FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________
(Mark One)
/ X / QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended December 31, 1999
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from________ to___________________________________
Commission File No. 1-5438
FOREST LABORATORIES, INC.
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(Exact name of registrant as specified in its charter)
Delaware 11-1798614
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(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
909 Third Avenue
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New York, New York 10022-4731
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(address of principal (Zip Code)
executive office)
Registrant's telephone number, including area code 212-421-7850
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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 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
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Number of shares outstanding of Registrant's Common Stock as of February
14, 2000: 84,490,768.
PART I - FINANCIAL INFORMATION
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FOREST LABORATORIES, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
December 31, 1999
(In thousands) (Unaudited) March 31,1999
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ASSETS
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Current assets:
Cash (including cash equivalent
investments of $221,641 in December
and $197,515 in March) $ 225,746 $ 200,968
Marketable securities 24,718 40,780
Accounts receivable, less allowances of
$9,102 in December and $14,160 in March 57,366 57,294
Inventories 156,805 132,675
Deferred income taxes 41,716 52,059
Refundable income taxes 12,809 12,411
Other current assets 5,907 6,174
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Total current assets 525,067 502,361
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Marketable securities 26,742 37,215
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Property, plant and equipment 147,213 129,811
Less: accumulated depreciation 43,334 38,615
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103,879 91,196
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Other assets:
Excess of cost of investment in subsidiaries
over net assets acquired, less accumulated
amortization of $9,212 in December and
$8,742 in March 15,747 16,217
License agreements, product rights
and other intangible assets, less
accumulated amortization of $102,543 in
December and $89,519 in March 281,498 195,203
Deferred income taxes 13,316 15,220
Other 20,106 17,685
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Total other assets 330,667 244,325
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TOTAL ASSETS $ 986,355 $ 875,097
========== ==========
See notes to condensed consolidated financial statements.
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FOREST LABORATORIES, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
December 31, 1999
(In thousands, except for par values) (Unaudited) March 31,1999
----------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
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Current liabilities:
Accounts payable $ 38,329 $ 66,673
Accrued expenses 74,385 38,114
Income taxes payable 23,944 25,173
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Total current liabilities 136,658 129,960
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Deferred income taxes 1,506 1,625
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Shareholders' equity:
Series A junior participating preferred
stock, $1.00 par;
shares authorized 1,000;
no shares issued or outstanding
Common stock, $.10 par; shares authorized
500,000; issued 102,020 shares in
December and 100,854 shares in March 10,202 10,085
Capital in excess of par 416,442 390,750
Retained earnings 717,093 632,334
Accumulated other comprehensive loss ( 12,212) ( 7,175)
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1,131,525 1,025,994
Less common stock in treasury,
at cost (17,699 shares in December
and 17,683 shares in March) 283,334 282,482
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Total shareholders' equity 848,191 743,512
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TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 986,355 $ 875,097
========== ==========
See notes to condensed consolidated financial statements.
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FOREST LABORATORIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(Unaudited)
(In thousands, except Three Months Ended Nine Months Ended
per share amounts) December 31, December 31,
------------------- ------------------
1999 1998 1999 1998
-------- -------- -------- --------
Net sales $234,413 $137,462 $614,563 $371,922
Contract revenue 3,010 9,412 6,317 39,823
Other income 3,422 7,808 13,163 20,061
-------- -------- -------- --------
240,845 154,682 634,043 431,806
Costs and expenses:
Cost of goods sold 58,671 34,140 153,692 93,445
Selling, general and
administrative 119,732 77,336 312,632 243,666
Research and development 17,747 12,553 47,887 39,418
-------- -------- -------- --------
196,150 124,029 514,211 376,529
-------- -------- -------- --------
Income before income taxes 44,695 30,653 119,832 55,277
Income tax expense 12,939 9,135 35,073 17,028
-------- -------- -------- --------
Net income $ 31,756 $ 21,518 $ 84,759 $ 38,249
======== ======== ======== ========
Net income per common
and common equivalent share:
Basic $.38 $.26 $1.01 $.47
==== ==== ====== ====
Diluted $.36 $.25 $ .97 $.45
==== ==== ====== ====
Weighted average number of
common and common equivalent
shares outstanding:
Basic 83,871 81,495 83,553 80,963
====== ====== ====== ======
Diluted 87,801 86,178 87,585 85,474
====== ====== ====== ======
See notes to condensed consolidated financial statements.
