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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
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 October 28, 1999
--------------------- ----------------
$.50 par value 129,229,715
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MYLAN LABORATORIES INC. AND SUBSIDIARIES
----------------------------------------
INDEX
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Page
Number
--------
PART I. FINANCIAL INFORMATION
ITEM 1: Financial Statements
Consolidated Statements of Earnings - Three and
Six Months Ended September 30, 1999 and 1998 2
Consolidated Balance Sheets - September 30, 1999
and March 31, 1999 3
Consolidated Statements of Cash Flows - Six
Months Ended September 30, 1999 and 1998 4
Notes to Consolidated Financial Statements -
Six Months Ended September 30, 1999 5 - 9
ITEM 2: Management's Discussion and Analysis of
Financial Condition and Results of
Operations 10 - 16
ITEM 3: Quantitative and Qualitative Disclosures
About Market Risk 16
PART II. OTHER INFORMATION
ITEM 1: Legal Proceedings 16 - 18
ITEM 4: Submission of Matters to a Vote of
Security Holders 19
ITEM 6: Exhibits and Reports on Form 8-K 19
SIGNATURES 19
MYLAN LABORATORIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands except per share amounts)
UNAUDITED
Three Months Ended Six Months Ended
September 30, September 30,
---------------- ---------------
1999 1998 1999 1998
---------- ---------- --------- --------
NET SALES $194,489 $177,592 $371,584 $344,310
COST AND EXPENSES:
Cost of Sales 83,677 85,548 164,525 167,112
Research and Development 11,473 13,382 23,264 27,466
Selling and Administrative 38,880 28,435 76,994 53,444
--------- ----------- -------- ---------
134,030 127,365 264,783 248,022
EQUITY IN (LOSS) EARNINGS OF SOMERSET (989) 2,142 (1,071) 4,492
OTHER (EXPENSE) INCOME (1,097) 4,078 2,762 8,112
-------- ----------- --------- ---------
EARNINGS BEFORE INCOME TAXES 58,373 56,447 108,492 108,892
INCOME TAXES 21,307 19,232 39,473 37,495
--------- ----------- --------- ---------
NET EARNINGS $ 37,066 $ 37,215 $ 69,019 $ 71,397
========= =========== ========= =========
EARNINGS PER COMMON SHARE:
Basic $ .29 $ .30 $ .53 $ .58
========= =========== ========= =========
Diluted $ .28 $ .30 $ .53 $ .58
========= =========== ========= =========
WEIGHTED AVERAGE COMMON SHARES:
Basic 129,182 122,408 129,159 122,352
========= =========== ========= =========
Diluted 130,144 123,809 130,227 123,943
========= =========== ========= =========
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
(In thousands except share information)
UNAUDITED
ASSETS
September 30, March 31,
1999 1999
------ ------
Current Assets:
Cash and cash equivalents $ 232,784 $ 189,849
Marketable securities 61,297 69,872
Accounts receivable - net 162,419 148,896
Inventories:
Raw materials 66,058 57,414
Work in process 23,812 20,813
Finished goods 49,974 58,266
---------- ----------
139,844 136,493
Deferred income tax benefit 27,120 18,199
Other current assets 16,376 19,650
----------- ----------
Total Current Assets 639,840 582,959
Property, Plant and Equipment - at cost 257,307 244,793
Less accumulated depreciation 98,054 90,157
----------- ----------
159,253 154,636
Investment in and Advances to Somerset 32,800 34,114
Intangible Assets - net of accumulated amortization 330,191 336,003
Other Assets 97,744 98,949
------------ ----------
Total Assets $1,259,828 $1,206,661
============ ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Trade accounts payable $ 17,092 $ 12,142
Current portion of long-term obligations 15,417 16,941
Cash dividend payable 5,185 5,178
Other current liabilities 49,708 62,100
---------- ----------
Total Current Liabilities 87,402 96,361
Long-Term Obligations 24,052 26,827
Deferred Income Tax Liability 27,283 23,568
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 130,083,792 shares at
September 30, 1999 and 129,968,514 shares at
March 31, 1999 65,042 64,984
Additional paid-in capital 313,527 311,995
Retained earnings 748,688 690,003
Accumulated other comprehensive income 2,016 1,105
----------- ----------
1,129,273 1,068,087
Less treasury stock - at cost, 888,578 shares at
September 30, 1999 and March 31, 1999 8,182 8,182
----------- ----------
Total Shareholders' Equity 1,121,091 1,059,905
---------- ----------
Total Liabilities and Shareholders' Equity $1,259,828 $1,206,661
=========== ==========
