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 September 30, 1998
----
/ / 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.
- -------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 11-1798614
- -------------------------------- ------------------------
(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
- ------------------- ------------
(address of principal (Zip Code)
executive office)
Registrant's telephone number, including area code 212-421-7850
------------
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
------ ------
Number of shares outstanding of Registrant's Common Stock as of November
13, 1998: 81,562,876.
PART I - FINANCIAL INFORMATION
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FOREST LABORATORIES, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
September 30, 1998
(In thousands) (Unaudited) March 31, 1998
------------------ ---------------
ASSETS
- ------
Current assets:
Cash (including cash equivalent investments
of $135,605 in September and $143,423
in March) $142,288 $149,653
Marketable securities 30,555 32,199
Accounts receivable, less allowances of
$13,307 in September and $12,416 in March 44,890 41,464
Inventories 88,747 82,718
Deferred income taxes 46,643 47,675
Refundable income taxes 9,432 9,432
Other current assets 12,621 8,506
-------- --------
Total current assets 375,176 371,647
-------- --------
Marketable securities 30,709 47,748
-------- --------
Property, plant and equipment 128,312 116,265
Less: accumulated depreciation 37,362 34,815
-------- --------
90,950 81,450
-------- --------
Other assets:
Excess of cost of investment in subsidiaries
over net assets acquired, less accumulated
amortization of $8,429 in September and
$8,117 in March 16,530 16,842
License agreements, product rights
and other intangible assets, less accumulated
amortization of $82,808 in September and
$76,190 in March 203,225 197,095
Deferred income taxes 16,653 17,639
Other 16,813 11,902
-------- --------
Total other assets 253,221 243,478
-------- --------
TOTAL ASSETS $750,056 $744,323
======== ========
See notes to condensed consolidated financial statements.
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FOREST LABORATORIES, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
September 30, 1998
(In thousands, except for par values) (Unaudited) March 31, 1998
------------------- ---------------
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable $ 43,119 $ 30,409
Accrued expenses 51,686 70,998
Income taxes payable 14,193 28,482
-------- --------
Total current liabilities 108,998 129,889
-------- --------
Deferred income taxes 283 273
-------- --------
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 98,461 shares in September
and 98,054 shares in March 9,846 9,805
Capital in excess of par 341,187 334,781
Retained earnings 571,892 555,161
Accumulated other comprehensive income ( 784) ( 4,530)
-------- --------
922,141 895,217
Less common stock in treasury,
at cost (17,660 shares in September
and 17,651 shares in March) 281,366 281,056
-------- --------
Total shareholders' equity 640,775 614,161
-------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $750,056 $744,323
======== ========
See notes to condensed consolidated financial statements.
-3-
FOREST LABORATORIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(Unaudited)
(In thousands, except Three Months Ended Six Months Ended
per share amounts) September 30, September 30,
------------------- ------------------
1998 1997 1998 1997
-------- -------- -------- --------
Net sales $127,395 $104,461 $234,460 $190,827
Contract revenue 16,418 4,080 30,411 4,953
Other income 5,547 2,842 12,253 5,930
-------- -------- -------- --------
149,360 111,383 277,124 201,710
-------- -------- -------- --------
Costs and expenses:
Cost of goods sold 32,390 25,048 59,305 47,352
Selling, general and
administrative 89,007 53,063 166,330 109,767
Research and development 12,926 10,114 26,865 20,449
-------- -------- -------- --------
134,323 88,225 252,500 177,568
-------- -------- -------- --------
Income before income taxes 15,037 23,158 24,624 24,142
Income tax expense 4,729 7,642 7,893 7,967
------- -------- -------- --------
Net income $ 10,308 $ 15,516 $ 16,731 $ 16,175
======== ======== ======== ========
Net income per common
and common equivalent share:
Basic $.13 $.19 $.21 $.20
==== ==== ==== ====
Diluted $.12 $.19 $.20 $.19
==== ==== ==== ====
Weighted average number of
common and common equivalent
shares outstanding:
Basic 80,770 81,325 80,639 81,635
====== ====== ====== ======
Diluted 85,192 83,640 85,046 83,733
====== ====== ====== ======
See notes to condensed consolidated financial statements.
-4-
FOREST LABORATORIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
(In thousands) Three Months Ended Six Months Ended
September 30, September 30,
------------------ ----------------
1998 1997 1998 1997
------- ------- ------- -------
Net income $10,308 $15,516 $16,731 $16,175
Other comprehensive income (loss) 3,460 ( 1,828) 3,746 ( 2,196)
------- ------- ------- -------
Comprehensive income $13,768 $13,688 $20,477 $13,979
======= ======= ======= =======
See notes to condensed consolidated financial statements.
