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SECURITIES AND EXCHANGE COMMISSION
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WASHINGTON, D. C. 20549
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FORM 10-K
(Mark One)
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/ X / ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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For the Fiscal Year Ended March 31, 1997
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/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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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
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
909 Third Avenue, New York, New York 10022
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including
area code: (212) 421-7850
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
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Common Stock, $.10 par value American Stock Exchange
Rights to purchase one American Stock Exchange
one-hundredth share of Series A
Junior Participating Preferred
Stock, par value $1.00 per share
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
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YES / X / NO / /
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Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein
and will not be contained, to the best of the registrant's
knowledge, in the Proxy Statement incorporated by reference in
Part III of this Form 10-K or any amendment to this
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Form 10-K / X /.
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The aggregate market value of the voting stock held by
non-affiliates of the registrant as of June 23, 1997 is
$1,735,930,764.
Number of shares outstanding of registrant's Common Stock as of
June 23, 1997: 40,969,323.
The following documents are incorporated by reference herein:
Portions of the definitive proxy statement to be filed
pursuant to Regulation 14A promulgated under the Securities
Exchange Act of 1934 in connection with the 1997 Annual
Meeting of Stockholders of registrant.
Portions of the registrant's Annual Report to Stockholders
for the fiscal year ended March 31, 1997.
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2
PART I
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ITEM 1. BUSINESS
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GENERAL
Forest Laboratories, Inc. and its subsidiaries
(collectively, "Forest" or the "Company") develop, manufacture
and sell both branded and generic forms of ethical drug products
which require a physician's prescription, as well as
non-prescription pharmaceutical products sold over-the-counter.
Forest's most important United States products consist of branded
ethical drug specialties marketed directly, or "detailed," to
physicians by the Company's salesforce and its controlled release
line of generic products sold to wholesalers, chain drug stores
and generic distributors. In recent years the Company has
emphasized increased detailing to physicians of those branded
ethical drugs it believes have the most potential for growth, and
the introduction of new products acquired from other companies or
developed by the Company.
Forest's products include those developed by Forest and
those acquired from other pharmaceutical companies and integrated
into Forest's marketing and distribution systems. See "Recent
Developments."
Forest is a Delaware corporation organized in 1956, and
its principal executive offices are located at 909 Third Avenue,
New York, New York 10022 (telephone number (212-421-7850).
RECENT DEVELOPMENTS
TRADE INCENTIVES: 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 is
that distributors are deferring purchases of products until such
time as they have reduced their inventories to minimal levels,
thereby resulting in lower sales. Lower sales resulting from
this policy change, as well as lower sales of Lorcet-R- due to
generic competition and lower prices received for the Company's
generic product line, are principally responsible for the losses
reported during the last two quarters of the 1997 fiscal year.
SHARE REPURCHASE PROGRAM: In May 1996, Forest commenced
a share repurchase program pursuant to which Forest may purchase
up to 4,500,000 shares of Forest's Common Stock (approximately
10% of the shares outstanding) at prices prevailing from time to
time. In December 1996, Forest's Board of Directors authorized
the repurchase of up to an additional 2,000,000 shares. As of
3
June 23, 1997, Forest has purchased 4,748,800 shares pursuant to
this program. No date for completing the share repurchase
program has been established.
MONUROL-TM- : In April 1997, Forest commercially launched
MONUROL, which had been approved for marketing by the United
States Food and Drug Administration ("FDA") in December 1996.
MONUROL (fosfomycin tromethamine) is a single dose antibiotic
used for the treatment of uncomplicated urinary tract infections.
There are currently no other single dose antibiotics approved for
this indication in the United States. Forest licenses the United
States rights to MONUROL from the Zambon Group of Italy. The
product had previously been approved for marketing in eleven
other countries, including the United Kingdom, Germany, Italy and
Spain.
CITALOPRAM: In March 1996, Forest acquired an exclusive
license to market Citalopram in the United States. Citalopram is
a selective serotonin reuptake inhibitor used for the treatment
of depression. Citalopram is currently marketed in most European
countries and is the leading antidepressant in several European
markets. In May 1997, Forest filed a New Drug Application (an
"NDA") with the FDA, which included two pivotal clinical studies
already completed in the United States, together with an
extensive European data base.
OXYCODONE/IBUPROFEN: In August 1996, Forest licensed
worldwide rights to a patented combination of oxycodone and
ibuprofen from BTG plc, a technology transfer company with
headquarters in London. The product is a combination narcotic/
anti-inflammatory for the treatment of moderate to severe pain.
Pursuant to the license agreement, Forest has undertaken to
complete the development of and seek FDA approval to market the
drug, which recently entered Phase III clinical trials.
SYNAPTON TRIALS: In August 1996, Forest completed Phase
III trials for Synapton-TM- , a sustained release
acetylcholinesterase inhibitor being developed for the
amelioration of the dementia associated with Alzheimer's Disease.
Such studies demonstrated statistically significant efficacy in
the primary clinical endpoints for this condition. Forest
expects to file an NDA with the FDA by July, 1997.
TIAZAC-R-: On November 1, 1995, Forest completed the
acquisition from Biovail Corporation International ("BCI") of an
exclusive license to market Tiazac, a once daily formulation of
diltiazem in the United States. Tiazac is a long-acting calcium
channel blocker used for the treatment of hypertension. Tiazac
was commercially launched by Forest in February 1996 and competes
with the once daily diltiazem products Cardizem CD-R- distributed
by Hoechst Marion Roussel and Dilacor XR distributed by Rhone-
Poulenc Rorer, as well as other treatments for hypertension. The
aggregate consideration paid by Forest for the acquisition (which
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included the acquisition through a tender offer of a 22% equity
interest in BCI) was approximately $95.6 million. Pursuant to
supply arrangements completed together with the acquisition, BCI
has agreed to supply Forest's requirements of Tiazac and Forest
has agreed to pay BCI certain on-going royalties based upon
Forest's net sales of the product.
In May 1996, Forest sold its common equity interest in
BCI to four institutional investors in a privately negotiated
transaction for an aggregate consideration, net of related costs,
of $102,301,000. The sale did not affect any of Forest's rights
to Tiazac.
CLIMARA-R- CO-PROMOTION: On September 8, 1996, Forest
acquired co-promotion rights in the United States to the Climara
estrodiol transdermal system, a seven day estrogen patch
developed and marketed by Berlex Laboratories, Inc. Forest is
marketing this product to primary care physicians, as well as to
female healthcare specialists.
CERVIDIL: On March 30, 1995, the FDA approved an NDA
for Forest's Cervidil-TM-, a pessary infused with the hormone
Prostaglandin E2. The product is used for the initiation or
continuation of cervical ripening where there is a medical or
obstetrical indication for the induction of labor. Forest
launched the product commercially in May, 1995.
INFASURF: In June 1991, the Company entered into a
licensing agreement with ONY, Inc. ("ONY") for the marketing by
the Company in the United States, the United Kingdom and Canada
of the product Infasurf-R- for the treatment of respiratory
distress syndrome in premature infants. Such licensing
arrangements were expanded in May 1992 to include worldwide
rights to the product.
The FDA has approved the NDA for Infasurf, but has not
permitted its marketing pending a determination that Infasurf is
not the "same drug" as Survanta-R- within the meaning of the Orphan
Drug Act which would delay its introduction until July 1998.
Management believes that there are significant chemical and
clinical differences between Infasurf and Survanta that
demonstrate that the marketing of Infasurf should not be delayed
by the Orphan Drug Act. In addition, the Company has been
notified by Abbott Laboratories, the owner of the Survanta
patents, that it considers that Infasurf infringes its Survanta
patents. The Company believes, following consultation with its
patent counsel, that such claim is without merit. In March 1996,
the Company and ONY commenced an action against Abbott
Laboratories in the Federal District Court for the Western
District of New York seeking a declaration that Infasurf does not
infringe the Survanta patents and that the Survanta patents are
invalid.
5
PRINCIPAL PRODUCTS
The Company actively promotes in the United States those
of its branded products which the Company's management believes
have the most potential for growth and which enable its
salesforce to concentrate on groups of physicians who are high
prescribers of its products. Such products include the
respiratory products Aerobid, Aerochamber-R- and Tessalon-R-,
Tiazac, Forest's once-daily diltiazem for the treatment of
hypertension, the Climara estrodiol transdermal system, Cervidil,
used for the initiation or continuation of cervical ripening and
MONUROL, a single dose antibiotic for the treatment of
uncomplicated urinary tract infections (See "Recent
Developments").
Aerobid is a metered dose inhaled steroid used in the
treatment of asthma. Sales of Aerobid accounted for 20.6% of
Forest's sales for the fiscal year ended March 31, 1997 as
compared to 33.0% and 24.2% for the fiscal years ended March 31,
1996 and 1995, respectively. Aerochamber is a spacer device
used to improve the delivery of aerosol administered products,
including Aerobid.
Sales of Lorcet, a line of potent analgesics, accounted
for 9.7% of sales for the fiscal year ended March 31, 1997, as
compared to 15.9% and 17.0% of sales for the fiscal years ended
March 31, 1996 and 1995, respectively. Sales of Tiazac, launched
in 1996, accounted for 9.0% of sales for the fiscal year ended
March 31, 1997.
Forest's generic line emphasizes the Company's
capability to produce difficult to formulate controlled release
products which are sold in the United States by Forest's Inwood
Laboratories, Inc. subsidiary. Inwood's most important products
include Propranolol E.R., a controlled release beta blocker used
in the treatment of hypertension, Indomethacin E.R., a controlled
release non-steroidal anti-inflammatory drug used in the
treatment of arthritis, and Theochron-TM- , a controlled release
theophylline tablet used in treatment of asthma. Sales of
Propranolol did not account for more than 10% of Forest's sales
during the fiscal years ended March 31, 1997 and 1996, and
accounted for 16.0% for the fiscal year ended March 31, 1995.