See Notes to Consolidated Financial Statements
-3-
MYLAN LABORATORIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(In thousands)
UNAUDITED
1999 1998
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 69,019 $ 71,397
Adjustments to reconcile net earnings to net
cash provided from operating activities:
Depreciation and amortization 17,866 11,154
Deferred income tax benefit (5,904) (4,716)
Equity in the loss(earnings)of Somerset 1,071 (4,492)
Cash received from Somerset 243 585
Allowances on accounts receivable 23,338 8,287
Other noncash expense 10,402 323
Changes in operating assets and liabilities:
Accounts receivable (36,861) (29,041)
Inventories (3,225) (5,181)
Trade accounts payable 4,950 (2,626)
Other operating assets and liabilities (12,510) 11,203
-------- --------
Net cash provided from operating activities 68,389 56,893
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (12,514) (8,104)
Increase in intangible and other assets (8,632) (3,084)
Proceeds from investment securities 95,985 13,853
Purchase of investment securities (85,528) (11,995)
-------- --------
Net cash used in investing activities (10,689) (9,330)
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on long-term obligations (6,028) (6,139)
Cash dividends paid (10,327) (9,781)
Proceeds from exercise of stock options 1,590 2,824
-------- --------
Net cash used in financing activities (14,765) (13,096)
Net Increase in Cash and Cash Equivalents 42,935 34,467
Cash and cash equivalents - beginning of period 189,849 103,756
-------- --------
Cash and cash equivalents - end of period $232,784 $138,223
======== ========
CASH PAID DURING THE PERIOD FOR:
Interest $ 542 $ 275
======== ========
Income Taxes $ 47,168 $ 38,329
======== ========
See Notes to Consolidated Financial Statements
-4-
MYLAN LABORATORIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED
SEPTEMBER 30, 1999
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 Mylan
Laboratories Inc. and subsidiaries (the "Company") as of September 30,
1999, and March 31, 1999, together with the results of operations and cash
flows for the interim periods ended September 30, 1999 and 1998. The
consolidated results of operations for the three and six months ended
September 30, 1999, 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 1999
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 common shares outstanding was 962,000 and 1,401,000 for
the three months ending September 30, 1999 and 1998, and 1,068,000 and
1,591,000 for the six months ending September 30, 1999 and 1998.
D. Total comprehensive income for the three and six months ended September 30,
1999 and 1998, are as follows: (in thousands)
Three Months Ended Six Months Ended
September 30, September 30,
------------- -------------
1999 1998 1999 1998
---- ---- ---- ----
Net earnings $37,066 $37,215 $69,019 $71,397
Other comprehensive income, net
of tax:
Unrealized gain(loss) on
marketable securities 2,883 (454) 3,385 (1,849)
Adjustment for gains
included in net earnings (2,439) (94) (2,474) (191)
------- ------- ------- --------
Comprehensive income $37,510 $36,667 $69,930 $69,357
======= ======= ======== ========
Accumulated other comprehensive income, as reflected on the balance sheet, is
comprised solely of the unrealized gain on marketable securities, net of
deferred income taxes.
-5-
MYLAN LABORATORIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED
SEPTEMBER 30, 1999
Unaudited
E. The following table presents the comparative operating results for the
Company's operating segments: (in thousands)
Three Months Ended Six Months Ended
September 30, September 30,
--------------- ---------------
1999 1998 1999 1998
---- ---- ---- ----
Generic Segment:
Net Sales $163,814 $161,529 $315,751 $314,333
Segment Profit 68,535 56,016 127,752 108,159
Branded Segment:
Net Sales $ 30,675 $ 16,063 $ 55,833 $ 29,977
Segment Profit 5,483 3,947 7,184 6,007
Corporate Expenses $(15,645) $(3,516) $(26,444) $ (5,274)
Consolidated:
Net Sales $194,489 $177,592 $371,584 $344,310
Pretax Earnings 58,373 56,447 108,492 108,892
Segment net sales represents sales to unrelated third parties. Segment
profit represents segment gross profit less direct research and
development, sales and marketing and administrative expenses. Corporate
expenses include legal costs, amortization of goodwill, other corporate
administrative expenses and nonoperating income and expense.