-5-
FOREST LABORATORIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended
(In thousands) September 30,
-------------------------
1998 1997
-------- -------
Cash flows from operating activities:
Net income $ 16,731 $ 16,175
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 3,560 3,298
Amortization 6,930 6,741
Gain on sale of assets of closed
facilities ( 564)
Deferred income tax expense 2,028 828
Foreign currency transactions gain ( 1,238) ( 561)
Net change in operating assets and
liabilities:
Decrease (increase) in:
Accounts receivable, net ( 3,426) ( 15,329)
Inventories ( 6,029) 8,418
Refundable income taxes 20,204
Other current assets ( 4,115) ( 50)
Increase (decrease) in:
Accounts payable 12,710 ( 157)
Accrued expenses ( 19,312) 2,650
Income taxes payable ( 14,289) 5,397
Increase in other assets ( 4,911) ( 761)
-------- --------
Net cash provided by (used
in) operating activities ( 11,361) 46,289
Cash flows from investing activities:
Purchase of property, plant and equipment,
net ( 11,481) ( 3,148)
Proceeds from sale of assets of closed
facilities 1,875
Purchase of marketable securities
Available-for-sale ( 6,318) ( 11,497)
Redemption of marketable securities
Available-for-sale 25,001 9,045
Purchase of license agreements, product rights
and intangible assets, net ( 12,000) ( 2,075)
-------- --------
Net cash used in investing
activities ( 4,798) ( 5,800)
-------- --------
- Continued -
-6-
FOREST LABORATORIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
- Continued -
Six Months Ended
(In thousands) September 30,
-----------------------
1998 1997
--------- ---------
Cash flows from financing activities:
Net proceeds from common stock options exercised
by employees under stock option plans $ 4,963 $ 2,577
Tax benefit realized from the exercise of stock
options by employees 1,174 400
Purchase of treasury stock, net ( 40,838)
-------- --------
Net cash provided by (used in) financing
activities 6,137 ( 37,861)
Effect of exchange rate changes on cash 2,657 39
-------- -------
Increase (decrease) in cash and cash equivalents ( 7,365) 2,667
Cash and cash equivalents, beginning of period 149,653 162,842
-------- --------
Cash and cash equivalents, end of period $142,288 $165,509
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Income taxes $18,980 $525
Issuance of warrants for the purchase of
license agreements $3,500
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 six-month period ended
September 30, 1998 are not necessarily indicative of the results that
may be expected for the year ending March 31, 1999. 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, 1998.
2. Inventories
-----------
Inventories consist of the following:
September 30, 1998
(In thousands) (Unaudited) March 31, 1998
------------------ --------------
Raw materials $27,788 $34,723
Work in process 3,841 4,320
Finished goods 57,118 43,675
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$88,747 $82,718
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3. Net Income Per Share
--------------------
A reconciliation of shares used in calculating basic and diluted net
income per share follows (in thousands):
Three Months Ended Six Months Ended
September 30, September 30,
------------------ ----------------
1998 1997 1998 1997
------ ------ ------ ------
Basic 80,770 81,325 80,639 81,635
Effect of assumed conversion
of employee stock options
and warrants 4,422 2,315 4,407 2,098
------ ------ ------ ------
Diluted 85,192 83,640 85,046 83,733
====== ====== ====== ======
Options and warrants to purchase approximately 573,000 shares of
common stock at an exercise price of $39.06 per share were outstanding
during a portion of the three and six month periods ended September
30, 1998, but were not included in the computation of diluted earnings
per share because they were anti-dilutive. Options and warrants to
purchase approximately 3,260,000 shares of common stock at exercise
prices ranging from $22.03 to $25.73 per share and 4,223,000 shares of
common stock at exercise prices ranging from $20.84 to $25.73 per
share were outstanding during a portion of the three and six month
periods ended September 30, 1997, respectively, but were not included
in the computation of diluted earnings per share because they were
anti-dilutive. These options and warrants expire through 2008.
-8-
FOREST LABORATORIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
4. Accounting Changes
------------------
Effective April 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130 ("SFAS No. 130"), "REPORTING
COMPREHENSIVE INCOME." Under provisions of this statement, the
Company has included a financial statement presentation of
comprehensive income to conform to these new requirements. SFAS No.
130 requires unrealized gains or losses on the Company's available-for-
sale securities and foreign currency translation adjustments to be
included in other comprehensive income. Implementation of this
disclosure standard did not have a material affect on the Company's
financial position or results of operations.
