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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
___________
FORM 10-K
(Mark One)
____
/ X / ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- ---- SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended March 31, 2000
____
/ / 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
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including
area code: (212) 421-7850
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
------------------- ------------------------
Common Stock, $.10 par value New York Stock Exchange
Rights to purchase one New York Stock Exchange
one-hundredth share of Series A
Junior Participating Preferred
Stock, par value $1.00 per share
Securities registered pursuant to Section 12(g) of the Act:
None
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 / /
---- ----
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein
and will not be contained, to the best of the registrant's knowledge,
in the Proxy Statement incorporated by reference in Part III of
____
this Form 10-K or any amendment to this Form 10-K / X /.
----
The aggregate market value of the voting stock held by
non-affiliates of the registrant as of June 23, 2000 is
$7,941,718,066.
Number of shares outstanding of registrant's Common Stock as of
June 23, 2000: 87,202,809.
The following documents are incorporated by reference herein:
Portions of the definitive proxy statement to be filed
pursuant to Regulation 14A promulgated under the Securities
Exchange Act of 1934 in connection with the 2000 Annual
Meeting of Stockholders of registrant.
Portions of the registrant's Annual Report to Stockholders
for the fiscal year ended March 31, 2000.
______________
PART I
ITEM 1. BUSINESS
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GENERAL
Forest Laboratories, Inc. and its subsidiaries (collectively,
"Forest" or the "Company") develop, manufacture and sell both
branded and generic forms of ethical drug products which require a
physician's prescription, as well as non-prescription pharmaceutical
products sold over-the-counter. Forest's most important United States
products consist of branded ethical drug specialties marketed
directly, or "detailed," to physicians by the Company's Forest
Pharmaceuticals, Forest Therapeutics and Forest Specialty Sales
salesforces. In recent years the Company has emphasized
increased detailing to physicians of those branded ethical drugs
it believes have the most potential for growth, and the
introduction of new products acquired from other companies or
developed by the Company.
Forest's products include those developed by Forest and
those acquired from other pharmaceutical companies and integrated
into Forest's marketing and distribution systems. See "Recent
Developments."
Forest is a Delaware corporation organized in 1956, and
its principal executive offices are located at 909 Third Avenue,
New York, New York 10022 (telephone number (212-421-7850).
RECENT DEVELOPMENTS
ML3000: In March 2000 Forest entered into a Joint
Development, License and Supply Agreement with the German
pharmaceutical company Merckle GmbH, for the development and
marketing in the United States of ML3000, a novel compound being
investigated for its role in the management of osteoarthritis, a
degenerative joint disease that affects an estimated 21 million
Americans.
ML3000 is a new entity in a novel class of dual-acting,
anti-inflammatory drugs called COX/LO inhibitors. These drugs
simultaneously inhibit the enzymes cyclooxygenase (COX) and 5-
lipoxygenase (LO), both of which are involved in the inflammatory
process. Leukotrienes, inflammatory products generated by LO,
are believed to contribute to the gastrointestinal irritation
caused by traditional non-steroidal anti-inflammatory drugs
(NSAID's) and may contribute to the arthritic symptoms. In
several Phase II studies, as a result of its dual inhibitory
properties, ML3000 demonstrated an overall safety profile similar
to placebo at doses which were effective in the treatment of
osteoarthritis. The product entered Phase III studies in Europe
earlier this year.
CELEXA-TM-: On July 17, 1998 the United States Food and
Drug Administration ("FDA") approved Forest's New Drug
Application (an "NDA") for Celexa (citalopram HBr), Forest's
selective serotonin reuptake inhibitor ("SSRI") for the treatment
of depression. Forest, together with its co-promotion partner,
the Parke-Davis division of the Warner-Lambert Company, commenced
detailing of Celexa in September 1998. Sales of Celexa were
$427,342,000 for the fiscal year ended March 31, 2000. According
to data published by IMS, an independent prescription audit firm,
as of May 12, 2000 Celexa has achieved a 12.2% share of new
prescriptions for antidepressants in the SSRI category.
Citalopram is currently marketed in most European countries and
is the leading antidepressant in several European markets.
Forest licenses the United States rights to Celexa from H.
Lundbeck A/S, a pharmaceutical company based in Copenhagen and
the drug's originator.
In December 1999, the FDA approved the marketing of an
oral liquid solution of Celexa, which Forest anticipates will be
particularly useful for elderly patients and other patients with
difficulty swallowing tablets.
Effective June 30, 1999, Forest exercised its option to
buy out all royalty obligations to a private investor group which
had funded $60 million of the development, pre-launch and costs
of expanding Forest's salesforce over an approximately two year
period. The option exercise price was $85 million and
extinguished royalties of 25% to 5%, depending on Celexa sales
levels. In addition, Forest separately bought out a limited one
percent trailing royalty to the investor group for a purchase
price of $10 million.
TERMINATION OF CELEXA CO-PROMOTION: In March 1998,
Forest entered into an agreement with the Parke-Davis division of
the Warner-Lambert Company ("Warner-Lambert") providing for the
co-promotion of Celexa by Forest and the Warner-Lambert
salesforces for the three year period following the launch of the
product. The agreement provided for the payment of a co-
promotion fee to Warner-Lambert during the three year co-
promotion period and a reduced fee for a three year period
thereafter. In November 1999, Warner-Lambert announced its
intention to merge with another pharmaceutical manufacturer which
markets a competing anti-depressant and Pfizer, Incorporated,
which markets Zoloft-R-, a competing SSRI, announced its intention
to acquire Warner-Lambert. As a result, Forest expanded its
salesforces to be positioned to assume, and even exceed, the
detailing and marketing activities being performed by Warner-
Lambert, and, by agreement effective April 30, 2000, Forest and
Warner-Lambert terminated the co-promotion agreement. Pursuant
to the termination agreement, Forest paid a one-time termination
payment of $14 million and Warner-Lambert's co-promotion fee and
interest in the product for all periods subsequent to April 30,
2000 was terminated.
RESEARCH AND DEVELOPMENT FACILITY: In March 2000,
Forest acquired a 100,000 square foot facility in Commack, New
York. Forest has commenced the development of a research and
development facility at this location, which is expected to
become operational in fiscal 2002.
STRATEGIC ALLIANCE WITH H. LUNDBECK A/S: On March 27,
1998, Forest entered into a strategic alliance with H. Lundbeck
A/S ("Lundbeck")covering United States marketing rights to
central nervous system ("CNS") products developed by Lundbeck.
Lundbeck, founded in 1915, is a pharmaceutical company based in
Copenhagen specializing in the development of pharmaceutical
compounds for the treatment of central nervous system disorders.
Lundbeck is also the originator and Forest's licensor of Celexa.
The strategic alliance specifically provides for the
license to Forest of marketing rights in the United States to
three products: (1) Lu26-054, the active enantiomer of Celexa,
which is currently in Phase III clinical trials and has patent
protection in the United States until the year 2009 and the
potential to extend patent protection beyond 2009; (2) Lu25-109,
a selective muscarinic agonist and M3 antagonist, currently being
investigated for the treatment of urinary incontinence; and
(3) Lu28-179, a new anxiolytic compound presently in Phase I
studies. In addition, the alliance sets forth the terms for
joint development of future products resulting from Lundbeck's
research programs for marketing in the United States under the
name of Forest-Lundbeck.
Forest paid Lundbeck $32 million for the United States
rights to the compounds presently under development, which,
together with related expenses, was charged to research and
development expenses in the fourth quarter of the fiscal year
ended March 31, 1998. Lundbeck will receive on-going license
fees and product payments from the marketing of the strategic
alliance products in the United States.
AEROBID-R-: On December 3, 1999, Forest and the 3M
Pharmaceuticals Division of the Minnesota Mining and
Manufacturing Company ("3M") entered into a Supply and
Distribution Agreement for the long-term supply and manufacture
by 3M on an exclusive basis of a hydrofluralkane (HFA)
formulation of Aerobid, Forest's metered dose inhaled steroid for
the treatment of asthma. The HFA formulation does not contain
chlorofluorocarbons, which are being phased out of commercial use
due to environmental concerns. In addition, the HFA formulation
of Aerobid incorporates a built-in spacer device which Forest
believes will enhance use of the product. Forest filed an NDA
with the FDA for the HFA formulation of Aerobid on April 27,
2000, which NDA has not yet been approved.
CLIMARA-R-: Effective October 1, 1999, Forest and Berlex
Laboratories, Inc. restructured their co-marketing agreement for
Climara, Berlex's transdermal patch used in estrogen replacement
therapy. Pursuant to the restructuring, Forest no longer co-
markets the product but continues to receive a royalty on sales
of the product.
INFASURF-R-: In October 1999, Forest launched Infasurf, a
lung surfactant for the treatment of respiratory distress
syndrome in premature infants. The product launch followed a
decision by a United States District Court that Infasurf does not
infringe patents held by Abbott Laboratories with respect to a
competing product, Survanta-R-. Forest owns world wide rights to
Infasurf pursuant to licensing arrangements with ONY, Inc., a
privately held company which invented the product. Sales of
Infasurf were $4,794,000 for the fiscal year ended March 31,
2000.
TIAZAC-R-: Tiazac, launched in 1996, is Forest's once-
daily formulation of diltiazem, used in the treatment of
hypertension and angina. On March 6, 2000, the United States
District Court for the Southern District of Florida held that an
extended release formulation of diltiazem formulated by Andrx
does not infringe the patent claims of Biovail Corporation
International, which is Forest's licensor of Tiazac. Biovail has
appealed this decision. There can be no assurance that this
appeal will be successful or that Andrx will not be able to
successfully launch its diltiazem formulation as a generic
competitor to Tiazac. Under current FDA regulations, the FDA
will not approve the marketing of the Andrx formulation until the
expiration of a 30 month period from the date Andrx certified
that its formulation did not infringe the Biovail patent (August
25, 1998) or the date when Andrx successfully defends the Biovail
appeal, whichever first occurs.
NEW YORK STOCK EXCHANGE; SHARE REPURCHASE PROGRAM: On
October 8, 1999, shares of Forest's common stock were listed for
trading on the New York Stock Exchange. Forest's shares were
previously traded on the American Stock Exchange.
In December 1997, Forest's Board of Directors authorized
an increase in Forest's share repurchase program of 4,000,000
shares, bringing such total authorization to 17,000,000 shares.
Pursuant to the program, Forest may repurchase shares on the open
market at prices prevailing from time to time. As of June 23,
2000, Forest has purchased 12,321,000 shares pursuant to this
program. No date for completing the share repurchase program has
been established.
