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, 1996
ALPHARMA INC.
(Exact name of registrant as specified in its charter)
Delaware 22-2095212
(State of Incorporation) (I.R.S. Employer Identification No.)
One Executive Drive, Fort Lee, New Jersey 07024
(Address of principal executive offices) zip code
(201) 947-7774
(Registrant's Telephone Number Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Name of each Exchange on
Title of each Class which Registered
Class A Common Stock, New York Stock Exchange
$.20 par value
Warrants to Purchase Shares New York Stock Exchange
of Class A Common Stock
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 1, 1997 was
$182,777,000.
The number of shares outstanding of each of the Registrant's
classes of common stock as of March 1, 1997 was:
Class A Common Stock, $.20 par value - 13,539,060 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 May 28, 1997 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
Overview
Alpharma Inc. (the "Company") is a multinational
pharmaceutical company which develops, manufactures and markets
specialty generic and proprietary human pharmaceutical and animal
health products.
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 under the
trading symbol "ALO".
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 reorganized its business 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("USPD"),
International Pharmaceuticals("IPD") and Fine Chemicals ("FCD").
The Animal Health segment consists of two operating divisions,
Animal Health ("AHD") and Aquatic Animal Health("AAHD").
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 (which changed its name in January 1996 to
Alpharma AS, hereinafter referred to as "Alpharma Oslo"). The
Company then acquired the shares of Alpharma 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"). The Warrants have an exercise
price of $21.945 (subject to change as set forth below), and
expire on January 3, 1999. Warrants to purchase 2,450,246 shares
of Class A common stock (out of the 3,600,000 total) became
exercisable after October 3, 1995 with the remainder to become
exercisable after October 3, 1997. The Company filed a
registration statement with the Securities and Exchange
Commission ("SEC"), which became effective on September 28, 1995,
concerning the Warrants and warrant shares exercisable in 1995.
In addition, the Company listed such Warrants and warrant shares
for trading and quotation on the New York Stock Exchange as of
October 9, 1995.
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.
Industrier's holdings of the Company's Class B Common Stock
account for approximately 37.8% of the Company's total common
stock outstanding at December 31, 1996.
On February 10, 1997, the Company entered into a
subscription agreement with A.L. Industrier, under which A.L.
Industrier irrevocably committed to purchase 1,273,438 newly
issued shares of the Company's Class B Common Stock at $16.34 per
share. The Board of Directors of the Company also approved a
distribution to its Class A Common shareholders of special rights
(the "Rights") to purchase for $16.34 per share approximately one
share of Class A Common Stock for every six shares of Class A
Common Stock held by such holders. The distribution of the Rights
will be made with a prospectus (subject to registration of the
rights with the SEC). Although the details of the Rights have not
been finalized, the Rights will be transferable and will have a
term expiring no later than November 30, 1997. A.L. Industrier's
purchase of the Class B Common Stock will occur upon termination
of the Rights. Assuming the Rights are fully exercised, the new
equity issued pursuant to these events will maintain the current
ownership percentages between the Class A and Class B
Shareholders.
Upon issuance of the Rights, the exercise price of the
outstanding Warrants will be adjusted downward and amount of
shares purchasable thereunder will be adjusted upward pursuant to
the governing warrant agreement.
Statements in this Report on Form 10-K which are not
historical facts, so-called "forward looking statements" are made
pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. Investors are cautioned that all
forward-looking statements involve risks and uncertainties,
including those detailed in the narrative description of the
Company's business set forth below and in "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of
Operations".
Financial Information About Industry Segments
The Company's two business segments are (1) Human
Pharmaceuticals and (2) Animal Health. The Company's segments and
their operating divisions contributed the following percentages
of revenues.
1996 1995 1994
USPD 31% 33% 37%
IPD 29% 28% 26%
FCD 7% 8% 7%
Human Pharmaceuticals 67% 69% 70%
Animal Health * 33% 31% 30%
Total Revenues 100% 100% 100%
* Predominantly sales of AHD.
For additional financial 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")
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
three wholly-owned subsidiaries: Alpharma USPD Inc. ("AUI";
formerly called Barre-National, Inc.), NMC Laboratories, Inc.
("NMC") and ParMed Pharmaceuticals, Inc. ("ParMed"). In August
1996, the USPD sold the tablet business of its Able Laboratories,
Inc. ("Able") subsidiary (including its leased manufacturing
facility in South Plainfield, New Jersey) to an unrelated third
party and moved production of Able's line of suppository products
to its facility in Lincolnton, North Carolina.
AUI, acquired in October 1987, is the leading U.S.
manufacturer of liquid generic pharmaceutical and over-the-
counter ("OTC") products. NMC, acquired in August 1990, is a
specialized manufacturer of pharmaceutical creams and ointments
for topical use. ParMed, acquired in May, 1986, distributes a
line of over 1,600 generic prescription and OTC pharmaceutical
product presentations (including those manufactured by USPD as
well as those of third parties) primarily to U.S. independent
retail pharmacies. They also provide, under the "Impact
Marketing" name, certain custom marketing services (such as
telemarketing, order processing and distribution) to the
pharmaceutical and certain other industries.
In March 1993, AUI acquired a pharmaceutical manufacturing
facility in Lincolnton, North Carolina ("Lincolnton") including
inventories, Abbreviated New Drug Applications ("ANDA") and other
related assets. The facility is designed to manufacture topical
creams and ointments and suppositories. The facility was
expanded in 1994 and the USPD expects this facility to grow and
become more efficient as it realigns production capacity in
accordance with the accelerated production consolidation plan
announced in May 1996. Such plan includes the discontinuation of
all activities in its facilities in Glendale, New York and South
Plainfield, New Jersey and the transfer of production to
Lincolnton. The move is expected to be complete by mid-1997 and
requires FDA approval for each ANDA transferred.
Generic pharmaceuticals are the chemical and therapeutic
equivalents of brand-name drugs. Although typically less
expensive, they are required to meet the same governmental
standards as brand-name drugs and must receive approval from the
U.S. Food and Drug Administration ("FDA") prior to manufacture
and sale. Generic pharmaceuticals may be manufactured and
marketed only if relevant patents (and any additional government-
mandated market exclusivity periods) have expired. Generic
pharmaceutical sales have increased in recent years, due in part
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; (iii)
increased acceptance of generic drugs by physicians, pharmacists
and consumers; and (iv) the increasing number of formerly
patented drugs which have become available to off-patent
competition.
The USPD (excluding its ParMed operation) manufactures
and/or markets approximately 175 generic products, primarily in
liquid, cream, ointment and suppository dosage forms. Each
product represents a different formulation or chemical entity.
Products are sold in over 300 product presentations under the
"Alpharma", "Barre" or "NMC" labels and private labels.
Prescription products are sold by a divisional sales force. OTC
products are sold by the divisional sales force as well as by
certain independent sales representatives.
Liquid Pharmaceuticals: The USPD is the leading U.S.
manufacturer of generic pharmaceutical products in liquid
form with approximately 110 products. Most of the
division's liquid products are manufactured in its 268,000
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, this 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.
In 1996, the USPD received approval from the FDA to
manufacture and market Minoxidil Topical Solution 2%.
Creams, Lotions and Ointments: The USPD manufactures
approximately 50 cream, lotion and ointment products for
topical use. Most of these creams, lotions and ointments
are prescription products and include antibacterial, anti-
inflammatory and combination products. As previously
mentioned herein, the USPD is in the process of transferring
all cream, lotion and ointment manufacturing to Lincolnton
and will close its NMC facility in Glendale, New York in the
first quarter of 1997.
In 1996, the USPD received approval from the FDA to
manufacture and market Miconazole Nitrate Vaginal Cream 2%.
Suppositories and Other Specialty Generic Products: The USPD
also manufactures five suppository products and markets
certain other specialty generic products, including
Epinephrine Mist and a Home Pregnancy Test Kit.
The generic pharmaceutical industry is highly competitive,
with competition from companies specializing in generic products
as well as generic divisions of major international innovator
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 FDA. In
addition, brand-name competitors often try to prevent or
discourage the use of generic equivalents through marketing and
regulatory activities and litigation. Some brand-name
competitors also have introduced generic versions of their own
branded products prior to expiration of the patents for such
drugs, which may result in a greater market share for these
companies following expiration of the applicable patents.
The USPD has historically sold its products to
pharmaceutical wholesalers, distributors, mass merchandising and
retail chains, grocery stores, and to a lesser extent, hospitals
and managed care providers. However, in 1996, the U.S. generic
pharmaceutical industry experienced a fundamental shift in
distribution, purchasing and stocking patterns which resulted in
accelerated price erosion and significant volume swings as
inventories were adjusted. Programs initiated by U.S. national
wholesalers fueled the trend of lower prices as they reduced the
market share of private label pharmaceutical distributors, which
were an important (but declining) part of the USPD customer base.
The overall trend of aggressive trade inventory reductions
continued and resulted in lower levels of stocking in advance of
the cough and cold season. As a direct result of these industry
trends, the USPD experienced lower sales volume and lower pricing
compared to 1995. The Company cannot predict when pricing will
stabilize or when the negative effects of this shift may cease.
In addition to the decline in market share of pharmaceutical
distributors as set forth above, there is a general trend of
consolidation within the customer base for pharmaceutical
products in the U.S. At present, the USPD is not dependent on
any one customer. However, if consolidation continues, the
division could become more dependent on individual customers as
certain customers increase their size and market share.
USPD's principal focus in its product development strategy
is to obtain FDA approval to market equivalent formulations of
drugs through the ANDA process. The Company has been impacted
from time to time 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.
International Pharmaceuticals Division ("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, Indonesia and the Middle East. The division
is managed by a single senior management team and business is
primarily conducted through two wholly-owned subsidiaries, Dumex-
Alpharma A/S of Copenhagen, Denmark ("Dumex") and Alpharma Oslo
and their respective subsidiaries. The IPD conducts its business
primarily in Scandinavian and U.S. Dollar denominated currencies
(or currencies which generally fluctuate with the U.S. Dollar).
Dosage-Form Pharmaceuticals: The IPD manufactures and
markets 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-counter skin care, gastrointestinal
and analgesic products.
The principal geographical markets for IPD's dosage form
pharmaceutical products are the Nordic and other Western
European countries as well as Indonesia and the Middle East.
IPD manufactures such products at its facilities in Lier,
Norway, Copenhagen, Denmark and Jakarta, Indonesia.
In May 1996, the Company's Board of Directors approved a
production rationalization plan which includes the transfer
of all tablet, ointment and liquid production from
Copenhagen to Lier and transfer of all sterile production to
the Copenhagen facility. The full transfer will be
completed in 1998. The facility at Lier 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 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.
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 Norway and Denmark, the IPD's pharmaceutical products are
beginning to encounter price pressures from parallel imports
(i.e. imports of identical products from lower priced
markets under the European Union free trade clause). 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
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 1996 significant expenses continued to be incurred for an
administrative, selling and marketing infrastructure to
promote Elyzol Dental Gel and for continuing research and
development work, including work done with regard to the
Company's project to conduct clinical trials as part of the
new drug approval process in the U.S. for Elyzol Dental Gel.
At present, the Company is in the process of clarifying the
FDA's current guidelines for the next phase of clinical
trials for such product. Additionally, IPD management is
continuing to explore alternative marketing arrangements for
the product which may include licensing and/or obtaining
marketing partners in certain geographical areas. The
Company considers the Elyzol Dental Gel product to be in the
developmental phase.
Adhesive Bandages and Surgical Tapes: The IPD manufactures
adhesive bandages, surgical tapes and non-medical tapes
under its proprietary Norgesplaster brand, and is the only
manufacturer of adhesive bandages and surgical tapes in the
Nordic countries. Its 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 ("FCD")
The FCD develops, manufactures and markets bulk antibiotics
to the pharmaceutical industry worldwide and is managed by a
single senior management team. Business is conducted through the
Company and its Alpharma Oslo and Dumex subsidiaries.
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,
intestinal and systemic 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 systemically and in specialized topical and surgical human
applications. In addition, the FCD markets other well-
established bulk antibiotics, such as Gramicidin and Tyrothricin,
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.
Animal Health
Since the completion of the Combination Transaction on
October 3, 1994, the Animal Health segment is comprised of two
operating divisions of the Company, namely the AHD and the AAHD.
Animal Health Division ("AHD")
The AHD develops, manufactures and markets feed additives
and animal health products for animals raised for commercial food
production worldwide and is managed by a single senior management
team. Business is primarily conducted through the Company,
Alpharma Oslo and Wade Jones Company, Inc., a major U.S. poultry
health products distributor acquired in July 1994. The AHD
restructured its operations in 1996 to better align its services
with customer needs. The restructuring resulted in a reduction
of approximately 10% of its workforce. The AHD believes its
streamlined organization will be better able to adapt to the ever-
changing animal health market place.
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. The AHD also
manufactures and markets a feed additive for poultry, swine and
calves under the Albac trademark. 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 D3, and
other feed additives which are used for poultry and swine.
Commencing in 1994, the AHD also marketed and sold Merck AgVet's
(a division of Merck & Co., Inc.) line of poultry products in the
U.S. However, the AHD and Merck mutually agreed to terminate
this relationship effective June 30, 1996 as Merck sold its
poultry products line to an unrelated third party.
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 Norway. The 3-Nitro product line is manufactured in
accordance with a ten year agreement using AHD technology at an
unrelated company's facility. 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.
The AHD presently sells a major portion of its volume in the
U.S. However, with the opening of sales offices in Canada, Latin
America, and the Far East, coupled 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.
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
throughout the country. Sales of the AHD's products outside
North America are made primarily through the use of distributors
and sales companies. Although the AHD is not dependent on any one
customer, the customer base for animal health products is in a
consolidation phase. Therefore, as consolidation continues, the
AHD could become more dependent on certain individual customers
as such customers increase their size and market share.
