35
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10 - K/A
Amendment No. 1 to
Annual Report Pursuant to Section 13 or 15 (d) of
the Securities Exchange Act of 1934
For the fiscal year ended Commission File No.
1-8593
December 31, 1999
ALPHARMA INC.
(Exact name of registrant as specified in its charter)
Delaware 22-2095212
(State of Incorporation) (I.R.S. Employer
Identification No.)
One Executive Drive, Fort Lee, New Jersey 07024
(Address of principal executive offices) zip
code
(201) 947-7774
(Registrant's Telephone Number Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Name of
each Exchange on
Title of each Class which
Registered
Class A Common Stock, New York Stock
Exchange
$.20 par value
Subordinated Convertible Notes due 2005 New York Stock
Exchange
Convertible Senior Subordinated Notes due 2006 New York
Stock Exchange
Securities registered pursuant to Section 12 (g) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all
reports to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding twelve 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 registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ( )
The aggregate market value of the voting stock of the Registrant
(Class A Common Stock, $.20 par value) as of March 10, 2000 was
$762,249,000.
The number of shares outstanding of each of the Registrant's
classes of common stock as of March 10, 2000 was:
Class A Common Stock, $.20 par value - 20,122,736 shares;
Class B Common Stock, $.20 par value - 9,500,000 shares.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Proxy Statement relating to the Annual Meeting of
Shareholders to be held on May 25, 2000 are incorporated by
reference into Part III of this report. Other documents
incorporated by reference are listed in the Exhibit index.
PART I
Item 1. Business
GENERAL
The Company is a multinational pharmaceutical company that
develops, manufactures and markets pharmaceutical products for
use in humans and animals. The Company manufactures and markets
approximately 620 pharmaceutical products for human use and 40
animal health products. The Company conducts business in more
than 60 countries and has approximately 3,300 employees at 40
sites in 22 countries. For the year ended December 31, 1999, the
Company generated revenue and operating income of over $732
million and $95 million, respectively.
Restatement of Financial Statements
In the third quarter of 2000 the Company discovered that
with respect to its Brazilian Animal Health Division ("AHD")
operations, which reported revenues of approximately $1.8
million, $6.0 million and $13.7 million for the years 1997, 1998,
and 1999, respectively, a small number of employees collaborated
to circumvent established company policies and controls to create
invoices that were either not supported by underlying
transactions or for which the recorded sales were inconsistent
with the underlying transactions.
A full investigation of the matter with the assistance of
counsel and the company's independent auditors was initiated and
completed. As a result, the individuals responsible have been
removed, new management has been appointed to supervise AHD
Brazilian operations and the Company has restated all affected
period, comprising all four quarters of 1999 and the first two
quarters of 2000.
See Notes 2B, 21 and 22 of the Consolidated Financial
Statements for additional information.
As a result of the revisions to our 1999 financial
statements, the Company will also be amending other SEC filings
to reflect the revisions to our quarterly results.
Formation
The Company was originally organized as A.L. Laboratories,
Inc., a wholly owned subsidiary of Apothekernes Laboratorium
A.S., a Norwegian healthcare company (the predecessor company to
A.L. Industrier). In 1994, the Company acquired the complementary
human pharmaceutical and animal health business of its parent
company and subsequently changed its name to Alpharma Inc. to
operate worldwide as one corporate entity (the "Combination
Transaction").
Controlling Stockholder
A.L. Industrier beneficially owns all of the outstanding
shares of the Company's Class B Common Stock, or 32.1% of the
Company's total common stock outstanding at December 31, 1999. In
addition, A.L. Industrier holds $67.8 million of Convertible
Subordinated Notes due 2005 which may, under certain
circumstances, be converted into 2,372,896 shares of the
Company's Class B Common Stock. The Class B Common Stock bears
the right to elect more than a majority of the Company's Board of
Directors and to cast a majority of the votes in any vote of the
Company's stockholders. Mr. Einar Sissener, Chairman of the Board
of the Company and a controlling stockholder of A.L. Industrier,
and members of his immediate family, also beneficially own
328,667 shares of the Company's Class A Common Stock. As a
result, A.L. Industrier, and ultimately Mr. Sissener, can control
the Company.
Convertible Senior Subordinated Note Offering
In June, 1999, the Company sold $170 million principal
amount of 3% Convertible Senior Subordinated Notes due 2006 (the
"06 Notes"). The 06 Notes are convertible at an initial
conversion price of $32.11 per share into shares of the Company's
Class A Common stock. Substantially all of the Notes have been
registered with the Securities and Exchange Commission and are
listed on the New York Stock Exchange.
Class A Common Stock Offering
On November 12, 1999, the Company sold 2,000,000 shares of
its Class A Common Stock (the "Shares") for $31.30 per share to
Bear Stearns & Co. Inc. who then offered the Shares to third
parties. The Shares have been registered with the Securities and
Exchange Commission and are listed on the New York Stock
Exchange.
Forward-Looking Statements
This annual report contains "forward-looking statements," or
statements that are based on current expectations, estimates, and
projections rather than historical facts. The Company offers
forward-looking statements in reliance on the safe harbor
provisions of the Private Securities Litigation Reform Act of
1995. Forward-looking statements may prove, in hindsight, to
have been inaccurate because of risks and uncertainties that are
difficult to predict. Many of the risks and uncertainties that
the Company faces are included under the caption "Risk Factors".
Financial Information About Industry Segments
The Company operates in the human and animal pharmaceutical
industries. It has five business segments within these
industries. The table that follows shows how much each of these
segments contributed to revenues and operating income in the past
three
years.
($in Millions) Revenues Operating Income
(loss)
1999 1998 1997 1999 1998 1997
International
Pharmaceuticals
Division 303.3 193.1 134.1 35.6 8.0 11.0
U.S. Pharmaceutical
Division 197.3 178.8 155.4 16.6 11.1 4.1
Fine Chemicals Division 60.8 53.0 38.7 23.1 17.5 9.4
Animal Health Division 159.5* 166.3 158.4 38.1* 37.8 32.0
Aquatic Animal Health
Division 16.1 19.0 15.3 (2.5) 3.6 2.8
* Previously reported 1999 amounts for the Animal Health Division
were revenues $169.2 million and operating income $42.3 million.
For additional financial information concerning the
Company's business segments see Note 21 of the Notes to the
Consolidated Financial Statements included in Item 8 of this
Report.
NARRATIVE DESCRIPTION OF BUSINESS
Human Pharmaceuticals
The Company's human pharmaceuticals business is comprised of
the International Pharmaceuticals Division, U.S. Pharmaceuticals
Division and Fine Chemicals Division. Each of these Divisions is
managed by a separate senior management team. The Company's human
pharmaceutical business had sales of approximately $561.4 million
in 1999, before elimination of intercompany sales, with operating
profit of approximately $75.3 million.
Generic pharmaceuticals which are the primary products of
the U.S. and International Pharmaceuticals Division, are the
chemical and therapeutic equivalents of brand-name drugs.
Although typically less expensive, they are required to meet the
same governmental standards as brand-name drugs and most must
receive approval from the appropriate regulatory authority prior
to manufacture and sale. A manufacturer cannot produce or market
a generic pharmaceutical until all relevant patents (and any
additional government-mandated market exclusivity periods)
covering the original brand-name product have expired.
International Pharmaceuticals Division ("IPD")
The Company's International Pharmaceuticals Division develops,
manufactures, and markets a broad range of pharmaceuticals for
human use. The Company believes that it is one of the largest
manufacturers and marketers of generic solid dose pharmaceuticals
in Europe including the United Kingdom, Germany, France, the
Nordic countries, the Netherlands and Portugal. IPD also has a
significant presence in Southeast Asia including a strong
presence in Indonesia.
Product Lines. The International Pharmaceuticals Division
manufactures approximately 305 products which are sold in
approximately 1,100 product presentations including tablets,
ointments, creams, liquids, suppositories and injectable dosage
forms.
Prescription Pharmaceuticals. The Division has a broad
range of products with a concentration on prescription drug
antibiotics, analgesics/antirheumatics, psychotropics and
cardiovascular products. The predominant
number of these products are sold on a generic basis.
OTC Products. The Division also has a broad range of
OTC products, such as those for skin care, gastrointestinal
care and pain relief, and including such products as
vitamins, fluoride tablets, adhesive bandages and surgical
tapes. Substantially all of these products are sold on a
branded basis.
On May 7, 1998, the Company acquired a substantial generic
pharmaceutical presence in the United Kingdom through the
purchase of all of the capital stock of Arthur H. Cox and Co.
Ltd. ("Cox") from Hoechst AG for a total purchase price of
approximately $198 million in cash. Cox's main operations (which
consist primarily of a manufacturing plant, warehousing
facilities and a sales organization) are located in Barnstaple,
England. Cox is a generic pharmaceutical manufacturer and
marketer of tablets, capsules, suppositories, liquids, ointments
and creams. Cox distributes its products to pharmacy retailers
and pharmaceutical wholesalers primarily in the United Kingdom.
In addition, in November 1998 and April 1999, in
substantially smaller transactions, the Company acquired generic
pharmaceutical product lines in Germany and France. All of the
products purchased in these transactions are manufactured under
contract by third parties.
Effective June 15, 1999, the Company acquired a leading market
presence in the German generic market through the purchase of all
of the capital stock of the ISIS group of companies from Schwarz
Pharma AG for a purchase price of approximately $153 million.
ISIS has a substantial marketing organization but no
manufacturing operations. All products are manufactured for ISIS
by third parties, including a substantial number under a Supply
Agreement with Schwarz Pharma. Approximately 80% of ISIS's sales
are of cardiovascular products, the most important of which is
the drug PentalongTM.
The Company intends to continue the operations of Cox, ISIS
and the smaller German and French generic product lines to
achieve benefits from leveraging these new activities with the
other businesses of the International Pharmaceutical Division. In
addition, the Company plans to expand the scope of the acquired
operations by adding to the acquired product base certain other
pharmaceutical products of the Company. The Company is continuing
to review market expansion opportunities in Europe.
Facilities. The Company maintains five manufacturing
facilities for its international pharmaceutical products, all of
which also house administrative offices and warehouse space. The
Company's plants in Lier, Norway and Barnstaple, England, include
many technologically advanced applications for the manufacturing
of tablet, liquid and ointment products. The Company's plant in
Copenhagen, Denmark, which it shares with the Fine Chemical
Division, manufactures sterile products. In addition to the
Barnstaple, Copenhagen and Lier facilities, the Company also
operates plants in Vennesla, Norway, for bandages and surgical
tape products, and Jakarta, Indonesia, for tablets, ointments and
liquids. The Jakarta plant has received regulatory approval to
export certain products to Europe.
In 1998, the Company substantially completed the
implementation of a production rationalization plan which
included the transfer of all tablet, ointment and liquid
production from Copenhagen to Lier and the transfer of sterile
production from Norway to the Copenhagen facility. In addition to
increasing available capacity, the Company is recognizing
manufacturing efficiencies from this reorganization.
Competition. The Division operates in geographic areas that
are highly competitive. Many of the Company's competitors in this
area are substantially larger and have greater financial,
technical, and marketing resources than the Company. Most of the
Company's international pharmaceutical products compete with one
or more other products that contain the same active ingredient.
In European countries in recent years, sales of generic
pharmaceuticals have been increasing relative to sales of patent
protected pharmaceuticals. Generics are gaining market share
because, among other things, governments are attempting to reduce
pharmaceutical expenses by enacting regulations that promote
generic pharmaceuticals in lieu of original formulations. This
increased focus on pharmaceutical prices may lead to increased
competition and price pressure for suppliers of all types of
pharmaceuticals, including branded generics (see "Risk Factors").
The Company's international pharmaceutical products have also
been encountering price pressures from "parallel imports"
(i.e.,imports of identical products from lower priced markets
under EU laws of free movement of goods). (See "Risk Factors").
Geographic Markets. The principal geographic markets for the
Division's pharmaceutical products are the United Kingdom,
Germany, Netherlands, France, the Nordic and other Western
European countries, Indonesia, and the Middle East.
Sales and Distribution and Customers. Depending on the
characteristics of each geographic market, generic products are
predominantly marketed under either brand or generic names. OTC
products are typically marketed under brand names with
concentration on skin care, tooth cavity prevention, pain relief
and vitamins. The Division employs a specialized sales force of
363 persons, 134 and 143 of whom are in Indonesia and Germany
respectively, that markets and promotes products to doctors,
dentists, hospitals, pharmacies and consumers. In each of its
international markets, the Company uses wholesalers to distribute
its pharmaceutical products.
U.S. Pharmaceuticals Division ("USPD")
The U.S. Pharmaceuticals Division develops, manufactures,
and markets specialty generic prescription and over-the-counter
("OTC") pharmaceuticals for human use. With approximately 170
products, the Division is a market leader in generic liquid and
topical pharmaceuticals with what the Company believes to be
the broadest portfolio of manufactured products in the generic
industry. In addition, the Company believes it is the only major
U.S. generic liquid and topical prescription drug manufacturer
with a substantial presence in generic OTC pharmaceuticals. With
approximately 60 OTC products, the Company is increasing its
presence as a significant supplier to major retailers. The
Company believes that its broad product lines give the Company a
competitive advantage by providing large customers the ability to
buy a significant line of products from a single source.
Sales of generic pharmaceuticals have continued to increase.
The Company has identified four reasons for this trend: (i) laws
permitting and/or requiring pharmacists to substitute generics
for brand-name drugs; (ii) pressure from managed care and third
party payors to encourage health care providers and consumers to
contain costs; (iii) increased acceptance of generic drugs by
physicians, pharmacists, and consumers; and (iv) an increase in
the number of formerly patented drugs which have become available
to off-patent competition.
Product Lines. The Company's U.S. Pharmaceutical Division
(excluding its telemarketing operation) manufactures and/or
markets approximately 170 generic products, primarily in liquid,
cream and ointment, respiratory and suppository dosage forms.
Each product represents a different chemical entity. These
products are sold in over 300 product presentations under the
"Alpharma", "Barre" or "NMC" labels and private labels.
Liquid Pharmaceuticals. The U.S. Pharmaceuticals
Division is the leading U.S. manufacturer of generic
pharmaceutical products in liquid form with approximately
110 products. The experience and technical know-how of the
Division enables it to formulate therapeutic equivalent
drugs in liquid forms and to refine product characteristics
such as taste, texture, appearance and fragrance.
Cough and cold remedies constitute a significant
portion of the Division's liquid pharmaceuticals business.
This business is seasonal in nature, and sales volume is
higher in the fall and winter months and is affected, from
year to year, by the incidence of colds, respiratory
diseases, and influenza.
Creams, Lotions and Ointments. The Division
manufactures approximately 40 cream, lotion and ointment
products for topical use. Most of these creams, lotions and
ointments are sold only by prescription.
Suppositories, Aerosols and Other Specialty Generic
Products. The Division also manufactures six suppository
products and markets certain other specialty generic
products, including two aerosols and two nebulizer products.
In 1999, the Company maintained its strategy of entering
into third party alliances to market certain of its U.S.
pharmaceutical products under licenses to third parties or under
third party brands. In addition, in February of 1999, the
Company reached an agreement with Ascent Pediatrics, Inc. to lend
that entity a maximum of $40 million; $12 million of which can be
used for working capital purposes and the remainder of $28
million to be used to execute projects reasonably designed for
intermediate term growth. As of February 2000 only the $12
million for working capital has been advanced. Additional loans
are subject to Ascent meeting a number of terms and conditions.
The Company also received an option to purchase all of the
capital stock of Ascent in 2003 for approximately 12.2 times
Ascent's 2002 operating earnings.
Facilities. The Company maintains two manufacturing
facilities for its U.S. pharmaceutical operations, a research and
development center, four telemarketing facilities and an
automated central distribution center. The Division's largest
manufacturing facility is located in Baltimore, Maryland and is
designed to manufacture high volumes of liquid pharmaceuticals.
The Company's facility in Lincolnton, North Carolina manufactures
creams, ointments and suppositories.
Competition. Although the Company is a market leader in the
U.S. in the manufacture and marketing of specialty generic
pharmaceuticals, it operates in a highly competitive market. The
Company competes with other companies that specialize in generic
products and with the generic drug divisions of major
international branded drug companies and encounters market entry
resistance from branded drug manufacturers.
Sales and Distribution. The Company maintains a professional
sales force to market the U.S. Pharmaceutical Division's
products. The Company supplements its sales effort through its
use of selected independent sales representatives. In addition,
the Company's advanced telemarketing operation, which employs
approximately 75 sales personnel, markets and distributes
products manufactured by third parties and, to a limited extent,
the Division. The Company has recently increased the use of its
telemarketing operations for the sale of its own products by
adding a dedicated facility for this expanded activity. This
business also provides certain custom marketing services, such as
order processing, and distribution, to the pharmaceutical and
certain other industries.
Customers. The Company has historically sold its U.S.
pharmaceutical products to pharmaceutical wholesalers,
distributors, mass merchandising and retail chains, and, to a
lesser extent, grocery stores, hospitals and managed care
providers. In response to the general trend of consolidation
among pharmaceutical customers and greater amount of products
sold through wholesalers, the Company is placing an increased
emphasis on marketing its products directly to managed care
organizations, purchasing groups, mass merchandisers and chain
drug stores to gain market share and enhance margins.
Fine Chemicals Division ("FCD")
The Company's Fine Chemicals Division develops, manufactures
and markets active pharmaceutical ingredients to the
pharmaceutical industry for use in finished dose products sold in
more than 50 countries and benefits from over four decades of
experience in the use of and development of fermentation and
purification technology. In addition, the Company's fermentation
expertise in the production of bulk antibiotics has a direct
technological application to the manufacture of products of the
Company's animal health business.
Product Lines. The Company's fine chemical products
constitute the active substances in certain pharmaceuticals for
the treatment of certain skin, throat, intestinal and systemic
infections. The Company is the world's leading producer of
bacitracin, bacitracin zinc and polymixin, and is a leading
producer of vancomycin; all of which are important pharmaceutical
grade antibiotics. The Company also manufactures other
antibiotics such as amphotericin B and colistin for use
systemically and in specialized topical and surgical human
applications. The Company has substantially expanded its
production capacity and sales of vancomycin as a result of the
1997 approval to sell vancomycin in the U.S., expanded capacity
at its Copenhagen facility, and the December 1998 acquisition of
a facility in Budapest, Hungary.
Facilities. The Company manufactures its fine chemical
products in its plants in Oslo, Norway (which also manufactures
products for the Animal Health Division), Copenhagen, Denmark
(which it shares with the International Pharmaceuticals
Division)and Budapest, Hungary. Each plant includes fermentation,
specialized recovery and purification equipment. The Budapest
facility is presently undergoing a material upgrade in
manufacturing processes and capacity. All these facilities have
been approved as a manufacturer of certain sterile and non-
sterile bulk antibiotics by the FDA and by the health authorities
of certain European countries. (See "Environmental Matters" for a
discussion of an administrative action related to the Budapest
facility)
Competition. The bulk antibiotic industry is highly
competitive and many of the Company's competitors in this area
are substantially larger and have greater financial, technical,
and marketing resources than the Company. Sales are made to
relatively few large customers with prices and quality as the
determining sales factors. In sales to smaller customers, price,
quality and service are the determining factors. The Company
believes its fermentation and purification expertise and
established reputation provide it with a competitive advantage in
these antibiotic products.
Geographic Markets and Sales and Distribution. U.S. sales of
fine chemical products represent approximately 50% of the revenue
from these products with significant additional sales in Europe,
Asia and Latin America. The Company distributes and sells its
fine chemical products in the U.S. and Europe using its own sales
force. Sales in other parts of the world are primarily through
the use of local agents and distributors.
Animal Pharmaceuticals
The animal pharmaceutical business is comprised of the Animal
Health Division and the Aquatic Animal Health Division. Each of
these divisions is managed by a separate senior management team.
In 1999, the Company had animal health product sales of
approximately $175.6 million, before elimination of intercompany
sales, with operating profit of approximately $35.6 million.
Animal Health Division ("AHD")
The Company develops, manufactures and markets
pharmaceutical products for animals raised for commercial food
production worldwide. The Company believes that its animal health
business is a leading manufacturer and marketer of feed additives
to the worldwide poultry and swine industries.
Product Lines. The Company's principal animal health
products are: (i) BMDT, a bacitracin based feed additive used to
promote growth and feed efficiency and prevent or treat diseases
in poultry and swine; (ii) Albac(TM), a bacitracin based feed
additive to promote growth and feed efficiency and prevent or
treat diseases in poultry, swine and calves; (iii) 3-Nitro(R),
Histostat(TM), Zoamix(R), anticoccidials, and chloromax ("CTC"),
feed grade antibiotics, all of which are commonly used in
combination or sequentially with BMD; (iv) Deccox, a feed
additive used to prevent and control diseases that affect growth
in cattle and calves; (v) Vitamin D3, a feed additive which is an
essential nutrient for growth in poultry and swine and (vi)
soluble antibiotics and vitamins. Based upon its fermentation
experience and a strong marketing presence, the Company is the
market leader in the manufacture and sale of bacitracin-based
feed additives which are marketed under the brand names Albac and
BMD. In addition, the Company believes that it has a significant
market share with several other of its feed additives, including
those sold under the Company's 3-Nitro brands.
In 1997, the Company acquired the Deccox brand name and
certain related assets from Rhone-Poulenc's Animal Nutrition
Division. Under the agreement pursuant to which Deccox was
acquired, Rhone-Poulenc will continue to manufacture this product
for sale by the Company for a period of 15 years. Deccox is used
to prevent and control coccidiosis (a parasite that adversely
affects growth)in cattle. The acquisition of the Deccox brand has
provided the Company with its initial entry into the cattle and
calf market. In addition to Deccox sales, this has offered the
opportunity to market to the cattle industry several of the
Company's established products which have historically been sold
only in the swine and poultry markets.
In 1999 the Company purchased I.D. Russell Company
Laboratories, a manufacturer of a line of soluble antibiotics and
vitamins and acquired exclusive marketing rights to an animal
fertility testing system. In addition, during 1999 the Company
acquired exclusive marketing rights to Reporcin (a performance
and meat quality improvement product for injectable use in
swine). Sales of Reporcin are ongoing in certain limited
countries; however the full realization of the potential for PST
is dependant upon governmental license approvals, and market
acceptance, in numerous other countries, including the United
States. The agreement granting the Company rights to PST requires
the Company to make a maximum of $65 million in additional
product payments upon receipt of product licenses in certain
specified countries and to expend additional funds to build or
lease a plant to manufacture Reporcin.
The Company believes that the number of products it has
approved to be used in combination with other products is a
significant competitive advantage. FDA regulations require animal
health products to be approved for use in combination with other
products in animal feeds. Therefore, it is generally difficult to
gain market acceptance for new products unless such products are
approved for use with other existing products. The approval for
use of a new product in combination with other products generally
requires the cooperation of the manufacturer of such other
products. When seeking such cooperation from other manufacturers,
the Company believes it is a competitive advantage to have
products with which other manufacturers desire to obtain
combination approval. To date, the Company has been successful in
its ability to obtain the cooperation of third parties in seeking
combination approval for its products. There can be no assurance,
however, that the Company will continue to obtain such
cooperation from others. Presently, the Company has a total of
271 combination approvals in the U.S.
The Company believes that features of BMD have enhanced the
Company's competitive position in the animal health business.
