FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________
(Mark One)
----
/ X / QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
---- SECURITIES EXCHANGE ACT OF 1934
For the Period Ended December 31, 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.
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(Exact name of registrant as specified in its charter)
Delaware 11-1798614
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
909 Third Avenue
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New York, New York 10022-4731
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(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
February 13, 1998: 40,164,121.
PAGE
Part I - Financial Information
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FOREST LABORATORIES, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
December 31, 1997
(In thousands) (Unaudited) March 31, 1997
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ASSETS
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Current assets:
Cash (including cash equivalent investments
of $156,988 in December and $157,897 in
March) $159,472 $162,842
Marketable securities 11,857 9,401
Accounts receivable, less allowance of
$12,255 in December and $9,594 in March 42,813 21,896
Inventories 82,756 92,539
Deferred income taxes 33,193 34,896
Refundable income taxes 9,432 29,636
Other current assets 9,266 8,420
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Total current assets 348,789 359,630
-------- --------
Marketable securities 22,832 17,417
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Property, plant and equipment 115,414 115,580
Less: accumulated depreciation 33,530 32,256
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81,884 83,324
-------- --------
Other assets:
Excess of cost of investment in subsidiaries
over net assets acquired, less accumulated
amortization of $7,960 in December and
$7,491 in March 16,999 17,468
License agreements, product rights
and other intangible assets, less accumulated
amortization of $72,999 in December and
$63,419 in March 200,448 205,785
Deferred income taxes 6,378 6,055
Other 9,688 10,602
-------- --------
Total other assets 233,513 239,910
-------- --------
TOTAL ASSETS $687,018 $700,281
======== ========
See notes to condensed consolidated financial statements.
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FOREST LABORATORIES, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
December 31, 1997
(In thousands, except for par values) (Unaudited) March 31, 1997
----------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
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Current liabilities:
Accounts payable $ 27,063 $ 22,311
Accrued expenses 39,623 36,976
Income taxes payable 20,059 14,257
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Total current liabilities 86,745 73,544
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Deferred income taxes 331 338
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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 48,556 shares in
December and 48,336 shares in March 4,856 4,834
Capital in excess of par 325,050 314,321
Retained earnings 554,123 518,464
Other ( 3,130) ( 633)
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880,899 836,986
Less common stock in treasury,
at cost (8,824 shares in December and
7,171 shares in March) 280,957 210,587
-------- --------
Total shareholders' equity 599,942 626,399
-------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $687,018 $700,281
======== ========
See notes to condensed consolidated financial statements.
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FOREST LABORATORIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
(In thousands, except Three Months Ended Nine Months Ended
per share amounts) December 31, December 31,
------------------ -----------------
1997 1996 1997 1996
------- ------- ------- -------
Net sales $115,942 $40,604 $306,769 $221,102
Contract revenue (expense) 8,530 ( 241) 13,483 ( 1,904)
Other income 5,600 2,299 11,530 27,405
-------- ------- -------- --------
130,072 42,662 331,782 246,603
-------- ------- -------- --------
Costs and expenses:
Cost of goods sold 27,716 20,227 75,068 62,715
Selling, general and
administrative 60,097 60,607 169,864 166,963
Research and development 13,178 11,689 33,627 27,115
-------- ------- -------- --------
100,991 92,523 278,559 256,793
-------- ------- -------- --------
Income (loss) before income
taxes 29,081 ( 49,861) 53,223 ( 10,190)
Income taxes (benefit) 9,597 ( 17,548) 17,564 ( 5,316)
-------- ------- -------- --------
Net income (loss) $ 19,484 ($32,313) $ 35,659 ($ 4,874)
======== ======= ======== ========
Net income (loss) per share:
Basic $.49 ($.77) $.88 ($.11)
==== ==== ==== ====
Diluted $.47 ($.77) $.86 ($.11)
==== ==== ==== ====
Weighted average number of
shares outstanding:
Basic 40,085 42,029 40,572 43,609
====== ====== ====== ======
Diluted 41,286 42,029 41,667 43,609
====== ====== ====== ======
See notes to condensed consolidated financial statements.
