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 June 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
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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
August 14, 1997: 40,862,855.
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Part I - Financial Information
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<TABLE>
FOREST LABORATORIES, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
June 30, 1997
(In thousands) (Unaudited) March 31, 1997
-------------- --------------
<S> <C> <C>
ASSETS
- ------
Current assets:
Cash (including cash equivalent investments
of $160,366 in June and $157,897 in March) $165,133 $162,842
Marketable securities 9,961 9,401
Accounts receivable, less allowances of
$11,669 in June and $9,594 in March 34,440 21,896
Inventories 84,621 92,539
Deferred income taxes 34,248 34,896
Refundable income tax 9,787 29,636
Other current assets 9,295 8,420
-------- --------
Total current assets 347,485 359,630
Marketable securities 17,714 17,417
-------- --------
Property, plant and equipment 114,246 115,580
Less: accumulated depreciation 32,090 32,256
-------- --------
82,156 83,324
-------- --------
Other assets:
Excess of cost of investment in subsidiaries
over net assets acquired, less accumulated
amortization of $7,631 in June and $7,491
in March 17,328 17,468
License agreements, product rights
and other intangible assets, less accumulated
amortization of $66,616 in June and $63,419
in March 204,203 205,785
Deferred income taxes 6,333 6,055
Other 10,904 10,602
-------- --------
Total other assets 238,768 239,910
-------- --------
TOTAL ASSETS $686,123 $700,281
======== ========
See notes to condensed consolidated financial statements.
</TABLE>
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<TABLE>
FOREST LABORATORIES, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
June 30, 1997
(In thousands, except for par values) (Unaudited) March 31, 1997
------------- --------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable $ 17,300 $ 22,311
Accrued expenses 34,917 36,976
Income taxes payable 13,534 14,257
-------- --------
Total current liabilities 65,751 73,544
-------- --------
Deferred income taxes 338 338
-------- --------
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 48,386 shares
in June and 48,336 shares in March 4,839 4,834
Capital in excess of par 316,000 314,321
Retained earnings 519,123 518,464
Other ( 1,001) ( 633)
-------- --------
838,961 836,986
Less common stock in treasury,
at cost (7,405 shares in June
and 7,171 shares in March) 218,927 210,587
-------- --------
Total shareholders' equity 620,034 626,399
-------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $686,123 $700,281
======== ========
See notes to condensed consolidated financial statements.
</TABLE>
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<TABLE>
FOREST LABORATORIES, INC. AND SUBSIDIARIES,
Condensed Consolidated Statements of Income
(Unaudited)
Three Months Ended
(In thousands, except per share amounts) June 30,
------------------------
1997 1996
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<S> <C> <C>
Net sales $86,366 $ 90,316
Non-recurring income, net (Note 2) 19,149
Other income 3,961 2,285
------- --------
90,327 111,750
------- --------
Costs and expenses:
Cost of goods sold 22,304 19,805
Selling, general and administrative 56,704 53,150
Research and development 10,335 7,246
------- --------
89,343 80,201
------- --------
Income before income taxes 984 31,549
Income tax expense 325 9,683
------- --------
Net income $ 659 $ 21,866
======= ========
Net income per common and
common equivalent share: $.02 $.47
==== ====
Weighted average number of
common and common equivalent
shares outstanding: 41,795 46,656
====== ======
See notes to condensed consolidated financial statements.
</TABLE>
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<TABLE>
FOREST LABORATORIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended
(In thousands) June 30,
------------------------
1997 1996
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<S> <C> <C>
Cash flows from operating activities:
Net income $ 659 $ 21,866
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 1,670 1,374
Amortization 3,337 3,139
Gain on sale of investment in
unconsolidated affiliate ( 26,399)
Gain on sale of assets of closed
facilities ( 564)
Deferred income tax expense (benefit) 370 ( 1,414)
Foreign currency transaction (gain) loss ( 258) 64
Net change in operating assets and liabilities
Decrease (increase) in:
Accounts receivable, net ( 12,544) 114,166
Inventories 6,741 ( 22,174)
Refundable income taxes 19,850
Other current assets ( 875) 1,908
Increase (decrease) in:
Accounts payable ( 5,011) 13,887
Accrued expenses ( 1,526) ( 15,052)
Income taxes payable ( 723) 4,405
Increase in other assets ( 302) 665
-------- -------
Net cash provided by operating
activities 10,824 96,435
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Cash flows from investing activities:
Purchase of property, plant and equipment, net ( 1,552) ( 2,565)
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 ( 2,747) ( 27,785)
Redemption of marketable securities
Available-for-sale 1,890 33,279
Purchase of license agreements, product rights
and intangible assets, net ( 2,000)
-------- --------
Net cash provided by (used in)
investing activities ( 2,534) 105,230
-------- --------
- Continued -
</TABLE>
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<TABLE>
FOREST LABORATORIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
- Continued -
Three Months Ended
(In thousands) June 30,
-----------------------
1997 1996
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<S> <C> <C>
Cash flows from financing activities:
Net proceeds from common stock options exercised
by employees under stock option plans $ 1,652 $ 2,083
Purchase of treasury stock, net ( 8,308) ( 49,942)
-------- --------
Net cash used in financing
activities ( 6,656) ( 47,859)
-------- --------
Effect of exchange rate changes on cash 657 ( 969)
-------- --------
Increase in cash and cash equivalents 2,291 152,837
Cash and cash equivalents, beginning of period 162,842 83,543
-------- --------
Cash and cash equivalents, end of period $165,133 $236,380
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Income taxes $678 $6,067
See notes to condensed consolidated financial statements.