Generally, FDA regulations do not permit animals to be sold for
food production unless their feed has been free of additives that
are absorbed into animal tissue for a certain period of time as
required by FDA rules. BMD is not absorbed into animal tissue,
and therefore need not be withdrawn from feed prior to the
marketing of the food animals. This attribute of BMD allows
producers to avoid the burden of removing these additives from
feed in order to meet the FDA requirement.
Facilities. The Company produces its animal health products
in state-of-the-art manufacturing facilities. The Animal Health
Division produces BMD at its Chicago Heights, Illinois facility,
which contains a modern fermentation and recovery plant. Albac is
manufactured at the Oslo facility shared with the Fine Chemicals
Division. Soluble antibiotics and vitamins are formulated in the
division's Longmont, Colorado facility and PST is produced at the
Company's plant in Melbourne, Australia. CTC is purchased from
foreign suppliers and blended domestically at the Company's
facility in Lowell, Arkansas and at independent blending
facilities. The 3-Nitro product line is manufactured in
accordance with a ten year agreement using the Company's
technology at an unrelated company's facility. The contract
requires the Company to purchase minimum yearly quantities on a
cost plus basis. Blending of 3-Nitro is done at the Company's
Lowell plant.
Competition. The animal health industry is highly
competitive and includes a large number of companies with greater
financial, technical, and marketing resources than the Company.
These companies offer a wide range of products with various
therapeutic and production enhancing qualities. Due to the
Company's strong market position in antibiotic feed additives and
its experience in obtaining requisite FDA approvals for
combination therapies, the Company believes it enjoys a
competitive advantage in commercializing FDA-approved combination
animal feed additives.
Geographic Markets. The Company presently sells a major
portion of its animal health products in the U.S. With the
opening of sales offices in Canada, Latin America, and the Far
East, the Animal Health Division has expanded its international
sales capability consistent with its strategy for internal
growth.
Sales and Distribution. The Company's animal health products
in the U.S., Canada, Mexico, Brazil, Australia and certain other
selected markets are sold through a staff of technically trained
sales and service employees. The Company has sales offices in
Norway, Canada, Mexico, Singapore, the People's Republic of
China, Brazil, France and Belgium and, in 1999, added sales
offices in Australia. The Company anticipates establishing
additional foreign sales offices. Sales of the Animal Health
Division's products in the remainder of the world are made
primarily through the use of distributors and sales companies. In
January of 1999, the Company combined its wholly-owned U.S.
distribution company with two similar third party distribution
businesses to form a joint venture 50% owned by the Company. The
new entity is a regional distributor of animal health products in
the Central South West and Eastern regions of the U.S.
Customers. Sales are made principally to commercial animal
feed manufacturers and integrated swine and poultry producers.
Although the Division is not dependent on any one customer, the
customer base for animal health products is in a consolidation
phase. Therefore, as consolidation continues, the Company may
become more dependent on certain individual customers as such
customers increase their size and market share.
Aquatic Animal Health Division ("AAHD")
The Company believes it is a leader in the development,
manufacture and marketing of vaccines for use in immunizing
farmed fish against disease. While third parties may, from time
to time, have products which they deem to be superior, the
Company believes it has been, and expects to continue as, a
leading innovator with respect to the research and development of
vaccines to combat newly developing forms of aquatic disease.
The Company's vaccines for fish are used by fish farms to
control disease in densely populated, artificial growth
environments. The Company believes that the market for vaccines
will continue to grow along with the growth of fish farms as the
worldwide demand for fish continues to increase beyond what can
be supplied from the natural fish habitat.
In November 1999 the Company purchased Vetrepharm Ltd., the
United Kingdom distributor of AAHD products and certain products
of unaffiliated manufacturers for cash consideration of
approximately $2.5 million.
Product Lines. The Aquatic Animal Health Division is the
leading supplier of injectable vaccines for farm raised salmon.
In addition the Division is a pioneer in the development of
vaccines for trout, sea bass, sea bream, yellowtail and other
commercially important farm species.
Facilities. The Company manufactures its fish vaccine
products at its Overhalla, Norway facility. Contract
manufacturing is utilized to provide certain raw materials for
vaccine production. In 1999, the Company closed its Bellevue,
Washington production facility and transferred substantially all
of the products manufactured at that plant to Overhalla.
Competition. While the Company has few competitors in the
aquatic animal health industry, the industry is subject to rapid
technological change. Competitors could develop new techniques
and products that would render the Company's aquatic animal
health products obsolete if the Company was unable to match the
improvements quickly. In this regard, the Company is presently
developing a new salmon vaccine to reverse a decline in market
share caused by the market perception that a competing product
may provide better disease protection.
Geographic Markets. The Company sells its aquatic animal
health products in Norway, the United Kingdom, Canada, the U.S.,
Greece and Turkey.
Sales and Distribution. The Company sells its aquatic animal
health products through its own technically oriented sales staff
in Norway and the United Kingdom. In other markets, the Company
operates through distributors. The Company sells its products to
fish farms, usually under a contract which extends for at least
one growing season. There are relatively few customers for the
Division's products.
Information Applicable to all Business Segments
External Growth Strategy
An important element of the Company's long term strategy is
to pursue acquisitions that in general will broaden global reach
and/or augment the product portfolios of the Company. In this
regard the Company is currently evaluating and, in some instances
actively considering, several possible acquisition candidates.
Subsequent to December 31, 1999 the Company executed a non-
binding letter of intent with respect to one such business.
Filings were made and clearance received under the Hart-
Scott-Rodino Anti-trust Improvements Act and the Company is
currently negotiating definitive agreements and reviewing certain
data, including recently received financial information. If
consummated, this acquisition would be material to the operations
and financial position of the Company and would require funding
in addition to that presently available under the Company's
banking arrangements. There can be no assurance that such
activities will result in the consummation of any transaction.
Research, Product Development and Technical Activities
Scientific development is important to each of the Company's
business segments. The Company's research, product development
and technical activities in the Human Pharmaceuticals business
within the U.S., Norway and Denmark concentrate on the
development of generic equivalents of established branded
products as well as discovering creative uses of existing drugs
for new treatments. The Company's research, product development
and technical activities also focus on developing proprietary
drug delivery systems, patent circumvention development (in the
U.S.) and on improving existing delivery systems, fermentation
technology and packaging and manufacturing techniques. In view of
the substantial funds which are generally required to develop new
chemical drug entities, the Company does not anticipate
undertaking such activities.
The Company's technical development activities for Animal
Pharmaceuticals involve extensive product development and testing
for the primary purpose of establishing clinical support for new
products and additional uses for or variations of existing
products and seeking related FDA and analogous governmental
approvals.
Generally, research and development are conducted on a
divisional basis. The Company conducts its technical product
development activities at its facilities in Copenhagen, Denmark;
Oslo, Norway; Baltimore, Maryland; and Chicago Heights, Illinois,
as well as through independent research facilities in the U.S.
and Europe.
Research and development expenses were approximately $40.2
million, $36.0 million, and $32.1 million in 1999, 1998, and
1997, respectively.
Government Regulation
General. The research, development, manufacturing and
marketing of the Company's products are subject to extensive
government regulation by either the FDA or the USDA, as well as
by the DEA, FTC, CPSC, and by comparable authorities in the EU,
Norway, Indonesia and other countries. Although Norway is not a
member of the EU, it is a member of the European Economic
Association and, as such, has accepted all EU regulations with
respect to pharmaceuticals except in the area of feed
antibiotics. Government regulation includes detailed inspection
of and controls over testing, manufacturing, safety, efficacy,
labeling, storage, recordkeeping, approval, advertising,
promotion, sale and distribution of pharmaceutical products.
Noncompliance with applicable requirements can result in civil or
criminal fines, recall or seizure of products, total or partial
suspension of production and/or distribution, debarment of
individuals or the Company from obtaining new generic drug
approvals, refusal of the government to approve new products and
criminal prosecution. Such government regulation substantially
increases the cost of producing human pharmaceutical and animal
health products.
The evolving and complex nature of regulatory requirements,
the broad authority and discretion of the FDA and analogous
foreign agencies, and the generally high level of regulatory
oversight results in a continuing possibility that from time to
time the Company will be adversely affected by regulatory actions
despite its ongoing efforts and commitment to achieve and
maintain full compliance with all regulatory requirements. As a
result of actions the Company has taken to respond to the
progressively more demanding regulatory environment in which it
operates, the Company has spent, and will continue to spend,
significant funds and management time on regulatory compliance.
Product Marketing Authority. In the U.S., the FDA
regulatory procedure applicable to the Company's generic
pharmaceutical products depends on whether the branded drug is:
(1) the subject of an approved New Drug Application which has
been reviewed for both safety and effectiveness; (2) marketed
under an NDA approved for safety only; (3) marketed without an
NDA; or (4) marketed pursuant to over-the-counter monograph
regulations. If the drug to be offered as a generic version of a
branded product is the subject of an NDA approved for both safety
and effectiveness, the generic product must be the subject of an
Abbreviated New Drug Application ("ANDA") and be approved by the
FDA prior to marketing. Drug products which are generic copies
of the other types of branded products may be marketed in
accordance with either an FDA enforcement policy or the over-the-
counter drug review monograph process and currently are not
subject to ANDA filings and approval prior to market
introduction. While the Company believes that all of our current
pharmaceutical products are legally marketed under the applicable
FDA procedure, its marketing authority is subject to revocation
by the agency. All applications for regulatory approval of
generic drug products subject to ANDA requirements must contain
data relating to product formulation, raw material suppliers,
stability, manufacturing, packaging, labeling and quality
control. Those subject to an ANDA under the Drug Price
Competition and Patent Term Restoration Act of 1984 (the "Waxman-
Hatch Act") also must contain bioequivalency data. Each product
approval limits manufacturing to a specifically identified site.
Supplemental filings for approval to transfer products from one
manufacturing site to another also require review and approval.
Certain of the Company's animal health products are
regulated by the FDA, as described above, while other animal
health products are regulated by the USDA.
An EU Directive requires that medical products must have a
marketing authorization before they are placed on the market in
the EU. The criteria upon which grant of an authorization is
assessed are quality, safety and efficacy. Demonstration of
safety and efficacy in particular requires clinical trials on
human subjects and the conduct of such trials is subject to the
standards codified in the EU guideline on Good Clinical Practice.
In addition, the EU requires that such trials be preceded by
adequate pharmacological and toxicological tests in animals, that
stability tests are also carried out and that clinical trials
should use controls, be carried out double blind and capable of
statistical analysis by using specific criteria wherever
possible, rather than relying on a large sample size. The
working party on the Committee of Proprietary Medicinal Products
has also made various recommendations in this area. Analogous
governmental and agency approvals are similarly required in other
countries where we conduct business. There can be no assurance
that new product approvals will be obtained in a timely manner,
if ever. Failure to obtain such approvals, or to obtain them
when expected, could have a material adverse effect on the
Company's business, financial condition and results of
operations.
The European union and five non-EU countries have banned the
use of four antibiotics effective July 1, 1999. While three of
these products were not manufactured or sold by the Company,
bacitracin zinc, a feed antibiotic growth promoter for livestock
which is manufactured by the Company, is included in the ban. The
Company is attempting to reverse or limit the EU action which
affects our Albac product. See "Risk Factors".
Facility Approvals. The Company's manufacturing operations
(in the U.S. as well as three of its European facilities that
manufacture products for export to the U.S.) are required to
comply with current Good Manufacturing Practices ("cGMP") as
interpreted by the FDA and EU regulations. cGMP encompasses all
aspects of the production process, including validation and
record keeping, and involves changing and evolving standards.
Consequently, continuing compliance with cGMP can be a
particularly difficult and expensive part of regulatory
compliance. There are similar regulations in other countries
where the Company has manufacturing operations. The EU requires
that before a medicinal product can be manufactured and
assembled, each company who carries out such an operation must
hold a manufacturer's license, a product license must be held by
the person responsible for the composition of the product, and
the manufacture and assembly must be in accordance with the
product license and good manufacturing practice ("GMP") as set
out in an EU Directive relating to Good Manufacturing Practice
which makes compliance with the principles of GMP compulsory
throughout the EU.
Potential Liability for Current Products. Continuing
studies of the proper utilization, safety, and efficacy of
pharmaceuticals and other health care products are being
conducted by the industry, government agencies and others. Such
studies, which increasingly employ sophisticated methods and
techniques, can call into question the utilization, safety and
efficacy of previously marketed products and in some cases have
resulted, and may in the future result, in the discontinuance of
their marketing and, in certain countries, give rise to claims
for damages from persons who believe they have been injured as a
result of their use.
Extended Protection for Branded Products. The Waxman-Hatch
Act amended both the Patent Code and the Federal Food, Drug and
Cosmetics Act (the "FDC Act"). The Waxman-Hatch Act codified and
expanded application procedures for obtaining FDA approval for
generic forms of brand-name pharmaceuticals which are off-patent
or whose market exclusivity has expired. The Waxman-Hatch Act
also provides patent extension and market exclusivity provisions
for innovator drug manufacturers which preclude the submission or
delay the approval of a competing ANDA under certain conditions.
One such provision allows a five year market exclusivity period
for NDAs involving new chemical compounds and a three year market
exclusivity period for NDAs containing new clinical
investigations essential to the approval of such application.
The market exclusivity provisions apply equally to patented and
non-patented drug products. Another provision authorizes the
extension of patent terms for up to five years as compensation
for reduction of the effective life of the patent as a result of
time spent in testing for, and FDA review of, an application for
a drug approval. Patent terms may also be extended pursuant to
the terms of the Uruguay Round Agreements Act ("URAA"). In
addition, the FDA Modernization Act of 1997 allows brand name
manufacturers to seek six months of additional exclusivity when
they have conducted pediatric studies on the drug. Therefore, we
cannot predict the extent to which the Waxman-Hatch Act, the FDA
Modernization Act of 1997, or URAA could postpone launch of some
of our new products.
In Europe, certain Directives confer a similar market
exclusivity in respect of proprietary medicines, irrespective of
any patent protection. Before a generic manufacturer can present
an abridged application for a marketing authorization, it must
generally wait until the original proprietary drug has been on
the market for a period which generally coincides with patent
expiry (unless they have the consent of the person who submitted
the original test data for the first marketing authorization, or
can compile an adequate dossier of their own). In the case of
high-technology products, this period is ten years and six years
in respect of other medicinal products, subject to the option for
member states to elect for an exclusivity period of ten years in
respect of all products, or to dispense with the six-year period
where that would offer protection beyond patent expiry.
In addition to the exclusivity period, it is also possible
in the EU to extend the period of patent protection for a product
which has a marketing authorization by means of a Supplementary
Protection Certificate ("SPC"). An SPC comes into force on the
expiry of the relevant patent and lasts for a period calculated
with reference to the delay between the lodging of the patent and
the granting of the first marketing authorization for the drug.
This period of protection, subject to a maximum of five years,
further delays the marketing of generic medicinal products.
The Generic Drug Enforcement Act. The Generic Drug
Enforcement Act of 1992, which amended the FDC Act, gives the FDA
six ways to penalize anyone that engages in wrongdoing in
connection with the development or submission of an ANDA. The
FDA can (1)permanently or temporarily prohibit alleged wrongdoers
from submitting or assisting in the submission of an ANDA; (2)
temporarily deny approval of, or suspend applications to market,
particular generic drugs; (3) suspend the distribution of all
drugs approved or developed pursuant to an invalid ANDA; (4)
withdraw approval of an ANDA; (5) seek civil penalties against
the alleged wrongdoer, and (6) significantly delay the approval
of any pending ANDA from the same party. The Company has never
been the subject of an enforcement action under this or any
similar statute, but there can be no assurance that restrictions
or fines will not be imposed on the Company in the future.
Controlled Substances Act. The Company also manufactures and
sells drug products which are "controlled substances" as defined
in the Controlled Substances Act, which establishes certain
security and record keeping requirements administered by the DEA,
a division of the Department of Justice. The Company is licensed
by the DEA to manufacture and distribute certain controlled
substances. The DEA has a dual mission: law enforcement and
regulation. The former deals with the illicit aspects of the
control of abusable substances and the equipment and raw
materials used in making them. The DEA shares enforcement
authority with the Federal Bureau of Investigation, another
division of the Department of Justice. The DEA's regulatory
responsibilities are concerned with the control of licensed
handlers of controlled substances, and with the substances
themselves, equipment and raw materials used in their manufacture
and packaging, in order to prevent such articles from being
diverted into illicit channels of commerce. The Company is not
under any restrictions for noncompliance with the foregoing
regulations, but there can be no assurance that restrictions or
fines will not be imposed on it in the future.
Health Care Reimbursement. The methods and level of
reimbursement for pharmaceutical products under Medicare,
Medicaid, and other domestic reimbursement programs are the
subject of constant review by state and federal governments and
private third party payors like insurance companies. The Company
believes that U.S. government agencies will continue to review
and assess alternative payment methodologies and reform measures
designed to reduce the cost of drugs to the public. Because the
outcome of these and other health care reform initiatives is
uncertain, the Company cannot predict what impact, if any, they
will have on it.
Medicaid legislation requires all pharmaceutical
manufacturers rebate to individual states a percentage of the
revenues that the manufacturers derive from Medicaid reimbursed
pharmaceutical sales in those states. The required rebate for
manufacturers of generic products is currently 11%.
In many countries other than the U.S. in which the Company
does business, the initial prices of pharmaceutical preparations
for human use are dependent upon governmental approval or
clearance under governmental reimbursement schemes. These
government programs generally establish prices by reference to
either manufacturing costs or the prices of comparable products.
Subsequent price increases may also be regulated. In past years,
as part of overall programs to reduce health care costs, certain
European governments have prohibited price increases and have
introduced various systems designed to lower prices. An
investigation regarding the pricing of generic drugs in the
United Kingdom was recently begun. (See "Legal Proceedings" and
"Risk Factors".) As a result, affected manufacturers, including
the Company, have not always been able to recover cost increases
or compensate for exchange rate fluctuations.
In order to control expenditures on pharmaceuticals, most
member states in the EU regulate the pricing of such products and
in some cases limit the range of different forms of a drug
available for prescription by national health services. These
controls can result in considerable price differences between
member states. There is also a Common External Tariff payable on
import of medicinal products into the EU, though exemptions are
available in respect of certain products which allows duty free
importation. Where there is no tariff suspension in operation in
respect of a medicinal product, an application can be made to
import the product duty free, but this is subject to review at
European level to establish whether a member state would be able
to produce the product in question instead. In addition, some
products are subject to a governmental quota which restricts the
amount which can be imported duty free.
Financial Information About Foreign and Domestic Operations and
Export Sales
The Company derives a substantial portion of its revenues
and operating income from its foreign operations. Revenues from
foreign operations accounted for approximately 50% of the
Company's revenues in 1999. For certain financial information
concerning foreign and domestic operations see Note 21 of the
Notes to the Consolidated Financial Statements included in Item 8
of this Report. Export sales from domestic operations were not
significant.
Environmental Matters
The Company believes that it is substantially in compliance
with all presently applicable federal, state and local provisions
regulating the discharge of materials into the environment, or
otherwise relating to the protection of the environment.
The Company is presently engaged in administrative proceedings
with respect to soil and acquifer contamination at its Budapest
plant and air and waste discharge issues at its Lowell, Arkansas
plant. The Company anticipates the need for improvements at these
plants; the cost of which has not yet been determined but is not
believed to be material to the Company. Certain costs incurred at
the Budapest facility are subject to reimbursement obligations of
the previous owner.
In addition, the Company is a Potentially Responsible Party
("PRP") at one site subject to U.S. Superfund legislation.
Superfund provides for joint and several liability for all PRP's.
Based upon the Company's minor involvement at this Superfund
site, and the identification of numerous PRP's who were larger
site users, the Company does not believe that its ultimate
liability for this site will be material to the Company. The
EPA has offered, and the Company has accepted, a tentative
settlement (subject to normal provisions for additional payments)
which would require a payment by the Company of less than one
thousand dollars.
Although many major capital projects typically include a
component for environmental control, including the Company's
current expansion projects, no material expenditures specifically
for environmental control are expected to be made in 2000.
Employees
As of December 31, 1999, the Company had approximately 3,300
employees, including 1,100 in the U.S. and 2,200 outside of the
U.S.
Risk Factors
This report includes certain forward looking statements.
Like any company subject to a competitive and changing business
environment, the Company cannot guarantee the results predicted
in any of the Company's forward-looking statements. Important
factors that could cause actual results to differ materially from
those in the forward-looking statements include (but are not
limited to) the following:
The Company's substantial indebtedness could limit its ability to
obtain additional financing, limit its operating flexibility and
make it more vulnerable to economic downturns.
As of December 31, 1999, the Company had total outstanding
long-term indebtedness of approximately $592 million or
approximately 63% of its total capitalization. In addition, the
Company had $160 million of availability under its revolving
credit facility and short-term European lines, subject to the
satisfaction of the financial tests and maintenance of the
financial ratios described in this document and our other public
filings. These tests and covenants include an interest coverage
ratio, total debt to EBITDA and equity to asset ratio. This
level of indebtedness could:
- - limit the Company's ability to obtain additional financing
- - limit the Company's operating flexibility as a result of
covenants contained in its credit facility
- - make the Company more vulnerable to economic downturns and
- - limit the Company's ability to pursue other business
opportunities.
Also, the Company is vulnerable to fluctuations in interest rates
since approximately $228 million of its total debt at December
31, 1999 was at variable interest rates. The Company believes it
is more leveraged than many of its competitors.
Potential acquisitions may reduce the Company's earnings, be
difficult to integrate into the Company and require additional
financing.
The Company is searching for and evaluating acquisitions
which will provide new product and market opportunities, leverage
existing assets and add critical mass. Acquisitions commonly
involve risks and may have a material effect on results of
operations. (See "Information Applicable to All Segments -
External Growth Strategy".) Any acquisitions the Company makes
may fail to accomplish its strategic objectives, may not be
successfully integrated with its operations and may not perform
as expected. In addition, based on current acquisition prices in
the pharmaceutical and animal health industry, acquisitions could
initially be dilutive to the Company's earnings and add
significant intangible assets and related goodwill amortization
charges. The Company's acquisition strategy will require
additional debt or equity financing, resulting in additional
leverage and/or dilution of ownership, respectively. The Company
may not be able to finance acquisitions on terms satisfactory to
it.
The Company is subject to government regulations and actions that
increase its costs and could prevent it from marketing or selling
some of its products in certain countries.
The research, development, manufacturing and marketing of
the Company's products is subject to extensive government
regulation. Government regulation includes inspection of and
controls over testing, manufacturing, safety, efficacy, labeling,
record keeping and sale and distribution of pharmaceutical
products. The U.S. and other governments regularly review
manufacturing operations. Noncompliance with applicable
requirements can result in fines, recall or seizure of products,
suspension of production and debarment of individuals or our
company from obtaining new drug approvals. Government regulation
substantially increases the cost of manufacturing, developing and
selling the Company's products.
The Company has filed applications to market its products
with the United States Food and Drug Administration and other
regulatory agencies both in the U.S. and internationally. The
timing of receipt of approvals of these applications can
significantly affect future revenues and income. This is
particularly significant with respect to human pharmaceuticals
where the Company is, in certain instances, considering the use
of procedures which would seek marketing approvals prior to the
latest date as to which a third party may claim patent
protection. The use of this strategy is likely to result in
significant litigation with no assurance of success and
potential exposure for patent infringement damages. There can be
no assurance that the Company will obtain new product approvals
in a timely manner, if ever. Failure to obtain approvals, or to
obtain them when expected, could have a material adverse effect
on the Company's business. The Company also has affiliations,
license agreements and other arrangements with companies, such as
Ascent Pediatrics, Inc. which arrangements depend on regulatory
approvals sought by such companies.
