FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________
(Mark One)
-----
/ X / QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- ----- SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1997
-----
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- ----- SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ______________________________
Commission File No. 1-5438
FOREST LABORATORIES, INC.
- -------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 11-1798614
- ------------------------------- -----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
909 Third Avenue
- ----------------
New York, New York 10022-4731
- ------------------- ---------------
(address of principal (Zip Code)
executive office)
Registrant's telephone number, including area code 212-421-7850
---------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Number of shares outstanding of Registrant's Common Stock as of
November 13, 1997: 40,303,072.
PAGE
Part I - Financial Information
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FOREST LABORATORIES, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
September 30, 1997
(In thousands) (Unaudited) March 31, 1997
------------------- --------------
ASSETS
- ------
Current assets:
Cash (including cash equivalent investments
of $158,188 in September and $157,897
in March) $165,509 $162,842
Marketable securities 14,109 9,401
Accounts receivable, less allowances of
$15,941 in September and $9,594 in March 37,225 21,896
Inventories 82,945 92,539
Deferred income taxes 33,631 34,896
Refundable income taxes 9,432 29,636
Other current assets 8,470 8,420
-------- --------
Total current assets 351,321 359,630
-------- --------
Marketable securities 15,161 17,417
-------- --------
Property, plant and equipment 113,863 115,580
Less: accumulated depreciation 31,970 32,256
-------- --------
81,893 83,324
Other assets:
Excess of cost of investment in subsidiaries
over net assets acquired, less accumulated
amortization of $7,844 in September and
$7,491 in March 17,115 17,468
License agreements, product rights
and other intangible assets, less accumulated
amortization of $69,808 in September and
$63,419 in March 204,445 205,785
Deferred income taxes 6,551 6,055
Other 11,363 10,602
-------- --------
Total other assets 239,474 239,910
-------- --------
TOTAL ASSETS $687,849 $700,281
======== ========
See notes to condensed consolidated financial statements.
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FOREST LABORATORIES, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
September 30, 1997
(In thousands, except for par values) (Unaudited) March 31, 1997
------------------ --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable $ 22,154 $ 22,311
Accrued expenses 39,626 36,976
Income taxes payable 19,654 14,257
-------- --------
Total current liabilities 81,434 73,544
-------- --------
Deferred income taxes 397 338
-------- --------
Shareholders' equity:
Series A junior participating preferred
stock, $1.00 par; authorized 1,000 shares;
no shares issued or outstanding
Common stock, $.10 par; shares authorized
250,000; issued 48,441 shares in September
and 48,336 shares in March 4,844 4,834
Capital in excess of par 321,049 314,321
Retained earnings 534,639 518,464
Other ( 2,829) ( 633)
-------- --------
857,703 836,986
Less common stock in treasury,
at cost (8,171 shares in September
and 7,171 shares in March) 251,685 210,587
-------- --------
Total shareholders' equity 606,018 626,399
-------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $687,849 $700,281
======== ========
See notes to condensed consolidated financial statements
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FOREST LABORATORIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(Unaudited)
(In thousands, except Three Months Ended Six Months Ended
per share amounts) September 30, September 30,
------------------ ------------------
1997 1996 1997 1996
------- ------- ------- -------
Net sales $104,461 $90,182 $190,827 $180,498
Contract revenue (expense) 4,080 ( 1,065) 4,953 ( 1,663)
Other income (Note 2) 2,842 3,074 5,930 25,106
-------- ------- -------- --------
111,383 92,191 201,710 203,941
-------- ------- -------- --------
Costs and expenses:
Cost of goods sold 25,048 22,683 47,352 42,488
Selling, general and
administrative 53,063 53,206 109,767 106,356
Research and development 10,114 8,180 20,449 15,426
-------- ------- -------- --------
88,225 84,069 177,568 164,270
-------- ------- -------- --------
Income before income taxes 23,158 8,122 24,142 39,671
Income tax expense 7,642 2,549 7,967 12,232