Because most of AHD's products are feed additives, the
division's sales of such products may be affected by the price of
feed grain. In 1996, the Company's results were negatively
impacted by record increases in U.S. grain (corn and wheat)
prices. These high prices resulted in a reduction in the use of
feed additives in general and intense price competition.
Although prices have decreased from their 1996 peak levels, the
Company cannot predict whether future feed grain price
developments might have an adverse effect on the Company.
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 ("AAHD")
The AAHD develops, manufactures and markets vaccines for use
in immunizing farmed fish against disease. The division is
managed by a single senior management team and business is
conducted through two wholly-owned subsidiaries, Alpharma Oslo
and Alpharma NW Inc. ("NW") which was acquired in July 1989.
Presently, the AAHD is the leading supplier of vaccines for farm
raised salmon in Norway, which is the largest market in the world
for the farming of salmon. In 1996, approximately 55% of the
revenues of the AAHD were generated from the Norwegian market.
The AAHD maintains two manufacturing locations, Bellevue,
Washington and Overhalla, Norway. The Overhalla facility was
purchased by the AAHD in November 1994 and a new production unit
within such facility was completed in 1996 so that it is capable
of manufacturing aquaculture products using state of the art
technology. The facility is also used to manufacture ringworm
vaccines for cattle and listeriosis vaccines for sheep and goats.
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 the Human Pharmaceuticals segment
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 compiling the necessary data to obtain
government approvals. The Company's research, product
development and technical activities also focus on developing
proprietary drug delivery systems and on improving existing
delivery systems, fermentation technology and packaging and
manufacturing techniques. In view of the substantial funds which
are generally required to develop new chemical drug entities the
Company 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.
Research and development expenses were approximately $34.3
million, $32.8 million, and $32.5 million in 1996, 1995 and 1994,
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. Revenues from
foreign operations accounted for over 45% of the Company's
revenues in 1996. 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 research, development, manufacturing and marketing of
the Company's products are subject to comprehensive government
regulation by the FDA in the U.S., and by comparable authorities
in Norway, Denmark, Indonesia and other countries. Government
regulation includes detailed inspection of and controls over
testing, manufacturing, safety, labeling, storage, recordkeeping,
approval, advertising, promotion, sale and distribution of
pharmaceutical products. Noncompliance with applicable
requirements can result in fines, recall or seizure of products,
total or partial suspension of production and/or distribution,
refusal of the government to approve new products and criminal
prosecution. Such government regulation substantially increases
the cost of producing human pharmaceutical and animal health
products.
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. All applications for FDA approval must
contain data relating to bioequivalency, product formulation, raw
material suppliers, stability, manufacturing, packaging, labeling
and quality control. Validation of manufacturing processes are
also required before a company can market new products and the
FDA conducts pre-and post-approval reviews and facility
inspections to implement these rules. Supplemental filings for
approval to transfer products from one manufacturing site to
another also require review. Analogous governmental and agency
approvals are similarly required in other countries where the
Company conducts business. These government approvals are
therefore very important to both the Human Pharmaceuticals and
Animal Health segments.
The Company's manufacturing operations (in the U.S. as well
as two of the Company's European facilities that manufacture
products for export to the U.S.) are required to comply with
Current Good Manufacturing Practices ("CGMP") as interpreted by
the FDA and, 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, especially since the FDA
and certain other analogous governmental agencies have increased
the number of regular inspections to determine compliance. 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
particularly affected as the Company has spent, and will continue
to spend, significant funds and management time on FDA compliance
matters. In this regard, in 1992, AUI concluded a binding
agreement in the form of a consent decree with the FDA which
clarified AUI's regulatory obligations (the "Consent Decree").
The Consent Decree defines the standards AUI must achieve in
meeting CGMP. USPD's Able operation also signed an amended
consent decree with FDA governing manufacturing operations in
accordance with CGMP. Additionally, the Company is currently
responding to a Warning Letter issued by the FDA regarding FDA's
latest inspection of bulk antibiotic production at its Skoyen,
Norway plant.
The evolving and complex nature of regulatory requirements,
the broad authority and discretion of the FDA and analogous
foreign agencies, and the generally high level of regulatory
oversight results in a continuing possibility that from time to
time the Company will be adversely affected by regulatory actions
despite its ongoing efforts and commitment to achieve and
maintain full compliance with all regulatory requirements.
Continuing studies of the proper utilization, safety, and
efficacy of pharmaceuticals and other health care products are
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 Waxman-Hatch Act of 1984 ("WH Act") extended the
abbreviated application procedure for obtaining FDA approval for
generic forms of brand-name pharmaceuticals originally marketed
before 1962 which are off-patent or whose market exclusivity has
expired. The WH Act also provides market exclusivity provisions
which could preclude the submission or delay the approval of a
competing ANDA. One such provision allows a five year market
exclusivity period for New Drug Applications ("NDA") involving
new chemical compounds and a three year market exclusivity period
for NDA's containing new clinical investigations essential to the
approval of such application. The market exclusivity provisions
apply equally to patented and non-patented drug products.
Another provision may extend patents for up to five years as
compensation for reduction of the effective life of the patent as
a result of time spent by the FDA reviewing an application for a
drug. Patents may also be extended pursuant to the terms of the
Uruguay Round Agreements Act ("URAA"). Therefore, the Company
cannot predict the extent to which the WH Act or URAA could
postpone launch of some of its new products.
The Generic Drug Enforcement Act of 1992 establishes
penalties for wrongdoing in connection with the development or
submission of an ANDA by authorizing the FDA to permanently or
temporarily debar companies or individuals from submitting or
assisting in the submission of an ANDA, and to temporarily deny
approval and suspend applications to market generic drugs. The
FDA may also suspend the distribution of all drugs approved or
developed in connection with certain wrongful conduct and/or
withdraw approval of an ANDA and seek civil penalties. The FDA
can also significantly delay the approval of any pending ANDA
under the "Fraud, Untrue Statements of Material Facts, Bribery
and Illegal Gratuities Policy".
The methods of reimbursement and fixing of reimbursement
levels under Medicare, Medicaid and other reimbursement programs
are under active review by state and federal government as well
as by private third party payors. In addition, Medicaid
legislation requires that all pharmaceutical manufactures rebate
to individual states a percentage of their revenues arising from
Medicaid-reimbursed pharmaceutical sales. The required rebate
for generic manufacturers is currently 11%. The Company believes
that the federal and/or state governments may continue to review
and assess alternative payment methodologies and reform measures
aimed at reducing the cost of drugs to the public. Due to the
uncertainties regarding the ultimate features of such reform
initiatives, the Company cannot predict which, if any, of such
measures will be adopted, when they will be adopted or what
impact they may have on the Company.
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 past 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 revenues 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. During
1995, the Company's AUI subsidiary received and responded to a
Notice of Potential Liability and Request for Information on a
site owned by Ramp Industries, an unaffiliated third party. AUI
historically made one small shipment to the site and no material
expenditures are expected to be made in conjunction with this
matter. Although many major capital projects typically include a
component for environmental control, including the Company's
current expansion projects, no material expenditures specifically
for environmental control are expected to be made in 1997.
Employees
As of December 31, 1996, the Company had approximately 2,550
employees, including 1,100 in the U.S. and 1,450 outside of the
U.S.
Item 1A. Executive Officers of the Registrant
The following is a list of the names and ages of all of the
Company's corporate officers and certain officers of each of the
Company's principal operating units, indicating all positions and
offices with the Registrant held by each such person and each
such person's principal occupations or employment during the past
five years.
Each of the Company's corporate officers has been elected to
the indicated office or offices of the Registrant, to serve as
such until the next annual election of officers of the Registrant
(expected to occur May 28, 1997) 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 68 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,
Alpharma AS since October
1994. President of A.L.
Industrier AS 1972--1994.
Chairman of A.L. Industrier AS
since November 1994.
Jeffrey E. Smith 49 Chief Financial Officer and
Vice President, Finance Vice President since May 1994.
and Chief Financial Executive Vice President and
Officer Member of the Office of the
Chief Executive July 1991--
May 1994. Vice President,
Finance of the Company from
November 1984--July 1991.
Diane M. Cady 42 Vice President, Investor
Vice President, Relations since November 1996.
Investor Relations Vice President, Investor
Relations for Ply Gem
Industries, Inc. 1987--October
1996.
Phil Corke 43 Vice President, Human
Vice President, Human Resources since April 1996.
Resources Director of Training,
Development and International
Compensation, Textron
Corporation 1994--March 1996.
Director, Human Resources--
Europe, Bristol-Myers Squibb
Company 1990--1993.
Beth P. Hecht 33 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.
Albert N. Marchio, II 44 Treasurer of the Company since
Treasurer May 1992. Treasurer of Laura
Ashley, Inc. 1990--1992.
John S. Towler 48 Controller of the Company
Controller since March 1989.
Thomas L. Anderson 48 President of the Company's
Vice President and U.S. Pharmaceuticals Division
President, U.S. since January 1997; President
Pharmaceuticals and Chief Operating Officer of
Division FoxMeyer Health Corporation
May 1993--February 1996;
Executive Vice President and
Chief Operating Officer of
FoxMeyer Health Corporation
July 1991--April 1993.
David E. Cohen 42 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.
September 1988--October 1994.
Thor Kristiansen 53 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--1994.
Knut Moksnes 46 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--1994.
Ingrid Wiik 52 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--1994.
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 - Alpharma
corporate office
and AHD
Headquarters
Skoyen, Norway Leased -- 204,400 Manufacturing of
AHD and FCD
products, Alpharma
corporate office
and headquarters
for IPD, FCD and
AAHD.
Chicago Owned 20 195,000 Manufacturing,
Heights, IL warehouse, R&D and
offices for AHD
Bellevue, WA Leased -- 20,000 Manufacturing,
warehouse,
laboratory and
offices for AAHD
Baltimore, MD Owned 19 268,000 Manufacturing, and
headquarters for
USPD
Baltimore, MD Leased -- 18,000 Research and
Development for
USPD
Columbia, MD Leased -- 165,000 Central
Distribution Center
for USPD
Lincolnton, NC Owned 13 138,000 Manufacturing and
offices for USPD
Lowell, AK Leased -- 68,000 Manufacturing,
warehouse and
offices for AHD
Niagara Falls, Owned 2 30,000 Warehouse and
NY offices for 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 for AAHD
Vennesla, Owned 4 81,300 Manufacturing of
Norway adhesive bandages
and surgical tapes,
warehousing and
offices for IPD
Copenhagen, Owned 10 425,000 Manufacturing,
Denmark warehouse, R&D and
offices for IPD and
FCD
Jakarta, Owned 5 80,000 Manufacturing,
Indonesia building warehouse, R&D and
leased offices for IPD
land
The Company believes that its principal facilities described
above are generally in good repair and condition and adequate and
suitable for the products they produce.
Item 3. Legal Proceedings
On September 13, 1982, the Company filed at the FDA a
"Citizen Petition" requesting the agency 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. FDA denied the Citizen Petition on
May 9, 1984, and the Company filed an action for judicial review
in the U.S. District Court for the District of Columbia (the
"Action") seeking to have FDA's denial of the Citizen Petition
set aside. Subsequent administrative proceedings also resulted
in FDA decisions denying the relief sought. The complaint in
this Action was amended to challenge FDA's decisions on these
subsequent proceedings. The parties filed cross-motions for
summary judgment and the U.S. District Court granted FDA's motion
for summary judgment to dismiss the Action. The Company appealed
this decision to the U.S. Court of Appeals for the District of
Columbia. On August 25, 1995, the Court of Appeals held that FDA
had not provided a reasonable explanation to support its finding
of safety and efficacy of the PRI Bacitracin Zinc. The Court's
order gave the FDA 90 days to provide a satisfactory explanation.
On October 27, 1995, the FDA sent to the Company's counsel a
letter containing its explanation and filed this letter in the
U.S. District Court, together with a Memorandum arguing that it
had complied with the Court of Appeals' remand. The Company
filed an opposing Memorandum arguing that FDA's purported
explanation did not meet the terms of the Court of Appeals order.
Oral argument was held in the District Court on November 29,
1995. Thereafter, on December 4, 1995, the District Court issued
an order continuing the PRI NADA pending a decision by it as to
whether the FDA's explanation was reasonable. The matter remains
pending before the District Court.
From time to time the Company is involved in certain non-
material litigation which is ordinarily found in businesses of
this type, including contract, employment matters and product
liability actions. Product liability suits represent a
continuing risk to pharmaceutical companies. The Company
attempts to minimize such risks by strict controls over
manufacturing and quality procedures. Although the Company
carries what it believes to be adequate insurance, there is no
assurance that such insurance can fully protect it against all
such risks due to the inherent potential liability in the
business of producing pharmaceuticals for human and animal use.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
Market Information
The Company's Class A Common Stock is listed on the New York
Stock Exchange ("NYSE"). Information concerning the 1996 and
1995 sales prices of the Company's Class A Common Stock are set
forth in the table below.
Stock Trading Price
1996 1995
Quarter High Low High Low
First $ 27.375 $22.00 $23.13 $19.25
Second $ 26.00 $19.125 $24.00 $16.50
Third $ 21.25 $14.625 $23.33 $17.25
Fourth $ 16.50 $10.625 $26.38 $21.38
As of December 31, 1996 and March 1, 1997 the Company's
stock closing price was $14.625 and $13.50, respectively.
Warrants to purchase the Company's Class A Common Stock with
an exercise price of $21.945 and expiring on January 3, 1999
commenced trading on the NYSE in October 1995 with an initial
trade of $7.00. At December 31, 1996 and March 1, 1997, the
closing price of the Company's warrants was $2.375 and $3.00,
respectively.
