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, 2001

[   ]

 

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
  incorporation or organization)

(I.R.S. Employer        
Identification No.)    

         909 Third Avenue
      New York, New York       


     10022-4731     
     

       (Address of principal
        executive office)

(Zip Code)           

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 14, 2001:
177,960,763.

 

TABLE OF CONTENTS
(Quick Links)

PART I - FINANCIAL INFORMATION

            ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:

                           BALANCE SHEETS
                           
STATEMENTS OF INCOME
                           
STATEMENTS OF COMPREHENSIVE INCOME
                           
STATEMENTS OF CASH FLOWS
                           
NOTES TO FINANCIAL STATEMENTS

            ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
            
CONDITION AND RESULTS OF OPERATIONS

            ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
            
MARKET RISK

PART II - OTHER INFORMATION

            ITEM 1. LEGAL PROCEEDINGS

            ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

            ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

 

 

PART I - FINANCIAL INFORMATION

FOREST LABORATORIES, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets


(In thousands)

September 30, 2001 
       (Unaudited)      
 


March 31, 2001 

 

 

 

Assets

   

 

 

 

Current assets:
    Cash (including cash equivalent investments
        of $406,870 in September and $378,955 in March)

 

$   413,076 



$   379,549 

    Marketable securities

42,540 

25,724 

    Accounts receivable, less allowance for doubtful accounts
        of $12,348 in September and $11,123 in March


114,763 


115,591 

    Inventories, net

290,141 

263,957 

    Deferred income taxes

58,537 

64,357 

    Refundable income taxes

25,788 

25,024 

    Other current assets

       13,944 

         9,947 

        Total current assets

     958,789 

     884,149 

     

Marketable securities

     269,705 

     100,451 

     

Property, plant and equipment

208,517 

192,453 

    Less: accumulated depreciation

       62,433 

       55,544 

 

     146,084 

     136,909 

Other assets:
    Excess of cost of investment in subsidiaries over net
        assets acquired, less accumulated amortization of
        $9,994 in September and March




14,965 




14,965 

    License agreements, product rights and other
        intangible assets, less accumulated amortization
        of $167,879 in September and $151,344 in March

 

258,085 



274,587 

    Deferred income taxes

10,658 

11,210 

    Other

       23,790 

       24,659 

        Total other assets

     307,498 

     325,421 

     

             Total assets

$1,682,076 

$1,446,930 

 

======== 

======== 

See notes to condensed consolidated financial statements.

 

FOREST LABORATORIES, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets


(In thousands, except for par values)

September 30, 2001 
       (Unaudited)      
 


March 31, 2001 

     

Liabilities and Shareholders' Equity

   
     

Current liabilities:
    Accounts payable


$     60,168 


$     41,921 

    Accrued expenses

160,783 

139,138 

    Income taxes payable

       52,676 

       42,559 

       Total current liabilities

     273,627 

     223,618 

     

Deferred income taxes

         1,833 

         1,198 

     

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
        213,052 shares in September and 212,052 shares in March


21,305 


21,205 

    Capital in excess of par

573,100 

546,649 

    Retained earnings

1,114,124 

960,118 

    Accumulated other comprehensive loss

(       14,972)

(       19,573)

 

1,693,557 

1,508,399 

    Less common stock in treasury, at cost (35,460 shares
        in September and 35,451 shares in March)


     286,941
 


     286,285 

            Total shareholders' equity

  1,406,616 

  1,222,114 

     

                Total liabilities and shareholders' equity

$1,682,076 

$1,446,930 

======== 

======== 

See notes to condensed consolidated financial statements.

 

FOREST LABORATORIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(Unaudited)


(In thousands, except per share amounts)

  Three Months Ended     
       September 30,          

   Six Months Ended       
       September 30,          

 

       2001 

       2000   

       2001 

       2000   

         

Net sales

$376,267 

$280,963   

$726,775 

$540,190   

Other income

      8,193 

      6,681   

    16,807 

    13,345   

 

  384,460 

  287,644   

  743,582 

  553,535   

         

Costs and expenses:
    Cost of goods sold


88,993 


69,931   


172,185 


133,872   

    Selling, general and administrative

147,390 

120,369   

285,706 

259,480   

    Research and development

    36,634 

    25,486   

    71,385 

    48,859   

 

  273,017 

  215,786   

  529,276 

  442,211   

         

Income before income taxes

111,443 

71,858   

214,306 

111,324   

         