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FOREST LABORATORIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
(In thousands) December 31,
--------------------
1997 1996
------- -------
Cash flows from operating activities:
Net income (loss) $ 35,659 ($ 4,874)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation 4,974 4,320
Amortization 10,049 9,864
Gain on sale of investment
in unconsolidated affiliate ( 26,399)
Gain on sale of assets of closed facilities ( 564)
Deferred income tax expense (benefit) 1,373 ( 1,981)
Foreign currency transactions (gain) loss ( 943) 114
Net change in operating assets and
liabilities:
Decrease (increase) in:
Accounts receivable, net ( 20,917) 163,508
Inventories 8,608 ( 34,983)
Refundable income taxes 20,204
Other current assets ( 846) ( 22,174)
Increase (decrease) in:
Accounts payable 4,752 8,372
Accrued expenses 2,647 ( 15,001)
Income taxes payable 5,802 ( 9,774)
Decrease (increase) in other assets 914 ( 111)
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Net cash provided by operating activities 71,712 70,881
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Cash flows from investing activities:
Purchase of property, plant and equipment, net ( 5,038) ( 7,355)
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 ( 21,576) ( 27,785)
Redemption of marketable securities
Available-for-sale 13,705 70,997
Held-to-maturity 2,000
Purchase of license agreements, product
rights and intangible assets, net ( 1,352) ( 1,000)
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Net cash provided by (used in)
investing activities ( 12,386) 139,158
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- Continued -
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FOREST LABORATORIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
- Continued -
Nine Months Ended
(In thousands) December 31,
------------------------
1997 1996
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Cash flows from financing activities:
Net proceeds from common stock options
exercised by employees under
stock option plans $ 5,641 $ 4,255
Tax benefit realized from the exercise of
stock options by employees 1,348 1,300
Purchase of treasury stock, net ( 70,109) ( 168,729)
-------- --------
Net cash used in financing
activities ( 63,120) ( 163,174)
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Effect of exchange rate changes on cash 424 3,207
-------- -------
Increase (Decrease) in cash and cash
equivalents ( 3,370) 50,072
Cash and cash equivalents, beginning of period 162,842 83,543
-------- --------
Cash and cash equivalents, end of period $159,472 $133,615
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Income taxes $7,825 $33,388
Issuance of warrants for the purchase of license
agreements $3,500
See notes to condensed consolidated financial statements.
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FOREST LABORATORIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
---------------------
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions
to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial
statements. In the opinion of Management, all adjustments
(consisting of only normal recurring accruals) considered necessary
for a fair presentation have been included. Operating results for
the three and nine-month periods ended December 31, 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 December 1997 quarter, the Company received an initial
payment from the settlement in its arbitration with Pharmacia &
Upjohn, Inc. with respect to Forest's claimed option to negotiate
for the rights to Detrusitol, Pharmacia & Upjohn, Inc.'s treatment
for urinary incontinence. Pursuant to the terms of settlement,
the Company may receive future payments which are dependant upon
certain events, including product approvals and sales of Detrusitol
with a maximum payment to the Company of $25,000,000. The amount
received ($5,000,000) was included in other income, net of $2,240,000
of related expenses.
During the June 1996 quarter, the Company reported a net non-recurring
gain of $19,149,000 or $12,687,000 ($.28 per diluted share) after
taxes. The gain resulted from the sale of Forest's approximate 21%
equity holding in Biovail Corporation International which resulted
in a gain of $26,399,000 or $17,019,000 ($.37 per diluted share) after
taxes partially offset by non-recurring charges of $7,250,000
or $4,332,000 ($.09 per diluted 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.
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FOREST LABORATORIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
3. Development and Marketing Agreement (Contd.)
-----------------------------------
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.
4. Income (Loss) Per Share
-----------------------
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 replaced the previously reported
primary and fully diluted earnings per share with basic and diluted
earnings per share and was effective for all financial statements
after December 15, 1997. Unlike primary earnings per share, basic
earnings per share is arrived at by dividing net income (loss) by the
weighted-average number of common shares outstanding for the period
while diluted earnings 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.
Earnings per share amounts for all periods presented have been
restated to conform to SFAS No. 128 requirements.
5. 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
fiscal years 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 Company's
consolidated financial statements.
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PAGE
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 $24,042,000
- ---------------------------------
from March 31, 1997. Cash generated from operating activities was utilized to
purchase an additional 1,647,000 shares of the Company's common stock at a
cost of $70,109,000 and for normal operating activities. During the current
quarter the Company announced that its Board of Directors had authorized the
purchase, from time to time, of an additional 2,000,000 shares of outstanding
common stock. At December 31, 1997, the Company had repurchased 6,161,000 of
the total 8,500,000 shares authorized for repurchase. As a result of sales
returning to more normal levels (refer to Results of Operations below),
inventory declined $9,783,000, net of a buildup of MONUROL-TM- inventory,
recently launched, while trade accounts receivable increased $13,413,000.
Other accounts receivable, which is included in accounts receivable,
increased $7,504,000 primarily 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 (Note 3).