The issue of the potential for increased human resistance to
certain antibiotics used in food producing animals is the subject
of discussions on a world-wide basis and, in certain instances,
has led to government restrictions on the use of antibiotics in
such animals. While most of this activity has involved products
other than those offered for sale by the Company, effective
July 1, 1999, the European Union and five non-EU countries have
banned the use of three products not manufactured by the Company
and bacitracin zinc, a feed antibiotic growth promoter
manufactured by the Company which has been used in livestock
feeds for over 40 years. The EU ban is based upon the
"Precautionary Principle" which states that a product may be
withdrawn from the market based upon a finding of a potential
threat of serious or irreversible damage even if such finding is
not supported by scientific certainty. 1998 sales (the last full
year of sales in the EU) of the Company's bacitracin based
products were approximately $10.9 million in the EU and $1.8
million in the non-EU countries which have also banned the
product. The Company's initial effort to reverse this action by
means of a court injunction from the Court of First Instance of
the European Court was denied. The Company is making further
attempts to reverse or limit this action, with particular
emphasis on political means. Although the Company may not
succeed, it believes that strong scientific evidence exists to
refute the EU position. In addition, other countries are
considering a similar ban. If the loss of bacitracin zinc sales
is limited to the European Union and those countries that have
already taken similar action, the Company does not anticipate a
material adverse effect. If either (a) other countries more
important to the Company's sales of bacitracin-based products ban
these products or (b) the European Union (or countries or
customers within the EU) acts to prevent the importation of meat
products from countries that allow the use of bacitracin-based
products, the Company could be materially affected. Specifically
the loss of the U.S. market for its bacitracin based products
would be materially adverse to the Company. The Company cannot
predict whether the present bacitracin zinc ban will be expanded.
In addition, the Company cannot predict whether this antibiotic
resistance issue will result in expanded regulations adversely
affecting other antibiotic based animal health products
manufactured by the Company.
The Company's foreign operations are subject to additional
economic and political risks.
The Company's foreign operations are subject to currency
exchange fluctuations and restrictions, political instability in
some countries, and uncertainty as to the enforceability of, and
government control over, commercial rights.
Some of the Company's foreign operations, particularly in
Indonesia where it has a manufacturing facility and Brazil where
it has recently added significant sales, are being affected by
the wide currency fluctuations and decreased economic activity in
these regions and, in the case of Indonesia, by social and
political unrest. While the Company's present exposure to
economic factors in these regions is not material, they are
important areas for anticipated future growth.
The Company sells products in many countries that are
recognized to be susceptible to significant foreign currency
risk. These products are generally sold for U.S. dollars, which
eliminates the direct currency risk but increases credit risk if
the local currency devalues significantly and it becomes more
difficult for customers to purchase U.S. dollars required to pay
the Company. Recent acquisitions in Europe have increased the
foreign currency risk.
The Company's operating results have varied in the past and may
continue to do so.
The Company's business may experience variations in revenues
and net income as a result of many factors, including
acquisitions, delays in the introduction of new products,
success or failures of strategic alliances and joint ventures,
management actions and the general conditions of the
pharmaceutical and animal health industries.
Many of the Company's competitors have more resources than the
Company.
All of the Company's businesses operate in highly
competitive markets and many of its competitors are substantially
larger and have greater financial, technical and marketing
resources. As a result, the Company may be at a disadvantage in
our ability to develop and market new products to meet
competitive demands.
The Company has been and will continue to be affected by the
competitive and changing nature of the pharmaceutical industry.
The Company's U.S. generic pharmaceutical business has
historically been subject to intense competition. As patents and
other bases for market exclusivity expire, prices typically
decline as generic competitors enter the marketplace. Normally,
there is a further unit price decline as the number of generic
competitors increases. The timing of these price decreases is
unpredictable and can result in a significantly curtailed period
of profitability for a generic product. In addition, brand-name
manufacturers frequently take actions to prevent or discourage
the use of generic equivalents through marketing and regulatory
activities and litigation.
Generic pharmaceutical market conditions in the U.S. were
further exacerbated in recent years by a fundamental shift in
industry distribution, purchasing and stocking patterns resulting
from increased importance of sales to major wholesalers and a
concurrent reduction in sales to private label generic
distributors. Wholesaler programs generally require lower prices
on products sold, lower inventory levels kept at the wholesaler
and fewer manufacturers selected to provide products to the
wholesaler's own marketing programs.
The factors which have adversely affected the U.S. generic
pharmaceutical industry may also affect some or all of the
markets in which the IPD operates. In addition, in Europe the
Company is encountering price pressure from parallel imports of
identical products from lower priced markets under EU laws of
free movement of goods. Parallel imports could lead to lower
volume growth. The Company'sIPD is also affected by governmental
initiatives or actions to maintain or reduce drug prices. Both
parallel imports and governmental cost containment and other
regulatory efforts could create lower prices in certain
geographic areas including the United Kingdom and the Nordic
countries where the Company has significant sales. (See "Legal
Proceedings".)
It may be difficult for the Company to respond to
competitive challenges because of the significance of relatively
few major customers, such as large wholesalers and chain stores,
a rapidly changing market and uncertainty of timing of new
product approvals.
Future inability to obtain raw materials or products from
contract manufacturers could seriously affect the Company's
operations.
The Company currently purchases many of its raw materials
and other products from single suppliers. Although the Company
has not experienced difficulty to date, it may experience supply
interruptions in the future and may have to obtain substitute
materials or products. If the Company has to obtain substitute
materials or products, the Company would require additional
regulatory approvals. Any significant interruption of supply
could have a material adverse effect on the Company's operations.
The Company's business is affected by the policies of third-party
payors, such as insurers and managed care organizations.
The Company's commercial success with respect to generic
products depends, in part, on the availability of adequate
reimbursement from third-party health care payors, such as
government and private health insurers and managed care
organizations. Third-party payors are increasingly challenging
the pricing of medical products and services and their
reimbursement practices may prevent the Company from maintaining
its present product price levels. In addition, the market for
the Company's products may be limited by third-party payors who
establish lists of approved products and do not provide
reimbursement for products not listed.
Some of the Company's products may be subject to product
liability claims.
Continuing studies are being conducted by the industry,
government agencies and others. These studies increasingly
employ sophisticated methods and techniques and can call into
question the utilization, safety and efficacy of previously
marketed products. In some cases, these studies have resulted in
the removal of products from the market and have given rise to
claims for damages from previous users. The Company's business
could be harmed by such actions.
The Company's relationship with its controlling stockholder could
lead to conflicts of interest.
A.L. Industrier AS, or Industrier, is the beneficial owner
of 100% of the outstanding shares of the Class B common stock.
Industrier also owns $67.8 million of the 05 Notes convertible
into Class B common stock. As a result of its ownership,
Industrier controls the Company and is presently entitled to
elect two-thirds of the members of its board of directors. Einar
W. Sissener, Chairman of the Board, controls a majority of
Industrier's outstanding shares and is Chairman of Industrier.
In addition, Mr. Sissener beneficially owns 328,667 shares of
Class A common stock.
The Company and Industrier engage in various transactions
from time to time, and conflicts of interest are present with
respect to the terms of such transactions. All contractual
arrangements between the Company and Industrier are subject to
review by, or ratification of, the audit committee of the
Company's board of directors as to the fairness of the terms and
conditions of such arrangements to the Company. The committee
consists of one or more directors who are unaffiliated with
Industrier.
Item 1A. Executive Officers of the Registrant
The following is a list of the names and ages of all of the
Company's corporate officers and certain officers of each of the
Company's principal operating units, indicating all positions and
offices with the Registrant held by each such person and each
such person's principal occupations or employment during the past
five years.
Each of the Company's corporate officers has been elected to
the indicated office or offices of the Registrant, to serve as
such until the next annual election of officers of the Registrant
(expected to occur May 25, 2000) and until their successor is
elected, or until his or her earlier death, resignation or
removal.
Name and Position Principal Business Experience
with the Company Age During the Past Five Years
E.W. Sissener 71 Chairman of the Company since
Chairman and Director 1975. Chief Executive Officer
from June 1994 to June 1999.
Member of the Office of the
Chief Executive of the Company
July 1991 to June 1994.
Chairman of the Office of the
Chief Executive June 1999 to
December 1999. President,
Alpharma AS since October
1994. President, Apothekernes
AS (now AL Industrier AS) 1972
to 1994. Chairman of A.L.
Industrier AS since November
1994.
Ingrid Wiik 55 President and Chief Executive
President, Chief Officer since January 2000.
Executive Officer and President of Alpharma's
Director International Pharmaceuticals
Division 1994 to 2000;
President, Pharmaceutical
Division of Apothekernes
Laboratorium A.S. 1986 to
1994.
Jeffrey E. Smith 52 Vice President and Chief
Vice President, Finance Financial Officer since May
and Chief Financial 1994. Executive Vice
Officer President and Member of the
Office of the Chief Executive
July 1991 to June 1994. Vice
President, Finance of the
Company from November 1984 to
July 1991.
Robert F. Wrobel 55 Vice President and Chief Legal
Vice President and Chief Officer since October of 1997.
Legal Officer Vice President and Associate
General Counsel of Duracell
Inc., 1994 to September 1997
and Senior Vice President,
General Counsel and Chief
Administrative Officer of The
Marley Company 1975 to 1993.
David R. Jackson 47 Vice President, Investor
Vice President, Investor Relations and Corporate
Relations and Corporate Communications since March
Communications 2000. Executive Vice President
and Managing Director Global
Consulting, Thomson Financial
Investor Relations, 1998 to
2000. Vice President, General
Manager, Corporate Services,
First Call Corporation 1996 to
1998.
Albert N. Marchio, II 47 Treasurer of the Company since
Vice President and May 1992. Treasurer of Laura
Treasurer Ashley, Inc. 1990 to 1992.
John S. Towler 51 Controller of the Company
Vice President and since March 1989.
Controller
Thomas L. Anderson 51 President of the Company's
Vice President and U.S. Pharmaceuticals Division
President, U.S. since January 1997; President
Pharmaceuticals Division and Chief Operating Officer of
FoxMeyer Health Corporation
May 1993 to February 1996;
Executive Vice President and
Chief Operating Officer of
FoxMeyer Health Corporation
July 1991 to April 1993.
Bruce Andrews, Vice 53 President of the Company's
President and President, Animal Health Division since
Animal Health Division May 1997. Consultant with
Brakke Consulting, Inc. from
1996 through May of 1997,
President of Lifelearn, Inc.
in 1995, and President of the
Cyanamid North American Animal
Health and Nutrition Division
from 1992 to 1994.
Carl-Ake Carlsson 37 President of Alpharma's
Vice President and International Pharmaceuticals
President, International Division since January 2000;
Pharmaceuticals Division Senior Vice President Finance
and Strategy Development of
International Pharmaceuticals
Division 1995 to 2000.
Thor Kristiansen 56 President of the Company's
Vice President and Fine Chemicals Division since
President, Fine Chemicals October 1994; President,
Division Biotechnical Division of
Apothekernes Laboratorium A.S
1986 to 1994.
Knut Moksnes 49 President of the Company's
Vice President and Aquatic Animal Health Division
President, Aquatic Animal since October 1994; Managing
Health Division Director, Fish Health Division
of Apothekernes Laboratorium
A.S 1991 to 1994.
Item 2. Properties
Manufacturing and Facilities
The Company's corporate offices and principal production and
technical development facilities are located in the U.S., Norway,
the United Kingdom, Denmark, Hungary and Indonesia. The Company
also owns or leases offices and warehouses in the U.S., Germany,
Sweden, Holland, Finland and elsewhere.
Facility
Location Status Size Use
(sq.ft.)
Fort Lee, NJ Leased 37,000 Offices-Alpharma corporate
and AHD headquarters
Oslo, Norway Leased 204,400 Manufacturing of AHD and FCD
products, Alpharma corporate
offices and headquarters for
IPD,FCD and AAHD
Baltimore, MD Owned 268,000 Manufacturing and offices for
USPD
Baltimore, MD Leased 18,000 Research and development for
USPD
Chicago Owned 195,000 Manufacturing,warehousing,res
Heights, IL. earch and development and
offices for AHD
Columbia, MD Leased 165,000 Distribution center for USPD
Lincolnton, NC Owned 138,000 Manufacturing and offices for
USPD
Lowell, AR Leased 105,000 Manufacturing,warehousing and
offices for AHD
Niagara Falls, Owned 30,000 Warehousing and offices for
NY USPD
Barnstaple,Engl Owned 250,000 Manufacturing, warehousing
and and offices for IPD
Budapest,Hungar Owned 175,000 Manufacturing,warehousing and
y offices for FCD
Copenhagen,Denm Owned 345,000 Manufacturing,warehousing,
ark research and development and
offices for IPD and FCD
Jakarta,Indones Owned 80,000 Manufacturing, warehousing,
ia research and development and
offices for IPD
Lier,Norway Owned 180,000 Manufacturing,warehousing and
offices for IPD
Overhalla,Norwa Owned 39,500 Manufacturing,warehousing and
y offices for AAHD
Vennesla,Norway Owned 81,300 Manufacturing, warehousing
and offices for IPD
Paris, France Leased 16,000 Warehousing and offices for
IPD
Melbourne, Leased 17,000 Manufacturing, warehousing
Australia and offices for AHD
Longmount, CO Owned 62,000 Manufacturing, warehousing
and offices for AHD
Fordinbridge, Leased 20,000 Warehousing and offices for
England AAHD
Langenfeldt, Leased 22,000 Offices for IPD
Germany
The Company believes that its principal facilities described
above are generally in good repair and condition and adequate and
suitable for the products they produce.
Item 3. Legal Proceedings
The United Kingdom Office of Fair Trading ("OFT") is
conducting an investigation into the pricing and supply of
medicine by the generic industry in the United Kingdom. As a part
of this investigation Cox, the Company's generic pharmaceutical
subsidiary in the United Kingdom, received in February 2000 a
request for information from the OFT. The request states that the
OFT is particularly concerned about the sustained rise in the
list price of a range of generic pharmaceuticals over the course
of 1999 and is considering this matter under competition
legislation. In December 1999 Cox received a request for
information from the Oxford Economic Research Association
("OXERA"), an economic research company which has been
commissioned by the United Kingdom Department of Health to carry
out a study of the generic drug industry. The requests related to
certain specified drugs and the Company has responded to both
requests for information. The Company is unable to predict what
impact the OFT investigation or OXERA study will have on the
operations of Cox and the pricing of generic pharmaceuticals in
the United Kingdom. The operating income of Cox was $28.9 million
in 1999 and 5.0 million in 1998 (not including special charges
related to the acquisition) with the increase being primarily
attributable to price increases and to a lesser extent, the fact
that Cox was owned for only eight months in 1998. See
"Management's Discussion and Analysis of Financial Condition and
Results of Operations - 1999 vs. 1998."
The Company was originally named as one of multiple
defendants in over 62 lawsuits filed in various U.S. Federal
District Courts and several State Courts alleging personal
injuries and six class actions requesting medical monitoring
resulting from the use of phentermine distributed by the Company
and prescribed for use in combination with fenfluramine or
dexfenfluramine manufactured and sold by other defendants (the
"Fen-Phen" lawsuits). None of the plaintiffs has specified the
amount of his or her monetary demand, but a majority of the
lawsuits allege serious injury. The Company has been dismissed
from all of the class actions, and the plaintiffs in all but 10
of the individual actions have agreed to take (or have already
taken) actions to dismiss the Company without prejudice. The
Company has demanded defense and indemnification from the
manufacturers from whom it purchased phentermine and have filed
claims against those manufacturers' insurance carriers and its
own carriers. The Company has received reimbursement of
litigation costs from one of the manufacturers' carriers and has
entered into an agreement with that manufacturer and its carrier
to continue to receive reimbursement for expenses and
indemnification for losses to the extent of the carriers policy
obligations and the manufacturer's legal liability. This
agreement requires that the Company share in the policy limits
and the manufacturer's available assets with certain other,
similarly situated Fen-Phen defendants. The Company does not
expect that the Fen-Phen lawsuits will be material. It is
possible that the Company could later be named as a defendant in
some of the additional lawsuits already on file with respect to
these drugs or in similar lawsuits which could be filed in the
future.
The Company has received written notice of a claim alleging
that it is violating certain third party U.S. patents in the area
of electronic reading devices and offering to enter into
licensing discussions. While the Company has not completed its
analysis of either the validity or applicability of said patents,
several material Company manufacturing facilities do use devices
and machinery within the general technical area covered by these
third party patents. Based upon factors considered reasonable as
of this date, the Company has no reason to anticipate that this
matter will result in liability material to the Company.
From time to time the Company is involved in certain non-
material litigation which is ordinarily found in businesses of
this type, including contract, employment matters and product
liability actions. Product liability suits represent a continuing
risk to pharmaceutical companies. The Company attempts to
minimize such risks by strict controls over manufacturing and
quality procedures. Although the Company carries what it believes
to be adequate insurance, there is no assurance that such
insurance can fully protect it against all such risks due to the
inherent potential liability in the business of producing
pharmaceuticals for human and animal use.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
Market Information
The Company's Class A Common Stock is listed on the New York
Stock Exchange ("NYSE"). Information concerning the 1999 and 1998
sales prices of the Company's Class A Common Stock is set forth
in the table below.
Stock Trading Price
1999 1998
Quarter High Low High Low
First $43.06 $30.56 $24.31 $18.94
Second $39.00 $25.69 $23.00 $19.75
Third $37.44 $32.50 $26.31 $21.44
Fourth $35.19 $26.88 $36.94 $22.56
As of December 31, 1999 and March 10, 2000 the Company's
stock closing price was $30.75 and $37.88, respectively.
Holders
As of March 10, 2000, there were 1,796 holders of record of
the Company's Class A Common Stock and A.L. Industrier held all
of the Company's Class B Common Stock. Record holders of the
Class A Common Stock include Cede & Co., a clearing agency which
held approximately 96% of the outstanding Class A Common
Stock as a nominee.
Dividends
The Company has declared consecutive quarterly cash
dividends on its Class A and Class B Common Stock beginning in
the third quarter of 1984. Quarterly dividends per share in 1999
and 1998 were $.045 per quarter or $.18 per year.
Item 6. Selected Financial Data
The following is a summary of selected financial data for
the Company and its subsidiaries. The data for each of the three
years in the period ended December 31, 1999 have been derived
from, and all data should be read in conjunction with, the
audited consolidated financial statements of the Company,
included in Item 8 of this Report. The Company's 1999 financial
statements have been restated. No financial statements prior to
1999 have been restated. For a further discussion of the
restatement see "Business - Restatement of Financial Statements"
and note 2B of the notes to consolidated financial statements.
All amounts are in thousands, except per share data.
Income Statement Data
Years Ended December 31,
1999(3,5) 1998(2) 1997 1996(1) 1995
(as
restated)
Total revenue $732,443 $604,584 $500,288 $486,184 $520,882
Cost of sales 392,316 351,324 289,235 297,128 302,127
Gross profit 340,127 253,260 211,053 189,056 218,755
Selling, general and
administrative 244,775 188,264 164,155 185,136 166,274
expenses
Operating income 95,352 64,996 46,898 3,920 52,481
Interest expense (39,174) (25,613) (18,581) (19,976) (21,993)
Other income
(expense), net 1,450 (400) (567) (170) (260)
Income (loss) before
income taxes 57,628 38,983 27,750 (16,226) 30,228
Provision (benefit)
for income taxes 20,656 14,772 10,342 (4,765) 11,411
Net income (loss) $36,972 $24,211 $ 17,408 $(11,461) 18,817 $
Average number of
shares outstanding:
Diluted 34,848(4) 26,279 22,780 21,715 21,754
Earnings (loss) per
share: Diluted $ 1.27 $ .92 $ .76 $ (.53) $ .87
Dividend per common
share $ .18 $ .18 $ .18 $ .18 $ .18
(1) 1996 includes Management Actions relating to production
rationalizations and severance which are included in cost of
goods sold ($1,100) and selling, general and
administrative ($17,700). Amounts net after tax of
approximately $12,600 ($0.58 per share).
(2) Includes results of operations from date of acquisition of
Cox Pharmaceuticals (May 1998) and non-recurring charges related
to the Cox acquisition which are included in cost of sales
($1,300) and selling, general and administrative ($2,300).
Charges, net after tax, were approximately $3,130 ($0.12 per
share).
(3) Includes results of operations from date of acquisition for
all 1999 acquisitions. In addition, 1999 includes pre-tax charges
of approximately $2,175 relating to the closing of the Company's
AAHD facility which are included in selling, general and
administrative.
(4) Includes shares assumed issued under the if-converted method
for the convertible notes.
(5) See note 2B of the notes to the consolidated financial
statements for a description of the adjustments resulting from
the restatement.
As of December 31,
Balance Sheet Data 1999(1,3) 1998(2) 1997 1996 1995
(as restated)
Current assets $ 381,872 $335,484 $273,677 $274,859 $282,886
Non-current assets 778,394 573,452 358,189 338,548 351,967
Total assets $1,160,266 $908,936 $631,866 $613,407 $634,853
Current liabilities $ 164,276 $170,437 $133,926 $155,651 $169,283
Long-term debt, less
current maturities 591,784 429,034 223,975 233,781 219,451
Deferred taxes and
other non-current
liabilities 52,273 42,186 35,492 37,933 40,929
Stockholders' equity 351,933 267,279 238,473 186,042 205,190
Total liabilities
and equity $1,160,266 $908,936 $631,866 $613,407 $634,853
(1) Includes accounts from date of acquisition for all 1999
acquisitions.
(2) Includes accounts from date of acquisition of Cox
Pharmaceuticals (May 1998).
(3) See note 2B of the notes to the consolidated financial
statements for a description of the adjustments resulting
from the restatement.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
The Management's Discussion and Analysis of Financial
Condition and Results of Operations for the year ended
December 31, 1999 presented below reflects certain restatements
to the Company's previously reported financial statements. See
"Business-Restatement of Financial Statements" and note 2B of the
notes to consolidated financial statements for a discussion of
the restatement.
Overview
1999, 1998 and 1997 were years in which operations improved
relative to the preceding year. Each year included a number of
significant transactions which the Company intended to enhance
future growth. Such transactions include:
1999
- In January, the Company's Animal Health Division
("AHD") contributed the distribution business of its
Wade Jones subsidiary into a joint venture with two
similar third-party distribution businesses. The new
entity, WYNCO, which is a regional distributor of animal
health products in the Central South West and Eastern
regions of the U.S., is 50% owned by the Company.
- In January, the Company replaced its revolving
credit facility and existing domestic short-term credit
lines with a $300.0 million syndicated facility which
provides for increased borrowing capacity.
- In February, the Company's U.S. Pharmaceutical
Divison ("USPD") entered into an agreement with Ascent
Pediatrics, Inc., a branded pediatric pharmaceutical
company, under which USPD may provide up to $40.0
million in loans subject to Ascent meeting agreed terms
and conditions. In addition, the Company will have the
option to acquire Ascent in 2003 for a price based on
Ascent's 2002 operating income. See "Liquidity and
Capital Resources" below for additional information.
- In April, the Company's International
Pharmaceutical Division ("IPD") purchased a French
generic pharmaceutical business for approximately $26.0
million in cash.
- In June, the Company issued $170.0 million
initial principal amount of 3% Convertible Senior
Subordinated Notes due 2006.
- In June, the Company's IPD acquired the Isis Pharma
Group, a German generic pharmaceutical business for
approximately $153.0 million in cash.