-------- ------- ------- --------
Net income $ 15,516 $ 5,573 $ 16,175 $ 27,439
======== ======= ======== ========
Net income per common
and common equivalent share $.37 $.13 $.39 $.61
==== ==== ==== ====
Weighted average number of
common and common equivalent
shares outstanding 41,821 44,401 41,871 45,238
====== ====== ====== ======
See notes to condensed consolidated financial statements
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FOREST LABORATORIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended
(In thousands) September 30,
--------------------------
1997 1996
---------- ----------
Cash flows from operating activities:
Net income $16,175 $ 27,439
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 3,298 2,854
Amortization 6,741 6,583
Gain on sale of investment
in unconsolidated affiliate ( 26,399)
Gain on sale of assets of closed facilities ( 564)
Deferred income tax expense (benefit) 828 ( 1,730)
Foreign currency transactions (gain) loss ( 561) 143
Net change in operating assets and liabilities:
Decrease (increase) in:
Accounts receivable, net ( 15,329) 101,682
Inventories 8,418 ( 35,252)
Refundable income taxes 20,204
Other current assets ( 50) 4,347
Increase (decrease) in:
Accounts payable ( 157) 9,266
Accrued expenses 2,650 ( 14,559)
Income taxes payable 5,397 ( 16,590)
Increase in other assets ( 761) ( 275)
------- --------
Net cash provided by operating
activities 46,289 57,509
------- -------
Cash flows from investing activities:
Purchase of property, plant and equipment, net ( 3,148) ( 5,010)
Proceeds from sale of assets of closed
facilities 1,875
Proceeds from sale of investment in
unconsolidated affiliate 102,301
Purchase of marketable securities
Available-for-sale ( 11,497) ( 27,785)
Redemption of marketable securities
Available-for-sale 9,045 50,315
Held-to-maturity 2,000
Purchase of license agreements, product rights
and intangible assets, net ( 2,075) ( 1,000)
------- --------
Net cash provided by (used in) investing
activities ( 5,800) 120,821
------- --------
- Continued -
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FOREST LABORATORIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
- Continued -
Six Months Ended
(In thousands) September 30,
-----------------------
1997 1996
-------- --------
Cash flows from financing activities:
Net proceeds from common stock options exercised
by employees under stock option plans $ 2,577 $ 3,132
Tax benefit realized from the exercise of stock
options by employees 400
Purchase of treasury stock, net ( 40,838) ( 109,748)
-------- --------
Net cash used in financing activities ( 37,861) ( 106,616)
-------- --------
Effect of exchange rate changes on cash 39 1,339
-------- --------
Increase in cash and cash equivalents 2,667 73,053
Cash and cash equivalents, beginning of period 162,842 83,543
-------- --------
Cash and cash equivalents, end of period $165,509 $156,596
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Income taxes $525 $30,552
Issuance of warrants for the purchase of
license agreements (Note 3) $3,500
See notes to condensed consolidated financial statements.
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PAGE
FOREST LABORATORIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
---------------------
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions
to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements.
In the opinion of Management, all adjustments (consisting of only
normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the six month
period ended September 30, 1997 are not necessarily indicative of the
results that may be expected for the year ending March 31, 1998. For
further information refer to the consolidated financial statements and
footnotes thereto incorporated by reference in the Company's Annual
Report on Form 10-K for the year ended March 31, 1997.
Certain amounts as previously reported have been reclassified to
conform to current quarter classifications.
2. Other Income
------------
During the June 1996 quarter the Company reported a net non-recurring
gain of $19,149,000 or $12,687,000 ($.27 per share) after taxes. The
gain results from the sale of Forest's approximate 21% equity holding
in Biovail Corporation International which resulted in a gain of
$26,399,000 or $17,019,000 ($.36 per share) after taxes partially
offset by non-recurring charges of $7,250,000 or $4,332,000 ($.09 per
share) after tax for expenses relating to the closing of certain of
the Company's facilities and for a reserve for the estimated cost of
settlement of certain litigations.