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FOREST LABORATORIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
(In thousands) Three Months Ended Nine Months Ended
December 31, December 31,
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1999 1998 1999 1998
-------- ------- ------- -------
Net income $31,756 $21,518 $84,759 $38,249
Other comprehensive income (loss) ( 4,772) ( 988) ( 5,037) 2,758
------- ------- ------- -------
Comprehensive income $26,984 $20,530 $79,722 $41,007
======= ======= ======= =======
See notes to condensed consolidated financial statements.
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FOREST LABORATORIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
(In thousands) December 31,
--------------------
1999 1998
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Cash flows from operating activities:
Net income $ 84,759 $ 38,249
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Depreciation 5,817 5,402
Amortization 13,494 10,387
Deferred income tax expense 12,128 11,066
Foreign currency transactions gain ( 1,108) ( 2,004)
Net change in operating assets and liabilities:
Decrease (increase) in:
Accounts receivable, net ( 72) ( 4,673)
Inventories ( 24,130) ( 39,062)
Refundable income taxes ( 398) ( 12,774)
Other current assets 267 3,905
Increase (decrease) in:
Accounts payable ( 28,344) 7,917
Accrued expenses 36,271 ( 17,766)
Income taxes payable ( 1,229) ( 10,281)
Increase in other assets ( 2,421) ( 5,060)
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Net cash provided by (used in)
operating activities 95,034 ( 14,694)
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Cash flows from investing activities:
Purchase of property, plant and equipment, net ( 19,672) ( 15,777)
Purchase of marketable securities
Available-for-sale ( 11,865)
Redemption of marketable securities
Available-for-sale 26,535 46,770
Purchase of license agreements, product rights
and other intangible assets, net ( 100,231) ( 12,000)
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Net cash provided by (used in)
investing activities ( 93,368) 7,128
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- Continued -
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FOREST LABORATORIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
- Continued -
Nine Months Ended
(In thousands) December 31,
--------------------
1999 1998
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Cash flows from financing activities:
Net proceeds from common stock options exercised
by employees under stock option plans $ 12,717 $ 10,980
Tax benefit realized from the exercise of stock
options by employees 12,240 10,032
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Net cash provided by financing
activities 24,957 21,012
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Effect of exchange rate changes on cash ( 1,845) 2,543
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Increase in cash and cash equivalents 24,778 15,989
Cash and cash equivalents, beginning of period 200,968 149,653
-------- --------
Cash and cash equivalents, end of period $225,746 $165,642
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Supplemental disclosures of cash flow information:
Cash paid during the period for:
Income taxes $13,046 $18,985
See notes to condensed consolidated financial statements.
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FOREST LABORATORIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
---------------------
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions
to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In
the opinion of Management, all adjustments (consisting of only normal
recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the nine-month period ended
December 31, 1999 are not necessarily indicative of the results that
may be expected for the year ending March 31, 2000. For further
information refer to the consolidated financial statements and
footnotes thereto incorporated by reference in the Company's Annual
Report on Form 10-K for the year ended March 31, 1999.
2. Inventories
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Inventories consist of the following:
December 31, 1999
(In thousands) (Unaudited) March 31, 1999
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Raw materials $ 32,350 $ 78,020
Work in process 5,819 2,913
Finished goods 118,636 51,742
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$156,805 $132,675
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3. Buy Out of Royalty Obligation
-----------------------------
On June 30, 1999 the Company exercised its purchase option to
terminate a royalty obligation to a private investor group on sales of
Celexa-R- for a predetermined one-time payment of $85,000,000. In fiscal
years 1998 and 1999, the private investor group had reimbursed the
Company a total of $60,000,000 for certain salesforce, marketing and
research and development expenses in connection with the launch of
Celexa. The investor group was to receive a royalty ranging from 25%
to 5% on sales of Celexa beginning in November 1999 for a period of
ten years. During the fiscal quarter ended September 30, 1999, the
Company also agreed to buy out a limited 1% trailing royalty for
$10,000,000.
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FOREST LABORATORIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
4. Net Income Per Share
--------------------
A reconciliation of shares used in calculating basic and diluted net
income per share follows (in thousands):
Three Months Ended Nine Months Ended
December 31, December 31,
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1999 1998 1999 1998
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Basic 83,871 81,495 83,553 80,963
Effect of assumed conversion of
employee stock options and
warrants 3,930 4,683 4,032 4,511
------ ------ ------ ------
Diluted 87,801 86,178 87,585 85,474
====== ====== ====== ======
Options and warrants to purchase approximately 1,212,500 shares of
common stock at an exercise price of $52.59 per share and 1,556,500
shares of common stock at exercise prices ranging from $49.16 to
$52.59 per share were outstanding during a portion of the three and
nine-month periods ended December 31, 1999, respectively, but were not
included in the computation of diluted earnings per share because they
were anti-dilutive. There were no outstanding options or warrants
excluded from the computation of diluted earnings per share for the
three-month period ended December 31, 1998 as none were anti-dilutive.