- In September, the Company's AHD acquired the
business of the I.D. Russell Company, a privately held
U.S.-based manufacturer of animal health products, for
approximately $21.5 million in cash.
- In September, the Company's AHD acquired the business
of Southern Cross Biotech, an Australian animal health
company, and a technology license for approximately $14.0
million in cash.
- In November, the Company sold 2.0 million Class A
Common shares and received proceeds of approximately
$62.4 million.
- In November, the Company's Aquatic Animal Health
Division("AAHD") purchased Vetrepharm, an animal and
aquatic health distribution company in the United Kingdom
for approximately $2.5 million.
1998
- In March, the Company issued $192.8 million of 5.75%
Convertible Subordinated Notes due in 2005.
- In May, the Company's IPD purchased the Cox Generic
Pharmaceutical business ("Cox") conducted primarily in
the United Kingdom for approximately $198.0 million.
- In November, the Company's IPD purchased a generic
pharmaceutical product line in Germany for $13.3 million.
- In November, the Company acquired pursuant to a tender
offer approximately 93% of the outstanding warrants which
were to have expired on January 3, 1999 with common stock
with a market value of approximately $37.0 million.
Subsequent to December 31, 1998 the majority of the
remaining warrants were exercised for $4.4 million in
cash.
- In December, the Company's Fine Chemicals Division
("FCD") purchased a fine chemical manufacturing plant in
Budapest, Hungary for $7.3 million.
1997
- The Company raised $56.4 million by issuing Class B stock
through a stock subscription ($20.4 million) and Class A stock
through a rights offering ($36.0 million).
- The AHD acquired the worldwide decoquinate ("Deccoxr")
product and business from a major pharmaceutical company. The
product is an anticocidial feed additive which provides AHD with
its first major product in the cattle industry.
- The FCD purchased a worldwide polymyxin business which
complements its existing polymyxin business.
- Both the USPD and the IPD completed partnership alliances
and marketing agreements to broaden their product lines.
Results of Operations - 1999 vs. 1998
Comparison of year ended December 31, 1999 to year ended
December 31, 1998. (All earnings per share amounts are diluted.)
For the year ended December 31, 1999 revenue was $732.4
million, an increase of $127.9 million (21.1%) compared to 1998.
Operating income was $95.4 million, an increase of $30.4 million,
compared to 1998. Net income was $37.0 million ($1.27 per share)
compared to a net income of $24.2 million ($.92 per share) in
1998. Results for 1998 include non-recurring charges resulting
from the Cox acquisition which reduced net income by $3.1 million
($.12 per share).
Acquisition Program
All comparisons of 1999 results to 1998 are affected by the
Company's acquisition program and the financing required to
implement the program. (See chronological overview.) The 1999
acquisitions increased revenue by approximately $54.5 million,
gross profit by approximately $33.5 million, operating expenses
by approximately $25.9 million, and operating income by
approximately $7.6 million. Estimated interest on the financings
essentially offset the operating income. The Cox acquisition
which was completed in May 1998 increased 1999 results both
because of timing (i.e. full year versus 8 months in 1998) and
significantly improved results in 1999 compared to the
corresponding period in 1998. The change in 1999 versus 1998 due
to timing resulted in increased revenue of $33.8 million and
operating income of $8.1 million. (The operating income change
includes the effect of the 1998 acquisition charges.) The Company
estimates Cox operations in 1999 compared to the corresponding 8
months in 1998 increased revenues by $28.8 million and operating
income by $19.2 million. The increase results primarily from
higher pricing which resulted from conditions affecting the
market which may not continue in 2000. (See Note 15 of "Notes to
Consolidated Financial Statements" and "Legal Proceedings".)
Revenues
Revenues increased in the Human Pharmaceuticals business by
$136.4 million and decreased in the Animal Pharmaceuticals
business by $9.8 million. Currency translation of international
sales into U.S. Dollars was not a major factor in the increases
or decreases of any business segment. On an overall basis, the
Company estimates that revenues grew approximately 10% excluding
the timing effect of acquisitions, the loss of sales to the WYNCO
joint venture and the overall effect of currency translation.
Changes in revenue and major components of change for each
division in the year ended December 31, 1999 compared to
December 31, 1998 are as follows:
Revenues in IPD increased by $110.1 million due primarily to
the acquisitions in 1998 and 1999 ($86.7 million aggregate
increase due mainly to the Cox and Isis acquisitions). The
introduction of new products and price increases which were
offset partially by lower volume in certain markets account for
the balance of the IPD increase. Cox revenues grew in 1999
primarily due to higher pricing due in large part to conditions
affecting the market which may not continue in 2000. USPD
revenues increased $18.5 million due to volume increases in
existing and new products offset partially by lower net pricing.
Revenues in FCD increased by $7.8 million due mainly to volume
increases in vancomycin, bacitracin and amphotericin. AHD
revenues decreased $6.9 million due primarily to sales previously
recorded by Wade Jones company now being recorded by WYNCO, the
Company's joint venture distribution company. (i.e., WYNCO joint
venture revenues are not included in the Company's consolidated
sales effective in January 1999 when the joint venture
commenced.) The AHD revenue decrease was partially offset by
increased volume in the poultry and cattle markets and one
quarter of revenues from I.D. Russell (acquired in September
1999). AAHD sales were $2.9 million lower due to increased
competition and an inability to supply certain products from the
Bellevue, Washington facility.
Gross Profit
On a consolidated basis, gross profit increased $86.9
million and the gross margin percent increased to 46.4% in 1999
compared to 41.9% in 1998. Gross profit in 1998 was reduced by a
$1.3 million charge related to the acquisition of Cox (or .2%).
A major portion of the dollar and percent increase in the
Company's consolidated gross profits was recorded in IPD and
results from the 1998 and 1999 acquisitions (particularly Cox and
Isis). Cox increased primarily due to higher pricing and the
normal Isis gross profit percent is higher than the Company
average. Other increases are attributable to higher volume,
manufacturing cost reductions and yield efficiencies in USPD and
FCD and sales of new products in IPD and USPD. Partially
offsetting increases were volume decreases in certain IPD
markets, lower vaccine sales by AAHD and lower net pricing
primarily in USPD.
Operating Expenses
Operating expenses increased $56.5 million and represented
33.4% of revenues in 1999 compared to 31.1% in 1998. A major
portion of the increase is attributable to the 1998 and 1999
acquisitions which include operating expenses and amortization of
intangible assets acquired. Other increases included professional
and consulting fees for litigation and administrative actions to
attempt to reverse the European Union ban on bacitracin zinc,
consulting expenses for information technology and acquisitions,
expenses related to the closing of the AAHD facility in Bellevue,
Washington, and increases in compensation including severance
related to management changes and incentive programs. Operating
expenses in 1998 include a write-off of in-process research and
development of $2.1 million and $.2 million for severance related
to the Cox acquisition.
Operating Income
Operating income as restated in 1999 increased by $30.4
million. The Company believes the change in operating income can
be approximated as follows:
($ in millions) IPD USPD FCD AHD AAHD Unalloc Total
.
1998 Operating
income $8.0 11.1 17.5 37.8 3.6 (13.0) $65.0
Acquisition
charges - Cox 3.6 - - - - - 3.6
Acquisition
operating income 12.7 - - .5 - - 13.2
Net margin
improvement due
to
volume, new 21.5 9.7 8.0 6.4 (3.9) - 41.7
products and
price
(Increase) in
operating
expenses, net
(9.8) (4.2) (3.1) (7.2) (2.0) (2.5) (28.8)
Translation and
other (.4) - .7 .6 (.2) - .7
1999 Operating $35.6 16.6 23.1 38.1 (2.5) (15.5) $95.4
income
Interest Expense/Other/Taxes
Interest expense increased in 1999 by $13.6 million due
primarily to financings related to the acquisition program.
Other, net was $1.5 million income in 1999 compared to $.4
million expense in 1998. Other, net in 1999 includes patent
litigation settlement income of $1.0 million, equity income from
the WYNCO joint venture of $1.1 million and a net foreign
exchange loss of $.1 million. 1998 included gains on property
sales of $.7 million, a litigation settlement of $.7 million and
a net foreign exchange loss of $.9 million.
The provision for income taxes was 35.8% in 1999 compared to
37.9% in 1998. The 1998 rate includes a 1.7% rate increase due to
the write-off of in-process R&D which is not tax benefited.
Results of Operations - 1998 vs. 1997
Comparison of year ended December 31, 1998 to year ended
December 31, 1997.
For the year ended December 31, 1998 revenue was $604.6
million, an increase of $104.3 million (20.8%) compared to 1997.
Operating income was $65.0 million, an increase of $18.1 million,
compared to 1997. Net income was $24.2 million ($.92 per share)
compared to a net income of $17.4 million ($.76 per share) in
1997. Results for 1998 include non-recurring charges resulting
from the Cox acquisition which reduced net income by $3.1 million
($.12 per share).
Acquisition of Cox
All comparisons of 1998 results to 1997 are affected by Cox
which was acquired in May of 1998 for a total purchase price
including direct costs of acquisition of approximately $198
million. Cox is a generic pharmaceutical manufacturer and
marketer of tablets, capsules, suppositories, liquids, ointments
and creams. Cox's main operations (which primarily consist of a
manufacturing plant, warehousing facilities and a sales
organization) are located in the United Kingdom with distribution
and sales operations located in Scandinavia and the Netherlands.
Cox distributes its products to pharmacy retailers and
pharmaceutical wholesalers primarily in the United Kingdom.
Exports account for approximately 10% of its sales.
The Company financed the $198 million purchase price and
related debt repayments from borrowings under its then existing
long-term Revolving Credit Facility and short-term lines of
credit. The $180 million Revolving Credit Facility ("RCF") was
used to fund the principal portion of the purchase price. At the
end of March 1998, the Company repaid approximately $162 million
of borrowings under the RCF with the proceeds from the issuance
of $193 million of convertible subordinated notes. Such repayment
created the capacity under the RCF to incur the borrowings used
to finance the acquisition of Cox.
The acquisition was accounted for in accordance with the
purchase method. The fair value of the assets acquired and
liabilities assumed and the results of operations are included
from the date of acquisition.
The purchase of Cox had a significant effect on the results
of operations of the Company for the year ended December 31,
1998. Cox is included in IPD.
For the approximate eight month period included in 1998, Cox
contributed sales of $62.1 million and operating income,
exclusive of non-recurring acquisition related charges, of $5.2
million. Operating income is reduced by the amortization of
goodwill totaling approximately $3.0 million. Interest expense
increased by approximately $8.0 million reflecting the financing
of the acquisition primarily with long-term debt.
Acquisition charges required by generally accepted
accounting principles and recorded in the second quarter of 1998
included the write-up of inventory to fair value and related
write-off on the sale of the inventory of $1.3 million, a write-
off of in-process research and development ("R&D") of $2.1
million and severance of certain employees of the IPD of $0.2
million. Because in-process R&D is not tax benefited the one-time
charges were $3.1 million after tax or $.12 per share.
Revenues
Revenues increased $104.3 million in 1998 despite currency
translation of international sales into U.S. dollars which
reduced reported sales by over $20.0 million. Increases in
revenues and major components of change for each division in 1998
compared to 1997 are as follows:
Revenues in IPD increased by $59.0 million due to the Cox
acquisition ($62.1 million), increased volume for existing and
other new and other acquired products ($14.0 million) offset by
translation of IPD sales in local currencies into the U.S. dollar
($17.1 million). Revenues in USPD increased $23.4 million due
primarily to volume increases in existing and new products and
revenue from licensing activities offset slightly by lower net
pricing. FCD revenues increased $14.4 million due mainly to
volume increases in vancomycin and polymyxin. AHD revenues
increased $7.9 million due primarily to sales of the Deccox
product line acquired in 1997. Aquatic Animal Health Division
sales increased $3.7 million due principally to increased sales
of AlphaMax, a treatment for salmon lice.
Gross Profit
On a consolidated basis gross profit increased $42.2 million
with margins at 41.9% in 1998 compared to 42.2% in 1997. Included
in 1998 results is the non-recurring charge of $1.3 million
related to the write-up and subsequent sale of acquired Cox
inventory. Without the charge overall gross profit percentages
would be essentially the same for both years. Gross profit
dollars were positively affected by volume increases for existing
and new products in all divisions and the acquisition of Cox
offset by increased costs incurred by IPD in the transfer of
production from Copenhagen to Lier and currency translation
effects primarily in IPD. On an overall basis pricing had a minor
positive effect.
Operating Expenses
Operating expenses increased by $24.1 million in 1998 on a
consolidated basis. Included in 1998 operating expenses is a
charge for in-process R&D of $2.1 million and IPD employee
severance of $.2 million resulting from the Cox acquisition.
Operating expenses in 1998 were 30.8% of revenues (31.1%
including the Cox acquisition charges) compared to 32.8% of
revenues in 1997. Operating expenses increased primarily due to
the acquisition of Cox including goodwill amortization, increased
selling and marketing expenses due to higher revenues, increased
general and administrative expenses due to targeted increases in
staffing and increased incentive programs offset slightly by
translation of costs incurred in foreign currencies.
Operating Income
Operating income as reported in 1998 increased by $18.1
million. The Company believes the change in operating income can
be approximated as follows:
($ in millions) IPD USPD FCD AHD AAHD Unalloc Total
.
1997 Operating
income $11.0 4.1 9.4 32.0 2.8 (12.4) $46.9
Acquisition
charges - Cox (3.6) - - - - - (3.6)
Cox operating 5.2 - - - - - 5.2
income
Net margin
improvement due
to
volume, new 5.9 10.5 7.7 9.8 3.0 - 36.9
products and
price
(Increase) in
production and
operating
expenses,
net (7.1) (3.5) (.1) (4.1) (1.9) (.6) (17.3)
Translation and
other (3.4) - .5 .1 (.3) - (3.1)
1998 Operating $8.0 11.1 17.5 37.8 3.6 (13.0) $65.0
income
Interest Expense/Other/Taxes
Interest expense increased in 1998 by $7.0 million due
primarily to the acquisition of Cox. Lower interest rates and
positive cash flow from operations which lowered debt levels
required for operations relative to 1997, offset a portion of the
increased interest from acquisitions.
The provision for income taxes was 37.9% in 1998 compared to
37.3% in 1997. The slight increase in 1998 results from a 1.7%
rate increase due to the write-off of in-process R&D which is not
tax benefited, a .7% rate increase due to non-deductible goodwill
resulting from the Cox acquisition offset partially by higher tax
credits and lower statutory tax rates on foreign earnings.
Management Actions
In 1999, the Company announced the decision to close or sell
its leased aquatic animal health plant in Bellevue, Washington
and terminate all 21 employees. All significant production is
being transferred to the AAHD production facility in Norway and
therefore AAHD revenues are not expected to be significantly
affected. At year end the Washington plant had ceased production
and the fixed assets have been written down to their net
realizable value. The result of the writedown of leasehold
improvements and certain machinery and equipment and the
severance of all employees is a total charge of approximately
$2.2 million in 1999.
While no specific actions are planned, the Company believes
the dynamic nature of its business may present additional
opportunities to rationalize personnel functions and operations
to increase efficiency and profitability. Accordingly, similar
management actions may be considered in the future and could be
material to the results of operations in the quarter they are
announced.
Inflation
The effect of inflation on the Company's operations during
1999, 1998 and 1997 was not significant.
Liquidity and Capital Resources
At December 31, 1999, stockholders' equity was $351.9
million compared to $267.3 million and $238.5 million at
December 31, 1998, and 1997, respectively. The ratio of long-
term debt to equity was 1.68:1, 1.61:1, and 0.94:1 at December
31, 1999, 1998 and 1997, respectively. The increase in
stockholders' equity in 1999 primarily reflects net income in
1999 and the issuance of common stock in 1999 primarily resulting
from the $62.4 million equity offering and the exercise of stock
options less dividends and the currency translation adjustment.
The increase in long-term debt from 1997 to 1999 was due
primarily to the acquisitions in 1998 and 1999.
Working capital at December 31, 1999 was $217.6 million
compared to $165.0 million and $139.8 million at December 31,
1998 and 1997, respectively. The current ratio was 2.32:1 at
December 31, 1999 compared to 1.97:1 and 2.04:1 at December 31,
1998 and 1997, respectively.
Balance sheet captions at year end 1999 compared to 1998 are
affected by the acquisition program which increased amounts and
foreign exchange which reduced amounts reported in U.S. dollars.
The 1999 acquisition program increased the following balance
sheet captions: accounts receivable ($22.9 million), inventory
($8.7 million), property plant and equipment ($4.6 million),
intangible assets ($213.5 million) and accounts payable ($36.7
million).
Balance sheet captions decreased as of December 31, 1999
compared to December 1998 in U.S. Dollars as the functional
currencies of the Company's principal foreign subsidiaries, the
Norwegian Krone, Danish Krone and British Pound, depreciated
versus the U.S. Dollar in 1999 by approximately 5%, 16% and 3%,
respectively. These decreases in balance sheet captions impact to
some degree the above mentioned ratios. The approximate decrease
due to currency translation of selected captions was: accounts
receivable $5.5 million, inventories $5.3 million, accounts
payable and accrued expenses $4.8 million, and total
stockholder's equity $26.2 million. The $26.2 million decrease in
stockholder's equity represents other comprehensive loss for the
year and results from the strengthening of the U.S. Dollar in
1999 against all major functional currencies of the Company's
foreign subsidiaries.
The Cox acquisition in 1998 substantially increased the
following balance sheet captions compared to 1997: accounts
receivable ($17.7 million), inventory ($17.1 million), property,
plant and equipment ($33.9 million), intangible assets ($160.0
million), and accounts payable and accrued expenses ($17.7
million).
The Company presently has various capital expenditure
programs under way and planned including the expansion of the FCD
facility in Budapest, Hungary, and the IPD facility in the UK. In
1999, the Company's capital expenditures were $33.7 million, and
in 2000 the Company plans to spend a greater amount than in 1999.
In February 1999, the Company's USPD entered into an
agreement with Ascent Pediatrics, Inc. ("Ascent") under which
USPD may provide up to $40 million in loans to Ascent to be
evidenced by 7 1/2% convertible subordinated notes due 2005. Up
to $12.0 million of the proceeds of the loans can be used only
for general corporate purposes, with $28.0 million of proceeds
reserved for approved projects and acquisitions intended to
enhance the growth of Ascent. All potential loans are subject to
Ascent meeting a number of terms and conditions at the time of
each loan. The exact timing and/or ultimate amount of loans to be
provided cannot be predicted. As of February 2000, $12.0 million
has been advanced for general corporate purposes.
Ascent has incurred operating losses since its inception. An
important element of Ascent's business plan contemplated
commercial introduction of two pediatric pharmaceutical products
which require FDA approval. Ascent has received FDA approval in
January 2000 for one product and the other product is subject to
FDA action which has delayed its commercial introduction until
mid-2000 or later. The delay in drug introduction resulted in
Ascent forecasting that its accumulated losses would exceed the
combined sum of its stockholders' equity and indebtedness
subordinate to the Company's loans during the first half of 2000.
In response to this forecast, the Company and Ascent have
negotiated amendments to the original agreements providing for
(a) a change in the option period (from 2002 to 2003), (b) a
change in the formula period for determining the price of the
Company's purchase option from 2001 to 2002, (c) the granting of
a security interest to the Company in the products or businesses
purchased by Ascent with funds loaned by Alpharma and (d) the
commitment of a major shareholder of Ascent to provide up to
$10.0 million of additional financing to Ascent (in addition to
the $4.0 million previously committed)subordinate to the
Company's loan. The Company is required to recognize losses, up
to the amount of its loans, to the extent Ascent has accumulated
losses in excess of its stockholders' equity and the indebtedness
subordinate to the Company's loans. The Company is further
required to assess the general collectibility of its loans to
Ascent and make any appropriate reserves. The additional
financing results in Ascent continuing to have positive
stockholders' equity and subordinated indebtedness assuming
current operating forecasts are met.
In September 1999, the Company acquired a technology license
and option agreement for the Southern Cross animal health
product, REPORCIN. The agreement requires the leasing or
construction of additional production capacity and additional
payments as additional regulatory approvals for the product are
obtained in other markets. Total additional payments of
approximately $65.0 million are required over the next 4-6 years
(approximately $30 million of which is expected over the next 2
years) if all 13 possible country approvals are received.
At December 31, 1999, the Company had $17.7 million in cash,
short term lines of credit of $40.8 million and approximately
$120.0 million available under its $300.0 million credit facility
("1999 Credit Facility"). The credit facility has several
financial covenants, including an interest coverage ratio, total
debt to EBITDA ratio, and equity to total asset ratio. Interest
on borrowings under the facility is at LIBOR plus a margin of
between .875% and 1.6625% depending on the ratio of total debt to
EBITDA. The Company believes that the combination of cash from
operations and funds available under existing lines of credit
will be sufficient to cover its currently planned operating needs
and firm commitments in 2000.
A substantial portion of the Company's short-term and long-
term debt is at variable interest rates. During 2000, the Company
will consider entering into interest rate agreements to fix
interest rates for all or a portion of its variable debt to
minimize the impact of future changes in interest rates. The
Company's policy is to selectively enter into "plain vanilla"
agreements to fix interest rates for existing debt if it is
deemed prudent.
An important element of the Company's long term strategy is
to pursue acquisitions that in general will broaden global reach
and/or augment product portfolios. In this regard the Company is
currently evaluating and, in some instances actively considering
several possible acquisition candidates. Subsequent to December
31, 1999 the Company executed a non-binding letter of intent with
respect to one such business. Filings were made and clearance
received under the Hart-Scott-Rodino Anti-trust Improvements Act
and the Company is currently negotiating definitive agreements
and reviewing certain data, including recently received financial
information. If consummated, this acquisition would be material
to the operations and financial position of the Company and would
require funding in addition to that presently available under the
Company's banking arrangements. Such funding may include bridge
financing, high yield notes, an expansion of current lines of
credit and a sale of additional equity. Depending on the
ultimate financing vehicle chosen the 1999 credit facility may be
restructured or expanded and the consent of the lenders
thereunder may be required. There can be no assurance that any
transaction will be completed.
Year 2000
The Company completed its program to address its potential
Y2K issues prior to December 31, 1999 and experienced no
disruption of operations from Y2K related problems on January 1,
2000 or during the first months of the new year. The costs
directly associated with the Company's Y2K remediation efforts
totaled approximately $2.4 million.
Although all systems and equipment are Y2K compliant and no
disruptions to Alpharma's operations have been experienced to
date, the Company will continue to monitor its internal systems
and equipment and third-party relationships for any Y2K related
problems that might develop. We do not expect any problems to
develop that would have a material effect on the Company's
operations or results.
Derivative Financial Instruments-Market Risk and Risk Management
Policies
The Company's earnings and cash flow are subject to
fluctuations due to changes in foreign currency exchange rates
and interest rates. The Company's risk management practice
includes the selective use, on a limited basis, of forward
foreign currency exchange contracts and interest rate agreements.
Such instruments are used for purposes other than trading.
Foreign currency exchange rate movements create fluctuations
in U.S. Dollar reported amounts of foreign subsidiaries whose
local currencies are their respective functional currencies. The
Company has not used foreign currency derivative instruments to
manage translation fluctuations. The Company and its respective
subsidiaries primarily use forward foreign exchange contracts to
hedge certain cash flows denominated in currencies other than the
subsidiary's functional currency. Such cash flows are normally
represented by actual receivables and payables and anticipated
receivables and payables for which there is a firm commitment.