F. A subsidiary of the Company is involved in a dispute relating to a license
and supply contract for nitroglycerin transdermal patches which both
parties claim has been breached by the other. The other company seeks
damages in excess of $20,000,000. The dispute is subject to binding
arbitration in which the hearing phase is now complete. Although the
Company believes that the claims against it are without merit, there can be
no assurance that the Company will prevail in this matter.
The Company is currently involved in negotiations with a state agency
concerning certain contract pricing matters. Management believes the
resolution of this matter will not have a material adverse effect on the
Company's operations or its financial position.
-6-
MYLAN LABORATORIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED
SEPTEMBER 30, 1999
Unaudited
F. (cont.) The Company had an agreement with Genpharm Inc. ("Genpharm") where
it benefitted from the sale of ranitidine HCl tablets by Novopharm Limited
("Novopharm") under a separate agreement between Genpharm and Novopharm.
Based on an independent audit, Genpharm initiated a lawsuit against
Novopharm to resolve contract interpretation issues and collect additional
funds due. In response to Genpharm's suit, Novopharm filed counterclaims
against both Genpharm and the Company claiming damages of up to
$60,000,000. The Company believes the counterclaims against Genpharm and
the Company are without merit and will vigorously defend its position.
In June 1998, the Company filed suit in the Los Angeles Superior Court
against VivoRx, Inc., VivoRx Diabetes, Inc. and certain directors
(collectively referred to as "VivoRx"). In March 1999, VivoRx filed an
answer to and cross-complaint in Los Angeles Superior Court against the
Company.
In October 1999, with respect to the above litigation and a related
arbitration award, the Company and VivoRx entered into a settlement
agreement in which all claims and disputes have been resolved. The Company
accepted title to an office building in California, subject to certain
leasing and buyback options held by VivoRx, in consideration of the
Company's discharge of $18,000,000 due from VivoRx and the release by the
Company of its security interest in certain VivoRx U.S. patents.
Additionally, VivoRx was granted an option to repurchase the common and
preferred stock currently owned by the Company for $15,000,000 over the
next five years. Upon the occurrence of certain events, as defined in the
settlement agreement, VivoRx must repurchase such stock or a portion
thereof.
In addition to the litigation involving VivoRx, in June 1998, the Company
filed suit in the Los Angeles Superior Court against associated companies:
American Bioscience, Inc. ("ABI"), American Pharmaceutical Partners, Inc.
("APP") and certain of their directors and officers. This litigation is not
part of the prior mentioned settlement. The Company's suit seeks various
equitable remedies, including but not limited to, appointment of a receiver
over and dissolution of ABI and APP, injunctive relief to stop the
misappropriation of the Company's research funding and equity investment
and the misappropriation of assets and personnel. The Los Angeles Superior
Court issued a preliminary injunction order which, among other things,
prohibits the defendants from transferring or disposing of funds, assets,
technology or property without the
-7-
MYLAN LABORATORIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED
SEPTEMBER 30, 1999
Unaudited
F. (cont.) Company's consent or commingling assets, property, technology or
personnel with those of VivoRx. In June 1999, the defendants filed an
answer to and cross-complaint against the Company. The cross-complaint
alleges violations of California State laws, interference with contractual
relations and prospective economic advantage, fraud, slander, libel and
other allegations. The cross- complainants seek unspecified compensatory
and punitive damages. The Company believes the cross-complaints are without
merit and intends to vigorously defend its position.
On December 22, 1998, the Federal Trade Commission ("FTC") filed suit in
U.S. District Court for the District of Columbia (the "Court") against the
Company. 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 two 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. Under the terms of the agreements
related to these raw materials, the Company has agreed to indemnify these
parties.
The Company is a party to other suits involving the Attorneys General from
33 states and more than 20 putative class actions that allege the same
conduct alleged in the FTC suit as well as alleged violations of state
consumer protection laws. A qui tam action was commenced by a private party
in the U.S. District Court for the District of South Carolina purportedly
on behalf of the United States alleging violations of the False Claims Act
and other statutes.
The relief sought by the FTC includes an injunction barring the Company
from engaging in the challenged conduct, recision of certain agreements and
disgorgement in excess of $120,000,000.