-9-
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 $24,420,000 from March 31, 1998
principally from normal operating activities. Cash, marketable
securities and accrued expenses declined during the period primarily
as a result of a $32,250,000 payment made for the marketing rights to
certain products under development by H. Lundbeck A/S of Denmark. This
expense had been accrued during the 1998 fiscal year. In addition, the
Company paid $12,000,000 in accordance with the licensing agreement
with H. Lundbeck A/S for the U.S. rights to Celexa-TM-, the Company's
selective serotonin reuptake inhibitor for depression, upon its
approval which was received in the second quarter.
Property, plant and equipment increased principally from the expansion
of the Company's St. Louis, Missouri facilities to meet the
anticipated demand for the warehousing and distribution of Celexa. The
Company is also expanding its facilities in Ireland to meet the
projected manufacturing demands of Celexa and on Long Island, New York
to facilitate increased activity for research and development
projects. The expansion will continue through fiscal 1999, and when
complete, should adequately meet the Company's needs for
manufacturing, warehousing, 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-months ended September 30, 1998 increased
$22,934,000 as compared to the period ended September 30, 1997. Initial
stocking sales of Celexa, which was launched during the quarter with
the Company's co-promotion partner, the Parke-Davis division of the
Warner Lambert Company, accounted for $21,014,000 of the increase.
While it is still too early to evaluate the results of the launch, the
Company is encouraged by the initial prescription demand and by the
response of the medical community. The Company's Pharmax Limited
subsidiary in the United Kingdom launched Exorex-TM-, used for the
treatment of eczema, during the June 1998 quarter. Initial stocking
sales, which continued in the current quarter, accounted for $793,000
of the net sales increase. Sales of Tiazac-R- were $12,899,000 higher
than last year's second quarter, of which $2,634,000 was due to higher
realized average selling prices. Aerobid-R- sales declined $5,589,000
from last year's quarter as a result of continuing competition in the
inhaled steroid market. Sales of the Company's other products were
$789,000 higher than last year, but were offset by the absence of
propranolol sales which amounted to $6,972,000 in last year's second
quarter. During the first quarter of the current fiscal year, the
Company temporarily discontinued shipments of propranolol, one of its
generic products, because of manufacturing difficulties. The Company
has not yet resumed shipments, but hopes to do so later this year.
Net sales for the six-months ended September 30, 1998 increased
$43,633,000 as compared to the six-month period ended September 30,
1997. Sales of Celexa and Exorex accounted for $21,014,000 and $897,000
of the increase, respectively. Sales of Tiazac were $20,700,000 higher
than last year's first six months, of which $3,450,000 was due to
higher realized average selling prices. Sales of the Company's other
products increased $1,022,000, net of a decrease of $12,396,000 in
propranolol sales.
-10-
FOREST LABORATORIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Cont'd.)
Contract revenue was $12,338,000 higher for the three-month period and
$25,458,000 higher for the six-month period than in each of the
corresponding prior periods, due principally to the Company's
arrangement with a private investor group to reimburse the Company for
certain expenses incurred in connection with Celexa. This arrangement
was not in effect during the prior year's first quarter. The remainder
of the increase was a result of increased co-promotion income on
increased sales of Climara-R-.
Other income in the three and six-month periods includes further
payments of $3,000,000 in each of the quarters from the settlement
with Pharmacia & Upjohn, Inc. with respect to the Company's claimed
option to negotiate for the rights to Detrol-R-. The Company may receive
the remaining $9,000,000 of the settlement, subject to the achievement
of certain sales objectives for Detrol.
Cost of sales as a percentage of sales increased to 25% in the current
quarter from 24% in the similar period last year due principally to a
change in product mix.
Selling, general and administrative expenses increased $35,944,000 and
$56,563,000, respectively, during the three and six-month periods
ended September 30, 1998, from the same periods last year. The
increases were principally due to the costs associated with the launch
of Celexa, including the addition of approximately 200 sales
representatives. A portion of these expenses, together with certain
research and development expenses related to Celexa, were reimbursed
by the private investor group, as discussed above.
Research and development expenses increased $2,812,000 and $6,416,000,
respectively, during the three and six-month periods ended September
30, 1998, from the same periods last year, due principally to costs
associated with conducting clinical trials in order to obtain approval
and market new products and from staff increases and associated costs
required to support an increased number of products under development.
During the current periods, particular emphasis was placed on various
clinical studies and new formulations for Aerobid and on clinical
studies for Celexa.
Income taxes as a percentage of income before taxes was approximately
1% lower for the three and six-month periods ended September 30, 1998,
from the same periods last year. The decreases resulted principally
from an increase in the Company's operating profit derived from tax
exempt operations.
The Company expects to continue its profitability in fiscal 1999 with
continued growth in its principal promoted products and Celexa.