The Company's United Kingdom and Ireland subsidiaries
sell both ethical products requiring a doctor's prescription and
over-the-counter preparations. Their most important products
include Sudocrem-R-, a topical preparation for the treatment of
diaper rash, Colomycin-R-, an antibiotic used in the treatment of
Cystic Fibrosis and Suscard-R- and Sustac-R-, sustained action
nitroglycerin tablets in both buccal and oral form used in the
treatment of angina pectoris, an ailment characterized by
insufficient oxygenation of the heart muscle.
6
MARKETING
In the United States, Forest directly markets its
products through its domestic salesforce, currently numbering 650
persons, which details products directly to physicians,
pharmacies and managed care organizations. Forest's salesforce
was increased by approximately 45% during the fiscal year ended
March 31, 1996 in connection with the launch of Tiazac and the
acquisition of co-promotion rights to Climara. In the United
Kingdom, the Company's Pharmax subsidiary's salesforce, currently
49 persons, markets its products directly. Forest's products are
sold elsewhere through independent distributors.
COMPETITION
The pharmaceutical industry is highly competitive as to
the sale of products, research for new or improved products and
the development and application of competitive controlled release
technologies. There are numerous companies in the United States
and abroad engaged in the manufacture and sale of both
proprietary and generic drugs of the kind sold by Forest and
drugs utilizing controlled release technologies. Many of these
companies have substantially greater financial resources than
Forest. In addition, the marketing of pharmaceutical products is
increasingly affected by the growing role of managed care
organizations in the provision of health services. Such
organizations negotiate with pharmaceutical manufacturers for
highly competitive prices for pharmaceutical products in
equivalent therapeutic categories, including certain of the
Company's principal promoted products.
GOVERNMENT REGULATION
The pharmaceutical industry is subject to comprehensive
government regulation which substantially increases the
difficulty and cost incurred in obtaining the approval to market
newly proposed drug products and maintaining the approval to
market existing drugs. In the United States, products developed,
manufactured or sold by Forest are subject to regulation by the
FDA, principally under the Federal Food, Drug and Cosmetic Act,
as well as by other federal and state agencies. The FDA
regulates all aspects of the testing, manufacture, safety,
labeling, storage, record keeping, advertising and promotion of
new and old drugs, including the monitoring of compliance with
good manufacturing practice regulations. Non-compliance with
applicable requirements can result in fines and other sanctions,
including the initiation of product seizures, injunction actions
and criminal prosecutions based on practices that violate
statutory requirements. In addition, administrative remedies can
involve voluntary recall of products as well as the withdrawal of
approval of products in accordance with due process procedures.
Similar regulations exist in most foreign countries in which
Forest's products are manufactured or sold. In many foreign
countries, such as the United Kingdom, reimbursement under
national health insurance programs frequently require that
7
manufacturers and sellers of pharmaceutical products obtain
governmental approval of initial prices and increases if the
ultimate consumer is to be eligible for reimbursement for the
cost of such products.
During the past several years the FDA, in accordance
with its standard practice, has conducted a number of inspections
of the Company's manufacturing facilities. Following these
inspections the FDA called the Company's attention to certain
"Good Manufacturing Practices" compliance and record keeping
deficiencies.
In March 1997, the FDA announced a proposed rule which
could result in the withdrawal of approval to market metered dose
inhaler formulations of corticosteroids (such as the Company's
Aerobid product) containing chlorofluorocarbons ("CFC's") once
three distinct non-CFC products are available in that therapeutic
category. The Company is currently developing a non-CFC
formulation of Aerobid and expects to complete its development in
time to meet the proposed regulation.
The cost of human health care products continues to be a
subject of investigation and action by governmental agencies,
legislative bodies and private organizations in the United States
and other countries. In the United States, most states have
enacted generic substitution legislation requiring or permitting
a dispensing pharmacist to substitute a different manufacturer's
version of a drug for the one prescribed. Federal and state
governments continue to press efforts to reduce costs of Medicare
and Medicaid programs, including restrictions on amounts agencies
will reimburse for the use of products. Under the Omnibus Budget
Reconciliation Act of 1990 (OBRA), manufacturers must pay certain
statutorily-prescribed rebates on Medicaid purchases for
reimbursement on prescription drugs under state Medicaid plans.
Federal Medicaid reimbursement for drug products of original
NDA-holders is denied if less expensive generic versions are
available from other manufacturers. In addition, the Federal
government follows a diagnosis related group (DRG) payment system
for certain institutional services provided under Medicare or
Medicaid. The DRG system entitles a health care facility to a
fixed reimbursement based on discharge diagnoses rather than
actual costs incurred in patient treatment, thereby increasing
the incentive for the facility to limit or control expenditures
for many health care products.
Under the Prescription Drug User Fee Act of 1992, the
FDA has imposed fees on various aspects of the approval,
manufacture and sale of prescription drugs. In 1993, the Clinton
Administration presented to Congress a proposal for reforming the
United States healthcare system. Other healthcare reform
proposals were also introduced in Congress. These proposals were
highly regulatory and contain provisions which would affect the
marketing of prescription drug products. None of these proposals
8
were enacted; however, the debate as to reform of the health care
system is expected to be protracted and the Company cannot
predict the outcome or effect on the marketing of prescription
drug products of the legislative process.
PRINCIPAL CUSTOMERS
Bergen Brunswig Corp. and Cardinal Distributors, Inc.,
national drug wholesalers, account for 10.4% and 10.2%,
respectively, of Forest's net sales for the fiscal year ended
March 31, 1997. McKesson Drug Company, a national drug
wholesaler, accounted for 12% and 11% of Forest's consolidated
net sales for the years ended March 31, 1996 and 1995,
respectively. No other customer accounted for 10% or more of
Forest's consolidated net sales for those fiscal years.
ENVIRONMENTAL STANDARDS
Forest anticipates that the effects of compliance with
federal, state and local laws and regulations relating to the
discharge of materials into the environment will not have any
material effect on capital expenditures, earnings or the
competitive position of Forest.
RAW MATERIALS
The principal raw materials used by Forest for its
various products are purchased in the open market. Most of these
materials are obtainable and available from several sources in
the United States and elsewhere in the world, although certain of
Forest's products contain patented or other exclusively
manufactured materials available from only a single source.
Forest has not experienced any significant shortages in supplies
of such raw materials.
PRODUCT LIABILITY INSURANCE
Forest currently maintains $100 million of product
liability coverage per "occurrence" and in the aggregate.
Although in the past there have been claims asserted against
Forest, none for which Forest has been found liable, there can be
no assurance that all potential claims which may be asserted
against Forest in the future would be covered by Forest's present
insurance.
RESEARCH AND DEVELOPMENT
During the year ended March 31, 1997, Forest spent
$40,689,000 for research and development, as compared to
$34,197,000 and $32,010,000 in the fiscal years ended March 31,
1996 and 1995, respectively. Forest's research and development
activities during the past year consisted primarily of the
conduct of clinical studies required to obtain approval of new
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products and the development of additional products, some of
which utilize the Company's controlled release technologies.
EMPLOYEES
At March 31, 1997, Forest had a total of 1,663
employees.
PATENTS AND TRADEMARKS
Forest owns or licenses certain U.S. and foreign patents
on many of its branded products and products in development,
including, but not limited to, Aerobid, Tiazac, Cervidil,
MONUROL, Synapton, Flumadine-R-, Forest's recently licensed
oxycodone/ibuprofen analgesic and Methoxatone (an anti-
inflammatory compound being evaluated for use in head trauma and
for other uses), which patents expire through 2010. Forest
believes these patents are or may become of significant benefit
to its business. Additionally, Forest owns and licenses certain
U.S. patents, and has pending U.S. and foreign patent
applications, relating to various aspects of its Synchron-R-
technology and to other controlled release technology, which
patents expire through 2008. Forest believes that these patents
are useful in its business, however, there are numerous patents
and unpatented technologies owned by others covering other
controlled release processes.
Forest owns various trademarks and trade names which it
believes are of significant benefit to its business.
BACKLOG -- SEASONALITY
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Backlog of orders is not considered material to Forest's
business prospects. Forest's business is not seasonal in nature.
ITEM 2. PROPERTIES
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Forest owns a 150,000 square foot building on 28 acres
in Commack, New York. This facility is used for packaging,
warehousing, administration and sales training. Forest also owns
six buildings and leases two buildings in and around Inwood, Long
Island, New York, containing a total of approximately 145,000
square feet. The buildings are used for manufacturing, research
and development, warehousing and administration. In addition,
Forest leases approximately 23,000 square feet in Farmingdale,
New York for use as a clinical laboratory testing facility.
Forest Pharmaceuticals, Inc. ("FPI"), a wholly owned
subsidiary of the Company, owns two facilities in Cincinnati,
Ohio aggregating approximately 108,000 square feet. In St.
Louis, Missouri, FPI owns facilities of 22,000 square feet and
87,000 square feet and leases a facility of 63,000 square feet.
10
These facilities are used for manufacturing, warehousing and
administration.
Pharmax owns an approximately 95,000 square foot complex
in the London suburb of Bexley, England, which houses its plant
and administrative and central marketing offices. Approximately
15,000 square feet of such space is leased by Pharmax to other
tenants.
Forest's Tosara subsidiary owns an 18,000 square foot
manufacturing and distribution facility located in an industrial
park in Dublin, Ireland. Forest Ireland, a newly-formed
subsidiary of Forest, has recently completed the development,
together with the Development Authority of the Republic of
Ireland, of an approximately 86,000 square foot manufacturing
and distribution facility located in Dublin, Ireland. The
facility will be used for the manufacture and distribution of
products in the U.S. and Europe, including the manufacture of
Citalopram tablets.
Forest presently leases approximately 90,000 square feet
of executive office space at 909 Third Avenue, New York, New
York. The lease is for a sixteen (16) year term, subject to 2
five year renewal options.
Management believes that the above-described properties
are sufficient for Forest's present and anticipated needs.
Net rentals for leased space for the fiscal year ended
March 31, 1997 aggregated approximately $2,953,000 and for the
fiscal year ended March 31, 1996 aggregated approximately
$2,535,000.