MANAGEMENT: The following management changes were made
during fiscal 2000: Dr. Ivan Gergel, who has served as the head
of Forest's Medical Department for the past two years, was
promoted to Vice President-Clinical Development and Medical
Affairs; Richard Overton was promoted to Vice President-
Manufacturing; and Shankar Hariharan was promoted to Vice
President-Pharmaceutical Research and Development.
FORWARD LOOKING STATEMENTS: Except for the historical
information contained herein, this report contains 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 and the timely
development and launch of new products.
PRINCIPAL PRODUCTS
The Company actively promotes in the United States those
of its branded products which the Company's management believes
have the most potential for growth and which enable its
salesforces to concentrate on groups of physicians who are high
prescribers of its products. Such products include Celexa,
Forest's SSRI for the treatment of depression; the respiratory
products Aerobid, Aerochamber-R- and Tessalon-R-; Tiazac, Forest's
once-daily diltiazem for the treatment of hypertension and
angina; Infasurf, a lung surfactant for the treatment and
prevention of respiratory distress syndrome in premature infants;
and Cervidil-R-, used for the initiation or continuation of
cervical ripening. (See "Recent Developments.")
Sales of Celexa, launched in September 1998, accounted
for 49.0% of Forest's sales for the fiscal year ended March 31,
2000 and 16.8% of Forest's sales for the fiscal year ended March
31, 1999.
Aerobid is a metered dose inhaled steroid used in the
treatment of asthma. Sales of Aerobid accounted for 7.3% of
Forest's sales for the fiscal year ended March 31, 2000, as
compared to 16.9% and 24.5% for the fiscal years ended March 31,
1999 and 1998, respectively. Aerochamber is a spacer device
used to improve the delivery of products administered by aerosol
delivery, including Aerobid.
Sales of Tiazac, launched in 1996, accounted for 18.1%,
23.7% and 19.7% of sales for the fiscal years ended March 31,
2000, 1999 and 1998, respectively.
Forest's generic line, marketed by the Company's Inwood
Laboratories, Inc. subsidiary, includes generic equivalents to
certain of the Company's branded products, as well as difficult
to formulate controlled release products.
The Company's United Kingdom and Ireland subsidiaries
sell both ethical products requiring a doctor's prescription and
over-the-counter preparations. Their most important products
include Sudocrem-R-, a topical preparation for the treatment of
diaper rash; Colomycin-R-, an antibiotic used in the treatment of
Cystic Fibrosis; and Suscard-R- and Sustac-R-, sustained action
nitroglyerin tablets in both buccal and oral form used in the
treatment of angina pectoris, an ailment characterized by
insufficient oxygenation of the heart muscle. In May 1998,
Pharmax launched Exorex-TM-, which is used in the treatment of
eczema. Syscor-R-, used for the treatment of angina, was launched
in February 1999.
MARKETING
In the United States, Forest directly markets its
products through its domestic salesforces, Forest
Pharmaceuticals, Forest Therapeutics and Forest Specialty Sales,
currently numbering 1,425 persons, which detail products directly
to physicians, pharmacies and managed care organizations.
Forest's salesforces were increased by approximately 70% during
the fiscal year ended March 31, 2000 in anticipation of the
termination of the co-promotion arrangement with Warner-Lambert
for Celexa. (See "Recent Developments.") The Company also
employs a contract salesforce of 240 representatives to promote
its products. In the United Kingdom, the Company's Pharmax
subsidiary's salesforce, currently 57 persons, markets its
products directly. Forest's products are sold elsewhere through
independent distributors.
COMPETITION
The pharmaceutical industry is highly competitive as to
the sale of products, research for new or improved products and
the development and application of competitive controlled release
and other drug formulation and delivery technologies. There are
numerous companies in the United States and abroad engaged in the
manufacture and sale of both proprietary and generic drugs of the
kind sold by Forest and drugs utilizing controlled release
technologies. Many of these companies have substantially greater
financial resources than Forest. The Company also faces
competition for the acquisition or licensing of new product
opportunities from other companies. In addition, the marketing
of pharmaceutical products is increasingly affected by the
growing role of managed care organizations, including
pharmaceutical benefit management companies, in the provision of
health services. Such organizations negotiate with
pharmaceutical manufacturers for highly competitive prices for
pharmaceutical products in equivalent therapeutic categories,
including certain of the Company's principal promoted products.
Failure to be included or to have a preferred position in a
managed care organization's drug formulary could result in
decreased prescriptions of a manufacturer's products.
GOVERNMENT REGULATION
The pharmaceutical industry is subject to comprehensive
government regulation which substantially increases the
difficulty and cost incurred in obtaining the approval to market
newly proposed drug products and maintaining the approval to
market existing drugs. In the United States, products developed,
manufactured or sold by Forest are subject to regulation by the
FDA, principally under the Federal Food, Drug and Cosmetic Act,
as well as by other federal and state agencies. The FDA
regulates all aspects of the testing, manufacture, safety,
labeling, storage, record keeping, advertising and promotion of
new and old drugs, including the monitoring of compliance with
good manufacturing practice regulations. Non-compliance with
applicable requirements can result in fines and other sanctions,
including the initiation of product seizures, injunction actions
and criminal prosecutions based on practices that violate
statutory requirements. In addition, administrative remedies can
involve voluntary recall of products as well as the withdrawal of
approval of products in accordance with due process procedures.
Similar regulations exist in most foreign countries in which
Forest's products are manufactured or sold. In many foreign
countries, such as the United Kingdom, reimbursement under
national health insurance programs frequently require that
manufacturers and sellers of pharmaceutical products obtain
governmental approval of initial prices and increases if the
ultimate consumer is to be eligible for reimbursement for the
cost of such products.
During the past several years the FDA, in accordance
with its standard practice, has conducted a number of inspections
of the Company's manufacturing facilities. Following these
inspections the FDA called the Company's attention to certain
"Good Manufacturing Practices" compliance and record keeping
deficiencies. In March 1999, the FDA requested that the Company
review its practices used to analyze blood level concentrations
of volunteers who receive various drugs for purposes of
pharmacokinetics trials. Forest has responded to the FDA's
comments and has modified procedures to comply with the requests
made by the FDA. In addition, in April 1998 and April 1999, the
Company identified certain stability problems with its generic
propranolol and indomethacin products, respectively. The Company
is not shipping either of such products pending resolution of
these problems.
In March 1997, the FDA announced a proposed rule which
could result in the withdrawal of approval to market metered dose
inhaler formulations of corticosteroids (such as the Company's
Aerobid product) containing chlorofluorocarbons ("CFC's") once
three distinct non-CFC products are available in that therapeutic
category. The Company has developed a non-CFC formulation of
Aerobid and has filed an NDA with the FDA covering this
formulation. (See "Recent Developments.") Forest expects to
receive NDA approval in time to meet the proposed rule.
The cost of human health care products continues to be a
subject of investigation and action by governmental agencies,
legislative bodies and private organizations in the United States
and other countries. In the United States, most states have
enacted generic substitution legislation requiring or permitting
a dispensing pharmacist to substitute a different manufacturer's
version of a drug for the one prescribed. Federal and state
governments continue to press efforts to reduce costs of Medicare
and Medicaid programs, including restrictions on amounts agencies
will reimburse for the use of products. Under the Omnibus Budget
Reconciliation Act of 1990 (OBRA), manufacturers must pay certain
statutorily-prescribed rebates on Medicaid purchases for
reimbursement on prescription drugs under state Medicaid plans.
Federal Medicaid reimbursement for drug products of original
NDA-holders is denied if less expensive generic versions are
available from other manufacturers. In addition, the Federal
government follows a diagnosis related group (DRG) payment system
for certain institutional services provided under Medicare or
Medicaid. The DRG system entitles a health care facility to a
fixed reimbursement based on discharge diagnoses rather than
actual costs incurred in patient treatment, thereby increasing
the incentive for the facility to limit or control expenditures
for many health care products.
Under the Prescription Drug User Fee Act of 1992, the
FDA has imposed fees on various aspects of the approval,
manufacture and sale of prescription drugs. In connection with
the 2000 Presidential campaign, the Company expects that a number
of competing healthcare reform proposals will be introduced and
debated which may be highly regulatory and affect the marketing
of prescription drug products. The Company cannot predict the
outcome or effect on the marketing of prescription drug products
of the legislative and political process.
PRINCIPAL CUSTOMERS
McKesson Drug Company, Bergen Brunswig Corp., Cardinal
Distributors, Inc. and Amerisource Corp., national drug
wholesalers, accounted for 19%, 14% 13% and 12%, respectively, of
Forest's net sales for the fiscal year ended March 31, 2000. For
fiscal years ended March 31, 1999 and 1998, McKesson Drug
Company, Bergen Brunswig Corp. and Cardinal Distributors, Inc.
accounted for 17%, 12% and 14%, and 13%, 12% and 11%,
respectively, of Forest's net sales. No other customer accounted
for 10% or more of Forest's net sales for those fiscal years.
ENVIRONMENTAL STANDARDS
Forest anticipates that the effects of compliance with
federal, state and local laws and regulations relating to the
discharge of materials into the environment will not have any
material effect on capital expenditures, earnings or the
competitive position of Forest.
RAW MATERIALS
The principal raw materials used by Forest for its
various products are purchased in the open market. Most of these
materials are obtainable and available from several sources in
the United States and elsewhere in the world, although the
Company's most important products, including Celexa, contain
patented or other exclusively manufactured materials available
from only a single source. Forest has not experienced any
significant shortages in supplies of such raw materials.
PRODUCT LIABILITY INSURANCE
Forest currently maintains $150 million of product
liability coverage per "occurrence" and in the aggregate.
Although in the past there have been product liability claims
asserted against Forest, none for which Forest has been found
liable, there can be no assurance that all potential claims which
may be asserted against Forest in the future would be covered by
Forest's present insurance.
RESEARCH AND DEVELOPMENT
During the year ended March 31, 2000, Forest spent
$70,292,000 for research and development, as compared to
$51,641,000 and $79,150,000 in the fiscal years ended March 31,
1999 and 1998, respectively. Included in research and
development expense in fiscal 2000, was a payment pursuant to the
licensing agreement with Merckle GmbH, a German pharmaceutical
company, in connection with the development and marketing in the
United States of the novel drug ML3000, which is being
investigated for its role in the management of osteoarthritis.
(See "Recent Developments.") Forest's research and development
expense in the 1998 fiscal year included $32,250,000 for the
license fee and related expenses of the license of the Lundbeck
joint venture products (see "Recent Developments") and otherwise
consisted primarily of the conduct of clinical studies required
to obtain approval of new products and the development of
additional products.
EMPLOYEES
At March 31, 2000, Forest had a total of 2,474 employees.