Holders
As of March 1, 1997, there were 1,034 holders of record of
the Company's Class A Common Stock and A.L. Industrier held all
of the Company's Class B Common Stock. Record holders of the
Class A Common Stock include Cede & Co., a clearing agency which
held approximately 97% 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
1996 and 1995 were $.045 per quarter or $.18 per year.
Item 6. Selected Financial Data
The following is a summary of selected financial data for
the Company and its subsidiaries. Financial data for prior years
has been restated to reflect the 1994 combination with Alpharma
Oslo as a pooling of interests. The data for each of the three
years in the period ended December 31, 1996 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) 1996(4) 1995 1994(3) 1993 1992
Total revenue $486,184 $520,882 $469,263 $402,675 $358,632
Cost of sales 297,128 302,127 275,543 233,423 194,665
Gross profit 189,056 218,755 193,720 169,252 163,967
Selling, general and
administrative
expenses 185,136 166,274 177,742 139,038 128,658
Operating income 3,920 52,481 15,978 30,214 35,309
Interest expense (19,976) (21,993) (15,355) (14,996) (18,534)
Other income, net (170) (260) 1,113 1,880 3,937
Income (loss) from
continuing operations
before taxes (16,226) 30,228 1,736 17,098 20,712
Provision (benefit)
for taxes (4,765) 11,411 3,439 6,969 7,161
Income (loss) from
continuing operations $(11,461) $ 18,817 $ (1,703) $ 10,129 $ 13,551
Net income (loss)(2) $(11,461) $ 18,817 $ (2,386) $ 10,129 $ 20,974
Average number of
shares outstanding:
Primary 21,715 21,754 21,568 21,581 18,388
Fully Diluted 21,715 22,407 21,568 21,581 21,568
Earnings per share:
Fully diluted
Income (loss) from
continuing operations $ (.53) $ .84 $ (.08) $ .47 $ .74
Net income (loss) $ (.53) $ .84 $ (.11) $ .47 $ 1.09
Dividend per common
share $ .18 $ .18 $ .18 $ .18 $ .18
(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), and Able Laboratories, Inc.
(October 1992). 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
in accounting for income taxes - $2,614; 1992 - Income from
discontinued Human Nutrition Segment - $4,809.
(3) 1994 includes transaction costs relating to the combination with
Alpharma Oslo and management actions which are included in cost of
goods sold ($450) and selling, general and administrative ($24,200).
Amounts net after tax of approximately $17,400.
(4) 1996 includes management actions relating to production
rationalizations and severance which are included in cost of
goods sold ($1,100) and selling, general and administrative
($17,700). Amounts net after tax of approximately $12,600.
As of December 31,
Balance Sheet Data (1) 1996 1995 1994 1993 1992
Current assets $274,859 $282,886 $250,499 $202,913 $178,283
Non-current assets 338,548 351,967 341,819 324,704 302,730
Total assets $613,407 $634,853 $592,318 $527,617 $481,013
Current liabilities $155,651 $169,283 $154,650 $139,205 $107,015
Long-term debt,
less current
maturities 233,781 219,451 220,036 144,350 133,701
Deferred taxes and
other non-current
liabilities 37,933 40,929 36,344 40,129 33,454
Stockholders' equity(2) 186,042 205,190 181,288 203,933 206,843
Total liabilities
and equity $613,407 $634,853 $592,318 $527,617 $481,013
(1) Includes accounts from date of acquisition of the Wade Jones
Company (July 1994), the Lincolnton facility (March 1993),
Norgesplaster A/S (January 1993), and Able Laboratories,
Inc. (October 1992) and the conversion of the Convertible
Subordinated Debentures in 1992.
(2) 1994 reflects acquisition of Alpharma Oslo accounted for as
a pooling of interests with cash purchase price deducted
from stockholders' equity.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Overview
1996 was a year in which internally initiated management
actions intended to improve future operations resulted in 1996
charges and external market conditions adversely affected
operations in both industry segments to varying degrees. These
factors combined to produce a loss for 1996 and included the
following:
Management actions - approximately $12.6 million after tax.
Rationalization of the International Pharmaceutical
Division's ("IPD") selling and marketing organization in
Scandinavia resulting in charges for severance.
Commencement of an IPD plan to transfer all tablet,
ointment and liquid production from Copenhagen, Denmark to
Lier, Norway resulting in charges for severance, asset write-
offs and other exit costs.
Commencement of a U.S. Pharmaceuticals Division ("USPD")
plan to accelerate the move of production from locations in
New Jersey and New York to an existing plant in Lincolnton,
North Carolina resulting in charges for severance, asset
write-offs and other exit costs.
Rationalization of the Animal Health Division ("AHD") and
USPD organizations to address current competitive conditions
in their respective industries resulting in charges for
severance and other termination benefits.
External Factors.
Fundamental shift in generic pharmaceutical industry
distribution, purchasing and stocking patterns resulting in
significantly lower sales and prices in the USPD.
Significant bad debt expense due to the bankruptcy of a
major wholesaler to the USPD and collection difficulties in
certain international markets.
High feed grain prices in the Animal Health industry which
resulted in lower industry usage of feed additive products
supplied by AHD and increased competition among feed
additive suppliers.
Generally increased competition in all industries and
markets served by the Company's operating divisions.
By comparison, 1995 was a year where management actions had
a neutral effect on profitability and markets were relatively
steady.
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 ("Alpharma
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
Alpharma Oslo.
The Company reorganized its business into two main
segments. The Human Pharmaceuticals Segment which
includes the IPD, the USPD and the Fine Chemicals
Division ("FCD"), and the Animal Health Segment which
includes the 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 Alpharma 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 Alpharma 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.
On a comparative basis excluding management actions,
operating income by segment for the three years was as follows
(in millions):
HPS AHS Unallocated Total
Operating income* 1996 $5.6 $22.5 $(5.4) $22.7
Operating income* 1995 $25.5 $31.4 $(4.6) $52.3
Operating income* 1994 $15.2 $30.5 $(5.0) $40.7
*Excludes management actions which are detailed in the year on
year analysis.
Results of Operations - 1996 Compared to 1995
Total revenue decreased $34.6 million (6.7%) in 1996
compared to 1995. Operating income in 1996 was $3.9 million, a
decrease of $48.6 million, compared to 1995. The Company recorded
a net loss in 1996 of $.53 per share compared to net income of
$.84 per share in 1995. The net loss is attributable to charges
for management actions (approximately $.58 per share net loss)
and generally difficult operating conditions. (See sections:
"Management Actions", "U.S. Generic Pharmaceutical Industry" and
"Animal Health Division Market Conditions.")
Revenues declined by $5.1 million (3.1%) in the Animal
Health Segment ("AHS"). The AHD revenues declined due to lower
sales volume of BMDr and other feed additives primarily to the
poultry market and price erosion due to competition. The decline
in the sale of other feed additives to the poultry market is
attributable mainly to the mutual termination of a distribution
agreement with Merck AgVet. AAHD revenues were lower due to the
introduction of competitive products in the Norwegian fish
vaccine market and an overall reduction in Norwegian salmon
production.
Revenues in the Human Pharmaceuticals Segment ("HPS") were
$29.7 million lower primarily due to USPD revenues which declined
approximately 12%, as a result of price and volume reductions in
the base product line (principally cough and cold products) due
to a fundamental shift in industry distribution, purchasing and
stocking patterns including a substantial drop in sales to
generic drug distributors. The declines were partially offset by
increased sales of products introduced in 1994 and 1995 and sales
of Minoxidil introduced in the second quarter of 1996. Revenues
for IPD and FCD declined by 3.9% and 5.1%, respectively due to
volume reductions and to a lesser extent currency translation
offset partially by limited price increases.
On a consolidated basis, gross profit decreased $29.7
million
and the gross margin percent was 38.9% in 1996 compared to 42.0%
in 1995. The gross profit for the Animal Health Segment declined
due to the lower volume sold of BMDr and high margin fish
vaccines and generally lower pricing due to competition. The
gross profit in the Pharmaceuticals Segment declined over $20.0
million due principally to the USPD. The USPD was affected by
lower sales volume, and significantly lower pricing across the
product line due to changes in the generic pharmaceutical
industry. Lower sales volume also affected gross profit by
causing reduced production volume which increases production
costs per unit. IPD and FCD also had lower gross margins due
primarily to lower sales. In addition, 1996 includes $1.1 million
primarily for accrued stay bonuses for production employees in
facilities to be closed in both the USPD and IPD. (Included in
Management Actions.)
Operating expenses (i.e. selling, general and administrative
expenses "SG&A") on a consolidated basis increased $18.9 million
or 11.3%. Included in 1996 operating expenses are management
actions totaling $17.7 million which include the following by
segment: HPS - severance and termination benefits, $6.7 million;
write off of assets at facilities to be closed $4.1 million; and
exit costs and other $2.1 million. AHS - Severance and
termination benefits $4.0 million; and exit costs and other $.4
million. Unallocated - severance and termination benefits $.4
million. Additionally, 1996 includes bad debt expenses of $2.0
million related to the bankruptcy of a major wholesaler and $1.0
million for financial advisory and consulting services related to
a potential acquisition. The following table summarizes the
above:
1996 1995
SG&A as reported $185.1 $166.3
Management actions
(described herein)
1996 (17.7)
1995 .2
Financial advisory fees (1.0)
Bad debt expense related
to the bankruptcy
of a wholesaler (2.0) _____
SG&A as adjusted $164.4 $166.5
The lack of growth in SG&A, excluding the items described
above, reflects an emphasis on cost control in response to
difficult business conditions in a number of markets (including
lower bonuses paid in 1996), a reduction of expenses resulting
from prior year management actions which reduced payroll and
generally flat selling and marketing expenses certain of which
vary directly with sales.
Operating income as reported declined $48.6 million.
The Company believes the change in operating income from
1995 to 1996 can be approximated as follows:
HPS AHS Unallocated Total
Operating income 1995 $26.1 $30.8 $(4.4) $52.5
Sales/gross profit
(decrease) increase:
Volume (21.0) (7.0) (28.0)
Price (8.0) (2.0) (10.0)
New products 12.0 4.0 16.0
(Increase) Decrease in:
Production and
operating expenses (2.9) (3.8) (.9) (7.6)
Management Actions (14.4) (4.1) (.5) (19.0)
Operating income 1996 $ (8.2) $ 17.9 $(5.8) $ 3.9
Interest expense declined $2.0 million in 1996 compared to
1995 due to lower interest rates in 1996 and to a lesser extent
decreased average debt levels.
The provision for income taxes was 37.8% in 1995 compared to
a benefit for income taxes (due to the pre-tax loss) of 29.4% in
1996. The principal difference between both the actual rates and
the statutory rates is due to the effect of non-deductible
expenses (principally goodwill).
Results of Operations - 1995 Compared to 1994
Total revenue increased to $520.9 million in 1995 compared
to $469.3 million in 1994. Operating income, net income and
earnings per share all increased substantially in 1995 as 1994
included significant transaction expenses and post-combination
management actions. As a result, the Company reported net income
of $18.8 million ($.84 per share fully diluted) in 1995 versus a
loss of $2.4 million in 1994 ($.11 loss per share).
Revenue in the Human Pharmaceuticals Segment accounted for
$29.3 million of the consolidated revenue increase. The IPD
accounted for the major portion of the HPS increase. IPD revenues
increased due to volume growth in Northern Europe and Indonesia,
the translation of sales in Norwegian Kroner ("NOK") and Danish
Kroner ("DKK") into the U.S. Dollar and to a lesser extent
selected price increases where permitted. Current pricing in a
number of European markets continues to be suppressed in part by
legislation enacted to contain pharmaceutical costs. Oral Health
Care ("OHC") revenues increased over $1.0 million compared to
1994 and due to increased R&D expenses the operating loss was
approximately the same as 1994. Sales by the FCD were
approximately the same as in 1994 in local currencies but
increased when translated into U.S. Dollars.
Revenues in the USPD were flat on a year to year basis.
Increases in sales of products introduced in late 1994 and 1995
(including Cimetidine HCL Solution, Clobetasol Cream and
Ointment, Clemastine Fumarate Syrup and a number of other over
the counter and prescription products), some price increases and
increased volume in a number of products were offset by declines
in the volume of cough and cold products sold due to a mild flu
season in early 1995 as well as the discontinuance of products
containing iodinated glycerol in July of 1994.
Animal Health Segment revenues increased primarily due to
the acquisition of the Wade Jones Company, Inc. in July 1994. In
addition, revenue increases were achieved due to higher sales
internationally and, to a lesser extent, domestically, of disease
preventative products used in poultry markets and sales of
products made pursuant to a poultry products distribution
agreement signed with Merck AgVet in July 1994. In 1996 the
distribution agreement was terminated by mutual agreement as
Merck sold its poultry line to an unrelated third party. BMDr
sales increased marginally with volume gains in poultry markets,
offset by lower volume in the domestic swine market which was
impacted by adverse economic conditions experienced by pork
producers. The AAHD sales of fish vaccines were lower than 1994
due to increased competition in the Norwegian salmon farming
market, offset partially by sales of newly introduced trout and
other vaccines.
On a consolidated basis gross profit increased $25.0 million
and the gross margin percent increased to 42.0% in 1995 compared
to 41.3% in 1994.
Gross profit dollars in HPS accounted for a substantial
amount of the dollar increase due to increased sales volume
(especially by the IPD), production efficiencies, the effect of
translation of gross profits in DKK and NOK into U.S. Dollars for
both the IPD and FCD and selected price increases partially
offset by the elimination of sales of high margin iodinated
glycerol products. Gross profit percentages improved in HPS as a
result of increases in gross margin percentages and amounts in
IPD and FCD which have higher than the prior years average gross
margin percentage. Accordingly, the overall percentage increase
is attributable to the HPS.
