SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10 - K
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, 1994
A.L. PHARMA 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
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 17, 1995 was $282,810,000.
The number of shares outstanding of each of the Registrant's classes of
common stock as of March 17, 1995 was:
Class A Common Stock, $.20 par value - 13,387,469 shares;
Class B Common Stock, $.20 par value - 8,226,562 shares.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Proxy Statement relating to the Annual Meeting of
Shareholders to be held on June 7, 1995 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
A.L. Pharma Inc., formerly called A. L. Laboratories, Inc.,
(the "Company") is a multinational pharmaceutical company engaged
in developing, manufacturing and marketing specialty generic and
proprietary human pharmaceuticals and animal health products.
The Company maintains dual corporate headquarters in Fort Lee,
New Jersey and Oslo, Norway.
The Company was originally organized in 1975 as a wholly-
owned subsidiary of Apothekernes Laboratorium A.S, a Norwegian
health care company established in 1903. In February 1984, the
Company's Class A Common Stock was initially listed on the
American Stock Exchange through a public offering and such stock
is currently listed on the New York Stock Exchange.
On October 3, 1994, the Company completed a transaction (the
"Combination Transaction") in which the Company acquired the
pharmaceutical, bulk antibiotic, animal health and aquatic animal
health businesses of Apothekernes Laboratorium A.S (the "Related
Norwegian Businesses"). Immediately following the closing, the
Company changed its name to "A.L. Pharma Inc." and its trading
symbol on the New York Stock Exchange to "ALO".
In order to accomplish the Combination Transaction,
Apothekernes Laboratorium A.S changed its name to A.L. Industrier
AS ("A.L. Industrier") and demerged the Related Norwegian
Businesses into a new Norwegian corporation called Apothekernes
Laboratorium AS ("A.L. Oslo"). The Company then acquired the
shares of A.L. Oslo through a tender offer for $23.6 million
plus warrants to purchase 3,600,000 shares of the Company's Class
A Common Stock, par value $0.20 per share. The warrants have an
exercise price of $21.945, generally become exercisable after
October 3, 1995 and expire on January 3, 1999. The Company has
agreed to file, and use its best efforts to cause to become
effective, a registration statement concerning the warrants and
the warrant shares with the Securities and Exchange Commission
("SEC") by October 3, 1995. In addition, the Company has agreed
to take all action necessary to list the warrants and the warrant
shares for trading or quotation on a national securities exchange
or over-the-counter system to facilitate the trading of the
warrants and the warrant shares when exercisable.
A.L. Industrier is the beneficial owner of 100% of the
outstanding shares of the Company's Class B Common Stock and 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. A.L.
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Industrier's holdings of the Company's Class B Common Stock
account for approximately 38.1% of the Company's total common
stock outstanding at December 31, 1994.
Subsequent to the Combination Transaction, the Company was
reorganized into five operating divisions included in two
business segments, Human Pharmaceuticals and Animal Health. The
Human Pharmaceuticals segment consists of three operating
divisions, U.S. Pharmaceuticals, International Pharmaceuticals
and Fine Chemicals. The Animal Health segment consists of two
operating divisions, Animal Health and Aquatic Animal Health.
After the closing of the Combination Transaction, each
division was required to evaluate its business to determine
actions necessary to maximize the division's and the Company's
competitive position. As a result, in December 1994, the Board
of Directors approved a plan and the Company announced post-
combination management actions which included exiting certain
businesses and product lines which did not fit into the Company's
new strategic direction, severing certain employees employed in
the businesses or product lines to be exited or whose positions
had become redundant as a result of the acquisition and the sale
or exiting of certain support facilities which also became
redundant as a result of the acquisition (the "Post Combination
Actions"). A summary of the charges resulting from these actions
is included in Note 3 of the Notes to the Consolidated Financial
Statements included in Item 8 of this report.
In 1992, the Company's wholly owned Danish subsidiary, Dumex
Ltd, completed the sale of all its former Human Nutrition
businesses. Accordingly, prior year financial information has
been presented to reflect the Human Nutrition segment as a
discontinued operation.
Human Pharmaceuticals
U.S. Pharmaceuticals Division (the "USPD")
The USPD develops, manufactures and markets specialty
generic human pharmaceuticals in the U.S. The division is
managed by a single senior management team and is comprised of
four wholly-owned subsidiaries, Barre-National , Inc. ("Barre"),
NMC Laboratories, Inc. ("NMC"), Able Laboratories, Inc. ("Able")
and ParMed Pharmaceuticals, Inc. ("ParMed"). Barre, acquired in
October 1987, is the leading U.S. manufacturer of liquid generic
pharmaceutical products. NMC, acquired in August 1990, is a
specialized pharmaceutical manufacturer and marketer of creams
and ointments for topical use, primarily prescription products.
Able, acquired in October 1992, is a manufacturer and marketer of
specialized prescription and over the counter pharmaceuticals
with an emphasis on suppositories and tablets. ParMed, acquired
in May, 1986, markets a broad line of generic pharmaceuticals
nationally under the "ParMed" label. ParMed has its products
manufactured by drug manufacturers and sells primarily to
independent retail pharmacies utilizing advanced telemarketing
techniques.
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In March 1993, Barre acquired a pharmaceutical manufacturing
facility in Lincolnton, North Carolina ("Lincolnton"), including
inventories, approved Abbreviated New Drug Applications ("ANDA")
and other related assets. The facility is designed to
manufacture oral liquids and topical ointments and creams. In
addition, a multi-year supply agreement was signed which provides
for the sale of pharmaceutical products from Barre, Able and NMC
to the previous owner of Lincolnton, a major generic drug
distributor. The facility was expanded in 1994 and the USPD
expects future productive capacity increases and/or the possible
realignment of productive capacity to relocate the manufacture of
certain products to Lincolnton.
During the formation and organization of the USPD in late
1993 and 1994, management took a number of consolidating actions.
Sales and marketing functions of all the manufacturing
subsidiaries comprising the division were combined to provide
pharmaceutical purchasers greater access to a larger portfolio of
products. Research and development activities were centralized
in a modern facility at the Bayview campus of Johns Hopkins
University in Baltimore, Maryland. In addition, the USPD
consolidated distribution from its four manufacturing sites into
one 165,000 square foot facility in Maryland to better serve
customers and improve inventory management.
Additionally, as part of the Post Combination Actions, the
USPD decided to cease producing tablets at its South Plainfield,
New Jersey facility in 1995.
International Pharmaceuticals Division (the "IPD")
The IPD develops, manufactures and markets a broad range of
generic and specialty dosage-form human pharmaceuticals, oral
health care products, adhesive bandages and surgical tapes under
proprietary brands primarily in the Nordic and other Western
European countries and Indonesia. The division is managed by a
single senior management team and business is primarily conducted
through two wholly-owned subsidiaries, Dumex Ltd. of Copenhagen,
Denmark ("Dumex") and A.L. Oslo and their respective
subsidiaries.
As part of the Post Combination Actions, the IPD decided to
discontinue one oral health care product produced under license,
fully integrate the remaining oral health care business as part
of the division, and sell unimproved land which, prior to the
consummation of the Combination Transaction, was to have been the
site of a future manufacturing plant.
Fine Chemicals Division (the "FCD")
The FCD develops, manufactures and markets bulk
pharmaceutical antibiotics to the pharmaceutical industry
worldwide. The products of the FCD constitute the active
substances in a large number of finished pharmaceuticals. The
division is managed by a single senior management team and
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business is conducted through the Dumex and A.L. Oslo
subsidiaries.
Animal Health
Animal Health Division (the "AHD")
The AHD develops, manufactures and markets feed additives
and animal health products for animals raised for commercial food
production worldwide. The division's principal feed additive is
the antibiotic bacitracin methylene disalicylate sold under the
BMD trademark ("BMD "), which is used to promote growth and feed
efficiency and to prevent or treat diseases in poultry and swine.
In addition, as a result of the Combination Transaction, the AHD
also manufactures a zinc bacitracin based feed additive sold
under the Albac trademark ("Albac "). Sales of the division's
products are made principally to commercial feed manufacturers
and swine and poultry producers through a staff of scientifically
trained sales and technical service personnel. The division is
managed by a single senior management team and business is
primarily conducted through the Company, A.L. Oslo and certain
other subsidiaries.
In July 1994 the AHD acquired the Wade Jones Company, Inc.
("Wade Jones"). Wade Jones is the major poultry animal health
products distributor in the U.S. and is also actively involved in
the development, manufacture and sale of its own line of products
including animal health pharmaceuticals and feed additives.
In July 1991 the AHD acquired, in two unrelated
transactions, trademarks, New Animal Drug Applications ("NADA"),
other intangibles and inventory associated with two product lines
of growth promotants and disease preventatives, the principal
components of which are commonly used in combination or
sequentially with BMD .
Aquatic Animal Health Division (the "AAHD")
The AAHD develops, manufactures and markets vaccines for use
in immunizing farmed fish against disease. The AAHD was the
leading supplier of fish vaccines to the Norwegian fish farming
industry in 1994. The division is managed by a single senior
management team and business is conducted through two wholly-
owned subsidiaries, A.L. Oslo and Biomed, Inc. of Bellevue,
Washington ("Biomed") which was acquired in July 1989.
As part of the Post Combination Actions, AAHD has
discontinued manufacture and marketing of one aquatic animal
health antibiotic product and will close a current production
facility in Tromso, Norway.
Financial Information About Industry Segments
The Company's two business segments are (1) Human
Pharmaceuticals and (2) Animal Health. For certain financial
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information concerning the Company's business segments see Note
20 of the Notes to the Consolidated Financial Statements included
in Item 8 of this Report.
Narrative Description of Business
Human Pharmaceuticals
The human pharmaceuticals segment is comprised of three of
the five operating divisions of the Company, namely the USPD, IPD
and FCD.
U.S. Pharmaceuticals Division
The USPD develops, manufactures and markets specialty
generic human pharmaceuticals in the U.S. The USPD is not
dependent on a single customer or a few customers. Generic
pharmaceuticals are chemical equivalents of drugs that are sold
under established brands and that may have been subject to patent
protection. Although typically less expensive, generic drugs
must meet the same regulatory standards for good manufacturing
practices, efficacy and safety as the corresponding branded
products.
The generic pharmaceutical industry is highly competitive,
with competition from companies specializing in generic products
as well as the branded and generic product operations of the
major international pharmaceutical companies. Consequently,
profit margins on generic drug products tend to be reduced as
more competitors obtain the necessary approvals to manufacture
and sell such products from the U.S. Food and Drug Administration
(the "FDA").
In recent years generic pharmaceuticals have increased their
market share in the U.S. relative to branded drugs. This
increase is due to several factors including: (i) state laws
permitting and/or mandating substitution of generics by
pharmacists; (ii) pressure from managed care and third party
payors to encourage cost containment by health care providers and
consumers; and (iii) increased acceptance of generic drugs by
physicians, pharmacists and consumers.
Since 1989 the U.S. pharmaceutical industry has been, and
continues to be, subject to an intense level of scrutiny by the
FDA and by members of Congress. As a result of actions taken by
the Company to respond to the progressively more demanding
regulatory environment in which it operates, the operating income
of the USPD's operations has been negatively affected. The
Company has spent, and will continue to spend, significant funds
and management time on FDA compliance matters. In 1992 Barre
concluded a binding agreement in the form of a consent decree
with the FDA which clarified Barre's regulatory obligations (the
"Consent Decree"). The Consent Decree defines the standards
Barre must achieve in meeting Current Good Manufacturing
Practices ("CGMP"). In addition, USPD's Able operation is also
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a party to an amended consent decree with the FDA governing
manufacturing operations in accordance with CGMP. In this
regard, Able has engaged in extensive regulatory compliance
activities which have included discontinuing certain products
and making capital expenditures and increasing operating
expenditures for quality assurance and control.
As described above, the cost of actions, both direct and
indirect, taken by the Company with respect to meeting regulatory
requirements has negatively affected gross profit and operating
income. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included in Item 7 of this
report. Certain of these higher costs will continue to be
incurred as a normal part of the business while others are of a
one-time nature.
The Company has been impacted in previous years by delays in
the receipt of approvals for new products and supplemental
approvals for certain existing products from the FDA. The
Company cannot predict whether future legislative or regulatory
developments might have an adverse effect on the Company.
In April 1993, the USPD, together with all other
manufacturers and marketers, was requested by the FDA to
discontinue marketing products to treat respiratory congestion
which contain iodinated glycerol. During the period from May
through October 1993, the USPD did not ship these products.
However, as a result of the USPD's support of its position to
the FDA that these products should remain on the market and that
the innovator company was allowed to continue shipping, the USPD
resumed marketing of these products on a limited basis in late
October 1993. In June 1994, the innovator company reached
agreement with the FDA for the orderly cessation of sales of
these products. Accordingly, the USPD advised the FDA in late
July that it had ceased the manufacture and distribution of these
products.
In 1994, sales of iodinated glycerol products exceeded 1993
sales and reflected strong market demand (i.e. 1994 sales were
approximately 2% of the Company's sales). The prospective loss
of iodinated glycerol products will negatively impact the
Company's future operations. These products were used to treat
respiratory congestion resulting from cough and colds. The USPD
has a broad line of cough and cold remedies which may provide
alternative therapies to the iodinated glycerol product line.
However, the Company cannot predict the extent, if any, which the
alternative products will be substituted.
The USPD markets more than 300 product presentations,
primarily in liquid, cream, ointment and suppository dosage
forms. These products are marketed nationwide to pharmaceutical
distributors, merchandising chains and wholesalers under the
"Barre" and "Barre-NMC" labels and private labels. Prescription
products are sold by a divisional sales force. Over-the-counter
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products are sold by the divisional sales force as well as by
certain independent sales representatives.
Liquid Pharmaceuticals: Through its Barre operation, the
USPD is the leading manufacturer of generic pharmaceutical
products in liquid form with approximately 190 product
presentations. Most of the division's liquid products are
manufactured in its 255,000 square foot facility in
Baltimore, Maryland. The experience and technical know-how
of the USPD enables it to formulate therapeutic equivalent
drugs in liquid forms and to refine product characteristics
such as taste, texture, appearance and fragrance.
Because of the importance to the USPD of cough and cold
remedies, the liquid pharmaceutical business is seasonal in
nature. A higher percentage of sales are made in the winter
months and are affected, from year to year, by the incidence
of colds, respiratory diseases and influenza in its
geographical market.
As with its other products, the USPD must obtain FDA
approval for new generic drugs it is developing. In 1994,
the USPD received approval from the FDA to manufacture and
market Cimetidine Hydrochloride Oral Solution. In addition,
the USPD launched three other liquid products in 1994:
Clemastine Fumarate Syrup and Metaproterenol Sulfate
Inhalation Solution in 0.4% and 0.6% strengths.
Creams and Ointments: The USPD manufactures more than 90
cream and ointment presentations for topical use. Most of
these creams and ointments are prescription products and
include antibacterial, anti-inflammatory and combination
products. The USPD manufactures these creams and ointments
through its NMC operation in Glendale, New York as well as
at Lincolnton, North Carolina. Consistent with the other
manufacturing facilities of USPD, the NMC facility has also
been affected by increased regulatory costs in its ongoing
efforts to comply with the FDA's interpretation of CGMP.
The creams and ointments market is highly competitive and
includes a number of companies with significant market
share. This market is expected to grow significantly and a
number of important products will come off patent in the
next few years.
In 1994, the USPD received approval from the FDA to
manufacture and market Clobetasol Propionate Cream 0.05% and
Clobetasol Propionate Ointment 0.05%. In addition, the USPD
was able to expand its sales launch of Clotrimazole Vaginal
Cream during 1994 after its limited introduction in late
1993.
Suppositories and Other Specialty Generic Products: During
1994 and early 1995, the USPD expanded its suppository line
to 6 product presentations. In addition, the USPD also
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manufactures and/or markets certain other specialty generic
products, including Epinephrine Mist and home pregnancy
test kits.
In late February 1995, the USPD received FDA approval to
manufacture and market three strengths of Acetaminophen
Suppositories USP, 120 mg., 325 mg. and 650 mg. In
addition, USPD also began commercial sale of Miconazole
Nitrate Vaginal Suppositories 200 mg. in January 1995.