ITEM 3. LEGAL PROCEEDINGS
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The Company is a defendant in actions filed in various
federal district courts alleging certain violations of the
Federal anti-trust laws in the marketing of pharmaceutical
products. In each case, the actions were filed against many
pharmaceutical manufacturers and suppliers and allege price
discrimination and conspiracy to fix prices in the sale of
pharmaceutical products. The actions were brought by various
pharmacies (both individually and, with respect to certain
claims, as a class action) and seek injunctive relief and
monetary damages. The Judicial Panel on Multi-District
Litigation has ordered these actions coordinated (and, with
respect to those actions brought as class actions, consolidated)
in the Federal District Court for the Northern District of
Illinois (Chicago) under the caption "In re Brand Name
Prescription Drugs Antitrust Litigation." On April 4, 1996,
motions for summary judgment filed by the manufacturer defendants
(including the Company) with respect to conspiracy claims alleged
11
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. Proceedings in this action have
been stayed pending the interlocutory appeal to the Court of
Appeals for the Seventh Circuit of certain rulings of the trial
court.
Similar actions alleging price discrimination and
conspiracy claims under state law are pending against many
pharmaceutical manufacturers, including the Company, in 12 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.
While the Company believes these 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.
In March 1996, the Company was informed that the Federal
Trade Commission has begun an investigation of the existence of
concerted action among 22 pharmaceutical manufacturers, including
the Company, with respect to pricing practices. The Company
believes that no such concerted activity has taken place
involving the Company and intends to cooperate with the FTC's
investigation.
See "Item 1, Business, Recent Developments" for a
description of an action commenced by the Company against Abbott
Laboratories seeking a declaration that Infasurf does not
infringe certain patent rights of Abbott.
The Company is not subject to any other material pending
legal proceedings, other than ordinary routine claims incidental
to its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS
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Not Applicable.
12
PART II
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ITEM 5. MARKET FOR REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDER
MATTERS
- ------- ------------------------------
The information required by this item is incorporated
by reference to page 24 of the Annual Report.
Forest has never paid cash dividends on its Common Stock
and does not expect to pay such dividends in the foreseeable
future. Management presently intends to retain all available
funds for the development of its business and for use as working
capital. Future dividend policy will depend upon Forest's
earnings, capital requirements, financial condition and other
relevant factors.
ITEM 6. SELECTED FINANCIAL DATA
- ------- -----------------------
The information required by this item is incorporated by
reference to page 12 of the Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND
- ------- ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
-------------------------------
The information required by this item is incorporated by
reference to pages 10 and 11 of the Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND
- ------- SUPPLEMENTARY DATA
------------------------
The information required by this item is incorporated by
reference to pages 13 through 23 of the Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS
- ------- WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
------------------------------
Not Applicable.
13
PART III
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In accordance with General Instruction G(3), the
information called for by Part III (Items 10 through 13) is
incorporated by reference from Forest's definitive proxy statement
to be filed pursuant to Regulation 14A promulgated under the
Securities Exchange Act of 1934 in connection with Forest's 1996
Annual Meeting of Stockholders.
14
PART IV
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ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
-------- AND REPORTS ON FORM 8-K
---------------------------------------
(a) 1. Financial statements. The following consolidated
financial statements of Forest Laboratories, Inc.
and subsidiaries included in the Annual Report
are incorporated by reference herein in Item 8:
Report of Independent Certified Public
Accountants
Consolidated balance sheets -
March 31, 1997 and 1996
Consolidated statements of operations -
years ended March 31, 1997, 1996 and 1995
Consolidated statements of shareholders'
equity -
years ended March 31, 1997, 1996 and 1995
Consolidated statements of cash flows -
years ended March 31, 1997, 1996 and 1995
Notes to consolidated financial statements
2. Financial statement schedules. The following
consolidated financial statement schedule of
Forest Laboratories, Inc. and Subsidiaries is
included herein:
Report of Independent Certified Public
Accountants S-1
Schedule II Valuation and qualifying accounts S-2
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission
are not required under the related instructions or are
inapplicable, and therefore have been omitted.
3. Exhibits:
(3)(a) Articles of Incorporation of Forest, as amended.
Incorporated by reference from the Current Report
on Form 8-K dated March 9, 1981 filed by Forest,
from Registration Statement on Form S-1
(Registration No. 2-97792) filed by Forest on May
16, 1985, from Forest's definitive proxy statement
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filed pursuant to Regulation 14A with respect to
Forest's 1987, 1988 and 1993 Annual Meetings of
Shareholders and from the Current Report on Form
8-K dated March 15, 1988.
(3)(b) By-laws of Forest. Incorporated by reference to
Forest's Current Report on Form 8-K dated October
11, 1994.
(10) MATERIAL CONTRACTS
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10.1 Option Agreement and Registration Rights
Agreement dated February 18, 1988 between
Forest and Howard Solomon. Incorporated
by reference to Forest's Annual Report on
Form 10-K for the fiscal year ended March
31, 1988 (the "1988 10-K").
10.2 Option Agreement and Registration Rights
Agreement dated February 18, 1988 between
Forest and Phillip M. Satow.
Incorporated by reference to the 1988
10-K.
10.3 Benefit Continuation Agreement dated as
of December 1, 1989 between Forest and
Howard Solomon. Incorporated by
reference to Forest's Annual Report on
Form 10-K for the fiscal year ended
March 31, 1990 (the "1990 l0-K").
10.4 Benefit Continuation Agreement dated as
of December 1, 1989 between Forest and
Joseph M. Schor. Incorporated by
reference to the 1990 10-K.
10.5 Benefit Continuation Agreement dated as
of May 27, 1990 between Forest and
Kenneth E. Goodman. Incorporated by
reference to the 1990 10-K.
10.6 Benefit Continuation Agreement dated as
of April 1, 1995 between Forest and
Phillip M. Satow.
10.7 Option Agreement dated December 10, 1990
between Forest and Howard Solomon.
Incorporated by reference to Forest's
Annual Report on Form 10-K for the fiscal
year ended March 31, 1991 (the "1991
10-K").
16
10.8 Option Agreement dated December 10, 1990
between Forest and Kenneth E. Goodman.
Incorporated by reference to the 1991
10-K.
10.9 Option Agreement dated December 10,
1990 between Forest and Phillip M.
Satow. Incorporated by reference
to the 1991 10-K.
10.10 Split Dollar Life Insurance Agreement
dated March 29, 1994 between Forest and
Howard Solomon. Incorporated by
reference to Forest's Annual Report on
Form 10-K for the fiscal year ended March
31, 1994 (the "1994 10-K").
10.11 Split Dollar Life Insurance Agreement
dated March 29, 1994 between Forest and
Joseph M. Schor. Incorporated by
reference to the 1994 10-K.
10.12 Split Dollar Life Insurance Agreement
dated March 29, 1994 between Forest and
Phillip M. Satow. Incorporated by
reference to the 1994 10-K.
10.13 Split Dollar Life Insurance Agreement
dated March 29, 1994 between Forest and
Kenneth E. Goodman. Incorporated by
reference to the 1994 10-K.
10.14 Employment Agreement dated as of
September 30, 1994 by and between Forest
and Howard Solomon. Incorporated by
reference to Forest's Annual Report on
Form 10-K for the fiscal year ended March
31, 1995 (the "1995 10-K").
10.15 Employment Agreement dated as of
September 30, 1994 by and between Forest
and Phillip M. Satow. Incorporated by
reference to the 1995 10-K.
10.16 Employment Agreement dated as of
September 30, 1994 by and between Forest
and Kenneth E. Goodman. Incorporated by
reference to the 1995 10-K.
10.17 Employment Agreement dated as of October
24, 1995 by and between Forest and Dr.
Lawrence S. Olanoff. Incorporated by
reference to Forest's Annual Report on
17
Form 10-K for the fiscal year ended March
31, 1996.
13 Portions of the Registrant's Annual
Report to Stockholders.
22 List of Subsidiaries. Incorporated by
reference to Exhibit 22 to the 1988
10-K.
23 Consent of BDO Seidman, L.L.P.
27 Financial Data Schedule.
18
SIGNATURES
----------
Pursuant to the requirements of Section 13 and 15(d) of
the Securities Exchange Act of 1934, Forest has duly caused this
report to be signed on its behalf by the undersigned, thereunto
duly authorized.
Dated: June 27, 1997
FOREST LABORATORIES, INC.
-------------------------
By: /s/Howard Solomon
-----------------------------
Howard Solomon,
President, Chief Executive
Officer and Director
Pursuant to the requirements of the Securities Exchange
Act of 1934, this report has been signed below by the following
persons on behalf of Forest and in the capacities and on the dates
indicated.
PRINCIPAL EXECUTIVE
OFFICER:
-------------------
/s/ Howard Solomon President, Chief June 27, 1997
-------------------------
Howard Solomon Executive Officer
and Director
PRINCIPAL FINANCIAL
AND ACCOUNTING OFFICER:
----------------------
/s/ Kenneth E. Goodman Vice President, June 27, 1997
------------------------- Finance
Kenneth E. Goodman
DIRECTORS
---------
/s/ George S. Cohan Director June 27, 1997
-------------------------
George S. Cohan
/s/William J. Candee, III Director June 27, 1997
- ---------------------------
William J. Candee, III
19
/s/ Dan L. Goldwasser Director June 27, 1997
--------------------------
Dan L. Goldwasser
/s/Joseph M. Schor Director June 27, 1997
--------------------------
Joseph Martin Schor
20
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
Forest Laboratories, Inc.
The audits referred to in our report dated May 5, 1997, relating
to the consolidated financial statements of Forest Laboratories,
Inc. and Subsidiaries, which is referred to in Item 8 of this
Form 10-K, include the audits of the accompanying financial
statement schedule. This financial statement schedule is the
responsibility of the Company's management. Our responsibility
is to express an opinion of this financial statement schedule
based upon our audits.
In our opinion, such financial statement schedule presents
fairly, in all material respects ,the information set forth
therein.