3. Development and Marketing Agreement
-----------------------------------
On July 1, 1997, the Company completed financial arrangements to
substantially increase its program for the launch, marketing and
clinical development of Citalopram, the Company's selective serotonin
reuptake inhibitor for depression presently pending at the FDA. The
Company has arranged for a private investor group to reimburse Forest
for up to $60,000,000 of expenses, over an approximate two-year
period, in connection with the Citalopram development and marketing,
including the addition of approximately 200 sales personnel to its
existing 650 person salesforce. In exchange, the investors will
receive royalties on Citalopram's sales commencing fifteen months
after FDA approval at varying rates from twenty-five percent to five
percent, depending on sales levels. The Company has an option to buy
out all but a limited one percent royalty for $85,000,000. The
investor group bears all of the financial risks of any amounts so
funded. The funded amounts are being recorded as contract revenue and
are recorded as earned.
In lieu of higher royalty rates, the Company has also issued
five-year warrants to the investors to purchase an aggregate of
500,000 shares of the Company's common stock at $51.45 per share.
The estimated fair value of the warrants ($3,500,000) is included
in License agreements, product rights and other intangible assets.
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FOREST LABORATORIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
4. New Accounting Standards Not Yet Adopted
----------------------------------------
In June 1997, the Financial Accounting Standards Board issued two
new disclosure standards. Results of operations and financial
position will be unaffected by implementation of these new
standards.
Statement of Financial Accounting Standards No. 130, ("SFAS NO.
130") "REPORTING COMPREHENSIVE INCOME", established standards for
reporting and display of comprehensive income, its components and
accumulated balances. Comprehensive income is defined to
include all changes in equity except those resulting from investments
by owners and distributions to owners. Among other disclosures,
SFAS NO. 130 requires that all items that are required to be
recognized under current accounting standards as components of
comprehensive income be reported in a financial statement that
is displayed with the same prominence as other financial
statements. SFAS NO. 131, ("SFAS NO. 131") "DISCLOSURES ABOUT
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION", which supersedes
SFAS NO. 14, "FINANCIAL REPORTING FOR SEGMENTS OF A BUSINESS
ENTERPRISE", establishes standards for the way that public enterprises
report information about operating segments in annual financial
statements and requires reporting of selected information about
operating segments in interim financial statements issued to the
public. It also establishes standards for disclosures regarding
products and services, geographic areas and major customers.
SFAS No. 131 defines operating segments as components of an
enterprise about which separate financial information is available
that is evaluated regularly by Management in deciding how to
allocate resources and in assessing performance.
Both of these new standards are effective for financial statements
for periods beginning after December 15, 1997 and require comparative
information for earlier years to be restated. The adoption of these
statements is not expected to have a material effect on the
consolidated financial statements.
In March 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128,
("SFAS NO. 128"), "EARNINGS PER SHARE". SFAS No. 128
specifies the computation, presentation and disclosure
requirements for earnings per share. SFAS No. 128 is effective
for periods ending after December 15, 1997. The adoption of this
statement is not expected to have a material effect on the
consolidated financial statements.
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FOREST LABORATORIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FINANCIAL CONDITION AND LIQUIDITY
- ---------------------------------
Net current assets decreased by $16,199,000 from March 31, 1997. Cash generated
from ongoing operations and the collection, during the first quarter, of
$19,850,000 of refundable U.S. Federal income taxes was utilized to purchase an
additional 994,000 shares of the Company's common stock at a cost of
$40,837,000 and for normal operating activities. At September 30, 1997, the
Company had repurchased 5,508,000 of the 6,500,000 shares authorized to
date at a cost of $210,231,000. The reduction in inventory levels reflects
sales returning to more normal levels (refer to Results of Operations below)
somewhat offset by a buildup of MONUROL-TM- inventory, the Company's unique
single-dose antibiotic for the treatment of uncomplicated urinary tract
infections, recently launched. The increase in accounts receivable reflects
sales returning to more normal levels from the prior year's last two quarters'
levels which were adversely affected by high trade inventories. Management
believes that current cash levels, coupled with funds to be generated by ongoing
operations, will continue to provide adequate liquidity to facilitate potential
acquisitions of products, capital investments and the share repurchase program.
