain subsidiaries alleging patent infringement relating to the marketing of its nitroglycerin transdermal system. The Company received FDA approval for its nitroglycerin transdermal system in September 1996 and immediately began marketing the product. The relief sought includes a preliminary and permanent injunction, treble damages along with interest and attorney's fees and expenses. On September 25, 1998, Key's request for a preliminary injunction was denied. The trial stage of this proceeding is completed and the judge's ruling is forthcoming. The Company continues to believe the suit is without merit and will vigorously defend its position. -7- MYLAN LABORATORIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NINE MONTH PERIOD ENDED DECEMBER 31, 1998 Unaudited H. On December 22, 1998, the Federal Trade Commission ("FTC") filed suit in federal district court for the District of Columbia against the Company. The FTC alleges that the Company violated Section 5(a) of the Federal Trade Commission Act (the "FTC Act") with respect to two generic drugs manufactured and sold by the Company (lorazepam and clorazepate). Specifically, the FTC's complaint alleges 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 these drugs. The FTC also sued in the same case the foreign supplier of the raw materials, the supplier's parent company and its United States distributor. The relief sought includes an injunction barring the Company from engaging in conduct that violates Section 5(a) of the FTC Act, rescission of certain agreements and disgorgement in excess of $120 million. In a parallel case also filed on the same day Attorney Generals for ten states, Connecticut, Florida, Illinois, Minnesota, New York, North Carolina, Ohio, Pennsylvania, Virginia and Wisconsin (the "States"), joined together to file a single lawsuit against the Company in the same court. The complaint filed by the States asserts claims pursuant to Section 1 and 2 of the federal Sherman Act against the same parties as those named in the FTC suit and one other distributor not named by the FTC. These claims are analogous to the claims brought by the FTC under Section 5(a) of the FTC Act, and are based on similar allegations. The States' complaint also alleges violations of the respective states' competition laws. The States further allege a per se violation of Section 1 of the Sherman Act with respect to the pricing of raw material used in the manufacture of lorazepam (an allegation not made by the FTC). Without specifying a dollar amount, the States seek relief similar to that sought by the FTC and up to treble damages. The complaint was amended in February 1999 to include 22 additional states as plaintiffs. The Company is aware of 13 putative class actions filed by private parties in various state and federal courts involving the same conduct alleged in the complaints brought by the FTC and the States, as well as alleged violations of state consumer protection laws. The lawsuits seek an unspecified amount of damages. In addition, on January 11, 1999, a class action suit was filed in federal district court for the Western District of Pennsylvania alleging violations of federal securities laws by the Company and certain directors and officers of the Company. The suit alleges that the Company failed to disclose monopolization of certain raw materials used to manufacture lorazepam and clorazepate pursuant to Sections 10(b) and 20 of the Securities and Exchange Act of 1934 and Rule 10 b-5 of the Securities and Exchange Commission. The alleged class period is from February 17, 1998 to December 5, 1998. Without specifying a dollar amount, the suit seeks compensatory damages. The Company believes that it has meritorious defenses to the claims in all of these suits and intends to vigorously defend them. Although the Company believes it has meritorious defenses to the claims, an adverse result in these suits could have a material adverse effect on the Company's financial position and results of operations. -8- PART 1 - FINANCIAL INFORMATION ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Introduction On October 2, 1998, the Company completed its acquisition of Penederm Inc. ("Penederm"). The acquisition is being accounted for under the purchase method of accounting. The preceding financial statements reflect 1) the issuance of 5.9 million new shares of the Company's common stock to facilitate the acquisition, 2) the results of Penederm's operations from the date of acquisition, 3) expense resulting from the amortization of intangible assets acquired and 4) a one-time charge of $29 million relating to acquired in-process research and development ("IPR&D"). Based on a preliminary valuation provided by an independent valuation expert, the Company had anticipated the one-time charge for IPR&D would be approximately $150 million. However, the Securities and Exchange Commission subsequently issued new guidance relating to the methodology used in determining the value of IPR&D, which substantially reduced the final independent valuation. As a direct result of the new guidance, the Company recorded