The states and private parties seek similar relief, treble damages and
attorneys' fees. In addition, a class action suit was filed alleging
violations of federal securities laws by the Company and certain directors
and officers of the Company. Without specifying a dollar amount, the suit
seeks compensatory damages.
-8-
MYLAN LABORATORIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED
SEPTEMBER 30, 1999
Unaudited
F. (cont.) The Company had filed motions to dismiss the FTC complaint,
significant portions of the State Attorneys General complaint and the
federal securities case. In July 1999, the Court denied the Company's
motion to dismiss the FTC complaint. The Company filed a motion requesting
the Court to certify its ruling with respect to the jurisdictional issue
for expedited appeal to the U.S. Court of Appeals for the District of
Columbia. This motion was denied. The Court granted in part and denied in
part the Company's motion to dismiss portions of the State Attorneys
General complaint. In so doing, the Court limited certain theories of
recovery asserted by the states. Some States have filed a motion with the
Court requesting that it reconsider certain claims that were dismissed. The
Company's motions to dismiss the federal securities case and various
private actions remain pending.
The Company believes that it has meritorious defenses to the claims in all
remaining 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 its operations.
-9-
MYLAN LABORATORIES INC. AND SUBSIDIARIES
PART 1 - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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Introduction
- -------------
Net earnings for the quarter ended September 30, 1999, were $37.1 million
or $.28 per share compared to $37.2 million or $.30 per share for the same prior
year period. Net earnings for the six month period then ended were $69.0 million
or $.53 per share compared to $71.4 million or $.58 per share for the same prior
year period. The Company experienced record sales for both the three and six
month periods ended September 30, 1999, due in part to the acquisition of
Penederm Inc. in October 1998. While sales and gross profits exceeded prior year
levels, higher operating expenses due to the inclusion of Penederm, expansion of
the Company's branded sales force and increased legal expenses resulted in
relatively unchanged operating income on a year-to-year comparison.
All references to per share amounts in Item 2 are based on diluted weighted
average common shares.
The following table presents the comparative operating results for the
Company's operating segments: (dollars in millions)
Three Months Ended Six Months Ended
September 30, September 30,
--------------- ---------------
1999 1998 % Change 1999 1998 % Change
---- ---- -------- ---- ---- --------
Generic Segment:
Net Sales $163.9 $161.5 1% $315.8 $314.3 0%
Gross Profit 89.0 81.6 9% 168.4 158.2 6%
Segment Profit 68.5 56.0 22% 127.7 108.2 18%
Branded Segment:
Net Sales $ 30.6 $ 16.1 90% $ 55.8 $ 30.0 86%
Gross Profit 21.8 10.4 110% 38.7 19.0 104%
Segment Profit 5.5 3.9 41% 7.2 6.0 20%
Corporate Expenses $ (15.6) $ (3.5) $(26.4) $ (5.3)
Consolidated:
Net Sales $194.5 $177.6 10% $371.6 $344.3 8%
Gross Profit 110.8 92.0 20% 207.1 177.2 17%
Pretax Earnings 58.4 56.4 4% 108.5 108.9 0%
-10-
MYLAN LABORATORIES INC. AND SUBSIDIARIES
The Generic Segment includes Mylan Pharmaceuticals Inc. and UDL
Laboratories. The Branded Segment includes Bertek Pharmaceuticals Inc. and
Penederm Inc. Segment net sales represents sales to unrelated third parties.
Segment gross profit represents segment net sales less the corporate wide costs
of manufacturing, warehousing and shipping associated with such sales. Segment
profit represents segment gross profit less direct research and development,
sales and marketing and administrative expenses. Corporate expenses include
legal costs, amortization of goodwill, other corporate administrative expenses
and nonoperating income and expenses.
Results of Operations
- ---------------------
Net Sales and Gross Profit
Net sales for the three months ended September 30, 1999, were $194.5
million compared to $177.6 million for the same prior year period, an increase
of 10%. Net sales for the six months ended September 30, 1999, were $371.6
million compared to $344.3 million for the same prior year period, an increase
of 8%. The increase in sales for both the three and six month periods is
primarily attributable to growth in the Branded Segments which includes sales of
products acquired in the Penederm transaction.