At December 31, 1999 the Company had forward foreign
exchange contracts with a notional amount of $29.3 million. The
fair market value of such contracts is essentially the same as
the notional amount. All contracts expire in the first three
quarters of 2000. The cash flows expected from the contracts will
generally offset the cash flows of related non-functional
currency transactions. The change in value of the foreign
currency forward contracts resulting from a 10% movement in
foreign currency exchange rates would be approximately $1.2
million and generally would be offset by the change in value of
the hedged receivable or payable.
At December 31, 1999 the Company has no interest rate
agreements outstanding. The Company is considering entering into
interest rate agreements in 2000 to fix the interest rate on a
portion of its long-term debt.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board
(FASB) issued SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities (SFAS 133). SFAS 133 is effective for all
fiscal quarters of all fiscal years beginning after June 15, 2000
(January 1, 2001 for the Company). SFAS 133 requires that all
derivative instruments be recorded on the balance sheet at their
fair value. Changes in the fair value of derivatives are recorded
each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a
hedge transaction and, if it is, the type of hedge transaction.
SFAS 133 is not expected to have a material impact on the
Company's consolidated results of operations, financial position
or cash flows.
On December 3, 1999, the staff of the Securities and
Exchange Commission issued Staff Accounting Bulletin 101 (SAB
101), "Revenue Recognition in Financial Statements" which
summarizes some of the staff's interpretations of the application
of generally accepted accounting standards to revenue
recognition. The Company is currently evaluating the impact, if
any, of SAB 101 on its results of operations.
Item 8. Financial Statements and Supplementary Data
See page F-1 of this Report, which includes an index to the
consolidated financial statements and financial statement
schedule.
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information as to the Directors of the Registrant set
forth under the sub-caption "Board of Directors" appearing under
the caption "Election of Directors" of the Proxy Statement
relating to the Annual Meeting of Shareholders to be held on May
25, 2000, which Proxy Statement will be filed on or prior to
April 15, 2000, is incorporated by reference into this Report.
The information as to the Executive Officers of the Registrant is
included in Part I hereof under the caption Item 1A "Executive
Officers of the Registrant" in reliance upon General Instruction
G to Form 10-K and Instruction 3 to Item 401(b) of Regulation S-
K.
Item 11. Executive Compensation
The information to be set forth under the subcaption
"Directors' Fees and Related Information" appearing under the
caption "Board of Directors" of the Proxy Statement relating to
the Annual Meeting of Shareholders to be held on May 25, 2000,
which Proxy Statement will be filed on or prior to April 15,
2000, and the information set forth under the caption "Executive
Compensation and Benefits" in such Proxy Statement is
incorporated into this Report by reference.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
The information to be set forth under the caption "Security
Ownership of Certain Beneficial Owners" of the Proxy Statement
relating to the Annual Meeting of Stockholders expected to be
held on May 25, 2000, is incorporated into this Report by
reference. Such Proxy Statement will be filed on or prior to
April 15, 2000.
There are no arrangements known to the Registrant, the
operation of which may at a subsequent date result in a change in
control of the Registrant.
Item 13. Certain Relationships and Related Transactions
The information to be set forth under the caption "Certain
Related Transactions and Relationships" of the Proxy Statement
relating to the Annual Meeting of Stockholders expected to be
held on May 25, 2000, is incorporated into this Report by
reference. Such Proxy Statement will be filed on or prior to
April 15, 2000.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K
List of Financial Statements
See page F-1 of this Report, which includes an index to
consolidated financial statements and financial statement
schedule.
List of Exhibits (numbered in accordance with Item 601 of
Regulation S-K)
3.1A Amended and Restated Certificate of Incorporation of
the Company, dated September 30, 1994 and filed with the
Secretary of State of the State of Delaware on October 3, 1994,
was filed as Exhibit 3.1 to the Company's 1994 Annual Report on
Form 10-K and is incorporated by reference.
3.1B Certificate of Amendment of the Certificate of
Incorporation of the Company dated September 15, 1995 and filed
with the Secretary of State of Delaware on September 15, 1995 was
filed as Exhibit 3.1 to the Company's Amendment No. 1 to Form S-3
dated September 21, 1995 (Registration on No. 33-60029) and is
incorporated by reference.
3.1C Certificate of Amendment to the Amended and Restated
Certificate of Incorporation of the Company effective July 22,
1999 was filed as Exhibit 3.1 to the Company's June 30, 1999
quarterly report on Form 10-Q/A and is incorporated by reference.
3.2 Amended and Restated By-Laws of the Company,
effective as of October 3, 1994, were filed as Exhibit 3.2 to the
Company's 1994 Annual Report on Form 10-K and is incorporated by
reference.
4.1 Reference is made to Article Fourth of the Amended
and Restated Certificate of Incorporation of the Company which is
referenced as Exhibit 3.1 to this Report.
4.2 Registration Rights Agreement dated as of June 2,
1999, by and among the Registrant and the initial purchases named
therein, was filed as Exhibit 4.2 to the Company's Form 8-K dated
as of June 17, 1999 and is incorporated by reference.
10.1 $300,000,000 Credit Agreement among Alpharma U.S.
Inc. as Borrower, Union Bank of Norway, as agent and arranger,
and Den norske Bank AS, as co-arranger, dated January 20, 1999,
was filed as Exhibit 10.2 to the Company's 1998 Annual Report on
Form 10K and is incorporated by reference.
10.2 Purchase Agreement, dated as of March 25, 1998, by
and among the Company, SBC Warburg Dillion Read Inc., CIBC
Oppenheimer Corp. and Cowen Company was filed as Exhibit 1.1 of
the Company's Form 8-K, dated as of March 30, 1998 and is
incorporated by reference.
10.3 Indenture, dated as of March 30, 1998, by and among
the Company and First Union National Bank, as trustee, with
respect to the 5 3/4% Convertible Subordinated Notes due 2005 was
filed as Exhibit 4.1 of the Company's Form 8-K dated as of March
30, 1998 and is incorporated by reference.
10.4 Note Purchase Agreement dated March 5, 1998 and Amendment
No. 1 thereto dated March 25, 1998 by and between the Company and
A.L. Industrier A.S. was filed as Exhibit 1.2 of the Company's
Form 8-K dated as of March 30, 1998 and is incorporated by
reference.
10.5 Indenture dated as of June 2, 1999, by and between
the Registrant and First Union National Bank, as trustee, with
respect to the 3% Convertible Senior Subordinated Notes due 2006,
was filed as Exhibit 4.1 to the Company's Form 8-K dated as of
June 16, 1999 and is incorporated by reference.
Copies of debt instruments (other than those listed above)
for which the related debt does not exceed 10% of consolidated
total assets as of December 31, 1999 will be furnished to the
Commission upon request.
10.6 Parent Guaranty, made by the Company in favor of
Union Bank of Norway, as agent and arranger, and Den norske Bank
AS, as co-arranger, dated January 20, 1999 was filed as Exhibit
10.7 to the Company's 1998 Annual Report on Form 10K and is
incorporated by reference.
10.7 Restructuring Agreement, dated as of May 16, 1994,
between the Company and Apothekernes Laboratorium A.S (now known
as A.L. Industrier AS) was filed as Exhibit A to the Definitive
Proxy Statement dated August 22, 1994 and is incorporated herein
by reference.
10.8 Employment Agreement dated January 1, 1987, as
amended December 12, 1989, between I. Roy Cohen and the Company
and A.L. Laboratories, Inc. was filed as Exhibit 10.3 to the
Company's 1989 Annual Report on Form 10-K and is incorporated
herein by reference.
10.9 The Company's 1997 Incentive Stock Option and
Appreciation Right Plan, as amended was filed as Exhibit 10.1 to
the Company's June 30, 1999 quarterly report on Form 10Q/A and is
incorporated by reference.
10.10 Employment agreement dated July 30, 1991 between the
Company and Jeffrey E. Smith was filed as Exhibit 10.8 to the
Company's 1991 Annual Report on Form 10-K and is incorporated by
reference.
10.11 Employment agreement between the Company and Thomas
Anderson dated January 13, 1997 was filed as Exhibit 10.9 to the
Company's 1996 Annual Report on Form 10-K and is incorporated by
reference.
10.12 Employment Agreement between the Company and Bruce I.
Andrews dated April 7, 1997 was filed as Exhibit 10.b to the
Company's March 31, 1997 quarterly report on Form 10-Q and is
incorporated by reference.
10.13 Lease Agreement between A.L. Industrier AS, as
landlord, and Alpharma AS, as tenant, dated October 3, 1994 was
filed as Exhibit 10.10 to the Company's 1994 Annual Report on
Form 10-K and is incorporated by reference.
10.14 Administrative Services Agreement between A.L.
Industrier AS and Alpharma AS dated October 3, 1994 was filed as
Exhibit 10.11 to the Company's 1994 Annual Report on Form 10-K
and is incorporated by reference.
10.15 Employment agreement dated July 1, 1999 between the
Company and Einar W. Sissener is filed as an Exhibit to this
Report.*
10.16 Employment contract dated October 5, 1989 between
Apothekernes Laboratorium A.S (transferred to Alpharma Oslo per
the combination transaction) and Ingrid Wiik was filed as Exhibit
10.20 to the Company's 1994 Annual Report on Form 10-K and is
incorporated by reference.
10.17 Employment contract dated October 5, 1989 between
Apothekernes Laboratorium A.S (transferred to Alpharma Oslo per
the combination transaction) and Thor Kristiansen was filed as
Exhibit 10.14 to the Company's 1994 Annual Report on Form 10-K
and is incorporated by reference.
10.18 Employment contract dated October 2, 1991 between
Apothekernes Laboratorium A.S (transferred to Alpharma Oslo per
the combination transaction) and Knut Moksnes was filed as
Exhibit 10.15 to the Company's 1994 Annual Report on Form 10-K
and is incorporated by reference.
10.19 Stock Subscription and Purchase Agreement dated
February 10, 1997 between the Company and A.L. Industrier was
filed as Exhibit 10 on Form 8-K filed on February 19, 1997 and is
incorporated herein by reference.
10.19a Amendment No. 1 to Stock Subscription and Purchase
Agreement dated June 26, 1997, between the Company and A.L.
Industrier AS was filed as an Exhibit to the Company's Form 8-K
dated June 27, 1997 and is incorporated herein by reference.
10.20 Employment Agreement dated March 13, 1998 between the
Company and Gert W. Munthe was filed as Exhibit 10a to the
Company's March 31, 1998 Quarterly Report on Form 10-Q and is
incorporated by reference.
10.21 Resignation Agreement dated September 24, 1999
between the Company and Gert Munthe was filed as Exhibit 10.1 to
the Company's September 30, 1999 quarterly report on Form 10-Q
and is incorporated by reference.
10.22 Master Agreement dated as of February 16, 1999 by and
among Ascent, USPD and the Company and was filed as Exhibit 99.1
of the Company's Form 8-K dated February 23, 1999 and is
incorporated by reference.
10.22a Depositary Agreement dated as of February 16, 1999 by
and among Ascent, USPD the Company and State Street Bank and
Trust Company was filed as Exhibit 99.2 of the Company's Form 8-K
dated February 23, 1999 and is incorporated by reference.
10.22b Loan Agreement dated as of February 16, 1999 by and
among Ascent, USPD and the Company was filed as Exhibit 99.3 of
the Company's Form 8-K dated February 23, 1999 and is
incorporated by reference.
10.22c Guaranty Agreement dated as of February 16, 1999 by
and between Ascent and the Company was filed as Exhibit 99.4 of
the Company's Form 8-K dated February 23, 1999 and is
incorporated by reference.
10.22d Registration Rights Agreement dated as of February
16, 1999 by and between Ascent and USPD was filed as Exhibit 99.5
of the Company's Form 8-K dated February 23, 1999 and is
incorporated by reference.
10.22e Subordination Agreement dated as of February 16, 1999
by and among Ascent, USPD and the purchasers named therein was
filed as Exhibit 99.6 of the Company's Form 8-K dated February
23, 1999 and is incorporated by reference.
10.22f Supplemental Agreement dated as of July 1, 1999 by
and among Ascent, Alpharma USPD Inc. and the Company was filed as
Exhibit 10.2 to the Company's June 30, 1999 quarterly report on
Form 10Q/A is incorporated by reference.
10.22g Second Supplemental Agreement dated October 15, 1999
by and among Ascent Pediatrics Inc., Alpharma USPD Inc. and the
Company was filed as Exhibit 10.1 to the Company's September 30,
1999 quarterly report on Form 10-Q and is incorporated by
reference.
10.23 Agreement for the sale and purchase of the issued
share capital of Cox Investments Limited, dated April 30, 1998
between Hoechst AG, Alpharma (U.K.) Limited, and Alpharma Inc.
was filed as Exhibit 2.1 of the Company's Form 8-K, dated as of
May 7, 1998 and is incorporated by reference.
10.24 Sale and purchase agreement between Schwarz Pharma
AG, Alpharma GmbH & Co. KG and Alpharma Inc. dated June 18, 1999
was filed as Exhibit 2.1 of the Company's Form 8-K dated as of
July 2, 1999, and is incorporated by reference.
21 A list of the subsidiaries of the Registrant as of
March 1, 2000 is filed as an Exhibit to this Report.*
23 Consent of PricewaterhouseCoopers L.L.P., Independent
Accountants, is filed as an Exhibit to this Report.
27 Financial Data Schedule is filed as an Exhibit to
this Report.
* Previously filed with original Form 10-K for 1999.
Report on Form 8-K
There were no reports on Form 8-K filed in the fourth
quarter of 1999.
Undertakings
For purposes of complying with the amendments to the rules
governing Registration Statements under the Securities Act of
1933, the undersigned Registrant hereby undertakes as follows,
which undertaking shall be incorporated by reference into
Registrant's Registration Statements on Form S-8 (No. 33-60495,
effective July 13, 1990) and Form S-3 (File Nos. 333-57501, 333-
86037, 333-86153 and 333-70229):
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers
and controlling persons of the Registrant pursuant to the
foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
expressed in the Securities Act of 1933 and is, therefore,
unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of
any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question
whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final
adjudication of such issue.
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly authorized.
November 13, 2000 ALPHARMA INC.
Registrant
By: /s/ Einar W. Sissener
Einar W. Sissener
Director and Chairman of the Board
Pursuant to the requirements of the Securities and Exchange Act of
1934, this Report has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates
indicated.
Date: November 13, 2000 /s/ Einar W. Sissener
Einar W. Sissener
Director and Chairman of the Board
Date: November 13, 2000 /s/ Ingrid Wiik
Ingrid Wiik
Director, President and
Chief Executive Officer
Date: November 13,2000 /s/ Jeffrey E. Smith
Jeffrey E. Smith
Vice President, Finance and
Chief Financial Officer
(Principal accounting officer)
Date: November 13, 2000 /s/ I. Roy Cohen
I. Roy Cohen
Director and Chairman of the
Executive Committee
Date: November 13, 2000 /s/ Thomas G. Gibian
Thomas G. Gibian
Director and Chairman of the
Audit Committee
Date: November 13, 2000 /s/ Glen E. Hess
Glen E. Hess
Director
Date: November 13, 2000
Peter G. Tombros
Director and Chairman
of the Compensation Committee
Date: November 13, 2000 /s/ Erik G. Tandberg
Erik G. Tandberg
Director
Date: November 13, 2000 /s/ Oyvin Broymer
Oyvin Broymer
Director
Date: November 13, 2000 /s/ Erik Hornnaess
Erik Hornnaess
Director
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
______________
Page
Consolidated Financial Statements:
Report of Independent Accountants F-2
Consolidated Balance Sheet at
December 31, 1999 (restated) and 1998 F-3
Consolidated Statement of Income for
the years ended December 31, 1999 (restated),
1998 and 1997 F-4
Consolidated Statement of Stockholders'
Equity for the years ended
December 31, 1999 (restated), 1998 and 1997 F-5 to F-6
Consolidated Statement of Cash Flows
for the years ended December 31, 1999
(restated), 1998 and 1997 F-7 to
F-8
Notes to Consolidated Financial Statements F-9 to F-44
Financial statement schedules are omitted for the reason that
they are not applicable or the required information is included
in the consolidated financial statements or notes thereto.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and
Board of Directors of
Alpharma Inc.:
In our opinion, the accompanying consolidated financial
statements listed in the index on page F-1 of this Form 10-K/A
present fairly, in all material respects, the consolidated
financial position of Alpharma Inc. and Subsidiaries (the
"Company") as of December 31, 1999 and 1998 and the consolidated
results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999, in conformity
with accounting principles generally accepted in the United
States. 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 of these statements in accordance with auditing
standards generally accepted in the United States which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed
above.
As discussed in Note 2B, in the 1999 consolidated financial
statements have been restated for certain sales transactions.
PRICEWATERHOUSECOOPERS LLP
Florham Park, New Jersey
February 23, 2000, except for
Note 2B and paragraph 2 of
Note 23, as to which the date
is November 10, 2000
ALPHARMA INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In thousands, except share data)
December 31,
1999 1998
(as restated)
ASSETS
Current assets:
Cash and cash equivalents $ 17,655 $ 14,414
Accounts receivable, net 189,261 169,744
Inventories 161,033 138,318
Prepaid expenses and other
current assets 13,923 13,008
Total current assets 381,872 335,484
Property, plant and equipment, net 244,413 244,132
Intangible assets, net 488,958 315,709
Other assets and deferred charges 45,023 13,611
Total assets $1,160,266 $908,936
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 9,111 $ 12,053
Short-term debt 4,289 41,921
Accounts payable 51,621 41,083
Accrued expenses 83,660 64,596
Accrued and deferred income taxes 15,595 10,784
Total current liabilities 164,276 170,437
Long-term debt:
Senior 225,110 236,184
Convertible subordinated notes,
including $67,850 to related party 366,674 192,850
Deferred income taxes 35,065 31,846
Other non-current liabilities 17,208 10,340
Stockholders' equity:
Preferred stock, $1 par value,
no shares issued - -
Class A Common Stock, $.20
par value, 20,390,269 and
17,755,249 shares issued 4,078 3,551
Class B Common Stock, $.20 par value,
9,500,000 shares issued 1,900 1,900
Additional paid-in capital 297,780 219,306
Accumulated other comprehensive loss (34,201) (7,943)
Retained earnings 88,560 56,649
Treasury stock, at cost (6,184) (6,184)
Total stockholders' equity 351,933 267,279
Total liabilities and
stockholders' equity $1,160,266 $908,936
See notes to consolidated financial statements.
ALPHARMA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(In thousands, except per share data)
Years Ended December 31,
1999 1998 1997
(as restated)
Total revenue $732,443 $604,584 $500,288
Cost of sales 392,316 351,324 289,235
Gross profit 340,127 253,260 211,053
Selling, general and
administrative expenses 244,775 188,264 164,155
Operating income 95,352 64,996 46,898
Interest expense (39,174) (25,613) (18,581)
Other income (expense), net 1,450 (400) (567)
Income before income taxes 57,628 38,983 27,750
Provision for income taxes 20,656 14,772 10,342
Net income $ 36,972 $24,211 $ 17,408
Earnings per common share:
Basic $ 1.33 $ .95 $ .77
Diluted $ 1.27 $ .92 $ .76
See notes to consolidated financial statements.
ALPHARMA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands)
Accumulated
Other Total
Additional Comprehen- Stock-
Common Paid-In sive Income Retained Treasury holders
Stock Capital (Loss) Earnings Stock Equity
Balance, December 31, 1996 $4,408 $122,252 $10,491 $54,996 $(6,105) $186,042
Comprehensive
income(loss):
Net income - 1997 17,408 17,408
Currency translation
adjustment (18,866) (18,866)
Total comprehensive loss (1,458)
Dividends declared
($.18 per common share) (4,198) (4,198)
Tax benefit realized from
stock option plan 228 228
Purchase of treasury stock (13) (13)
Exercise of stock options
(Class A) and other 14 794 808
Exercise of stock rights
(Class A) 440 35,538 35,978
Stock subscription by
A.L. Industrier (Class B) 254 20,125 20,379
Employee stock purchase
plan 8 699 707
Balance, December 31, 1997 $5,124 $179,636 $(8,375) $68,206 $(6,118) $238,473
Comprehensive
income(loss):
Net income - 1998 24,211 24,211
Currency translation
adjustment 432 432
Total comprehensive
income 24,643
Dividends declared
($.18 per common share) (4,651) (4,651)
Tax benefit realized from
stock option plan 1,415 1,415
Purchase of treasury stock (66) (66)
Exercise of stock options
(Class A) and other 68 5,687 5,755
Exercise of warrants 48 4,910 4,958
Stock subscription
receivable for warrant
exercises (47) (4,869) (4,916)
Stock issued in tender
offer for warrants 246 30,871 (31,117) --
Employee stock purchase
plan 12 1,656 1,668
Balance, December 31, 1998 $5,451 $219,306 $(7,943) $56,649 $(6,184) $267,279
Comprehensive income
(loss):
Net income - 1999 36,972 36,972
(restated)
Currency translation
adjustment (restated) (26,258) (26,258)
Total comprehensive
income (restated) 10,714
Dividends declared
($.18 per common share) (5,061) (5,061)
Tax benefit realized from
stock option plan 1,670 1,670
Exercise of stock options
(Class A) and other 67 7,834 7,901
Exercise of warrants 48 4,873 4,921
Proceeds from equity
offering 400 61,999 62,399
Employee stock purchase
plan 12 2,098 2,110
Balance, December 31, 1999 $ 5,978 $297,780 $(34,201) $ 88,560 $ (6,184) $351,933
(restated)
See notes to consolidated financial statements.
ALPHARMA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
Years Ended December 31,
1999 1998 1997
(as restated)
Operating activities:
Net income $36,972 $24,211 $17,408
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation and amortization 50,418 38,120 30,908
Deferred income taxes (6,122) 493 (1,101)
Other noncash items 6,178 2,081 -
Change in assets and liabilities, net
of effects from business
acquisitions:
(Increase) in accounts receivable (5,494) (22,487) (13,029)
(Increase) decrease in inventory (21,535) 3,212 (2,121)
(Increase) decrease in prepaid
expenses and other current assets 1,849 (686) (1,013)
Increase(decrease) in accounts
payable and accrued expenses 164 8,189 (4,782)
Increase in accrued income taxes 6,401 3,641 4,077
Other, net 1,107 (119) 616
Net cash provided by operating
activities 69,938 56,655 30,963
Investing activities:
Capital expenditures (33,735) (31,378) (27,783)
Purchase of businesses
and intangibles, net of cash
acquired (205,281) (220,669) (44,029)
Loans to Ascent Pediatrics (10,500) - -
Net cash used in investing
activities (249,516) (252,047) (71,812)
Continued on next page.
See notes to consolidated financial statements.
ALPHARMA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
(In thousands)
Years Ended
December 31,
1999 1998 1997
Financing activities:
Net advances (repayments)
under lines of credit $(38,616) $ 2,542 $(19,389)
Proceeds of senior long-term debt 317,000 187,522 27,506
Reduction of senior long-term debt (330,611) (183,751) (25,366)
Dividends paid (5,061) (4,651) (4,198)
Proceeds from sale of convertible
subordinated notes 170,000 192,850 -
Proceeds from exercise of stock
rights - - 56,357
Payment for debt issuance costs (8,796) (4,175) -
Proceeds from equity offering, net 62,399 - -
Proceeds from employee stock option
and stock purchase plan and other 11,681 8,772 1,729
Proceeds from exercise of warrants 4,921 42 -
Net cash provided by
financing activities 182,917 199,151 36,639
Exchange rate changes:
Effect of exchange rate changes
on cash (1,936) 397 (1,606)
Income tax effect of exchange rate
changes on intercompany advances 1,838 (739) 869
Net cash flows from exchange
rate changes (98) (342) (737)
Increase (decrease) in cash and cash
equivalents 3,241 3,417 (4,947)
Cash and cash equivalents at
beginning of year 14,414 10,997 15,944
Cash and cash equivalents at
end of year $17,655 $14,414 $10,997
See notes to consolidated financial statements.
