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, 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.
- -------------------------------------------------------------------------
(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
- ----------------
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 15, 1999: 83,568,177.
PART I - FINANCIAL INFORMATION
- ------------------------------
FOREST LABORATORIES, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
September 30, 1999
(In thousands) (Unaudited) March 31, 1999
------------------- ---------------
ASSETS
- ------
Current assets:
Cash (including cash equivalent
investments of $174,892 in September
and $197,515 in March) $ 176,996 $ 200,968
Marketable securities 32,617 40,780
Accounts receivable, less allowances of
$9,527 in September and $14,160
in March 56,016 57,294
Inventories 141,423 132,675
Deferred income taxes 40,894 52,059
Refundable income taxes 11,321 12,411
Other current assets 7,116 6,174
---------- ----------
Total current assets 466,383 502,361
---------- ----------
Marketable securities 28,948 37,215
---------- ----------
Property, plant and equipment 142,891 129,811
Less: accumulated depreciation 42,336 38,615
---------- ----------
100,555 91,196
---------- ----------
Other assets:
Excess of cost of investment in
subsidiaries over net assets
acquired, less accumulated
amortization of $9,055 in September
and $8,742 in March 15,904 16,217
License agreements, product rights
and other intangible assets, less
accumulated amortization of $96,982
in September and $89,519 in March 283,950 195,203
Deferred income taxes 14,040 15,220
Other 19,801 17,685
---------- ----------
Total other assets 333,695 244,325
---------- ----------
TOTAL ASSETS $ 929,581 $ 875,097
========== ==========
See notes to condensed consolidated financial statements.
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FOREST LABORATORIES, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
September 30, 1999
(In thousands, except for par values) (Unaudited) March 31, 1999
------------------ ---------------
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable $ 45,086 $ 66,673
Accrued expenses 59,398 38,114
Income taxes payable 24,013 25,173
---------- ----------
Total current liabilities 128,497 129,960
---------- ----------
Deferred income taxes 1,552 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 101,200 shares in
September and 100,854 shares in March 10,120 10,085
Capital in excess of par 394,042 390,750
Retained earnings 685,337 632,334
Accumulated other comprehensive income ( 7,440) ( 7,175)
---------- ----------
1,082,059 1,025,994
Less common stock in treasury,
at cost (17,684 shares in September
and 17,683 shares in March) 282,527 282,482
---------- ----------
Total shareholders' equity 799,532 743,512
---------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 929,581 $ 875,097
========== ==========
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,
------------------ -------------------
1999 1998 1999 1998
-------- -------- -------- --------
Net sales $201,357 $127,395 $380,150 $234,460
Contract revenue 2,098 16,418 3,307 30,411
Other income 2,849 5,547 9,741 12,253
-------- -------- -------- --------
206,304 149,360 393,198 277,124
-------- -------- -------- --------
Costs and expenses:
Cost of goods sold 50,288 32,390 95,021 59,305
Selling, general and
administrative 100,780 89,007 192,900 166,330
Research and development 15,635 12,926 30,140 26,865
-------- -------- -------- --------
166,703 134,323 318,061 252,500
-------- -------- -------- --------
Income before income taxes 39,601 15,037 75,137 24,624
Income tax expense 11,651 4,729 22,134 7,893
-------- -------- -------- --------
Net income $ 27,950 $ 10,308 $ 53,003 $ 16,731
======== ======== ======== ========
Net income per common
and common equivalent share:
Basic $.33 $.13 $.64 $.21
==== ==== ==== ====
Diluted $.32 $.12 $.61 $.20
==== ==== ==== ====
Weighted average number of
common and common equivalent
shares outstanding:
Basic 83,465 80,770 83,403 80,639
====== ====== ====== ======
Diluted 87,531 85,192 87,490 85,046
====== ====== ====== ======
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,
------------------- --------------------
1999 1998 1999 1998
-------- -------- -------- --------
Net income $27,950 $10,308 $53,003 $16,731
Other comprehensive income (loss) 3,253 3,460 ( 265) 3,746
------- ------- ------- -------
Comprehensive income $31,203 $13,768 $52,738 $20,477
======= ======= ======= =======
See notes to condensed consolidated financial statements.