PATENTS AND TRADEMARKS
Forest owns or licenses certain U.S. and foreign patents on
many of its branded products and products in development,
including, but not limited to, Aerobid, Tiazac, Cervidil,
Monurol-R-, Synapton-TM-, Flumadine-R-, Forest's licensed oxycodone/
ibuprofen analgesic, and ML3000, the compound under development
pursuant to an agreement with Merckle GmbH for the treatment of
osteoarthritis and those products under development pursuant to
the joint venture with Lundbeck (see "Recent Developments"),
which patents expire through 2010. While no longer subject to
patent protection, Celexa enjoys legal marketing exclusivity in
the United States under the Waxman-Hatch Act until 2003. Forest
believes these patents and other rights are or may become of
significant benefit to its business. Additionally, Forest owns
and licenses certain U.S. patents, and has pending U.S. and
foreign patent applications, relating to various aspects of its
Synchron-R- technology and to other controlled release technology,
which patents expire through 2008. Forest believes that these
patents are useful in its business, however, there are numerous
patents and unpatented technologies owned by others covering
other controlled release processes.
Forest owns various trademarks and trade names which it
believes are of significant benefit to its business.
BACKLOG -- SEASONALITY
Backlog of orders is not considered material to Forest's
business prospects. Forest's business is not seasonal in nature.
ITEM 2. PROPERTIES
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Forest owns a 150,000 square foot building on 28 acres
in Commack, New York. This facility is used for packaging,
warehousing, administration and sales training. On March 17,
2000, Forest acquired an additional 100,000 square foot facility
in Commack, New York. Forest is developing this location as a
research and development facility which is expected to become
operational in fiscal 2002.
Forest also owns five buildings and leases two buildings
in and around Inwood, Long Island, New York, containing a total
of approximately 145,000 square feet. The buildings are used for
manufacturing, research and development, warehousing and
administration. In addition, Forest leases approximately 32,000
square feet in Farmingdale, New York for use as a clinical
laboratory testing facility. On March 1, 2000, Forest entered
into a lease for an additional 105,000 square foot warehouse and
administrative office facility in Hauppauge, New York.
Forest also leases approximately 23,000 square feet of
office space in Jersey City, New Jersey, which is used by certain
of its scientific and regulatory personnel.
Forest Pharmaceuticals, Inc. ("FPI"), a wholly owned
subsidiary of the Company, owns two facilities in Cincinnati,
Ohio aggregating approximately 108,000 square feet. In St.
Louis, Missouri, FPI owns a 330,000 square foot facility on 26
acres of land. This facility is being used for warehousing,
distribution and administration. In addition, FPI owns a
facility of 22,000 square feet in St. Louis, Missouri. This
facility is used principally for manufacturing.
Pharmax owns an approximately 95,000 square foot complex
in the London suburb of Bexley, England, which houses its plant
and administrative and central marketing offices.
Forest's Tosara subsidiary owns an 18,000 square foot
manufacturing and distribution facility located in an industrial
park in Dublin, Ireland. Forest Ireland, a subsidiary of Forest,
owns an approximately 130,000 square foot manufacturing and
distribution facility located in Dublin, Ireland. The facility
is currently used principally for the manufacture of and
distribution to the United States of Celexa tablets. Forest
expanded this facility in fiscal 2000.
Forest presently leases approximately 120,000 square
feet of executive office space at 909 Third Avenue, New York, New
York. The lease is for a sixteen (16) year term, expiring in
2010, subject to 2 five year renewal options.
Management believes that the above-described properties
are sufficient for Forest's present and anticipated needs.
Net rentals for leased space for the fiscal year ended
March 31, 2000 aggregated approximately $3,339,000 and for the
fiscal year ended March 31, 1999 aggregated approximately
$3,052,000.
ITEM 3. LEGAL PROCEEDINGS
-----------------
The Company is a defendant in actions filed in various
federal district courts alleging certain violations of the
Federal anti-trust laws in the marketing of pharmaceutical
products. In each case, the actions were filed against many
pharmaceutical manufacturers and suppliers and allege price
discrimination and conspiracy to fix prices in the sale of
pharmaceutical products. The actions were brought by various
pharmacies (both individually and, with respect to certain
claims, as a class action) and seek injunctive relief and
monetary damages. The Judicial Panel on Multi-District
Litigation has ordered these actions coordinated (and, with
respect to those actions brought as class actions, consolidated)
in the Federal District Court for the Northern District of
Illinois (Chicago) under the caption "In re Brand Name
Prescription Drugs Antitrust Litigation."
On November 30, 1998, the defendants remaining in the
consolidated federal class action (which proceeded to trial
beginning in September 1998), 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 and stated "the evidence of conspiracy is
meager, and the evidence as to individual defendants paltry or
non-existent." During the fiscal year ended March 31, 2000, the
Court of Appeals for the Seventh Circuit affirmed the granting of
the directed verdict in the federal class case in favor of the
Company and the District Court granted the Company summary
judgment as to a remaining aspect of the case as to which the
Court of Appeals had directed further proceedings in the District
Court. The United States Supreme Court denied a motion for
certiorari filed by the class action plaintiffs, and the class
action plaintiffs did not appeal the decision by the District
Court granting summary judgment to the Company.
Following the Seventh Circuit's affirmance of the
directed verdict in favor of the Company, the Company has secured
the voluntary dismissal of the conspiracy allegations contained
in all of the federal cases brought by individual plaintiffs who
elected to "opt-out" of the federal class action, which cases
were included in the coordinated proceedings. The Company,
together with other manufacturers, remains a defendant in many of
the Federal opt-out cases included in the coordinated proceedings
to the extent of claims alleging price discrimination in
violation of the Robinson-Patman Act. While no discovery or
other significant proceedings have been taken to date in respect
of such claims, there can be no assurance that the Company will
not be required to actively defend such claims or to pay
substantial amounts to dispose of such claims.
In addition, following the granting of a directed
verdict in favor of the defendants in the federal class action,
the Company moved for an award of sanctions from the attorneys
for the class action plaintiffs in light of certain
misrepresentations made with respect to Forest by such attorneys
during the course of the class action. On April 29, 1999, the
trial court granted Forest's motion, awarding Forest
approximately $2.1 million in attorneys' fees and expenses
incurred in this action. The attorneys for the class plaintiffs
appealed this decision and reached a settlement of such appeal
with the Company pursuant to which the Company fully recovered
its costs in connection with the matters covered by the sanctions
award.
Similar actions alleging price discrimination and
conspiracy claims under state law were brought against many
pharmaceutical manufacturers, including the Company, in various
state courts and the District of Columbia. Such actions include
actions purported to be brought on behalf of consumers, as well
as those brought by retail pharmacists. The Company has been
dismissed, or is in the process of obtaining dismissal, from all
of such actions.
The Company is a defendant in an action pending in
Federal District Court for the Northern District of Illinois
entitled G.D. Searle & Co. v. Forest Laboratories, Inc..
----------------------------------------------
Plaintiff G.D. Searle asserts claims for federal and common law
trademark infringement in respect to rights Searle alleges as to
the name "Celebra" and arising from the marketing of Celexa. The
action seeks injunctive relief and unspecified monetary damages.
During fiscal 2000, the Company's motion to dismiss this action
on the pleadings was dismissed by the trial court and discovery
has been commenced. The Company believes this action is without
merit.
The Company is not subject to any other pending legal
proceedings, other than ordinary routine claims incidental to its
business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS
-------------------------------
Not Applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDER
MATTERS
------------------------------
The information required by this item is incorporated
by reference to page 30 of the Annual Report.
Forest has never paid cash dividends on its Common Stock
and does not expect to pay such dividends in the foreseeable
future. Management presently intends to retain all available
funds for the development of its business and for use as working
capital. Future dividend policy will depend upon Forest's
earnings, capital requirements, financial condition and other
relevant factors.
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
The information required by this item is incorporated by
reference to page 16 of the Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
-------------------------------
The information required by this item is incorporated by
reference to pages 14 and 15 of the Annual Report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
-----------------------------
The information required by this item is incorporated by
reference to page 15 of the Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA
------------------------
The information required by this item is incorporated by
reference to pages 17 through 29 of the Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS
WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
------------------------------
Not Applicable.
PART III
In accordance with General Instruction G(3), the
information called for by Part III (Items 10 through 13) is
incorporated by reference from Forest's definitive proxy
statement to be filed pursuant to Regulation 14A promulgated
under the Securities Exchange Act of 1934 in connection with
Forest's 2000 Annual Meeting of Shareholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K
---------------------------------------
(a) 1. Financial statements. The following
consolidated financial statements of Forest
Laboratories, Inc. and Subsidiaries included in
the Annual Report are incorporated by reference
herein in Item 8:
Report of Independent Certified Public Accountants
Consolidated balance sheets -
March 31, 2000 and 1999
Consolidated statements of income -
years ended March 31, 2000, 1999 and 1998
Consolidated statements of comprehensive income -
years ended March 31, 2000, 1999 and 1998
Consolidated statements of shareholders' equity -
years ended March 31, 2000, 1999 and 1998
Consolidated statements of cash flows -
years ended March 31, 2000, 1999 and 1998
Notes to consolidated financial statements
2. Financial statement schedules. The
following consolidated financial statement
schedule of Forest Laboratories, Inc. and
Subsidiaries is included herein:
Report of Independent Certified Public
Accountants S-1
Schedule II Valuation and qualifying accounts S-2
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission
are not required under the related instructions or are
inapplicable, and therefore have been omitted.
3. Exhibits:
(3)(a) Articles of Incorporation of Forest, as
amended. Incorporated by reference from the
Current Report on Form 8-K dated March 9, 1981
filed by Forest, from Registration Statement on
Form S-1 (Registration No. 2-97792) filed by
Forest on May 16, 1985, from Forest's definitive
proxy statement filed pursuant to Regulation 14A
with respect to Forest's 1987, 1988 and 1993
Annual Meetings of Shareholders and from the
Current Report on Form 8-K dated March 15, 1988.
(3)(b) By-laws of Forest. Incorporated by reference to
Forest's Current Report on Form 8-K dated
October 11, 1994.
(10) Material Contracts
------------------
10.1 Benefit Continuation Agreement
dated as of December 1, 1989
between Forest and Howard Solomon.
Incorporated by reference to Forest's
Annual Report on Form 10-K for the
fiscal year ended March 31, 1990 (the
"1990 l0-K").
10.2 Benefit Continuation Agreement
dated as of May 27, 1990
between Forest and Kenneth E. Goodman.
Incorporated by reference to the 1990
10-K.
10.3 Benefit Continuation Agreement
dated as of April 1, 1995
between Forest and Phillip M. Satow.
Incorporated by reference to Forest's
Annual Report on Form 10-K for the
fiscal year ended March 31, 1995 (the
"1995 10-K").
10.4 Split Dollar Life Insurance Agreement
dated March 29, 1994 between Forest
and Howard Solomon. Incorporated by
reference to Forest's Annual Report
on Form 10-K for the fiscal year ended
March 31, 1994 (the "1994 10-K").