ALPHARMA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
1. The Company:
Alpharma Inc. and Subsidiaries, (the "Company") is a
multinational pharmaceutical company which develops,
manufactures and markets specialty generic and proprietary human
pharmaceutical and animal health products.
In 1994, the Company acquired the pharmaceutical, animal
health, bulk antibiotic and aquatic animal health business
("Alpharma Oslo") of A.L. Industrier A.S ("A.L. Industrier"), the
beneficial owner of 100% of the outstanding shares of the
Company's Class B Stock. The Class B stock represents 32.1% of
the total outstanding common stock as of December 31, 1999. A.L.
Industrier, a Norwegian company, is able to control the Company
through its ability to elect more than a majority of the Board of
Directors and to cast a majority of the votes in any vote of the
Company's stockholders. (See Note 17.)
The Company is organized on a global basis within its Human
Pharmaceutical and Animal Pharmaceutical businesses into five
decentralized divisions each of which has a president and
operates in a distinct business and/or geographic area.
Divisions in the Human Pharmaceutical business include: the
U.S. Pharmaceuticals Division ("USPD"), the International
Pharmaceuticals Division ("IPD") and the Fine Chemicals Division
("FCD"). The USPD's principal products are generic liquid and
topical pharmaceuticals sold primarily to wholesalers,
distributors and merchandising chains. The IPD's principal
products are dosage form pharmaceuticals sold primarily in
Scandinavia, the United Kingdom and western Europe as well as
Indonesia and certain middle eastern countries. The FCD's
principal products are bulk pharmaceutical antibiotics sold to
the pharmaceutical industry in the U.S. and worldwide for use as
active substances in a number of finished pharmaceuticals.
Divisions in the Animal Pharmaceutical business include: the
Animal Health Division ("AHD") and the Aquatic Animal Health
Division ("AAHD"). The AHD's principal products are feed additive
and other animal health products for animals raised for
commercial food production (principally poultry, cattle and
swine) in the U.S. and worldwide. The AAHD manufactures and
markets vaccines primarily for use in immunizing farmed fish
(principally salmon) worldwide with a concentration in Norway.
(See Note 21 for segment and geographic information.)
2A. Summary of Significant Accounting Policies:
Principles of consolidation:
The consolidated financial statements include the accounts
of the Company and its domestic and foreign subsidiaries. The
effects of all significant intercompany transactions have been
eliminated.
Use of estimates:
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions. The estimates and assumptions
affect the reported amounts of assets and liabilities, the
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. Actual results could differ
from those estimates.
Cash equivalents:
Cash equivalents include all highly liquid investments that
have an original maturity of three months or less.
Inventories:
Inventories are valued at the lower of cost or market. The
last-in, first-out (LIFO) method is principally used to determine
the cost of the USPD manufacturing subsidiary inventories. The
first-in, first-out (FIFO) and average cost methods are used to
value remaining inventories.
Property, plant and equipment:
Property, plant and equipment are recorded at cost.
Expenditures for additions, major renewals and betterments are
capitalized and expenditures for maintenance and repairs are
charged to income as incurred. When assets are sold or retired,
their cost and related accumulated depreciation are removed from
the accounts, with any gain or loss included in net income.
Interest is capitalized as part of the acquisition cost of
major construction projects. In 1999, 1998 and 1997, $325, $744
and $407 of interest cost was capitalized, respectively.
Depreciation is computed by the straight-line method over
the estimated useful lives which are generally as follows:
Buildings 30-40 years
Building improvements 10-30 years
Machinery and equipment 2-20 years
Intangible assets:
Intangible assets represent the excess of cost of acquired
businesses over the underlying fair value of the tangible net
assets acquired and the cost of technology, trademarks, New
Animal Drug Applications ("NADAs"), and other non-tangible assets
acquired in product line acquisitions. Intangible assets are
amortized on a straight-line basis over their estimated period of
benefit. The Company continually reviews its intangible assets on
a divisional basis to evaluate whether events or changes have
occurred that would suggest an impairment of carrying value. An
impairment would be recognized when expected future operating
cash flows are lower than the carrying value. The following table
is net of accumulated amortization of $84,718 and $63,014 at
December 31, 1999 and 1998, respectively.
1999 1998 Life
Excess of cost of acquired
businesses over the fair value
of the net assets acquired $382,132 $247,869 15 - 40
Technology, trademarks, NADAs
and other 106,826 67,840 6 - 20
$488,958 $315,709
Foreign currency translation and transactions:
The assets and liabilities of the Company's foreign
subsidiaries are translated from their respective functional
currencies into U.S. Dollars at rates in effect at the balance
sheet date. Results of operations are translated using average
rates in effect during the year. Foreign currency transaction
gains and losses are included in income. Foreign currency
translation adjustments are included in accumulated other
comprehensive income (loss) as a separate component of
stockholders' equity. The foreign currency translation
adjustment for 1999, 1998 and 1997 is net of $1,838, $(739), and
$869, respectively, representing the foreign tax effects
associated with intercompany advances to foreign subsidiaries.
Foreign exchange contracts:
The Company selectively enters into foreign exchange
contracts to buy and sell certain cash flows in non-functional
currencies and to hedge certain firm commitments due in foreign
currencies. Foreign exchange contracts, other than hedges of firm
commitments, are accounted for as foreign currency transactions
and gains or losses are included in income. Gains and losses
related to hedges of firm commitments are deferred and included
in the basis of the transaction when it is completed.
Interest rate transactions:
The Company selectively enters into interest rate agreements
which fix the interest rate to be paid for specified periods on
variable rate long-term debt. The effect of these agreements is
recognized over the life of the agreements as an adjustment to
interest expense.
Revenue Recognition:
Revenue is recognized upon shipment of products to
customers. Provisions for rebates, returns and allowances and
other price adjustments are estimated and deducted from gross
revenues.
Reclassification:
Certain prior year amounts have been reclassified to conform
with current year presentation.
Income taxes:
The provision for income taxes includes federal, state and
foreign income taxes currently payable and those deferred because
of temporary differences in the basis of assets and liabilities
between amounts recorded for financial statement and tax
purposes. Deferred taxes are calculated using the liability
method.
At December 31, 1999, the Company's share of the
undistributed earnings of its foreign subsidiaries (excluding
cumulative foreign currency translation adjustments) was
approximately $67,600. No provisions are made for U.S. income
taxes that would be payable upon the distribution of earnings
which have been reinvested abroad or are expected to be returned
in tax-free distributions. It is the Company's policy to provide
for U.S. taxes payable with respect to earnings which the Company
plans to repatriate.
Accounting for stock-based compensation:
The Company has adopted Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation" by disclosing the pro forma effect of the fair
value method of accounting for stock-based compensation plans. As
allowed by SFAS 123 the Company has continued to account for
stock options under Accounting Principle Board (APB) Opinion No.
25 "Accounting for Stock Issued to Employees."
Comprehensive income:
SFAS 130, "Reporting Comprehensive Income", requires foreign
currency translation adjustments and certain other items, which
were reported separately in stockholders' equity, to be included
in other comprehensive income (loss). The only components of
accumulated other comprehensive loss for the Company are foreign
currency translation adjustments. Total comprehensive income
(loss) for the years ended 1999, 1998 and 1997 is included in the
Statement of Stockholders' Equity.
Segment information:
SFAS 131, "Disclosures about Segments of an Enterprise and
Related Information" requires segment information to be prepared
using the "management" approach. The management approach is based
on the method that management organizes the segments within the
Company for making operating decisions and assessing performance.
SFAS 131 also requires disclosures about products and services,
geographic areas, and major customers.
Recent accounting pronouncements:
In June 1998, the Financial Accounting Standards Board
(FASB) issued SFAS 133, "Accounting for Derivative Instruments
and Hedging Activities." SFAS 133 is effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000
(January 1, 2001 for the Company). SFAS 133 requires that all
derivative instruments be recorded on the balance sheet at their
fair value. Changes in the fair value of derivatives are recorded
each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a
hedge transaction and, if it is, the type of hedge transaction.
SFAS 133 is not expected to have a material impact on the
Company's consolidated results of operations, financial position
or cash flows.
2B. Restatement of 1999 Financial Statements
In the third quarter of 2000 the Company discovered that
with respect to its Brazilian AHD operations, which reported
revenues of approximately $1,800, $6,000 and $13,700 for the
years 1997, 1998, and 1999, respectively, a small number of
employees collaborated to circumvent established company policies
and controls to create invoices that were either not supported by
underlying transactions or for which the recorded sales were
inconsistent with the underlying transactions.
A full investigation of the matter with the assistance of
counsel and the company's independent auditors was initiated and
completed. As a result, the individuals responsible have been
removed, new management has been appointed to supervise AHD
Brazilian operations and the Company has restated all affected
periods, comprising all four quarters of 1999 and the first two
quarters of 2000.
A summary of the effects of the restatement adjustment on
the accompanying 1999 consolidated balance sheet and statement of
income is as follows:
December 31, 1999
As
previously
reported in
1999 Restatement
Form 10-K Adjustments As restated
ASSETS
Cash $ 17,655 $ - $ 17,655
Accounts Receivable, net 199,207 (9,946) 189,261
Inventories 155,338 5,695 161,033
Prepaid expenses & other 13,923 - 13,923
Current assets 386,123 (4,251) 381,872
Property, Plant &
Equipment, net 244,413 - 244,413
Intangible assets, net 488,958 - 488,958
Other assets 45,023 - 45,023
Total assets $1,164,517 $ (4,251) $1,160,266
LIABILITIES AND EQUITY
Current portion of long-
term debt $ 9,111 $ - $ 9,111
Short term debt 4,289 - 4,289
Accounts payable &
accrued 135,281 - 135,281
expenses
Accrued and deferred 17,175 (1,580) 15,595
taxes
Current liabilities 165,856 (1,580) 164,276
Long term debt 591,784 - 591,784
Deferred income taxes 35,065 - 35,065
Other non-current
liabilities 17,208 - 17,208
Stockholders' equity 354,604 (2,671) 351,933
Total
liabilities $1,164,517 $ (4,251) $1,160,266
and equity
Year Ended December 31, 1999
As
previously
reported in
1999 Restatement
Form 10-K Adjustments As restated
Total revenue $742,176 $(9,733) $732,443
Cost of Sales 397,890 (5,574) 392,316
Gross profit 344,286 (4,159) 340,127
Selling, general and
administrative 244,775 - 244,775
expenses
Operating income 99,511 (4,159) 95,352
Interest expense (39,174) - (39,174)
Other, net 1,450 - 1,450
Income before provision
for income taxes 61,787 (4,159) 57,628
Provision for income 22,236 (1,580) 20,656
taxes
Net income $ 39,551 $ (2,579) $36,972
Earnings per common
share
Basic $ 1.43 $ 1.33
Diluted $ 1.34 $ 1.27
3. Business and Product Line Acquisitions:
The following acquisitions were accounted for under the
purchase method and the accompanying financial statements reflect
the fair values of the assets acquired and liabilities assumed
and the results of operations from their respective acquisition
dates. While certain of the 1999 purchase price allocations are
preliminary, none are expected to change materially.
Vetrepharm:
On November 15, 1999, the Company's AAHD acquired all of the
capital stock of Vetrepharm Limited for a total cash purchase
price of approximately $2,500 including direct costs of
acquisition. Vetrepharm operates its aquatic animal health
distribution business in the United Kingdom. The Company is
amortizing the acquired goodwill (approximately $2,000) over 10
years using the straight line method.
Southern Cross:
On September 23, 1999, the Company's AHD acquired the
business of Southern Cross Biotech, Pty. Ltd. ("Southern Cross")
and the exclusive worldwide license for REPORCIN for
approximately $14,000 in cash, which includes a prepayment of
royalties of approximately $2,900. Southern Cross is an
Australian manufacturer and marketer of REPORCIN. REPORCIN is a
product which is used to aid in the production of leaner swine.
The purchase price included the rights to the countries in which
REPORCIN has already received regulatory approval and the assets
of Southern Cross. Under the terms of the license agreement
additional cash payments will be made as regulatory approvals are
obtained and licenses granted in other countries. Total
additional payments will approximate $65,000 if all 13 possible
country approvals are received over the next 4-6 years. The
Company is amortizing the acquired intangibles and goodwill
(approximately $9,000) over 15 years using the straight-line
method.
I.D. Russell:
On September 2, 1999, the Company's AHD acquired the
business of I.D. Russell Company Laboratories ("IDR") for
approximately $21,500 in cash. IDR is a US manufacturer of animal
health products primarily soluble antibiotics and vitamins. The
acquisition consisted of working capital, an FDA approved
manufacturing facility in Colorado, product registrations,
trademarks and 35 employees. The Company has preliminarily
allocated the purchase price to the manufacturing facility and
identified intangibles and goodwill (approximately $11,000) which
will be generally amortized over 15 years. The fair value of the
net assets acquired was based on preliminary estimates and may be
revised at a later date. The purchase agreement provides for up
to $4,000 of additional purchase price if two product approvals
currently pending are received in the next four years.
Isis:
Effective June 15, 1999, the Company's IPD acquired all of
the capital stock of Isis Pharma GmbH and its subsidiary, Isis
Puren ("Isis") from Schwarz Pharma AG for a total cash purchase
price of approximately $153,000, including estimated purchase
price adjustments and direct costs of acquisition. Isis operates
a generic and branded pharmaceutical business in Germany. The
acquisition consisted of personnel (approximately 200 employees;
140 of whom are in the sales force) and product registrations and
trademarks. No plant, property or manufacturing equipment were
part of the acquisition. The Company is amortizing the acquired
intangibles and goodwill based on lives which vary from 7 to 20
years (average approximately 16 years) using the straight-line
method. Intangible assets and goodwill at December 31, 1999 was
approximately $147,000. The allocation of purchase price of the
net assets acquired was based on a valuation. The final purchase
price adjustment will be agreed in 2000.
The Company financed the $153,000 purchase price under its
1999 Credit Facility. On June 2, 1999, the Company repaid
borrowings under the 1999 Credit Facility with a substantial
portion of the proceeds from the issuance of 3% convertible
senior subordinated notes due in 2006. ("06 notes" - See Note
10). Such repayment created the capacity under the 1999 Credit
Facility to incur the borrowings used to finance the acquisition
of Isis.
Jumer:
On April 16, 1999, the Company's IPD acquired the generic
pharmaceutical business Jumer Laboratories SARL and related
companies of the Cherqui group ("Jumer") in Paris, France for
approximately $26,000, which includes the assumption of debt
which was repaid subsequent to closing. Based on product
approvals received additional purchase price of approximately
$3,000 may be paid in the next 3 years. The acquisition consisted
of products, trademarks and registrations. The Company is
amortizing the acquired intangibles and goodwill based on lives
which vary from 16 to 25 years (average approximately 22 years)
using the straight line method. Intangible assets and goodwill at
December 31, 1999 was approximately $29,700.
Cox:
On May 7, 1998, the Company's IPD acquired all of the
capital stock of Cox Investments Ltd. and its wholly owned
subsidiary, Arthur H. Cox and Co., Ltd. and all of the capital
stock of certain related marketing subsidiaries ("Cox") from
Hoechst AG for
a total purchase price including the purchase price adjustment
and direct costs of the acquisition of approximately $198,000.
Cox's operations are included in IPD and are located primarily in
the United Kingdom with distribution operations located in
Scandinavia and the Netherlands. Cox is a generic pharmaceutical
manufacturer and marketer of tablets, capsules, suppositories,
liquids, ointments and creams. Cox distributes its products to
pharmacy retailers and pharmaceutical wholesalers primarily in
the United Kingdom. The Company is amortizing the acquired
goodwill (approximately $160,000) over 35 years using the
straight-line method.
The Company financed the $198,000 purchase price and related
debt repayments from borrowings under its long-term Revolving
Credit Facility and short-term lines of credit which had been
repaid in March 1998 with the proceeds of the convertible
subordinated notes offering ("05 Notes"). The Revolving Credit
Facility was replaced in January 1999 with a new credit facility
which contains updated financial covenants. (See Note 10.)
The non-recurring charges related to the acquisition of Cox
included in the second quarter of 1998 are summarized below. The
charge for in-process research and development ("R&D") is not tax
benefited; therefore the computed tax benefit is below the
expected rate. The valuation of purchased in-process R&D was
based on the cost approach for 12 generic products at varying
stages of development at the acquisition date.
Inventory write-up $1,300 (Included in cost of sales)
In-process R&D 2,100 (Included in selling, general
Severance of and administrative expenses)
existing employees 200
3,600
Tax benefit (470)
$3,130 ($.12 per share)
Pro forma Information:
The following unaudited pro forma information on results of
operations assumes the purchase of all businesses discussed above
(except for Vetrepharm and Southern Cross) as if the companies
had combined at the beginning of each period presented:
Pro forma
Year Ended
December 31,
1999 1998*
Revenue $780,100 $748,100
Net income $31,800 $27,200
Basic EPS $1.15 $1.06
Diluted EPS $1.12 $1.04
* Excludes actual non-recurring charges related to the
acquisition of Cox of $3,130 after tax or $0.12 per share.
These unaudited pro forma results have been prepared for
comparative purposes only and include certain adjustments, such
as additional amortization expense as a result of acquired
intangibles and goodwill and an increased interest expense on
acquisition debt. They do not purport to be indicative of the
results of operations that actually would have resulted had the
acquisitions occurred at the beginning of each respective period,
or of future results of operations of the consolidated entities.
Other Acquisitions:
In December 1998, the Company's FCD acquired SKW Biotech,
a part of SKW Trostberg AG, in Budapest, Hungary. The purchase
included an antibiotic fermentation and purification plant in
Budapest on a 300,000 square foot site. SKW Biotech is included
in the FCD and currently produces vancomycin. The cost of
approximately $7,300 was allocated to property, plant and
equipment.
In November 1998, the Company's IPD acquired the Siga
product line in Germany from Hexal AG. The branded product line,
"Siga", is included in the IPD and consists of over 20 products.
The acquisition consisted of product registrations and
trademarks; no personnel or plants were part of the transaction.
The cost of approximately $13,300 has been allocated to
intangible assets and will be amortized over 15 years.
In November 1997, the Company's FCD acquired the worldwide
polymyxin business from Cultor Food Science. Polymyxin is an
antibiotic mainly used in topical ointments and creams. The
transaction included product technology, registrations, customer
information and inventories. The Company's FCD manufactures
polymyxin in its Copenhagen facility and has manufactured its
additional polymyxin requirements at this facility. The cost was
approximately $16,500 which included approximately $500 of
inventory. The balance of the purchase price has been allocated
to intangible assets and will generally be amortized over 15
years. The purchase agreement also provides for a contingent
payment and future royalties in the event that certain sales
levels are achieved of a product presently being developed by an
independent pharmaceutical company utilizing polymyxin supplied
by the Company.
In September 1997, the Company's AHD acquired the worldwide
decoquinate business from Rhone-Poulenc Animal Nutrition of
France (RPAN). Decoquinate is an anticoccidial feed additive used
primarily in beef cattle and calves. The transaction included all
rights for decoquinate worldwide and the trademark Deccoxr that
is registered in over 50 countries. The agreement also provides
that RPAN will continue to manufacture decoquinate for the AHD
under a long term supply contract. The cost was approximately
$27,550, which included approximately $1,850 of inventory. The
balance of the purchase price has been allocated to intangible
assets and will generally be amortized over 15 years.
4. Strategic Alliances:
Joint venture:
In January 1999, the AHD contributed the distribution
business of its Wade Jones Company ("WJ") into a partnership with
G&M Animal Health Distributors and T&H Distributors. The WJ
distribution business which was merged had annual sales of
approximately $30,000 and assets (primarily accounts receivable
and inventory) of less than $10,000. The Company owns 50% of the
new entity, WYNCO LLC ("WYNCO"). The Company accounts for its
interest in WYNCO under the equity method.
WYNCO is a regional distributor of animal health products
and services primarily to integrated poultry and swine producers
and independent dealers operating in the Central South West and
Eastern regions of the U.S. WYNCO is the exclusive distributor
for the Company's animal health products. Manufacturing and
premixing operations at WJ remain part of the Company. Wade Jones
Company was renamed Alpharma Animal Health Company in 1999.
Ascent Loan Agreement and Option:
On February 4, 1999, the Company entered into a loan
agreement with Ascent Pediatrics, Inc. ("Ascent") under which the
Company may provide up to $40,000 in loans to Ascent to be
evidenced by 7 1/2% convertible subordinated notes due 2005.
Pursuant to the loan agreement, up to $12,000 of the proceeds of
the loans can be used for general corporate purposes, with
$28,000 of proceeds reserved for projects and acquisitions
intended to enhance the growth of Ascent. All potential loans are
subject to Ascent meeting a number of terms and conditions at the
time of each loan. As of December 31, 1999, the Company had
advanced $10,500 to Ascent under the agreement. The advances to
date are included in the balance sheet as "Other assets".
In addition, Ascent and the Company have entered into an
amended agreement under which the Company will have the option
during the first half of 2003 to acquire all of the then
outstanding shares of Ascent for cash at a price to be determined
by a formula based on Ascent's operating income during its 2002
fiscal year. The amended agreement which extended the option from
2002 to 2003 and altered the formula period from 2001 to 2002 is
subject to approval by Ascent's stockholders.
5. Management Actions:
In 1999, the Company announced the decision to close or sell
its leased aquatic animal health plant in Bellevue, Washington
and terminate all 21 employees. A severance charge of $575 was
established in the third quarter of 1999 when the employees were
notified. During 1999, $231 of the severance was paid and the
balance to be paid in 2000 is $344. All significant production is
being transferred to the AAHD production facility in Norway. At
year end the Washington plant had ceased production and the fixed
assets have been written down to their net realizable value of
approximately $100. The result of the write down of leasehold
improvements and certain machinery and equipment is a charge of
approximately $1,600 in the fourth quarter of 1999.
In 1996, the Company took a number of actions to strengthen
its business. The actions included the termination of
approximately 450 employees.
A summary of the liabilities set up for severance in 1996
and included in accrued expenses is as follows:
1996 Actions
1999 1998 1997
Balance, January 1, $478 $3,407 $9,214
Payments (390) (3,007) (5,980)
Accruals - - 652
Translation and adjustments (88) 78 (479)
Balance, December 31, $ - $ 478 $3,407
6. Earnings Per Share:
Basic earnings per share is based upon the weighted average
number of common shares outstanding. Diluted earnings per share
reflect the dilutive effect of stock options, warrants and
convertible debt when appropriate.
A reconciliation of weighted average shares outstanding for
basic to diluted weighted average shares outstanding used in the
calculation of EPS is as follows:
(Shares in thousands) For the years ended
December 31,
1999 1998 1997
Average shares
outstanding - basic 27,745 25,567 22,695
Stock options 359 222 85
Warrants - 490 -
Convertible notes 6,744 - -
Average shares
outstanding - diluted 34,848 26,279 22,780
The amount of dilution attributable to the stock options and
warrants determined by the treasury stock method depends on the
average market price of the Company's common stock for each
period.