Gross profit dollars in the Animal Health Segment increased
at a rate lower than the sales increase. The gross profit percent
declined due to sales increases attributable to the Wade Jones
Company, Inc., a distributor to the poultry market, and sales
made pursuant to the poultry product distribution agreement with
Merck AgVet. The composition of Animal Health Division sales has
changed with the addition of these two distribution businesses
which have lower gross margins. In addition, gross profits were
negatively affected due to lower volume of high gross margin fish
vaccine sales.
Operating expenses were $166.3 million in 1995 compared to
$177.7 million in 1994. Operating expenses in 1995 include a net
benefit of $.2 million relating to 1995 post combination
management actions. The net benefit includes income from the sale
of an equity interest and other rights in an R&D company ($6.5
million) offset by the utilization of substantial consulting
resources focused primarily on accelerating the realization of
certain combination benefits in the IPD ($4.6 million) and
severance of 77 employees in the IPD, USPD and AHD ($1.7
million). Operating expenses in 1994 include management actions
and transaction expenses totaling $24.2 million summarized by
segment as follows: HPS: severance of $2.9 million, $8.3 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. AHS: 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 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.
On a comparable basis, operating expenses increased
approximately $13.0 million (8.5%) compared to an 11.0% sales
increase. Operating expenses increased due to variable selling
expense increases, additional research and development expenses,
the acquisition of the Wade Jones Company in July 1994 and the
effect of the translation of NOK and DKK expenses into U.S.
Dollars.
Post combination and transaction expenses impacted operating
income by segment in 1995 and 1994 as follows:
HPS AHS Unallocated Total
Operating income
(loss) as reported:
1995 $26.1 $30.8 $(4.4) $52.5
1994 $(3.8) $28.5 $(8.7) $16.0
Transaction costs
and post-combination
actions (income)
expense:
1995 $ (.7) $ .5 $ - $(.2)
1994 $19.0 $ 2.0 $ 3.7 $24.7
Operating income (loss)
excluding transaction
costs (1994) and post-combination
actions:
1995 $25.4 $31.3 $(4.4) $52.3
1994 $15.2 $30.5 $(5.0) $40.7
Interest expense increased $6.6 million for the year ended
1995, due to increased debt levels resulting from the acquisition
of Alpharma Oslo in October 1994, increased capital expenditures
in 1994, the acquisition of the Wade Jones Company, Inc. in July
1994, and increased working capital requirements to support sales
increases. Additionally, interest rates have generally increased
relative to 1994. Comparability is also affected in that the
Company restated the 1994 financials to reflect the acquisition
of Alpharma Oslo in a manner similar to a pooling of interests.
The restated results for 1994 do not include interest expense on
either the cash consideration or actual transaction costs which
would have been incurred had the acquisition taken place in prior
periods. The Company estimates that interest expense calculated
on a comparable basis in 1994 would have been approximately $1.5
million higher.
Other income (expense), net for 1995 includes net foreign
exchange transaction losses of approximately $.8 million
resulting from the translation of non-functional currency
receivables net of non-functional currency payables and forward
foreign exchange contracts. The losses were primarily recorded by
the Company's subsidiaries in Norway and Denmark in the first
quarter of 1995 and primarily relate to sales denominated in
currencies (i.e. U.S. Dollar, Swedish Kroner, British Pound and
Portuguese Escudo) which depreciated significantly in the first
quarter compared to the NOK and DKK. In addition, currency losses
were sustained by the Company's Mexican operations due to the
devaluation of the Mexican Peso.
The provision for income taxes in 1995 was 37.8% compared to
income taxes in excess of pretax income in 1994. The rate in 1995
represents a more normal relationship and the diminishing effect
as pre-tax income increases of non-deductible expenses primarily
related to goodwill amortization.
Inflation
The effect of inflation on the Company's operations during
1996, 1995 and 1994 was not significant.
Governmental Actions affecting the Company
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
stringent regulatory requirements on the pharmaceutical industry.
The U.S. manufacturing companies included in the Company's Human
Pharmaceuticals Segment, as well as two of the Company's European
facilities that manufacture products for export to the U.S., are
affected in that they are required to comply with the FDA's
interpretation of CGMP.
In 1994, 1995 and 1996, 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) may continue to increase in the future.
In the fourth quarter of 1996 the Company recorded
approximately $1.3 million representing the estimated costs for a
recall of certain lots of four products: Guiatuss AC and DAC;
Dihistine expectorant and Lidocaine. This recall resulted from
the Company's ongoing internal quality programs which identified
a required revision of expiration dates for these products.
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 loss of sales of these products
negatively impacted the Company's 1995 operations.
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.
Management Actions
In December 1994, the Company announced a number of
management actions which included staff reductions and certain
product line and facilities rationalizations as a first step
toward realizing combination synergies and maximizing the overall
position of the newly combined Company. As a part of the December
1994 management actions, the Company discontinued funding
research projects relating to the colonic delivery of drugs and
committed to disposing of the resultant equity interest in the
R&D company performing the research.
In September 1995, the Company announced additional
management actions which continued the process begun in December
1994. The actions include elimination of up to 130 positions
company-wide (77 employees were severed in 1995), further efforts
toward consolidation of operations in the Company's USPD, the
utilization of substantial consulting resources focused primarily
on accelerating the realization of certain combination benefits
in the IPD and the sale in September of its minority equity
position and certain other rights in the R&D company.
In the first quarter of 1996 the Company continued the
process and announced the reorganization of the IPD sales and
marketing organization in Scandinavia. The reorganization
resulted in severing 30 personnel at a cost of $1.9 million. IPD
estimates the annual expense reduction by 1997 from this action
at over $1.0 million.
In the second quarter of 1996, the Board of Directors
approved an IPD production rationalization plan which includes
the transfer of all tablet, ointment and liquid production from
Copenhagen, Denmark to Lier, Norway. The full transfer will be
completed in 1998 and will result in the net reduction of
approximately 100 employees. The rationalization plan resulted in
a charge in the second quarter for severance for Copenhagen
employees, an impairment write-off for certain buildings and
machinery and equipment and other exit costs.
In 1995 the Company announced a plan by USPD to move all
suppositories and cream and ointment production from two present
locations to the Lincolnton, N.C. location. The transfer of
prescription products requires the Company to obtain the approval
of the FDA for each product transferred. The Company has been
successful to date in the product transfer but the ultimate time
necessary and complete success cannot be predicted with certainty
by the Company. Based on results through the second quarter of
1996 USPD prepared to plan to accelerate the previously approved
plan for consolidation of the manufacturing operations within
USPD. The Board of Directors approved the acceleration in May
1996.
The acceleration plan included the discontinuing of all
activities in two USPD manufacturing facilities in New York and
New Jersey and the transfer of all pharmaceutical production from
those sites to the facility in Lincolnton, North Carolina. The
plan provided for complete exit by early 1997 and has resulted in
a net reduction of over 150 employees. The acceleration plan
resulted in a second quarter charge for severance of employees, a
write-off for leasehold improvements and machinery and equipment
and significant exit costs including estimated remaining lease
costs and facility refurbishment costs. In the third quarter of
1996 the Company sold its tablet business which was located in
New Jersey and sub-leased the New Jersey location. The sale
netted proceeds of approximately $.5 million and resulted in the
adjustment of certain accruals for exit costs made in the second
quarter which contemplated the shut down of the facility.
Because of the time necessary to complete the transfers, the
production rationalization plans include stay bonus plans to keep
the production work force intact until the transfer is complete.
The stay bonus plans generally require the employee remain until
their position is eliminated to earn a payment. The overall cost
of these plans is estimated at $1.9 million and is being accrued
over the periods necessary to achieve the shut downs. In the
first quarter of 1997 the New York facility was shut down and the
stay bonus has been substantially paid.
In the second half of 1996 additional management actions
included a reorganization at USPD which resulted in severing 15
employees and a reorganization of the Animal Health Division
business practices and staffing levels which resulted in severing
and/or early retirement of 33 employees and other exit costs.
As a result of the 1996 reorganizations in USPD and AHD the
Company believes annual payroll and payroll related costs of $2.5
million have been eliminated. The production rationalization
plans are expected to significantly benefit operations in 1997
for USPD and in 1998 for IPD.
The Company believes the dynamic nature of its business may
present additional opportunities to rationalize personnel
functions and operations to increase efficiency and
profitability. Accordingly, while no actions are presently
planned, similar management actions or changes to announced
management actions may be required in the future.
U.S. Generic Pharmaceutical Industry
The U.S. Generic Pharmaceutical industry has historically
been characterized by intense competition which is evidenced by
eroding prices for products as additional market participants
receive approvals for these products. Growth has historically
occurred through new product approvals and subsequent sales
exceeding declines in the base product line due to price
reductions and/or volume decreases. Generic pharmaceutical market
conditions were further exacerbated in the second half of 1996 by
a rapidly emerging fundamental shift in industry distribution,
purchasing and stocking patterns. The shift has resulted in a
substantial drop in the USPD's volume overall but in particular
to generic drug distributors who represent an important but
declining part of the Company's base business. Programs initiated
by major wholesalers have accelerated the changes and have forced
prices to decline at a faster rate. Wholesaler programs generally
require lower prices on products sold, lower inventory levels
kept at the wholesaler and fewer manufacturers selected to
provide products to the wholesalers. The USPD has been affected
by lower sales as distributors reduced business and as
wholesalers reduced inventories and prices. The Company has made
agreements with major wholesalers to provide product but cannot
predict the effect on future volume and prices. USPD has been and
will continue to be affected by the competitive and changing
nature of this industry. Accordingly, because of competition, the
significance of relatively few major customers (i.e. large
wholesalers, distributors and chain stores), a rapidly changing
market and uncertainty of timing of new product approvals, USPD
sales volume and prices are subject to unforeseen fluctuation.
The generic industry in general is subject to similar
fluctuations.
Animal Health Division Market Conditions
The Animal Health Division's principal product, BMDr, is a
feed additive used to promote growth and feed efficiency and
prevent or treat diseases in Swine and Poultry. AHD also sells
other feed additives most of which are used in combination or
sequentially with BMDr. In 1996 and especially in the second
quarter, results were negatively impacted by a steep rise in
grain (corn and wheat) prices in the U.S. The record high prices
of these feed grains in the second quarter resulted in intense
price competition and a reduction in the use of feed additives in
general, including AHD products, primarily in the poultry market.
During the second half of 1996 feed grain prices were lower
relative to the second quarter but were still historically high.
Price and other competitive intensity has continued. The Company
does not believe grain prices will remain high permanently but
does believe that competitive conditions in the industry will
remain intense for the foreseeable future. The Animal Health
Division has reevaluated its business structure and practices to
address the current industry conditions.
European Operations
The fluctuations of European currencies have and will
continue to impact the Company's European operations which
comprised approximately 45% of revenues in the year ended
December 31, 1996. In addition, many European governments have
enacted or are in the process of enacting mechanisms aimed at
lowering the cost of 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, 1996, stockholders' equity was $186.0
million compared to $205.2 million and $181.3 million at December
31, 1995, and 1994, respectively. The ratio of long-term debt to
equity was 1.26:1, 1.07:1 and 1.21:1 at December 31, 1996, 1995
and 1994, respectively. The decrease in stockholder's equity in
1996 primarily reflects the 1996 loss of the Company and an
decrease in the translation adjustment ($5.4 million) due to the
weakening of the DK and NOK in 1996.
Working capital at December 31, 1996 was $119.2 million
compared to $113.6 million and $95.8 million at December 31, 1995
and 1994, respectively. The current ratio was 1.77:1 at
December 31, 1996 compared to 1.67:1 and 1.62:1 at December 31,
1995 and 1994, respectively.
Significant fluctuations included accounts receivable being
lower in 1996 by $11.6 million resulting from substantially lower
fourth quarter sales in the USPD and the European subsidiaries
offset by a tax refund receivable of $7.2 million recorded due to
the domestic tax loss incurred by the Company. The current
portion of long-term debt was reduced as a result of an amendment
to the Company's long term debt agreement. Accrued expenses
increased due primarily to accruals for severance related to
management actions of approximately $9.3 million.
All working capital elements also decreased in 1996 in U.S.
Dollars as the functional currencies of the Company's principal
foreign subsidiaries, the Danish Krone and Norwegian Krone,
weakened versus the U.S. Dollar as compared to 1995 by
approximately 7% and 2%, respectively. The approximate decrease
due to currency translation was: accounts receivable $2.4
million, inventory $2.3 million and accounts payable and accrued
expenses $1.9 million.
The Company presently has various capital expenditure
programs under way and planned including the expansion of the
Lier, Norway facility. In 1996, the Company's capital
expenditures were $30.9 million and in 1997 the Company plans to
spend approximately the same amount as in 1996.
At December 31, 1996, the Company had $26.5 million
available under existing short-term unused lines of credit and
$15.9 million in cash. In addition, the Company has $1.5 million
available in Europe under long-term lines of credit and $6.8
million available under an amended revolving 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. At December 31, 1996, the Company has
entered into interest rate agreements to fix the interest rates
for $61.8 million of the variable debt at 5.655% plus the
required margin through October 1998. The Company is considering
similar transactions to fix additional variable rate debt for
specified periods to minimize the impact of future changes in
interest rates. The Company's policy is to selectively enter into
"plain vanilla" agreements to fix interest rates for existing
debt if it is deemed prudent.