Through its ParMed operation, the USPD distributes a line of
over 1800 generic prescription and over-the-counter
pharmaceutical product presentations under the "ParMed" label as
well as private labels in the U.S. The largest part of ParMed's
sales are made to independent retail pharmacists in the U.S. A
substantial majority of ParMed's sales are made through a 45
person telemarketing sales force. ParMed's products are
manufactured by drug manufacturers who package and label products
for ParMed. Most products are available from more than one
source. ParMed also markets USPD products bearing the "Barre",
"Barre-NMC" and "Able" labels as part of its overall strategy.
Due to the fact that ParMed does not manufacture its products,
ParMed may be affected from time to time due to recalls of
products by its suppliers.
International Pharmaceuticals Division
The IPD develops, manufactures and markets a broad
range of generic and specialty dosage-form human pharmaceuticals,
oral health care products, adhesive bandages and surgical tapes
under proprietary brands primarily in the Nordic and other
Western European countries, Indonesia and the Middle East. The
IPD conducts its business primarily in Scandinavian and U.S.
Dollar denominated currencies (or currencies linked to the U.S.
Dollar).
Dosage-Form Pharmaceuticals: Substantially all of the dosage
form pharmaceutical products sold by the IPD in the Nordic
Countries, Western Europe and the Middle East are
manufactured at its facilities in Lier, Norway and
Copenhagen, Denmark, while products sold in Indonesia are
manufactured at its facility in Jakarta, Indonesia. The
facility at Lier, Norway was designed with a view towards
meeting the FDA's CGMP standard. However, given that the
facility's current production is not exported to the U.S.,
the Company has not initiated the process to cause the
facility to be in compliance with the FDA's interpretation
of CGMP.
The IPD has a broad range of dosage-forms, including
tablets, ointments, creams, and liquid and injectable
preparations for many different therapies with a
concentration on prescription drug antibiotics,
analgesics/antirheumatics and psychotropics, over-the-
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counter skin care, gastrointestinal and analgesic products.
The principal geographical markets for the IPD's dosage-form
pharmaceutical products are the Nordic and other Western
European countries as well as Indonesia and certain Middle
Eastern countries. The IPD employs a specialized sales
force which markets and promotes dosage-form products to
doctors, hospitals, pharmacies and consumers. In each of
its markets, the IPD uses wholesalers to distribute its
pharmaceutical products. In Norway, all pharmaceuticals
have historically been distributed through Norsk
Medisinaldepot ("NMD"), the state controlled distribution
entity, but have been marketed and promoted by
pharmaceutical manufacturers and suppliers to the ultimate
customer. However, as a result of Norway becoming a member
state of the European Economic Agreement, NMD is no longer
entitled to be the sole distributor in Norway and the IPD
believes that other wholesalers may begin to compete with
NMD in the near future.
The pharmaceutical business is highly competitive, and many
of IPD's competitors are substantially larger and have
greater financial, technical and marketing resources than
the IPD. Most of the IPD's pharmaceutical products compete
with one or more products of other companies which contain
the same active ingredient.
The development, manufacture and marketing of IPD
pharmaceutical products is subject to comprehensive
government regulation both in Norway, Denmark and in other
countries where the products are manufactured and marketed.
Government regulation includes detailed inspection of and
controls over manufacturing and quality control practices
and procedures, requires approvals to market products and
can result in the recall of products and the suspension of
production. Such government regulation substantially
increases the cost of producing pharmaceutical products.
Regulatory approvals are required before any new
prescription or over-the-counter drug can be marketed.
In Denmark, the IPD's pharmaceutical products are beginning
to encounter price pressures from parallel imports (i.e.
imports of competing products from neighboring countries).
The IPD believes that it is likely that parallel imports may
be a developing trend in other markets in which the IPD
sells its dosage-form pharmaceuticals. Such parallel
imports could lead to lower volume growth and downward
pressure on prices in certain product and market areas.
In the Nordic countries in recent years, there has been an
increase in volume of sales of generic pharmaceuticals
relative to original pharmaceuticals. This increase in
market share is primarily a result of government initiatives
to reduce pharmaceutical expenses through new regulations
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which promoted generic pharmaceuticals in lieu of original
formulations. However, the increased focus on the
regulation of pharmaceutical prices may lead to increased
competition and price pressure for suppliers of all types of
pharmaceuticals.
The pharmaceutical business of the IPD also includes oral
health care products. The two primary oral health care
products are Elyzol Dental Gel for the treatment of
periodontal disease and Flux sodium fluoride tablets.
In 1994 significant expenses continued to be incurred to
build an administrative, selling and marketing
infrastructure for promotion of Elyzol Dental Gel and for
continuing research and development work, including the
preparation of a New Drug Application to be submitted for
Elyzol Dental Gel in the United States.
As part of the Post Combination Actions, the Elyzol Dental
Gel business was administratively combined with the IPD and
the infrastructure to market Elyzol Dental Gel was subject
to cost reduction via the severance of certain employees.
In addition, IPD management is continuing to study
alternative marketing arrangements for the product. The
Company considers the Elyzol Dental Gel product to be in the
developmental phase and expects to continue to incur
expenses in excess of revenues during 1995.
Adhesive Bandages and Surgical Tapes: The IPD, through its
Norgesplaster subsidiary, manufactures adhesive bandages,
surgical tapes and non-medical tapes and is the only
manufacturer of adhesive bandages and surgical tapes in the
Nordic countries. Norgesplaster's most significant market
is Norway, where it is the leading supplier in the industry.
These products are sold to consumers and hospitals through
pharmacies and other retail outlets. The IPD's production
facility is located at Vennesla, Norway, which is 320 km
southwest of Oslo.
Fine Chemicals Division
The FCD develops, manufactures and markets bulk
pharmaceutical antibiotics to the pharmaceutical industry
worldwide. The products of the FCD constitute the active
substances in a large number of finished pharmaceuticals,
including finished pharmaceuticals for the treatment of certain
skin, throat and intestinal infections. Bacitracin, Zinc
Bacitracin and Polymyxin are the most significant products for
the FCD, which believes it is the world's largest manufacturer
and supplier of such products. The division also manufactures
other antibiotics such as Vancomycin, Amphotericin B and Colistin
for use in specialized, low volume topical and surgical human
applications. In addition, the FCD markets other well-
established bulk antibiotics, such as Gramicidin and Tyrothricin,
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which are contract manufactured for the division by a Danish
company.
The FCD manufactures its products in its plants in Oslo,
Norway and Copenhagen, Denmark. Both plants include
fermentation, specialized recovery and purification equipment.
Both facilities have been approved as a manufacturer of sterile
and non-sterile bulk antibiotics by the FDA and by the health
authorities of European countries. The manufacturing methods,
quality control procedures and quality assurance systems for the
production of such antibiotics are subject to periodic
inspections by regulatory agencies.
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Animal Health
Since the completion of the Combination Transaction on
October 3, 1994, the Animal Health segment is comprised of two
of the operating divisions of the Company, namely the AHD and the
AAHD.
Animal Health Division
The AHD develops, manufactures and markets feed additives
and animal health products for animals raised for commercial food
production worldwide. The AHD's principal animal health product
is BMD , a feed additive, which is used to promote growth and
feed efficiency and prevent or treat diseases in poultry and
swine. In addition, the AHD also manufactures and markets a feed
additive for poultry, swine and calves sold under the Albac
trademark. Albac is produced in granulated, powder and
lactodispersible forms and contains a special grade of zinc
bacitracin as its active ingredient.
In 1991, the Company purchased two animal health lines which
are commonly used in combination or sequentially with BMD . These
products include 3-Nitro , Histostat , Zoamix , Mycostatin , and
chlortetracycline ("CTC"), a feed grade antibiotic. The AHD also
manufactures and sells Vitamin D and other feed additives which
are used for poultry and swine.
The AHD presently sells a major portion of its volume in the
U.S. However, with the opening of sales offices in Mexico and
Canada in 1993 and with the international scope of the animal
health business acquired in the Combination Transaction, the AHD
has increased its manufacturing and marketing capabilities
outside the U.S. and expects international sales to increase in
the future.
Historically, the principal market for BMD has been the
poultry segment of the feed additives business where it is one of
the leading products. The AHD continues to increase its
marketing efforts with respect to the swine segment of the
market, which is more fragmented than the poultry market.
Effective August 1994, the AHD completed a distribution
arrangement with Merck AgVet, a division of Merck & Co., Inc.
Under the agreement, the AHD will assume all sales, marketing and
distribution functions for Merck AgVet's poultry products line in
the U.S. This arrangement affords the AHD an opportunity to
further broaden its product offerings to the U.S. poultry
industry with the addition of the well established Merck AgVet,
anticoccidial products which are complementary to the division's
BMD and 3-Nitro products.
Sales of the AHD's products in the U.S., Canada and Mexico
are made principally to commercial feed manufacturers and
integrated swine and poultry producers through a staff of
technically trained sales and technical service personnel located
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throughout the country. Sales of the AHD's products outside
North America are made primarily through the use of distributors
and sales companies.
The AHD produces BMD at its Chicago Heights, Illinois
facility, which includes a modern fermentation and recovery
plant. During recent years, the Chicago Heights facility's
capacity has increased and it has operated at or near capacity.
In the Combination Transaction the Company acquired the
technology to manufacture BMD which it previously licensed from
A.L. Industrier.
The Albac product is manufactured at the division's Skoyen
facility in Oslo, Norway. The 3-Nitro product line is
manufactured in accordance with a ten year agreement using AHD
technology at an unrelated company's facility in Charles City,
Iowa. The contract requires the AHD to purchase minimum yearly
quantities on a cost plus basis. CTC is purchased primarily from
foreign suppliers and blended domestically.
In July 1994, the AHD acquired Wade Jones Company, Inc.
Wade Jones is the major poultry animal health products
distributor in the U.S. and is also actively involved in the
development, manufacture and sales of its own line of products
including animal health pharmaceuticals and feed additives.
Approximately two-thirds of all products sold by the AHD in the
U.S. to the poultry industry are distributed by Wade Jones.
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 growth stimulating qualities. Competition is also affected
by the issuance of regulatory approvals for similar or competing
products (particularly in the U.S.) and the availability of
generic versions of certain products. The Company believes that
its competitive position in the animal health business has been
enhanced because BMD and Albac are not absorbed into animal
tissues. The FDA does not require BMD and Albac to be
withdrawn from feed prior to the marketing of the food animals.
Certain tests have also shown that BMD and Albac do not tend to
produce resistance in bacteria which is a characteristic of some
competitive products.
Aquatic Animal Health Division
The AAHD develops, manufactures and markets vaccines for use
in immunizing farmed fish against disease. The Company
originally entered the aquaculture business with the purchase of
Biomed in 1989. This base business was expanded after the
Combination Transaction with the acquisition of A.L. Oslo's fish
health business. Presently, the AAHD is the leading supplier of
vaccines for farm raised salmon in Norway, which is the largest
market for the farming of salmon and other cold water species of
fish. In 1994, approximately 78% of the revenues of the AAHD
-13-
were generated from the Norwegian market. The Company believes
that the share of sales from markets outside Norway will increase
in the future as the division continues to expand its sales
efforts internationally.
The AAHD manufactures its products at two locations,
Bellevue, Washington and Tromso, Norway. However, in November
1994 the AAHD purchased a new manufacturing facility in
Overhalla, Norway and expects to shift all Norwegian production
from Tromso to Overhalla by the end of 1996.
Competition in the aquatic animal health industry is
characterized by relatively few competitors. However, the
industry is subject to rapid technological change. As a result,
new techniques and products developed by competitors could cause
the AAHD products to become obsolete if the division was unable
to match technological improvements.
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 human pharmaceuticals 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
and on establishing the necessary data to obtain government
approvals. The Company's research, product development and
technical activities also focus on developing improved delivery
systems and packaging and manufacturing techniques. In view of
the substantial funds which are generally required to develop new
chemical drug entities the Company has not emphasized such
activities. The Company's technical development activities for
the Animal Health segment 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, Bellevue, Washington and
Chicago Heights, Illinois, as well as through independent
research facilities in the U.S.
Significant research and development projects in progress
include: A project to conduct clinical trials as part of the new
drug approval process in the U.S. for Elyzol Dental Gel, a
product for the treatment of the gum disease periodontitis, a
project to obtain FDA approval for Albuterol metered dose
inhalant products, and a project to obtain FDA approval for a
gram negative antibiotic which will be used as an injectable
treatment for respiratory and systemic diseases in broilers,
turkeys and cattle.
-14-
In March 1993, the Company committed to provide funds for
research and development and collaborate to some extent with an
Israeli company to develop products based on colonic delivery of
drugs. In 1994 the Company fulfilled its commitment to fund such
project by paying a total of $3.5 million to the Israeli company
for such research and development. The Company does not intend
to provide any additional funding for this project.
Research and development expenses were approximately $32.5
million, $24.0 million and $20.6 million in 1994, 1993 and 1992,
respectively.
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. Restated
revenues from foreign operations accounted for 38.3% of the
Company's revenues in 1994 compared to 40.7% in 1993 and 48.0% in
1992. For certain financial information concerning foreign and
domestic operations see Note 20 of the Notes to the Consolidated
Financial Statements included in Item 8 of this Report. Export
sales from domestic operations were not significant.
The Company's foreign operations are subject to various
risks which are not present in domestic operations, including, in
certain countries, currency exchange fluctuations and
restrictions, restrictions on imports, government price controls,
restrictions on the level of remittance of dividends, interest,
royalties and other payments, the need for governmental approval
of new operations, the continuation of existing operations and
other corporate actions, political instability, the possibility
of expropriation and uncertainty as to the enforceability of
commercial rights, trademarks and other proprietary rights.
Regulation; Proprietary Rights
The development, manufacturing and marketing of the
Company's products are subject to comprehensive government
regulation both in the U.S., Norway, Denmark and other countries.
Government regulation includes detailed inspection of and
controls over manufacturing practices and procedures, requires
approvals to market products and can result in the recall of
products and suspension of production. Such government
regulation substantially increases the cost of producing human
pharmaceutical and animal health products. FDA approval is
required before any new prescription or over-the-counter drug
products or any animal health drug can be marketed in the U.S.
Analogous governmental and agency approvals are similarly
required before such products are marketed in other countries.
These government approvals are therefore very important to both
the Human Pharmaceuticals and Animal Health segments.
Continuing studies of the proper utilization, safety, and
efficacy of pharmaceuticals and other health care products are
-15-
being conducted by 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.
The Company's manufacturing operations are required to
comply with CGMP as interpreted by the FDA and, in countries
outside the U.S., with similar regulations. This concept
encompasses all aspects of the production process, including
validation and record keeping, and involves changing and evolving
standards. Consequently, continuing compliance with CGMP is a
particularly difficult and expensive part of regulatory
compliance.
The evolving and complex nature of regulatory requirements,
the broad authority and discretion of the FDA and analogous
foreign agencies, and the generally increased level of regulatory
oversight have resulted in a higher 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.
In many countries in which the Company does business,
including some of the Scandinavian countries, the initial prices
of pharmaceutical preparations for human use are dependent upon
governmental approval or clearance under governmental
reimbursement schemes usually based on costs or prices of
comparable products and subsequent price increases may also be
regulated. In the past three years, as part of overall programs
to lower health care costs, certain European governments have not
allowed price increases and have introduced various systems to
lower prices. As a result, cost increases and/or lower prices
due to exchange rate fluctuations have not been recovered.
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. No
material capital expenditures are expected to be made in 1995 for
environmental control facilities.
Employees
As of December 31, 1994, the Company had approximately 2,819
employees, including 1,425 in the U.S. and 1,394 outside of the
United States.
Item 1A. Executive Officers of the Registrant
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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 June 7, 1995) and until his successor is
elected, or until his earlier death, resignation or removal.