The 05 Notes issued in March 1998, convertible into
6,744,481 shares of common stock at $28.59 per share, were
outstanding at December 31, 1999 and 1998 and were included in
the computation of diluted EPS using the if-converted method for
the year ended December 31, 1999 and the three month periods
ended September 30, and December 31, 1998. The if-converted
method was antidilutive for the year ended December 31, 1998 and
therefore the shares attributable to the 05 Notes were not
included in the diluted EPS calculation.
In addition, the 06 Notes issued in June 1999 and
convertible into 5,294,301 shares of common stock at $32.11 per
share, were included in the computation of diluted EPS for the
three month periods ended September 30, and December 31, 1999.
The if-converted method was antidilutive for the year ended
December 31, 1999 and therefore the shares attributable to the
subordinated debt were not included in the diluted EPS
calculation.
The numerator for the calculation of basic EPS is net income
for all periods. The numerator for the calculation of diluted EPS
is net income plus an add back for interest expense and debt cost
amortization, net of income tax effects, related to the
convertible notes.
A reconciliation of net income used for basic to diluted EPS
is as follows:
1999 1998 1997
Net income - basic $36,972 $24,211 $17,408
Adjustments under the if-
converted method, net of tax 7,245 - -
Adjusted net income - diluted $44,217 $24,211 $17,408
7. Accounts Receivable, Net:
Accounts receivable consist of the following:
December 31,
1999 1998
Accounts receivable, trade $187,507 $171,073
Other 7,918 4,941
195,425 176,014
Less, allowances for doubtful
accounts 6,164 6,270
$189,261 $169,744
The allowance for doubtful accounts for the three years
ended December 31, consisted of the following:
1999 1998 1997
Balance at January 1, $6,270 $5,205 $4,359
Provision for doubtful
accounts 995 1,032 2,111
Reductions for accounts
written off (303) (175) (789)
Translation and other (798) 208 (476)
Balance at December 31, $6,164 $6,270 $5,205
8. Inventories:
Inventories consist of the following:
December 31,
1999 1998
Finished product $ 94,189 $ 78,080
Work-in-process 28,938 25,751
Raw materials 37,906 34,487
$161,033 $138,318
At December 31, 1999 and 1998, approximately $44,700 and
$41,900 of inventories, respectively, are valued on a LIFO basis.
LIFO inventory is approximately equal to FIFO in 1999 and 1998.
9. Property, Plant and Equipment, Net:
Property, plant and equipment, net, consist of the
following:
December 31,
1999 1998
Land $10,042 $ 10,603
Buildings and building
improvements 120,688 120,357
Machinery and equipment 271,372 259,988
Construction in progress 15,993 20,199
418,095 411,147
Less, accumulated depreciation 173,682 167,015
$244,413 $244,132
10. Long-Term Debt:
Long-term debt consists of the following:
December 31,
1999 1998
Senior debt:
U.S. Dollar Denominated:
1999 Revolving Credit Facility
(7.3 - 8.1%) $180,000 $-
Prior Revolving Credit Facility
(6.6 - 7.0%) - 180,000
A/S Eksportfinans - 7,200
Industrial Development Revenue Bonds:
Baltimore County, Maryland
(7.25%) 3,930 4,565
(6.875%) 1,200 1,200
Lincoln County, NC (3.4% - 4.2%) 4,000 4,500
Other, U.S. 172 504
Denominated in Other Currencies:
Mortgage notes payable (NOK) 38,521 42,224
Bank and agency development loans 6,387 7,991
(NOK)
Other, foreign 11 53
Total senior debt 234,221 248,237
Subordinated debt:
3% Convertible Senior Subordinated
Notes due 2006 (6.875% yield),
including interest accretion 173,824 -
5.75% Convertible Subordinated Notes
due 2005
125,000 125,000
5.75% Convertible Subordinated
Note due 2005 - Industrier Note 67,850 67,850
Total subordinated debt 366,674 192,850
Total long-term debt 600,895 441,087
Less, current maturities 9,111 12,053
$591,784 $429,034
Senior debt:
In January 1999, the Company signed a $300,000 credit
agreement ("1999 Credit Facility") with a consortium of banks
arranged by the Union Bank of Norway, Den norske Bank A.S., and
Summit Bank. The agreement replaced the prior revolving credit
facility and a U.S. short-term credit facility and increased
overall credit availability. The prior revolving credit facility
was repaid in February 1999 by drawing on the 1999 Credit
Facility.
The 1999 Credit Facility provides for (i) a $100,000 six
year Term Loan; and (ii) a revolving credit agreement of $200,000
which includes a $30,000 working capital facility and has an
initial term of five years with two possible one year extensions.
The 1999 Credit Facility has several financial covenants,
including an interest coverage ratio, total debt to earnings
before interest, taxes, depreciation and amortization ("EBITDA"),
and equity to total asset ratio. Interest on the facility will be
at the LIBOR rate with a margin of between .875% and 1.6625%
depending on the ratio of total debt to EBITDA. Margins can
increase based on the ratio of equity to total assets.
In December 1995, the Company's Danish subsidiary, A/S
Dumex, borrowed $9,000 from A/S Eksportfinans to finance an
expansion of its Vancomycin manufacturing facility in Copenhagen.
The term of the loan was seven years. Interest for the loan was
fixed at 6.59%. The loan was repaid in February 1999 from
proceeds received under the 1999 Credit Facility.
The Baltimore County Industrial Development Revenue Bonds
are payable in varying amounts through 2009. Plant and equipment
with an approximate net book value of $8,200 collateralize this
obligation.
The Company has issued Industrial Development Revenue Bonds
in connection with the expansion of the Lincolnton, North
Carolina plant. The bonds require monthly interest payments at a
floating rate approximating the current money market rate on tax
exempt bonds and the payment by the Company of annual letter of
credit, remarketing, trustee, and rating agency fees of 1.125%.
The bonds require a yearly sinking fund redemption of $500 to
August 2004 and $300 thereafter through August 2009. Plant and
equipment with an approximate net book value of $4,900 serve as
collateral for this loan.
The mortgage notes payable denominated in Norwegian Kroner
(NOK) include amounts issued in connection with the construction
and subsequent expansion of a pharmaceutical facility in Lier,
Norway. The mortgage is collateralized by this facility (net book
value $40,800). The debt was borrowed in a number of tranches
over the construction period and interest is fixed for specified
periods based on actual yields of Norgeskreditt publicly traded
bonds plus a lending margin of 0.70%. The weighted average
interest rate at December 31, 1999 and 1998 was 6.5% and 6.8%,
respectively. The tranches are repayable in semiannual
installments through 2021. Yearly amounts payable vary between
$1,451 and $2,009.
Mortgage notes payable also include amounts issued in 1997
($5,356) to finance a production unit at an Aquatic Animal Health
facility in Overhalla, Norway. The mortgage has a 12 year term
and an interest rate of 4.9%, is repayable in 10 equal
installments in years 2001 - 2009, and is collateralized by the
net book value of the facility ($6,800).
Alpharma Oslo has various loans with government development
agencies and banks which have been used for acquisitions and
construction projects. Annual payments are $1,074 through 2003,
$631 in 2004 and $186 through 2012. The weighted average interest
rate of the loans at December 31, 1999 and 1998 was 6.8% and
7.4%, respectively.
Subordinated debt:
In June 1999, the Company issued $170,000 principal amount
of 3.0% Convertible Senior Subordinated Notes due 2006 (the "06
Notes"). The 06 Notes pay cash interest of 3% per annum,
calculated on the initial principal amount of the Notes. The
Notes will mature on June 1, 2006 at a price of 134.104% of the
initial principal amount. The payment of the principal amount of
the Notes at maturity (or earlier, if the Notes are redeemed by
the Company prior to maturity), together with cash interest paid
over the term of the Notes, will yield investors 6.875% per
annum. The interest accrued but which will not be paid prior to
maturity (3.875% per annum) is reflected as long-term debt in the
accounts of the Company. The 06 Notes are redeemable by the
Company after June 16, 2002.
The 06 Notes are convertible at any time prior to maturity,
unless previously redeemed, into 31.1429 shares of the Company's
Class A Common stock per one thousand dollars of initial
principal amount of 06 Notes. This ratio results in an initial
conversion price of $32.11 per share. The number of shares into
which a 06 Note is convertible will not be adjusted for the
accretion of principal or for accrued interest.
The net proceeds from the offering of approximately $164,000
were used to retire outstanding senior long-term debt principally
outstanding under the 1999 Credit Facility. This created the
capacity under the 1999 Credit Facility to finance the
acquisition of Isis in the second quarter. (See Note 3.)
In March 1998, the Company issued $125,000 of 5.75%
Convertible Subordinated Notes (the "05 Notes") due 2005. The 05
Notes may be converted into common stock at $28.594 at any time
prior to maturity, subject to adjustment under certain
conditions. The Company may redeem the 05 Notes, in whole or in
part, on or after April 6, 2001, at a premium plus accrued
interest.
Concurrently, A.L. Industrier, the controlling stockholder
of the Company, purchased at par for cash $67,850 principal
amount of a Convertible Subordinated Note (the "Industrier
Note"). The Industrier Note has substantially identical
adjustment terms and interest rate as the 05 Notes. The 05 Notes
are convertible into Class A common stock. The Industrier Note is
automatically convertible into Class B common stock if at least
75% of the Class A notes are converted into common stock.
The net proceeds from the combined offering of $189,100 were
used initially to retire outstanding senior long-term debt. The
Revolving Credit Facility was used in the second quarter of 1998,
along with an amount of short term debt, to finance the
acquisition of Cox Pharmaceuticals. (See Note 3.)
Maturities of long-term debt during each of the next five
years and thereafter as of December 31, 1999 are as follows:
2000 $ 9,111
2001 19,363
2002 19,359
2003 19,418
2004 99,035
Thereafter 434,609
$600,895
11. Short-Term Debt:
Short-term debt consists of the following:
December 31,
1999 1998
Domestic $1,000 $17,275
Foreign 3,289 24,646
$4,289 $41,921
At December 31, 1999, the Company and its domestic
subsidiaries have available short term bank lines of credit
totaling $1,000 and a $30,000 working capital line included in
its 1999 Credit Facility. Borrowings under the lines are made for
periods generally less than three months and bear interest from
8.00% to 8.50% at December 31, 1999. At December 31, 1999, the
amount of the unused lines totaled $30,000. (See Note 10.)
At December 31, 1999, the Company's foreign subsidiaries
have available lines of credit with various banks totaling
$44,100 ($42,600 in Europe and $1,500 in the Far East). Drawings
under these lines are made for periods generally less than three
months and bear interest at December 31, 1999 at rates ranging
from 3.75% to 15.50%. At December 31, 1999, the amount of the
unused lines totaled $40,800 ($39,300 in Europe and $1,500 in the
Far East).
The weighted average interest rate on short-term debt during
the years 1999, 1998 and 1997 was 6.4%, 6.4% and 5.9%,
respectively.
12. Income Taxes:
Domestic and foreign income before income taxes was $30,031,
and $27,597, respectively in 1999, $28,296 and $10,687,
respectively in 1998, and $14,267 and $13,483, respectively in
1997. Taxes on income of foreign subsidiaries are provided at the
tax rates applicable to their respective foreign tax
jurisdictions. The provision for income taxes consists of the
following:
Years Ended December 31,
1999 1998 1997
Current:
Federal $8,752 $8,373 $5,164
Foreign 16,780 4,224 5,184
State 1,246 1,682 1,095
26,778 14,279 11,443
Deferred:
Federal (1,508) (351) 439
Foreign (3,963) 930 (1,295)
State ( 651) (86) (245)
(6,122) 493 (1,101)
Provision for
income taxes $20,656 $14,772 $10,342
A reconciliation of the statutory U.S. federal income tax
rate to the effective rate follows:
Years Ended December 31,
1999 1998 1997
Statutory U.S. federal rate 35.0% 35.0% 35.0%
State income tax, net of federal
tax benefit 0.5% 2.6% 2.0%
Lower taxes on foreign
earnings, net (5.6%) (5.2%) (4.4%)
Tax credits (1.2%) (1.2%) -
Non-deductible costs, principally
amortization of intangibles
related to acquired companies 5.9% 5.6% 4.9%
Non-deductible in-process R&D - 1.7% -
Other , net 1.2% (0.6%) (0.2%)
Effective rate 35.8% 37.9% 37.3%
Deferred tax liabilities (assets) are comprised of the
following:
Year Ended
December 31,
1999 1998
Accelerated depreciation and amortization
for income tax purposes $22,047 $23,956
Excess of book basis of acquired assets
over tax bases 18,124 11,488
Differences between inventory valuation
methods used for book and tax purposes 2,888 2,219
Other 824 623
Gross deferred tax liabilities 43,883 38,286
Accrued liabilities and other reserves (5,121) (4,418)
Pension liabilities (1,766) (1,496)
Loss carryforwards (3,846) (1,890)
Deferred income (815) (581)
Other (2,502) (1,792)
Gross deferred tax assets (14,050) (10,177)
Deferred tax assets valuation allowance 1,116 1,890
Net deferred tax liabilities $30,949 $29,999
As of December 31, 1999, the Company has state loss
carryforwards in one state of approximately $15,000, which are
available to offset future taxable income and expire between 2007
and 2014. The Company has recognized a deferred tax asset
relating to these state loss carryforwards, and believes that it
is more likely than not that these carryforwards will be
available to reduce future state income tax liabilities. The
Company also has foreign loss carryforwards in six countries as
of December 31, 1999, of approximately $13,000, which are
available to offset future taxable income, and have carryforward
periods ranging from five years to unlimited. The Company has
recognized a deferred tax asset relating to these foreign loss
carryforwards. Based on analysis of current information, which
indicated that it is not likely that some of these foreign losses
will be realized, a valuation allowance has been established for
a portion of these foreign loss carryforwards.
13. Pension Plans and Postretirement Benefits:
Domestic:
The Company maintains a qualified noncontributory, defined
benefit pension plan covering the majority of its domestic
employees. The benefits are based on years of service and the
employee's highest consecutive five years compensation during the
last ten years of service. The Company's funding policy is to
contribute annually an amount that can be deducted for federal
income tax purposes. The plan assets are under a single custodian
and a single investment manager. Plan assets are invested in
equities, government securities and bonds. In addition, the
Company has unfunded supplemental executive pension plans
providing additional benefits to certain employees.
The Company also has an unfunded postretirement medical and
nominal life insurance plan ("postretirement benefits") covering
certain domestic employees who were eligible as of January 1,
1993. The plan has not been extended to any additional employees.
Retired employees are required to contribute for coverage as if
they were active employees.
The postretirement transition obligation as of January 1,
1993 of $1,079 is being amortized over twenty years. The discount
rate used in determining the 1999, 1998 and 1997 expense was
6.75%, 7.25%, and 7.75%, respectively. The health care cost trend
rate was 6.5% declining to 5.0% over a ten year period, remaining
level thereafter. Assumed health care cost trend rates do not
have a significant effect on the amounts reported for the health
care plans. A one-percentage-point change in assumed health care
cost trend rates would not have a material effect on the reported
amounts.
Postretirement
Pension Benefits Benefits
Change in benefit obligation 1999 1998 1999 1998
Benefit obligation at
beginning of year $16,627 $13,973 $2,633 $3,011
Service cost 1,610 1,235 97 85
Interest cost 1,211 1,035 172 167
Plan participants'
contributions - - 24 23
Amendments - 32 - (533)
Actuarial (gain) loss (3,924) 882 (454) 70
Benefits paid (633) (530) (201) (190)
Benefit obligation at end of
year 14,891 16,627 2,271 2,633
Change in plan assets
Fair value of plan assets at
beginning of year 17,618 12,897 - -
Actual return on plan assets 3,365 4,051 - -
Employer contribution 13 1,200 - -
Benefits paid (633) (530) - -
Fair value of plan assets at
end of year 20,363 17,618 - -
Funded status 5,472 991 (2,271) (2,633)
Unrecognized net actuarial
(gain)loss (5,812) (144) 261 744
Unrecognized net transition
obligation 125 155 239 258
Unrecognized prior service
cost (743) (823) - -
Prepaid (accrued) benefit $ (958) $ 179 $(1,771) $(1,631)
cost
Postretirement
Pension Benefits Benefits
1999 1998 1999 1998
Weighted-average assumptions
as of December 31
Discount rate 8.00% 6.75% 8.00% 6.75%
Expected return on plan 9.25% 9.25% N/A N/A
assets
Rate of compensation increase 4.50% 4.00% N/A N/A
Postretirement
Pension Benefits Benefits
1999 1998 1997 1999 1998 1997
Components of net
periodic benefit
cost
Service cost $1,610 $1,235 $1,192 $97 $85 $92
Interest cost 1,211 1,035 1,035 172 167 204
Expected return on
plan assets (1,621) (1,274) (1,056) - - -
Net amortization of
transition 30 30 30 18 18 54
obligation
Amortization of
prior (81) (81) (82) - - -
service cost
Recognized net
actuarial - (2) 28 29 21 15
(gain)loss
Net periodic benefit
cost $1,149 $943 $1,147 $ 316 $291 $ 365
The projected benefit obligation, accumulated benefit
obligation, and fair value of plan assets for plans with
accumulated benefit obligations in excess of plan assets were
$182, $55 and $0 respectively as of December 31, 1999 and $288,
$177 and $0 as of December 31, 1998.
The Company and its domestic subsidiaries also have a number
of defined contribution plans, both qualified and non-qualified,
which allow eligible employees to withhold a fixed percentage of
their salary (maximum 15%) and provide for a Company match based
on service (maximum 6%). The Company's contributions to these
plans were approximately $1,200 in 1999, 1998 and 1997.
Europe:
Certain of the Company's European subsidiaries have various
defined benefit plans, both contributory and noncontributory,
which are available to a majority of employees. Pension plan
contributions from the Company and the participants are paid to
independent trustees and invested in fixed income and equity
securities in accordance with local practices.
Certain subsidiaries also have direct pension arrangements
with a limited number of employees. These pension commitments are
paid out of general assets and the obligations are accrued but
not prefunded.
1999 1998
Change in benefit obligation:
Benefit obligation at
beginning of year $43,634 $20,230
Service cost 2,936 2,003
Interest cost 2,452 1,763
Amendments 3,613 -
Plan participants' contribution 347 234
Actuarial (gain)/loss (1,673) 3,859
Acquisition 1,049 16,787
Benefits paid (1,159) (622)
Translation adjustment (2,005) (620)
Benefit obligation at end
of year 49,194 43,634
Change in plan assets:
Fair value of plan assets at
beginning of year 29,062 11,832
Actual return on plan assets 2,507 1,818
Acquisition - 14,700
Employer contribution 1,504 1,347
Plan participants' contributions 347 234
Benefits paid (1,041) (548)
Translation adjustment (1,184) (321)
Fair value of plan assets at
end of year 31,195 29,062
Funded status (17,999) (14,572)
Unrecognized net actuarial
loss 6,085 8,500
Unrecognized transitional
obligation 411 448
Unrecognized prior service
cost 4,075 777
Additional minimum liability (2,970) (452)
Prepaid (accrued) benefit cost $(10,398) $(5,299)
1999 1998
Weighted-average assumptions:
Discount rate 6.4% 6.4%
Expected return on plan assets 7.3% 7.3%
Rate of compensation increase 4.2% 4.5%
1999 1998 1997
Components of net periodic
benefit cost:
Service cost $2,936 $2,003 $1,264
Interest cost 2,452 1,763 1,142
Expected return on plan assets (1,951) (1,478) (793)
Amortization of transition
obligation 4 35 102
Amortization of prior service
cost 173 101 107
Recognized net actuarial
loss 260 40 -
Net periodic benefit cost $3,874 $2,464 $1,822
The Company's Danish subsidiary, Dumex, has a defined
contribution pension plan for salaried employees. Under the plan,
the Company contributes a percentage of each salaried employee's
compensation to an account which is administered by an insurance
company. Pension expense under the plan was approximately $2,200,
$2,059 and $2,204 in 1999, 1998 and 1997, respectively.
14. Transactions with A. L. Industrier:
Years Ended December 31,
1999 1998 1997
Sales to and commissions received
from A.L. Industrier $2,306 $2,722 $3,107
Compensation received for
management services rendered to
A.L. Industrier $ 385 $ 397 $ 424
Inventory purchased from and
commissions paid to A.L.
Industrier $ 30 $ 32 $ 34
Interest incurred on
Industrier Note $3,901 $2,937 $ -
In March 1998, A.L. Industrier purchased a convertible
subordinated note issued by the Company in the amount of $67,850.
(See Note 10.) As of December 31, 1999 and 1998 there was a net
current payable of $136 and $98, respectively, to A.L.
Industrier.
In 1997 A.L. Industrier purchased Class B common stock from
the Company. (See Note 17.)
The Company and A.L. Industrier have an administrative
service agreement whereby the Company provides management
services to A.L. Industrier. The agreement provides for payment
equal to the direct and indirect cost of providing the services
subject to a minimum amount. The agreement is automatically
extended for one year each January 1, but may be terminated by
either party upon six months notice.
In connection with the agreement to purchase Alpharma Oslo,
A.L. Industrier retained the ownership of the Skoyen
manufacturing facility and administrative offices (not including
leasehold improvements and manufacturing equipment) and leases it
to the Company. The Company is required to pay all expenses
related to the operation and maintenance of the facility in
addition to nominal rent. The lease has an initial 20 year term
and is renewable at the then fair rental value at the option of
the Company for four consecutive five year terms.
15. Contingent Liabilities, Litigation and Commitments:
The United Kingdom Office of Fair Trading ("OFT") is
conducting an investigation into the pricing and supply of
medicine by the generic industry in the United Kingdom. As part
of this investigation, Cox received in February 2000 a request
for information from the OFT. The request states that the OFT is
particularly concerned about the sustained rise in the list price
of a range of generic pharmaceuticals over the course of 1999 and
is considering this matter under competition legislation. In
December 1999 Cox received a request for information from the
Oxford Economic Research Association ("OXERA"), an economic
research company which has been commissioned by the United
Kingdom Department of Health to carry out a study of the generic
drug industry. The requests related to certain specified drugs
and the Company has responded to both requests for information.
The Company is unable to predict what impact the OFT
investigation or OXERA study will have on the operations of Cox
and the pricing of generic pharmaceuticals in the United Kingdom.
The Company was originally named as one of multiple
defendants in 62 lawsuits alleging personal injuries and six
class actions for medical monitoring resulting from the use of
phentermine distributed by the Company and subsequently
prescribed for use in combination with fenflurameine or
dexfenfluramine manufactured and sold by other defendants (Fen-
Phen Lawsuits). None of the plaintiffs have specified an amount
of monetary damage. Because the Company has not manufactured, but
only distributed phentermine, it has demanded defense and
indemnification from the manufacturers and the insurance carriers
of manufacturers from whom it has purchased the phentermine. The
Company has received a partial reimbursement of litigation costs
from one of the manufacturer's carriers. The Company has been
dismissed in all the class actions and the plaintiffs in 52 of
the lawsuits have agreed to dismiss the Company without
prejudice. Based on an evaluation of the circumstances as now
known, including but not solely limited to, 1) the fact that the
Company did not manufacture phentermine, 2) it had a diminimus
share of the phentermine market and 3) the presumption of some
insurance coverage, the Company does not expect that the ultimate
resolution of the current Fen-Phen lawsuits will have a material
impact on the financial position or results of operations of the
Company.