RESULTS OF OPERATIONS
- ---------------------
In December 1996, the Company announced that it had decided to eliminate trade
incentives for all of its branded products in order to reduce high trade
inventory levels, principally of Aerobid-R- and thus improve profit margins in
future periods. The result of this policy change was that distributors deferred
purchases of products until such time as they had reduced their inventories to
minimal levels, resulting in lower sales. Lower sales resulting from this
policy change were principally responsible for the losses reported during the
last two quarters of the 1997 fiscal year and the modest earnings reported in
the first quarter of the current fiscal year. During the current quarter, sales
were not affected by the destocking of wholesalers' inventories. The Company
believes that trade inventories are down to normal levels and that sales will
now more closely reflect prescription demand for our products.
Net sales for the three months ended September 30, 1997 increased $14,279,000 as
compared to the three-month period ended September 30, 1996. Of significance was
the contribution realized from higher average selling prices of the Company's
branded products, which resulted from the Company's decision to eliminate trade
incentives as discussed above. During the quarter, sales of Tiazac-R-
(launched February 1996) and MONUROL (launched May 1997) accounted for
$13,815,000 of the increase principally all of which was due to volume.
Sales of the Company's older unpromoted product lines increased $3,913,000
resulting from $5,881,000 in higher realized average selling prices, offset by
a net volume decline of $1,968,000. Continuing competition for Aerobid and the
Company's generic products accounted for $7,322,000 of the change, though higher
realized averaged selling prices for Aerobid ($3,873,000) somewhat offset the
declines. The Company expects that sales volume for its principal promoted
products, overall, will continue to improve in the coming quarters despite
heightened competition in the inhaled steroid market for Aerobid. The Company
believes that there may be further declines in the Company's generic business
as a result of continuing competition.
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FOREST LABORATORIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Contd.)
Net sales for the six months ended September 30, 1997 increased $10,329,000 as
compared to the six-month period ended September 30, 1996. During the period,
sales of Tiazac and MONUROL accounted for $29,583,000 of the increase of which
$30,758,000 was due to volume offset by price decreases amounting to
$1,175,000. Sales of the Company's older unpromoted products increased
$8,157,000 resulting from $9,037,000 in higher realized average selling prices,
somewhat offset by a net volume decline of $880,000. The inventory destocking
and continuing competition for Aerobid, and the increased competition for the
Company's generic products accounted for a reduction in sales of $32,263,000,
although higher realized averaged selling prices for Aerobid ($4,852,000)
somewhat offset the declines.
Contract revenue (expense) was higher than in the prior periods presented due to
co-promotion income exceeding co-promotion expenses on Climara-R- sales. In
addition, the current quarter's amount includes $3,300,000 from the Company's
arrangement with a private investor group to reimburse the Company for up to
$60,000,000 of expenses, over an approximate two year period, in connection
with Citalopram development and marketing, including the addition of
approximately 200 sales personnel (Note 3).
Other income for each of the periods presented was lower from lower interest
income, which resulted from utilizing funds for the share repurchase program,
partially offset by a gain on the sale of a portion of the assets of one of the
Company's Puerto Rican subsidiaries, which was closed during the first quarter
of the current fiscal year. Other income for the prior years' six month period
included a net non-recurring gain of $19,149,000 (Note 2).
Cost of sales as a percentage of sales decreased to 24% in the second quarter
of fiscal 1998 from 25% in the similar period of fiscal 1997. The decrease
reflects the effects of eliminating trade incentives on all of the Company's
branded products, as discussed above, thus improving profit margins. On a
year-to-date comparative basis, cost of sales as a percentage of sales was
approximately 1% higher than the similar prior period. Lower sales
of high margin branded products in the first fiscal quarter due to the
wholesaler destocking, together with lower prices received on generic products,
more than offset the benefit of higher average selling prices attained during
the current quarter.
Selling, general and administrative expenses were $143,000 lower during the
three-month period but $3,411,000 higher during the six-month period ended
September 30, 1997 than those similar periods of fiscal 1997. The increase for
the six-month period was principally due to an increase in the Company's
provision for uncollectible accounts receivable, continued growth of the
Company's salesforce efforts and costs associated with the launch of MONUROL
and forthcoming launch of Citalopram.