/s/BDO SEIDMAN, LLP
- ---------------------------
BDO Seidman, LLP
New York, New York
May 5, 1997
S-1
SCHEDULE II
FOREST LABORATORIES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
- --------------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
- --------------------------------------------------------------------------------------------------------------------
Additions
- --------------------------------------------------------------------------------------------------------------------
Balance at (1) (2) Balance at
beginning Charged to costs Charged to other Deductions-- end of
Description of period and expenses accounts-describe(A) describe(B) period
- --------------------------------------------------------------------------------------------------------------------
Year ended March 31, 1997:
Allowance for
doubtful accounts $5,309,000 $4,371,000 $1,143,000 $1,229,000 $9,594,000
========== ========== ========== ========== ==========
Year ended March 31, 1996:
Allowance for
doubtful accounts $5,016,000 $ 514,000 ($134,000) $ 87,000 $5,309,000
========== ========== ======== ========== ==========
Year ended March 31, 1995:
Allowance for
doubtful accounts $4,918,000 $ 905,000 $156,000 $ 963,000 $5,016,000
========== ========== ======== ========== ==========
(A) Includes allowances for medicaid rebates and cash discounts
(B) Includes adjustments for wholesale chargebacks and bad debt write-offs.
S-2
EXHIBIT 13
QUARTERLY STOCK MARKET PRICE
HIGH LOW
------ ------
April-June 1996 50 1/4 37 7/8
July-September 1996 43 1/8 33
October-December 1996 40 5/8 28 1/4
January-March 42 1/2 31 5/8
As of June 6, 1997 there were 2,453 stockholders of record of the Company's
common stock.
SELECTED FINANCIAL DATA
1997 1996 1995 1994 1993
--------- -------- -------- -------- -------
March 31, (IN THOUSANDS)
Financial Position:
Current Assets $359,630 $470,612 $348,969 $345,929 $314,636
Current Liabilities 73,544 89,571 57,649 52,223 41,145
Net Current Assets 286,086 381,041 291,320 293,706 273,491
Total Assets 700,281 899,361 757,205 619,211 520,512
Long-Term Debt and Deferred
Income Taxes 338 273 222 206 191
Total Shareholders' Equity 626,399 809,517 699,334 566,782 479,176
Year Ended March 31, (IN THOUSANDS,
EXCEPT PER SHARE DATA) 1997 1996 1995 1994 1993
-------- --------- -------- -------- ---------
Summary of Operations:
Net Sales $280,745 $446,883 $393,359 $351,641 $285,364
Non-recurring Income, net 19,149
Other Income 9,167 13,061 11,470 9,680 11,070
Costs and Expenses 348,060 297,569 248,683 235,843 195,748
Income (Loss) Before Income Taxes ( 38,999) 162,375 156,146 125,478 100,686
Income Taxes (Benefits) ( 15,458) 58,130 55,997 45,280 36,379
Net Income (Loss) ( 23,541) 104,245 100,149 80,198 64,307
Net Income (Loss) Per Share:
Primary ($ 0.55) $2.22 $2.15 $1.75 $1.42
Fully Diluted ($ 0.55) $2.20 $2.14 $1.72 $1.41
Weighted Average Number of
Common and Common
Equivalent Shares
Outstanding (Note A):
Primary 43,009 47,053 46,682 45,957 45,432
Fully Diluted 43,009 47,289 46,768 46,614 45,764
No dividends were paid on common shares in any period.
A. Net income (loss) per share was computed by dividing net income (loss) by the weighted
average number of common and common equivalent shares during each year. Common
equivalent shares consist of unissued shares under options and warrants, and
are included to the extent that they have a dilutive effect. Fully diluted
net income (loss) per share is presented because of an increase in the dilutive effect
of stock options (using the treasury stock method) which resulted from the
higher price of the Company's stock at the end of the year as compared with
the average price during the year.
FOREST LABORATORIES, INC. AND SUBSIDIARIES
------------------------------------------
CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------
YEARS ENDED MARCH 31, 1997, 1996 AND 1995
-----------------------------------------
-1-
PAGE
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
- --------------------------------------------------
Board of Directors and Shareholders
Forest Laboratories, Inc.
New York, New York
We have audited the accompanying consolidated balance sheets of Forest
Laboratories, Inc. and Subsidiaries as of March 31, 1997 and 1996, and
the related consolidated statements of operations, shareholders'
equity and cash flows for each of the three years in the period ended
March 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall presentation of the financial statements.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position
of Forest Laboratories, Inc. and Subsidiaries as of March 31, 1997 and
1996, and the results of their operations and their cash flows for
each of the three years in the period ended March 31, 1997 in
conformity with generally accepted accounting principles.
BDO SEIDMAN, LLP
New York, New York
May 5, 1997
-2-
PAGE
FOREST LABORATORIES, INC. AND SUBSIDIARIES
------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(IN THOUSANDS)
MARCH 31,
-------------------------
1997 1996
---------- ----------
ASSETS
- ------
Current assets:
Cash (including cash equivalent investments of $162,842 $ 83,543
$157,897 in 1997 and $78,818 in 1996)
Marketable securities 9,401 40,164
Accounts receivable, less allowances of $9,594
in 1997 and $5,309 in 1996 21,896 254,708
Inventories 92,539 58,949
Deferred income taxes 34,896 20,411
Refundable income taxes 29,636
Other current assets 8,420 12,837
-------- --------
Total current assets 359,630 470,612
-------- --------
Marketable securities 17,417 22,170
-------- --------
Property, plant and equipment:
Land and buildings 64,994 61,160
Machinery and equipment 41,994 37,027
Vehicles and other 8,592 7,977
-------- --------
115,580 106,164
Less accumulated depreciation 32,256 26,807
-------- --------
83,324 79,357
-------- --------
Other assets:
Investment in unconsolidated affiliate 75,902
Excess of cost of investment in subsidiaries
over net assets acquired, less accumulated
amortization of $7,491 in 1997 and $6,866
in 1996 17,468 18,093
License agreements, product rights and other
intangible assets, net 205,785 216,078
Deferred income taxes 6,055 7,398
Other 10,602 9,751
-------- --------
239,910 327,222
-------- --------
$700,281 $899,361
======== ========
-3-
PAGE
FOREST LABORATORIES, INC. AND SUBSIDIARIES
------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(IN THOUSANDS, EXCEPT FOR PAR VALUES)
MARCH 31,
-----------------------
1997 1996
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable $ 22,311 $ 13,994
Accrued expenses 36,976 50,332
Income taxes payable 14,257 25,245
-------- --------
Total current liabilities 73,544 89,571
-------- --------
Deferred income taxes 338 273
-------- --------
Commitments and contingencies
Shareholders' equity:
Series A junior participating preferred stock,
$1.00 par; shares authorized 1,000;
no shares issued or outstanding
Common stock $.10 par; shares authorized
250,000; issued 48,336 shares in 1997 and
48,133 shares in 1996 4,834 4,813
Capital in excess of par 314,321 306,635
Retained earnings 518,464 542,005
Other ( 633) ( 2,985)
-------- --------
836,986 850,468
Less common stock in treasury, at cost
(7,171 shares in 1997 and 2,650 shares
in 1996) 210,587 40,951
-------- --------
626,399 809,517
-------- --------
$700,281 $899,361
======== ========
See accompanying notes to consolidated financial statements.