</TABLE>
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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
month period ended June 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.
2. Non-recurring Income, net
-------------------------
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 (AMEX:BVF) 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 Company has also issued five-year
warrants to the investors to purchase an aggregate of 500,000 shares
of Forest's common stock at $51.45 per share.
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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. Due to the recent
issuance of these standards, Management has been unable to fully
evaluate the impact, if any, they may have on future financial
statement disclosures.
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 $4,352,000
- ---------------------------------
from March 31, 1997. During the quarter, cash generated from ongoing operations
and the collection of $19,850,000 of refundable U.S. Federal income taxes was
utilized to purchase an additional 234,000 shares of the Company's common stock
at a cost of $8,308,000 and for normal operating activities. At June 30, 1997,
the Company had repurchased 4,749,000 of the 6,500,000 shares authorized to date
at a cost of $177,701,000. The reduction in inventory levels reflects sales
returning to more normal levels somewhat offset by 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 previous 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, thereby 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.
During the current quarter destocking by wholesalers continued to adversely
impact sales, however the Company believes that trade inventories are now down
to normal levels.
Net sales during the quarter decreased $3,950,000 from the same period last year
due principally to the elimination of trade incentives as discussed above. The
most significant impact of this program was on sales of Aerobid, which
experienced a net decline of $20,547,000. Continuing competition for Lorcet-R-
and the Company's generic products contributed $4,867,000 to the sales
decrease, of which $3,942,000 was attributable to volume and $925,000 was
attributable to price. Offsetting these declines were increased sales of
Tiazac-R- and MONUROL amounting to $15,768,000. Also increasing
during the quarter by $5,696,000 were sales of the Company's older unpromoted
product lines of which $3,521,000 was due to volume and $2,175,000 was due to
price. The Company expects increased competition in the inhaled steroid market
for Aerobid, that the generic substitution rate for Lorcet may continue to grow
and that there may be further declines in the generic business as a result of
continuing competition.
Other income was $1,676,000 higher as compared with the prior year's quarter
principally as a result of co-promotion income exceeding co-promotion expenses
on Climara-R- sales. Lower interest income, which resulted from utilizing funds
for the share repurchase program, was offset by a gain on the sale of a
portion of the assets of one of the Company's Puerto Rican subsidiaries, which
has been closed.
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FOREST LABORATORIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Cost of sales as a percentage of sales increased to 26% in the first quarter of
fiscal 1998 from 22% in the similar period of fiscal 1997 due to lower sales of
high margin branded products primarily resulting from trade inventory
reductions, lower prices received on generic products due to heightened
competition, and higher product unit costs as a result of lower production
volumes which were required to support lower sales volumes.
Selling, general and administrative expenses were $3,554,000 higher during the
first quarter of fiscal 1998 than the similar period of fiscal 1997. The
increase 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.
Research and development expenses were $3,089,000 higher during the first
quarter of fiscal 1998 than the similar period of fiscal 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 quarter, particular emphasis was placed on
comparative clinical studies and new formulations for Aerobid and for
Citalopram, a selective serotonin reuptake inhibitor used to treat depression,
for which an NDA was filed with the FDA during the quarter.
Income taxes as a percentage of income before taxes was 33% for the current
quarter versus 31% in the similar period last year due principally to an
increase 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 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, 1997.
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Part II - Other Information
- ---------------------------
Item 1. Legal Proceedings
-----------------
Reference is made to the Company's Annual Report on Form 10-K for
the year ended March 31, 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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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 14, 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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<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000038074
<NAME> JAMES A. BRAJA
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> JUN-30-1997
<CASH> 165,133
<SECURITIES> 27,675
<RECEIVABLES> 46,109
<ALLOWANCES> 11,669
<INVENTORY> 84,621
<CURRENT-ASSETS> 347,485
<PP&E> 114,246
<DEPRECIATION> 32,090
<TOTAL-ASSETS> 686,123
<CURRENT-LIABILITIES> 65,751
<BONDS> 0
0
0
<COMMON> 4,839
<OTHER-SE> 615,195
<TOTAL-LIABILITY-AND-EQUITY> 686,123
<SALES> 86,366
<TOTAL-REVENUES> 90,327
<CGS> 22,304
<TOTAL-COSTS> 79,008
<OTHER-EXPENSES> 10,335
<LOSS-PROVISION> 2,270
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 984
<INCOME-TAX> 325
<INCOME-CONTINUING> 659
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 659
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