Sales of generic products remain relatively unchanged as new products along
with the Company's initiative of selectively raising prices offset price
deterioration on other generic products. Total generic volume was 2.1 billion
units for the quarter ended September 30, 1999, an increase of 10% over the same
prior year period and 4.1 billion units for the current year six month period,
an increase of 5% over the same prior year period.
Gross profits increased $18.9 million over the prior year three month
period to $110.8 million and $29.9 million to $207.1 million over the prior year
six month period. Gross margins (gross profit as a percent of net sales)
increased to 57% from 52% and 56% from 51% for these same three and six month
periods. The overall increase in gross margins is attributable to increases in
both the branded and generic gross margins and the additional increase in
branded sales. The increase in generic margins resulted from the Company
selectively increasing prices in prior quarters and the reduction in profit
sharing payments on certain products. The increase in branded gross margins
resulted from increased sales of higher margin products including products
acquired in the Penederm transaction.
-11-
MYLAN LABORATORIES INC. AND SUBSIDIARIES
Research and Development
Expenditures for research and development were $11.5 million for the
quarter ended September 30, 1999, and $23.3 million for the six months then
ended. The current three and six month periods include approximately $2.1
million and $4.2 million in charges for dermatology related projects incurred by
Penederm and charged to the Branded Segment. All other research and development
costs are charged to the Generic Segment.
In the quarter ended June 30, 1999, the Company terminated funding to its
diabetes project with VivoRx Inc. This has temporarily reduced expenditures in
the current periods. As current projects enter into advanced stages of
development and additional projects are initiated the Company expects research
and development expenses to increase.
The Company is actively pursuing joint development projects in an effort to
broaden its scope of capabilities in bringing to market new innovative products.
Such arrangements generally provide for payments by the Company only upon the
attainment of certain milestones. While such arrangements help to reduce the
Company's financial risk for unsuccessful projects, attainment of milestones may
result in fluctuations in quarterly research and development expenses.
Selling and Administrative Expenses
Selling and administrative expenses were $38.9 million for the three
months ended September 30, 1999, compared to $28.4 million for the same period
in the prior year. Expenses for the six months ended September 30, 1999, were
$77.0 million compared to $53.4 million for the same period in the prior year.
Corporate administrative expenses were $13.5 million and $28.1 million for
the current three and six month periods compared to $9.7 million and $17.9
million for the comparable prior periods. The increases over the prior periods
are attributable to higher goodwill amortization resulting from the Penederm
acquisition and higher legal expenses primarily related to the FTC litigation.
Branded Segment selling and administrative expenses were $14.2 million and
$27.2 million for the current three and six month periods compared to $6.4
million and $12.9 million for the comparable prior periods. The increase in both
periods over the prior year periods is primarily due to the inclusion of
Penederm, $4.1 million and $7.9 million in the current periods, and the costs
associated with expanding the sales and support staff for the Branded Segment.
-12-
MYLAN LABORATORIES INC. AND SUBSIDIARIES
Generic Segment selling and administrative expenses were $11.2 million and
$21.7 million for the current three and six month periods, which were relatively
unchanged from the same prior year periods.
Equity in Earnings
The equity in the loss of Somerset in the current periods was primarily the
result of lower sales due to generic competition on Eldepryl(R) and increased
expenditures for research and development. Somerset Pharmaceuticals, Inc. is
continuing its research for alternative uses for Eldepryl(R), which is expected
to result in continued losses in the near term.
Other Income
During the current quarter the Company recorded a loss on an investment it
has in a limited partnership. The loss of $8.5 million was partially offset by a
gain of $3.9 million on the partial sale of another investment.
Income Taxes
The Company's effective tax rate was 36% for both the three and six month
periods ending September 30, 1999. The increase from the prior year comparable
periods is primarily the result of nondeductible goodwill amortization resulting
from the acquisition of Penederm. The Company expects the tax rate to remain at
approximately the current level throughout fiscal year 2000.
Liquidity, Capital Resources and Financial Condition
- ------------------------------------------------------
Working capital increased from $486.6 million at March 31, 1999, to $552.4
million at September 30, 1999. The ratio of current assets to current
liabilities has increased from 6.0 to 1 at March 31, 1999, to 7.3 to 1 at
September 30, 1999. The increase in working capital of $65.8 million was
primarily due to the Company's net earnings. In addition to net earnings, net
cash provided from operating activities was affected by changes in accounts
receivable and its related allowance accounts. Based on its current cash
management program, the Company has invested additional cash in short term
marketable securities in the past. This has created the increase in proceeds
received from investment securities and the subsequent purchase of additional
marketable securities as reflected in the Statements of Cash Flows.