10.5 Split Dollar Life Insurance Agreement
dated March 29, 1994 between Forest
and Phillip M. Satow. Incorporated by
reference to the 1994 10-K.
10.6 Split Dollar Life Insurance Agreement
dated March 29, 1994 between Forest and
Kenneth E. Goodman. Incorporated by
reference to the 1994 10-K.
10.7 Employment Agreement dated as of
September 30, 1994 by and
between Forest and Howard Solomon.
Incorporated by reference to 1995 10-K.
10.8 Employment Agreement dated as of
September 30, 1994 by and between Forest
and Kenneth E. Goodman. Incorporated by
reference to the 1995 10-K.
10.9 Employment Agreement dated as of
October 24, 1995 by and between Forest
and Dr. Lawrence S. Olanoff. Incorporated
by reference to Forest's Annual Report
on Form 10-K for the fiscal year ended
March 31, 1996 (the "1996 10-K").
10.10 Employment Agreement dated June 24, 1998
between Forest and Elaine Hochberg.
Incorporated by reference to Forest's
Annual Report on Form 10-K for the fiscal
year ended March 31, 1998 (the "1998 10-K").
10.11 Employment Agreement dated June 21, 1999
between Forest and John E. Eggers.
Incorporated by reference to Forest's Annual
Report on Form 10-K for the fiscal year ended
March 31, 1999 (the "1999 10-K").
10.12 Employment Agreement dated January 16, 1995
between Forest and Mary Prehn. Incorporated by
reference to the 1998 10-K.
10.13 Employment Agreement dated February 23, 1998
between Forest and Raymond Stafford. Incorporated
by reference to the 1998 10-K.
10.14 License Agreement dated September 11, 1995 between
Biovail Corporation International and Forest.
Incorporated by reference to Exhibit No.
(C)(2) to Schedule 14D-1 of Forest dated
September 18, 1995.
10.15 License and Supply Agreement dated October 3, 1995
between Forest Laboratories (Ireland) Limited
and H. Lundbeck A/S. Incorporated by
reference to the 1999 10-K.
13 Portions of the Registrant's Annual Report to
Stockholders.
22 List of Subsidiaries. Incorporated by reference
to Exhibit 22 to the 1988 10-K.
23 Consent of BDO Seidman, LLP.
27 Financial Data Schedule.
SIGNATURES
Pursuant to the requirements of Section 13 and 15(d) of
the Securities Exchange Act of 1934, Forest has duly caused this
report to be signed on its behalf by the undersigned, thereunto
duly authorized.
Dated: June 29, 2000
FOREST LABORATORIES, INC.
By: /s/Howard Solomon
-------------------
Howard Solomon,
Chairman of the Board,
Chief Executive Officer
and Director
Pursuant to the requirements of the Securities Exchange
Act of 1934, this report has been signed below by the following
persons on behalf of Forest and in the capacities and on the
dates indicated.
PRINCIPAL EXECUTIVE
OFFICERS:
/s/ Howard Solomon Chairman of the June 29, 2000
- ------------------------ Board, Chief
Howard Solomon Executive Officer
and Director
/s/ Kenneth E. Goodman President, Chief
- ------------------------ Operating Officer June 29, 2000
Kenneth E. Goodman and Director
PRINCIPAL FINANCIAL
AND ACCOUNTING OFFICER:
/s/ John E. Eggers Vice President-
- ------------------------- Finance and Chief June 29, 2000
John E. Eggers Financial Officer
DIRECTORS
/s/ Phillip M. Satow Director June 29, 2000
- --------------------------
Phillip M. Satow
/s/ George S. Cohan Director June 29, 2000
- ---------------------------
George S. Cohan
/s/William J. Candee, III Director June 29, 2000
- ---------------------------
William J. Candee, III
/s/ Dan L. Goldwasser Director June 29, 2000
- ---------------------------
Dan L. Goldwasser
/s/ Lester B. Salans Director June 29, 2000
- ---------------------------
Lester B. Salans
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
- --------------------------------------------------
Board of Directors and Shareholders
Forest Laboratories, Inc.
The audits referred to in our report dated May 1, 2000
relating to the consolidated financial statements of Forest
Laboratories, Inc. and Subsidiaries, which is referred to in
Item 8 of this Form 10-K, include the audits of the
accompanying financial statement schedule. This financial
statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion of
this financial statement schedule based upon our audits.
In our opinion, such financial statement schedule presents
fairly, in all material respects, the information set forth
therein.
/s/ BDO SEIDMAN, LLP
- --------------------
BDO Seidman, LLP
New York, New York
May 1, 2000
S-1
SCHEDULE II
FOREST LABORATORIES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
- ------------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
- ------------------------------------------------------------------------------------------------------------------
Additions
- ------------------------------------------------------------------------------------------------------------------
Balance at (1) (2) Balance at
beginning Charged to costs Charged to other Deductions- end of
Description of period and expenses accounts-describe(A) describe(B) period
- ------------------------------------------------------------------------------------------------------------------
Year ended March 31, 2000:
Allowance for doubtful
accounts $14,160,000 $2,312,000 $8,056,000 $13,830,000 $10,698,000
=========== ========== ========== =========== ===========
Year ended March 31, 1999:
Allowance for doubtful
accounts $12,416,000 $1,036,000 $5,350,000 $4,642,000 $14,160,000
=========== ========== ========== ========== ===========
Year ended March 31, 1998:
Allowance for doubtful
accounts $9,594,000 $3,237,000 $5,640,000 $6,055,000 $12,416,000
========== ========== ========== ========== ===========
(A) Includes allowances for wholesale chargebacks, medicaid rebates, quarterly
rebates, cash discounts and domestic returns.
(B) Includes adjustments for wholesale chargebacks, medicaid rebates, cash
discounts and bad debt write-offs.
S-2
EXHIBIT 13
QUARTERLY STOCK MARKET PRICES
High Low
---- ---
April-June 1998 40 1/2 32 1/8
July-September 1998 42 5/8 32
October-December 1998 53 1/4 32
January-March 1999 58 7/8 42 5/16
April-June 1999 57 1/4 41 1/4
July-September 1999 54 41 3/4
October-December 1999 61 3/4 42
January-March 2000 87 1/4 57 5/16
As of June 5, 2000 there were 2,095 stockholders of record of
the Company's common stock.
SELECTED FINANCIAL DATA
March 31, (In thousands) 2000 1999 1998 1997 1996
---------- -------- -------- -------- --------
Financial Position:
Current Assets $ 645,233 $502,361 $371,647 $359,630 $470,612
Current Liabilities 211,090 129,960 129,889 73,544 89,571
Net Current Assets 434,143 372,401 241,758 286,086 381,041
Total Assets 1,097,642 875,097 744,323 700,281 899,361
Total Shareholders' Equity 884,690 743,512 614,161 626,399 809,517
Year Ended March 31, (In thousands,
except per share data) 2000 1999 1998 1997 1996
---------- -------- -------- -------- --------
Summary of Operations:
Net Sales $872,822 $546,266 $427,086 $280,745 $446,883
Other Revenue 26,479 77,722 47,618 28,316 13,061
Costs and Expenses 741,854 513,185 419,932 348,060 297,569
Income (Loss) Before Income Taxes (Benefit) 157,447 110,803 54,772 ( 38,999) 162,375
Income Taxes (Benefit) 44,759 33,630 18,075 ( 15,458) 58,130
Net Income (Loss) 112,688 77,173 36,697 ( 23,541) 104,245
Net Income (Loss) Per Share:
Basic $1.34 $0.95 $0.45 ($0.27) $1.15
Diluted $1.28 $0.90 $0.44 ($0.27) $1.12
Weighted Average Number of
Common and Common
Equivalent Shares
Outstanding (Note A):
Basic 83,783 81,445 80,906 86,018 90,628
Diluted 87,945 85,956 83,425 86,018 92,872
No dividends were paid on common shares in any period.
A. Basic net income (loss) per share was computed by dividing net income (loss)
by the weighted average number of common shares outstanding during each year.
Diluted net income (loss) per share includes the potential dilution that
could occur if options and warrants outstanding were included in the weighted
average number of common shares outstanding for the period.
FOREST LABORATORIES, INC. AND SUBSIDIARIES
------------------------------------------
CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------
YEARS ENDED MARCH 31, 2000, 1999 AND 1998
-----------------------------------------
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
--------------------------------------------------
Board of Directors and Shareholders
Forest Laboratories, Inc.
New York, New York
We have audited the accompanying consolidated balance sheets of
Forest Laboratories, Inc. and Subsidiaries as of March 31, 2000
and 1999, and the related consolidated statements of income,
comprehensive income, shareholders' equity and cash flows for
each of the three years in the period ended March 31, 2000.
These financial statements are the responsibility of the
Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall presentation of the financial statements. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Forest Laboratories, Inc. and Subsidiaries as of
March 31, 2000 and 1999, and the results of their operations and
their cash flows for each of the three years in the period ended
March 31, 2000 in conformity with generally accepted accounting
principles.
BDO SEIDMAN, LLP
New York, New York
May 1, 2000
FOREST LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
MARCH 31,
-----------------------
2000 1999
ASSETS ---------- ----------
- ------
Current assets:
Cash (including cash equivalent investments of
$299,673 in 2000 and $197,515 in 1999) $ 302,600 $ 200,968
Marketable securities 35,019 40,780
Accounts receivable, less allowances of $10,698
in 2000 and $14,160 in 1999 60,570 57,294
Inventories 177,798 132,675
Deferred income taxes 49,568 52,059
Refundable income taxes 11,321 12,411
Other current assets 8,357 6,174
---------- ----------
Total current assets 645,233 502,361
---------- ----------
Marketable securities 17,619 37,215
---------- ----------
Property, plant and equipment:
Land and buildings 93,362 74,772
Machinery and equipment 59,607 48,060
Vehicles and other 9,567 6,979
---------- ----------
162,536 129,811
Less accumulated depreciation 45,520 38,615
---------- ----------
117,016 91,196
---------- ----------
Other assets:
Excess of cost of investment in subsidiaries
over net assets acquired, less accumulated
amortization of $9,368 in 2000 and $8,742
in 1999 15,591 16,217
License agreements, product rights and other
intangible assets, net 262,676 195,203
Deferred income taxes 19,435 15,220
Other 20,072 17,685
---------- ----------
317,774 244,325
---------- ----------
$1,097,642 $ 875,097
========== ==========
See accompanying notes to consolidated financial statements.