The $185.0 million credit facility contained various
financial covenants including the maintenance of minimum equity
to assets, current and interest coverage ratios. During 1996 as
a result of charges for management actions and poor operating
results the Company requested and received a waiver for the
required interest coverage ratio from the members of the bank
syndicate which are participants in the credit facility. The
ratio required quarterly computation of compliance based on a
trailing four quarters and accordingly, the Company and the banks
amended the agreement to determine compliance solely based on
1997 results compared to 1997 interest. In addition the banks
agreed to include in equity the stock subscription of the Class B
shareholder of $20.8 million, convert existing debt tranches into
a three and one half year revolving credit and adjust the amount
of the credit facility to $170.0 million.
The Company's prospective liquidity and capital resources
were strengthened in early 1997 when the Company signed an
agreement with A.L. Industrier whereby A.L. Industrier
irrevocably agreed to purchase 1,273,438 shares of Class B Common
for $16.34 per share (total proceeds approximately $20.8
million). Concurrently the Company announced that Class A
shareholders would be issued special rights to purchase one share
of Class A Common Stock for $16.34 per share for every six shares
of Class A Common currently held. (Potential proceeds of
approximately $34.0 million.) If the Class A rights are exercised
the current ownership proportion between the Class A and B
shareholders would be maintained. The distribution of the rights
will be made with a prospectus. The final details, terms and
conditions of the rights have not been finalized, however, they
are expected to be transferable and have a term expiring no later
than November 30, 1997. A.L. Industrier's purchase of Class B
Common Stock will occur upon termination of the Class A rights,
but is not conditioned on the exercise of any of the Class A
rights.
The Company cannot predict whether the Class A rights will
be exercised. The stock subscription for the Class B Common will
be completed by the fourth quarter of 1997. (The subscription is
supported by a letter of credit.)
Item 8. Financial Statements and Supplementary Data
See page F-1 of this Report, which includes an index to the
consolidated financial statements and financial statement
schedule.
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information as to the Directors of the Registrant set
forth under the sub-caption "Board of Directors" appearing under
the caption "Election of Directors" of the Proxy Statement
relating to the Annual Meeting of Shareholders to be held on
May 28, 1997, which Proxy Statement will be filed on or prior to
April 7, 1997, is incorporated by reference into this Report.
The information as to the Executive Officers of the Registrant is
included in Part I hereof under the caption Item 1A "Executive
Officers of the Registrant" in reliance upon General Instruction
G to Form 10-K and Instruction 3 to Item 401(b) of Regulation S-
K.
Item 11. Executive Compensation
The information to be set forth under the subcaption
"Directors' Fees and Related Information" appearing under the
caption "Board of Directors" of the Proxy Statement relating to
the Annual Meeting of Shareholders to be held on May 28, 1997,
which Proxy Statement will be filed on or prior to April 7, 1997,
and the information set forth under the caption "Executive
Compensation and Benefits" in such Proxy Statement is
incorporated into this Report by reference.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
The information to be set forth under the caption "Security
Ownership of Certain Beneficial Owners" of the Proxy Statement
relating to the Annual Meeting of Stockholders expected to be
held on May 28, 1997, is incorporated into this Report by
reference. Such Proxy Statement will be filed on or prior to
April 7, 1997.
There are no arrangements known to the Registrant, the
operation of which may at a subsequent date result in a change in
control of the Registrant.
Item 13. Certain Relationships and Related Transactions
The information to be set forth under the caption "Certain
Related Transactions and Relationships" of the Proxy Statement
relating to the Annual Meeting of Stockholders expected to be
held on May 28, 1997, is incorporated into this Report by
reference. Such Proxy Statement will be filed on or prior to
April 7, 1997.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K
List of Financial Statements
See page F-1 of this Report, which includes an index to
consolidated financial statements and financial statement
schedule.
List of Exhibits (numbered in accordance with Item 601 of
Regulation S-K)
3.1A Amended and Restated Certificate of Incorporation of
the Company, dated September 30, 1994 and filed with the
Secretary of State of the State of Delaware on October 3, 1994,
was filed as Exhibit 3.1 to the Company's 1994 Annual Report on
Form 10-K and is incorporated by reference.
3.1B Certificate of Amendment of the Certificate of
Incorporation of the Company dated September 15, 1995 and filed
with the Secretary of State of Delaware on September 15, 1995 was
filed as Exhibit 3.1 to the Company's Amendment No. 1 to Form S-3
dated September 21, 1995 (Registration on No. 33-60029) and is
incorporated by reference.
3.2 Amended and Restated By-Laws of the Company,
effective as of October 3, 1994, were filed as Exhibit 3.2 to the
Company's 1994 Annual Report on Form 10-K and is incorporated by
reference.
4.1 Reference is made to Article Fourth of the Amended
and Restated Certificate of Incorporation of the Company which is
referenced as Exhibit 3.1 to this Report.
4.2 Warrant Agreement between the Company and The First
National Bank of Boston, as warrant agent, was filed as an
Exhibit 4.2 to the Company's 1994 Annual Report on Form 10-K and
is incorporated by reference.
10.1 $185,000,000 Credit Agreement among A.L.
Laboratories, Inc.,(now known as Alpharma U.S. Inc.) as Borrower,
Union Bank of Norway, as agent and arranger, and Den norske Bank
AS, as co-arranger, dated September 28, 1994, was filed as
Exhibit 10.1 to the Company's 1994 Annual Report on Form 10-K and
is incorporated by reference.
10.1A Amendment to the Credit Agreement dated February 26,
1997 between the Company and the Union Bank of Norway, as agent
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, 1995 will be furnished to the
Commission upon request.
10.2 Parent Guaranty, made by the Company in favor of
Union Bank of Norway, as agent and arranger, and Den norske Bank
AS, as co-arranger, dated September 28, 1994 was filed as Exhibit
10.2 to the Company's 1994 Annual Report on Form 10-K and is
incorporated by reference.
10.3 Restructuring Agreement, dated as of May 16, 1994,
between the Company and Apothekernes Laboratorium A.S (now known
as A.L. Industrier AS) was filed as Exhibit A to the Definitive
Proxy Statement dated August 22, 1994 and is incorporated herein
by reference.
10.4 Employment Agreement dated January 1, 1987, as
amended December 12, 1989, between I. Roy Cohen and the Company
and A.L. Laboratories, Inc. was filed as Exhibit 10.3 to the
Company's 1989 Annual Report on Form 10-K and is incorporated
herein by reference.
10.5 Control Agreement dated February 7, 1986 between
Apothekernes Laboratorium A.S (now known as A.L. Industrier AS)
and the Company was filed as Exhibit 10.10 to the Company'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 the Company was filed as Exhibit 10.6 to
the Company's 1994 Annual Report on Form 10-K and is incorporated
by reference.
10.6A Amendment to Control Agreement dated December 19,
1996 between A.L. Industrier AS and the Company is filed as an
Exhibit to this report.
10.7 The Company's 1983 Incentive Stock Option Plan, as
amended through June 7, 1995 was filed as Exhibit 10.7 to the
Company's 1995 Annual Report on Form 10-K and is incorporated by
reference.
10.8 Employment agreement dated July 30, 1991 between the
Company and Jeffrey E. Smith was filed as Exhibit 10.8 to the
Company's 1991 Annual Report on Form 10-K and is incorporated by
reference.
10.9 Employment agreement between the Company and Thomas
Anderson dated January 13, 1997 is filed as an Exhibit to this
Report.
10.10 Employment Agreement between the Company and David E.
Cohen dated December 31, 1995 was filed as Exhibit 10.10 to the
Company's 1995 Annual Report on Form 10-K and is incorporated by
reference.
10.11 Lease Agreement between A.L. Industrier AS, as
landlord, and Alpharma AS, as tenant, dated October 3, 1994 was
filed as Exhibit 10.10 to the Company's 1994 Annual Report on
Form 10-K and is incorporated by reference.
10.12 Administrative Services Agreement between A.L.
Industrier AS and Alpharma AS dated October 3, 1994 was filed as
Exhibit 10.11 to the Company's 1994 Annual Report on Form 10-K
and is incorporated by reference.
10.13 Employment agreement dated March 14, 1996 between the
Company and Einar W. Sissener was filed as Exhibit 10.13 to the
Company's 1995 Annual Report on Form 10-K and is incorporated by
reference.
10.14 Employment contract dated October 5, 1989 between
Apothekernes Laboratorium A.S (transferred to Alpharma Oslo per
the combination transaction) and Ingrid Wiik was filed as Exhibit
10.13 to the Company's 1994 Annual Report on Form 10-K and is
incorporated by reference.
10.15 Employment contract dated October 5, 1989 between
Apothekernes Laboratorium A.S (transferred to Alpharma Oslo per
the combination transaction) and Thor Kristiansen was filed as
Exhibit 10.14 to the Company's 1994 Annual Report on Form 10-K
and is incorporated by reference.
10.16 Employment contract dated October 2, 1991 between
Apothekernes Laboratorium A.S (transferred to Alpharma Oslo per
the combination transaction) and Knut Moksnes was filed as
Exhibit 10.15 to the Company's 1994 Annual Report on Form 10-K
and is incorporated by reference.
10.17 Stock Subscription and Purchase Agreement dated
February 10, 1997 between the Company and A.L. Industrier was
filed as Exhibit 10 on Form 8-K filed on February 19, 1997 and is
incorporated herein by reference.
11 Computation of Earnings per Common Share for the
years ended December 31, 1996, 1995 and 1994.
21 A list of the subsidiaries of the Registrant as of
March 18, 1997 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
See exhibit index on Page E-1 for exhibits filed with this
report.
Report on Form 8-K
On February 19, 1997, the Company filed a report on Form 8-K
dated February 10, 1997 reporting Item 5. "Other events" and Item
9. "Sales of Equity Securities pursuant to Regulation S".
The event reported was the Stock Subscription Agreement
signed with A.L. Industrier and the intention to issue rights to
the Class A Common stockholders.
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 Statement on Form S-8 No. 33-
60495:
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers
and controlling persons of the Registrant pursuant to the
foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
expressed in the Securities Act of 1933 and is, therefore,
unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of
any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question
whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final
adjudication of such issue.
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly authorized.
March 21, 1997 ALPHARMA 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 21, 1997 /s/ Einar W. Sissener
Einar W. Sissener
Chairman, Director and
Chief Executive Officer
Date: March 21, 1997 /s/ Jeffrey E. Smith
Jeffrey E. Smith
Vice President, Finance and
Chief Financial Officer
(Principal accounting officer)
Date: March 21, 1997 /s/ I. Roy Cohen
I. Roy Cohen
Director and Chairman of the
Executive Committee
Date: March 21, 1997 /s/ Thomas G. Gibian
Thomas G. Gibian
Director and Chairman of the
Audit Committee
Date: March 21, 1997 /s/ Glen E. Hess
Glen E. Hess
Director
Date: March 21, 1997 /s/ Peter G. Tombros
Peter G. Tombros
Director and Chairman
of the Compensation Committee
Date: March 21, 1997 /s/ Erik G. Tandberg
Erik G. Tandberg
Director
Date: March 21, 1997 /s/ Gert Munthe
Gert Munthe
Director
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
______________
Page
Consolidated Financial Statements:
Report of Independent Accountants F-2
Consolidated Balance Sheet at
December 31, 1996 and 1995 F-3
Consolidated Statement of Operations for
the years ended December 31, 1996,
1995 and 1994 F-4
Consolidated Statement of Stockholders'
Equity for the years ended
December 31, 1996, 1995 and 1994 F-5 to F-7
Consolidated Statement of Cash Flows
for the years ended December 31, 1996,
1995 and 1994 F-8 to F-9
Notes to Consolidated Financial Statements F-10 to F-40
Financial statement schedules are omitted for the reason that
they are not applicable or the required information is included
in the consolidated financial statements or notes thereto.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and
Board of Directors of
Alpharma Inc.:
We have audited the consolidated financial statements of
Alpharma Inc. and Subsidiaries (the "Company") listed in the
index on page F-1 of this Form 10-K. These financial statements
are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that we
plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall 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 Alpharma Inc. and Subsidiaries as of
December 31, 1996 and 1995 and the consolidated results of their
operations and their cash flows for each of the three years in
the period ended December 31, 1996 in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Parsippany, New Jersey
March 5, 1997
ALPHARMA INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In thousands, except share data)
December 31,
1996 1995
ASSETS
Current assets:
Cash and cash equivalents $ 15,944 $ 18,351
Accounts receivable, net 120,551 132,161
Inventories 123,585 120,084
Prepaid expenses and other
current assets 14,779 12,290
Total current assets 274,859 282,886
Property, plant and equipment, net 209,803 212,176
Intangible assets, net 119,918 128,186
Other assets and deferred charges 8,827 11,605
Total assets $613,407 $634,853
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 4,966 $ 13,160
Short-term debt 60,952 62,695
Accounts payable 30,557 38,343
Accrued expenses 57,731 48,435
Accrued and deferred income taxes 1,445 6,650
Total current liabilities 155,651 169,283
Long-term debt 233,781 219,451
Deferred income taxes 29,882 30,961
Other non-current liabilities 8,051 9,968
Stockholders' equity:
Preferred stock, $1 par value,
no shares issued
Class A Common Stock, $.20
par value, 13,813,516 and
13,699,592 shares issued 2,762 2,740
Class B Common Stock, $.20 par value,
8,226,562 shares issued 1,646 1,646
Additional paid-in capital 122,252 120,357
Foreign currency translation adjustment 10,491 15,884
Retained earnings 54,996 70,385
Treasury stock, 274,786 and 263,017
shares of Class A Common Stock,
at cost (6,105) (5,822)
Total stockholders' equity 186,042 205,190
Total liabilities and
stockholders' equity $613,407 $634,853
See notes to consolidated financial statements.