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FOREST LABORATORIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended
(In thousands) September 30,
-----------------------
1999 1998
-------- --------
Cash flows from operating activities:
Net income $ 53,003 $ 16,731
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 3,802 3,560
Amortization 7,776 6,930
Deferred income tax expense 12,272 2,028
Foreign currency transactions gain ( 671) ( 1,238)
Net change in operating assets
and liabilities:
Decrease (increase) in:
Accounts receivable, net 1,278 ( 3,426)
Inventories ( 8,748) ( 6,029)
Refundable income taxes 1,090
Other current assets ( 942) ( 4,115)
Increase (decrease) in:
Accounts payable ( 21,587) 12,710
Accrued expenses 21,284 ( 19,312)
Income taxes payable ( 1,160) ( 14,289)
Increase in other assets ( 2,116) ( 4,911)
-------- --------
Net cash provided by (used in)
operating activities 65,281 ( 11,361)
-------- --------
Cash flows from investing activities:
Purchase of property, plant and equipment,
net ( 13,196) ( 11,481)
Purchase of marketable securities
Available-for-sale ( 6,318)
Redemption of marketable securities
Available-for-sale 16,430 25,001
Purchase of license agreements,
product rights and other intangible
assets, net ( 96,310) ( 12,000)
-------- --------
Net cash used in investing
activities ( 93,076) ( 4,798)
-------- --------
- Continued -
-6-
FOREST LABORATORIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
- Continued -
Six Months Ended
(In thousands) September 30,
-----------------------
1999 1998
-------- --------
Cash flows from financing activities:
Net proceeds from common stock options exercised
by employees under stock option plans $ 3,282 $ 4,963
Tax benefit realized from the exercise of stock
options by employees 1,174
-------- --------
Net cash provided by financing
activities 3,282 6,137
-------- --------
Effect of exchange rate changes on cash 541 2,657
-------- --------
Decrease in cash and cash equivalents ( 23,972) ( 7,365)
Cash and cash equivalents, beginning of period 200,968 149,653
-------- --------
Cash and cash equivalents, end of period $176,996 $142,288
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Income taxes $10,382 $18,980
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, 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:
September 30, 1999
(In thousands) (Unaudited) March 31, 1999
------------------- --------------
Raw materials $ 35,600 $ 78,020
Work in process 5,318 2,913
Finished goods 100,505 51,742
-------- --------
$141,423 $132,675
======== ========
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-TM- 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 quarter ended June 30, 1999 the Company paid
$53,951,000 of the $85,000,000 purchase option. The Company paid the
remaining $31,049,000 of the royalty obligation during the fiscal
quarter ended September 30, 1999. In separate negotiations, 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 Six Months Ended
September 30, September 30,
------------------- ----------------
1999 1998 1999 1998
------ ------ ------ ------
Basic 83,465 80,770 83,403 80,639
Effect of assumed conversion
of employee stock options
and warrants 4,066 4,422 4,087 4,407
------ ------ ------- ------
Diluted 87,531 85,192 87,490 85,046
====== ====== ======= ======
Options and warrants to purchase approximately 353,000 shares of
common stock at exercise prices ranging from $49.16 to $50.16 per
share and 795,800 shares of common stock at exercise prices ranging
from $48.34 to $50.16 per share were outstanding during a portion of
the three and six-month periods ended September 30, 1999, respectively,
but were not included in the computation of diluted earnings per share
because they were anti-dilutive. 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. These options and warrants expire through 2008.