goodwill and various other intangible assets of approximately $192 million. This amount is significantly higher than the amounts contemplated in the Company's registration statement on Form S-4 dated August 20, 1998 and will result in future amortization expense being higher than that contemplated in the registration statement by approximately $0.01 per share per quarter. All references to per share amounts in this Management's Discussion and Analysis of Financial Condition and Results of Operations are based on diluted common shares. Results of Operations Net earnings for the three months ended December 31, 1998 were $8,154,000 ($.06 per share) representing a 63% decease over the same period a year ago and for the nine months then ended were $79,551,000 ($.63 per share) representing a 15% increase over the same period a year ago. Excluding the one-time charge for acquired IPR&D, net earnings for the quarter ended December 31, 1998 were $37.2 million ($0.29 per share) representing a 69% increase over the same quarter a year ago and the net earnings for the nine months ended December 31, 1998 were $108.6 million ($0.86 per share) representing a 57% increase over the comparable period a year ago. -9- Net Sales and Gross Profits The improvements in recurring net earnings relate primarily to higher revenues and gross profits. The following table provides total revenues (net sales and other revenues) and gross profit dollars (total revenues less cost of sales) for the Company's primary operating divisions: ($ in millions) Three Months Ended Nine Months Ended December 31, December 31, Percent Percent 1998 1997 Change 1998 1997 Change ---- ---- ------ ---- ---- ------ Generic Division Revenues $158.2 $114.6 38% $472.5 $352.7 34% Gross Profit 80.5 45.1 78% 238.7 160.9 48% G.P. % 51% 39% 51% 46% Branded Division Revenues $ 28.0 $ 14.9 88% $ 58.0 $ 40.0 45% Gross Profit 19.2 9.3 106% 38.2 24.1 59% G.P. % 69% 62% 66% 60% The generic division includes Mylan Pharmaceuticals Inc. and UDL Laboratories Inc. The branded division includes Bertek Pharmaceuticals Inc. and Penederm Inc. The Company's branded division was favorably impacted by the acquisition of Penederm as previously discussed. Penederm had net sales of $10 million with gross profits of $7.5 million during the quarter ended December 31, 1998. Bertek Pharmaceuticals Inc. achieved 20% revenue growth and improvements in gross profit margins over the prior year three and nine month periods as newer branded product sales replaced the declining wound care product sales. The growth in the current three and nine months periods in the Company's generic division resulted primarily from the favorable impact of selective price increases on 14 products, seven of which were implemented in the last half of fiscal 1998 and seven more which were implemented in the quarter ended June 30, 1998. Gross profits resulting from the addition of nine products to the generic product line after December 31, 1997 and higher volume were not sufficient to offset the impact of price deterioration for products marketed prior to December 31, 1997. The Company estimates that such price deterioration resulted in reduced net sales and gross profits of $17.6 million for the three months ended December 31, 1998 and $32.5 million for the nine months ended December 31, 1998 as compared to the same periods in the prior year. The decision to increase prices was made in light of continued price deterioration and increased costs involved in bringing new products to market, primarily resulting from legal challenges under the Hatch-Waxman Act. The products selected for increase and the amounts of the increases were based on numerous factors including, product line contribution, market size, competition, raw material suppliers and manufacturing capacity. The Company chose to increase prices and plans to continue to review its products and pricing strategies in order to ensure that the Company's full line of low-cost, effective, quality generic alternatives remain available to the American public. -10- In December 1998, actions were commenced by the Federal Trade Commission ("FTC") and ten states, in addition to a number of private actions, which allege violations of federal and state antitrust laws in connection with certain drugs manufactured and sold by the Company (see note H). At issue in the FTC litigation are contracts executed in 1997, between the Company and its raw materials supplier, Profarmaco S.r.l., relating to the active pharmaceutical ingredients used by the Company to manufacture generic versions of clorazepate and lorazepam. The FTC claims that the exclusivity provisions of these contracts violated antitrust laws. The agreements were terminated as of January 1, 1999. As referenced above, the Company raised the prices of clorazepate, lorazepam, methyclothiazide and certain other products during late 1997 through June 1998. These increases had a substantial favorable impact on earnings in the nine months ended December 31, 1998. Since June 30, 1998, aggregate prices on these three products described above have dropped by approximately 