ALPHARMA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share data)
Years Ended December 31,
1996 1995 1994
Total revenue $486,184 $520,882 $469,263
Cost of sales 297,128 302,127 275,543
Gross profit 189,056 218,755 193,720
Selling, general and
administrative expenses 185,136 166,274 177,742
Operating income 3,920 52,481 15,978
Interest expense (19,976) (21,993) (15,355)
Other income (expense), net (170) (260) 1,113
Income (loss) before provision
(benefit) for income taxes,
and extraordinary item (16,226) 30,228 1,736
Provision (benefit) for
income taxes (4,765) 11,411 3,439
Income (loss) before extraordinary
item (11,461) 18,817 (1,703)
Extraordinary item, net of tax _______ _______ (683)
Net income (loss) $(11,461) $ 18,817 $ (2,386)
Average common shares outstanding:
Primary 21,715 21,754 21,568
Fully diluted 21,715 22,407 21,568
Earnings per common share:
Primary
Income (loss) before extraordinary
item $ (.53) $ .86 $ (.08)
Net income (loss) $ (.53) $ .86 $ (.11)
Fully diluted
Income (loss) before extraordinary
item $ (.53) $ .84 $ (.08)
Net income (loss) $ (.53) $ .84 $ (.11)
See notes to consolidated financial statements.
ALPHARMA 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, 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)
Purchase of treasury stock (14,097) (300) (300)
Exercise of stock options
(Class A) 44,025 9 9
Employee stock purchase plan 36,776 7 7
Balance, December 31, 1995 21,926,154 $2,740 $1,646 (263,017) $(5,822) $(1,436)
Purchase of treasury stock (11,769) (283) (283)
Exercise of stock options 66,637 13 13
(Class A)
Employee stock purchase plan 47,287 9 9
Balance, December 31, 1996 22,040,078 $2,762 $1,646 (274,786) $(6,105) $(1,697)
ALPHARMA 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, 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 Alpharma Oslo to
A.L.Industrier (1,384) (1,384)
Appropriation of retained
earnings equal to cash
purchase price for Alpharma
Oslo 23,594 (23,594)
Purchase of Alpharma 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 $181,288
Net income -1995 18,817 18,817
Dividends declared
($.18 per common share) (3,914) (3,914)
Net foreign currency
translation adjustment 7,759 7,759
Tax benefit realized from
stock option plan 137 137
Purchase of treasury stock (300) (300)
Exercise of stock options
(Class A) 9 578 587
Employee stock purchase plan 7 809 816
Balance, December 31, 1995 $(1,436) $120,357 $ 15,884 $70,385 $205,190
Net loss - 1996 (11,461) (11,461)
Dividends declared
($.18 per common share) (3,928) (3,928)
Net foreign currency
translation adjustment (5,393) (5,393)
Tax benefit realized from
stock option plan 202 202
Purchase of treasury stock (283) (283)
Exercise of stock options
(Class A) 13 862 875
Employee stock purchase plan 9 831 840
Balance, December 31, 1996 $(1,697) $122,252 $ 10,491 $54,996 $186,042
See notes to consolidated financial statement.
ALPHARMA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands of dollars)
Years Ended December 31,
1996 1995 1994
Operating activities:
Net income (loss) $(11,461) $18,817 $ (2,386)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization 31,503 31,022 26,773
Deferred income taxes (3,104) 1,054 (5,506)
Noncurrent asset write-offs 5,753 14,841
Extraordinary item 683
Change in assets and liabilities, net
of effects from business
acquisitions:
(Increase) decrease in accounts
receivable 9,204 (9,295) (14,864)
(Increase) in inventory (5,876) (10,468) (11,639)
(Increase) in prepaid
expenses and other current
assets (595) (1,462) (774)
Increase in accounts
payable and accrued expenses 3,346 4,462 8,492
Increase (decrease) in accrued
income taxes (4,523) 2,802 (1,269)
Other, net 574 (104) 2,811
Net cash provided by operating
activities 24,821 36,828 17,162
Investing activities:
Capital expenditures (30,874) (24,836) (44,326)
Acquisition of Alpharma Oslo (23,594)
Purchase of acquired businesses,
and intangibles, net of cash
acquired (3,500) (13,733)
Other (348) 579 _______
Net cash used in investing
activities (31,222) (27,757) (81,653)
Continued on next page.
See notes to consolidated financial statements.
ALPHARMA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
(In thousands of dollars)
Years Ended December 31,
1996 1995 1994
Financing activities:
Net borrowings under
lines of credit $ (630) $ (296) $ 4,494
Proceeds of long-term debt 24,213 9,000 164,423
Reduction of long-term debt (17,137) (13,121) (100,719)
Dividends paid (3,928) (3,914) (3,893)
Cash transfers between Alpharma Oslo
and A.L. Industrier 4,991
Treasury stock acquired (283) (300) (24)
Proceeds from employee stock option
and stock purchase plan 1,715 1,403 818
Other, net 201 137 (2,713)
Net cash provided by (used in)
financing activities 4,151 (7,091) 67,377
Exchange rate changes:
Effect of exchange rate changes
on cash (627) 1,338 1,481
Income tax effect of exchange rate
changes on intercompany advances 470 (479) (502)
Net cash flows from exchange rate
changes (157) 859 979
Increase (decrease) in cash and cash
equivalents (2,407) 2,839 3,865
Cash and cash equivalents at
beginning of year 18,351 15,512 11,647
Cash and cash equivalents at
end of year $15,944 $18,351 $15,512
See notes to consolidated financial statements.
ALPHARMA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
1. The Company:
Alpharma Inc., (the "Company") is a multinational
pharmaceutical company which develops, manufactures and markets
specialty generic and proprietary human pharmaceutical and
animal health products.
The Company's Human Pharmaceutical business consists of
three divisions: The U.S. Pharmaceuticals Division ("USPD"), The
International Pharmaceuticals Division ("IPD") and the Fine
Chemicals Division ("FCD"). The USPD's principal products are
generic liquid and topical pharmaceuticals sold primarily to
wholesalers, distributors and merchandising chains. The IPD's
principal products are dosage form pharmaceuticals and adhesive
bandages sold primarily in Scandinavia and western Europe as well
as Indonesia and certain middle eastern countries. The FCD's
principal products are bulk pharmaceutical antibiotics sold to
the pharmaceutical industry in the U.S. and worldwide for use as
active substances in a number of finished pharmaceuticals.
The Company's Animal Health business consists of two
divisions: The Animal Health Division ("AHD") and the Aquatic
Animal Health Division ("AAHD"). The AHD's principal products are
feed additive and other animal health products for animals raised
for commercial food production (principally poultry and swine) in
the U.S. and worldwide. The AAHD manufactures and markets
vaccines primarily for use in immunizing farmed fish (principally
salmon) worldwide with a concentration in Norway. (See Note 20
for segment and geographic information.)
The Company's Class B stock (37.8% of total outstanding
common stock) is totally held by A.L. Industrier AS (A.L.
Industrier), a Norwegian Company. A.L. Industrier 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 Notes 16
and 21.)
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.
Use of Estimates:
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions. The estimates and assumptions
affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ
from those estimates.
Cash equivalents:
Cash equivalents include all highly liquid investments that
have an original maturity of three months or less.
Inventories:
Inventories are valued at the lower of cost or market. The
last-in, first-out (LIFO) method is principally used to determine
the cost of the USPD manufacturing subsidiary inventories. The
first-in, first-out (FIFO) and average cost methods are used to
value remaining inventories.
Property, plant and equipment:
Property, plant and equipment are recorded at cost.
Expenditures for additions, major renewals and betterments are
capitalized and expenditures for maintenance and repairs are
charged to income as incurred. When assets are sold or retired,
their cost and related accumulated depreciation are removed from
the accounts, with any gain or loss included in net income.
Interest is capitalized as part of the acquisition cost of
major construction projects. In 1996, 1995 and 1994, $572, $318
and $722 of interest cost was capitalized, respectively.
Depreciation is computed by the straight-line method over
the estimated useful lives which are generally as follows:
Buildings 30-40 years
Building improvements 10-30 years
Machinery and equipment 2-20 years
Intangible assets:
Intangible assets represent the excess of cost of acquired
businesses over the underlying fair value of the tangible net
assets acquired and the cost of technology, trademarks, New
Animal Drug Applications ("NADAs"), and other non-tangible assets
acquired in product line acquisitions. Intangible assets are
amortized on a straight-line basis over their estimated period of
benefit. The Company analyzes its intangible assets by division,
based upon estimated future undiscounted cash flows. At December
31, 1996 and 1995 such analyses did not demonstrate any evidence
of impairment. The following table is net of accumulated
amortization of $42,982 and $35,903 for 1996 and 1995,
respectively.
1996 1995 Life
Excess of cost of acquired
businesses over the fair value
of the net assets acquired $ 98,304 102,434 20 - 40
Technology, trademarks, NADAs
and other 21,614 25,752 6 - 20
$119,918 $128,186
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 1996, 1995 and 1994 is net of $470, ($479), and
($502), respectively, representing the foreign tax effects
associated with intercompany advances to foreign subsidiaries.
Foreign exchange contracts:
The Company selectively enters into foreign exchange
contracts to buy and sell certain cash flows in non-functional
currencies. Foreign exchange contracts are accounted for as
foreign currency transactions and gains or losses are included in
income.
Interest Rate Transactions:
The Company selectively enters into interest rate agreements
which fix the interest rate to be paid for specified periods on
variable rate long-term debt. The effect of these agreements is
recognized over the life of the agreements as an adjustment to
interest expense.
Income Taxes:
The provision for income taxes includes federal, state and
foreign income taxes currently payable and those deferred because
of temporary differences in the basis of assets and liabilities
between amounts recorded for financial statement and tax
purposes. Deferred taxes are calculated using the liability
method.
At December 31, 1996, the Company's share of the
undistributed earnings of its foreign subsidiaries (excluding
cumulative foreign currency translation adjustments) was
approximately $36,100. No provisions are made for U.S. income
taxes that would be payable upon the distribution of earnings
which have been reinvested abroad or are expected to be returned
in tax-free distributions. It is the Company's policy to provide
for U.S. taxes payable with respect to earnings which the Company
plans to repatriate.
Accounting for Postretirement Benefits:
The Company accounts for postretirement benefits in
accordance with Statement of Financial Accounting Standards
"SFAS" No. 106 "Employers' Accounting for Postretirement Benefits
Other than Pensions". The statement requires accrual accounting
for these benefits over the service lives of the employees.
Earnings Per Share:
Primary earnings per share is based upon the weighted
average number of common shares outstanding and common stock
equivalents (i.e. stock options and commencing in 1994 warrants
to purchase common shares are included when dilutive).
Fully diluted earnings per share reflect the dilutive effect
of stock options and the fully diluted effect of the 1994
warrants when appropriate. Such options and warrants did not have
a dilutive effect in 1996 and 1994.
Accounting for Impairment of Long-Lived Assets:
Effective January 1, 1996, the Company formally adopted SFAS
No. 121 "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of."
The standard requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity be
reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable. The adoption of SFAS No. 121 did not have a
material impact on the Company.
Accounting for Stock Based Compensation:
Effective January 1, 1996, the Company formally adopted SFAS
NO. 123, "Accounting for Stock-Based Compensation." The standard
establishes a fair value method for accounting for or,
alternatively, disclosing the pro-forma effect of stock-based
compensation plans. The Company has adopted the disclosure
alternative. As a result, the adoption of this standard will not
have any impact on reported results of operations and financial
position.
3. Acquisition of Alpharma Oslo, Transaction Expenses and
Management Actions
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").
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
("Alpharma Oslo"). The Company then acquired the shares of
Alpharma 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. (See Notes 1
and 16.)
The consideration paid by the Company for Alpharma 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 warrant 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
Alpharma Oslo as a transfer and exchange between companies under
common control. Accordingly in 1994, the accounts of Alpharma
Oslo were combined with the Company at historical cost in a
manner similar to a pooling-of-interests and the Company's
financial statements were restated to include Alpharma Oslo. At
the acquisition date, the consideration paid for Alpharma Oslo
was reflected as a decrease to stockholders' equity net of the
estimated value ascribed to the warrants. There were no
adjustments required to conform accounting practices of the
companies.
The restated statement of operations for the period
January 1, to October 2, 1994 does not include interest expense
related to the cash consideration paid on October 3, 1994 by the
Company for Alpharma Oslo and related transaction costs. Assuming
cash consideration of $23,594, and transaction costs of
approximately $3,100, interest expense after tax would have
decreased reported results by approximately $950 in 1994 (for the
period January 1, to October 2, 1994).
In connection with the acquisition of Alpharma Oslo in 1994,
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 totaled
$3,100 of which $2,600 were expensed in the fourth quarter of
1994. Certain of these expenses are not deductible for tax
purposes. 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 1994
charges resulting from these actions follows:
Pre-tax
Amount Description of Action
$3,750 Sever 53 employees primarily in the Human
Pharmaceuticals Segment.
$8,800 Exit by sale or closing the U.S. tablet
business. Write-off includes intangible
assets of $5,800 and plant and equipment of
$3,000. During 1995 the tablet business
operated at a reduced level with a negligible
impact on operating income. The Company sold
the tablet business in August 1996.
$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 was
no longer needed as a result of the
acquisition resulting in a write down to fair
market value. In 1995 and 1996 the land was
offered for sale however, no transaction was
consummated. The Company believes no
additional write down is warranted.
$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 and dispose of the resultant equity
position and certain other rights in the R&D company performing
the research. The Company accelerated all contractually required
payments of $2,500 in the fourth quarter of 1994.
The 1994 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 in 1994 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).
