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 Period Ended June 30, 1999
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/ / 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 August
13, 1999: 83,432,676.
Part I - Financial Information
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FOREST LABORATORIES, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
June 30, 1999
(In thousands) (Unaudited) March 31, 1999
-------------- --------------
ASSETS
- ------
Current assets:
Cash (including cash equivalent investments
of $195,070 in June and $197,515 in March) $ 198,673 $ 200,968
Marketable securities 34,599 40,780
Accounts receivable, less allowances of
$16,347 in June and $14,160 in March 43,833 57,294
Inventories 138,712 132,675
Deferred income taxes 51,660 52,059
Refundable income taxes 11,701 12,411
Other current assets 7,369 6,174
-------- --------
Total current assets 486,547 502,361
Marketable securities 35,997 37,215
-------- --------
Property, plant and equipment 133,169 129,811
Less: accumulated depreciation 40,197 38,615
-------- --------
92,972 91,196
-------- --------
Other assets:
Excess of cost of investment in subsidiaries
over net assets acquired, less accumulated
amortization of $8,899 in June and $8,742
in March 16,060 16,217
License agreements, product rights
and other intangible assets, less
accumulated amortization of $92,908 in
June and $89,519 in March 276,277 195,203
Deferred income taxes 14,784 15,220
Other 17,901 17,685
--------- ---------
Total other assets 325,022 244,325
--------- ---------
TOTAL ASSETS $ 940,538 $ 875,097
========= =========
See notes to condensed consolidated financial statements.
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FOREST LABORATORIES, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
June 30, 1999
(In thousands, except for par values) (Unaudited) March 31, 1999
-------------- --------------
>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 60,471 $ 66,673
Accrued expenses 82,581 38,114
Income taxes payable 29,594 25,173
-------- --------
Total current liabilities 172,646 129,960
-------- --------
Deferred income taxes 1,580 1,625
-------- --------
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 101,074 shares
in June and 100,854 shares in March 10,107 10,085
Capital in excess of par 392,019 390,750
Retained earnings 657,387 632,334
Accumulated other comprehensive loss ( 10,693) ( 7,175)
--------- ---------
1,048,820 1,025,994
Less common stock in treasury,
at cost (17,684 shares in June
and 17,683 shares in March) 282,508 282,482
--------- ---------
Total shareholders' equity 766,312 743,512
--------- ---------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 940,538 $ 875,097
========= =========
See notes to condensed consolidated financial statements.
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FOREST LABORATORIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(Unaudited)
Three Months Ended
(In thousands, except per share amounts) June 30,
--------------------------
1999 1998
--------- ---------
Net sales $178,793 $107,065
Contract revenue 1,209 13,993
Other income 6,892 6,706
-------- --------
186,894 127,764
Costs and expenses: -------- --------
Cost of goods sold 44,733 26,915
Selling, general and administrative 92,120 77,323
Research and development 14,505 13,939
-------- --------
151,358 118,177
-------- --------
Income before income taxes 35,536 9,587
Income tax expense 10,483 3,164
-------- -------
Net income $ 25,053 $ 6,423
======== =======
Net income per common and
common equivalent share:
Basic $.30 $.08
==== ====
Diluted $.29 $.08
==== ====
Weighted average number of
common and common equivalent
shares outstanding:
Basic 83,361 80,507
====== ======
Diluted 87,429 84,896
====== ======
See notes to condensed consolidated financial statements.
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FOREST LABORATORIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
Three Months Ended
June 30,
-----------------------
1999 1998
-------- ------
(In thousands)
Net income $25,053 $6,423
Other comprehensive income (loss) ( 3,518) 286
------- ------
Comprehensive income $21,535 $6,709
======= ======
See notes to condensed consolidated financial statements.