18%. Due to the highly competitive nature of the generic industry, the Company expects to see continued price deterioration on these products, which could adversely affect the Company's future operating results. Research and Development Expenditures for research and development were $12.3 million for the quarter ended December 31, 1998 and $39.7 million for the nine months then ended. The Company remains committed to funding research projects for branded, generic and transdermal products in order to grow its various product lines. The Company entered into an agreement with Genpharm Inc. to co-develop 15 branded and generic products. The Company will exclusively market and distribute the products in the United States. This transaction was recorded in the quarter ended December 31, 1998. Since 1994, the Company has been providing funding to VivoRx Inc. ("VivoRx"), a California based research and development company which was pursuing novel diabetes related research. The Company suspended cash funding for periods after March 31, 1998, but continued to accrue $2.5 million per quarter in the June and September 1998 quarters, pending resolution of certain accounting irregularities on the part of VivoRx. Litigation has commenced between the Company, VivoRx, certain VivoRx officers and directors, and certain companies owned or controlled by those officers and directors. Based on recent developments in this matter, the Company has determined that it will not provide additional funding to VivoRx under its current management and corporate structure. The decision to discontinue funding of VivoRx may result in the termination of a licensing agreement whereby the Company had secured North American marketing rights to VivoRx technology used in the treatment of diabetes. Selling and Administrative Expenses Selling and administrative expenses were $36.0 million for the three months ended December 31, 1998 and $89.4 million for the nine months then ended. These amounts represent 69% and 23% increases over the comparable periods a year ago. Expenses relating to Penederm of $5.1 million, including amortization expense, are included in the current quarter. -11- Legal and professional expenses were $6.8 million for the quarter and $14.7 million year to date this year compared to $2.5 million and $5.9 million for the same periods a year ago. The increase in these costs is primarily due to legal expenditures relating to patent challenges under the Hatch-Waxman Act, legal actions between the Company and VivoRx, and the FTC and related litigation. Generic advertising and promotions, including costs related to stocking allowances and similar programs associated with the launch of new generic products were $3.4 million for the quarter and $10.6 million year to date this year compared to $1.8 million and $12.9 million last year. Excluding Penederm, payroll and payroll related expenses charged to selling and administrative were $11.0 million for the quarter and $32.9 million year to date compared to $8.9 million and $26.0 million last year. Income Tax Expense Excluding the one-time charge of $29 million for acquired IPR&D, which is not deductible for income tax purposes, the effective tax rate for the quarter and year to date periods ended December 31, 1998 was 35% and 34% compared to 29% and 31% last year. The primary cause of the increase relates to higher levels of domestic generated income as opposed to income attributable to products manufactured in Puerto Rico for which the Company receives certain federal tax credits. Liquidity, Capital Resources and Financial Condition Working capital increased from $358,752,000 at March 31, 1998 to $441,239,000 at December 31, 1998. The ratio of current assets to current liabilities was 5.9 to 1 at December 31, 1998 compared to 6.0 to 1 at March 31, 1998. Net cash provided from operating activities was $108,151,000 for the nine months ended December 31, 1998 compared to $34,878,000 for the same period last year. This improvement resulted primarily from increased net earnings adjusted for non-cash expenses including allowances on accounts receivable and the write-off of acquired IPR&D and the timing of tax payments. The changes in accounts receivable and inventory correspond to the changes in sales of the Company's products. The Company's current capital expenditures are being funded through operating profits. During the current year, the Company acquired all of the outstanding stock of Penederm. The purchase price of approximately $207,236,000 was satisfied principally through the issuance of the Company's common stock. Although the Company believes it has meritorious defenses to the claims in all the suits described in note H, an adverse result in these suits could have a material adverse effect on the Company's business and financial condition, due to the size of the FTC's disgorgement claim and the threat of treble damages sought by the States, as well as possible damages in the other suits. The Company expects to incur substantial costs in defending itself in these actions. -12- Year 2000 The Company has completed an initial