FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________
(Mark One)
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/ X / QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
---- SECURITIES EXCHANGE ACT OF 1934
For the Period Ended December 31, 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.
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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
1-------------------- -----------
(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
----- -----
Number of shares outstanding of Registrant's Common Stock as of February
16, 1999: 82,681,684.
Part I - Financial Information
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FOREST LABORATORIES, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
December 31, 1998
(In thousands) (Unaudited) March 31, 1998
----------------- --------------
ASSETS
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Current assets:
Cash (including cash equivalent
investments of $161,428 in December
and $143,423 in March) $165,642 $149,653
Marketable securities 23,805 32,199
Accounts receivable, less allowances of
$13,621 in December and $12,416 in
March 46,137 41,464
Inventories 121,780 82,718
Deferred income taxes 38,409 47,675
Refundable income taxes 22,206 9,432
Other current assets 4,601 8,506
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Total current assets 422,580 371,647
-------- --------
Marketable securities 21,237 47,748
-------- --------
Property, plant and equipment 132,332 116,265
Less: accumulated depreciation 38,946 34,815
-------- --------
93,386 81,450
-------- --------
Other assets:
Excess of cost of investment in
subsidiaries over net assets acquired,
less accumulated amortization of
$8,586 in December and $8,117 in March 16,373 16,842
License agreements, product rights
and other intangible assets, less
accumulated amortization of $86,108
in December and $76,190 in March 199,835 197,095
Deferred income taxes 15,843 17,639
Other 16,962 11,902
-------- --------
Total other assets 249,013 243,478
-------- --------
TOTAL ASSETS $786,216 $744,323
======== ========
See notes to condensed consolidated financial statements.
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FOREST LABORATORIES, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
December 31, 1998
(In thousands, except for par values) (Unaudited) March 31, 1998
------------------ ---------------
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable $ 38,326 $ 30,409
Accrued expenses 53,232 70,998
Income taxes payable 18,201 28,482
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Total current liabilities 109,759 129,889
-------- --------
Deferred income taxes 277 273
-------- --------
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 99,337 shares in
December and 98,054 shares in March 9,934 9,805
Capital in excess of par 356,837 334,781
Retained earnings 593,410 555,161
Accumulated other comprehensive income ( 1,772) ( 4,530)
-------- --------
958,409 895,217
Less common stock in treasury,
at cost (17,679 shares in December and
17,651 shares in March) 282,229 281,056
-------- --------
Total shareholders' equity 676,180 614,161
-------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $786,216 $744,323
======== ========
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,
------------------ ------------------
1998 1997 1998 1997
-------- -------- -------- --------
Net sales $137,462 $115,942 $371,922 $306,769
Contract revenue 9,412 8,530 39,823 13,483
Other income 7,808 5,600 20,061 11,530
-------- -------- -------- --------
154,682 130,072 431,806 331,782
-------- -------- -------- --------
Costs and expenses:
Cost of goods sold 34,140 27,716 93,445 75,068
Selling, general and
administrative 77,336 60,097 243,666 169,864
Research and development 12,553 13,178 39,418 33,627
-------- -------- -------- --------
124,029 100,991 376,529 278,559
-------- -------- -------- --------
Income before income taxes 30,653 29,081 55,277 53,223
Income tax expense 9,135 9,597 17,028 17,564
-------- -------- ------- --------
Net income $ 21,518 $ 19,484 $38,249 $ 35,659
======== ======== ======= ========
Net income per common
and common equivalent share:
Basic $.26 $.24 $.47 $.44
==== ==== ==== ====
Diluted $.25 $.24 $.45 $.43
==== ==== ==== ====
Weighted average number of
common and common equivalent
shares outstanding:
Basic 81,495 80,169 80,963 81,145
====== ====== ====== ======
Diluted 86,178 82,573 85,474 83,334
====== ====== ====== ======
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,
------------------ -----------------
1998 1997 1998 1997
------ ------ ------- -------
Net income $21,518 $19,484 $38,249 $35,659
Other comprehensive income (loss) ( 988) ( 301) 2,758 ( 2,497)
------- ------- ------- -------
Comprehensive income $20,530 $19,183 $41,007 $33,162
======= ======= ======= =======
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,
----------------------
1998 1997
---------- --------
Cash flows from operating activities:
Net income $ 38,249 $ 35,659
Adjustments to reconcile net income to
net cash provided by (used in) operating
activities:
Depreciation 5,402 4,974
Amortization 10,387 10,049
Gain on sale of assets of closed
facilities ( 564)
Deferred income tax expense 11,066 1,373
Foreign currency transactions gain ( 2,004) ( 943)
Net change in operating assets and
liabilities:
Decrease (increase) in:
Accounts receivable, net ( 4,673) ( 20,917)
Inventories ( 39,062) 8,608