-4-
PAGE
FOREST LABORATORIES, INC. AND SUBSIDIARIES
------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED MARCH 31,
1997 1996 1995
-------- -------- --------
Net sales $280,745 $446,883 $393,359
Non-recurring income, net 19,149
Other income 9,167 13,061 11,470
--------- -------- --------
309,061 459,944 404,829
-------- -------- --------
Costs and expenses:
Cost of sales 85,874 90,485 75,794
Selling, general and administrative 221,497 172,887 140,879
Research and development 40,689 34,197 32,010
-------- -------- --------
348,060 297,569 248,683
-------- -------- --------
Income (loss) before income tax
expense (benefit) ( 38,999) 162,375 156,146
Income tax expense (benefit) ( 15,458) 58,130 55,997
-------- -------- --------
Net income (loss) ($ 23,541) $104,245 $100,149
======== ======== ========
Earnings (loss) per common and common
equivalent share:
Primary ($0.55) $2.22 $2.15
===== ===== =====
Fully diluted ($0.55) $2.20 $2.14
===== ===== =====
Weighted average number of common
and common equivalent shares outstanding:
Primary 43,009 47,053 46,682
====== ====== ======
Fully diluted 43,009 47,289 46,768
====== ====== ======
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
-5-
PAGE
FOREST LABORATORIES, INC. AND SUBSIDIARIES
------------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
-----------------------------------------------
YEARS ENDED MARCH 31, 1997, 1996 AND 1995
-----------------------------------------
(IN THOUSANDS)
Capital in
Common stock Capital in Treasury stock
--------------- excess of Retained -----------------
Shares Amount par earnings Other Shares Amount
------ ------ -------- --------- ------ ------ --------
Balance, April 1, 1994 46,276 $4,628 $266,233 $337,611 ($3,817) 2,587 $ 37,873
Shares issued for product acquisition 108 10 4,689
Shares issued upon exercise of stock
options 1,440 144 15,694
Treasury stock acquired from employees
upon exercise of stock options 56 2,718
Tax benefit related to stock options
exercised by employees 10,309
Other 4,275
Net income 100,149
------- ------ -------- -------- ----- ----- -------
Balance, March 31, 1995 47,824 4,782 296,925 437,760 458 2,643 40,591
Shares issued upon exercise of stock
options 309 31 8,385
Treasury stock acquired from employees
upon exercise of stock options 7 360
Tax benefit related to stock options
exercised by employees 1,325
Other ( 3,443)
Net income 104,245
------- ------ -------- -------- ------ ----- -------
Balance, March 31, 1996 48,133 4,813 306,635 542,005 ( 2,985) 2,650 40,951
Shares issued upon exercise of stock
options 203 21 5,865
Treasury stock acquired from employees
upon exercise of stock options 7 243
Purchase of treasury stock 4,514 169,393
Tax benefit related to stock options
exercised by employees 1,821
Other 2,352
Net loss ( 23,541)
------- ------- ------- -------- ------ ----- --------
Balance, March 31, 1997 48,336 $4,834 $314,321 $518,464 ($ 633) 7,171 $210,587
======= ======= ======== ======== ====== ===== ========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
-6-
PAGE
FOREST LABORATORIES, INC. AND SUBSIDIARIES
------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(IN THOUSANDS)
YEAR ENDED MARCH 31,
--------------------------------
1997 1996 1995
--------- -------- --------
Cash flows from operating activities:
Net income (loss) ($ 23,541) $104,245 $100,149
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation 6,017 4,634 3,954
Amortization 13,168 11,885 10,097
Gain on sale of investment in
unconsolidated affiliate ( 26,399)
Deferred income tax benefit ( 13,077) ( 6,624) ( 5,157)
Foreign currency translation
(gain) loss 57 329 ( 53)
Equity in income of unconsolidated
affiliate ( 261)
Net change in operating assets
and liabilities:
Decrease (increase) in:
Accounts receivable, net 232,812 ( 105,053) ( 37,985)
Inventories ( 33,590) ( 19,986) ( 1,783)
Refundable income taxes ( 29,636)
Other current assets 4,417 ( 6,398) ( 2,626)
Increase (decrease) in:
Accounts payable 8,317 ( 240) 3,727
Accrued expenses 6,644 6,408 ( 1,628)
Income taxes payable ( 10,988) 5,754 3,327
Increase in other assets ( 851) ( 455) ( 6,779)
-------- -------- --------
Net cash provided by (used in)
operating activities 133,350 ( 5,762) 65,243
-------- -------- --------
Cash flows from investing activities:
Purchase of property, plant and equipment,
net ( 9,655) ( 11,645) ( 22,230)
Purchase of investment in unconsolidated
affiliate ( 76,328)
Proceeds from sale of investment in
unconsolidated affiliate 102,301
Purchase of marketable securities:
Available-for-sale ( 41,606) ( 64,529)
Held-to-maturity ( 131,110)
Redemption of marketable securities:
Available-for-sale 75,118 166,432
Held-to-maturity 2,004 4,504 8,877
Purchase of license agreements, product
rights and other intangibles ( 22,250) ( 44,476) ( 22,287)
-------- -------- --------
Net cash provided by (used in)
investing activities 105,912 ( 26,042) ( 166,750)
-------- -------- --------
-7-
FOREST LABORATORIES, INC. AND SUBSIDIARIES
------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(IN THOUSANDS)
YEAR ENDED MARCH 31,
---------------------------------
1997 1996 1995
------- ------- -------
Cash flows from financing activities:
Net proceeds from common stock options
exercised by employees under stock
option plans 5,643 8,056 15,119
Tax benefit realized from the exercise
of stock options by employees 1,821 1,325 10,309
Purchase of treasury stock, net ( 169,393)
-------- -------- --------
Net cash provided by (used in)
financing activities ( 161,929) 9,381 25,428
-------- -------- --------
Effect of exchange rate changes on cash 1,966 ( 1,645) 2,596
-------- -------- --------
Increase (decrease) in cash and cash
equivalents 79,299 ( 24,068) ( 73,483)
Cash and cash equivalents, beginning
of year 83,543 107,611 181,094
-------- -------- --------
Cash and cash equivalents, end of year $162,842 $ 83,543 $107,611
======== ======== ========
Supplemental disclosures of cash flow
information: (in thousands)
1997 1996 1995
-------- --------- --------
Cash paid during the year for:
Income taxes $35,036 $57,675 $47,519
------- ------- -------
Supplemental schedule of noncash
financing activities:
Accrued license fee $20,000
Issuance of common stock for the
purchase of license agreements,
product rights and other intangibles $2,700
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
-8-
PAGE
FOREST LABORATORIES, INC. AND SUBSIDIARIES
------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF CONSOLIDATION: The consolidated financial statements include the
accounts of Forest Laboratories, Inc. (the "Company") and its subsidiaries, all
of which are wholly owned. The Company accounts for investments in
unconsolidated affiliates which are 50% or less owned under the equity method.
All significant intercompany accounts and transactions have been eliminated.
CASH EQUIVALENTS: Cash equivalents consist of short-term, highly liquid
investments (primarily municipal bonds with interest rates that are re-set
weekly) which are readily convertible into cash at par value (cost).
INVENTORIES: Inventories are stated at the lower of cost or market, with
cost determined on the first-in, first-out basis.
MARKETABLE SECURITIES: Marketable securities are stated at fair market value
or historical cost in accordance with Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities", and consist of investments in municipal bonds maturing through 1999
and bonds of the Commonwealth of Puerto Rico maturing through 2002.
PROPERTY, PLANT AND EQUIPMENT AND DEPRECIATION: Property, plant and equipment
are stated at cost. Depreciation is provided over the estimated useful lives
of the assets primarily by the straight-line method.
INTANGIBLE ASSETS: The excess of cost of investment over the fair value of net
assets of subsidiaries at the time of acquisition is being amortized using the
straight line method over 35 to 40 years. The costs of obtaining license
agreements, product rights and other intangible assets are being amortized using
the straight line method over the estimated lives of the assets, 10 to 40 years.
REVENUE RECOGNITION: Sales are recorded in the period the merchandise is
shipped. Provisions for estimated sales allowances, returns and losses are
accrued at the time revenues are recognized.
RESEARCH AND DEVELOPMENT: Expenditures for research and development are
charged to expense as incurred.
SAVINGS AND PROFIT SHARING PLAN: Substantially all non-bargaining unit
employees of the Company's domestic subsidiaries may participate
in the savings and profit sharing plan after becoming eligible
(as defined). Profit sharing contributions are primarily at the discretion of
the Company. The savings plan contributions include a matching contribution
made by the Company. Savings and profit sharing contributions amounted to
$4,100,000, $3,145,000 and $3,320,000 for 1997, 1996 and 1995, respectively.
-9-
PAGE
FOREST LABORATORIES, INC. AND SUBSIDIARIES
------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)
EARNINGS PER SHARE: Earnings per share are based on the weighted average number
of common and common equivalent shares outstanding during each year. Common
equivalent shares consist of the dilutive effect of unissued shares under
options and warrants, computed using the treasury stock method (using the
average stock prices for primary basis and the higher of average or period end
stock prices for fully diluted basis). At March 31, 1996 and 1995, the primary
and fully diluted common equivalent shares amounted to 1,872,000 and 2,108,000,
2,206,000 and 2,287,000, respectively. There were no common equivalent shares
for the 1997 fiscal year.
INCOME TAXES: The Company accounts for income taxes on the liability method.
Under the liability method, deferred income taxes are provided on the
differences in bases of assets and liabilities between financial reporting and
tax returns using enacted tax rates.
USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires the Company to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. The Company reviews all significant estimates affecting the
financial statements on a recurring basis and records the effect of any
adjustments when necessary.
LONG-LIVED ASSETS: Long-lived assets, such as goodwill, intangible assets and
property and equipment, are evaluated for impairment when events or changes in
circumstances indicate that the carrying amount of the assets may not be
recoverable through the estimated undiscounted future cash flows from the use of
these assets. When any such impairment exists, the related assets will be
written down to fair value. This policy is in accordance with Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which was
adopted in the 1997 fiscal year. No impairment losses have been necessary
through March 31, 1997.
STOCK BASED COMPENSATION: The Company accounts for its stock option awards
under the intrinsic value based method of accounting prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees."
Under the intrinsic value based method, compensation cost is the excess, if any,
of the quoted market price of the stock at grant date or other measurement date
over the amount an employee must pay to acquire the stock. The Company makes
pro forma disclosures of net income and earnings per share as if the fair value
based method of accounting had been applied as required by Statement of
Financial Accounting Standards No. 123 ("SFAS No.123"), "Accounting for
Stock-Based Compensation."
FAIR VALUE OF FINANCIAL INSTRUMENTS: The carrying amounts of cash, accounts
receivable, accounts payable, accrued expenses and income taxes payable are
reasonable estimates of their fair value because of the short maturity of these
items.
RECLASSIFICATIONS: Certain amounts as previously reported have been
reclassified to conform to current year classifications.
RECENT ACCOUNTING STANDARDS: 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.
-10-
FOREST LABORATORIES, INC. AND SUBSIDIARIES
------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
------------------------------------------
2. ACQUISITIONS:
(a) Biovail Corporation International: On November 1, 1995, the Company
purchased approximately 22% of the total outstanding common shares of stock
of Biovail Corporation International ("BCI") for $76,328,000. This
investment was accounted for under the equity method of accounting. The
purchase price exceeded the Company's share of BCI's underlying book value
by $68,689,000 which was accounted for as goodwill. The goodwill was
amortized, using the straight-line method, based on an estimated life of the
investment of 25 years and charged against the equity in income of BCI. For
the year ended March 31, 1996, the Company recorded its share of BCI's
equity in income, as of BCI's year end of December 31. On May
22, 1996, the Company sold its entire investment in BCI for net proceeds
of $102,301,000 which resulted in a net non-recurring gain of $26,399,000 or
$17,019,000 after taxes.
(b) Product licenses: On November 1, 1995, the Company purchased an
exclusive product license from Biovail Laboratories Inc., a wholly owned
subsidiary of BCI, for $20,000,000. The exclusive license is for Tiazac, a
once daily formulation of diltiazem. The cost of the acquisition is
included in license agreements, product rights and other intangible assets
and is being amortized, using the straight-line method, over the estimated
life of the product of 25 years.
(c) On September 8, 1995, the Company entered into a Development and
Co-Promotion Agreement, with Berlex Laboratories, Inc., to co-promote the
Climara Patch Product. The Company paid $44,500,000 in connection with the
agreement, which is included in license agreements, product rights and other
intangible assets and is being amortized, using the straight-line method,
over the estimated life of the product of 20 years. The Company may be
required to make additional payments of up to $50,000,000 based on the
performance of the patch.
