FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________
(Mark One)
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/ X / QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
- ----- OF THE SECURITIES EXCHANGE ACT OF 1934
For the Period Ended June 30, 1998
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/ / 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
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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
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Number of shares outstanding of Registrant's Common Stock as of
August 13, 1998: 80,662,958.
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Part I - Financial Information
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FOREST LABORATORIES, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
June 30, 1998
(In thousands) (Unaudited) March 31, 1998
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ASSETS
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Current assets:
Cash (including cash equivalent
investments of $108,650 in June
and $143,423 in March) $115,117 $149,653
Marketable securities 35,056 32,199
Accounts receivable, less allowances
of $11,948 in June and $12,416
in March 38,904 41,464
Inventories 100,611 82,718
Deferred income taxes 47,186 47,675
Refundable income taxes 9,432 9,432
Other current assets 8,009 8,506
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Total current assets 354,315 371,647
Marketable securities 46,657 47,748
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Property, plant and equipment 124,219 116,265
Less: accumulated depreciation 35,592 34,815
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88,627 81,450
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Other assets:
Excess of cost of investment in
subsidiaries over net assets
acquired, less accumulated
amortization of $8,273 in
June and $8,117 in March 16,686 16,842
License agreements, product rights
and other intangible assets, less
accumulated amortization of $79,381
in June and $76,190 in March 193,988 197,095
Deferred income taxes 17,146 17,639
Other 14,383 11,902
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Total other assets 242,203 243,478
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TOTAL ASSETS $731,802 $744,323
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See notes to condensed consolidated financial statements.
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FOREST LABORATORIES, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
June 30, 1998
(In thousands, except for par values) (Unaudited) March 31, 1998
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LIABILITIES AND SHAREHOLDERS' EQUITY
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Current liabilities:
Accounts payable $ 37,150 $ 30,409
Accrued expenses 49,554 70,998
Income taxes payable 19,951 28,482
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Total current liabilities 106,655 129,889
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Deferred income taxes 274 273
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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
250,000; issued 98,275 shares
in June and 98,054 shares in March 9,828 9,805
Capital in excess of par 338,973 334,781
Retained earnings 561,584 555,161
Accumulated other comprehensive income ( 4,244) ( 4,530)
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906,141 895,217
Less common stock in treasury,
at cost (17,657 shares in June
and 17,651 shares in March) 281,268 281,056
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Total shareholders' equity 624,873 614,161
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TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $731,802 $744,323
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See notes to condensed consolidated financial statements.
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FOREST LABORATORIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(Unaudited)
Three Months Ended
(In thousands, except per share amounts) June 30,
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1998 1997
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Net sales $107,065 $86,366
Contract revenue 13,993 873
Other income 6,706 3,088
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127,764 90,327
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Costs and expenses:
Cost of goods sold 26,915 22,304
Selling, general and administrative 77,323 56,704
Research and development 13,939 10,335
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118,177 89,343
Income before income taxes 9,587 984
Income tax expense 3,164 325
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Net income $ 6,423 $ 659
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Net income per common and
common equivalent share:
Basic $.08 $.01
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Diluted $.08 $.01
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Weighted average number of
common and common equivalent
shares outstanding:
Basic 80,507 81,949
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Diluted 84,896 83,823
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See notes to condensed consolidated financial statements.
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FOREST LABORATORIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
Three Months Ended
June 30,
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1998 1997
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(In thousands)
Net income $6,423 $659
Other comprehensive income (loss) 286 ( 368)
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Comprehensive income $6,709 $291
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See notes to consolidated condensed financial statements.