Name and Position Principal Business Experience
with the Company Age During the Past Five Years
E.W. Sissener 66 Chief Executive Officer since
Chairman, Director and June 1994. Member of the
Chief Executive Officer Office of the Chief Executive
of the Company July 1991 - May
1994. Chairman of the Company
since 1975. President of
Apothekernes Laboratorium AS
since October 1994. President
of A.L. Industrier AS from
1972-1994. Chairman of A.L.
Industrier AS since November
1994.
Jeffrey E. Smith 47 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 - May 1994. Vice
President, Finance of the
Company from November 1984 to
July 1991.
Beth P. Hecht 31 Corporate Counsel of the
Secretary and Corporate Company since June 1993;
Counsel Secretary of the Company since
November 1993; Attorney with
the law firm of Kirkland &
Ellis 1990-1993; Attorney with
the law firm of Willkie, Farr
& Gallagher 1988-1990.
Albert N. Marchio, II 42 Treasurer of the Company since
Treasurer May 1992; Treasurer of Laura
Ashley, Inc. 1990-1992,
Director of Taxes of Laura
Ashley, Inc. 1986-1990
-17-
David E. Cohen 40 President of the Company's
Vice President and Animal Health Division since
President, Animal October 1994; President,
Health Division Animal Health Division of
A. L. Laboratories, Inc. since
September 1988.
George S. Barrett 39 President of the Company's
Vice President and U.S. Pharmaceutical Division
President, U.S. since 1993; President of
Pharmaceuticals Barre-National since August
Division 1991; President of NMC since
August 1990; Vice President,
Operations of NMC, 1984 to
August 1990.
Thor Kristiansen 51 President of the Company's
Vice President and Fine Chemicals Division since
President, Fine October 1994; President,
Chemicals Division Biotechnical Division of
Apothekernes Laboratorium A.S
1986 to 1994.
Knut Moksnes 44 President of the Company's
Vice President and Aquatic Animal Health Division
President, Aquatic since October 1994; Managing
Animal Health Division Director, Fish Health Division
of Apothekernes Laboratorium
A.S 1991 to 1994.
Ingrid Wiik 50 President of the Company's
Vice President and International Pharmaceuticals
President, Division since October 1994;
International President, Pharmaceutical
Pharmaceuticals Division of Apothekernes
Division Laboratorium A.S 1986 to 1994.
-18-
Item 2. Properties
The Company's principal production and technical development
facilities are located in the United States, Denmark, Norway and
Indonesia. The Company also owns or leases offices and
warehouses in the United States, Sweden, Holland, Finland and
elsewhere.
FACILITY
LAND SIZE
LOCATION TITLE (acres) (sq. USE
ft.)
Fort Lee, NJ Leased -- 48,000 Office - dual
corporate office
and AHD
Headquarters
Skoyen, Norway Leased -- 204,400 Manufacturing of
AHD and FC
products, dual
corporate office
and headquarters
for IDP, FC and
AAHD.
Chicago Owned 20 195,000 Manufacturing,
Heights, IL warehouse, R&D and
offices - AHD
Bellevue, WA Leased -- 20,000 Manufacturing,
warehouse,
laboratory and
offices - Biomed
(AAHD)
Baltimore, MD Owned 19 255,000 Manufacturing,
warehouse, and
offices - Barre-
National, Inc., and
USPD headquarters.
Baltimore, MD Leased -- 18,000 Research and
Development - USPD
Columbia, MD Leased -- 165,000 Central
Distribution Center
- USPD
Lincolnton, NC Owned 13 138,000 Manufacturing,
warehouse, and
offices - Barre-
National,
Inc.(USPD)
-19-
Glendale, NY Leased -- 78,000 Manufacturing,
warehouse, and
offices -
NMC Laboratories,
Inc. (USPD)
Lowell, AK Leased -- 68,000 Manufacturing,
warehouse and
offices - the Wade
Jones Company (AHD)
Niagara Falls, Owned 2 30,000 Warehouse and
NY offices - ParMed
(USPD)
South Leased -- 60,000 Manufacturing,
Plainfield, NJ warehouse, and
offices - Able
Laboratories, Inc.
(USPD)
Lier, Norway Owned 23 118,400 Manufacturing of
IPD products,
warehousing and
offices
Overhalla, Owned 1 12,900 Manufacturing of
Norway vaccines,
warehousing and
offices (AAHD).
Tromso, Norway Leased 10,600 Manufacturing of
fish vaccines,
warehousing and
offices (AAHD).
Vennesla, Owned 4 81,300 Manufacturing of
Norway adhesive bandages
and surgical tapes,
warehousing and
offices -
Norgesplaster
(IPD).
Copenhagen, Owned 10 425,000 Manufacturing,
Denmark warehouse, R&D and
offices - Dumex
(IPD & FCD)
Jakarta, Owned 5 80,000 Manufacturing,
Indonesia building warehouse, R&D and
leased offices - P. T.
land Dumex (IPD)
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.
-20-
-21-
Item 3. Legal Proceedings
On September 13, 1982, the Company filed at the FDA a
"Citizen Petition" requesting the FDA to reconsider and rescind
its approval of a new animal drug application ("NADA") filed by
Philips Roxane, Inc.("PRI") for the use of Bacitracin Zinc in
animal feeds for growth promotion. PRI is now a subsidiary of
Boehringer Ingleheim Animal Health Inc. The Citizen Petition
contended that FDA's approval was invalid and improper in several
respects, including improper reliance on confidential data which
was proprietary to the Company and inadequate evidence by PRI of
safety and efficacy. FDA denied the Citizen Petition on May 9,
1984 and the Company filed an action for judicial review in the
United States District Court for the District of Columbia (the
"Action") seeking to have FDA's denial of the Citizen Petition
set aside. Subsequent administrative proceedings based on
further alleged irregularities in FDA's continued approval of the
PRI NADA also resulted in FDA decisions denying the relief
sought. The complaint in the Action was amended to challenge
FDA's decisions on those subsequent proceedings. The parties
filed cross-motions for summary judgement and the U.S. District
Court granted FDA's motion for summary judgement to dismiss the
Action. The Company has appealed this decision to the U.S. Court
of Appeals for the District of Columbia. The matter has been
briefed and is scheduled to be argued in late March 1995.
From time to time the Company is involved in certain non-
material litigation which is ordinarily found in businesses of
this type, including product liability, contract and employment
matters.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
-22-
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. Information concerning the 1994 and 1993 sales
prices of the Company's Class A Common Stock are set forth in the
table below.
Stock Trading Price
1994 1993
Quarter High Low High Low
First $16.88 $14.00 $27.25 $20.00
Second $16.25 $13.00 $29.38 $20.00
Third $17.25 $12.63 $27.50 $13.75
Fourth $20.63 $15.63 $18.75 $12.75
As of December 31, 1994 and March 8, 1995 the Company's
stock closing price was $20.25 and $20.75, respectively.
Holders
As of February 28, 1995, there were 1,181 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 94.6% 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
1994 and 1993 were as follows:
Quarter Dividend per common share
1994 1993
First $.045 $.045
Second $.045 $.045
Third $.045 $.045
Fourth $.045 $.045
-23-
Item 6. Selected Financial Data
The following is a summary of selected financial data for
the Company and its subsidiaries. All financial data has been
restated to reflect the combination with A.L. Oslo as a pooling
of interests. The data for each of the three years in the period
ended December 31, 1994 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. All amounts are in thousands, except per share data.
Years Ended December 31,
Income Statement Data (1) 1994(3) 1993 1992 1991 1990
Total revenue $469,263 $402,675 $358,632 $301,814 $289,424
Cost of sales 275,543 233,423 194,665 162,523 151,037
Gross profit 193,720 169,252 163,967 139,291 138,387
Selling, general and
administrative
expenses 177,742 139,038 128,658 122,175 101,547
Operating income 15,978 30,214 35,309 17,116 36,840
Interest expense (15,355) (14,996) (18,534) (15,070) (13,348)
Other income, net 1,113 1,880 3,937 5,961 2,128
Income from continuing
operations before
taxes 1,736 17,098 20,712 8,007 25,620
Provision for taxes 3,439 6,969 7,161 3,389 9,629
Income (loss) from
continuing operations $ (1,703) $ 10,129 $ 13,551 $ 4,618 $ 15,991
Net income (loss)(2) $ (2,386) $ 10,129 $ 20,974 $ 9,120 $ 16,874
Average number of
shares outstanding:
Primary 21,568 21,510 18,264 16,904 16,788
Fully Diluted 21,666 21,581 21,568 21,611 21,434
Earnings per share:
Fully diluted
Income (loss) from
continuing operations $ (.08) $ .47 $ .74 $ .27 $ .89
Net income (loss) $ (.11) $ .47 $ 1.09 $ .54 $ .93
(1) Includes results of operations from date of acquisition of the Wade
Jones Company (July 1994), the Lincolnton facility (March 1993),
Norgesplaster A/S (January 1993), Able Laboratories, Inc. (October
1992) and NMC Laboratories, Inc. (August 1990). Reflects the
adoption of Statement of Financial Accounting Standards No. 109 and
No. 106 effective January 1, 1992 and January 1, 1993, respectively.
(2) Net income includes: 1994 - extraordinary item - loss on
extinguishment of debt ($683); 1992 - cumulative effect of a change
-24-
in accounting for income taxes - $2,614; 1992, 1991 and 1990 - Income
from discontinued Human Nutrition Segment - $4,809, $4,502 and $883,
respectively.
(3) 1994 includes transaction costs relating to the combination with A.L.
Oslo and post-combination actions which are included in cost of goods
sold ($450) and selling, general and administrative ($24,200).
Amount net after tax of approximately $17,400.
As of December 31,
Balance Sheet Data (1) 1994 1993 1992 1991 1990
Current assets $250,499 $202,913 $178,283 $187,416 $178,792
Non-current assets 341,819 324,704 302,730 301,140 232,199
Total assets $592,318 $527,617 $481,013 $488,556 $410,991
Current liabilities $154,650 $139,205 $107,015 $125,697 $112,138
Long-term debt,
less current
maturities 220,036 144,350 133,701 196,103 142,476
Deferred taxes and
other non-current
liabilities 36,344 40,129 33,454 28,449 26,129
Stockholders' equity(2) 181,288 203,933 206,843 138,307 130,248
Total liabilities
and equity $592,318 $527,617 $481,013 $488,556 $410,991
(1) Includes accounts from date of acquisition of the Wade Jones Company
(July 1994), the Lincolnton facility (March 1993), Norgesplaster A/S
(January 1993), Able Laboratories, Inc. (October 1992) and NMC
Laboratories, Inc. (August 1990) and the conversion of the
Convertible Subordinated Debentures in 1992.
(2) 1994 reflects acquisition of A.L. Oslo accounted for as a pooling of
interests with cash purchase price deducted from stockholders'
equity.
-25-
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
1994 Compared to 1993
General
1994 was a year of significant change for the Company. The
following major events occurred and had an effect on the
Company's operations and financial position.
- The Company acquired the related Norwegian Human
Pharmaceutical and Animal Health businesses ("A.L.
Oslo") of its controlling shareholder for $23.6
million and warrants to purchase 3.6 million shares of
the Company's Class A Common Stock. The combination
was accounted for in a manner similar to a pooling of
interests since the companies were under common
control. All prior financial statements were restated
to include A.L. Oslo and the following discussion
reflects such restatement.
- The Company changed its name from A. L. Laboratories,
Inc. to A.L. Pharma Inc. and reorganized its business
into two main segments. The Human Pharmaceuticals
Segment which includes the International
Pharmaceuticals Division ("IPD"), the U.S.
Pharmaceuticals Division ("USPD") and the Fine
Chemicals Division ("FCD"), and the Animal Health
Segment which includes the Animal Health Division
("AHD") (both U.S. and International) and the Aquatic
Animal Health Division ("AAHD").
- The Company incurred significant charges as follows:
- Direct transaction expenses relating to the
acquisition of A.L. Oslo including special committee
fees, investment banking, legal, accounting and
other expenses - $2.9 million after tax.
- Post-combination management actions which resulted
in charges for severance, exiting of certain
businesses and product lines and other related
actions - $14.5 million after tax.
- The Company obtained a $185.0 million credit facility
to purchase A.L. Oslo, refinance a significant amount
of existing long and short term debt and for general
corporate purposes. The refinancing of existing debt
resulted in an extraordinary item for a loss on debt
extinguishment of $.7 million after tax.
Results of Operations
-26-
Total revenue increased to $469.3 million in 1994 compared
to $402.7 million in 1993 while operating income and income
before extraordinary item and taxes decreased substantially due
to the above described transaction expenses and post-combination
expenses. As a result, the Company had a loss before
extraordinary item of $1.7 million ($.08 loss per share) in 1994
compared to income of $10.1 million ($.47 per share) in 1993.
Revenue in the Human Pharmaceuticals Segment accounted for
$44.4 million of the consolidated revenue increase. The USPD
accounted for a major portion of the increase due primarily to
volume increases achieved in its liquids (including products
containing iodinated glycerol), creams and ointments, and
suppository product lines. The volume increase was fueled by
products introduced in late 1993, (Epinephrine Mist and
Clotrimazole cream) and products introduced in 1994 (Cimetidine
liquid, Clobetasol cream and ointment, Miconazole suppositories
and Clemastine liquid). On an overall basis price increases for
certain products offset and slightly exceeded price declines for
other products caused by competitive pressures.
IPD including oral health care also accounted for a portion
of the revenue increase due primarily to volume, and where
permitted by local conditions selected price increases. Oral
health care revenues increased by $2.9 million and the related
operating loss declined due to continued penetration in markets
where approval has been received, especially Sweden. FCD
revenues improved by approximately 10% due to volume increases
for Bacitracin, Vancomycin and Amphotericin B and selected price
increases for Polymyxin and Bacitracin.
Animal Health Segment revenue increased $22.3 million
primarily due to the acquisition of Wade Jones Company in July
1994, higher volume sales of BMD and international and domestic
sales of disease preventative products used in poultry markets.
In addition, sales volume of fish vaccines, primarily for salmon,
increased approximately 10% compared to 1993.
On a consolidated basis gross profit increased $24.5 million
while the gross margin percentage declined marginally from 42.0%
to 41.3% in 1994.
Gross profit dollars in the Human Pharmaceuticals Segment
increased at a rate consistent with the sales increase as the
aggregate gross profit percentage improved slightly compared to
1993. The U.S. Pharmaceuticals Division increased significantly
in dollars and marginally in percent as overall product volume
increases and higher value added new products offset continued
high production and operating costs incurred to maintain
compliance with "Current Good Manufacturing Practices" ("CGMP").
International Pharmaceuticals and Fine Chemicals generally
maintained gross margins in line with revenue increases.
Gross profit dollars in the Animal Health Segment increased
at a rate less than the sales increase as the gross margin
-27-
percent declined slightly. The gross margin percent for the
Animal Health Division declined mainly due to competitive
pressure on BMD prices and due to the acquisition of the Wade
Jones Company, a distributor to the poultry market, and sales
made pursuant to a distribution agreement with Merck AgVet for
poultry products. The gross profits earned in the distribution
business are generally lower than manufacturing gross profits.
Gross profits earned by the Aquatic Animal Health Division as a
percentage of sales were generally maintained as sales increased.
Operating expenses on a consolidated basis increased $38.7
million compared to 1993. Included in operating expenses are
$24.2 of expenses for transaction costs and for post-combination
actions by management relating to the combination with A.L. Oslo.
If the transaction and post-combination expenses were
excluded the operating expense increase was $14.5 million or
10.4% compared to a 16.5% revenue increase.
Operating expenses, not including transaction and post-
combination expenses, in the Human Pharmaceuticals Segment
increased due to variable selling expenses related to volume
increases, additional research and development expenses for
planned projects in process, and additional costs incurred in
USPD in setting up a Central Distribution Center in 1994.
Operating expenses, excluding transaction and post-combination
expenses, for the Animal Health Segment increased due to the
acquisition of Wade Jones in July 1994, increases in variable
selling expenses and increases in research and development
expenses.