FOREST LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except for par values)
MARCH 31,
-----------------------
2000 1999
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable $ 71,976 $ 66,673
Accrued expenses 94,523 38,114
Income taxes payable 44,591 25,173
---------- ----------
Total current liabilities 211,090 129,960
---------- ----------
Deferred income taxes 1,862 1,625
---------- ----------
Commitments and contingencies
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 102,364 shares in 2000 and
100,854 shares in 1999 10,236 10,085
Capital in excess of par 427,318 390,750
Retained earnings 745,022 632,334
Accumulated other comprehensive loss ( 14,312) ( 7,175)
---------- ----------
1,168,264 1,025,994
Less common stock in treasury, at cost
(17,703 shares in 2000 and 17,683
shares in 1999) 283,574 282,482
---------- ----------
884,690 743,512
---------- ----------
$1,097,642 $ 875,097
========== ==========
See accompanying notes to consolidated financial statements.
FOREST LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
YEARS ENDED MARCH 31,
--------------------------------
2000 1999 1998
-------- -------- --------
Net sales $872,822 $546,266 $427,086
Contract revenue 8,976 51,235 28,102
Other income 17,503 26,487 19,516
-------- -------- --------
899,301 623,988 474,704
-------- -------- --------
Costs and expenses:
Cost of sales 215,651 136,477 104,412
Selling, general and administrative 455,911 325,067 236,370
Research and development 70,292 51,641 79,150
-------- -------- --------
741,854 513,185 419,932
-------- -------- --------
Income before income tax expense 157,447 110,803 54,772
Income tax expense 44,759 33,630 18,075
-------- -------- --------
Net income $112,688 $ 77,173 $ 36,697
======== ======== ========
Earnings per common and common
equivalent share:
Basic $1.34 $0.95 $0.45
===== ===== =====
Diluted $1.28 $0.90 $0.44
===== ===== =====
Weighted average number of common
and common equivalent shares outstanding:
Basic 83,783 81,445 80,906
====== ====== ======
Diluted 87,945 85,956 83,425
====== ====== ======
See accompanying notes to consolidated financial statements.
FOREST LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
YEARS ENDED MARCH 31,
------------------------------
2000 1999 1998
-------- ------- -------
Net income $112,688 $77,173 $36,697
Other comprehensive loss, net of tax:
Foreign currency translation losses ( 6,770) ( 2,682) ( 4,060)
Unrealized gains (losses) on securities:
Unrealized holding gain (loss) arising
during the period (available-for-sale) ( 367) 37 163
-------- ------- -------
Other comprehensive loss ( 7,137) ( 2,645) ( 3,897)
-------- ------- -------
Comprehensive income $105,551 $74,528 $32,800
======== ======= =======
See accompanying notes to consolidated financial statements.
FOREST LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED MARCH 31, 2000, 1999 AND 1998
(In thousands)
Accumulated
Common stock Capital in other Treasury stock
----------------- excess of Retained comprehensive ------------------
Shares Amount par earnings loss Shares Amount
------ ------ ---------- -------- ------------- ------ ------
Balance, April 1, 1997 96,672 $ 9,668 $309,487 $518,464 ($ 633) 14,342 $210,587
Shares issued upon exercise of
stock options 1,382 137 14,054
Treasury stock acquired from
employees upon exercise of
stock options 16 360
Purchase of treasury stock 3,293 70,109
Warrants issued, net of expenses 3,500
Tax benefit related to stock
options exercised by employees 7,740
Other comprehensive loss ( 3,897)
Net income 36,697
------- ------- -------- -------- ------- ------ --------
Balance, March 31, 1998 98,054 9,805 334,781 555,161 ( 4,530) 17,651 281,056
Shares issued upon exercise of
stock options and warrants 2,800 280 33,727
Treasury stock acquired from
employees upon exercise of
stock options 32 1,426
Tax benefit related to stock
options exercised by employees 22,242
Other comprehensive loss ( 2,645)
Net income 77,173
------- ------- ------- ------- ------- ------ --------
Balance, March 31, 1999 100,854 10,085 390,750 632,334 ( 7,175) 17,683 282,482
Shares issued upon exercise of
stock options and warrants 1,510 151 20,237
Treasury stock acquired from
employees upon exercise of
stock options 20 1,092
Tax benefit related to stock
options exercised by employees 16,331
Other comprehensive loss ( 7,137)
Net income 112,688
------- ------- -------- -------- ------- ------ --------
Balance, March 31, 2000 102,364 $10,236 $427,318 $745,022 ($14,312) 17,703 $283,574
======= ======= ======== ======== ======= ====== ========
See accompanying notes to consolidated financial statements.
FOREST LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
YEARS ENDED MARCH 31,
------------------------------
2000 1999 1998
-------- -------- --------
Cash flows from operating activities:
Net income $112,688 $ 77,173 $ 36,697
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 8,231 7,309 6,660
Amortization 32,413 13,955 13,396
Gain on sale of assets of
closed facilities ( 564)
Deferred income tax
expense (benefit) ( 8,837) 4,834 ( 18,024)
Foreign currency translation gain ( 1,202) ( 1,560) ( 1,036)
Net change in operating assets
and liabilities:
Decrease (increase) in:
Accounts receivable, net ( 3,276) ( 15,830) ( 19,568)
Inventories ( 45,123) ( 49,957) 8,646
Refundable income taxes 1,090 ( 2,979) 20,204
Other current assets ( 2,183) 2,332 ( 86)
Increase (decrease) in:
Accounts payable 5,303 36,264 8,098
Accrued expenses 56,409 ( 32,884) 34,022
Income taxes payable 19,418 ( 3,309) 14,225
Increase in other assets ( 2,387) ( 5,783) ( 1,300)
-------- -------- --------
Net cash provided by
operating activities 172,544 29,565 101,370
-------- -------- --------
Cash flows from investing activities:
Purchase of property, plant and
equipment, net ( 35,322) ( 17,166) ( 6,899)
Proceeds from sale of assets of closed
facilities 1,875
Purchase of marketable securities:
Available-for-sale ( 15,997) ( 56,538) ( 75,010)
Redemption of marketable securities:
Available-for-sale 41,354 58,490 19,674
Held-to-maturity 2,207
Purchase of license agreements, product
rights and other intangible assets ( 100,231) ( 12,000) ( 1,352)
-------- -------- --------
Net cash used in investing
activities ( 110,196) ( 27,214) ( 59,505)
-------- -------- --------
See accompanying notes to consolidated financial statements.
FOREST LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
YEARS ENDED MARCH 31,
------------------------------
2000 1999 1998
-------- -------- --------
Cash flows from financing activities:
Net proceeds from common stock options
exercised by employees under stock
option plans 19,296 32,581 13,830
Tax benefit realized from the exercise
of stock options by employees 23,681 16,796 1,336
Purchase of treasury stock, net ( 70,109)
-------- -------- --------
Net cash provided by (used in)
financing activities 42,977 49,377 ( 54,943)
-------- -------- --------
Effect of exchange rate changes on cash ( 3,693) ( 413) ( 111)
-------- -------- --------
Increase (decrease) in cash and cash
equivalents 101,632 51,315 ( 13,189)
Cash and cash equivalents, beginning
of year 200,968 149,653 162,842
-------- -------- --------
Cash and cash equivalents, end of year $302,600 $200,968 $149,653
======== ======== ========
Supplemental disclosures of cash flow
information: (In thousands) 2000 1999 1998
------ ------- -------
Cash paid during the year for:
Income taxes $9,910 $18,340 $20,538
====== ======= =======
Supplemental schedule of noncash
financing activities:
Issuance of warrants in
connection with development
and marketing agreements $3,500
======
See accompanying notes to consolidated financial statements.
FOREST LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF CONSOLIDATION: The consolidated financial statements include the
accounts of Forest Laboratories, Inc. (the "Company") and its subsidiaries,
all of which are wholly owned. All significant intercompany accounts and
transactions have been eliminated.
FOREIGN CURRENCY TRANSLATION: An Irish subsidiary of the Company reports
its financial position and results of operations in the reporting currency
of the Company. The financial position and results of operations of the
Company's other foreign subsidiaries, which are in aggregate immaterial,
are determined using the respective local currency as the functional
currency.
CASH EQUIVALENTS: Cash equivalents consist of short-term, highly liquid
investments (primarily municipal bonds with interest rates that are re-set
monthly) which are readily convertible into cash at par value (cost).
INVENTORIES: Inventories are stated at the lower of cost or market, with
cost determined on the first-in, first-out basis.
MARKETABLE SECURITIES: Marketable securities are stated at fair market
value or historical cost in accordance with Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt
and Equity Securities," and consist of investments in municipal bonds
maturing through 2002 and a bond of the Commonwealth of Puerto Rico
maturing in 2002.
PROPERTY, PLANT AND EQUIPMENT AND DEPRECIATION: Property, plant and
equipment are stated at cost. Depreciation is provided over the estimated
useful lives of the assets primarily by the straight-line method.
INTANGIBLE ASSETS: The excess of cost of investment over the fair value of
net assets of subsidiaries at the time of acquisition is being amortized
using the straight-line method over 25 to 40 years. The costs of obtaining
license agreements, product rights and other intangible assets are being
amortized using the straight-line method over the estimated lives of the
assets, 4 to 40 years.
REVENUE RECOGNITION: Sales are recorded in the period the merchandise is
shipped. Provisions for estimated sales allowances, returns and losses are
accrued at the time revenues are recognized.
RESEARCH AND DEVELOPMENT: Expenditures for research and development are
charged to expense as incurred.
SAVINGS AND PROFIT SHARING PLAN: Substantially all non-bargaining unit
employees of the Company's domestic subsidiaries may participate in the
savings and profit sharing plan after becoming eligible (as defined). Profit
sharing contributions are primarily at the discretion of the Company. The
savings plan contributions include a matching contribution made by the
Company. Savings and profit sharing contributions amounted to approximately
$6,800,000, $6,300,000 and $5,600,000 for 2000, 1999 and 1998, respectively.
FOREST LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)
EARNINGS PER SHARE: Basic earnings per share includes no dilution and is
computed by dividing income available to common shareholders by the
weighted average number of common shares outstanding for the period.
Diluted earnings per share reflect, in periods in which they have a
dilutive effect, the effect of common shares issuable upon exercise of
stock options and warrants.
ACCUMULATED OTHER COMPREHENSIVE LOSS: Other comprehensive loss refers to
revenues, expenses, gains and losses that under generally accepted accounting
principles are excluded from net income as these amounts are recorded
directly as an adjustment to shareholders' equity. Accumulated other
comprehensive loss is comprised of the cumulative effects of foreign currency
translation and unrealized losses on securities, which amounted to
approximately $13,682,000 and $630,000 in fiscal 2000 and $6,912,000 and
$263,000 in fiscal 1999.
INCOME TAXES: The Company accounts for income taxes using the liability
method. Under the liability method, deferred income taxes are provided on the
differences in bases of assets and liabilities between financial reporting
and tax returns using enacted tax rates.
USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires the Company to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. The Company reviews all significant estimates
affecting the financial statements on a recurring basis and records the
effect of any adjustments when necessary.
LONG-LIVED ASSETS: Long-lived assets, such as goodwill, intangible assets,
property and equipment and certain sundry assets, are evaluated for
impairment when events or changes in circumstances indicate that the
carrying amount of the assets may not be recoverable through the estimated
undiscounted future cash flows from the use of these assets. When any such
impairment exists, the related assets will be written down to fair value.
STOCK-BASED COMPENSATION: The Company accounts for its stock option awards
under the intrinsic value based method of accounting prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." Under the intrinsic value based method, compensation cost is
the excess, if any, of the quoted market price of the stock at grant date
or other measurement date over the amount an employee must pay to acquire
the stock. The Company makes pro forma disclosures of net income and
earnings per share as if the fair value based method of accounting had been
applied as required by Statement of Financial Accounting Standards No. 123
("SFAS 123"), "Accounting for Stock-Based Compensation."
FAIR VALUE OF FINANCIAL INSTRUMENTS: The carrying amounts of cash, accounts
receivable, accounts payable, accrued expenses and income taxes payable are
reasonable estimates of their fair value because of the short maturity of
these items.
FOREST LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)
RECLASSIFICATIONS: Certain amounts as previously reported have been
reclassified to conform to current year classifications.
RECENT ACCOUNTING STANDARDS: In June 1998, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 133 ("SFAS 133"),
"Accounting for Derivative Instruments and Hedging Activities." SFAS 133 is
effective for the Company for transactions entered into after April 1, 2001.
SFAS 133 requires that all derivative instruments be recorded on the balance
sheet at fair value. Changes in the fair value of derivatives are recorded
each period in current earnings or other comprehensive income, depending on
whether a derivative is designated as part of the hedge transaction and the
type of hedge transaction. The ineffective portion of all hedges will be
recognized in earnings. Presently, the Company does not utilize any
derivative instruments or hedging activities.
2. EARNINGS PER SHARE:
A reconciliation of shares used in calculating basic and diluted earnings per
share follows:
(In thousands) 2000 1999 1998
------ ------ ------
Basic 83,783 81,445 80,906
Effect of assumed conversion
of employee stock options
and warrants 4,162 4,511 2,519
------ ------ ------
Diluted 87,945 85,956 83,425
====== ====== ======
Options and warrants to purchase approximately 31,500, 446,800 and 1,021,000
shares of common stock at exercise prices ranging from $24.09 to $66.75 per
share were outstanding during a portion of fiscal 2000, 1999 and 1998,
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.
3. ACQUISITIONS:
PRODUCT LICENSE: (i) On March 27, 2000, the Company entered into an
agreement with Merckle GmbH, for the development and U.S. marketing rights
of the novel drug ML3000 which is being investigated for its role
in the treatment of osteoarthritis. The cost incurred upon signing the
contract was included in research and development expenses in the fourth
quarter as the product has not yet entered final phase testing.
(ii) On March 27, 1998, the Company entered into an agreement with H.
Lundbeck A/S ("Lundbeck"), obtaining the U.S. marketing rights to certain
products which were in the early stages of development by Lundbeck. The
cost to the Company was $32,250,000, which was charged during fiscal 1998
to research and development expense. Royalties are payable to Lundbeck
from the future sales, if any, of the products.
FOREST LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. BUSINESS OPERATIONS:
The Company and its subsidiaries, which are located in the United States,
Ireland and the United Kingdom, manufacture and market ethical and other
pharmaceutical products. The Company operates in only one segment. Sales
are made primarily in the United States and European markets. The net sales
and long-lived assets for the years ended March 31, 2000, 1999 and 1998, are
from the Company's or one of its subsidiaries' country of origin, as follows:
(In thousands) 2000 1999 1998
--------------------- --------------------- ---------------------
Long-lived Long-lived Long-lived
Net sales assets Net sales assets Net sales assets
--------- ---------- --------- ---------- --------- ----------
United States $836,191 $365,206 $509,222 $276,113 $391,126 $272,692
Ireland 5,475 46,577 4,076 39,997 5,256 28,930
United Kingdom 31,156 4,045 32,968 4,191 30,704 5,667
-------- -------- -------- -------- -------- --------
$872,822 $415,828 $546,266 $320,301 $427,086 $307,289
======== ======== ======== ======== ======== ========
For the year ended March 31, 2000, McKesson Drug Company, Bergen Brunswig
Corporation, Cardinal Distributors, Inc. and Amerisource Corporation
accounted for 19%, 14%, 13% and 12%, respectively, of the Company's
net sales. For the years ended March 31, 1999 and 1998, McKesson Drug
Company, Bergen Brunswig Corporation and Cardinal Distributors, Inc.
accounted for 17%, 12% and 14%, and 13%, 12% and 11%, respectively, of
the Company's net sales.
Sales of Celexa, a selective serotonin reuptake inhibitor ("SSRI") for the
treatment of depression, launched in September 1998, accounted for 49% and 17%
of the Company's sales for the years ended March 31, 2000 and 1999,
respectively.
5. INVENTORIES:
Inventories consist of the following:
March 31, (In thousands) 2000 1999
-------- --------
Raw materials $ 35,976 $ 78,020
Work in process 12,766 2,913
Finished goods 129,056 51,742
-------- --------
$177,798 $132,675
======== ========
6. MARKETABLE SECURITIES
The composition of the investment portfolio at March 31 was (in thousands):
Gross Gross
unrealized unrealized Market
Cost gains losses value
-------- ---------- ---------- ----------
2000
- ----
Available-for-sale:
- ------------------
State and local obligations $51,268 ($630) $50,638
Held-to-maturity:
- ----------------
Foreign government obligations 2,000 $33 2,033
------- --- ---- -------
$53,268 $33 ($630) $52,671
======= === ==== =======
FOREST LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. MARKETABLE SECURITIES: (Continued)
Gross Gross
unrealized unrealized Market
Cost gains losses value
-------- ---------- ---------- ----------
1999
- ----
Available-for-sale:
- ------------------
State and local obligations $76,258 ($263) $75,995
Held-to-maturity:
- ----------------
Foreign government obligations 2,000 $101 2,101
------- ---- ---- -------
$78,258 $101 ($263) $78,096
======= ==== ==== =======
The contractual maturities of debt securities at March 31, 2000, regardless
of their balance sheet classification, consist of the following (in
thousands):
Amortized Fair
cost value
--------- -----
Available-for-sale:
- ------------------
Less than one year $35,603 $35,019
One to two years 15,665 15,619
------- -------
51,268 50,638
------- -------
Held-to-maturity:
- ----------------
Two to three years 2,000 2,033
------- -------
$53,268 $52,671
======= =======
The net unrealized holding losses at March 31, 2000, 1999 and 1998 of $630,
$263 and $300, respectively, are from available-for-sale securities and
included in Shareholders' equity: Accumulated other comprehensive loss.
7. OTHER ASSETS:
License agreements, product rights and other intangible assets consist of the
following:
(In thousands, except for estimated lives
which are stated in years)
Estimated
March 31, lives 2000 1999
- ------------------------------------------ --------- -------- --------
License agreements 10-40 $156,662 $155,162
Product rights 10-14 38,547 37,238
Buy-out of royalty agreements (refer to Note 12) 4-10 95,000
Trade names 20-40 34,190 34,190
Goodwill 25-40 29,412 29,412
Non-compete agreements 10-13 22,987 22,987
Customer lists 10 3,506 3,506
Other 10-40 1,679 2,227
-------- --------
381,983 284,722
Less accumulated amortization ( 119,307) ( 89,519)
-------- --------
$262,676 $195,203
======== ========
In the fourth quarter of fiscal 2000 the Company wrote off intangible assets
of $10,000,000 related to certain discontinued products.
FOREST LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. ACCRUED EXPENSES:
Accrued expenses consist of the following:
March 31, (In thousands) 2000 1999
------- -------
Employee compensation and other benefits $21,897 $15,776
Clinical research and development costs 22,229 8,528
Royalties 4,369 4,944
Co-promotion fee (refer to Note 12) 29,771
Other 16,257 8,866
------- -------
$94,523 $38,114
======= =======
9. COMMITMENTS:
LEASES: The Company leases manufacturing, office and warehouse facilities,
equipment and automobiles under operating leases expiring through 2010. Rent
expense approximated $9,797,000, $8,444,000 and $7,196,000 for fiscal years
ended 2000, 1999 and 1998, respectively. Aggregate minimum rentals under
noncancellable leases are as follows:
Year ending March 31, (In thousands)
2001 $13,583
2002 12,724
2003 10,958
2004 6,874
2005 6,330
Thereafter 31,550
-------
$82,019
=======
ROYALTY AGREEMENTS: The Company has royalty agreements on certain of its
licensed products. Royalties are paid based on a percentage of sales, as
defined. For fiscal years ended 2000, 1999 and 1998, royalties amounted to
$17,039,000, $16,240,000 and $15,850,000, respectively.
10. SHAREHOLDERS' EQUITY:
PREFERRED STOCK PURCHASE RIGHTS: On September 30, 1994, the Company's Board
of Directors declared a dividend of one preferred share purchase right (a
"Right") for each outstanding share of the Company's common stock, par value
$.10 per share. Each Right will entitle the holder to buy one one-hundredth
of a share of authorized Series A Junior Participating Preferred Stock, par
value $1.00 per share ("Series A Preferred Stock") at an exercise price of
$250 per Right, subject to adjustment. Prior to becoming exercisable, the
Rights are evidenced by the certificates representing the common stock and
may not be traded apart from the common stock. The Rights become
exercisable on the tenth day after public announcements that a person or
group has acquired, or obtained the right to acquire, 20% or more of the
Company's outstanding common stock, or an announcement of a tender offer
that would result in a beneficial ownership by a person or group of 20% or
more of the Company's common stock.
FOREST LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. SHAREHOLDERS EQUITY: (Continued)
If, after the Rights become exercisable, the Company is a party to certain
merger or business combination transactions, or transfers 50% or more of its
assets or earning power, or if an acquirer engages in certain self-dealing
transactions, each Right (except for those held by the acquirer) will
entitle its holder to buy a number of shares of the Company's Series A
Preferred Stock or, in certain circumstances, a number of shares of the
acquiring company's common stock, in either case having a value equal to two-
and-one-half times the exercise price of the Right. The Rights may be
redeemed by the Company at any time up to ten days after a person or group
acquires 20% or more of the Company's common stock at a redemption price of
$.001 per Right. The Rights will expire on September 30, 2004.
The Company has reserved 900,000 shares of Series A Preferred Stock for the
exercise of the Rights.