Research and development expenses increased $1,934,000 and $5,023,000,
respectively, during the three and six month periods ended September 30, 1997
due principally from costs associated with conducting clinical trials in order
to obtain approval for new products and from staff increases and associated
costs required to support an increased number of products under development and
in various stages of submission. During the periods, particular emphasis was
placed on clinical studies and new formulations for Aerobid and on
clinical studies for Citalopram, a selective serotonin reuptake inhibitor used
to treat depression, for which an NDA was filed with the FDA during the first
quarter of the current fiscal year.
-10-
FOREST LABORATORIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Contd.)
Income taxes as a percentage of income before taxes was 33% for the current
quarter and six month periods versus 31% in the similar periods last year due
principally to a decrease in the proportion of the Company's operating profit
derived from fully taxable operations as compared to tax exempt operations,
tax-free interest income and tax credits.
The Company expects to continue its profitability in the remainder of fiscal
1998 as a result of sales returning to normal levels following the reduction of
trade inventories. The continuing decline in generic prices and weakness in
Aerobid sales, due to new competition, should be offset by increases in the
sales of recently launched and growing products such as Cervidil-TM-, Tiazac
and MONUROL.
Inflation has not had a material effect on the Company's operations for the
periods presented.
FORWARD LOOKING STATEMENTS Except for the historical information contained
- --------------------------
herein, the Management Discussion and other portions of this Form 10-Q contain
forward looking statements that involve a number 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, 1997.
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Part II - OTHER INFORMATION
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Item 1. 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 Judical
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 April 4, 1996, motions for summary
judgment filed by the manufacturer defendants (including the Company)
with respect to conspiracy claims alleged in those actions were
denied by the Court. Certain manufacturer defendants (but not the
Company) reached a settlement of the federal class action which
received court approval in June 1996, pursuant to which they agreed to
pay an aggregate of approximately $350 million and make certain
commitments with regard to pricing practices. A tentative trial date of
September 1998 has been set for the federal retailer class action.
Similar actions alleging price discrimination and conspiracy claims
under state law are pending against many pharmaceutical manufacturers,
including the Company, in 15 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.
A settlement agreement has been entered into on behalf of all
defendants in actions pending in Minnesota and Wisconsin on behalf of
retailers in those states. Forest's share of the combined settlement
is not material to Forest's results of operations or financial
condition.
While the Company believes the pending actions are without merit, there
can be no assurance that these cases will not result in the payment of
damages or the entering into of injunctive relief which could have an
adverse effect upon the Company's marketing or pricing policies.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The registrant held its annual meeting of stockholders on
August 11, 1997.
(b) N/A
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Part II - Other Information (Contd.)
- ---------------------------
(c) At the annual meeting, holders of the registrant's Common Stock
voted for the election of five members of the registrant's Board
of Directors to serve until the next annual meeting and until
their successors are duly elected and qualified. In addition,
holders of the registrant's Common Stock voted for the
radification of BDO Seidman, LLP to serve as the registrant's
independent certified public accountants for the fiscal year
ending March 31, 1998.
At the meeting, the following votes for and against, as well as
the number of abstentions and broker non-votes were recorded for
each matter as set forth below:
Withhold Broker
Matter For Against Abstain Authority Non-Votes
Election of Directors:
Howard Solomon 35,402,121 555,732
William J. Candee III 35,405,121 553,041
Dan L. Goldwasser 35,410,162 548,000
George S. Cohan 35,383,125 575,037
Joseph M. Schor 35,407,625 550,537
Ratification of
Independent Public
Accountants: 35,875,854 37,137 45,171 -0-
Item 6. Exhibits and Reports on Form 8-K
(b) Reports on Form 8-K. None
Exhibit 27. Financial Data Schedule
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PAGE
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 13, 1997
Forest Laboratories, Inc.
-------------------------
(Registrant)
/s/ Howard Solomon
-------------------------
Howard Solomon
President and Chief
Executive Officer
/s/ Kenneth E. Goodman
--------------------------
Kenneth E. Goodman
Vice President - Finance
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