Including transaction and post-combination costs operating
income was $16.0 million in 1994 compared to $30.2 million in
1993. By segment operating income was impacted as follows (in
millions):
Human Animal
Pharmaceuticals Health
Segment Segment Unallocated Total
Operating income (loss)
as reported $(3.8) $28.5 $(8.7) $16.0
Transaction costs and
post-combination
actions $19.0 $ 2.0 $ 3.7 $24.7
Operating income (loss)
excluding transaction
costs and post-combination
actions - 1994 $15.2 $30.5 $(5.0) $40.7
Operating income (loss) -
1993 $ 8.6 $28.8 $(7.2) $30.2
-28-
Post-combination charges reflect the following management
actions for the Human Pharmaceuticals Segment: severance of $2.9
million for employees eliminated due to redundancy, $8.8 million
(including the write off of $5.8 million of intangibles) for the
exit of the USPD from the tablet business in the U.S., $3.4
million for a write off of an intangible relating to an oral
health care product which will no longer be marketed, $.9 million
for the write down to fair market value of land which will be
held for sale, $2.5 million for an accelerated payment for
contractually committed research and development relating to a
project which will no longer be funded by the Company and $.5
million for closing sales offices and eliminating duplicate
distributors and other.
Post-combination management actions for the Animal Health
Segment relate to Aquatic Animal Health and include the exiting
of an antibiotic product and related equipment of $1.7 million
and severance of $.3 million.
Unallocated expenses relate primarily to Corporate functions
and include severance for redundant personnel of $.6 million and
$3.1 million for transaction expenses primarily for legal,
accounting and investment banking services incurred in 1994 to
complete the combination. 1993 unallocated expenses include
approximately $1.0 million for pre-combination transaction costs.
The transaction costs and charges for post-combination
management actions, a majority of which did not use cash, are
anticipated to lower future expenses (i.e. eliminate redundant
employees, distributors, etc.) and allow management to focus on
its core businesses (i.e. eliminate U.S. tablet business and
other minor products and exit non core research and development
projects). The Company has provided for the exiting of the U.S.
tablet business by the most probable exit plan (i.e. sale). If
the exit by sale is not achieved an adjustment for additional
future costs could be required in 1995.
Interest expense increased $.4 million in 1994 to $15.4
million due primarily to additional debt incurred for the
acquisition of A.L. Oslo and capital expenditures in the U.S.,
and higher U.S. interest rates in the latter part of 1994.
Partially offsetting domestic increases was lower foreign
interest expense due primarily to lower rates relative to 1993.
As required the Company restated the prior years results of
operations to reflect the acquisition of A.L. Oslo in a manner
similar to a pooling of interests. Previous restated periods do
not include the interest expense on the purchase price of $23.6
million which would have been incurred had the acquisition
actually taken place in prior periods. Assuming an interest rate
of 7%, interest expense for 1994 and 1993 would have been
approximately $1.2 million and $1.7 million higher, respectively.
The provision for income taxes in 1994 exceeded pre-tax
income compared to a more representative 40.8% tax rate in 1993.
The disproportionate relationship is the result of low pre-tax
-29-
income (due to the transaction costs and post-combination
actions) which magnifies the effect of non-deductible expenses
principally goodwill amortization and portions of the transaction
costs capitalized for tax purposes.
Results for 1994 include an extraordinary item for a loss on
extinguishment of debt. The loss of $.7 million ($1.1 million
less a tax benefit of $.4 million) results from the expensing of
debt issuance costs related to the previously existing debt when
the Company refinanced such debt with a $185.0 million credit
agreement.
1993 Compared to 1992
General
The discussion which follows analyzes operating results by
segment for 1993 and 1992 as restated in the manner in which the
businesses were managed (i.e. as legal entities not as operating
divisions which were set up in 1994).
Results of Operations
Revenue increased $44.0 million, (12.3%), while operating
income, income from continuing operations and net income declined
in the year ended December 31, 1993. Fully diluted earnings per
share from continuing operations were $0.47 in 1993 compared to
$0.74 in 1992. Discontinued operations in 1992 include income
from the Human Nutrition business which was sold in September
1992.
Revenue in the Human Pharmaceuticals Segment increased $31.2
million. Barre National ("Barre") achieved significant volume
increases in most major product lines which were partially offset
by lower pricing due to competitive pressures. ParMed and NMC
Laboratories ("NMC") also had sales increases primarily related
to volume. Included in the volume increases were sales in excess
of $2.5 million for new products including Epinephrine Mist,
Loperamide liquid and Clotrimazole cream. In addition, revenue
increased from the inclusion of Able Laboratories, Inc. ("Able")
acquired in October 1992, and sales related to the manufacturing
facility in Lincolnton, NC ("Lincolnton") purchased in March
1993.
Revenue decreased at Dumex Ltd. ("Dumex") due primarily to
devaluations of Scandinavian currencies relative to the Danish
Krone("DKK"), the translation effect of lower average exchange
rates in 1993 versus the U.S. Dollar, lower exports to non-
European markets, and price declines and controls mandated by
certain Scandinavian and other European governments.
Revenues increased at A.L. Oslo due to the acquisition of
the remaining 50% of Norgesplaster A/S on January 1, 1993 and
increased sales due to both price and volume increases of
pharmaceutical grade bacitracin and other bulk antibiotics.
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Norgesplaster, previously accounted for on the equity basis,
became a consolidated subsidiary on January 1, 1993. Partially
offsetting the increases were lower Scandinavian revenues due to
devaluations of the Swedish Kroner and the Finnish Mark in 1993
and the translation effect of lower average exchange rates in
1993 versus the U.S. Dollar.
Revenue in the Animal Health business ("Animal Health")
increased $14.4 million. North American sales of the Company's
BMD antibiotic in both the poultry and swine markets increased
due primarily to volume. Product lines used in combination or
sequentially with BMD including 3-Nitro and CTC also increased
sales due mainly to volume. Internationally BMD , Albac and 3-
Nitro sales increased primarily due to volume. Contributing to
the segment's increase was the Aquatic Animal Health Division,
which had significant gains in the sale of vaccines for farm
raised salmon.
On a consolidated basis, gross profit increased $5.3 million
while the gross profit percentage declined from 45.7% in 1992 to
42.0% in 1993.
The decline in gross profit percentage resulted from a
number of factors in the Human Pharmaceuticals Segment. A.L.
Oslo gross margins improved in dollars and percent due to the
acquisition of Norgesplaster in January 1993, manufacturing
efficiencies and increased sales of higher margin fine chemical
products. Dumex gross margins declined in percent and dollars
due to lower revenues resulting from devaluations of Scandinavian
currencies other than the DKK, lower sales prices and increased
manufacturing costs in 1993.
The U.S. Pharmaceuticals gross margin percentage declined
due to the negative impact of price reductions, and continued
higher production and operating costs incurred to maintain
regulatory compliance with CGMP. In particular, gross margin
percentages were lower at Able due to increased costs incurred in
connection with intensive regulatory compliance activities. The
percentage reductions were somewhat offset by the benefit of
higher volume in the U.S.
The decline in gross profit dollars in the Human
Pharmaceuticals Segment was more than offset by the Animal Health
segment which had increased sales volume and maintained gross
margins in its operating units.
Consolidated operating expenses increased 8.1% or $10.4
million compared to a 12.3% revenue increase. The increase
reflects higher selling expense related to volume increases and
higher research and development expense. The Human
Pharmaceuticals Segment had increased operating expenses due to
the inclusion of Able and Norgesplaster and the acquisition of
the Lincolnton facility, and continued expenses incurred to build
an oral health care ("OHC") infrastructure. In addition, 1993
-31-
and 1992 include expenses related to settlement of the class
action litigation and the combination study with A. L. Oslo.
Operating income decreased on a consolidated basis by $5.1
million as a result of a $9.4 million reduction in the operating
income for the Human Pharmaceuticals Segment which was offset in
part by a $6.7 million increase in operating profit in Animal
Health. The lower operating income in the Human Pharmaceuticals
Segment results primarily from the decline in gross profit
margins and dollars due to lower pricing, currency effects, and
higher manufacturing costs primarily due to regulatory
compliance, and the loss incurred by the newly established OHC
business.
In 1993 OHC sales were less than $1.0 million and
significant expenses were incurred to build an administrative,
selling and marketing infrastructure, for promotion of products
when approved and for continuing research and development work,
including the preparation of a New Drug Application ("NDA") for
Elyzol Dental Gel to be filed in the United States.
Interest expense decreased by $3.5 million due to the
redemption of the convertible subordinated debentures in October
1992 and lower interest rates in 1993. Additional debt incurred
to fund the acquisitions and additional working capital partially
offset the decrease.
Other income (expense), net was $1.9 million income in 1993
compared to $3.9 million income in 1992 due mainly to foreign
exchange transaction gains recorded by A.L. Oslo of $3.3 million.
Such gains resulted primarily from the termination of
transactions which effectively denominated A.L. Oslo s debt in
U.S. Dollars at a time when the Norwegian Kroner exchange rate
was strong vis a vis the U.S. Dollar. These gains were offset in
part by foreign exchange transaction losses incurred as a result
of the devaluation of Scandinavian currencies other than the DKK.
The Company's effective tax rate for continuing operations
increased to 40.8% from 34.6% in 1992. Income taxes for 1992
were lowered by approximately $1.0 million due to the
remeasurement of deferred taxes in Denmark due to the enactment
of lower tax rates in the second quarter of 1992. 1992 results
also include a non-cash increase to income of $2.6 million for
the cumulative effect of adopting SFAS 109 as of January 1, 1992.
Inflation
The effect of inflation on the Company's operations during
1994, 1993 and 1992 was not significant.
Governmental Actions affecting the Company
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The Company's operations in all countries are subject to
regulation which includes inspections of manufacturing
facilities, requires approvals to market products, and can result
in the recall of products and suspension of production. In the
United States the Food and Drug Administration (FDA) has imposed
more stringent regulatory requirements on the pharmaceutical
industry.
The U.S. manufacturing companies included in the Company's
Pharmaceuticals Segment, Barre, NMC, and Able, are affected in
that they are required to comply with the FDA's interpretation of
CGMP. In this regard, Barre and Able are parties to separate
consent decrees with the FDA which define the specific standards
they must meet to comply with CGMP.
In 1992, 1993 and 1994, regulatory compliance has continued
to affect costs directly by requiring the addition of personnel,
programs and capital and indirectly by adding activities without
directly increasing efficiency. The costs both direct and
indirect of regulatory compliance (which have increased in recent
years) are expected to continue to increase in the future.
In July 1994, the Company ceased the marketing of products
which contain iodinated glycerol. The cessation was the result
of an industry wide banning of such products by the FDA. Because
the FDA allowed for an orderly cessation of sales of these
products the immediate impact was minimized.
Iodinated glycerol products represented approximately 2% of
the Company's 1994 sales and the prospective loss of sales of
these products will negatively impact the Company's future
operations.
The iodinated glycerol product line was used to treat
respiratory congestion resulting from coughs and colds. The
Company has a broad line of other cough and cold remedies which
may provide alternative therapies to the iodinated glycerol
product line. The Company cannot predict the extent, if any,
which the alternative products will be substituted.
The Company and its subsidiaries have filed applications to
market products with regulatory agencies both in the U.S. and
internationally. The timing of receipt of approvals of these
applications can significantly increase future revenues and
income. The Company cannot control or predict with accuracy
whether such applications will be approved or the timing of their
approval.
European Operations
The fluctuations of European currencies have and will
continue to impact the Company's European operations which
comprise approximately 35% of revenues in 1994. In addition,
many European governments have enacted or are in the process of
enacting mechanisms aimed at lowering the cost of
-33-
pharmaceuticals. Currency fluctuations and governmental actions
to reduce or not allow increases of prices have affected revenue.
The Company cannot predict future currency fluctuations or future
governmental pricing actions or their impact on the Company's
results.
Liquidity and Capital Resources
At December 31, 1994, stockholders' equity was $181.3
million compared to $203.9 million at December 31, 1993. The
ratio of long-term debt to equity was 1.21:1 and .71:1 at
December 31, 1994 and 1993, respectively. The increase in the
ratio reflects the financing required for the acquisition of A.L.
Oslo, significant capital expenditures in 1994, and increased
working capital requirements. Additionally, the required
accounting for the A.L. Oslo acquisition magnified the change in
the ratio since restated prior year financials include A.L.
Oslo's equity as part of restated stockholders' equity and upon
acquisition, the cash purchase price, $23.6 million, was deducted
from stockholders' equity and in effect, added to long-term debt
(i.e. the acquisition was financed).
Working capital at December 31, 1994 was $95.8 million
compared to $63.7 million and $71.3 million at December 31, 1993
and 1992, respectively. The current ratio was 1.62:1 at
December 31, 1994 compared to 1.46:1 and 1.67:1 at December 31,
1993 and 1992, respectively.
Working capital increased relative to 1993 primarily due to
increases in accounts receivable and inventory partially offset
by an increase in accounts payable and accrued expenses.
Accounts receivable increased due to seasonally higher fourth
quarter sales of liquid pharmaceuticals by the USPD, increased
Animal Health sales of fish vaccines and poultry products, and
the acquisition of the Wade Jones Company in 1994.
Inventory increased due to additional Animal Health
inventories for Wade Jones and products sold under a distribution
agreement with Merck AgVet. USPD inventories increased to meet
expected demand.
All working capital elements also increased in 1994 in U.S.
Dollars as the functional currencies of the Company's principal
foreign subsidiaries, the Danish Krone and Norwegian Krone,
strengthened versus the U.S. Dollar as compared to 1993 by
approximately 10%. The approximate increase due to currency
translation was; accounts receivable $4.4 million, inventory $3.7
million and accounts payable and accrued expenses $3.2 million.
The Company presently has various capital expenditure
programs under way and planned including the planned expansion of
a fermentation facility in Denmark. In 1994, the Company's
capital expenditures were $44.3 million and in 1995 the Company
plans to spend a lower amount than 1994.
-34-
If anticipated sales growth occurs the Company will have
increased working capital requirements.
At December 31, 1994, the Company had $26.9 million
available under existing short-term unused lines of credit and
$15.5 million in cash. In addition, the Company has $10.3
million available in Europe under long-term lines of credit and
$30.0 million available under a revolving credit facility which
was included in the $185.0 million credit facility. 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. A substantial
portion of the Company's short-term and long-term debt is at
variable interest rates. An increase in interest rates in the
U.S.or EuropewillnegativelyimpacttheCompany'sresultsofoperations.
The $185.0 million credit facility contains various
financial covenants including the maintenance of minimum equity
to assets, current and interest coverage ratios. The equity to
asset ratio requires the Company maintain stockholders' equity
(plus adjustments) of at least 30% of total assets. This ratio
will in effect require the Company to issue equity in the near
term if significant additional funding for acquisitions or other
purposes is required.
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 June
7, 1995, which Proxy Statement will be filed on or prior to April
12, 1995, 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
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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 June 7, 1995,
which Proxy Statement will be filed on or prior to April 12,
1995, 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 June 7, 1995, is incorporated into this Report by
reference. Such Proxy Statement will be filed on or prior to
April 12, 1995.
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 June 7, 1995, is incorporated into this Report by
reference. Such Proxy Statement will be filed on or prior to
April 12, 1995.
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 Financial Statement Schedule
See index to consolidated financial statements and financial
statement schedule, which appears at page F-1 of this Report.
List of Exhibits (numbered in accordance with Item 601 of
Regulation S-K)
3.1 Amended and Restated Certificate of Incorporation of
A.L. Pharma Inc., dated September 30, 1994 and filed with the
-36-
Secretary of State of the State of Delaware on October 3, 1994,
is filed as an Exhibit to this Report.
3.2 Amended and Restated By-Laws of A.L. Pharma Inc.,
effective as of October 3, 1994, is filed as an Exhibit to this
Report.
4.1 Reference is made to Article Fourth of the Amended
and Restated Certificate of Incorporation of A.L. Pharma Inc.
which is being filed as Exhibit 3.1 to this Report.
4.2 Warrant Agreement between A.L. Pharma Inc. and The
First National Bank of Boston, as warrant agent, is filed as an
Exhibit to this Report.
10.1 $185,000,000 Credit Agreement among A.L.
Laboratories, Inc., as Borrower, Union Bank of Norway, as agent
and arranger, and Den norske Bank AS, as co-arranger, dated
September 28, 1994, is filed as an Exhibit to this Report.