Stock options: The Company has various Employee Stock Option Plans whereby
options to purchase an aggregate of 17,000,000 shares of common stock have
been or remain to be issued to employees of the Company and its subsidiaries
at prices not less than the fair market value of the common stock at the date
of grant. Both incentive and non-qualified options may be issued under the
plans. The options are exercisable up to the tenth anniversary of the date
of issuance.
SFAS No. 123 requires the Company to provide pro forma information regarding
net income and earnings per share as if compensation cost for the Company's
stock option plans had been determined in accordance with the fair value of
each stock option at the grant date by using the Black-Scholes option-pricing
model with the following weighted average assumptions used for grants:
dividend yield of zero for all three years; expected volatility of 38.25%
in 2000, 39.26% in 1999 and 29.61% in 1998; risk-free interest rates of 6% in
fiscal 2000, 6% in fiscal 1999 and between 5.75% and 6.5% in 1998; and expected
lives of four to seven years for all three years.
Under the accounting provisions of SFAS No. 123, the Company's net income and
earnings per share would have been reduced to the pro forma amounts indicated
below:
(In thousands, except per share data)
2000 1999 1998
-------- ------- -------
Net income:
As reported $112,688 $77,173 $36,697
Pro forma 89,836 64,083 24,953
Net income per common share:
Basic:
As reported $1.34 $0.95 $0.45
Pro forma 1.07 0.79 0.30
Diluted:
As reported $1.28 $0.90 $0.44
Pro forma 1.02 0.75 0.30
FOREST LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. SHAREHOLDERS EQUITY: (Continued)
The following table summarizes information about stock options outstanding at
March 31, 2000:
Options outstanding Options exercisable
--------------------------------------------------------------- ---------------------------------
Number Weighted average Number
Range of outstanding remaining Weighted average exercisable Weighted average
exercise prices at 3/31/00 contractual life exercise price at 3/31/00 exercise price
- ---------------- ----------- ---------------- ---------------- ------------ ----------------
$12.13 to $20.00 4,535,424 2.3 $14.86 3,128,305 $13.49
20.01 to 40.00 3,098,738 4.4 25.54 1,827,388 22.94
40.01 to 66.75 2,057,765 7.5 51.37 266,205 48.37
---------- --- ------ --------- ------
9,691,927 4.1 $26.03 5,221,898 $18.58
Transactions under the stock option plans and individual non-qualified options
not under the plans are summarized as follows:
Weighted average
Shares exercise price
----------- -----------------
Shares under option at March 31, 1997
(at $4.25 to $24.09 per share) 11,295,514 $15.02
Granted (at $21.25 to $30.75 per share) 1,763,500 22.20
Exercised (at $4.25 to $23.31 per share) ( 1,382,342) 10.27
Cancelled ( 548,258) 16.37
----------
Shares under option at March 31, 1998
(at $4.95 to $30.75 per share) 11,128,414 16.66
Granted (at $33.69 to $48.35 per share) 1,201,685 42.24
Exercised (at $4.95 to $30.75 per share) ( 2,390,808) 14.57
Cancelled ( 343,871) 20.80
----------
Shares under option at March 31, 1999
(at $10.84 to $48.35 per share) 9,595,420 20.15
Granted (at $49.16 to $66.75 per share) 1,655,850 52.15
Exercised (at $10.84 to $48.34 per share) ( 1,331,178) 15.64
Cancelled ( 228,165) 29.17
----------
Shares under option at March 31, 2000
(at $12.13 to $66.75 per share) 9,691,927 $26.03
----------
Options exercisable at March 31:
1998 6,522,545 $14.70
1999 5,360,883 $15.96
2000 5,221,898 $18.58
Weighted average fair value
of options granted during:
1998 $8.86
1999 $20.66
2000 $28.54
At March 31, 2000, 1999 and 1998, 2,128,200, 3,571,910 and 422,494 shares,
respectively, were available for grant.
FOREST LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. SHAREHOLDERS' EQUITY: (Continued)
On July 1, 1997, in connection with the private investors group arrangement
(refer to Note 12), the Company issued five-year warrants to the investors
to purchase an aggregate of 1,000,000 shares of the Company's common stock
at $25.73 per share. As of March 31, 2000, no warrants remain outstanding.
In connection with the acquisition of product rights in fiscal 1995, the
Company issued 560,000 warrants, which expire on July 7, 2004, at an
exercise price of $22.86 per share which was equal to the then fair market
value of the Company's common stock. As of March 31, 2000, 183,823 warrants
remain outstanding.
11. CONTINGENCIES:
The Company is a defendant in actions filed in various federal district
courts alleging certain violations of the Federal anti-trust laws in the
marketing of pharmaceutical products. In each case, the actions were filed
against many pharmaceutical manufacturers and suppliers and allege price
discrimination and conspiracy to fix prices in the sale of pharmaceutical
products. The actions were brought by various pharmacies (both individually
and, with respect to certain claims, as a class action) and seek injunctive
relief and monetary damages. The Judicial Panel on Multi-District Litigation
has ordered these actions coordinated (and, with respect to those actions
brought as class actions, consolidated) in the Federal District Court for the
Northern District of Illinois (Chicago) under the caption "In re Brand Name
Prescription Drugs Antitrust Litigation."
On November 30, 1998, the defendants remaining in the consolidated federal
class action (which proceeded to trial beginning in September 1998),
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 and stated "the evidence of conspiracy is
meager, and the evidence as to individual defendants paltry or non-existent."
During the fiscal year ended March 31, 2000, the Court of Appeals for the
Seventh Circuit affirmed the granting of the directed verdict in the federal
class case in favor of the Company and the District Court granted the Company
summary judgement as to a remaining aspect of the case as to which the Court
of Appeals had directed further proceedings in the District Court. The
United States Supreme Court denied a motion for certiorari filed by the class
action plaintiffs, and the class action plaintiffs did not appeal the
decision by the District Court granting summary judgement to the Company.
Following the Seventh Circuit's affirmance of the directed verdict in favor
of the Company, the Company has secured the voluntary dismissal of the
conspiracy allegations contained in all of the federal cases brought by
individual plaintiffs who elected to "opt-out" of the federal class
action, which cases were included in the coordinated proceedings. The
Company, together with other manufacturers, remains a defendant in many of
the Federal opt-out cases included in the coordinated proceedings to the
extent of claims alleging price discrimination in violation of the Robinson-
Patman Act.
FOREST LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. CONTINGENCIES: (Continued)
While no discovery or other significant proceedings have been taken to date
in respect of such claims, there can be no assurance that the Company will
not be required to actively defend such claims or to pay substantial
amounts to dispose of such claims.
In addition, following the granting of a directed verdict in favor of the
defendants in the federal class action, the Company moved for an award of
sanctions from the attorneys for the class action plaintiffs in light of
certain misrepresentations made with respect to the Company by such attorneys
during the course of the class action. On April 29, 1999, the trial court
granted the Company's motion, awarding the Company approximately $2,100,000
in attorney's fees and expenses incurred in this action. The attorneys for
the class plaintiffs appealed this decision but subsequently reached a
settlement with the Company in which the Company fully recovered its costs
incurred in defending this action.
Similar actions alleging price discrimination and conspiracy claims under
state law are pending against many pharmaceutical manufacturers, including
the Company, in various state courts and the District of Columbia. Such
actions include actions purported to be brought on behalf of consumers, as
well as those brought by retail pharmacists. The Company has been dismissed,
or is in the process of obtaining dismissal, from all of such actions.
The Company is a defendant in an action pending in Federal District Court for
the Northern District of Illinois entitled G.D. Searle & Co. v. Forest
---------------------------
Laboratories, Inc. Plaintiff G.D. Searle asserts claims for federal and
- -----------------
common law trademark infringement in respect to rights Searle alleges as to
the name "Celebra" and arising from the marketing of Celexa. The action
seeks injunctive relief and unspecified monetary damages. During fiscal
2000, the Company's motion to dismiss this action on the pleadings was
dismissed by the trial court and discovery has commenced. The Company
believes this action is without merit.
The Company is not subject to any other pending legal proceedings, other than
ordinary routine claims incidental to its business.
12. DEVELOPMENT AND MARKETING AGREEMENTS:
On June 30, 1999 the Company exercised its purchase option to terminate a
royalty obligation to a private investor group on sales of Celexa 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
$38,387,000 and $21,613,000, respectively, 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 fiscal quarter ended September 30, 1999, the Company also agreed
to buy out a limited 1% trailing royalty for $10,000,000.
FOREST LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. DEVELOPMENT AND MARKETING AGREEMENTS: (Continued)
In lieu of higher royalty rates, the Company also issued five-year warrants
to the investors to purchase an aggregate of 1,000,000 shares of the
Company's common stock at $25.73 per share (refer to Note 10).
On March 27, 1998 the Company entered into an agreement with the Parke-Davis
division of 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 to
Warner-Lambert was based on the profits (as defined) earned on Celexa's
sales. Subsequent to year-end, as a result of the planned merger of
Warner-Lambert with a company that markets a competing SSRI, the co-
promotion agreement was terminated effective April 30, 2000. In connection
with the termination, the Company will pay $14,000,000 which will eliminate
any future participation by Warner-Lambert in the profits of Celexa. The
$14,000,000 will be expensed in the first quarter of fiscal 2001.
13. OTHER INCOME:
Other income consists of the following:
Year ended March 31, (In thousands) 2000 1999 1998
------- ------- -------
Interest and dividends $12,473 $ 9,898 $ 9,542
Other income, net 5,030 16,589 9,974
------- ------- -------
$17,503 $26,487 $19,516
======= ======= =======
The Company recorded income of $3,000,000, $12,000,000 and $7,694,000 in
fiscal years 2000, 1999 and 1998, respectively, from the settlement of its
arbitration with Pharmacia & Upjohn, Inc. with respect to the Company's
claimed option to negotiate for the rights to Detrol-R-. The income recognized
in fiscal 1998 was net of related expenses of $2,306,000.
FOREST LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. INCOME TAXES:
The Company and its mainland U.S. subsidiaries file a consolidated federal
income tax return.
Income before income tax expense includes income from foreign operations of
$67,827,000, $20,576,000 and $4,451,000 for the years ended March 31, 2000,
1999 and 1998, respectively.
The Company has a tax holiday in Ireland, which expires in 2010. The net
impact of the tax holidays in 2000, 1999 and 1998 was to increase net
income and net income per share (diluted) by approximately $13,118,000 and
$.15, $5,092,000 and $.06 and $2,343,000 and $.03, respectively.