Income tax expense

    31,483 

    20,120   

    60,300 

    31,328   

         

Net income

$  79,960 

$  51,738   

$154,006 

$  79,996   

 

======= 

=======   

======= 

=======   

Net income per common
    and common equivalent share:

       
         

    Basic

$.45 

$.30   

$.87 

$.46   

 

=== 

===   

=== 

===   

    Diluted

$.43 

$.28   

$.83 

$.44   

 

=== 

===   

=== 

===   

Weighted average number of common
    and common equivalent shares outstanding:

       
         

    Basic

177,353 

174,662   

177,062 

173,076   

 

====== 

======   

====== 

======   

    Diluted

185,079 

182,692   

184,702 

181,346   

 

====== 

======   

====== 

======   

See notes to condensed consolidated financial statements.

 

FOREST LABORATORIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)


(In thousands)

  Three Months Ended    
      September 30,         

      Six Months Ended       
       September 30,          

 

     2001 

     2000   

       2001 

     2000   

         

Net income

$79,960 

$51,738   

$154,006 

$79,996   

Other comprehensive income (loss)

    7,409 

(    4,676)  

      4,601 

(    5,809)  

         

Comprehensive income

$87,369 

$47,062   

$158,607 

$74,187   

 

====== 

======   

======= 

======   

See notes to condensed consolidated financial statements.

 

FOREST LABORATORIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)

 

    Six Months Ended        

(In thousands)

          September 30,           

 

       2001 

       2000 

Cash flows from operating activities:

   

   Net income

$154,006 

$  79,996 

   Adjustments to reconcile net income to

   

     net cash provided by operating activities:

   

       Depreciation

6,459 

5,008 

       Amortization

16,535 

16,168 

       Deferred income tax expense

737 

364 

       Foreign currency translation (gain) loss

(         157)

16 

       Tax benefit realized from the exercise of stock
          options by employees


19,073 


15,705 

       Net change in operating assets and liabilities:

   

          Decrease (increase) in:

   

             Accounts receivable, net

828 

(    18,793)

             Inventories, net

(    26,184)

(    19,953)

             Refundable income taxes

(         764)

 

             Other current assets

(      3,997)

1,066 

          Increase (decrease) in:

   

             Accounts payable

18,247 

(    28,227)

             Accrued expenses

    21,645 

(      8,070)

             Income taxes payable

10,117 

(    14,205)

          Decrease (increase) in other assets

         869 

(      5,077)

     

                Net cash provided by operating activities

  217,414 

    23,998 

     

Cash flows from investing activities:

   

   Purchase of property, plant and equipment, net

(    15,506)

(    12,842)

   Purchase of marketable securities: available-for-sale

(  319,857)

(    11,121)

   Redemption of marketable securities: available-for-sale

  133,787 

      1,987 

   Purchase of license agreements, product rights and other
      intangible assets


                


(    22,545)

     

                Net cash used in investing activities

(  201,576)

(    44,521)

     

Cash flows from financing activities:

   

   Net proceeds from common stock options exercised
      by employees under stock option plans


    13,092
 


    37,210
 

     

Effect of exchange rate changes on cash

      4,597 

(      5,466)

Increase in cash and cash equivalents

33,527 

11,221 

Cash and cash equivalents, beginning of period

  379,549 

  302,600 

Cash and cash equivalents, end of period

$413,076 

$313,821 

 

======= 

======= 

     

Supplemental disclosures of cash flow information:

   
     

Cash paid during the period for:

   

    Income taxes

$31,353 

$29,587 

See notes to condensed consolidated financial statements.

 

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, 2001 are not necessarily indicative of the results that may be expected for the year ending March 31, 2002. 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, 2001.

2.   Inventories:

Inventories, net of reserves for obsolescence, consist of the following:

 

September 30, 2001

 

(In thousands)

       (Unaudited)        

March 31, 2001   

 

 

 

Raw materials

$161,858

$135,844

Work in process

      6,264

    11,709

Finished goods

  122,019

  116,404

 

$290,141

$263,957

 

======= 

======= 

3.   Terminated Co-Marketing Agreement:

On March 27, 1998 the Company entered into an agreement with the Warner-Lambert Company to co-promote Celexa™. Under that agreement Warner-Lambert would promote Celexa for three years and receive residual payments for an additional three years. Compensation for these services to Warner-Lambert was based on the profits (as defined) earned on Celexa's sales. As a result of the merger of Warner-Lambert with Pfizer, Inc., a marketer of a competing antidepressant product, the co-promotion agreement was terminated effective April 30, 2000. In connection with the termination, the Company paid $14,000,000 in the first quarter of fiscal 2001, which was included in selling, general and administrative expense. The termination ended Warner-Lambert's co-promotion activities with respect to Celexa and entitlement to future compensation therefor.