In the third quarter of 1995, the Company announced
additional post-combination management actions which continued
the process begun in December 1994. The actions occurred in the
third and fourth quarters of 1995 and included severance of
certain employees company wide, further efforts toward
consolidation of operations in the USPD, the utilization of
substantial consulting resources focused primarily on
accelerating the realization of certain combination benefits in
the IPD and the sale in September of its minority equity position
and certain other product rights in the R&D company.
The net effect of the additional management actions for the
year ended December 31, 1995 was a net reduction of selling,
general and administrative expenses of $159 resulting from the
income received on the sale of the equity position in the R&D
company and certain other product rights ($6,463) net of expenses
for the other management actions ($6,304). The expenses of the
other management actions were $4,556 for consulting services and
$1,748 for severance for 77 employees in the IPD, USPD and AHD.
The net after tax effect of the 1995 actions was approximately
zero.
In 1996, the IPD continued to take additional actions
designed to further strengthen the competitive nature of the
division by lowering costs. In the first quarter of 1996, IPD
severed approximately 30 sales, marketing and other personnel
based primarily in the Nordic countries and incurred termination
related costs of approximately $1,900. The termination costs are
included in selling, general and administrative expenses.
In May 1996, the Board of Directors approved a production
rationalization plan which includes the transfer of all tablet,
ointment and liquid production from Copenhagen, Denmark to Lier,
Norway. The full transfer will be completed in 1998 and will
result in the reduction of approximately 175 employees (primarily
involved in production). The rationalization plan resulted in a
charge in the second quarter for severance for Copenhagen
employees, an impairment write off for certain buildings and
machinery and equipment and other exit costs.
In addition in May 1996, the Board of Directors approved the
U.S. Pharmaceuticals Division ("USPD") plan to accelerate a
consolidation of manufacturing operations within USPD.
The plan included the discontinuing of all activities in two
USPD manufacturing facilities in New York and New Jersey and the
transfer of all pharmaceutical production from those sites to the
facility in Lincolnton, North Carolina. The plan provided for
complete exit by early 1997 and resulted in a reduction of
approximately 200 employees (i.e. all production, administration
and support personnel at the plants). The acceleration plan
resulted in a second quarter charge for severance of employees, a
write-off of leasehold improvements and machinery and equipment
and significant exit costs including estimated remaining lease
costs and refurbishment costs for the facilities being exited.
Due to the time necessary to achieve both transfers of
production the Company, as part of the severance arrangements,
has instituted stay bonus plans. The overall cost of the stay
bonus plans is estimated at $1,900, and is being accrued over the
periods necessary to achieve shut down and transfer. The stay
bonus plans generally require the employee remain until their
position is eliminated to earn the payment.
In the second half of 1996 the USPD's management actions
were adjusted for the sale of the Able tablet business. The sale
of the Able tablet business and sub-lease of the Able facility
(located in New Jersey) resulted in the Company reducing certain
accruals which would have been incurred in closing the facility.
The net reduction of the second quarter charge for the sale was
$1,400 and included the net proceeds received on the sale of
approximately $500. In addition in 1996 certain staff and
executives at USPD headquarters were terminated (15 employees)
resulting in severance of $782.
As a result of difficult market conditions experienced in
1996, the Company's Animal Health Division "AHD" reviewed its
business practices and staffing levels. As a result 33 salaried
employees were terminated or elected an early retirement program.
Concurrently office space was vacated resulting in a charge for
the write off of leasehold improvements and lease payments
required to terminate the lease. In addition, the AHD
distribution business was reviewed and a number of minor products
were discontinued.
A summary of 1996 charges and expenses resulting from the
management actions which are included in cost of goods sold
($1,100), and selling, general and administrative expenses
($17,700)follows:
Year Description
$11,200 Severance and employee termination benefits for all
1996 employee related actions (approximately 450
employees are to be terminated; at year end
approximately 130 employees were terminated).
1,000 Stay bonus accrued, as earned.
4,175 Write off of building, leasehold improvements and
machinery and equipment. (Net of sales proceeds of
approximately $500 in the third quarter.)
550 Accrual of the non cancelable term of the operating
leases and estimated refurbishment costs for USPD
facilities.
1,875 Exit costs for demolition of facilities, clean up
costs and other.
______
$18,800
The net after tax effect of the 1996 management actions was
a loss of approximately $12,600 or ($.58 per share).
A summary of the liabilities set up for severance and
included in accrued expenses is as follows (including stay
bonus):
1994 1995 1996
Actions Actions Actions
Balance, December 31, 1994 $3,156
1995
Accruals $1,748
Payments (2,782) (463)
Translation and
adjustments 32 _____
Balance, December 31, 1995 $ 406 1,285
1996
Accruals $11,338
Payments (261) (1,270) (2,122)
Translation and
adjustments (12) _____ (2)
Balance, December 31, 1996 $ 133 $ 15 $ 9,214
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 August 1995, the Company acquired a company whose
principal asset was a NADA for a feed additive used in the
treatment and prevention of respiratory diseases in swine. The
cost of $3,000 has been allocated to intangible assets ($1,500)
and a covenant not to compete ($1,500) and will be amortized over
20 and 5 year periods, respectively.
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. In addition, the agreement provided for
contingent payments based on future product approvals and market
penetration of such products. In 1996 and 1995 contingent
payments of $203 and $500 were made in accordance with the
purchase agreement. The excess of purchase price over the
underlying estimated fair value of net assets acquired is being
amortized over 20 years.
Contingent payments are included in intangible assets when
earned and amortized over their remaining life.
5. Accounts receivable, net:
Accounts receivable consist of the following:
December 31,
1996 1995
Accounts receivable, trade $113,577 $133,540
Federal and state income
taxes receivable 7,194 -
Other 4,139 4,372
124,910 137,912
Less allowances for doubtful
accounts 4,359 5,751
Accounts receivable, net $120,551 $132,161
The allowance for doubtful accounts for the three years
ended December 31, consisted of the following:
1996 1995 1994
Balance at January 1, $5,751 $4,897 $2,983
Provision for doubtful
accounts 3,572 2,166 1,861
Reductions for accounts
written off (4,589) (1,117) (208)
Translation and other (375) (195) 261
Balance at December 31, $4,359 $5,751 $4,897
6. Inventories:
Inventories consist of the following:
December 31,
1996 1995
Finished product $ 69,629 $ 68,529
Work-in-process 17,126 16,697
Raw materials 36,830 34,858
$123,585 $120,084
At December 31, 1996 and 1995, approximately $49,000 and
$50,800 of inventories, respectively, are valued on a LIFO basis.
Such amounts are (lower) than the FIFO basis by $(774) in 1996
and $(321) in 1995.
7. Property, Plant and Equipment:
Property, plant and equipment, at cost, consist of the
following:
December 31,
1996 1995
Land $ 10,221 $10,040
Buildings and building
improvements 104,463 97,649
Machinery and equipment 222,911 216,728
Construction in progress 12,011 11,763
349,606 336,180
Less, accumulated depreciation 139,803 124,004
$209,803 $212,176
8. Long-Term Debt:
Long-term debt consists of the following:
December 31,
1996 1995
U.S. Dollar Denominated:
1994 Credit Facility
Term Loan A - 6.8% $ 61,750 $ 65,000
Term Loan B - 7.2% 68,400 72,000
Revolving Credit - 6.8% 33,000 18,000
A/S Eksportfinans 9,000 9,000
Lincolnton acquisition note - 1,500
Industrial Development Revenue
Bonds:
Baltimore County, Maryland
(7.25%) 5,705 6,220
(6.875%) 1,200 1,200
Lincoln County, NC 5,500 6,000
Other, U.S. 1,390 1,919
Denominated in Other Currencies:
Mortgage notes payable (NOK) 30,911 33,571
Bank and agency development
loans (NOK) 21,362 17,345
Other, foreign 529 856
238,747 232,611
Less, current maturities 4,966 13,160
$233,781 $219,451
In September 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 Alpharma Oslo (including related
transaction costs, fees and expenses)(Note 3) and for general
corporate purposes.
The 1994 Credit Facility 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 1.0% (2)
1.25% (1)(2) 1.125%(2)
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 55% extension
at final at final
maturity maturity
(1) The interest rate was fixed at 5.655% plus 1.25% by the
use of an interest rate swap through October 1998. (See Note 17.)
(2) Margin rate, in effect, at next interest fixing date.
The 1994 Credit Facility has several financial covenants,
including an interest coverage ratio, minimum capital, and equity
to asset ratio. During 1996, as a result of insufficient
operating income as compared to interest expense the Company
requested and received a waiver of the interest coverage ratio.
In February 1997, the Company and syndicate banks agreed to and
signed an amendment to the 1994 Credit Facility providing for:
(1) The conversion of Term Loan (A) and (B) and the
existing revolving credit into an overall revolving $170,000
Credit Facility ("1996 Credit Facility") with an initial
expiration of August 28, 2000. The 1996 Credit Facility may be
extended annually upon approval of the syndicate banks.
(2) Interest on the facility will be at the Eurodollar rate
with a margin of 1.125% to 1.25%.
(3) Modification of the calculation of the Interest
Coverage ratio for 1997 to include only 1997 operating income and
interest expense.
(4) Modification of the definition of net worth to include
the irrevocable stock subscription by A.L. Industrier. (See Note
21.)
In December 1995, the Company's Danish subsidiary A/S Dumex
borrowed $9,000 from A/S Eksportfinans with credit support
provided by Union Bank of Norway and Bikuben Girobank A/S
("Bikuben") to finance an expansion of its Vancomycin
manufacturing facility in Copenhagen. The term of the loan is
seven years. Repayment will be made in ten semi-annual
installments of $900 beginning in March 23, 1998 and ending
September 22, 2002 Interest for the loan is fixed at 6.59%,
including the cost of the credit support provided via guarantee
by Union Bank of Norway and Bikuben.
The Baltimore County Industrial Development Revenue Bonds
are payable in varying amounts through 2009. Plant and equipment
with an approximate net book value of $13,200 collateralize the
Baltimore County Industrial Revenue Bonds.
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 (4.45% at December 31, 1996;
3.672% cumulative weighted average for 1996) 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. Plant and equipment with an
approximate net book value of $10,700 serve as collateral for
this loan.
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 $36,850 at
December 31, 1996) and the Oslo, Norway ("Skoyen") facility. (See
Note 13.) 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, 1996 and 1995 was 6.1% and 8.8%,
respectively. The tranches are repayable in semiannual
installments through 2021. Yearly amounts payable vary between
$1,239 and $2,005.
Alpharma 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 semiannual payments in 1997 and 1998
of $1,043 and $1,597 and a final payment of $8,636 in 1999. The
weighted average interest rate of the loans at December 31, 1996
and 1995 was 6.1% and 6.4%, respectively. The banks and agencies
have the option to extend payment in 1999.
As of December 31, 1996, Alpharma Oslo had approximately
$1,549 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. Certain NOK
loans have loan covenants which apply directly to Alpharma Oslo.
Maturities of long-term debt during each of the next five
years and thereafter are as follows:
Year ending December 31,
1997 $4,966
1998 7,505
1999 22,136
2000 167,430
2001 4,319
Thereafter 32,391
$238,747
9. Short-Term Debt:
Short-term debt consists of the following:
December 31,
1996 1995
Domestic $41,760 $48,240
Foreign 19,192 14,455
$60,952 $62,695
At December 31, 1996, the Company and its domestic
subsidiaries have available bank lines of credit totaling
$60,000. Borrowings under these lines are made for periods
generally less than three months and bear interest from 6.45% to
6.69% at December 31, 1996. At December 31, 1996, the amount of
the unused lines totaled $18,240.
At December 31, 1996, the Company's foreign subsidiaries
have available lines of credit with various banks totaling
$27,420($24,544 in Europe and $2,876 in the Far East). Drawings
under these lines are made for periods generally less than three
months and bear interest at December 31, 1996 at rates ranging
from 3.90% to 8.0%. At December 31, 1996, the amount of the
unused lines totaled $8,228($5,352 in Europe and $2,876 in the
Far East).
The weighted average interest rate on short-term debt during
the years 1996, 1995 and 1994 was 6.2%, 6.6% and 5.9%,
respectively.
10. Income Taxes:
Domestic and foreign income (loss) before income taxes was
$(17,991), and $1,765, respectively in 1996, $17,548 and $12,680,
respectively in 1995, and $158 and $1,578, respectively in 1994.
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,
1996 1995 1994
Current:
Federal $(4,796) $ 6,009 $6,246
Foreign 3,367 3,074 1,389
State (232) 1,274 1,310
$(1,661) $10,357 8,945
Deferred:
Federal (522) (27) (5,018)
Foreign (2,531) 958 142
State (51) 123 (630)
(3,104) 1,054 (5,506)
Provision/(benefit)
for income taxes $(4,765) $11,411 $3,439
A reconciliation of the statutory U.S. federal income tax
rate to the effective rate follows:
Years Ended December 31,
1996 1995 1994
Provision for income taxes at
statutory rate (35.0%) 35.0% 35.0%
State income tax, net of federal
tax benefit (1.1%) 3.0% 25.5%
Higher (lower) taxes on foreign
earnings, net (2.7%) (2.6%) 14.2%
Tax credits (0.9%) (1.3%) (0.1%)
Non-deductible costs, principally
depreciation and amortization
related to acquired companies 8.5% 3.9% 78.1%
Capitalized combination costs 49.4%
Other 1.8% ( .2%) (4.0%)
Provision/(benefit)
for income taxes (29.4%) 37.8% 198.1%
Deferred tax liabilities (assets) are comprised of the
following:
Year Ended
December 31,
1996 1995
Accelerated depreciation and amortization
for income tax purposes $23,949 $24,637
Excess of book basis of acquired assets
over tax bases 8,815 9,308
Differences between inventory valuation
methods used for book and tax purposes
(Denmark) 3,410 2,887
Other 1,147 1,462
Gross deferred tax liabilities 37,321 38,294
Accrued liabilities and other reserves (8,791) (7,245)
Pension liabilities (1,408) (1,321)
Loss carryforwards (2,628) (2,093)
Other (2,796) (2,666)
Gross deferred tax assets (15,623) (13,325)
Deferred tax assets valuation allowance 2,628 2,093
Net deferred tax liabilities $24,326 $27,062
As of December 31, 1996, the Company has state loss
carryforwards in one state of approximately $15,350, which are
available to offset future taxable income. These carryforwards
will expire between the years 1999 and 2003. The Company also has
foreign loss carryforwards in one country as of December 31,
1996, of approximately $4,200, which are available to offset
future taxable income, and have an unlimited carryforward period.