-13-
MYLAN LABORATORIES INC. AND SUBSIDIARIES
The Company continues to examine opportunities to expand its business
through product and company acquisitions. The Company's capital resources,
financial condition and results of operations could be materially impacted if
the Company were to complete one or more of such acquisitions.
Although the Company believes it has meritorious defenses to the claims in
the FTC and related suits, 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 related suits.
The Company expects to incur substantial costs in defending itself in these
actions.
Year 2000
- ---------
The Company has reviewed 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 taken or is taking the
following steps to address its IT and non-IT operating systems:
o Formed a project team across functional departments to review and
identify nonconforming systems.
o Communicated to employees throughout the Company to increase
awareness of issues and activate the identification process.
o Identified critical IT and non-IT nonconforming operating systems and
developed a plan to bring these systems into compliance.
o Established a testing program to ensure that such systems are
compliant.
o Corresponded with customers, vendors, service suppliers and financial
institutions to verify their readiness.
o Developed contingency plans where practical in the event of system
failures.
Because of the 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. The Company has not
been required to spend, nor does it anticipate spending, significant incremental
funds to become Y2K compliant.
-14-
MYLAN LABORATORIES INC. AND SUBSIDIARIES
The Company has completed system conversions for all major operating and
financial systems. All such systems have been certified by the vendor to be Y2K
compliant. The Company has completed its own testing on these systems and
verified their Y2K compliance.
Due to the upgrades and replacements of its computer systems to accommodate
its growth, the Company has neither delayed, nor anticipates delaying, any
significant information system projects prior to the year 2000.
The project team continues to evaluate and update contingency plans. These
plans are developed based on correspondence with customers, vendors, raw
material suppliers, service suppliers and financial institutions regarding the
status of their Y2K readiness and the results of testing performed on the
Company's internal systems. The Company has contacted all of its significant
business partners. As part of this process and due to the critical nature of the
Company's products, the Company has also initiated steps to monitor customers'
orders and buying patterns. The Company has taken these steps to ensure the
availability of its products to all its customers as the millennium approaches.
While the project team continues to develop contingency 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.
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 include 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.
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MYLAN LABORATORIES INC. AND SUBSIDIARIES
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, potential trends that may impact future results of operations, and
its beliefs or expectations about future 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, 1999, and under "Year 2000" in this Item
2.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------------------------------------------------------------------
The information required by Item 3 has been disclosed in Item 7A of the
Company's 1999 Annual Report on Form 10-K. There has been no material change in
the disclosure regarding market risk.
PART II. OTHER INFORMATION
--------------------------
ITEM 1. LEGAL PROCEEDINGS
- -------------------------
Since the date of the filing of the Company's report on Form 10-Q for the
period ended June 30, 1999, there have been no material new legal proceedings
involving the Company or any material developments to such proceedings, except
as described below.
A subsidiary of the Company is involved in a dispute relating to a license
and supply contract for nitroglycerin transdermal patches which both parties
claim has been breached by the other. The other company seeks damages in excess
of $20,000,000. The dispute is subject to binding arbitration in which the
hearing phase is now complete. Although the Company believes that the claims
against it are without merit, there can be no assurance that the Company will
prevail in this matter.
In June 1998, the Company filed suit in the Los Angeles Superior Court
against VivoRx, Inc., VivoRx Diabetes, Inc. and certain directors (collectively
referred to as "VivoRx"). In March 1999, VivoRx filed an answer to and
cross-complaint in Los Angeles Superior Court against the Company.
In October 1999, with respect to the above litigation and a related
arbitration award, the Company and VivoRx entered into a settlement agreement in
which all claims and disputes have been resolved. The Company accepted title to
an office building in California, subject to certain leasing and buyback options
held by VivoRx, in consideration of the Company's discharge of $18,000,000 due
from VivoRx and the release by the Company of its security interest in certain
VivoRx U.S.
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MYLAN LABORATORIES INC. AND SUBSIDIARIES
patents. Additionally, VivoRx was granted an option to repurchase the common and
preferred stock currently owned by the Company for $15,000,000 over the next
five years. Upon the occurrence of certain events, as defined in the settlement
agreement, VivoRx must repurchase such stock or a portion thereof.