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, 1994 will be furnished to the
Commission upon request.
10.2 Parent Guaranty, made by A.L. Pharma Inc. in favor of
Union Bank of Norway, as agent and arranger, and Den norske Bank
AS, as co-arranger, dated September 28, 1994 is filed as an
Exhibit to this Report.
10.3 Restructuring Agreement, dated as of May 16, 1994,
between A.L. Laboratories, Inc. (now known as A.L. Pharma Inc.)
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.
10.4 Employment Agreement dated January 1, 1987, as
amended December 12, 1989, between I. Roy Cohen and A.L.
Laboratories, Inc. was filed as Exhibit 10.3 to A.L.
Laboratories, Inc.'s 1989 Annual Report on Form 10-K and is
incorporated herein by reference.
10.5 Control Agreement dated February 7, 1986 between
Apothekernes Laboratorium A.S (now known as A.L. Industrier AS)
and A.L. Laboratories, Inc. (now known as A.L. Pharma Inc.) was
filed as Exhibit 10.10 to the A.L. Laboratories, Inc.'s 1985
Annual Report on Form 10-K and is incorporated herein by
reference.
10.6 Amendment to Control Agreement dated October 3, 1994
between A.L. Industrier AS (formerly known as Apothekernes
Laboratorium A.S) and A.L. Laboratories, Inc. (now known as A.L.
Pharma Inc.) is filed as an Exhibit to this Report.
-37-
10.7 A.L. Laboratories, Inc. 1983 Incentive Stock Option
Plan, as amended through January 1, 1991 was filed as Exhibit
10.7 to A.L. Laboratories, Inc.'s 1990 Annual Report on Form 10-K
and is incorporated herein by reference.
10.8 Employment agreement dated July 30, 1991 between the
Company and Jeffrey E. Smith was filed as Exhibit 10.8 to A.L.
Laboratories, Inc.'s 1991 Annual Report on Form 10-K and is
incorporated herein by reference.
10.9 Employment agreement between NMC Laboratories and
George S. Barrett dated August 6, 1990 was filed as Exhibit 10.11
to A.L. Laboratories, Inc.'s 1991 Annual Report on Form 10-K and
is incorporated herein by reference.
10.10 Lease Agreement between A.L. Industrier AS, as
landlord, and Apothekernes Laboratorium AS, as tenant, dated
October 3, 1994 is filed as an Exhibit to this Report.
10.11 Administrative Services Agreement between A.L.
Industrier AS and Apothekernes Laboratorium AS dated October 3,
1994 is filed as an Exhibit to this Report.
10.12 Employment agreement dated August 10, 1972 between
Apothekernes Laboratorium A.S (transferred to A.L. Oslo per the
combination transaction) and Einar W. Sissener is filed as an
exhibit to this report.
10.13 Employment contract dated October 5, 1989 between
Apothekernes Laboratorium A.S (transferred to A.L. Oslo per the
combination transaction) and Ingrid Wiik is filed as an exhibit
to this report.
10.14 Employment contract dated October 5, 1989 between
Apothekernes Laboratorium A.S (transferred to A.L. Oslo per the
combination transaction) and Thor Kristiansen is filed as an
exhibit to this report.
10.15 Employment contract dated October 2, 1991 between
Apothekernes Laboratorium A.S (transferred to A.L. Oslo per the
combination transaction) and Knut Moksnes is filed as an exhibit
to this report.
11 Computation of Earnings per Common Share for the
years ended December 31, 1994, 1993 and 1992.
21 A list of the subsidiaries of the Registrant as of
March 18, 1995 is filed as an Exhibit to this Report.
23 Consent of Coopers & Lybrand L.L.P., Independent
Accountants, is filed as an Exhibit to this Report.
27 Financial Data Schedule
-38-
See exhibit index on Page E-1 for exhibits filed with this
report.
Report on Form 8-K
On October 17, 1994, the Company filed a report on Form 8-K
dated October 3, 1994 reporting Item 2. "Acquisition or
Disposition of Assets" and Item 7. "Financial statements of
businesses acquired, proforma financial information and exhibits
relating to the acquisition of the Related Norwegian businesses.
-39-
Undertakings
For purposes of complying with the amendments to the rules
governing Form S-8 (effective July 13, 1990) 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 Nos. 2-
97830(as amended April 19, 1989) and 33-37516 (filed November 1,
1990):
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.
-40-
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.
March 30, 1995 A.L. PHARMA INC.
Registrant
By: /s/ Einar W. Sissener
Einar W. Sissener
Chairman, Director and
Chief Executive Officer
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: March 30, 1995 /s/ Einar W. Sissener
Einar W. Sissener
Chairman, Director and
Chief Executive Officer
Date: March 30, 1995 /s/ Jeffrey E. Smith
Jeffrey E. Smith
Vice President, Finance and
Chief Financial Officer
(Principal accounting officer)
Date: March 30, 1995 /s/ I. Roy Cohen
I. Roy Cohen
Director and Chairman of the
Executive Committee
Date: March 30, 1995
James Balog
Director and Chairman of the
Audit Committee
-41-
Date: March 30, 1995 /s/ Thomas G. Gibian
Thomas G. Gibian
Director and Chairman of the
Compensation Committee
Date: March 30, 1995 /s/ Glen E. Hess
Glen E. Hess
Director
Date: March 30, 1995 /s/ Peter G. Tombros
Peter G. Tombros
Director
Date: March 30, 1995 /s/ Georg W. Sverdrup
Georg W. Sverdrup
Director
Date: March 30, 1995 /s/ Erik G. Tandberg
Erik G. Tandberg
Director
Date: March 30, 1995 /s/ Gert Munthe
Gert Munthe
Director
-42-
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
______________
Page
Consolidated Financial Statements:
Report of Independent Accountants F-2
Consolidated Balance Sheet at
December 31, 1994 and 1993 F-3
Consolidated Statement of Operations for
the years ended December 31, 1994,
1993 and 1992 F-4 to F-5
Consolidated Statement of Stockholders'
Equity for the years ended
December 31, 1994, 1993 and 1992 F-6 to F-8
Consolidated Statement of Cash Flows
for the years ended December 31, 1994,
1993 and 1992 F-9 to F-10
Notes to Consolidated Financial Statements F-11 to F-42
Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts
for the years ended December 31, 1994,
1993 and 1992 F-43
Financial statement schedules other than Schedule II are omitted
for the reason that they are not applicable or the required
information is included in the consolidated financial statements
or notes thereto.
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and
Board of Directors of
A.L. Pharma Inc.:
We have audited the consolidated financial statements and
the financial statement schedule of A.L. Pharma Inc. and
Subsidiaries (formerly A.L. Laboratories, Inc.) (the "Company")
listed in the index on page F-1 of this Form 10-K. These
financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that we
plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of A.L. Pharma Inc. and Subsidiaries as of
December 31, 1994 and 1993 and the consolidated results of their
operations and their cash flows for each of the three years in
the period ended December 31, 1994 in conformity with generally
accepted accounting principles. In addition, in our opinion, the
financial statement schedule referred to above, when considered
in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information
required to be included therein.
As discussed in Note 2 to the consolidated financial
statements, effective January 1, 1993, the Company changed its
method of accounting for postretirement benefits other than
pensions, and effective January 1, 1992, the Company changed its
method of accounting for income taxes.
COOPERS & LYBRAND L.L.P.
Parsippany, New Jersey
F-2
March 1, 1995
F-3
A.L. PHARMA INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In thousands, except share data)
December 31,
1994 1993
ASSETS
Current assets:
Cash and cash equivalents $ 15,512 $ 11,647
Accounts receivable, net 119,084 97,306
Inventories 106,297 88,132
Prepaid expenses and other current assets 9,606 5,828
Total current assets 250,499 202,913
Property, plant and equipment, net 202,903 170,355
Intangible assets, net 128,758 135,098
Other assets and deferred charges 10,158 19,251
Total assets $592,318 $527,617
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 13,288 $ 14,108
Short-term debt 61,196 55,533
Accounts payable 31,153 23,556
Accrued expenses 46,651 42,448
Accrued and deferred income taxes 2,362 3,560
Total current liabilities 154,650 139,205
Long-term debt 220,036 144,350
Deferred income taxes 27,528 28,797
Other non-current liabilities 8,816 11,332
Stockholders' equity:
Preferred stock, $1 par value, no shares issued
Class A Common Stock, $.20 par value,
13,618,791 and 13,567,683 shares issued 2,724 2,714
Class B Common Stock, $.20 par value,
8,226,562 shares issued 1,646 1,646
Additional paid-in capital 118,833 111,473
Foreign currency translation adjustment 8,125 307
Retained earnings 55,482 93,291
Treasury stock, 248,920 and 247,210 shares of
Class A Common Stock, at cost (5,522) (5,498)
Total stockholders' equity 181,288 203,933
Total liabilities and
stockholders' equity $592,318 $527,617
See notes to consolidated financial statements.
F-4
A.L. PHARMA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share data)
Years Ended December 31,
1994 1993 1992
Total revenue $469,263 $402,675 $358,632
Cost of sales 275,543 233,423 194,665
Gross profit 193,720 169,252 163,967
Selling, general and
administrative expenses 177,742 139,038 128,658
Operating income 15,978 30,214 35,309
Interest expense (15,355) (14,996) (18,534)
Other income (expense), net 1,113 1,880 3,937
Income from continuing operations
before provision for income taxes,
extraordinary item and cumulative
effect of change in accounting
principle 1,736 17,098 20,712
Provision for income taxes 3,439 6,969 7,161
Income (loss) from continuing operations
before extraordinary item and
cumulative effect of change in
accounting principle (1,703) 10,129 13,551
Income from discontinued
operations, net of tax 4,809
Income (loss) before extraordinary item
and cumulative effect of change
in accounting principle (1,703) 10,129 18,360
Extraordinary item, net of tax (683)
Cumulative effect of change in
accounting principle 2,614
Net income (loss) $ (2,386) $ 10,129 $ 20,974
Average common shares outstanding:
Primary 21,568 21,510 18,264
Fully diluted 21,666 21,581 21,568
Continued on next page.
F-5
A.L. PHARMA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS, (Continued)
(In thousands, except per share data)
Earnings per common share:
Primary
Income (loss) from continuing operations
before extraordinary item and
cumulative effect of change in
accounting principle $ (.08) $ .47 $ .74
Cumulative effect of change in
accounting principle .14
Net income (loss) $ (.11) $ .47 $ 1.15
Fully diluted
Income (loss) from continuing operations
before extraordinary item and
cumulative effect of change in
accounting principle $ (.08) $ .47 $ .74
Cumulative effect of change in
accounting principle .12
Net income (loss) $ (.11) $ .47 $ 1.09
See notes to consolidated financial statements.
F-6
A.L. PHARMA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(COMMON STOCK ACCOUNTS)
(In thousands, except share data)
Class Class
A B
Common Common
Stock Stock Treasury Stock Total
Common Common
Shares Par Par Shares Stock
Issued Value Value Held Cost Accounts
Balance, December 31, 1991 17,213,023 $1,797 $1,646 (179,871) $(3,759) $ (316)
Purchase of treasury stock (27,127) (651) (651)
Exercise of stock options
(Class A) and other 82,423 16 16
Employee stock purchase plan 25,678 5 5
Conversion of debentures 4,377,917 876 876
Balance, December 31, 1992 21,699,041 $2,694 $1,646 (206,998) $(4,410) $ (70)
Purchase of treasury stock (40,212) (1,088) (1,088)
Exercise of stock options
(Class A) and other 57,574 13 13
Employee stock purchase plan 37,630 7 7
Balance, December 31, 1993 21,794,245 $2,714 $1,646 (247,210) $(5,498) $(1,138)
Purchase of treasury stock (1,710) (24) (24)
Exercise of stock options
(Class A) 2,750 1 1
Employee stock purchase plan 48,358 9 9
Balance, December 31, 1994 21,845,353 $2,724 $1,646 (248,920) $(5,522) $(1,152)
F-7
A.L. PHARMA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
Foreign Total
Common Additional Currency Stock-
Stock Paid-In Translation Retained holders'
Accounts Capital Adjustment Earnings Equity
Balance, December 31, 1991
previously reported $ (316) $ 49,588 $11,159 $53,575 $114,006
Accounts of A.L. Oslo (ALO)
net of eliminations 2,621 21,680 24,301
Balance, December 31, 1991
restated (316) 49,588 13,780 75,255 138,307
Net income - 1992 20,974 20,974
Dividends declared
($.18 per common share) (3,305) (3,305)
Net foreign currency
translation adjustment (7,137) (7,137)
Purchase of treasury stock (651) (651)
Tax benefit realized from
stock option plan 447 447
Exercise of stock options
(Class A) and other 16 662 678
Employee stock purchase plan 5 575 580
Conversion of debentures 876 58,605 59,481
Remittances from ALO to
A.L. Industrier (2,531) (2,531)
Balance, December 31, 1992 $ (70) $109,877 $ 6,643 $90,393 $206,843
Net income - 1993 10,129 10,129
Dividends declared
($.18 per common share) (3,873) (3,873)
Net foreign currency
translation adjustment (6,336) (6,336)
F-8
A.L. PHARMA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (Continued)
(In thousands, except share data)
Foreign Total
Common Additional Currency Stock-
Stock Paid-In Translation Retained holders'
Accounts Capital Adjustment Earnings Equity
Purchase of treasury stock (1,088) (1,088)
Tax benefit realized from
stock option plan 311 311
Exercise of stock options
(Class A) and other 13 586 599
Employee stock purchase plan 7 699 706
Remittances from ALO to
A.L. Industrier (3,358) (3,358)
Balance, December 31, 1993 $(1,138) $111,473 $ 307 $93,291 $203,933
Net loss - 1994 (2,386) (2,386)
Dividends declared
($.18 per common share) (3,893) (3,893)
Net foreign currency
translation adjustment 7,818 7,818
Purchase of treasury stock (24) (24)
Exercise of stock options
(Class A) 1 30 31
Employee stock purchase plan 9 778 787
Remittances from ALO to
A.L. Industrier (1,384) (1,384)
Appropriation of retained
earnings equal to cash
purchase price for A.L.
Oslo 23,594 (23,594)
Purchase of A.L. Oslo
Cash paid (23,594) (23,594)
Warrants issued 6,552 (6,552)
Balance, December 31, 1994 $(1,152) $118,833 $ 8,125 $55,482 $181,288
F-9
A.L. PHARMA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands of dollars)
Years Ended December 31,
1994 1993 1992
Operating activities:
Net income (loss) $ (2,386) $ 10,129 $ 20,974
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization 26,773 23,842 22,671
Deferred income taxes (5,506) 493 2,763
Noncurrent asset writeoffs 14,841
Extraordinary item 683
Income from option fee and sale of
trademarks and intangibles (4,958)
Cumulative effect of change in
accounting principle (2,614)
Change in assets and liabilities, net
of effects from business
acquisitions:
(Increase) decrease in accounts
receivable (14,864) (16,000) 14,464
(Increase) in inventory (11,639) (4,635) (11,114)
(Increase) decrease in prepaid
expenses and other current
assets (774) (833) 797
Increase (decrease) in accounts
payable and accrued expenses 8,492 3,497 (12,538)
Increase (decrease) in accrued and
deferred income taxes (1,269) (2,592) 1,723
Other, net 2,811 1,847 918
Net cash provided by operating
activities 17,162 15,748 33,086
Investing activities:
Proceeds from option fee, sale of
trademarks, intangibles and
equipment 268 5,043
Capital expenditures (44,326) (24,044) (21,325)
Acquisition of A.L. Oslo (23,594)
Purchase of acquired businesses,
and intangibles, net of cash
acquired (13,733) (17,280) (11,660)
Net cash used in investing
activities (81,653) (41,056) (27,942)
Continued on next page.
See notes to consolidated financial statements.