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FOREST LABORATORIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended
(In thousands) June 30,
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1998 1997
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Cash flows from operating activities:
Net income $ 6,423 $ 659
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 1,749 1,670
Amortization 3,347 3,337
Gain on sale of assets of closed
facilities ( 564)
Deferred income tax expense 983 370
Foreign currency transaction gain ( 561) ( 258)
Net change in operating assets
and liabilities:
Decrease (increase) in:
Accounts receivable, net 2,560 ( 12,544)
Inventories ( 17,893) 6,741
Refundable income taxes 19,850
Other current assets 497 ( 875)
Increase (decrease) in:
Accounts payable 6,741 ( 5,011)
Accrued expenses ( 21,444) ( 1,526)
Income taxes payable ( 8,531) ( 723)
Increase in other assets ( 2,481) ( 302)
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Net cash provided by(used in)
operating activities ( 28,610) 10,824
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Cash flows from investing activities:
Purchase of property, plant and equipment,
net ( 9,300) ( 1,552)
Proceeds from sale of assets of
closed facilities 1,875
Purchase of marketable securities
Available-for-sale ( 6,318) ( 2,747)
Redemption of marketable securities
Available-for-sale 4,552 1,890
Purchase of license agreements,
product rights and intangible assets, net ( 2,000)
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Net cash used in investing
activities ( 11,066) ( 2,534)
- Continued -
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FOREST LABORATORIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
- Continued -
Three Months Ended
(In thousands) June 30,
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1998 1997
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Cash flows from financing activities:
Net proceeds from common stock options
exercised by employees under stock
option plans $ 3,904 $ 1,652
Tax benefit realized from the exercise of
stock options by employees 99
Purchase of treasury stock, net ( 8,308)
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Net cash provided by (used in)
financing activities 4,003 ( 6,656)
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Effect of exchange rate changes on cash 1,137 657
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Increase (decrease) in cash and cash
equivalents ( 34,536) 2,291
Cash and cash equivalents, beginning
of period 149,653 162,842
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Cash and cash equivalents, end of period $115,117 $165,133
======== ========
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Income taxes $10,613 $678
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
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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 month period
ended June 30, 1998 are not necessarily indicative of the results
that may be expected for the year ending March 31, 1999. 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,
1998.
2. Net income per share
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A reconciliation of shares used in calculating basic and diluted
net income per share follows (IN THOUSANDS):
June 30, 1998 June 30, 1997
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Basic 80,507 81,949
Effect of assumed conversion
of employee stock options
and warrants 4,389 1,874
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Diluted 84,896 83,823
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There were no outstanding options or warrants excluded from the
computation of diluted earnings per share for the current quarter
as none were anti-dilutive. Options and warrants to purchase
approximately 2,899,000 shares of common stock at exercise prices
ranging from $19.84 to $24.09 per share were outstanding during a
portion of the first quarter of fiscal 1998, but were not
included in the computation of diluted earnings per share because
they were anti-dilutive. These options and warrants expire
through 2008.
3. Accounting Changes
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Effective April 1, 1998, the Company adopted Statement of
Financial Accounting Standards No. 130("SFAS No. 130"),
"REPORTING COMPREHENSIVE INCOME." Under provisions of this statement,
the Company has included a financial statement presentation of
comprehensive income to conform to these new requirements. SFAS No. 130
requires unrealized gains or losses on the Company's available-for-sale
securities and foreign currency translation adjustments to be
included in other comprehensive income. Implementation of this disclosure
standard did not have a material affect on the Company's financial
position or results of operations.
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FOREST LABORATORIES, INC. AND SUBSIDIARIES
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
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AND RESULTS OF OPERATIONS
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FINANCIAL CONDITION AND LIQUIDITY
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Net current assets increased by $5,902,000 from March 31, 1998
principally from normal operating activities. Cash and
accrued expenses declined during the quarter primarily as a
result of a $32,250,000 payment made for the marketing rights to certain
products under development by H. Lundbeck A/S of Denmark. This expense
had been accrued during the 1998 fiscal year. The increase in
inventory was due principally to a buildup of Celexa-TM- inventory, the
Company's selective serotonin reuptake inhibitor for depression, which
will be launched during the second quarter.
Property, plant and equipment increased principally from the
expansion of the Company's St. Louis, Missouri facilities
to meet the anticipated demand for the warehousing and distribution
of Celexa. The Company is also expanding its facilities in
Ireland to meet the projected manufacturing demands of Celexa
and on Long Island to facilitate increased activity for
research and development projects. The expansion will continue
through fiscal 1999, and when complete, should adequately meet
the Company's needs for manufacturing, warehousing, 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, capital investments and the share repurchase program.