4.   Net Income Per Share:

A reconciliation of shares used in calculating basic and diluted net income per share follows:

 

Three Months Ended 
     September 30,      

Six Months Ended  
     September 30,     

(In thousands)

 

    2001

    2000

     2001

     2000

Basic

177,353

174,662

177,062

173,076

Effect of assumed conversion of
   employee stock options and warrants


    7,726


    8,030


    7,640


    8,270

Diluted

185,079

182,692

184,702

181,346

 

======

======

======

======

There were no outstanding options or warrants excluded from the computation of diluted earnings per share for the three and six-month periods ended September 30, 2001 as none were anti-dilutive. Also, there were no outstanding options or warrants excluded from the computation of diluted earnings per share for the three-month period ended September 30, 2000 as none were anti-dilutive. Options to purchase approximately 684,200 shares of common stock at an exercise price of $49.35 per share that were outstanding during a portion of the six-month period ended September 30, 2000 were not included in the computation of diluted earnings per share because they were anti-dilutive. These options expire through 2010.

The two-for-one stock split effected as a 100% stock dividend in December 2000 has been reflected retroactively for all outstanding common stock, stock options and warrants.

5.   Recent Accounting Standards:

In April 2001, the Company adopted Financial Accounting Standards Board Statements No. 141, Business Combinations (SFAS 141), and No. 142, Goodwill and Other Intangible Assets (SFAS 142). SFAS 141 requires the use of the purchase method of accounting and prohibits the use of the pooling-of-interests method of accounting for business combinations initiated after June 30, 2001. SFAS 141 also requires that the Company recognize acquired intangible assets apart from goodwill if the acquired intangible assets meet certain criteria. SFAS 141 applies to all business combinations initiated after June 30, 2001 and for purchase business combinations completed on or after July 1, 2001. It also requires, upon adoption of SFAS 142, that the Company reclassify if necessary, the carrying amounts of intangible assets and goodwill based on the criteria in SFAS 141. SFAS 142 requires, among other things, that companies no longer amortize goodwill, but instead test goodwill for impairment at least annually. In addition, SFAS 142 requires that the Company identify reporting units for the purposes of assessing potential future impairments of goodwill, reassess the useful lives of other existing recognized intangible assets, and cease amortization of intangible assets with an indefinite useful life.

The Company's previous business combinations were accounted for using both the pooling-of-interests and purchase methods. At March 31, 2001, the net carrying amount of goodwill from prior purchase transactions was $14,965,000, which was being amortized by $626,000 each year. Annual amortization of this amount ceased effective April 1, 2001.

The Company has determined that the classification and useful lives utilized for its other intangible assets, which consist primarily of license and product right agreements, are appropriate and consistent with those identified as of March 31, 2001. No impairment losses have been deemed necessary for the quarter ended September 30, 2001.

 

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 $24,631,000 from March 31, 2001 due to ongoing operations. Increases in cash, marketable securities, inventories, accounts payable, accrued expenses and income taxes payable resulted primarily from the increases in product sales, particularly Celexa™. Celexa (citalopram HBr), Forest's selective serotonin reuptake inhibitor (SSRI) for the treatment of depression, is our leading product and continued to show strong growth.

Property, plant and equipment increased principally as the result of the acquisition of new facilities on Long Island, New York to meet current and projected future research and development activities. Further expansions and acquisitions are likely to meet the needs of increased production, warehousing and distribution and research and development.

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, 2001 rose 34% to $376,267,000, an increase of $95,304,000 from the same period last year. Celexa continued its strong growth, achieving sales of $256,078,000, an increase of $87,469,000 or 52%, from the prior year's second quarter. Celexa's prescription volume and share of the SSRI market have both increased during these periods. Sales of the Company's other products increased $7,835,000.

Net sales for the six-month period ended September 30, 2001 rose 35% to $726,775,000, an increase of $186,585,000 from the same period last year. Sales of Celexa accounted for $175,705,000 of the net sales change totaling $494,164,000, an increase of 55% from the same period last year. Sales of the Company's other products increased by $10,880,000.

The increase in other income in each of the periods presented was due primarily to higher interest income resulting from increases in funds available for investment.