-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 $34,515,000 from March 31, 1999 due mostly
to reductions in cash and marketable securities. During the period, the
Company exercised its purchase option to terminate royalty obligations on
Celexa-TM- (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 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 changes in
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 expansion of
the Company's facility in Dublin, Ireland to meet the projected
manufacturing 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 September 30, 1999 increased
$73,962,000 as compared to the three-month period ended September 30, 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 $97,461,000 and accounted for $76,447,000 of the change from the
same period last year. Sales of Tiazac-R- were $7,250,000 higher than the
prior year's quarter due primarily to volume increases. In anticipation of
the October launch of Infasurf-R-, initial stocking sales of the product
amounted to $472,000. Infasurf is the Company's lung surfactant for
respiratory distress in premature infants. Sales of Aerobid-R- declined
$6,981,000 principally as a result of continuing competition in the inhaled
steroid market. Sales of the Company's older and less promoted products
decreased by $3,226,000 due primarily to volume declines.
-10-
FOREST LABORATORIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Net sales for the six-month period ended September 30, 1999 increased
$145,690,000 as compared to the six-month period ended September 30, 1998.
Sales of Celexa, Tiazac and Infasurf accounted for $153,959,000,
$19,669,000 and $472,000 of the increase, respectively. Sales of Aerobid
declined $15,126,000 for the six-month period due to the continuing
competition in the inhaled steroid market. Sales of the Company's other
products decreased by $13,284,000 primarily due to volume declines.
Contract revenue was $14,320,000 and $27,104,000, less than in the three
and six-month periods, respectively, ended September 30,1998, 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 current fiscal
year, 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 six-month period ended September 30, 1999, unchanged from the same
periods last year.
Selling, general and administrative expenses increased $11,773,000 and
$26,570,000, respectively, during the three and six-month periods ended
September 30, 1999, from the same periods last year. The increases were
principally due to marketing, promotional and selling activities related to
Celexa, which was launched in September 1998.
Research and development expenses increased $2,709,000 and $3,275,000,
respectively, during the three and six-month periods ended September 30,
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.
Income tax expense as a percentage of income before taxes was 29% for the
three and six-month periods ended September 30, 1999 as compared to 31% and
32% 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, the addition of Infasurf and the strength of
its other products.
-11-
FOREST LABORATORIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
YEAR 2000 READINESS DISCLOSURE
- ------------------------------
At September 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. The testing phase
attempts to verify that all systems function, including interfaces with key
business partners. Testing begins as systems are remediated and have
continued 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 has developed various contingency plans to address critical
areas of the Company's business. These plans are designed to mitigate
serious disruptions to business flows beyond the end of 1999. In
developing its contingency plans, the Company has sought to exercise
sound business judgment and to engage in the appropriate cost/benefit
analysis of the risks posed by Year 2000 and the Company's resolution
of those risks.
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
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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 (the "Annual
Report") for a description of certain legal proceedings to which
the Company is a party.
With respect to the federal class action described in the Annual
Report as part of the case captioned "In re Brand Name
Prescription Drugs Antitrust Litigation," on July 13, 1999 the
United States Court of Appeals for the Seventh Circuit affirmed
the granting of a directed verdict in favor of the defendants,
including the Company, but directed further proceedings in the
trial court with respect to a single aspect of the conspiracy
alleged by the class action plaintiffs. The class action
plaintiffs have filed a petition for a writ of certiorari with
the Unites States Supreme Court seeking a review of the decision
by the Court of Appeals. By decision of the trial court dated
November 4, 1999, the trial court granted a renewed motion for
summary judgement by the Company dismissing the remaining aspect
of the case as to the Company.
In addition, the Company has secured the voluntary dismissal of
the conspiracy allegations contained in the federal "opt-out"
cases described in the Annual Report and has obtained voluntary
dismissal of most of the remaining antitrust cases pending in
various state courts.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
(a) The registrant held its annual meeting of stockholders on
August 16, 1999.
(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 the ratification of BDO Seidman, LLP
to serve as the registrant's independent certified public
accountants for the fiscal year ending March 31, 2000.
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 70,432,983 483,428
Kenneth E. Goodman 70,469,400 447,011
Phillip M. Satow 70,455,214 461,197
William J. Candee III 70,403,037 513,374
George S. Cohan 70,414,292 502,119
Dan L. Goldwasser 70,448,619 467,792
Lester B. Salans 70,468,061 448,350
-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
Ratification of
Independent
Public
Accountants: 70,810,615 22,859 82,937
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 15, 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
-15-