RESULTS OF OPERATIONS
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Net sales during the quarter increased $20,699,000 from the same
period last year, in part because the June 1997 quarter was still
negatively impacted by the reduction in inventory levels by
wholesalers. During the current quarter, with inventories at
normal levels, sales of the Company's principal promoted products
more closely reflected overall growth and prescription demand.
Sales of Aerobid-R-, Tiazac-R- and Cervidil-R- accounted for $17,480,000
of the net sales change, due mostly to volume increases. The
Company's older and less promoted products increased by
$6,854,000, principally all of which was also due to volume,
while the Companny's generic product line declined by $3,635,000
during the period as a result of reduced volumes and continuing
price competition. During the quarter, the Company temporarily
discontinued shipments of propranolol, one of its generic
products, because of manufacturing difficulties. The Company has not yet
resumed shipments, but hopes to do so later this year.
Contract revenue for the current quarter includes $11,887,000
from the Company's arrangement with a private investor group to
reimburse the Company for certain expenses incurred in connection
with Celexa. This arrangement was not in effect during the prior
year's first quarter. The remainder of the increase was a result
of increased co-promotion income on increased sales of Climara-R-.
Other income includes a further $3,000,000 payment from the
settlement with Pharmacia & Upjohn, Inc. with respect to the
Company's claimed option to negotiate for the rights to Detrol-R-.
The Company may receive the remaining $12,000,000 of the
settlement, subject to the achievement of certain sales
objectives for Detrol, over the next four quarters.
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FOREST LABORATORIES, INC. AND SUBSIDIARIES
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
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AND RESULTS OF OPERATIONS
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Cost of sales as a percentage of sales decreased to 25% in the
current quarter, from 26% in the similar period last year.
Now that sales have returned to more normal levels, the proportion
of high margin branded products to total product sales has increased,
resulting in the improved profit margin.
Selling, general and administrative expenses were $20,619,000
higher during the current quarter than the same period last
year. The increase was principally due to the costs associated
with the upcoming launch of Celexa, including the addition of
approximately 200 sales representatives. A portion of these
expenses, together with the research and development expenses
related to Celexa, were reimbursed by the private investor group,
as discussed above.
The increase in research and development expense was due to
costs associated with conducting clinical trials in order to
obtain approval and market new products and from staff increases and
associated costs required to support an increased number of
products under development. During the current quarter, particular
emphasis was placed on various clinical studies and new formulations for
Aerobid and on clinical studies for Celexa.
The Company expects to continue its profitability in fiscal 1999
with continued growth in its principal promoted products and the
introduction, during the second quarter, of Celexa.
At June 30, 1998, 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 of its Systems will be
compliant by the end of 1999. Management believes that the cost
to modify these Systems is not material. The Company is also assessing
its vendors and customers to determine if their Systems
are Year 2000 compliant and is not yet able to assess whether any
failures to be compliant would have a material effect on its business
operations.
FORWARD LOOKING STATEMENTS Except for the historical information
--------------------------
contained herein, the Management Discussion and other portions of
this Form 10-Q contain forward looking statements that
involve a number of risks and uncertainties, including the
difficulty of predicting FDA approvals, acceptance and demand for
new pharmaceutical products, the impact of competitive products
and pricing, the timely development and launch of new products
and the risk factors listed from time to time in the Company's
SEC reports, including the Company's Annual Report on Form 10-K
for the fiscal year ended March 31, 1998.
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Part II - Other Information
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Item 1. Legal Proceedings
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Reference is made to the Company's Annual Report on Form 10-K
for the year ended March 31, 1998, 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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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: August 13, 1998
Forest Laboratories, Inc.
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(Registrant)
/s/ Howard Solomon
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Howard Solomon
President and Chief
Executive Officer
/s/ Kenneth E. Goodman
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Kenneth E. Goodman
Executive Vice President -
Operations and Chief
Financial Officer
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