Options and warrants to purchase approximately 580,000 shares of
common stock at an exercise price of $39.06 per share were outstanding
during a portion of the nine-month period ended December 31, 1998, but
were not included in the computation of diluted earnings per share
because they were anti-dilutive. These options and warrants expire
through 2008.
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FOREST LABORATORIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Financial Condition and Liquidity
- ---------------------------------
Net current assets increased by $16,008,000 from March 31, 1999. During the
period the Company exercised its purchase option to terminate royalty
obligations on Celexa-R- (citalopram HBr) to a private investor group.
Celexa, which is the Company's selective serotonin reuptake inhibitor
("SSRI") for the treatment of depression, was launched in September 1998.
The purchase of the royalty obligation was completed in July 1999, for a
predetermined one-time payment of $85,000,000. In fiscal years 1999 and
1998, the private investor group had reimbursed the Company a total of
$60,000,000 for certain salesforce, marketing and research and development
expenses in connection with the launch of Celexa. The private investor
group was to receive a royalty ranging from 25% to 5% on the sales of
Celexa beginning in November 1999 for a period of ten years. In separate
negotiations, the Company also agreed to buy out a limited 1% trailing
royalty for $10,000,000. These amounts are included in license agreements,
product rights and other intangible assets and are being amortized using
the straight-line method. The Company utilized a portion of its cash and
marketable securities to conclude these transactions during the second
quarter. The changes in cash, inventories, accounts payable and accrued
expenses resulted principally from increases in the level of the Company's
overall operations, caused mostly by activities related to Celexa.
Property, plant and equipment increased principally from the expansions of
the Company's worldwide manufacturing and distribution facilities in order
to meet projected demands for Celexa and expansions on Long Island, New
York and in Jersey City, New Jersey to facilitate increased activity for
research and development projects. These expansions will continue through
fiscal 2001, and when complete, should adequately meet the Company's
foreseeable needs for manufacturing, warehousing and distribution and
research activities.
Management believes that current cash levels coupled with funds to be
generated by ongoing operations will continue to provide adequate liquidity
to facilitate potential acquisitions of products and capital investments.
Results of Operations
- ---------------------
Net sales for the three-month period ended December 31, 1999 increased
$96,951,000 as compared to the three-month period ended December 31, 1998.
Net sales of Celexa, which was launched in September 1998 with the
Company's co-promotion partner, the Parke-Davis division of the Warner-
Lambert Company, amounted to $118,221,000 for the quarter and accounted for
$97,336,000 of the change from the same period last year. In October, the
Company launched Infasurf-R-, a lung surfactant for use in the
prophylaxis and treatment of respiratory distress syndrome in premature
infants. Sales of Infasurf amounted to $2,097,000 for the quarter. Sales of
Tiazac-R- were $3,800,000 higher than the prior year's quarter due primarily
to increases in volume. Sales of Flumadine-R-, the Company's oral antiviral
for the treatment and prophylaxis of Influenza A infection, were $4,406,000
higher than the prior year's quarter. Sales of Aerobid-R- declined $7,029,000
-10-
FOREST LABORATORIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
principally as a result of continuing competition in the inhaled steroid
market. Sales of the Company's older and less promoted products declined by
$3,659,000.
Net sales for the nine-month period ended December 31, 1999 increased
$242,641,000 as compared to the nine-month period ended December 31, 1998.
Sales of Celexa amounted to $293,194,000 for the nine-month period and
accounted for $251,295,000 of the increase. Sales of Infasurf, Tiazac and
Flumadine accounted for $2,569,000, $23,469,000 and $5,429,000 of the
increase, respectively. Sales of Aerobid declined $22,155,000 for the
nine-month period due to the continuing competition in the inhaled steroid
market. Sales of the Company's older and less promoted products declined by
$17,966,000.
Contract revenue was $6,402,000 and $33,506,000 less than in the three and
nine-month periods, respectively, ended December 31, 1999, primarily as a
result of the completion of an arrangement with a private investor group
for the reimbursement of certain expenses incurred in connection with
Celexa.
The decreases in other income in each of the periods presented were due
primarily to the collection, during the first quarter, of the final payment
from a settlement with Pharmacia & Upjohn, Inc., with respect to the
Company's claimed option to negotiate for the rights to Detrol-R-.