F-10
A.L. PHARMA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
(In thousands of dollars)
Years Ended December 31,
1994 1993 1992
Financing activities:
Net borrowings under
lines of credit $ 4,494 $ 23,484 $ (9,141)
Proceeds of long-term debt 164,423 26,375 28,000
Reduction of long-term debt (100,719) (12,397) (20,280)
Dividends paid (3,893) (3,873) (3,305)
Cash transfers between A.L. Oslo
and A.L. Industrier 4,991 (3,358) (2,531)
Treasury stock acquired (24) (1,088) (651)
Proceeds from employee stock option
and stock purchase plan 818 1,305 1,258
Other, net (2,713) 575 (79)
Net cash provided by (used in)
financing activities 67,377 31,023 (6,729)
Exchange rate changes:
Effect of exchange rate changes
on cash 1,481 (818) (558)
Income tax effect of exchange rate
changes on intercompany advances (502) 225 384
Net cash flows from exchange rate
changes 979 (593) (174)
Increase (decrease) in cash and cash
equivalents 3,865 5,122 (1,759)
Cash and cash equivalents at
beginning of year 11,647 6,525 8,284
Cash and cash equivalents at
end of year $ 15,512 $ 11,647 $ 6,525
See notes to consolidated financial statements.
F-11
A.L. PHARMA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
1. The Company and Basis of Presentation:
A.L. Pharma Inc., previously named A. L. Laboratories,
Inc., (the "Company") is a specialized multinational
pharmaceutical company engaged in developing, manufacturing and
marketing branded and generic, value-added human pharmaceuticals
and animal health products.
On October 3, 1994, the Company completed the acquisition
of the pharmaceutical, animal health, bulk antibiotic and aquatic
animal health businesses of Apothekernes Laboratorium A.S (the
"Related Norwegian Businesses"). Concurrent with the closing of
the acquisition the Company changed its name to A.L. Pharma Inc.
from A. L. Laboratories, Inc.
The combination of the Related Norwegian Businesses of
Apothekernes Laboratorium A.S with the Company was completed
pursuant to an Agreement dated May 16, 1994, which was
subsequently approved separately by the shareholders of both
companies.
In order to accomplish the transaction Apothekernes
Laboratorium A.S changed its name to A.L. Industrier A.S ("A.L.
Industrier") and demerged the Related Norwegian Businesses into a
new Norwegian corporation called Apothekernes Laboratorium AS
("A.L. Oslo"). The Company then acquired the shares of A.L. Oslo
through a tender offer.
A.L. Industrier is the beneficial owner of 100% of the
outstanding shares of the Company's Class B stock and 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 15.)
The consideration paid by the Company for A.L. Oslo was
$30,146 consisting of $23,594 in cash, and warrants to purchase
3.6 million shares of the Company's Class A Common Stock
(estimated value at time of closing of $1.82 per share or $6,552
in total). The warrants expire on January 3, 1999 and have an
exercise price of $21.945.
The Company was required to account for the acquisition of
A.L. Oslo as a transfer and exchange between companies under
common control. Accordingly, the accounts of A.L. Oslo were
combined with the Company at historical cost in a manner similar
to a pooling-of-interests and the Company's financial statements
have been restated to include A.L. Oslo. At the acquisition
date, the consideration paid for A.L. Oslo was reflected as a
decrease to stockholders' equity net of the estimated value
ascribed to the warrants. There were no adjustments required to
conform accounting practices of the companies.
F-12
A.L. PHARMA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
______________________
Selected information for A. L. Laboratories, Inc. and A.L. Oslo
follows:
1994 1993 1992
Total Revenue
A. L. Laboratories, Inc. $400,636 $338,230 $295,112
A.L. Oslo 85,401 78,467 78,724
Eliminations (a) (16,774) (14,022) (15,204)
$469,263 $402,675 $358,632
Income (loss) from continuing
operations
A. L. Laboratories, Inc. $ (2,705) $ 8,621 $ 11,367
A.L. Oslo 1,202 1,008 2,535
Eliminations (a) (200) 500 (351)
$ (1,703) $ 10,129 $ 13,551
Discontinued operations
A. L. Laboratories, Inc. $ 4,809
Extraordinary item -
debt retirement
A. L. Laboratories, Inc. $ (683)
Cumulative effect of
change in accounting
for income taxes
A.L. Oslo $ 2,614
Net income (loss)(b)
A. L. Laboratories, Inc. $ (3,388) $ 8,621 $ 16,176
A.L. Oslo 1,202 1,008 5,149
Eliminations (a) (200) 500 (351)
$ (2,386) $ 10,129 $ 20,974
(a) Prior to the combination there were transactions between
A.L. Laboratories, Inc. and A.L. Oslo such as sales, commissions
and license fees. As a result of the combination such
transactions became intercompany in nature and have been
eliminated.
(b) The 1994 net loss includes the net after tax effect of
combination related transaction costs and the extraordinary item
of approximately $3,600 ($.17 per share) and the net after tax
effect of post-combination management actions of approximately
$14,500 ($.67 per share). The total of $18,100 was incurred
$3,200 by A.L. Oslo and $14,900 by A. L. Laboratories, Inc.
The restated statement of operations for 1992, 1993 and the
period January 1, to October 2, 1994 do not include interest
expense related to the cash consideration paid on October 3, 1994
by the Company for A.L. Oslo. Assuming cash consideration of
F-13
A.L. PHARMA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
______________________
$23,594, interest expense after tax would have decreased reported
results by approximately $750 in 1994 (for the period January 1,
to October 2, 1994), and $1,000 in 1993 and 1992.
2. 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.
Financial statements and related footnotes have been
restated for all periods presented to reflect the combination of
the Company with A.L. Oslo. (See Note 1.)
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 U.S. Pharmaceuticals manufacturing subsidiary
inventories including: Barre-National, Inc. ("Barre"), NMC
Laboratories, Inc. ("NMC") and Able Laboratories, Inc. ("Able").
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 1994, 1993 and 1992, $722, $262
and $214 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
F-14
A.L. PHARMA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
__________________
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's policy in assessing the recoverability of
intangible assets is to compare the carrying value of the
intangible assets with the anticipated future income of
businesses to which the intangibles relate. In connection with
the acquisition of A.L. Oslo and the reorganization of the
Company in December 1994, the Company decided to exit its U.S.
tablet business and cease the marketing of an oral health care
product based on licensed technology. These actions resulted in
a write off of intangible assets of $9,200. (See Note 3). The
following table is net of accumulated amortization of $28,699 and
$21,884 for 1994 and 1993, respectively.
1994 1993 Life
Excess of cost of acquired
businesses over the fair value
of the net assets acquired $104,768 $101,039 20 - 40
Technology, trademarks, NADAs
and other 23,990 34,059 6 - 20
$128,758 $135,098
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 accumulated in a separate component
of stockholders' equity. The foreign currency translation
adjustment for 1994, 1993 and 1992 is net of ($502), $225, and
$384, respectively, representing the foreign tax effects
associated with intercompany advances to foreign subsidiaries.
Foreign exchange contracts:
The Company enters into foreign exchange contracts to buy
and sell certain cash flows in non-functional currencies and as a
hedge against foreign debt payable. Market value gains and
losses are recognized, and the resulting credit or debit offsets
foreign exchange gains or losses on the foreign debt. Foreign
F-15
A.L. PHARMA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
__________________
exchange contracts that are not recognized as hedges are
accounted for as foreign currency transactions.
Interest rate hedging transactions:
The Company enters into interest rate hedge agreements
which fix the interest rate to be paid for specified periods on
variable rate long-term debt. The differential to be paid or
received is recorded as of the value date and recognized over the
life of the agreements as an adjustment to interest expense.
Change in accounting method for income taxes:
In 1992, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS
109). SFAS 109 requires the utilization of the liability method
of accounting for deferred taxes based on enacted tax rates. The
cumulative effect of adopting SFAS 109 as of January 1, 1992
resulted in a non-cash increase to net income of $2,614 ($.12 per
share fully diluted).
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.
At December 31, 1994, the Company's share of the
undistributed earnings of its foreign subsidiaries (excluding
cumulative foreign currency translation adjustments) was
approximately $27,000. No provisions have been 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 taxes payable with respect to earnings which the
Company plans to repatriate.
Change in Accounting Method for Postretirement Benefits:
Effective January 1, 1993, the Company adopted Statement of
Financial Accounting Standards No. 106 "Employers' Accounting for
Postretirement Benefits Other than Pensions" (SFAS 106). The
statement requires accrual accounting for these benefits over the
service lives of the employees instead of expensing payments as
incurred. Adoption of SFAS 106 did not have a material impact on
the Company. (See Note 11.)
Accounting for Postemployment Benefits:
Effective January 1, 1994, the Company formally adopted
Statement of Financial Accounting Standards No. 112 "Employers'
Accounting for Postemployment Benefits" (SFAS 112). The
F-16
A.L. PHARMA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
__________________
statement requires accrual of postemployment benefits during the
employment period when certain conditions are met. The adoption
of SFAS 112 did not have a material impact on the Company.
Earnings per share:
Primary earnings per share is based upon the weighted
average number of common shares outstanding and commencing in
1994 warrants to purchase common shares will be included when
dilutive.
Fully diluted earnings per share reflect the dilutive
effect of stock options (not material for the computation of
primary) and assumes through October of 1992 that the 7 3/4%
Convertible Subordinated Debentures were converted into common
stock, with earnings being increased for interest expense
thereon, net of taxes. In October 1992, the Convertible
Subordinated Debentures were fully converted into Class A Common
Stock.
3. Transaction Expenses and Post-Combination Management
Actions
In connection with the acquisition of A.L. Oslo, the
Company incurred transaction expenses related to the combination
for fees paid to a special committee of the Board of Directors
(charged with evaluating the feasibility of the transaction), and
investment banking, legal, accounting and other transaction
expenses. In 1994 these expenses before tax totalled $3,100 of
which $2,600 were expensed in the fourth quarter of 1994.
Certain of these expenses are not deductible for tax purposes.
Similar expenses of approximately $1,000 were incurred in both
1993 and 1992 relating to a possible combination. Additionally,
to complete the acquisition, the Company refinanced its long-term
debt and incurred a loss on extinguishment of $683 ($1,102 loss
less $419 of income taxes or $.03 per share which has been
classified as an extraordinary item.)
Upon consummation of the acquisition the Company was
reorganized on a global basis into decentralized business
divisions. Each division was required to evaluate its business
to determine actions necessary to maximize the division's and the
Company's competitive position. As a result, in December 1994
the Board of Directors approved a plan and the Company announced
post-combination management actions which included exiting
certain businesses and product lines which did not fit into the
Company's new strategic direction, severing certain employees
employed in the businesses or product lines to be exited or whose
positions had become redundant as a result of the acquisition and
the sale or exiting of certain support facilities which also
became redundant as a result of the acquisition. A summary of
the charges resulting from these actions follows:
F-17
A.L. PHARMA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
__________________
F-18
A.L. PHARMA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
__________________
Pre-tax
Amount Description of Action
$3,750 Sever 53 employees primarily in the
pharmaceutical segment. All identified
employees were notified in the fourth quarter
of 1994. At year end $3,156 was accrued for
severance to be paid subsequent to December
31, 1994.
$8,800 Exit by sale or closing the U.S. tablet
business in 1995. Write-off includes
intangible assets of $5,800 and plant and
equipment of $3,000. No severance for tablet
employees was accrued based on management's
evaluation of the most probable exit plan
(sale). Should such exit plan fail to be
consummated an adjustment for additional
future costs could be required in 1995 if the
business is closed.
$5,000 Discontinue manufacturing and marketing of
Aquatic Animal Health antibiotics and an oral
health care product produced under license.
Write off includes $1,600 of tangible assets,
primarily machinery and equipment and
intangible assets of $3,400.
$900 Sell unimproved land which was to be the site
for manufacturing expansion. This land is no
longer needed as a result of the acquisition
resulting in a write down to fair market
value.
$600 Close duplicate sales offices and eliminate
duplicate distributors.
In addition, the Company made the decision to no longer
pursue research and development activities relating to the
colonic delivery of drugs. The Company accelerated contractually
required payments of $2,500 in the fourth quarter of 1994 and
does not intend to fund future activities in this area.
The expenses for transaction costs (excluding the
extraordinary item) and the post-combination actions described
are included in cost of goods sold ($450) and in selling, general
and administrative expenses ($24,200).
The net after tax effect of the transaction costs including
the extraordinary item was approximately $3,600 ($.17 per share)
and the net after tax effect of the post-combination actions
described above was approximately $14,500 ($.67 per share).
F-19
A.L. PHARMA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
__________________
4. Business and Product Line Acquisitions:
The following acquisitions were accounted for under the
purchase method and the accompanying financial statements reflect
results of operations from their respective acquisition dates.
In July 1994, the Company acquired the Wade Jones Company
("Wade Jones") headquartered in Lowell, Arkansas. Wade Jones is
a major distributor of poultry animal health products and also
manufactures and blends certain animal health products.
The purchase agreement required a purchase price of
approximately $8,350 including adjustments based on actual
financial position on the closing date. In addition, the
agreement provides for contingent payments based on future
product approvals. The excess of purchase price over the
underlying estimated fair value of net assets acquired based on a
preliminary allocation is being amortized over 20 years.
Had the acquisition of Wade Jones occurred as of January 1,
1993 pro forma revenues and net income (loss) would have been as
follows (unaudited):
Year Ended
December 31,
1994 1993
Revenues $481,525 $427,014
Income (loss) before extraordinary
items $ (1,488) $ 10,471
Net Income (loss) $ (2,168) $ 10,471
Net Income (loss) per common share
Primary $(.10) $.49
Fully diluted $(.10) $.49
The foregoing pro forma information is presented in
response to applicable accounting rules relating to business
acquisitions and is not necessarily indicative of results of
operations that would have been reported had the acquisition been
completed at the beginning of 1993.
On January 1, 1993, A.L. Oslo acquired the remaining
outstanding shares (50% ownership) of Norgesplaster A/S which it
did not already own from an unrelated third party for $2,100 in
cash. Norgesplaster is a Norwegian manufacturer of adhesive
bandages, surgical tapes and non-medical tapes. The excess of
the total cost of the acquisition over the fair value of the net
assets aggregated approximately $900 and is being amortized over
20 years.
F-20
A.L. PHARMA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
__________________
In March 1993, the Company's subsidiary, Barre, acquired a
pharmaceutical manufacturing facility in Lincolnton, North
Carolina ("Lincolnton"), including inventories, approved ANDAs
and other related assets for approximately $16,000 including
direct costs of acquisition. The purchase price was paid by cash
and by issuance of a $5,000 long-term promissory note bearing
interest at prime. The facility is designed to manufacture oral
liquids and topical ointments and creams. In addition, a multi-
year supply agreement was signed which provides for the sale from
Lincolnton, Barre, Able and NMC of pharmaceutical products to the
previous owner of Lincolnton, a major generic drug distributor.
In October 1992, the Company acquired the business, assets
and assumed liabilities of Able.
Able is a manufacturer and marketer of specialized
prescription and over-the-counter pharmaceuticals with an
emphasis on suppositories, and tablets for specialty markets.
The purchase agreement required an initial payment in cash and
provided for contingent payments based on FDA product approvals
received. The cost of the acquisition was approximately $17,900,
including direct costs of acquisition and actual contingent
payments of $6,000. The contingent payments for FDA approvals of
suppository products were recorded as intangible assets and are
being amortized over 15 years. No further contingent payments
are required in accordance with the terms of an agreement reached
with the prior owners in the fourth quarter of 1994. (See Notes
2 and 3 relating to the Company's decision to exit the U.S.
tablet business.)
During 1994 the Company recorded contingent payments based
on the results of operations required by the respective purchase
agreements of approximately $750 for NMC (acquired in 1990) and
$762 for Biomed Inc. (acquired in 1989). No further contingent
payments are required for Biomed.
Contingent payments are included in intangible assets when
earned and amortized over their remaining life. The excess of
purchase prices over the underlying fair value of net assets
acquired for Lincolnton and the suppository business of Able is
being amortized on a straight-line basis over 30 years.