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
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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 last two quarters, sales were not adversely affected by the destocking of
wholesalers' inventories. The Company believes that sales now more closely
reflect prescription demand for its products.
Net sales for the three and nine months ended December 31, 1997 were
$75,338,000 and $85,667,000 higher than the three and nine-month periods
ended December 31, 1996. Beginning with the third quarter of last year, sales
were adversely effected by the destocking of wholesalers' inventories as
discussed above. During the current quarter, as sales have returned to more
normal levels, the Company's principal promoted products, particularly Aerobid
and Tiazac-R-, experienced higher unit sales and accounted for most of the
increase. Aerobid, which did not return to normal levels until the second
quarter of this year and is under pressure from new entries in the inhaled
steroid market, accounted for $32,402,000 of the increase for the current
quarter and $10,228,000 for the nine-month period. Tiazac, Cervidil-TM- and the
Company's other promoted products contributed $39,011,000 to the quarter's
net sales increase and $78,905,000 for the year. The Company's older and
less promoted products added $6,967,000 to the net sales increase for the
quarter and $4,813,000 for the year. These increases were offset by a
$3,042,000 and $8,279,000 decline in sales of the Company's generic products as
a result of continuing competition, a trend which the Company expects will
continue in future quarters.
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FOREST LABORATORIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Contd.)
Contract revenue (expense) for the current year's periods includes $6,230,000
for the quarter and $9,530,000 for the nine-month period from the Company's
arrangement with a private investor group to reimburse the Company for certain
expenses incurred in connection with Citalopram (Note 3). This arrangement was
not in effect during the prior year's periods. In addition, during the current
year's periods, co-promotion income exceeded co-promotion expenses on Climara-R-
sales.
Other income for each of the comparative periods presented reflects lower
interest income, which resulted from utilizing funds for the share repurchase
program. During the current quarter this decrease was partially offset by the
net revenue realized from the initial payment received from Pharmacia &
Upjohn, Inc. (Note 2). During the nine-month period, the decrease in interest
income was offset by a gain on the sale of the assets of one of the
Company's Puerto Rican subsidiaries and from the net revenue realized from
Pharmacia & Upjohn, Inc. Other income for the prior years' nine-month period
includes a net non-recurring gain of $19,149,000 (Note 2).
Cost of sales as a percentage of sales was 24% in the current quarter and for
the nine-month period as compared to 50% and 28% in similar periods of fiscal
1997, respectively. As a result of sales returning to more normal levels during
the current period, the proportion of high margin branded products to total
product sales increased significantly and together with improved overhead
absorption from higher production levels, resulted in improved profit
margins.
Selling, general and administrative expense for the current quarter decreased
as compared with the same period last year. Included in last year's third
quarter as well as this year's first quarter were higher than normal charges for
uncollectible accounts receivable. Excluding those charges, the Company's
selling, general and administrative expenses were higher for both the three and
nine-month periods ending December 31, 1997, principally due to costs associated
with the upcoming launch of Citalopram, the Company's selective serotonin
reuptake inhibitor used to treat depression, anticipated for the summer of
1998.
Research and development expenses increased $1,489,000 and $6,512,000,
respectively, during the three and nine-month periods ended December 31, 1997.
These increases were due principally from the 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 for which an NDA
was filed with the FDA during the first quarter of the current fiscal year.
Income tax expense as a percentage of income before taxes was 33% for the
current quarter and nine-month periods ended December 31, 1997 as compared to
31%, which was the Company's effective tax rate prior to last year's last two
quarters which reflected net losses. The increase was due principally to a
decrease in the proportion of the Company's operating profit derived from tax
exempt operations as compared to fully taxable operations, tax-free interest
income and tax credits.
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FOREST LABORATORIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Contd.)
The Company expects to continue its profitability in the remainder of fiscal
1998 as sales continue at normal levels following the reduction of trade
inventories. The continuing decline in the generic market should be offset by
increases in the sales of recently launched and growing products such as
Cervidil and Tiazac.
At December 31, 1997, primarily all computer systems and software
( the "Systems") of the Company's U.S. operations are Year 2000 compliant.
Presently, the Company's European subsidiaries are preparing to replace existing
Systems that are not Year 2000 compliant. The Company anticipates that all
Systems will be compliant by the end of 1999. Management believes that the cost
to modify these Systems is immaterial.
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
Reference is hereby made to Part II Item 1 of the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1997
for a description of certain legal proceedings.
Item 6 Exhibits and Reports on Form 8-K
(B) Reports on Form 8-K. None.
Exhibit 27. Financial Data Schedule.
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PAGE
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: February 13, 1998
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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