3. BUSINESS OPERATIONS:
The Company and its subsidiaries, which are located in the United States,
Puerto Rico, the United Kingdom and Ireland, manufacture and market ethical
and other pharmaceutical products. Information about the Company's sales
and profitability by different geographic areas for the years ended
March 31, 1997, 1996 and 1995 follows:
Domestic operations
-----------------------------
United
United States Exports, Kingdom
and principally and Ireland
1997 (In thousands) Puertro Rico Europe operations Eliminations Consolidated
- ------------------- ------------ ----------- ----------- ------------ ------------
Net sales to unaffiliated
customers $247,778 $1,540 $31,427 $280,745
Sales between geographic areas 1,200* $1,200
-------- ------ ------- ------ --------
Net sales $247,778 $2,740 $31,427 $1,200 $280,745
======== ====== ======= ====== ========
Operating profit (loss) ($ 62,585) $ 239 $ 4,534 $ 448 ($ 58,260)
======== ====== ======= ====== =========
Other income 28,316
Unallocated expenses ( 9,055)
=======
Income (loss) before income tax
expense (benefit) ($ 38,999)
========
Identifiable assets $482,423 $31,507 513,930
======== =======
Corporate assets 186,351
--------
Total assets $700,281
*At normal profit margins
11
PAGE
FOREST LABORATORIES, INC. AND SUBSIDIARIES
------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
------------------------------------------
3. BUSINESS OPERATIONS: (continued)
Domestic operations
-----------------------------
United
United States Exports, Kingdom
and principally and Ireland
1996 (In thousands) Puerto Rico Europe operations Eliminations Consolidated
- ------------------- ------------- ----------- ------------ ------------ -----------
Net sales to unaffiliated
customers $413,794 $2,591 $30,498 $446,883
Sales between geographic areas 1,232* $1,232
-------- ------ ------- ------ --------
Net sales $413,794 $3,823 $30,498 $1,232 $446,883
======== ====== ======= ====== ========
Operating profit $152,494 $1,435 $ 2,755 $ 448 $156,236
======== ====== ======= ====== ========
Other income 13,061
Unallocated expenses ( 6,922)
--------
Income before income taxes $162,375
========
Identifiable assets $650,339 $31,772 $682,111
======== =======
Corporate assets 217,250
--------
Total assets $899,361
========
*AT NORMAL PROFIT MARGINS
Domestic operations
-----------------------------
United
United States Exports, Kingdom
and principally and Ireland
1995 (IN THOUSANDS) Puerto Rico Europe operations Eliminations Consolidated
- ------------------- ------------- ----------- ----------- ------------ ------------
Net sales to unaffiliated
customers $360,014 $2,455 $30,890 $393,359
Sales between geographic areas 1,416* $1,416
-------- ------ ------- ------ --------
Net sales $360,014 $3,871 $30,890 $1,416 $393,359
======== ====== ======= ====== ========
Operating profit $144,927 $1,457 $ 6,341 $ 448 $152,277
======== ====== ======= ====== ========
Other income 11,470
Unallocated expenses ( 7,601)
--------
Income before income taxes $156,146
========
Identifiable assets $450,015 $32,079 $482,094
======== =======
Corporate assets 275,111
--------
Total assets $757,205
========
*AT NORMAL PROFIT MARGINS
The Company sells primarily in the United States and European markets.
Operating profit (loss) is net sales less operating expenses, and does not
include other income, unallocated expenses or income taxes (benefit).
Two customers accounted for 10% each of the Company's consolidated net sales
for the year ended March 31, 1997. One customer accounted for 12% and 11% of
the Company's consolidated net sales for the years ended March 31, 1996 and
1995, respectively.
-12-
PAGE
FOREST LABORATORIES, INC. AND SUBSIDIARIES
------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
------------------------------------------------------
4. INVENTORIES:
Inventories consist of the following:
March 31, (IN THOUSANDS) 1997 1996
------- -------
Raw materials $29,702 $19,500
Work in process 2,328 2,638
Finished goods 60,509 36,811
------- -------
$92,539 $58,949
======= =======
5. MARKETABLE SECURITIES:
The composition of the investment portfolio at March 31, was:
Gross Gross
unrealized unrealized Market
Cost gains losses value
------- ---------- ---------- ------
1997
- ---
Available for sale:
- ------------------
State and local obligations $23,074 ($ 463) $22,611
Held-to-maturity:
- ----------------
Foreign government obligations 4,207 $210 4,417
------- ---- ------ ------
$27,281 $210 ($ 463) $27,028
======= ==== ====== =======
1996
- ----
Available-for-sale:
- -------------------
State and local obligations $57,568 $ 38 ($1,483) $56,123
Held-to-maturity:
- -----------------
Foreign government obligations 4,211 154 4,365
Corporate debt securities 2,000 83 2,083
------- --- ------ ------
6,211 237 6,448
======= === ====== =====
$63,779 $275 ($1,483) $62,571
======= ==== ====== =======
-13-
PAGE
FOREST LABORATORIES, INC. AND SUBSIDIARIES
------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
------------------------------------------
5. MARKETABLE SECURITIES: (continued)
The contractual maturities of debt securities at March 31, 1997, regardless of
their balance sheet classification, consist of the following:
Amortized Fair
cost value
--------- -----
Available-for-sale:
- -------------------
Less than one year $ 9,697 $ 9,401
One to three years 13,377 13,210
------- -------
23,074 22,611
------- -------
Held-to-maturity:
- ----------------
One to three years 2,207 2,292
Three to ten years 2,000 2,125
------- -------
4,207 4,417
------- -------
$27,281 $27,028
======= =======
The net unrealized holding loss at March 31, 1997 and 1996 of $463 and
$1,445, respectively, from available-for-sale securities is included in
Shareholders' equity: Other.
6. OTHER ASSETS:
License agreements, product rights and other intangible assets consist of the
following:
MARCH 31,
(IN THOUSANDS, EXCEPT FOR ESTIMATED LIVES
WHICH ARE STATED IN YEARS)
- ----------------------------------------- Estimated
lives 1997 1996
--------- -------- ---------
License agreements (refer to note 2) 10-40 $141,810 $139,560
Product rights 10-14 33,738 33,738
Trade names 20-40 34,190 34,190
Goodwill 25-40 29,412 29,412
Non-compete agreements 10-13 22,987 22,987
Customer lists 10 3,506 3,506
Other 10-40 3,561 3,561
-------- --------
269,204 266,954
Less accumulated amortization ( 63,419) ( 50,876)
-------- --------
$205,785 $216,078
======== ========
-14-
PAGE
FOREST LABORATORIES, INC. AND SUBSIDIARIES
------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
------------------------------------------
7. ACCRUED EXPENSES:
Accrued expenses consist of the following:
MARCH 31, (IN THOUSANDS) 1997 1996
------- -------
Employee compensation and other benefits $11,638 $ 8,029
Clinical research 5,677 4,832
Customer discounts 2,135 3,782
Royalties 636 4,617
License fee 20,000
Other 16,890 9,072
------- -------
$36,976 $50,332
======= =======
8. COMMITMENTS:
LEASES: The Company leases manufacturing, office and warehouse facilities,
equipment and automobiles under operating leases expiring through 2010. Rent
expense approximated $7,115,000 for 1997, $4,158,000 for 1996 and $4,869,000
for 1995. Aggregate minimum rentals under noncancellable leases are as
follows:
YEAR ENDING MARCH 31, (IN THOUSANDS)
1998 $ 6,604
1999 5,956
2000 4,026
2001 2,853
2002 2,628
Thereafter 21,144
-------
$43,211
=======
ROYALTY AGREEMENTS: In 1986, the Company entered into an agreement for research
and development (the "1986 Prutech Agreement") with Prutech Research and
Development Partnership ("Prutech"). In accordance with the provisions of this
agreement, the Company granted Prutech a nonexclusive license to certain of the
Company's controlled release technologies for the purpose of developing
controlled release forms of physostigmine. Prutech contracted with the Company
to perform research necessary to develop the product. In addition, Prutech
granted the Company options to acquire exclusive manufacturing and marketing
rights to the product if it is successfully developed. Under the agreement, the
Company will pay to Prutech an initial royalty on sales of the product of 7%,
decreasing to 2%, through December 31, 1999. No royalties have been incurred
under this agreement.
-15-
PAGE
FOREST LABORATORIES, INC. AND SUBSIDIARIES
------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
------------------------------------------
8. COMMITMENTS: (Continued)
In connection with the acquisition of the product license of Tiazac (refer to
Note 2), the Company entered into a license agreement. The license agreement
provides for an 8% royalty on net sales, as defined. Royalties under this
agreement amounted to $2,003,000 for 1997 and $1,043,000 for 1996. The
license agreement also required the Company to spend $15,000,000 in advertising
and on samples, as defined, in 1996 and 1997.
In connection with the acquisition of the Climara patch product (refer to
Note 2), the Company will receive a co-promotion fee based on 50% of
co-promotion income as defined. For fiscal years 1997 and 1996, co-
promotion expenses incurred exceeded co-promotion income resulting in a
loss of $1,902,000 and $1,076,000, respectively.
9. SHAREHOLDERS' EQUITY:
PREFERRED STOCK PURCHASE RIGHTS: On September 30, 1994, the Company's Board of
Directors redeemed the then outstanding preferred stock purchase rights
distributed on February 18, 1988 at the redemption price of $.001 per right.
Additionally, on September 30, 1994, the Company's Board of Directors declared a
dividend of one preferred share purchase right (a "Right") for each outstanding
share of the Company's common stock, par value $.10 per share. Each Right will
entitle the holder to buy one one-hundredth of a share of authorized Series A
Junior Participating Preferred Stock, par value $1.00 per share ("Series A
Preferred Stock") at an exercise price of $250 per Right, subject to adjustment.
Prior to becoming exercisable, the Rights are evidenced by the certificates
representing the common stock and may not be traded apart from the common stock.
The Rights become exercisable on the tenth day after public announcements that
a person or group has acquired, or obtained the right to acquire, 20% or more
of the Company's outstanding common stock, or an announcement of a tender offer
that would result in a beneficial ownership by a person or group of 20% or more
of the Company's common stock.