Refundable income taxes ( 12,774) 20,204
Other current assets 3,905 ( 846)
Increase (decrease) in:
Accounts payable 7,917 4,752
Accrued expenses ( 17,766) 2,647
Income taxes payable ( 10,281) 5,802
Decrease (increase) in other
assets ( 5,060) 914
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Net cash provided by (used in)
operating activities ( 14,694) 71,712
------- -------
Cash flows from investing activities:
Purchase of property, plant and equipment,
net ( 15,777) ( 5,038)
Proceeds from sale of assets of closed
facilities 1,875
Purchase of marketable securities
Available-for-sale ( 11,865) ( 21,576)
Redemption of marketable securities
Available-for-sale 46,770 13,705
Purchase of license agreements, product
rights and intangible assets ( 12,000) ( 1,352)
------- --------
Net cash provided by (used in)
investing activities 7,128 ( 12,386)
------- --------
- 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,
--------------------
1998 1997
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Cash flows from financing activities:
Net proceeds from common stock options
exercised by employees under stock option plans $ 10,980 $ 5,641
Tax benefit realized from the exercise of
stock options by employees 10,032 1,348
Purchase of treasury stock, net ( 70,109)
-------- --------
Net cash provided by (used in)
financing activities 21,012 ( 63,120)
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Effect of exchange rate changes on cash 2,543 424
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Increase (decrease) in cash and cash equivalents 15,989 ( 3,370)
Cash and cash equivalents, beginning of period 149,653 162,842
-------- --------
Cash and cash equivalents, end of period $165,642 $159,472
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Income taxes $18,985 $7,825
Supplemental disclosures of noncash financing
activity:
Issuance of warrants in connection with development
and marketing agreements $3,500
See notes to condensed consolidated financial statements.
-7-
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, 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:
December 31, 1999
(In thousands) (Unaudited) March 31, 1998
------------------ --------------
Raw materials $ 57,230 $34,723
Work in process 3,040 4,320
Finished goods 61,510 43,675
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$121,780 $82,718
======== =======
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 Nine Months Ended
December 31, December 31,
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1998 1997 1998 1997
------ ------ ------ ------
Basic 81,495 80,169 80,963 81,145
Effect of assumed conversion
of employee stock options
and warrants 4,683 2,404 4,511 2,189
------ ------ ------ ------
Diluted 86,178 82,573 85,474 83,334
====== ====== ====== ======
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. Options and warrants to purchase approximately
1,970,000 shares of common stock at exercise prices ranging from
$22.86 to $25.73 per share and 4,345,000 shares of common stock at
exercise prices ranging from $21.53 to $25.73 per share were
outstanding during a portion of the three and nine-month periods ended
December 31, 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 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.
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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 $71,063,000 from March 31, 1998
principally from normal operating activities. 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- (Citalopram HBr), the Company's
selective serotonin reuptake inhibitor (SSRI) for the treatment of
depression, upon its approval, which was received in the second quarter
of fiscal 1999. The increase in inventories and accounts payable relates
principally to a buildup of Celexa inventory. The increase in refundable
income taxes is due principally to income tax benefits from the exercise of
stock options by employees.
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 2000, 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, capital
investments and the probable buy out of a private investor group's
royalty arrangement, made in connection with Celexa's development and
marketing (Reference is made, herein to the consolidated financial
statements included in the Company's 1998 Annual Report - Note 12).
RESULTS OF OPERATIONS
- ---------------------
Net sales for the three months ended December 31, 1998 increased
$21,520,000 as compared to the three-month period ended December 31,
1997. Sales of Celexa, which was launched during the September 1998
quarter with the Company's co-promotion partner, the Parke-Davis division
of the Warner Lambert Company, were $20,885,000. The Company's
Pharmax Limited subsidiary in the United Kingdom launched Exorex-TM-, used
for the treatment of eczema, during the June 1998 quarter. Sales of
Exorex accounted for $429,000 of the net sales increase. Sales of Tiazac-R-
were $10,832,000 higher than last year's third quarter, of which
$3,578,000 was due to higher realized average selling prices. Aerobid-R-
sales declined $1,876,000 from last year's quarter as a result of
continuing competition in the inhaled steroid market. 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 in fiscal 2000. During last year's third
quarter, sales of propranolol amounted to $3,560,000. Sales of the
Company's other products were $5,190,000 lower than last year due to generic
competition.