-5-
FOREST LABORATORIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended
(In thousands) June 30,
--------------------
1999 1998
-------- --------
Cash flows from operating activities:
Net income $ 25,053 $ 6,423
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 1,841 1,749
Amortization 3,546 3,347
Deferred income tax expense 790 983
Foreign currency translation gain ( 642) ( 561)
Net change in operating assets and liabilities:
Decrease (increase) in:
Accounts receivable, net 13,461 2,560
Inventories ( 6,037) ( 17,893)
Refundable income taxes 710
Other current assets ( 1,195) 497
Increase (decrease) in:
Accounts payable ( 6,202) 6,741
Accrued expenses 13,418 ( 21,444)
Income taxes payable 4,421 ( 8,531)
Increase in other asset ( 216) ( 2,481)
-------- --------
Net cash provided by(used in)operating
activities 48,948 ( 28,610)
-------- --------
Cash flows from investing activities:
Purchase of property, plant and equipment, net ( 4,287) ( 9,300)
Purchase of marketable securities
Available-for-sale ( 6,318)
Redemption of marketable securities
Available-for-sale 7,399 4,552
Purchase of license agreements, product rights
and other intangible assets, net ( 53,951)
-------- --------
Net cash used in investing activities ( 50,839) ( 11,066)
- Continued -
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FOREST LABORATORIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
- Continued -
Three Months Ended
(In thousands) June 30,
----------------------
1999 1998
-------- --------
Cash flows from financing activities:
Net proceeds from common stock options exercised
by employees under stock option plans $ 1,265 $ 3,904
Tax benefit realized from the exercise of
stock options by employees 99
-------- --------
Net cash provided by
financing activities 1,265 4,003
-------- --------
Effect of exchange rate changes on cash ( 1,669) 1,137
-------- --------
Increase (decrease) in cash and cash equivalents ( 2,295) ( 34,536)
Cash and cash equivalents, beginning of period 200,968 149,653
-------- --------
Cash and cash equivalents, end of period $198,673 $115,117
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Income taxes $4,647 $10,613
Supplemental disclosures of noncash investing activity:
Royalty buy-out $31,049
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 three-month period
ended June 30, 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
-----------
Inventories consist of the following:
June 30, 1999
(In thousands) (Unaudited) March 31, 1999
------------- --------------
Raw materials $ 46,540 $ 78,020
Work in process 5,252 2,913
Finished goods 86,920 51,742
-------- --------
$138,712 $132,675
======== ========
3. Buy out of royalty obligation
-----------------------------
On June 30, 1999 the Company exercised its purchase option to terminate
a royalty obligation on Celexa-TM- for a predetermined one time payment of
$85,000,000. In fiscal years 1998 and 1999, a 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 the sales of Celexa
beginning in November 1999 for a period of ten years. During the quarter,
the company paid $53,951,000 of the $85,000,000 purchase option. The
remaining $31,049,000 was included in accrued expenses at June 30, 1999
was paid in July 1999.
-8-
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):
June 30, 1999 June 30, 1998
------------- -------------
Basic 83,361 80,507
Effect of assumed conversion of
employee stock options and warrants 4,068 4,389
------ ------
Diluted 87,429 84,896
====== ======
Options and warrants to purchase approximately 445,800 shares of
common stock at an exercise price of $48.34 per share were
outstanding during a portion of the three-month period ended June
30, 1999, but were not included in the computation of diluted
earnings per share because they were anti-dilutive. These
options and warrants expire through 2008. There were no
outstanding options or warrants excluded from the computation of
diluted earnings per share for the three-month period ended June
30, 1998 as none were anti-dilutive.
-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 decreased by $58,500,000 from March 31,
1999 as a result of the buy out of a royalty obligation
with a private investor group. During the quarter, the
Company exercised its purchase option to terminate a
royalty obligation on Celexa (citalopram HBr), the
Company's selective serotonin reuptake inhibitor ("SSRI")
for the treatment of depression, which was launched during
the second quarter of fiscal 1999, for a predetermined one
time payment of $85,000,000. In fiscal years 1998 and 1999,
a 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 the sales of Celexa
beginning in November 1999 for a period of ten years.