If, after the Rights become exercisable, the Company is a party to certain
merger or business combination transactions, or transfers 50% or more of its
assets or earning power, or if an acquirer engages in certain self-dealing
transactions, each Right (except for those held by the acquirer) will entitle
its holder to buy a number of shares of the Company's Series A Preferred Stock
or, in certain circumstances, a number of shares of the acquiring company's
common stock, in either case having a value equal to two-and-one-half times the
exercise price of the Right. The Rights may be redeemed by the Company at any
time up to ten days after a person or group acquires 20% or more of the
Company's common stock at a redemption price of $.001 per Right. The Rights
will expire on September 30, 2004.
The Company has reserved 500,000 shares of Series A Preferred Stock for the
exercise of the Rights.
STOCK OPTIONS: The Company has various Employee Stock Option Plans whereby
options to purchase an aggregate of 7,500,000 shares of common stock have been
or remain to be issued to employees of the Company and its subsidiaries at
prices not less than the fair market value of the common stock at the date of
grant. Both incentive and non-qualified options may be issued under the
plan. The options are exercisable up to the tenth anniversary of the date of
issuance, subject to acceleration upon termination of employment.
-16-
PAGE
FOREST LABORATORIES, INC. AND SUBSIDIARIES
------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
------------------------------------------
9. SHAREHOLDERS' EQUITY: (Continued)
SFAS No. 123, "Accounting for Stock-Based Compensation," requires the Company
to provide pro forma information regarding net income and earnings per share
as if compensation cost for the Company's stock option plans had been determined
in accordance with the fair value of each stock option at the grant date by
using the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1997 and 1996, respectively: dividend yield of
zero for both years; expected volatility of 35.37% for both years;
risk-free interest rates of 6.5% for both years and expected lives of
four to seven years, for both years.
Under the accounting provisions of SFAS No. 123, the Company's net income (loss)
and earnings (loss) per share would have been reduced to the pro forma amounts
indicated below:
1997 1996
-------- --------
Net income (loss)
As reported ($23,541) $104,245
Pro forma ( 27,911) 102,162
Net income (loss) per common share
As reported ($.55) $2.22
Pro forma ( .65) 2.17
The following table summarizes information about stock options outstanding at
March 31, 1997:
Options Outstanding Options Exercisable
----------------------------------------------------- --------------------------------
Number Weighted-average Number
Range of outstanding remaining Weighted-Average exercisable Weighted average
exercise prices at 3/31/97 contractual life exercise price at 3/31/97 exercise price
- --------------- ---------- ---------------- ---------------- ----------- -----------------
$ 8.500 to $20.000 766,942 1.3 $10.69 716,942 $10.81
20.000 to 35.000 2,005,815 3.5 24.39 1,855,265 23.95
35.000 to 48.875 2,875,000 6.7 39.63 792,951 43.57
--------- --- ------ --------- ------
5,647,757 4.8 $30.03 3,365,158 $25.77
Transactions under the stock option plans and individual non-qualified options
not under the plans are summarized as follows:
Weighted-average
Shares exercise price
------------ -----------------
Shares under option at March 31, 1994
(at $6.59 to $44.50 per share) 5,586,016 $23.54
Granted (at $42.81 to $48.19 per share) 707,500 46.87
Exercised (at $6.59 to $44.50 per share) (1,440,614) 15.42
Cancelled ( 107,625) 42.55
--------- ------
Shares under option at March 31, 1995
(at $8.50 to $48.19 per share) 4,745,277 29.16
Granted (at $41.69 to $44.19 per share) 1,390,900 43.11
Exercised (at $9.91 to $46.63 per share) ( 308,706) 27.31
Cancelled ( 157,315) 43.57
--------- ------
-17-
FOREST LABORATORIES, INC. AND SUBSIDIARIES
------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
------------------------------------------
9. SHAREHOLDERS' EQUITY: (Continued)
Shares under option at March 31, 1996
(at $8.50 to $48.88 per share) 5,670,156 32.23
Granted (at $29.69 to $46.56 per share) 2,046,922 36.42
Exercised (at $19.97 to $42.81 per share) ( 202,726) 28.95
Cancelled (1,866,595) 43.85
---------
Shares under option at March 31, 1997
(at $8.50 to $48.19 per share) 5,647,757 30.03
Options exercisable at March 31:
1995 3,380,967 22.41
1996 3,619,858 26.37
1997 3,365,158 25.77
Weighted average fair value
of options granted during:
1995 $20.81
1996 21.00
1997 17.88
At March 31, 1997 and 1996, 926,222 and 1,028,845 shares, respectively, were
available for grant.
In connection with the acquisition of product rights in fiscal 1995, the
Company issued 280,000 warrants, which expire on July 7, 2004, at an exercise
price of $45.71 per share which was equal to the then fair market value of the
Company's common stock.
Included in the caption Shareholders' equity: Other are the cumulative effects
of foreign currency translation adjustments and the unrealized holding loss
from available-for-sale securities.
-18-
PAGE
FOREST LABORATORIES, INC.
-------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
------------------------------------------
10 CONTINGENCIES:
The Company is subject to product liability and other claims which management
does not believe will have a material effect on the financial position,
operations or liquidity of the Company.
The Company is a defendant in actions filed in various federal district courts
alleging certain violations of the Federal anti-trust laws in the marketing of
pharmaceutical products. In each case, the actions were filed against many
pharmaceutical manufacturers and suppliers and allege price discrimination and
conspiracy to fix prices in the sale of pharmaceutical products. The actions
were brought by various pharmacies (both individually and, with respect to
certain claims, as a class action) and seek injunctive relief and monetary
damages. The Judicial Panel on Multi-District Litigation has ordered these
actions coordinated (and, with respect to those actions brought as class
actions, consolidated) in the Federal District Court for the Northern District
of Illinois (Chicago) under the caption "In re Brand Name Prescription Drugs
Antitrust Litigation." Similar actions alleging price discrmination claims
under state law are pending against many pharmaceutical manufacturers, including
the Company, in 12 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. 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. While the Company believes
these 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. In March 1996, the Company was informed that the Federal
Trade Commission has begun an investigation of the existence of concerted
action among 22 pharmaceutical manfuacturers, including the Company, with
respect to pricing practices. The Company believes that no such
concerted activity has taken place involving the Company and intends to
cooperate with the FTC's investigation.
11. OTHER INCOME
Other income consists of the following:
YEAR ENDED MARCH 31, (IN THOUSANDS) 1997 1996 1995
------ ------- -------
Interest and dividends $9,698 $12,921 $10,817
Other income (loss), net ( 531) 140 653
------ ------- -------
$9,167 $13,061 $11,470
====== ======= =======
During the first quarter, the Company reported a net non-recurring gain of
$19,149,000 or $12,687,000 after taxes. The gain results from the sale of
the Company's equity holding in BCI (refer to Note 2), which
resulted in a gain of $26,399,000 or $17,019,000 after taxes partially
offset by non-recurring charges of $7,250,000 or $4,332,000 after taxes 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.
12. INCOME TAXES:
The Company and its mainland U.S. subsidiaries file a consolidated federal
income tax return.
-19-
FOREST LABORATORIES, INC.
-------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
-------------------------------------------
12. INCOME TAXES: (continued)
Income (loss) before income tax expense (benefit) includes income from
foreign operations of $5,982,000, $3,540,000 and $7,238,000 for the years
ended March 31, 1997, 1996 and 1995, respectively.
The Company has tax holidays in Puerto Rico and Ireland which expire primarily
in 1997 and 2010, respectively. The net impact of these tax holidays was to
decrease the net loss and net loss per share (primary) by approximately
$1,149,000 and $.03 in 1997. In 1996 and 1995, net income and net income
per share (primary) were increased by approximately $2,131,000 and $.05 and
$2,794,000 and $.06, respectively.
The provision for income taxes (benefit) consists of the following:
YEAR ENDED MARCH 31, (IN THOUSANDS) 1997 1996 1995
- ----------------------------------- -------- ------- --------
Current:
U.S. federal ($ 3,352) $53,147 $40,617
State and local ( 2,572) 8,809 7,729
Foreign 1,722 1,473 2,499
------- ------ -------
( 4,202) 63,429 50,845
------- ------ -------
Deferred:
Domestic ( 12,521) ( 6,589) ( 4,964)
Foreign ( 556) ( 35) ( 193)
------- ------- -------
( 13,077) ( 6,624) ( 5,157)
------- ------- -------
Charge in lieu of income taxes,
relating to the tax effect of
stock option tax deduction 1,821 1,325 10,309
------- ------- -------
($15,458) $58,130 $55,997
======= ======= =======
No provision has been made for income taxes on the undistributed earnings of
the Company's foreign subsidiaries of approximately $47,952,000 at March 31,
1997, as the Company intends to indefinitely reinvest such earnings.
The reasons for the difference between the provision for income taxes
(benefit) and expected federal income taxes at statutory rates are as follows:
Year ended March 31, (IN THOUSANDS) 1997 1996 1995
-------- ------- -------
Expected federal income taxes (tax benefit) ($13,650) $56,831 $54,651
State and local income taxes (tax
benefit), less federal income tax benefit ( 2,120) 5,396 5,876
Net benefit of tax-exempt earnings ( 3,020) ( 2,159) ( 3,234)
Tax effect of permanent differences 2,118 ( 2,767) ( 2,117)
Other 1,214 829 821
------- ------- -------
($15,458) $58,130 $55,997
======= ======= =======
-20-
FOREST LABORATORIES, INC.