Cost of sales as a percentage of sales was 25% for the current quarter and
for the nine-month period ended December 31, 1999, unchanged from the same
periods last year.
Selling, general and administrative expenses increased $42,396,000 and
$68,966,000, respectively, during the three and nine-month periods ended
December 31, 1999, from the same periods last year. The increases were
principally due to marketing, promotional and selling activities related to
Celexa. In addition, during the quarter, the Company began an expansion of its
salesforce from 850 representatives and managers to 1,425 persons.
Warner-Lambert's expected merger with Pfizer Inc., which sells a competing
anti-depressant, will necessitate the early termination of the co-promotion
agreement. The Company anticipates that during this transition, increased
and overlapping expenses, which may not be offset by increased sales, may
reduce future quarterly earnings. However, subsequent to the termination of
the co-promotion agreement, the elimination of payments to the Warner-Lambert
Company will more than offset the costs of the larger salesforce.
Research and development expenses increased $5,194,000 and $8,469,000,
respectively, during the three and nine-month periods ended December 31,
1999, from the same periods last year. The increases were due to costs
associated with clinical trials conducted to obtain approval for new
products and from staff increases and associated costs required to support
currently marketed products and products under development and in various
stages of submission. During the current quarter, particular emphasis was
placed on clinical studies for Celexa and new formulations for Aerobid.
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FOREST LABORATORIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Income tax expense as a percentage of income before taxes was 29% for the
three and nine-month periods ended December 31, 1999 as compared to 30% and
31% respectively, for the same periods last year. The decrease resulted
principally from a decrease in the proportion of operating profit derived
from fully taxable U.S. operations as compared to lower taxed operations.
Celexa is licensed and manufactured in Ireland and a portion of its profit
is subject to a favorable tax rate.
The Company expects to continue its profitability in fiscal 2000 with
continued growth of Celexa, Tiazac, the addition of Infasurf and the strength of
its other products.
Year 2000 Readiness Disclosure
- ------------------------------
At December 31, 1999, all of the principal systems of the Company's U.S.
operations were Year 2000 compliant. Since January 1, 2000 the Company's
systems continue to operate normally. It is still too early to conclude the
full effect of the Year 2000 readiness from the Company's critical vendors,
major customers, service suppliers, product alliance partners and banks.
Thus far the Company has not been informed by any of its outside resources
that they have experienced any significant difficulties which may cause any
serious disruptions to business flows. The Company plans to continue its
evaluation of its major systems through the fourth fiscal quarter.
Because the Company's Year 2000 compliance is dependant upon key third
parties also being Year 2000 compliant, there can be no assurance that the
Company's efforts will prevent an adverse impact on its results of
operations. Management believes that its ongoing efforts to address the
Year 2000 issue will minimize possible negative consequences to the
Company.
Forward Looking Statements
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Except for the historical information contained herein, the Management
Discussion and other portions of this annual report contain forward looking
statements that involve a number or risks and uncertainties, including the
difficulty of predicting FDA approvals, acceptance and demand for new
pharmaceutical products, the impact of competitive products and pricing,
the timely development and launch of new products and the risk factors
listed from time to time in the Company's SEC reports, including the
Company's Annual Report on Form 10-K for the fiscal year ended March 31,
1999.
Quantitative and Qualitative Disclosures About Market Risk
- ----------------------------------------------------------
In the normal course of business, operations of the Company may be exposed
to fluctuations in currency values and interest rates. These fluctuations
can vary the costs of financing, investing and operating transactions.
Because the Company had no debt and only minimal foreign currency
transactions, there is no material impact on earnings of fluctuations in
interest and currency exchange rates.
-12-
Part II - Other Information
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Item 1. Legal Proceedings
-----------------
Reference is hereby made to the Company's Annual Report on Form
10-K for the fiscal year ended March 31, 1999, for a description
of certain legal proceedings to which the Company is a party.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(b) Reports on Form 8-K. None
Exhibit 27. Financial Data Schedule
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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.
Date: February 14, 2000
Forest Laboratories, Inc.
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(Registrant)
/s/ Kenneth E. Goodman
----------------------
Kenneth E. Goodman
President and Chief
Operating Officer
/s/ John E. Eggers
------------------
John E. Eggers
Vice President-Finance and
Chief Financial Officer
-14-
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.
Date: February 14, 2000
Forest Laboratories, Inc.
-------------------------
(Registrant)
Kenneth E. Goodman
------------------
President and Chief
Operating Officer
John E. Eggers
--------------
Vice President-Finance and
Chief Financial Officer
-14-