-10-
FOREST LABORATORIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Contd.)
Net sales for the nine months ended December 31, 1998 increased
$65,153,000 as compared to the nine-month period ended December 31, 1997.
Sales of Celexa and Exorex accounted for $41,899,000 and $1,326,000 of
the increase, respectively. Sales of Tiazac were $31,532,000 higher than
last year's first nine months of which $7,028,000 was due to higher
realized average selling prices. Sales of the Company's other products,
excluding propranolol, were $7,319,000 higher than last year's nine-month
period while the loss of propranolol sales accounted for the remaining
$16,923,000 of the change.
Contract revenue for the three-month period was $882,000 higher than in
the corresponding period ended December 31, 1997 due principally to
increased co-promotion income on increased sales of Climara-R-. Contract
revenue was $26,340,000 higher for the nine-month period as compared to
the corresponding period ended December 31, 1997, due principally to the
Company's arrangement with a private investor group to reimburse the
Company for certain expenses incurred in connection with Celexa. The
remainder of the increase was a result of increased co-promotion income on
increased sales of Climara.
The increase in other income for the three-month period was primarily from
a settlement with a vendor. Other income for the nine-month period ended
December 31, 1998 includes three equal quarterly payments totaling
$9,000,000 from the settlement with Pharmacia & Upjohn, Inc., with respect
to the Company's claimed option to negotiate for the rights to Detrol-R-.
The settlement occurred in the third quarter of fiscal 1998, during which
time the Company received an initial payment of $5,000,000 which was
recorded net of $2,240,000 in expenses. The Company may receive up to an
additional $6,000,000 of the settlement, subject to the achievement of
certain sales objectives for Detrol.
Cost of sales as a percentage of net sales increased to 25% in the current
quarter and for the nine-month period ended December 31, 1998 from 24%
during similar periods last year due principally to a change in product
mix.
Selling, general and administrative expenses increased $17,239,000 and
$73,802,000, respectively, during the three and nine-month periods ended
December 31, 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.
The increase in research and development expenses for the nine-month
period ended December 31, 1998, from the same period last year, was 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.
-11-
FOREST LABORATORIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Cont'd.)
Income taxes as a percentage of income before taxes was approximately 3%
lower for the three-month period and 2% lower for the nine-month period
ended December 31, 1998, from the same periods last year. The decreases
resulted principally from a decrease in the proportion of operating profit
derived from fully taxable U.S. operations as compared to lower taxed
operations and the utilization of tax loss carryforwards. Celexa is
manufactured in Ireland and a portion of its' profits are subject to a
favorable tax rate.
The Company expects to continue its profitability in fiscal 1999 with
continued growth in its principal promoted products.
At December 31, 1998, primarily all of the critical computer systems and
software (the "Systems") of the Company's U.S. operations are Year 2000
("Y2K") compliant. Other less critical systems in the U.S. and the
Company's European subsidiaries systems that are not Y2K 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 Y2K compliant
and is not yet able to assess whether any failures to be compliant would
have a material effect on its business operations.
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 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,
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 antitrust litigation described in the
Annual Report, on December 1, 1998 the defendants in the
consolidated federal class action, including the Company,
were granted a directed verdict by the trial court after the
plaintiffs' had concluded their case. In ruling in favor of
the defendants, the trial judge held that no reasonable jury
could reach a verdict in favor of the plaintiffs. The class
action plaintiffs have filed a notice of their intention to
appeal the verdict to the United States Court of Appeals for
the Seventh Circuit. While the Company continues to believe
that the plaintiffs' claims have no merit, there can be no
assurance that the decision of the trial court will be
sustained on appeal.
In addition, the Company settled similar actions in the
states of New York, Michigan, Maine and Minnesota brought on
behalf of consumers by making nominal settlement payments.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(B) Reports on Form 8-K. None.
Exhibit 27. Financial Data Schedule.
-13-
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 16, 1999
Forest Laboratories, Inc.
--------------------------
(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
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