Cost of sales as a percentage of sales decreased slightly to 24% in the three-month and six-month periods ended September 30, 2001 from 25% for the same periods last year. The decrease was due to an increase in overall plant utilization and to product mix as Celexa, with a lower cost of goods, comprised a larger portion of total sales.

Selling, general and administrative expenses increased $27,021,000 for the three months ended September 30, 2001, from the same period last year due primarily to marketing and selling activities related to the promotion of the Company's principal products and pre-launch marketing expenses for upcoming product launches. For the six-month period selling, general and administrative expenses increased $26,226,000. The first quarter of fiscal 2001 included a one-time $14,000,000 charge related to the termination of our co-promotion arrangement with Warner-Lambert for Celexa. Excluding that payment, the six-month increase was $40,226,000 related to the full impact of the Company's expanded salesforce, as well as increased marketing activities as discussed above.

Research and development expenses increased $11,148,000 or 44% and $22,526,000 or 46%, respectively, during the three and six-month periods ended September 30, 2001, from the same periods last year. The increases were due primarily to costs associated with ongoing clinical trials and from staff increases and associated costs required to support currently marketed products and products in various stages of development. During the periods presented, particular emphasis was placed on clinical studies for lercanidipine, for the treatment of hypertension, for which a New Drug Application (NDA) was filed with the FDA in October 2001. Forest is currently anticipating launching lercanidipine sometime during calendar year 2003. During the September quarter, spending also continued for ongoing clinical trials for escitalopram, for which an NDA was filed with the FDA during the fourth quarter of last year. Escitalopram is Forest's single enantiomer form of citalopram, the active ingredient of Celexa. The Company is currently anticipating launching escitalopram during the middle of calendar 2002. As a result of the completion of several licensing agreements during fiscal 2001, the Company anticipates further increases in research and development expenses during this year and beyond. Other products in our pipeline for which we expect to file NDA's during the current fiscal year include our patented combination of oxycodone/ibuprofen for moderate to severe pain and memantine, for the treatment of Alzheimer's Disease and neuropathic pain. The Company has several other ongoing clinical trials in various stages, including dexloxiglumide for the treatment of irritable bowel syndrome, ML3000 for osteoarthritis and ALX-0646 for the treatment of migraine headaches.

Income tax expense as a percentage of income before taxes for the three and six months ended September 30, 2001, was 28.3% and 28.1%, respectively. For the comparable periods last year, the tax rate was 28.0%. The tax rate is expected to remain in the current range principally because research and development expenses for the Company's newly licensed products, which are held by our Irish subsidiary, offset a portion of the tax benefit gained from producing Celexa in Ireland.

The Company expects to continue its profitability during the current fiscal year with continued growth of Celexa and its other principal promoted products.

Inflation has not had a material effect on the Company's operations for the periods presented.

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, 2001.

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 was no material impact on earnings of fluctuations in interest and currency exchange rates.

 

Part II - Other Information

Item 1.  Legal Proceedings

             Reference is hereby made to the Company's Annual Report on Form 10-K (the "2001 10-K")
             for the fiscal year ended March 31, 2001, for a description of certain legal proceedings to
             which the Company is a party.

             In August 2001, the Company and G.D. Searle & Co. agreed to settle the trademark action
             described in the 2001 10-K. The settlement did not require any material payment by the
             Company and did not effect the Company's rights to its Celexa trademark.

Item 4.  Submission of Matters to a Vote of Security Holders

             (a)    The registrant held its annual meeting of stockholders on August 13, 2001.

             (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, 2002.

                     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:


Matter


For


  Against


Abstain

Withhold
Authority

Broker
Non-Votes

Election of Directors:

 

 

 

 

 

    Howard Solomon

131,650,927

 

 

25,839,271  

 

    Kenneth E. Goodman

131,367,468

 

 

26,122,730  

 

    Phillip M. Satow

153,065,932

 

 

4,424,266  

 

    William J. Candee III

154,521,917

 

 

2,968,281  

 

    George S. Cohan

155,129,052

 

 

2,361,146  

 

    Dan L. Goldwasser

155,192,981

 

 

2,297,217  

 

    Lester B. Salans

155,184,166

 

 

2,306,032  

 

 

 

 

 

 

 

Ratification of Independent Public Accountants


155,856,719


1,023,212


610,267  

 

 

 

Item 6.  Exhibits and Reports on Form 8-K

             (b)    Reports on Form 8-K. None

 

 

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 14, 2001



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