5. Inventories:
Inventories consist of the following:
December 31,
1994 1993
Finished product $ 60,443 $ 46,698
Work-in-process 14,075 12,440
Raw materials 31,779 28,994
$106,297 $ 88,132
F-21
A.L. PHARMA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
__________________
At December 31, 1994 and 1993, approximately $47,300 and
$42,300 of inventories, respectively, are valued on a LIFO basis.
Such amounts exceeded the FIFO basis by $376 in 1994 and $1,566
in 1993.
6. Property, Plant and Equipment:
Property, plant and equipment, at cost, consist of the
following:
December 31,
1994 1993
Land $ 9,279 $ 8,507
Buildings and building
improvements 90,321 77,291
Machinery and equipment 191,701 157,080
Construction in progress 12,069 7,386
303,370 250,264
Less, accumulated depreciation 100,467 79,909
$202,903 $170,355
F-22
A.L. PHARMA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
__________________
7. Long-Term Debt:
Long-term debt consists of the following:
December 31,
1994 1993
U.S. Dollar Denominated:
1994 Credit Facility
Term Loan A - 7.625% $ 65,000
Term Loan B - 7.50% 72,000
Revolving Credit - 7.375% 18,000
Bank term loans $ 73,660
Lincolnton acquisition note 3,000 5,000
Industrial Development Revenue
Bonds:
Baltimore County, Maryland
(7.25%) 6,700 6,700
(6.875%) 1,200 1,200
Lincoln County, NC 6,000
Niagara County, NY
(70% of Prime) 100 154
Other, U.S. 4,809 2,046
Denominated in Other Currencies:
Mortgage notes payable (NOK) 32,496 30,029
Bank and agency development
loans (NOK) 16,979 15,577
Long term credit lines (NOK) 12,618
Lundbeck acquisition note
(DK) 6,056 10,404
Other, foreign 984 1,070
233,324 158,458
Less, current maturities 13,288 14,108
$220,036 $144,350
On September 28, 1994, the Company signed a $185,000 credit
agreement ("1994 Credit Facility") with a consortium of banks
arranged by the Union Bank of Norway and Den norske Bank A.S. The
agreement provided for the refinancing of outstanding
indebtedness, the acquisition of A.L. Oslo (including related
transaction costs, fees and expenses) and for general corporate
purposes.
F-23
A.L. PHARMA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
__________________
The credit agreement provided for the loans as follows:
Term Loan Term Loan Revolving
Credit
(A) (B) Facility
Maximum Amount $65,000 $72,000 $48,000
Term 7 years 5 years 4 years 3
months
Interest Rate Eurodollar Eurodollar Eurodollar
rate
(Variable) rate plus rate plus plus 1.125%
1.375% 1.25%
Amount of 5% to 9% of 5% to 10% of Revolving
repayment loan amount loan amount 100% at
per year per year maturity
commencing in commencing in subject to
1996 and 30% 1996 and 30% extension
at final at final
maturity maturity
On October 3, 1994, concurrent with the acquisition of A.L.
Oslo the Company borrowed $142,000 under the 1994 Credit Facility
and subsequently repaid bank term loans of $71,279 and line of
credit debt of $30,620. The repayment of the bank term loans
resulted in a loss on repayment of $1,102 ($683 net of tax). The
loss has been classified as an extraordinary item.
In connection with the purchase of the Lincolnton facility,
the Company issued the former owner a promissory note of $5,000
bearing interest at prime. ($3,000 at 8.5% is outstanding as of
December 31, 1994.) Payment of the note can vary under the terms
of the agreement but is expected to require repayment of $1,500
in both 1995 and 1996.
In August 1994, the Company issued Industrial Development
Revenue Bonds for $6,000 in connection with the expansion of the
Lincolnton, North Carolina plant. The bonds require monthly
interest payments at a floating rate (5.75% at December 31, 1994;
3.712% cumulative weighted average for 1994) 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 from August 1996 to August 2004 and $300
thereafter through August 2009. To account for the unexpended
bond proceeds at December 31, 1994, the Company has classified
$1,287 of cash, which is restricted for use in the plant
expansion, as construction in progress. Plant and equipment with
F-24
A.L. PHARMA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
__________________
an approximate net book value of $5,800 serve as collateral for
this loan.
The Baltimore County Industrial Development Revenue Bonds
are payable in varying amounts through 2009. Plant and equipment
with an approximate net book value of $12,900 collateralize the
Baltimore County Industrial Revenue Bonds.
The mortgage notes payable denominated in Norwegian Kroner
(NOK) were originally issued in connection with the construction
of a pharmaceutical facility in Lier, Norway and are
collateralized by this facility (net book value of $38,200 at
December 31, 1994) and the Oslo, Norway ("Skoyen") facility.
(See Note 12.) 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, 1994 and 1993 was 9.6% and 11.3%,
respectively. In 1995 and 1996, debt of approximately $6,000 and
$15,500, respectively, will be subject to interest rate
adjustments based on the then current rates. The tranches are
repayable in semiannual installments through 2021. Yearly
amounts payable vary between $1,120 and $1,950.
A.L. Oslo has various loans with government development
agencies and banks which have been used for acquisitions and
construction projects. Such loans are collateralized by the
Skoyen property and require yearly payments made semiannually
through 1998 of between $721 and $1,744 and a final payment of
$11,568 in 1999. The weighted average interest rate of the loans
at December 31, 1994 and 1993 was 6.9% and 8.8%, respectively.
The banks and agencies have the option to extend payment in 1999.
The $6,056 outstanding debt to Lundbeck represents the
present value of the remaining installment due in Danish Kroner
(DK) payable on the first business day of 1995. A.L. Oslo has
hedged the currency exposure arising from the Lundbeck
installments by purchasing forward exchange contracts which
mature on the same date as the DK installment is due. This debt
has been accounted for using the interest method applying an
interest rate of 10.00% Payments on this debt have been
guaranteed via a guarantee fee of 0.75% per annum. This loan was
repaid on January 2, 1995.
As of December 31, 1994, A.L. Oslo had approximately
$10,300 available in NOK in three year line of credit agreements
with two banks. The credit lines require certain equity, cash
flow and quick ratios, as defined, be maintained.
The 1994 Credit Facility has a number of loan covenants,
the most restrictive of which is the equity to asset ratio.
F-25
A.L. PHARMA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
__________________
Certain NOK loans have loan covenants which apply directly to
A.L. Oslo.
F-26
A.L. PHARMA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
__________________
Maturities of long-term debt during each of the next five
years and thereafter are as follows:
Year ending December 31,
1995 $13,288
1996 12,883
1997 19,110
1998 28,104
1999 89,703
Thereafter 70,236
$233,324
8. Short-Term Debt:
Short-term debt consists of the following:
December 31,
1994 1993
Domestic $42,096 $39,107
Foreign 19,100 16,426
$61,196 $55,533
At December 31, 1994, the Company and its domestic
subsidiaries have available bank lines of credit totaling
$61,250. Borrowings under these lines are made for periods
generally less than three months and bear interest from 6.625% to
8.50% at December 31, 1994. At December 31, 1994, the amount of
the unused lines totaled $19,154.
At December 31, 1994, the Company's foreign subsidiaries
have available lines of credit with various banks totaling
$26,846 ($23,963 in Europe and $2,883 in the Far East). Drawings
under these lines are made for periods generally less than three
months and bear interest at December 31, 1994 at rates ranging
from 6.25% to 7.13%. At December 31, 1994, the amount of the
unused lines totaled $7,746 ($6,731 in Europe and $1,015 in the
Far East).
The weighted average interest rate on short-term debt
during the years 1994, 1993 and 1992 was 5.9%, 5.7% and 8%,
respectively.
F-27
A.L. PHARMA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
__________________
9. Income Taxes:
Domestic and foreign income from continuing operations
before income taxes was $158 and $1,578, respectively in 1994,
$13,348 and $3,750, respectively in 1993, and $11,104 and $9,608,
respectively, in 1992. 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,
1994 1993 1992
Current:
Federal $6,246 $4,104 $3,224
Foreign 1,389 1,595 1,301
State 1,310 777 685
8,945 6,476 5,210
Deferred:
Federal (5,018) 748 825
Foreign 142 (397) 932
State (630) 142 194
(5,506) 493 1,951
Provision for
income taxes $3,439 $6,969 $7,161
A reconciliation of the statutory U.S. federal income tax
rate to the effective rate follows:
Years Ended December 31,
1994 1993 1992
Provision for income taxes at
statutory rate 35.0% 35.0% 34.0%
State income tax, net of federal
tax benefit 25.5% 3.5% 2.8%
Higher (lower) taxes on foreign
earnings, net 14.2% (4.4%) (2.4%)
Tax credits (0.1%) (0.4%) (.3%)
Non-deductible costs, principally
depreciation and amortization
related to acquired companies 78.1% 7.1% 5.0%
Capitalized combination costs 49.4%
Reduction in Danish tax rates (4.9%)
Non-deductible interest expense on
conversion of convertible debentures 1.9%
Other (4.0%) (1.5%)
Provision for income taxes 198.1% 40.8% 34.6%
F-28
A.L. PHARMA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
__________________
Deferred tax liabilities (assets) are comprised of the
following:
Year Ended
December 31,
1994 1993
Accelerated depreciation and amortization
for income tax purposes $22,157 $23,920
Excess of book basis of acquired assets
over tax bases 9,200 9,052
Differences between inventory valuation
methods used for book and tax purposes
(Denmark) 2,186 2,136
Other 40 374
Gross deferred tax liabilities 33,583 35,482
Accrued liabilities and other reserves (6,115) (4,183)
Pension liabilities (1,250) (701)
Loss carryforwards (801) (610)
Other (1,035) (882)
Gross deferred tax assets (9,201) (6,376)
Deferred tax assets valuation allowance 801 610
Net deferred tax liabilities $25,183 $29,716
As of December 31, 1994, the Company has state loss
carryforwards of approximately $8,898, which are available to
offset future taxable income. These carryforwards will expire
between the years 1999 and 2001. Accordingly, the Company has
recognized a deferred tax asset relating to these carryforwards.
The Company has established a valuation allowance for the entire
amount of these carryforwards.
Danish tax law prior to 1991 allowed the Company's Danish
subsidiaries to appropriate an investment fund of up to 25% of
annual taxable income adjusted for certain items. The
appropriation is tax deductible in the year it was made. Fifty
percent of the amount appropriated must be deposited in an
interest-yielding blocked bank account. Blocked funds are
released with the acquisition of the qualifying property and
equipment. Included in "other assets and deferred charges" as of
December 31, 1994 and 1993 is $1,481 and $1,988, respectively, of
such blocked funds.
F-29
A.L. PHARMA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
__________________
10. Pension Plans:
Domestic:
Prior to July 1, 1994, the Company maintained two qualified
noncontributory, defined benefit pension plans ("A.L. Plan" and
"Subsidiary Plan") covering the majority of its domestic
employees. Effective July 1, 1994, the Company amended the A.L.
Plan to include certain subsidiary employees and merged the
Subsidiary Plan into the A.L. Plan. The benefits are based on
years of service and the employee's compensation during the last
five years of service. The Company's funding policy is to
contribute annually an amount that can be deducted for federal
income tax purposes. Plan assets are invested in equities, long-
term government securities and bonds.
Net pension cost for 1994, 1993 and 1992 included the
following components:
Years Ended December 31,
1994 1993 1992
Service cost $1,047 $ 939 $ 794
Interest cost 856 693 549
Actual return on plan assets 105 (375) (451)
Net amortization and deferral (502) 106 160
$1,506 $1,363 $1,052
F-30
A.L. PHARMA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
__________________
The following tables set forth the plan's funded status as
of December 31, 1994 and 1993 (1993 amounts are combined to be
consistent with the 1994 presentation):
Accumulated
Benefits Exceed
Assets
1994 1993
Accumulated benefit obligation:
Vested $ 5,388 $ 5,838
Nonvested 770 520
$ 6,158 $ 6,358
Projected benefit obligation $ 8,767 $ 9,652
Fair value of plan assets (5,658) (5,986)
Unrecognized net loss (2,705) (2,551)
Unrecognized prior service cost 1,540 (76)
Unrecognized net transition
obligation (274) (304)
Additional minimum liability -- 354
Accrued pension costs $ 1,670 $ 1,089
The assumptions used were as follows:
1994 1993 1992
Weighted average discount rate 8.5% 7.25% 8.0%
Rate of increase in compensation
rate 5.0% 5.0% 5.0%
Expected long-term rate of return
on plan assets 8.0% 8.0% 8.0%
In 1993, the Company incurred a settlement loss of $322 as a
result of a number of retirees accepting lump sum settlements in
lieu of receiving pension benefits.
In addition, the Company has unfunded supplemental executive
pension plans providing additional benefits to a few highly
compensated employees. For 1994 such pension expense was
approximately $60 and the year end accrual was $115. Prior year
expenses and accruals were not material.
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 10%) and provide for a Company match based
on service (maximum 6%). The Company's contributions to these
F-31
A.L. PHARMA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
__________________
plans were approximately $700, $500 and $400 in 1994, 1993 and
1992, respectively.
Europe:
A.L. Oslo has defined benefit plans which cover the majority
of its employees. These pension commitments are funded through a
collective agreement with a Norwegian insurance company and A.L.
Oslo makes annual contributions to the plan in accordance with
Norwegian insurance principles and practices. In addition to the
annual premiums, A.L. Oslo has made prepayments to specific
premium funds. These premium funds are used to cover ordinary
future annual premiums. The pension plan assets are deposited in
the insurance company's general account which is principally
invested in fixed income securities.
A.L. Oslo also maintains a direct pension arrangement with
certain employees. These pension commitments are paid out of
general assets and the obligations are accrued but not prefunded.
Net pension cost for 1994, 1993 and 1992 included the following
components:
1994 1993 1992
Service cost $1,009 $ 729 $ 658
Interest cost 766 895 797
Actual return on plan assets (340) (12) (467)
Net amortization and deferral (178) (478) (22)
$1,257 $1,134 $ 966
F-32
A.L. PHARMA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
__________________
The following tables set forth the plans' funded status as of
December 31, 1994 and 1993:
Assets Exceed Accumulated
Accumulated Benefits
Benefits Exceed Assets
1994 1993 1994 1993
Accumulated benefit
obligation:
Vested $ 7,337 $ 5,919 $ 1,455 $ 1,070
Nonvested 418 90 77
$ 7,755 $ 6,009 $ 1,455 $ 1,147
Projected benefit
obligation $12,041 $ 9,125 $ 1,503 $ 1,207
Fair value of plan
assets (8,978) (7,616)
Unrecognized net gain
(loss) 2,082 2,356 (7) 109
Unrecognized prior
service cost (856) (811) (459) (472)
Unrecognized net
transition obligation (1,409) (1,360) (36) (36)
Additional minimum
liability 454 339
Accrued pension costs $ 2,880 $ 1,694 $ 1,455 $ 1,147
The assumptions used were as follows:
1994 1993 1992
Weighted average discount rate 7.0% 7.0% 8.5%
Rate of increase in compensation
rate 3.5% 3.5% 5.0%
Expected long-term rate of return
on plan assets 7.0% 7.0% 8.0%
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 $1,900, $1,800 and $2,000 in 1994, 1993 and 1992,
respectively.
F-33
A.L. PHARMA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
__________________
11. Postretirement Benefits:
The Company has an unfunded postretirement medical and
nominal life insurance plan covering certain domestic employees
included in the A.L. Plan as of January 1, 1993. The plan will
not be extended to any additional employees. Retired employees
are required to contribute for coverage as if they were active
employees.
The Company adopted SFAS 106 on January 1, 1993 and elected
to recognize the change on a delayed recognition basis.
Accordingly, the transition obligation of $1,079 will be
amortized over twenty years. The discount rate used in
determining the 1994 and 1993 expense was 7.25% and 8.0%,
respectively. The discount rate used in determining the
accumulated post retirement obligation as of December 31, 1994
and 1993 was 8.5% and 7.25%, respectively. The health care cost
trend rate was 9.5% declining to 5.0% over a ten year period,
remaining level thereafter.