The provision for income taxes consists of the following:
Year ended March 31, (In thousands) 2000 1999 1998
- ----------------------------------- ------- ------- --------
Current:
U.S. federal $19,566 $ 5,752 $28,455
State and local 4,087 3,959 4,225
Foreign 6,262 2,289 2,083
------- ------- -------
29,915 12,000 34,763
------- ------- -------
Deferred:
Domestic ( 8,949) 2,612 ( 18,351)
Foreign 112 2,222 327
------- ------- -------
( 8,837) 4,834 ( 18,024)
------- ------- -------
Charge in lieu of income taxes,
relating to the tax effect of
stock option tax deduction 23,681 16,796 1,336
------- ------- -------
$44,759 $33,630 $18,075
======= ======= =======
No provision has been made for income taxes on the undistributed earnings of
the Company's foreign subsidiaries of approximately $191,997,000 at March
31, 2000 as the Company intends to indefinitely reinvest such earnings.
The reasons for the difference between the provision for income taxes and
expected federal income taxes at statutory rates are as follows:
Year ended March 31, (In thousands) 2000 1999 1998
- ----------------------------------- ------- ------- -------
Expected federal income taxes $55,106 $38,781 $19,170
State and local income taxes,
less federal income tax benefit 2,511 3,178 2,740
Net benefit of tax-exempt earnings ( 3,076) ( 3,386) ( 2,316)
Tax effect of permanent differences
(primarily due to lower tax rates for
operations located in foreign
countries) ( 9,782) ( 2,931) ( 3,532)
Other ( 2,012) 2,013
------- ------- -------
$44,759 $33,630 $18,075
======= ======= =======
FOREST LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. INCOME TAXES: (Continued)
Net deferred income taxes consist of the following:
March 31, (In thousands) 2000 1999
------- -------
Inventory valuation $13,183 $ 9,926
Receivable reserves and other allowances 30,151 25,945
State and local net operating loss
carryforwards 4,052 3,910
Depreciation ( 2,661) ( 2,757)
Amortization 2,734 2,232
Tax credits and other carryforwards 264 255
Accrued liabilities 5,978 3,614
Expenses deferred for tax purposes 10,709 11,817
Employee stock option tax benefits 4,500 11,850
Other ( 1,769) ( 1,138)
------- -------
$67,141 $65,654
======= =======
15. QUARTERLY FINANCIAL DATA (UNAUDITED):
(In thousands, except per share data)
Diluted
earnings
Net sales Gross profit Net income per share
--------- ------------ ---------- ---------
2000
- ----
First quarter $178,793 $134,060 $25,053 $0.29
Second quarter 201,357 151,069 27,950 0.32
Third quarter 234,413 175,742 31,756 0.36
Fourth quarter 258,259 196,300 27,929 0.31
1999
- ----
First quarter $107,065 $ 80,150 $ 6,423 $0.08
Second quarter 127,395 95,005 10,308 0.12
Third quarter 137,462 103,322 21,518 0.25
Fourth quarter 174,344 131,312 38,924 0.45
FOREST LABORATORIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Financial Condition and Liquidity
- ---------------------------------
During fiscal 2000 net current assets increased by $61,742,000. Increases in
cash, accounts receivable, inventories and accrued expenses resulted primarily
from increases in sales of the Company's principal promoted products,
particularly Celexa-TM-. Celexa (citalopram HBr), the Company's selective
serotonin reuptake inhibitor ("SSRI") for the treatment of depression, was
launched in September 1998 and since that time has experienced rapid growth.
Inventory levels have increased to meet current demand and anticipated future
growth of Celexa. In addition to the Company's salesforce, Celexa has been
co-promoted by the Parke-Davis division of the Warner-Lambert Company since
its launch. Compensation to Warner-Lambert is included in selling, general and
administrative expense based on a share of the profits generated by Celexa
and any unpaid amounts are included in accrued expenses at March 31, 2000.
Subsequent to year-end, as a result of Warner-Lambert's pending merger with
Pfizer, marketer of a competing antidepressant product, the co-promotion
arrangement was terminated effective April 30, 2000. In connection with the
termination, the Company will pay $14,000,000 which will eliminate any future
participation by Warner-Lambert in the profits of Celexa. The increase in
license agreements, product rights and other intangible assets was the result
of payments made to terminate Celexa royalty obligations. In fiscal 1998, the
Company entered into an agreement pursuant to which a private investor group
reimbursed the Company for certain salesforce, marketing and research and
development expenses in connection with the launch of Celexa. In fiscal years
1999 and 1998, the Company received reimbursements totaling $60,000,000. The
private investor group was to receive royalties ranging from 25% to 5% on the
sales of Celexa for a period of ten years beginning in November 1999 but,
prior to that date, the Company exercised its option to terminate the royalty
obligation for a predetermined one-time payment of $85,000,000. In separate
negotiations, the Company also agreed to buy out a limited 1% trailing royalty
for $10,000,000. The Company utilized a portion of its cash and marketable
securities to conclude these transactions during the second quarter with a
resulting increase in intangible assets.
Property, plant and equipment increased principally from the expansion of the
Company's worldwide manufacturing and distribution facilities in order to meet
projected demands for Celexa and future products and expansions on Long Island,
New York and Jersey City, New Jersey to facilitate increased activity for
research and development projects. The expansions will continue through 2002
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.
FOREST LABORATORIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
- ---------------------
Net sales in fiscal 2000 increased $326,556,000 or 60% as compared to fiscal
1999. Celexa had the biggest impact on the sales increase. During fiscal 2000,
sales of Celexa were $427,342,000. Celexa was launched in September 1998 and
achieved sales of $91,910,000 for the period ended March 1999. Celexa, the
Company's largest product, has continued to steadily gain market share, ending
the fiscal year with an 11.9% share of new prescriptions in the SSRI market.
In October 1999, the Company launched Infasurf-R-, a lung surfactant for the
prevention and treatment of respiratory distress syndrome in premature infants.
Sales of Infasurf were $4,794,000. Tiazac-R-, which continues to experience
volume growth, increased $28,495,000 or 22% in fiscal 2000. As a result of a
virulent flu season, Flumadine-R- sales increased $3,931,000 or 26% from fiscal
1999. Sales of Aerobid-R-, which continues to experience competition in the
inhaled steroid market, declined $28,693,000 or 31% in fiscal 2000 as compared
to fiscal 1999. Sales of the Company's other products decreased $17,403,000 or
8% from fiscal 1999 due primarily to volume declines. Net sales for fiscal
1999 increased $119,180,000 or 28% from fiscal 1998. Sales of Celexa, which
was launched during the September quarter, amounted to $91,910,000. Sales of
Tiazac were $45,521,000 or 54% higher than the prior year, due principally to
increased volume. Sales of Aerobid declined $12,429,000 or 12% primarily as a
result of continuing competition in the inhaled steroid market. During the
first quarter of fiscal 1999, the Company discontinued shipments of
propranolol, one of its generic products, because of manufacturing
difficulties. During fiscal 1998,sales of propranolol amounted to $16,704,000.
Sales of the Company's other products were $10,882,000 higher in fiscal 1999
as compared to fiscal 1998 primarily due to price increases.
Contract revenue includes the Company's share of profits and royalties from
sales of Climara-R-, a transdermal estrogen product, which amounted to
$8,976,000 in fiscal 2000, $12,848,000 in fiscal 1999 and $6,489,000 in
fiscal 1998. In fiscal years 1999 and 1998, contract revenue also includes
$38,387,000 and $21,613,000, respectively, from the Company's arrangement
with a private investor group to reimburse the Company for certain expenses
incurred in connection with Celexa (refer to Note 12 of the consolidated
financial statements).
FOREST LABORATORIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Other income for fiscal years 2000, 1999 and 1998 includes $3,000,000,
$12,000,000 and $7,694,000 net of related expenses, respectively, from the
settlement with Pharmacia & Upjohn, Inc. with respect to the Company's
claimed option to negotiate for the rights to Detrol-R-. The balance of other
income was principally interest earned on invested funds for each of the years
presented.
Cost of sales as a percentage of sales was 25% in fiscal 2000, unchanged from
fiscal 1999, and 24% in fiscal 1998. The increase during fiscal 1999 from the
prior fiscal year was due principally to a change in product mix.
Selling, general and administrative expenses increased $130,844,000 during
fiscal 2000. The increase was principally due to marketing, promotional and
selling activities related to Celexa, including co-promotion fees payable to
the Parke-Davis division of the Warner-Lambert Company. No co-promotion fees
were earned in fiscal 1999. In addition, as a result of the anticipated merger
between the Warner-Lambert Company and Pfizer Inc., the Company expanded its
salesforce in order to take over the full promotion of Celexa after the
termination of the co-promotion agreement. The expansion, from approximately
850 to 1,425 representatives and managers, was begun in the third quarter of
fiscal 2000 and was completed in the first quarter of fiscal 2001.
During the third and fourth quarters, the Company incurred both the costs of
the increased salesforce and the co-promotion fees to Warner-Lambert. The
Company believes that the elimination of payments to Warner-Lambert in the
future will more than offset the costs of the salesforce expansion. The
increase in selling, general and administrative expenses in fiscal 1999 as
compared to fiscal 1998, was principally due to the costs associated with the
launch of Celexa. This included the full year's impact of the expansion of
the Company's U.S. salesforce by 200 representatives, which was begun in
fiscal 1998 in anticipation of Celexa's launch. A portion of these expenses,
together with certain research and development expenses related to Celexa,
for both fiscal years 1999 and 1998, were reimbursed by the private investor
group, as discussed above.
FOREST LABORATORIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The increase in research and development expense during fiscal 2000 as
Compared to fiscal 1999, was due primarily 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 in various stages of development. Research and development expense
decreased in fiscal 1999 as compared to fiscal 1998, because fiscal 1998
included a charge of $32,250,000 resulting from the Company's license of
certain products from H. Lundbeck A/S, which were in early stages of
development. (Refer to Note 3 of the consolidated financial statements.)
Income tax expense as a percentage of income before taxes was 28%, 30% and 33%
in fiscal years 2000, 1999 and 1998, respectively. 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. Celexa
is licensed and manufactured in Ireland and a portion of its profits are
subject to a favorable tax rate.
The Company expects to continue its profitability into fiscal 2001 with
continued growth in its 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 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, 2000.
FOREST LABORATORIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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.
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
- ---------------------------------------------------
Forest Laboratories, Inc.
New York, New York
We hereby consent to the incorporation by reference in the
Registration Statements of Forest Laboratories, Inc. on Form
S-8, filed with the Securities and Exchange Commission on
October 28, 1994 and October 18, 1998 and Form S-3 filed
with the Securities and Exchange Commission on November 30,
1993, respectively, of our reports dated May 1, 2000
on the consolidated financial statements and schedule of
Forest Laboratories, Inc. appearing in the Annual Report on
Form 10-K as of and for the year ended March 31, 2000.
/s/BDO Seidman, LLP
- -------------------------
BDO Seidman, LLP
New York, New York
June 29, 2000