In addition to the litigation involving VivoRx, in June 1998, the Company
filed suit in the Los Angeles Superior Court against associated companies:
American Bioscience, Inc. ("ABI"), American Pharmaceutical Partners, Inc.
("APP") and certain of their directors and officers. This litigation is not part
of the prior mentioned settlement. The Company's suit seeks various equitable
remedies, including but not limited to, appointment of a receiver over and
dissolution of ABI and APP, injunctive relief to stop the misappropriation of
the Company's research funding and equity investment and the misappropriation of
assets and personnel. The Los Angeles Superior Court issued a preliminary
injunction order which, among other things, prohibits the defendants from
transferring or disposing of funds, assets, technology or property without the
Company's consent or commingling assets, property, technology or personnel with
those of VivoRx. In June 1999, the defendants filed an answer to and
cross-complaint against the Company.
The cross-complaint alleges violations of California State laws,
interference with contractual relations and prospective economic advantage,
fraud, slander, libel and other allegations. The cross-complainants seek
unspecified compensatory and punitive damages. The Company believes the
cross-complaints are without merit and intends to vigorously defend its
position.
As described in the Form 10-K for the year ended March 31, 1999, in
December 1998, the Federal Trade Commission ("FTC") filed suit in U.S. District
Court for the District of Columbia (the "Court") against the Company. 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 two 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. Under the terms
of the agreements related to these raw materials, the Company has agreed to
indemnify these parties.
The Company is also a party to other suits involving the Attorneys General
from 33 states and more than 20 putative class actions that allege the same
conduct alleged in the FTC suit as well as alleged violations of state consumer
protection laws. A qui tam action was commenced by a private party in the U.S.
District Court for the District of South Carolina purportedly on behalf of the
United States alleging violations of the False Claims Act and other statutes.
The relief sought
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MYLAN LABORATORIES INC. AND SUBSIDIARIES
by the FTC includes an injunction barring the Company from engaging in the
challenged conduct, recision of certain agreements and disgorgement in excess of
$120,000,000.
The states and private parties seek similar relief, treble damages and
attorneys' fees. In addition, a class action suit was filed alleging violations
of federal securities laws by the Company and certain directors and officers of
the Company. Without specifying a dollar amount, the suit seeks compensatory
damages.
The Company had filed motions to dismiss the FTC complaint, significant
portions of the State Attorneys General complaint and the federal securities
case. In July 1999, the Court denied the Company's motion to dismiss the FTC
complaint. The Company filed a motion requesting the Court to certify its ruling
with respect to the jurisdictional issue for expedited appeal to the U.S. Court
of Appeals for the District of Columbia. This motion was denied.
The Court granted in part and denied in part the Company's motion to
dismiss portions of the State Attorneys General complaint. In so doing, the
Court limited certain theories of recovery asserted by the states. Some States
have filed a motion with the Court requesting that it reconsider certain claims
that were dismissed. The Company's motions to dismiss the federal securities
case, along with various private actions, remain pending.
The Company believes that it has meritorious defenses to the claims in all
FTC and related 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 its operations.
The Company is involved in various other legal proceedings that are
considered normal to its business. While it is not feasible to predict the
ultimate outcome of such proceedings, it is the opinion of management that the
outcome of these suits will not have a material adverse effect on the Company's
operations, financial position, or liquidity.
-18-
MYLAN LABORATORIES INC. AND SUBSIDIARIES
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -----------------------------------------------------------
On July 23, 1999, the annual meeting of the shareholders of the Company
was held. At this meeting, the shareholders overwhelmingly elected the seven
directors nominated and approved the appointment of Deloitte & Touche LLP as the
Company's independent auditors. Additionally, the shareholders approved a
shareholder's proposal recommending that the Company redeem the rights under the
Company's Shareholder Rights Plan so as to eliminate the continuing director
provisions of the Plan.
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 September 30, 1999.
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 11/03/99 /s/ Milan Puskar
-------------- ---------------------------
Milan Puskar
Chairman of the Board, Chief
Executive Officer and President
(Principal executive officer)
DATE 11/03/99 /s/ Donald C. Schilling
---------------- ---------------------------
Donald C. Schilling
Vice President of Finance and
Chief Financial Officer
(Principal financial officer)
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