At September 30, 1998, primarily all of the critical computer systems
and software (The "Systems") of the Company's U.S. operations are Year
2000 compliant. Other less critical systems in the U.S. and the
Company's European subsidiaries systems that are not Year 2000
compliant will be replaced or upgraded. The Company anticipates that
all of its Systems will be compliant by the end of 1999. Management
believes that the cost to modify these Systems is not material. The
Company is also assessing its vendors and customers to determine if
their Systems are Year 2000 compliant and is not yet able to assess
whether any failures to be compliant would have a material effect on
its business operations.
-11-
FOREST LABORATORIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Cont'd.)
FORWARD LOOKING STATEMENTS Except for the historical information
--------------------------
contained herein, the Management Discussion and other portions of this
Form 10-Q contain forward looking statements that involve a number of
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, 1998.
-12-
Part II - Other Information
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Item 1. Legal Proceedings
-----------------
Reference is made to the Company's Annual Report on Form 10-K for
the fiscal year ended March 31, 1998 (the "Annual Report") for a
description of certain legal proceedings.
With respect to the anti-trust litigation described in the Annual
Report, four additional manufacturer-defendants (not including the
Company) reached a settlement of the federal class action in August
1998 providing for aggregate payments by such settling defendants
of approximately $350 million and providing for the same
commitments as to future pricing practices included in the
settlements reached in 1996. Trial in the federal class action
commenced in September 1998 against the four manufacturer-
defendants (including the Company) and the wholesalers who have not
settled the case and is expected to continue through December 1998.
With respect to the patent litigation between the Company and
Abbott Laboratories described in the Annual Report, a jury
concluded that Infasurf-R- infringed Abbott's Survanta-R- patents.
The Company is seeking to have the verdict set aside. Although it
is premature to know the ultimate scope of the court result,
the Company has been informed that its' licensor will be able
to manufacture product outside the scope of the second of Abbott's two
patents and that it would therefore be able to market Infasurf
after expiry of the first patent in May 2000.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
(a) The registrant held its annual meeting of stockholders on
August 20, 1998.
(b) N/A
(c) At the annual meeting, holders of the registrant's Common
Stock voted for the election of seven members of the
registrant's Board of Directors to serve until the next
annual meeting and until their successors are duly elected
and qualified. In addition, holders of the registrant's
Common Stock voted for adoption of the registrant's 1998
Employee Stock Option Plan, an amendment to the registrant's
Certificate of Incorporation to increase the number of shares
of the registrant's authorized Common Stock and voted for the
ratification of BDO Seidman, LLP to serve as the registrant's
independent certified public accountants for the fiscal year
ending March 31, 1999.
At the meeting, the following votes for and against, as well
as the number of abstentions and broker non-votes were
recorded for each matter as set forth below:
Withhold Broker
Matter For Against Abstain Authority Non-Votes
Election of Directors:
Howard Solomon 67,752,588 619,935
Phillip M. Satow 67,759,000 613,523
Kenneth E. Goodman 67,760,404 612,119
William J. Candee III 67,743,842 628,681
George S. Cohan 67,714,214 658,309
Dan L. Goldwasser 67,766,704 605,819
Lester B. Salans 67,041,879 1,330,644
-13-
Part II - Other Information
- ---------------------------
Item 4. Submission of Matters to a Vote of Security Holders (Cont'd.)
---------------------------------------------------
Withhold Broker
Matter For Against Abstain Authority Non-Votes
1998 Employee Stock
Option Plan: 48,920,231 19,181,992 270,300
Amendment of
Certification of
Incorporation: 65,174,007 309,017 107,499 2,782,000
Ratification of
Independent Public
Accountants: 68,248,459 43,294 80,770 -0-
Item 5. Other
-----
In accordance with the requirements of Rule 14a-4(c) promulgated
under the Securities Exchange Act of 1934 (the "Exchange Act"),
in order for shareholder proposals submitted outside Rule 14a-8
(which includes proposals that the regulations under the Exchange
Act generally do not require to be included in the Company's
definitive proxy statement for its annual meeting of
shareholders) to be timely for purposes of the Company's 1999
Annual Meeting of Shareholders within the meaning of Rule 14a-
4(c) under the Exchange Act and for purposes of the Company's By-
Laws, such proposals must be received by the Company no later
than the close of business on May 22, 1999.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(b) Reports on Form 8-K. None
Exhibit 27. Financial Data Schedule
-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: November 13, 1998
Forest Laboratories, Inc.
-------------------------
(Registrant)
/s/ Howard Solomon
-------------------------
Howard Solomon
President and Chief
Executive Officer
/s/ Kenneth E. Goodman
-------------------------
Kenneth E. Goodman
Executive Vice President -
Operations and Chief
Financial Officer
-15-