review of its critical information technology ("IT") and non-IT operating systems for Year 2000 ("Y2K") compliance. Y2K compliance refers to the issue of systems and equipment having date sensitive components being able to recognize the year 2000. On the basis of this review and the processes described below, management believes that the costs of remediation and potential losses related to Y2K issues are unlikely to have a material effect on the Company's financial position, results of operations or cash flows. In assessing potential Y2K issues, the Company has or is taking the following steps to address its IT and non-IT operating systems: - Formed a project team across functional departments to complete a review and identify nonconforming systems. - Communicated to employees throughout the Company to increase awareness of issues and activate the identification process. - Identified critical IT and non-IT nonconforming operating systems and developed a plan to bring these systems into compliance. - Corresponded with customers, vendors, service suppliers and financial institutions to verify their readiness. - stablished a testing program to ensure that such systems are compliant. - Developed contingency plans where practical in the event of system failures. Because of the continued growth of the Company over the last several years and prior to the formation of the project team, the Company initiated major system conversions to accommodate the physical expansion and increased transaction volume associated with this growth. Many factors were considered during the selection process. While Y2K compliance was one of the factors considered, other factors were equally and significantly more important. Any new systems selected were expected to be and are believed to be Y2K compliant. Due to the recent independent upgrades and replacements of its computer systems to accommodate its growth, the Company has not been required to spend nor does it anticipate spending significant incremental funds to become Y2K compliant. The funds for system conversions will be financed through operating revenue of the Company. Such conversions are currently on schedule and are expected to meet the testing schedule established by the project team. The Company has neither delayed nor anticipates delaying any significant information system projects prior to the year 2000. Management believes that the Company has acted with appropriate diligence to address potential Y2K issues. The Company is, however, dependent on third parties, such as its customers, vendors, raw material suppliers, service suppliers which includes energy, water, communication and transportation and financial institutions, to make their own systems Y2K compliant. If these entities fail to remedy their Y2K issues, the Company could potentially suffer interruptions in its business operations. These interruptions could potentially delay the Company in its manufacturing or distribution of some or all its products for an undeterminable amount of time. In addition, the Company could experience the corruption of data in its own internal information systems. Such corruption could lead to temporary interruptions in certain isolated business operations. These interruptions may or may not lead to an adverse impact on the Company's overall business operations. -13- The project team continues to evaluate and update contingency plans. These plans are developed based on third party correspondence regarding the status of their Y2K readiness and the results of testing performed on the Company's internal systems. While the project team continues to develop plans for the more likely scenarios of possible business interruptions, there can be no assurance that the project team will identify and develop successful contingency plans for all of the business interruptions that could possibly occur. Forward Looking Statements The statements set forth in this Item 2 under Results of Operations concerning the manner in which the Company intends to conduct its future operations, and potential trends that may impact future results of operations, are forward-looking statements. The Company may be unable to realize its plans and objectives due to various important factors, including, but not limited to, the factors described under Forward Looking Statements in Item 7 of the Company's Annual Report on Form 10-K for the year ended March 31, 1998. In addition, the statements in this Item 2 under -Year 2000 which express the Company's belief that Y2K issues will not have a material adverse effect on the Company may also be forward-looking statements. Factors which could cause the Company to be unable to avoid any material Y2K issues include, but are not limited to, the failure of its Y2K project team to identify latent or other non-compliant codes or technologies, the failure of any of the customers, vendors, service suppliers or financial institutions with which the Company transacts business to address their own Y2K issues or the ineffectiveness of any contingent plans implemented by the Company to mitigate the effects of interruptions in its