The unfunded plan is recognized at December 31, 1994 and
1993 as follows:
1994 1993
Accumulated postretirement benefit obligation
Retirees $ 277 $ 327
Fully eligible active participants 180 184
Other active participants 819 849
1,276 1,360
Unrecognized estimated net loss 102 (137)
Unrecognized transition obligation (971) (1,025)
Accrued postretirement benefit cost $ 407 $ 198
The net periodic postretirement benefit cost included the
following components. Prior year costs expensed as incurred were
not material.
1994 1993
Service cost $102 $ 94
Interest cost 97 85
Amortization of
transition obligation 54 54
$253 $233
F-34
A.L. PHARMA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
__________________
12. Transactions With A. L. Industrier:
Years Ended December 31,
1994 1993 1992
Sales to and commissions received
from A.L. Industrier $2,805 $2,855 $1,716
Compensation received for
management services rendered to
A.L. Industrier $ 854 $ 876 $1,162
Inventory purchased from and
commissions paid to A.L.
Industrier $ 291 $ 580 $1,736
Net interest received from A.L.
Industrier $ 401 $ 850 $ 851
The acquisition of A.L. Oslo has been accounted for as a
pooling of interests. Therefore, prior period related party
transactions are now intercompany and eliminated in the
consolidation. Transactions between A.L. Oslo and A.L.
Industrier which were formerly intercompany are now related party
transactions. (See Note 1.)
As of December 31, 1994 and 1993 there was a net current
receivable of $673 and $1,141, respectively, from A.L.
Industrier. As of December 31, 1993, included in "other assets
and deferred charges" was a long-term interest bearing receivable
of $5,804 from A.L. Industrier which was repaid in 1994. The
rate of interest at December 31, 1993 was 13%.
The Company and A.L. Industrier have an administrative
service agreement whereby the Company is required to provide
management services to A.L. Industrier with an initial term
through January 1, 1997. The agreement provides for payment
equal to the direct and indirect cost of providing the services
subject to a minimum amount in the initial term. The agreement
may be terminated by either party upon six months notice after
the initial term.
In addition, in connection with the agreement to purchase
A.L. 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 agreement also permits the Company to use
the Skoyen facility as collateral on existing debt for five
years. 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
F-35
A.L. PHARMA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
__________________
renewable at the then fair rental value at the option of the
Company for four consecutive five year terms.
13. Contingent Liabilities, Litigation and Commitments:
In November 1992, a class action complaint was filed against
the Company and certain senior executives related to alleged
losses as a result of a decline in the Company's stock price in
November 1992. In the fourth quarter of 1993 the Company settled
the lawsuit while continuing to deny all facts and liabilities in
the matter. The gross settlement amount was $2,300 with a
significant amount covered by insurance. The settlement amount
was paid prior to December 31, 1993.
The Company and its subsidiaries are, from time to time,
involved in 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 pending suits should
not have a material adverse effect on the consolidated financial
position of the Company.
In connection with a 1991 product line acquisition, the
Company entered into a ten-year manufacturing agreement which
requires the Company to purchase a yearly minimum quantity of
feed additives 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 current cost of the yearly minimum quantity is
approximately $6,000 and the fixed cost portion is approximately
20%. For 1994 and prior years, the Company has purchased in
excess of the minimum quantities.
14. Leases:
Rental expense under operating leases for 1994, 1993 and
1992 was $5,513, $5,099 and $4,157, 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,
1995 $ 4,200
1996 3,200
1997 2,600
1998 2,400
1999 1,800
Thereafter 5,000
$19,200
F-36
A.L. PHARMA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
__________________
15. Stockholders' Equity:
The holders of the Company's Class B Common Stock, (totally
held by A. L. Industrier at December 31, 1994) 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.
In connection with the acquisition of A.L. Oslo the Company
issued warrants to purchase 3,600,000 shares of Class A Common
stock for $21.945 per share through January 3, 1999. The
warrants generally are exercisable on the earlier of October 3,
1995 or the date the registration statement relating to such
warrants becomes effective. (See Note 1.)
The number of authorized shares of Preferred Stock is
500,000; the number of authorized shares of Class A Common Stock
is 40,000,000; and the number of authorized shares of Class B
Common Stock is 15,000,000.
16. 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 Frequent Entered into to sell or
exchange contracts buy both fixed and
anticipated cash flows in
non-functional
currencies.
Interest rate Occasional Entered into to fix
hedge agreements interest rate for
specified periods on
variable rate long-term
debt.
At December 31, 1994 and 1993, the Company's European
subsidiaries had foreign currency contracts outstanding with a
notional amount of approximately $19,000. 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 expired by February 1995. At December 31, 1994 there
were no other derivative contracts outstanding.
F-37
A.L. PHARMA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
__________________
Counterparties to derivative agreements are major financial
institutions. Management believes the risk of incurring losses
related to credit risk is remote.
During 1991 and 1992, prior to its acquisition by the
Company A.L. Oslo, whose functional currency is the Norwegian
Kroner (NOK), entered into U.S. Dollar loans and through foreign
currency derivative contracts effectively denominated a
significant portion of its debt in U.S. Dollars. The favorable
movement of the NOK compared to the U.S. Dollar in 1992 resulted
in foreign exchange gains of approximately $2,400 in 1992. These
contracts were terminated in 1992.
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 approximate fair value because a significant portion of
the underlying debt is at variable rates and reprices frequently.
17. Stock Options and Employee Stock Purchase Plan:
Under the Company's 1983 Incentive Stock Option Plan, as
amended (the "Plan"), the Company may grant options to key
employees to purchase shares of Class A Common Stock. In May
1993 the Company's stockholders approved an increase, from
1,500,000 to 1,650,000, in the maximum number of shares available
for grant. 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. 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. This right must be exercised at
the same time the stock option is exercised and is limited to one
half of the total number of shares being exercised. Included in
options outstanding at December 31, 1994 are options to purchase
1,875 shares with cash appreciation rights, all 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, 1994 and 1993,
options for 299,373 and 482,748 shares, respectively, were
available for future grant.
F-38
A.L. PHARMA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
__________________
The table below summarizes the activity of the Plan:
Shares Option Shares
Outstanding Price Exercisable
Balance at December 31, 1991 460,535 $ 4.58 - $17.63 177,971
Granted in 1992 92,500 $19.50 - $19.50
Canceled in 1992 (26,751) $ 7.75 - $16.62
Exercised in 1992 (81,823) $ 4.58 - $16.62
Balance at December 31, 1992 444,461 $ 4.58 - $19.50 195,555
Granted in 1993 122,500 $21.38 - $27.13
Canceled in 1993 (20,187) $15.00 - $22.13
Exercised in 1993 (56,874) $ 4.58 - $16.62
Balance at December 31, 1993 489,900 $ 4.58 - $27.13 226,155
Granted in 1994 207,000 $13.50 - $16.87
Canceled in 1994 (23,625) $ 8.75 - $23.13
Exercised in 1994 ( 1,700) $ 8.75 - $ 8.75
Balance at December 31, 1994 671,575 $ 4.58 - $27.13 319,703
The Company implemented an Employee Stock Purchase Plan on
January 1, 1991. Eligible employees of the Company and its
domestic subsidiaries 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. Shares are issued on the last day of
each calendar quarter. The Company's contributions to the plan
were approximately $156, $140 and $115 in 1994, 1993 and 1992,
respectively.
F-39
A.L. PHARMA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
__________________
18. Supplemental Data:
Years Ended December 31,
1994 1993 1992
Allowance for doubtful accounts
receivable at year end $ 4,897 $ 2,983 $ 2,965
Research and development
expense 32,497 24,032 20,559
Depreciation expense 18,342 16,096 14,513
Amortization expense 8,431 7,746 8,158
Interest cost incurred 16,077 15,258 18,748
Other income (expense) net:
Interest income 1,432 1,915 1,740
Foreign exchange gains
(losses), net (34) 163 2,522
Other, net (285) (198) (325)
$ 1,113 $ 1,880 $ 3,937
Supplemental cash flow information:
Cash paid for interest
(net of amount capitalized) $15,687 $15,025 $18,514
Cash paid for income taxes 9,228 8,848 3,764
Supplemental schedule of
noncash investing and
financing activities:
Warrants issued $ 6,552
Conversion of debentures to
common stock, net $59,481
Fair value of assets acquired $19,437 $36,461 $18,699
Cash paid 13,733 17,280 11,660
Liabilities assumed $ 5,704 $19,181 $ 7,039
19. Discontinued Human Nutrition Business:
In September 1992, Dumex completed the disposition of the
remaining assets and operations of the Company's Human Nutrition
business. As a result, the Company has reported the Human
Nutrition business as a discontinued operation in the
Consolidated Statement of Operations.
The table below sets forth a summary of selected components
relating to the results of the Human Nutrition business. In
F-40
A.L. PHARMA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
__________________
accordance with applicable accounting requirements, the only
amounts shown in the accompanying Consolidated Statement of
Operations are the amounts shown below as "Income from
discontinued operations, net of tax".
Year ended
December 31,
1992
Revenues $35,496
Pre-tax Income:
Operations $ 1,067
Sale of trademarks,
intangibles and option
fee 4,958
6,025
Provision for foreign
income taxes
Current 404
Deferred 812
Income from
Discontinued operations,
net of tax $ 4,809
The provision for income taxes reflects a rate lower than
the statutory rate due to favorable tax treatment in Denmark of
capital gains.
20. Information Concerning Business Segments and Geographic
Operations:
The Company currently conducts its business operations in
two business segments: (1) Human Pharmaceuticals and (2) Animal
Health. The Human Pharmaceuticals business includes the U.S.
Pharmaceutical Division, International Pharmaceuticals Division
including Oral health care, and Fine Chemicals Division (i.e.
bulk antibiotics). The Animal Health business consists of the
Animal Health Division and the Aquatic Animal Health Division.
The Company's operations outside the United States are conducted
primarily in Europe by the Company's manufacturing subsidiaries
in Norway and Denmark.
In 1994 the Company combined with A. L. Oslo and was
required to restate its prior years financial statements. In
addition, the operating structure of the Company was reorganized
to include Fine Chemicals as part of Human Pharmaceuticals
instead of being part of the Animal Health business. As a result
of these changes 1993 and 1992 segment data were restated to
include A. L. Oslo and combine Fine Chemicals with Human
Pharmaceuticals.
F-41
A.L. PHARMA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
__________________
Depre-
ciation
and
Identi- Amorti- Capital
Total Operating fiable zation Expendi-
1994 Revenue Income(4) Assets Expense tures
Business segments:
Human
Pharmaceuticals
("HP") $329,113 $(3,850) $454,685 $20,900 $25,201
Animal Health
("AH") 141,077 28,532 122,804 5,657 18,134
Unallocated 615 (8,708) 14,829 216 991
Eliminations (1,542) 4
$469,263 $15,978 $592,318 $26,773 $44,326
Geographic:
United States $303,270 $ 6,774 $362,359
Europe and Other 179,714 9,180 230,722
Eliminations (13,721) 24 (763)
$469,263 $15,978 $592,318
1993
Business segments:
Human
Pharmaceuticals(1) $219,789 $(2,584) $326,429 $12,829 $12,828
Restatement and
Reclassification,
net(3) 64,950 11,148 101,943 5,951 3,802
HP restated 284,739 8,564 428,372 18,780 $16,630
Animal Health (1) 119,708 29,987 93,160 4,914 7,723
Restatement and
Reclassification,
net(3) (975) (1,139) (6,916) (23) (579)
AH restated 118,733 28,848 86,244 4,891 7,144
Unallocated (1) (6,479) 3,613 63 46
A.L. Oslo -
unallocated 470 (774) 9,388 108 224
Eliminations (1,267) 55
$402,675 $30,214 $527,617 $23,842 24,044
Geographic:
United States (1) $249,301 $17,404 $319,854
Europe and Other (2) 164,075 12,853 208,618
Eliminations (10,701) (43) (855)
$402,675 $30,214 $527,617
F-42
A.L. PHARMA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
__________________
Depre-
ciation
and
Identi- Amorti- Capital
Total Operating fiable zation Expendi-
Revenue Income(4) Assets Expense tures
1992
Business segments:
Human
Pharmaceuticals(1) $195,380 $ 8,420 $270,867 $12,202 $ 7,873
Restatement and
Reclassification,
net(3) 58,177 9,522 110,899 5,989 7,115
HP restated 253,557 17,942 381,766 18,191 $14,988
Animal Health (1) 100,308 24,060 92,236 4,116 6,755
Restatement and
Reclassification,
net(3) 4,061 (1,870) (11,679) 165 (634)
AH restated 104,369 22,190 80,557 4,281 $ 6,121
Unallocated (1) (3,986) 8,621 57 69
A.L. Oslo -
unallocated 1,282 (863) 10,069 142 147
Eliminations (576) 26
$358,632 $35,309 $481,013 $22,671 21,325
Geographic:
United States (1) $197,645 $18,557 $264,620
Europe and
Other (2) 172,090 16,766 217,840
Eliminations (11,103) (14) (1,447)
$358,632 $35,309 $481,013
1. As reported
2. 1993 and 1992 amounts increase compared to previously reported due to
the restatement.
3. Restatement and reclassification, net - includes the results of A.L.
Oslo and the reclassification of the Fine Chemicals Division from the
Animal Health Segment to the Human Pharmaceutical Segment.
4. 1994 operating income includes charges for post combination actions
related to the acquisition of A.L. Oslo and transaction expenses as
follows:
Human Pharmaceuticals $19,000
Animal Health 1,950
Unallocated 3,700
$24,650
F-43
A.L. PHARMA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
__________________
21. Selected Quarterly Financial Data (unaudited):
Quarter
Total
1994(a) First Second Third Fourth Year
Total revenue $107,380 $110,958 $117,438 $133,487 $469,263
Gross profit 45,230 45,504 48,261 54,725 193,720
Income loss before
extraordinary item 3,551 2,807 4,005 (12,066) (1,703)
Net income (loss)(b) $ 3,551 $ 2,807 $ 4,005 $(12,749) $(2,386)
Earnings per common share:
Primary
Income (loss) before
extraordinary item $ .16 $ .13 $ .19 $ (.56) $ (.08)
Net income (loss) $ .16 $ .13 $ .19 $ (.59) $ (.11)
Fully diluted
Income (loss) before
extraordinary item $ .16 $ .13 $ .19 $ (.56) $ (.08)
Net income (loss) $ .16 $ .13 $ .19 $ (.59) $ (.11)
1993(a)
Total revenue $ 94,617 $ 97,673 $ 97,418 $112,967 $402,675
Gross profit 43,179 42,668 38,402 45,003 169,252
Net income $ 3,952 $ 2,877 $ 829 $ 2,471 $10,129
Earnings per common share:
Primary
F-44
A.L. PHARMA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
__________________
Net income $ .18 $ .13 $ .04 $ .11 $ .47
Fully diluted
Net income $ .18 $ .13 $ .04 $ .11 $ .47
(a) Financial information for all quarters reflects the retroactive
effect of the October 1994 combination, accounted for as a pooling
of interests, with A.L. Oslo (See Note 1.)
(b) The fourth quarter 1994 reflects an extraordinary item for the
write off of deferred loan costs of $683, net of tax, related to
the early extinguishment of debt. The fourth quarter also
includes expenses for transaction costs and related charges for
post-combination actions taken by management. Such expenses
reduced net income by $17,025 ($.79 per share). (See Note 3.)
F-45
A.L. PHARMA INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In thousands of dollars)
Column A Column B Column C Column D Column E
Additions
Balance at Charged (Credited) to Balance
Beginning Costs and Other At End
Description of Period Expenses Accounts Deductions of Period
Reserve for doubtful accounts:
Year ended December 31,
1994 $ 2,983 $1,361 $ 261 * ($ 208) ** $4,897
1993 $ 2,965 $ 502 ($ 148) * ($ 336) ** $2,983
1992 $ 2,886 $ 588 ($ 56) * ($ 453) ** $2,965
* Includes $65 and $250 in 1993 and 1992, related to business acquisitions and ($ ),
($152) and ($150) in 1994, 1993 and 1992, respectively, related to foreign currency
translation adjustments. Includes ($61) and ($163) of cash collected in 1993 and 1992,
respectively, on previously written off accounts.
** Accounts written off to reserve.
F-46