During the quarter, the Company paid $53,951,000 of the
$85,000,000 purchase option. The remaining $31,049,000 was
included in accrued expenses at June 30, 1999 and was paid
in July 1999. The $85,000,000 purchase option is included
in license agreements, product rights and other intangible
assets and will be amortized, using the straight-line
method, over the corresponding royalty period. In July, in
separate negotiations, the Company also agreed to buy out a
limited 1% trailing royalty for $10,000,000.
Property, plant and equipment increased principally from the
expansions of the Company's facilities in Dublin, Ireland to
meet the projected manufacturing demands for Celexa and on
Long Island, New York and in Jersey City, New Jersey to
facilitate increased activity for research and development
projects. The expansions will continue through fiscal 2000,
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 June 30, 1999
increased $71,728,000 as compared to the three-month period
ended June 30, 1998. Sales of Celexa, which was launched in
the September 1998 quarter with the Company's co-promotion
partner, the Parke-Davis division of the Warner-Lambert
Company, amounted to $77,512,000. Sales of Tiazac-R- were
$12,419,000 higher than the prior year's quarter, of which
$13,498,000 was due to increased volume. Sales of Aerobid-R-
declined $8,145,000 principally as a result of continuing
competition in the inhaled steroid market. Sales of the
Company's older and less promoted products decreased by
$10,058,000. Volume declines accounted for $7,149,000 of the
decrease.
Contract revenue decreased $12,784,000 from the same period
last year primarily as a result of the completion of the
arrangement with a private investor group for the
reimbursement of certain expenses incurred in connection
with Celexa, as discussed above.
-10-
FOREST LABORATORIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Other income includes a final $3,000,000 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, unchanged from the first quarter of fiscal
1999.
Selling, general and administrative expenses were
$14,797,000 higher during the current quarter than the same
period last year. The increase was principally due to costs
associated with Celexa marketing and selling activities,
including co-promotion fees earned by Parke-Davis on Celexa
sales (as defined). No co-promotion fees were earned during
the 1999 fiscal year.
The increases in research and development expense during the
periods presented 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.
Income tax expense as a percentage of income before taxes
was 29% for the current fiscal quarter as compared to 33%
during the same period 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 profits is
subject to a favorable tax rate.
The Company expects to continue its profitability into
fiscal 2000 with continued growth in Celexa and Tiazac.
YEAR 2000 READINESS DISCLOSURE
- ------------------------------
At June 30, 1999, all of the principal systems of the
Company's U.S. operations are Year 2000 compliant. Other
less critical systems in the U.S. and in the Company's
European subsidiaries that are not Year 2000 compliant are
being replaced or upgraded. The Company has requested its
critical vendors, major customers, service suppliers,
product alliance partners and banks to verify their Year
2000 readiness. This evaluation has been completed for all
critical trading partners, but continues for non-critical
partners. The testing phase attempts to verify that all
systems function, including interfaces with key business
partners. Testing begins as systems are remediated and will
continue throughout 1999. The Company anticipates that all
of its systems will be compliant by the end of 1999 and the
cost of any modifications are not expected to be material.
The Company is currently developing a business contingency
plan (the "Plan") to address critical areas of the Company's
business. The Plan will be designed to mitigate serious
disruptions to business flows beyond the end of 1999. The
Plan will likely provide for maintaining increased inventory
of raw materials and finished goods to meet customer needs,
protecting the integrity of ongoing activities, identifying
and securing alternate sources of critical services, and
-11-
FOREST LABORATORIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
establishing management teams to address unexpected
problems. The Company expects to complete the final Plan by
the end of the second quarter of fiscal 2000.
Because the Company's Year 2000 compliance is dependant upon
key third parties also being Year 2000 compliant on a timely
basis, 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
- --------------------------
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
- ---------------------------
Item 1. Legal Proceedings
-----------------
Reference is made to the Company's Annual Report on Form 10-K
for the year ended March 31, 1999, for a description of
certain legal proceedings.
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: August 13, 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
-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: August 13, 1999
Forest Laboratories, Inc.
-------------------------
(Registrant)
Kenneth E. Goodman
------------------------
President and Chief
Operating Officer
John E. Eggers
--------------------------
Vice President-Finance and
Chief Financial Officer
-14-