business due to Y2K issues. PART II. OTHER INFORMATION Item 1. Legal Proceedings In November 1996, Synthecon Inc. filed suit in the Harris County Circuit Court, Harris County, Texas against the Company, VivoRx Inc., et al., alleging the Company has conspired with VivoRx Inc. to deprive Synthecon Inc. of its rights to a product under a license agreement acquired from the National Aeronautics and Space Administration. The suit was seeking unspecified damages. The suit was settled with no payments required by the Company. See footnote G and H for information required by Item 1. Additional information relating to securities and competition cases is set forth in the tables below. Securities cases Date Name Jurisdiction Filed - - ---- ----- Frank R. Ieradi, individually and on behalf of all W.D. Penn 1/11/99 others similarly situated v. Mylan Laboratories, Inc., Milan Puskar, Frank A. DeGeorge, Roderick P. Jackson, and Patricia A Sunseri, CA99-10 -14- Competition cases Date Name Jurisdiction Filed ------------ ----- Natalie O. Eldredge, on behalf of herself and all C.D. Cal. 12/14/98 others similarly situated in the United States of America v. Mylan Laboratories, Inc., Mylan Pharmaceuticals, Profarmca, and Does 1 through 100, No. 98-10048 Elmer and Ellen McLaughlin, on behalf of themselves and Sup. Ct., 12/24/98 all others similarly situated v. Mylan Laboratories, Yavapi Co., Inc., CV980863 Ariz. Richard Tumpowsky, individually and on behalf of all Sup. Ct., 12/17/98 others similarly situated v. Mylan Laboratories, and San Does 1 through 50, No. 999973 Francisco Co., Cal. Mary Bullock, on behalf of herself and all others Sup. Ct., 12/29/98 similarly situated v. Mylan Laboratories, Inc., Cambrex San Diego Corp., Profarmaco S.R.L., Gyma Laboratories of America, Co., Cal. Inc., SST Corp., No. 726950 Galloway, Inc., dba Galloway Pharmacy, on behalf of Sup. Ct., 1/15/99 itself and all others similarly situated v. Mylan San Diego Laboratories, Inc., Cambrex Corp., Gyma Laboratories of Co., Cal. America, Inc., No. 727358 Shoshana Datlown on behalf of herself and others Sup. Ct., 1/14/99 similarly situated v. Mylan Laboratories, Inc., Cambrex D.C. Corp., Gyma Laboratories of America, Inc., CA No. 0000266-99 Lawrence Dearman and Sharon Bouerassa, on behalf of 17th Cir. 1/6/99 themselves and all others similarly situated v. Mylan Ct., Broward Laboratories, Inc., Cambrex Corp., Profarmaco S.R.L., Co., Fla. Gyma Laboratories of America, Inc., No. 99000123 Jack A. Masin, Steven Aronson, Elliot Siverman, and 11th Jud. 12/14/98 Frances Silverman, on behalf of themselves and all Cir. Ct., others similarly situated v. Mylan Laboratories, Inc., Dade Co., Cambrex Corp., Gyma Laboratories of America, Inc., as Fla. amended, No. 98:28632CA13 Elaine Dunkel and Mona Lesnick, individually and on 6th Jud. 12/28/98 behalf of all others similarly situated v. Mylan Cir. Ct., Laboratories, Inc., Cambrex Corp., Gyma Laboratories of Oakland Co., America, Inc., as amended, No. 98-011503-CZ Mich. Thomas Kieffer, on behalf of himself and all others Sup. Ct., 1/15/99 similarly situated v. Mylan Laboratories, Inc., Mylan Bergen Co., Pharmaceuticals, Profarmca SrL, and Gyma Laboratories N.J. of America, Inc., BERL-365-99EM -15- Nathan Migden, individually and on behalf of all others Sup. Ct., 1/8/99 similarly situated v. Mylan Laboratories, Inc., No. N.Y. Co., 99600120 N.Y. Middle Tennessee Teamsters Trust Fund and Arkansas Chan. Ct., 12/23/98 Carpenters Health and Welfare Fund, on behalf of Davidson themselves and a class of all other similarly situated Co., Tenn. third party payors v. Mylan Laboratories, Inc., No. 98- 3833-II Scenic Bluffs Comm. Health Center, individually and on Cir. Ct., 12/22/98 behalf of all others similarly situated v. Mylan Dane Co., Laboratories, Inc., 98CV3286 Wisc. Item 6. Exhibits and Reports on Form 8-K (a) Exhibit 27 - Financial Data Schedule (b) Reports on Form 8-K - There were no reports on Form 8-K filed during the three months ended December 31, 1998. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Mylan Laboratories Inc. (Registrant) DATE 2/16/99 /s/ Milan Puskar -------- ---------------------------- Milan Puskar Chairman of the Board, Chief Executive Officer and President (Principal executive officer) DATE 2/16/99 /s/ Donald C. Schilling -------- --------------------------- Donald C. Schilling Vice President of Finance (Principal financial officer) -16- EX-27 2 FDS --
5 Exhibit 27 Financial Data Schedule Mylan Laboratories Inc. and Subsidiaries Article 5 of Regulation S-X The schedule contains summary financial information extracted from the Consolidated Balance Sheet at December 31, 1998 and the Consolidated Statement of Earnings for the nine months ended December 31, 1998 and is qualified in its entirety by reference to such financial statements. 0000069499 none 9-MOS MAR-31-1999 DEC-31-1998 188,114 17,061 188,999 38,239 146,989 531,326 239,324 86,828 1,158,313 90,087 30,648 0 0 64,884 959,066 1,158,313 530,505 530,505 253,591 253,591 158,171 530 1,390 136,735 57,184 79,551 0 0 0 79,551 .64 .63
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