-------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
------------------------------------------
12. INCOME TAXES: (Continued)
Net deferred income taxes consist of the following:
MARCH 31, (IN THOUSANDS): 1997 1996
- ------------------------ ------- -------
Inventory valuation $10,444 $ 2,298
Receivable reserves and other allowances 21,316 15,174
State and local net operating loss
carryforwards 3,420 3,792
Depreciation ( 2,030) ( 1,785)
Amortization 4,214 4,327
Tax credits and other carryforwards 255 704
Accrued liabilities 3,124 1,648
Other ( 130) 1,378
------- -------
$40,613 $27,536
======= =======
13. QUARTERLY FINANCIAL DATA (UNAUDITED):
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Primary
earnings
Net (loss)
1997 Net sales Gross profit income/loss per share
- ---- --------- ------------ ----------- --------
First quarter $90,316 $70,511 $21,866 $.47
Second quarter 90,182 67,499 5,573 .13
Third quarter 40,604 20,377 ( 32,313) ( .76)
Fourth quarter 59,643 36,484 ( 18,667) ( .45)
1996
- ----
First quarter $106,943 $86,045 $26,555 $.57
Second quarter 109,685 87,963 29,189 .62
Third quarter 122,870 96,790 24,871 .53
Fourth quarter 107,385 85,599 23,630 .50
The first quarter of fiscal 1997 includes a net non-recurring gain of
$19,149,000 ($12,687,000 after taxes or $.27 per share) from the sale of the
Company's equity holding in Biovail Corporation International which resulted in
a gain of $26,399,000 partially offset by non-recurring charges of $7,250,000
for expenses relating to the closing of certain of the Company's facilities and
for the estimated cost of settlement of certain litigations.
During the third fiscal quarter of 1997, 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, and thus improve
profit margins in future periods. As a result of this policy change,
distributors deferred purchases of products in order to reduce their inventories
to minimal levels. Lower sales resulting from this policy change, as well as
lower sales of Lorcet due to generic competition and lower prices received for
the Company's generic product line, were principally responsible for the losses
reported during the last two quarters of this fiscal year.
Fully diluted earnings (loss) per share are not presented, as the results
obtained are substantially the same as primary earnings (loss) per share.
-21-
PAGE
FOREST LABORATORIES, INC. AND SUBSIDIARIES
------------------------------------------
MANAGEMENT DISCUSSION AND ANALYSIS OF
-------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
FINANCIAL CONIDITION AND LIQUIDITY Net current assets decreased by $94,955,000
- ----------------------------------
during fiscal 1997. During the period, the Company modified its selling terms
to the trade, as more fully discussed below in the Results of Operations
section, which resulted in a substantial reduction in the Company's accounts
receivable. The Company also sold its investment in Biovail Corporation
International for $102,301,000, net of commissions and expenses. Cash generated
as a result of reduced receivables and the sale of the Biovail stock, together
with cash from maturing marketable securities, was used to pay the remaining
$20,000,000 license fee for Climara, a seven day estrogen patch, and for the
repurchase of the Company's common stock. At March 31, 1997, the Company had
repurchased 4,514,000 of the 6,500,000 shares authorized for repurchase at
a cost of $169,393,000. The increase in the allowance for doubtful accounts was
the result of the Company establishing a provision for amounts owed the Company
from Foxmeyer Drug, which is in bankruptcy. The increase in inventories
reflects a continuing buildup of Tiazac inventory, a once daily calcium channel
blocker for treating hypertension, a relatively new product that is growing
rapidly, and above average levels of Aerobid, an inhaled steroid product for
treating asthma, resulting from reduced sales as described below. The Company
anticipates that inventory levels will return to normal levels as sales increase
during fiscal 1998. Refundable income taxes includes previously paid income tax
prepayments which are now in excess of the current period's tax liability and
from the tax benefit generated by the current period's net operating loss. The
decrease in income taxes payable is due to lower taxable income. Accrued
expenses at March 31, 1996 included a $20,000,000 provision for the remainder of
the Climara license fee due Berlex Laboratories, Inc. which was paid in the
current fiscal year. The increase in deferred income taxes - current was
caused by provisions for various sales and inventory allowances which are not
currently deductible for tax purposes. 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, and thus improve
profit margins in future periods. The result of this policy change is that
distributors are deferring purchases of products until such time as they have
reduced their inventories to minimal levels, thereby resulting in lower sales.
Lower sales resulting from this policy change as well as lower sales of Lorcet
due to generic competition and lower prices received for the Company's generic
product line are principally responsible for the losses reported during the last
two quarters of this fiscal year.
PAGE
FOREST LABORATORIES, INC. AND SUBSIDIARIES
------------------------------------------
MANAGEMENT DISCUSSION AND ANALYSIS OF
-------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont'd.)
---------------------------------------------
Net sales decreased $166,138,000 in fiscal 1997 due to the factors discussed
above. $146,342,000 of the decrease was attributable to volume declines and
$19,796,000 was due to price declines. The principal volume declines, amounting
to $126,949,000, resulted from lower sales of Aerobid, Lorcet and the
Company's generic products. Other unpromoted products accounted for the
remaining net volume decline of $19,393,000, which was also due to
distributors reducing inventory levels. Price decreases were the result of
lower prices for the Company's generic products due to heightened competition
and lower prices for Aerobid as a result of having a higher percentage of those
sales made to managed care customers. The Company anticipates
that high trade inventory levels may continue to impact Aerobid sales,
through the Company's June 1997 fiscal quarter, that the generic substitution
rate for Lorcet will continue to grow and that there will be further declines in
the generic business as a result of continuing competition. Net sales
increased $53,524,000 in fiscal 1996 as compared to fiscal 1995 as a result of
the continued growth of the Company's branded promoted products, particularly
Aerobid, which was heavily stocked by the trade, and the launch of Cervidil and
Tiazac. Net volume growth of the Company's principal promoted products
accounted for $51,530,000 of the increase. Sales of Cervidil and
Tiazac amounted to $28,760,000. During this period, the Company experienced
generic competition for Lorcet 10 and aggressive pricing competition for other
generic products. As a result, sales of the Company's generic product lines
decreased by $27,667,000, of which $15,229,000 was from volume declines and
$12,438,000 was from price decreases. Sales declines of certain of the
Company's unpromoted product lines amounted to $11,678,000. The remainder of
the net sales change was due to net price increases on certain of the
Company's principal promoted products amounting to $13,539,000. The impact
of the reduction in foreign exchange translation rates was $960,000.
Non-recurring income represents a net non-recurring gain from the sale of the
Company's equity holding in Biovail Corporation International of $26,399,000
partially offset by non-recurring charges of $7,250,000 for expenses relating to
the closing of certain of the Company's facilities and for the estimated cost of
settlement of certain litigations.
Other income decreased $3,894,000 during fiscal 1997. Interest income was
lower, as funds were utilized for the share repurchase program, as discussed
above. Co-promotion expenses incurred on the sales of Climara exceeded
co-promotion income and accounted for $826,000 of the decrease in other
income. Other income increased $1,591,000 during fiscal 1996. Interest income
increased as a result of higher yields received on the Company's investments.
Cost of sales as a percentage of sales increased to 31% in fiscal 1997 from 20%
in fiscal 1996 and 19% in fiscal 1995. The increase during fiscal 1997 was due
to lower sales of high margin branded products which was a result of trade
inventory reductions, a higher percentage of low margin generic product sales
which were not affected by trade inventory reductions, lower prices received on
generic products due to heightened competition, and under absorbed overhead
which resulted from lower production levels needed to support lower sales. The
increase during fiscal 1996 was due to increases in overhead costs related to
the Company's facilities expansion and lower net prices received on certain
products.
Selling, general and administrative expenses increased $48,610,000 during fiscal
1997. The increase reflects the full year's impact of the expansion of the
Company's U.S. salesforce by 200 representatives which was completed in the
prior year's last fiscal quarter, for costs incurred in conjunction with the
launches of Tiazac and Monurol, a single dose antibiotic for treating urinary
tract infection, and for a write-down of monies owed the Company by Foxmeyer
Drug. The increase in selling, general and administrative expense during
fiscal 1996 was principally the result of the initial launch costs for
Tiazac and Climara and the cost of expanding the salesforce in order to
support both current and planned new product introductions. The increase
in selling, general and administrative expense during fiscal 1996 was
principally the result of the initial launch costs for Tiazac and Climara
and the cost of expanding the salesforce in order to support both
current and planned new product introductions.
PAGE
FOREST LABORATORIES, INC. AND SUBSIDIARIES
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MANAGEMENT DISCUSSION AND ANALYSIS OF
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FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont'd.)
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Research and development expense increased by $6,492,000 during 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 year, particular emphasis was placed
on comparative clinical studies for Aerobid and Tiazac and for New Drug
Applications (NDA) for Synapton, the Company's acetylcholinesterase inhibitor
for use in the treatment of Alzheimer's Disease, and for Citalopram, a
selective serotonin reuptake inhibitor used to treat depression, for which an
NDA was filed with the FDA in May 1997. The increase in fiscal 1996 of
$2,187,000 was principally a result of the cost of conducting clinical trials
in order to gain approval of new products and the cost of developing products
using the Company's controlled release technology. Particular emphasis was
on Synapton, Methoxatone, AF102B, and Aerobid. Methoxatone is a novel anti-
inflammatory compound being evaluated for treating various indications,
including head trauma. Evaluation of AF102B, an M1 agonist for the treatment of
Alzheimer's Disease, was discontinued in fiscal 1997. The Company anticipates
a continued increase in research and development expense as these products and
other potential products are developed and tested.
The income tax benefit reflects the consolidated net operating loss of the
Company's U.S. operating companies, which can be carried back to prior fiscal
periods to yield tax refunds, partially offset by taxes on the income of the
Company's United Kingdom operating companies, on the income of partially tax-
exempt operating companies and for various U.S. state and local taxes (which
are not solely payable on taxable income).
The Company expects to return to profitability in 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 rapidly growing products such as Cervidil, Tiazac and MONUROL, and from
Climara sales achieving profitability.
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.
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
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herein, the Management Discussion and other portions of this Annual Report
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 10K
for the fiscal year ended March 31, 1997.
EXHIBIT 23
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Forest Laboratories, Inc.
New York, NY
We hereby consent to the incorporation by reference in the Registration
Statements of Forest Laboratories, Inc. on Form S-8, filed with the
Securities and Exchange Commission on November 13, 1990 and
October 28, 1994, and Form S-3, filed with the Securities and Exchange
Commission on November 30, 1993 and August 8, 1994, of our reports
dated May 5, 1997, on the consolidated financial statements and
schedule of Forest Laboratories, Inc. Annual Report on Form 10-K for the
year ended March 31, 1997.
/s/ BDO SEIDMAN, LLP
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BDO SEIDMAN, LLP
New York, New York
June 26, 1997