Bacitracin zinc, one of the Company's feed additive products
has been banned from sale in the European Union (the "EU")
effective July 1, 1999. While initial efforts to reverse the ban
in court were unsuccessful, the Company is continuing to pursue
initiatives based on scientific evidence available for the
product, to limit the effects of this ban. In addition, certain
other countries, not presently material to the Company's sales of
bacitracin zinc have either followed the EU's ban or are
considering such action. The existing governmental actions
negatively impact the Company's business but are not material to
the Company's financial position or results of operations.
However, an expansion of the ban to additional countries where
the Company has material sales of bacitracin based products could
be material to the financial condition and results of operations
of the Company.
The Company and its subsidiaries are, from time to time,
involved in other litigation arising out of the ordinary course
of business. It is the view of management, after consultation
with counsel, that the ultimate resolution of all other pending
suits should not have a material adverse effect on the
consolidated financial position or results of operations of the
Company.
In connection with a 1991 product line acquisition and the
Decoquinate business purchased in 1997, the Company entered into
manufacturing agreements which require the Company to purchase
yearly minimum quantities of product on a cost-plus basis. If the
minimum quantities are not purchased, the Company must reimburse
the supplier a percentage of the fixed costs related to the
unpurchased quantities. The Company has purchased required
minimums which amounted to approximately $19,500 in 1999. In the
case of the Decoquinate agreement there are contingent payments
which may be required of either party upon early termination of
the agreement depending on the circumstances of the termination.
The Company considers the possibility of early termination of the
agreement to be remote.
In 1999, the Company made three acquisitions which may
require contingent payments in future years. The potential
amounts are described in note 3.
16. Leases:
Rental expense under operating leases for 1999, 1998 and
1997 was $6,827, $6,665 and $5,825, respectively. Future minimum
lease commitments under non-cancelable operating leases during
each of the next five years and thereafter are as follows:
Year Ending December 31,
2000 $ 6,274
2001 5,667
2002 4,710
2003 3,488
2004 2,998
Thereafter 5,972
$29,109
17. Stockholders' Equity:
The holders of the Company's Class B Common Stock, (totally
held by A. L. Industrier at December 31, 1999) are entitled to
elect 66 2/3% of the Board of Directors of the Company and may
convert each share of Class B Common Stock held into one fully
paid share of Class A Common Stock. Whenever the holders of the
Company's common stock are entitled to vote as a combined class,
each holder of Class A and Class B Common Stock is entitled to
one and four votes, respectively, for each share held.
The number of authorized shares of Preferred Stock is
500,000; the number of authorized shares of Class A Common Stock
is 50,000,000; and the number of authorized shares of Class B
Common Stock is 15,000,000.
On February 10, 1997, the Company entered into a Stock
Subscription and Purchase Agreement with A.L. Industrier. The
agreement provided for the sale of 1,273,438 newly issued shares
of Class B Common Stock for $16.34 per share. The agreement also
provided for the issuance of rights to the Class A shareholders
to purchase one share of Class A Common Stock for $16.34 per
share for every six shares of Class A Common held. The agreement
required that the Class B shares be purchased at the same time
that the rights for the Class A Common Stock would expire and
total consideration for the Class B Common Stock was agreed to be
$20,808.
On June 26, 1997, the Company and A.L. Industrier entered
into Amendment No. 1 to the Subscription and Purchase Agreement
whereby A.L. Industrier agreed to purchase the 1,273,438 Class B
shares on June 27, 1997. The amendment provided that the price
paid by A.L. Industrier would be adjusted to recognize the
benefit to the Company of the A.L. Industrier purchase of the
stock on June 27, 1997 instead of November 25, 1997 (the date the
Class A rights expired). The sale of stock was completed for cash
on June 27, 1997. Accordingly, stockholders' equity increased in
1997 by $20,379 to reflect the issuance of the Class B shares.
A.L. Industrier is the beneficial owner of 9,500,000 shares of
Class B Common Stock.
On September 4, 1997, the Board of Directors distributed to
the holders of its Class A Common Stock certain subscription
rights. Each shareholder received one right for every six shares
of Class A Stock held on the record date. Each right, entitled
the holder to purchase one share of Class A Stock at a
subscription price of $16.34 per share. The rights were listed
and traded on the New York Stock Exchange. The rights were
exercisable at the holder's option ending on November 25, 1997.
As a result of the rights offering the Company issued 2,201,837
shares with net proceeds of $35,978. (Approximately 97% of the
rights were exercised.)
In October 1994, the Company issued approximately 3,600,000
warrants which were a portion of the consideration paid for
Alpharma Oslo. The Company was required to account for the
acquisition of Alpharma Oslo as a transfer and exchange between
companies under common control. Accordingly, the accounts of
Alpharma were combined with the Company at historical cost in a
manner similar to a pooling-of-interests and the Company's
financial statements were restated. At the acquisition date, the
consideration paid for Alpharma Oslo was reflected as a decrease
to stockholders' equity net of the estimated value ascribed to
the warrants. The estimated value of the warrants ($6,552 or
$1.82 per warrant) was added to additional paid in capital and
deducted from retained earnings.
On October 21, 1998 the Company announced that its Board of
Directors had approved an offer by the Company to its
warrantholders to exchange all of the Company's outstanding
warrants for shares of its Class A Common Stock. There were
3,596,254 outstanding warrants, each of which represented the
right to purchase 1.061 shares of Class A Common Stock at an
exercise price of $20.69 per share. The warrants expired
January 3, 1999.
Under the transaction, the Company offered to issue to each
warrantholder a number of Class A shares in exchange for each
warrant pursuant to an exchange formula based upon the market
prices of the shares during the offer. The number of shares
issued for each warrant tendered was .3678 and, in total,
1,230,448 shares were issued in exchange for 3,345,921 warrants
tendered (93% of the warrants outstanding). The excess of the
fair market value of the warrants tendered over the estimated
value in 1994 of $31,117 was added to additional paid-in-capital
and Class A Common stock and deducted from retained earnings to
reflect the fair value of the Class A stock issued.
At December 31, 1998 the holders of 223,211 untendered
warrants gave irrevocable notice of their intention to exercise
their warrants by paying $20.69 per share. The subscription
amount for the exercised but unpaid for warrants are shown in
stockholders' equity at December 31, 1998 with the subscribed
amount ($4,916) deducted. The subscription proceeds were received
in January 1999 and included in stockholders' equity. Less than
1% of the original warrant issue was untendered or unexercised.
In November 1999, the Company sold 2,000,000 shares of Class
A Common Stock to an investment banker and received proceeds of
$62,399.
A summary of activity in common and treasury stock follows:
Class A Common Stock Issued
1999 1998 1997
Balance, January 1, 17,755,249 16,118,606 13,813,516
Exercise of stock options
and other 336,826 339,860 63,300
Exercise of stock rights - - 2,201,837
Exercise of warrants, net 237,809 2,124 -
Stock issued in tender
offer for warrants - 1,230,448 -
Stock issued in equity
offering 2,000,000 - -
Employee stock purchase
plan 60,385 64,211 39,953
Balance, December 31, 20,390,269 17,755,249 16,118,606
Class B Common Stock Issued
1999 1998 1997
Balance, January 1, 9,500,000 9,500,000 8,226,562
Stock subscription by
A.L. Industrier - - 1,273,438
Balance, December 31, 9,500,000 9,500,000 9,500,000
Treasury Stock (Class A)
1998 1997
Balance, January 1, 277,334 275,382 274,786
Purchases - 1,952 596
Balance, December 31, 277,334 277,334 275,382
18. Derivatives and Fair Value of Financial Instruments:
The Company currently uses the following derivative
financial instruments for purposes other than trading.
Derivative Use Purpose
Forward foreign Occasional Entered into selectively
exchange contracts to sell or buy cash flows
in non-functional
currencies.
Interest rate Occasional Entered into selectively
agreements to fix interest rate for
specified periods on
variable rate long-term
debt.
At December 31, 1999 and 1998, the Company's had foreign
currency contracts outstanding with a notional amount of
approximately $29,300 and $17,300, respectively. These contracts
called for the exchange of Scandinavian and European currencies
and in some cases the U.S. Dollar to meet commitments in or sell
cash flows generated in non-functional currencies. All
outstanding contracts will expire in 2000 and the unrealized
gains and losses are not material.
In 1997 and 1998, the Company had two interest rate swap
agreements with two members of the consortium of banks which were
parties to the Revolving Credit Facility to reduce the impact of
changes in interest rates on a portion of its floating rate long-
term debt. The swap agreements fixed the interest rate at 5.655%
plus 1.25% for a portion of the revolving credit facility
($54,600) through October 1998. (See Note 10.)
Counterparties to derivative agreements are major financial
institutions. Management believes the risk of incurring losses
related to credit risk is remote.
The carrying amount reported in the consolidated balance
sheets for cash and cash equivalents, accounts receivable,
accounts payable and short-term debt approximates fair value
because of the immediate or short-term maturity of these
financial instruments. The carrying amount reported for long-term
debt other than the Convertible Subordinated Notes issued in 1998
and 1999 approximates fair value because a significant portion of
the underlying debt is at variable rates and reprices frequently.
The estimated fair value based on the bid price of the
Convertible Subordinated Notes at December 31, 1999 and 1998 was
as follows:
$ in thousands 1999 1998
Carrying Fair Carrying Fair
Amount Value Amount Value
5.75% Convertible
Subordinated Notes
due 2005 $192,850 $228,045 $192,850 $264,928
3% Convertible
Senior Subordinated
Notes due 2006 $173,824 $183,813 -- --
19. Stock Options and Employee Stock Purchase Plan:
Under the Company's 1997 Incentive Stock Option and
Appreciation Right Plan (the "Plan"), the Company may grant
options to key employees to purchase shares of Class A Common
Stock. The maximum number of Class A shares available for grant
under the Plan is 4,500,000. In addition, the Company has a Non-
Employee Director Option Plan (the "Director Plan") which
provides for the issue of up to 150,000 shares of Class A Common
stock. The exercise price of options granted under the Plan may
not be less than 100% of the fair market value of the Class A
Common Stock on the date of the grant. Options granted expire
from three to ten years after the grant date. Generally, options
are exercisable in installments of 25% beginning one year from
date of grant. The Plan permits a cash appreciation right to be
granted to certain employees. Included in options outstanding at
December 31, 1999 are options to purchase 30,300 shares with cash
appreciation rights, 8,151 of which are exercisable. If an option
holder ceases to be an employee of the Company or its
subsidiaries for any reason prior to vesting of any options, all
options which are not vested at the date of termination are
forfeited. As of December 31, 1999 and 1998, options for
1,099,423 and 1,663,799 shares, respectively, were available for
future grant.
The table below summarizes the activity of the Plan:
Weighted Weighted
Options Average Average
Out- Exercise Options Exercise
standing Price Exercisabl Price
e
Balance at
December 31, 1996 838,338 $17.30 444,982 $16.42
Granted in 1997(1) 643,075 $16.65
Canceled in 1997 (107,347) $17.76
Exercised in 1997 (63,100) $12.22
Balance at
December 31, 1997 1,310,966 $17.20 462,765 $17.29
Granted in 1998(2) 989,500 $25.14
Canceled in 1998 (80,972) $18.34
Exercised in 1998 (344,160) $17.01
Balance at
December 31, 1998 1,875,334 $21.38 854,514 $23.09
Granted in 1999(3) 754,000 $39.19
Canceled in 1999 (189,624) $28.37
Exercised in 1999 (332,976) $23.57
Balance at
December 31, 1999 2,106,734 $26.77 721,379 $24.57
(1) Included in options outstanding at December 31, 1997 were
161,100 options granted in 1997 with exercise prices in excess of
the fair market value of Class A stock on the date of grant. The
weighted average exercise price of these options is $22.24. The
weighted average exercise price of the remaining 481,975 options
granted in 1997 is $14.76.
(2) Included in options outstanding at December 31, 1998 were
383,900 options granted in 1998 with exercise prices in excess of
the fair market value of Class A stock on the date of grant. The
weighted average exercise price of these options is $30.09. The
weighted average exercise price of the remaining 605,600 options
granted in 1998 is $22.01.
(3) Included in options outstanding at December 31, 1999 were
66,000 options granted in 1999 with exercise prices in excess of
the fair market value of Class A stock on the date of grant. The
weighted average exercise price of these options is $53.98. The
weighted average exercise price of the remaining 688,000 options
granted in 1999 is $37.76.
The Company has adopted the disclosure only provisions of
SFAS No. 123. If the Company had elected to recognize
compensation costs in accordance with SFAS No. 123 the reported
net income would have been reduced to the pro forma amounts for
the years ended December 31, 1999, 1998 and 1997 as indicated
below:
1999 1998 1997
Net income:
As reported $36,972 $24,211 $17,408
Pro forma $34,317 22,427 $16,328
Basic earnings per share:
As reported $1.33 $ .95 $ .77
Pro forma $1.24 $ .88 $ .72
Diluted earnings per share:
As reported $1.27 $ .92 $ .76
Pro forma $1.19 $ .85 $ .72
The Company estimated the fair value, as of the date of
grant, of options outstanding in the plan using the Black-Scholes
option pricing model with the following assumptions:
1999 1998 1997
Expected life (years) 1-5 1-5 4-5
Expected future dividend
yield (average) .50% .81% 1.25%
Expected volatility 0.40 0.35 0.40
The risk-free interest rates for 1999, 1998 and 1997 were
based upon U.S. Treasury instrument rates with maturity
approximating the expected term. The weighted average interest
rate in 1999, 1998 and 1997 amounted to 5.1%, 5.6% and 6.4%,
respectively. The weighted average fair value of options granted
during the years ended December 31, 1999, 1998, and 1997 with
exercise prices equal to fair market value on the date of grant
was $14.19, $8.36 and $5.53, respectively. The weighted average
fair value of options granted during the years ended December 31,
1999, 1998 and 1997 with exercise prices in excess of fair market
value at the date of grant was $.57, $1.26 and $3.27,
respectively.
The following table summarizes information about stock
options outstanding at December 31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
Weight- Weight-
ed ed
Number Weighted Average Average
Outstand- Average Exer- Number Exer-
Range of ing at Remain- cise Exercisable cise
Exercise 12/31/99 ing Life Price at 12/31/99 Price
Prices
$13.50-$22.13 1,085,834 4.1 $18.95 425,424 $18.62
$22.20-$39.69 954,900 3.9 $33.79 273,954 $31.45
$53.98-$53.98 66,000 2.2 $53.98 22,001 $53.98
$13.50-$53.98 2,106,734 3.9 $26.77 721,379 $24.57
The Company has an Employee Stock Purchase Plan by which
eligible employees of the Company may authorize payroll
deductions up to 4% of their regular base salary to purchase
shares of Class A Common Stock at the fair market value. The
Company matches these contributions with an additional
contribution equal to 25% of the employee's contribution. As of
the second quarter of 1998 the Company increased the match to 50%
of the employee contributions. Shares are issued on the last day
of each calendar quarter. The Company's contributions to the plan
were approximately $700, $513 and $137 in 1999, 1998 and 1997,
respectively.
20. Supplemental Data:
Other assets and deferred charges at December 31 include:
1999 1998
Deferred loan costs, net of
amortization $11,037 $ 3,831
Loans to Ascent 10,500 -
Equity investment in Wynco,
net of distributions 3,939 -
Other 19,547 9,780
$45,023 $13,611
Years Ended December 31,
1999 1998 1997
Research and development
expense $40,168 $36,034* $32,068
Depreciation expense $25,633 $22,941 $21,591
Amortization expense $24,785 $15,179 $ 9,317
Interest cost incurred $39,499 $26,357 $18,988
Other income (expense), net:
Interest income $ 1,538 $ 757 $ 519
Foreign exchange
losses, net (134) (895) (726)
Amortization of debt costs (1,643) (1,240) (397)
Litigation/insurance
settlements 1,000 670 -
Income from joint venture
carried at equity 1,131 - -
Other, net (442) 308 37
$ 1,450 $ (400) $ (567)
* Includes write-off of purchased in-process R&D related to Cox
acquisition. (See Note 3.)
Supplemental cash flow information:
1999 1998 1997
Cash paid for interest
(net of amount capitalized) $32,284 $25,078 $19,193
Cash paid for income taxes (net
of refunds) $11,766 $10,175 $ 221
Other noncash operating
activities:
Interest accretion on
convertible notes $3,824 $ - $ -
Undistributed earnings
of equity subsidiary 762 - -
Write down of AAHD
facility assets (see Note 5) 1,592 - -
Purchased in-process research
and development - 2,081 -
$6,178 $2,081 $ -
Other noncash investing
activities:
Fair value of assets acquired $262,044 $255,121 $44,029
Liabilities 50,704 33,950 -
Cash paid 211,340 221,171 44,029
Less cash acquired 6,059 502 -
Net cash paid $205,281 $220,669 $44,029
21. Information Concerning Business Segments and Geographic
Operations:
In 1998 the Company adopted SFAS 131. The Company's
reportable segments are the five decentralized divisions
described in Note 1, (i.e. IPD, FCD, USPD, AHD, and AAHD). Each
division has a president and operates in a distinct business
and/or geographic area. Segment data for 1997 has been restated
to present the required information.
The accounting policies of the segments are generally the
same as those described in the "Summary of Significant Accounting
Policies." Segment data includes immaterial intersegment
revenues. No customer accounts for more than 10% of consolidated
revenues.
The operations of each segment are evaluated based on
earnings before interest and taxes (operating income). Corporate
expenses and certain other expenses or income not directly
attributable to the segments are not allocated. Eliminations
include intersegment sales. Geographic revenues represent sales
to third parties by country in which the selling legal entity is
domiciled. Operating assets directly attributable to business
segments are included in identifiable assets (i.e. sum of
accounts receivable, inventories, net property, plant and
equipment and net intangible assets). Cash, prepaid expenses, and
other corporate and non allocated assets are included in
unallocated. For geographic reporting long lived assets include
net property, plant and equipment and net intangibles.
Depre-
ciation
Identi- and Capital
Total Operating fiable Amorti- Expendi-
Revenue Income Assets zation tures
1999
Business segments:
IPD $303,253 $35,562 $579,005 $22,750 $14,233
USPD 197,301 16,562 201,198 7,618 7,433
FCD 60,806 23,131 72,535 5,904 5,367
AHD (c) 159,461 38,113 199,937 8,853 4,184
AAHD 16,051 (2,464)(a) 20,593 1,071 593
Unallocated - (15,274) 86,998 4,222 1,925
Eliminations (4,429) (278) - - -
$732,443(c)$95,352(c)$1,160,266(c)$50,418 $33,735
1998
Business segments:
IPD $193,106 $ 7,971(b) $379,217 $11,460 $14,913
USPD 178,785 11,061 209,243 8,063 6,807
FCD 53,048 17,526 85,409 5,301 3,643
AHD 166,343 37,800 151,000 8,578 2,864
AAHD 18,963 3,623 19,850 1,044 815
Unallocated - (12,695) 64,217 3,674 2,336
Eliminations (5,661) (290) - - -
$604,584 $64,996 $908,936 $38,120 $31,378
1997
Business segments:
IPD $134,075 $10,975 $134,679 $ 6,525 $16,430
USPD 155,381 4,057 211,096 8,355 4,703
FCD 38,664 9,442 74,672 4,634 1,621
AHD 158,428 32,023 139,367 7,279 3,028
AAHD 15,283 2,764 19,494 1,110 151
Unallocated - (12,225) 52,558 3,005 1,850
Eliminations (1,543) (138) - - -
$500,288 $46,898 $631,866 $30,908 $27,783
(a)1999 AAHD includes management actions - See Note 5.
(b) 1998 IPD operating income includes one-time charges ($3,600)
related to the acquisition of Cox Pharmaceuticals.
Geographic Information
Long-lived
Revenues Identifiable Assets
1999 1998 1997 1999 1998 1997
United States $363,487 $338,487 $294,772 $210,886 $196,745 $205,188
Norway 79,984 86,019 91,760 80,596 85,719 86,384
Denmark 45,909 52,565 53,624 58,811 57,144 55,795
United Kingdom 124,282 73,258 8,961 190,733 196,669 -
Germany 52,646 11,690 7,790 148,696 394 398
Other foreign
(primarily
Europe) 66,135(c) 42,565 43,381 43,649 23,170 1,611
$732,443(c) $604,584 $500,288 $733,371 $559,841 $349,376
(c) 1999 is restated. (See Note 2B.) Restatement only affects
AHD. Segment information: amounts as previously reported -
AHD revenue - $169,194, AHD operating income - $42,272,
identifiable assets - $204,188, geographic information
other foreign revenues - $75,868.
22.Selected Quarterly Financial Data (unaudited):
(1999 quarters restated see Note 2B.)
Quarter
Total
As Reported First Second Third Fourth Year
1999
Total revenue $156,759 $163,839 $203,131 $218,447 $742,176
Gross profit $68,392 $73,811 $94,293 $107,790 $344,286
Net income $7,436 $7,772 $11,263 $13,080 $39,551
(b) (b)
Earnings per
common share:
Basic(a) $.27 $.28 $.41 $.46 $1.43
Diluted $.27 $.28 $.38 $.41 $1.34
Quarter
Total
As Restated First Second Third Fourth Year
1999
Total revenue $155,949 $162,217 $199,829 $214,448 $732,443
Gross profit $68,008 $73,160 $92,857 $106,102 $340,127
Net income $7,198 $7,368 $10,373 $12,033(b) $36,972
(b)
Earnings per
common share:
Basic(a) $.26 $.27 $.38 $.42 $1.33
Diluted $.26 $.26 $.35 $.38 $1.27
1998
Total revenue $126,562 $139,513 $164,337 $174,172 $604,584
Gross profit $53,417 $59,162 $66,695 $73,986 $253,260
Net income $5,402 $2,305(c) $7,551 $8,953 $24,211
Earnings per
common share:
Basic(a) $.21 $.09 $.30 $.34 $.95
Diluted(d) $.21 $.09 $.28 $.32 $.92
(a) The sum of the basic earnings per share for the four
quarters does not equal the total for the year due to
rounding for 1999 as reported and 1998. The sum of the
diluted earnings per share for the four quarters does not
equal the total for the year due to rounding for the 1999 as
restated.
(b) The third and fourth quarters of 1999 include charges of $575
and $1,600 pre tax, respectively, related to the closing of
the Company's AAHD facility. (See Note 5.)
(c) The second quarter of 1998 results include non-recurring
charges of $3,600 pre-tax ($3,130 after tax) or $.12 per
share related to the acquisition of Cox Pharmaceuticals. (See
Note 3.)
(d) The sum of the diluted earnings per share for the four
quarters in 1998 does not equal the total for the year due to
higher dilution in the third and fourth quarter calculations from
the effect of the convertible debt using the if-converted method.
The convertible debt was anti-dilutive for the year and therefore
not included in the full year calculation.
23. Subsequent Events
The Company has executed a non-binding letter of intent with
respect to a business which, if purchased, would be material to
the operations and financial position of the Company and which
would require funding in addition to that presently available
under the Company's banking arrangements. There can be no
assurance that such transaction will be consummated.
In November, 2000 two lawsuits were filed against the
Company and certain of its executive officers alleging violations
of securities laws and seeking to recover damages on behalf of a
class consisting of those persons and entities who purchased the
Company's common stock between April 1999, and October 2000.
Publicly available sources indicate that one or more additional
lawsuits containing similar allegations may have been filed, but
the Company has not received or reviewed court documents in that
regard. The Company believes it has defenses to these allegations
and intends to engage in a vigorous defense.