-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Qng5ZK7Lv31WXvulU1/sxUL1Nh47V8df973nDstqFOJUV3fGM1i/nJAoWYWKbteq YM75X3HBkPR1h+5qmV/1PQ== 0000038074-97-000004.txt : 19970630 0000038074-97-000004.hdr.sgml : 19970630 ACCESSION NUMBER: 0000038074-97-000004 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970627 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: FOREST LABORATORIES INC CENTRAL INDEX KEY: 0000038074 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 111798614 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-05438 FILM NUMBER: 97631118 BUSINESS ADDRESS: STREET 1: 909 THIRD AVENUE CITY: NEW YORK STATE: NY ZIP: 10022 BUSINESS PHONE: 2124217850 MAIL ADDRESS: STREET 1: 909 THIRD AVENUE CITY: NEW YORK STATE: NY ZIP: 10022 10-K 1 FOREST LABORATORIES, INC. 10-K 1997 SECURITIES AND EXCHANGE COMMISSION ---------------------------------- WASHINGTON, D. C. 20549 ------------------ FORM 10-K (Mark One) --- / X / ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE --- SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] --------------- For the Fiscal Year Ended March 31, 1997 --- / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE --- SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] --------------- For the transition period from __________ to _____________________ Commission File No. 1-5438 FOREST LABORATORIES, INC. ------------------------- (Exact name of registrant as specified in its charter) DELAWARE 11-1798614 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 909 Third Avenue, New York, New York 10022 (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 ------------------- ------------------------ 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. --- --- YES / X / NO / / --- --- 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 --- Form 10-K / X /. --- 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. ------------------ 2 PART I ------ ITEM 1. BUSINESS -------- 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 4 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 9 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 - ---------------------- Backlog of orders is not considered material to Forest's business prospects. Forest's business is not seasonal in nature. ITEM 2. PROPERTIES - ------- ---------- 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 - ------- ----------------- 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 - ------- ------------------------------- Not Applicable. 12 PART II ------- 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 -------- 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 ------- 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 15 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 ------------------ 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 ------------------------------------------ MANAGEMENT DISCUSSION AND ANALYSIS OF ------------------------------------- FINANCIAL CONDITION AND RESULTS OF OPERATIONS (cont'd.) --------------------------------------------- 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 - ------------------------- 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 - ---------------------------- BDO SEIDMAN, LLP New York, New York June 26, 1997 EX-27 2
5 0000038074 JAMES A. BRAJA 12-MOS MAR-31-1997 DEC-31-1996 162,842 26,818 31,490 9,594 92,539 359,630 115,580 32,256 700,281 73,544 0 0 0 4,834 832,152 700,281 280,745 309,061 85,874 307,371 40,689 4,077 0 (38,999) (15,458) (23,541) 0 0 0 (23,541) (0.55) (0.55)
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