The Company has recognized a deferred tax asset relating to these
carryforwards; however, based on analysis of current information,
which indicated that it is not likely that such state and foreign
losses will be realized, a valuation allowance has been
established for the entire amount of these carryforwards.
11. Pension Plans:
Domestic:
Prior to July 1, 1994, the Company maintained two qualified
noncontributory, defined benefit pension plans ("Corporate Plan"
and "Subsidiary Plan") covering the majority of its domestic
employees. Effective July 1, 1994, the Company amended the
Corporate Plan to include certain subsidiary employees and merged
the Subsidiary Plan into the Corporate 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. During 1995 the Company consolidated its
Plan assets under a single custodian and a single investment
manager. Plan assets are invested in equities, government
securities and bonds.
Net pension cost for 1996, 1995 and 1994 included the
following components:
Years Ended December 31,
1996 1995 1994
Service cost $1,339 $1,049 $1,047
Interest cost 974 874 856
Actual return on plan assets (1,499) (1,434) 105
Net amortization and deferral 610 957 (502)
$1,424 $1,446 $1,506
The following tables set forth the plan's funded status as
of December 31, 1996 and 1995:
1996 1995
Accumulated benefit obligation:
Vested $ 6,658 $ 7,549
Nonvested 1,132 1,196
$ 7,790 $ 8,745
Projected benefit obligation $11,457 $12,827
Fair value of plan assets (11,276) (9,972)
Unrecognized net loss (1,344) (4,014)
Unrecognized prior service cost 1,338 1,439
Unrecognized net transition
obligation (214) (244)
Accrued (prepaid) pension costs $ (39) $ 36
The assumptions used were as follows:
1996 1995 1994
Weighted average discount rate 7.75% 7.25% 8.5%
Rate of increase in compensation
rate 4.0% 4.0% 5.0%
Expected long-term rate of return
on plan assets 9.0% 8.0% 8.0%
In addition, the Company has unfunded supplemental executive
pension plans providing additional benefits to a few highly
compensated employees. For 1996, 1995 and 1994 such pension
expense was approximately $61, $65 and $60, respectively and the
year end accrual at December 31, 1996 and 1995 was $208 and $180,
respectively.
The Company and its domestic subsidiaries also have a number
of defined contribution plans, both qualified and non-qualified,
which allow eligible employees to withhold a fixed percentage of
their salary (maximum 15%) and provide for a Company match based
on service (maximum 6%). The Company's contributions to these
plans were approximately $1,300, $1,200 and $700 in 1996, 1995
and 1994, respectively.
Europe:
Alpharma 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 Alpharma Oslo makes annual contributions to the plan in
accordance with Norwegian insurance principles and practices. In
addition to the annual premiums, Alpharma 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.
Alpharma 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 1996, 1995 and 1994 included the following
components:
1996 1995 1994
Service cost $1,302 $ 954 $1,009
Interest cost 1,027 993 766
Actual return on plan assets (1,032) (456) (340)
Net amortization and deferral 413 (66) (178)
$1,710 $1,425 $1,257
The following tables set forth the plans' funded status as of
December 31, 1996 and 1995:
Assets Exceed Accumulated
Accumulated Benefits
Benefits Exceed Assets
1996 1995 1996 1995
Accumulated benefit
obligation:
Vested $10,587 $ 9,195 $1,361 $ 1,376
Nonvested 1,530 140 _____ ______
$12,117 $ 9,335 $1,361 $ 1,376
Projected benefit
obligation $16,871 $14,468 $1,361 $ 1,422
Fair value of plan
assets (11,738) (10,298)
Unrecognized net gain
(loss) 970 1,893 8 (40)
Unrecognized prior
service cost (803) (868) (348) (426)
Unrecognized net
transition obligation (1,264) (1,398) (28) (33)
Additional minimum
liability _____ ______ 368 454
Accrued pension costs $ 4,036 $ 3,797 $1,361 $ 1,377
The assumptions used were as follows:
1996 1995 1994
Weighted average discount rate 7.0% 7.0% 7.0%
Rate of increase in compensation
rate 3.5% 3.5% 3.5%
Expected long-term rate of return
on plan assets 7.0% 7.0% 7.0%
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 $2,250,
$2,400 and $1,900 in 1996, 1995 and 1994, respectively.
12. Postretirement Benefits:
The Company has an unfunded postretirement medical and
nominal life insurance plan covering certain domestic employees
included in the Corporate 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 1996, 1995 and 1994 expense was 7.25%, 8.5%, and
7.25%, respectively. The discount rate used in determining the
accumulated post retirement obligation as of December 31, 1996
and 1995 was 7.75% and 7.25%, respectively. The health care cost
trend rate was 8.0% declining to 5.0% over a ten year period,
remaining level thereafter.
The unfunded plan is recognized at December 31, 1996 and
1995 as follows:
1996 1995
Accumulated postretirement benefit obligation
Retirees $1,789 $ 579
Fully eligible active participants 191
Other active participants 958 1,276
2,747 2,046
Unrecognized estimated net (loss) gain (526) (500)
Unrecognized transition obligation (863) (917)
Accrued postretirement benefit cost $1,358 $ 629
In 1996 the Company's AHD announced an early retirement plan
for employees meeting certain criteria. As part of the plan
employees electing early retirement would be eligible for post
retirement medical even if they had not met the required service
and age requirements. The charge for the special termination
benefits of $492 was required and is included in the accrued post
retirement benefit cost.
The net periodic postretirement benefit cost included the
following components.
1996 1995 1994
Service cost $120 $ 101 $102
Interest cost 146 127 97
Amortization of:
Transition obligation 54 54 54
Unrecognized loss 17 ___ ___
$337 $282 $253
13. Transactions With A. L. Industrier:
Years Ended December 31,
1996 1995 1994
Sales to and commissions received
from A.L. Industrier $3,075 $3,353 $2,805
Compensation received for
management services rendered to
A.L. Industrier $ 464 $ 630 $ 854
Inventory purchased from and
commissions paid to A.L.
Industrier $ 200 $ 214 $ 291
Net interest received from A.L.
Industrier - - $ 401
As of December 31, 1996 and 1995 there was a net current
receivable of $764 and $702, respectively, from A.L. Industrier.
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 has been
extended after the initial term and may be terminated by either
party upon six months notice.
In addition, in connection with the agreement to purchase
Alpharma Oslo, A.L. Industrier retained the ownership of the
Skoyen manufacturing facility and administrative offices (not
including leasehold improvements and manufacturing equipment) and
leases it to the Company. The 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
renewable at the then fair rental value at the option of the
Company for four consecutive five year terms.
14. Contingent Liabilities, Litigation and Commitments:
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 $7,000 and the fixed cost portion is approximately
20%. For 1996 and prior years, the Company has purchased in
excess of the minimum quantities.
15. Leases:
Rental expense under operating leases for 1996, 1995 and
1994 was $6,578, $5,574 and $5,313, 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,
1997 $ 4,700
1998 5,200
1999 4,200
2000 3,800
2001 2,400
Thereafter 7,400
$27,700
16. Stockholders' Equity:
The holders of the Company's Class B Common Stock, (totally
held by A. L. Industrier at December 31, 1996) 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 Alpharma 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.
Warrants to purchase 2,450,246 shares became exercisable in
October 1995 with the balance to become exercisable in October
1997. (See Note 3.)
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.
17. Derivatives and Fair Value of Financial Instruments:
The Company currently uses the following derivative
financial instruments for purposes other than trading.
Derivative Use Purpose
Forward foreign Occasional Entered into selectively
exchange contracts to sell or buy cash flows
in non-functional
currencies.
Interest rate Occasional Entered into selectively
agreements to fix interest rate for
specified periods on
variable rate long-term
debt.
At December 31, 1996 and 1995, the Company's European
subsidiaries had foreign currency contracts outstanding with a
notional amount of approximately $8,100 and $8,000, respectively.
These contracts called for the exchange of Scandinavian and
European currencies and in some cases the U.S. Dollar to meet
commitments in or sell cash flows generated in non-functional
currencies. All outstanding contracts will expire by January 30,
1997.
In November 1995, the Company entered into two interest rate
swap agreements with two members of the consortium of banks which
are parties to the 1994 Credit Facility to reduce the impact of
changes in interest rates on a portion of its floating rate long-
term debt. The swap agreements fix the interest rate at 5.655%
plus 1.25% for term loan A ($61,750 at December 31, 1996) through
October 1998. (See Note 8.)
Counterparties to derivative agreements are major financial
institutions. Management believes the risk of incurring losses
related to credit risk is remote.
The carrying amount reported in the consolidated balance
sheets for cash and cash equivalents, accounts receivable,
accounts payable and short-term debt approximates fair value
because of the immediate or short-term maturity of these
financial instruments. The carrying amount reported for long-term
debt approximates fair value because a significant portion of the
underlying debt is at variable rates and reprices frequently.
18. 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 June
1995 the Company's stockholders approved an increase, from
1,650,000 to 2,500,000, 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, 1996 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, 1996 and 1995,
options for 873,748 and 881,748 shares, respectively, were
available for future grant.
The table below summarizes the activity of the Plan:
Shares Option Shares
Outstanding Price Exercisable
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
Granted in 1995 308,500 $18.38 - $18.75
Canceled in 1995 (40,875) $13.50 - $26.25
Exercised in 1995 (42,425) $ 6.58 - $22.13
Balance at December 31, 1995 896,775 383,278
Granted in 1996 44,000 $12,25 - $25.00
Canceled in 1996 (36,000) $13.50 - $22.13
Exercised in 1996 (66,437) $ 4.58 - $22.13
Balance at December 31, 1996 838,338 444,982
As indicated in Note 2 the Company has adopted the
disclosure only provisions of SFAS No. 123. If the Company had
elected to recognize compensation costs in accordance with SFAS
No. 123 the reported net income (loss) and income (loss) per
share for 1995 and 1996, respectively would not have been
materially affected. The effects of applying the Statement for
the required periods may not be representative of the effects on
future years.
The Company estimated the fair value, as of the date of
grant, of options outstanding in the plan using the Black-Scholes
option pricing model with the following assumptions:
1996 1995
Expected life 4-5 years 4-5 years
Risk free interest rate 5.96% 5.06%
Expected future dividend yield 1.23% 0.67%
Expected volatility 0.35 0.35
The weighted average remaining contractual life of options
outstanding is 6 and 7 years at December 31, 1996 and 1995,
respectively.
The Company has an Employee Stock Purchase Plan by which
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 $163, $155 and $156 in 1996, 1995 and 1994,
respectively.
19. Supplemental Data:
Years Ended December 31,
1996 1995 1994
Research and development
expense $34,269 $32,815 $32,497*
Depreciation expense 22,751 22,085 18,342
Amortization expense 8,752 8,937 8,431
Interest cost incurred 20,549 22,311 16,077
Other income (expense) net:
Interest income 529 711 1,432
Foreign exchange gains
(losses), net (195) (854) (34)
Other, net (504) (117) (285)
$ (170) $ (260) $ 1,113
* Includes $2,500 for contractually required payments for
Research and Development paid on an accelerated basis in December
1994. (See Note 3.)
Supplemental cash flow information:
Cash paid for interest
(net of amount capitalized) $20,250 $19,812 $15,687
Cash paid for income taxes 9,182 8,223 9,228
Supplemental schedule of
noncash investing and
financing activities:
Warrants issued $ 6,552
Fair value of assets acquired $ 3,500 $19,437
Cash paid 3,500 13,733
Liabilities assumed $ 0 $ 5,704
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 USPD,
IPD and FCD. The Animal Health business consists of the AHD and
AAHD. The Company's operations outside the United States are
conducted primarily in Europe by the Company's manufacturing
subsidiaries in Norway and Denmark.
Depre-
ciation
and
Identi- Amorti- Capital
Total Operating fiable zation Expendi-
Revenue Income(1) Assets Expense tures
1996
Business segments:
Human
Pharmaceuticals $328,724 $(8,216) $446,528 $23,013 $15,747
Animal Health 158,254 17,924 137,867 7,771 12,783
Unallocated 698 (5,521) 29,012 719 2,344
Eliminations (1,492) (267) _______ ______ ______
$486,184 $3,920 $613,407 $31,503 $30,874
Geographic:
United States $294,252 $(3,522) $355,432
Europe and Other 221,872 8,133 257,975
Eliminations (29,940) (691) _______
$486,184 $3,920 $613,407
1995
Business segments:
Human
Pharmaceuticals $358,392 $26,115 $476,738 $23,375 $15,708
Animal Health 163,322 30,839 140,860 7,406 8,720
Unallocated 407 (4,445) 17,255 241 408
Eliminations (1,239) (28) _______ ______ ______
$520,882 $52,481 $634,853 $31,022 $24,836
Geographic:
United States $328,491 $32,799 $376,134
Europe and Other 219,970 20,327 260,510
Eliminations (27,579) (645) (1,791)
$520,882 $52,481 $634,853
1994
Business segments:
Human
Pharmaceuticals $329,113 $(3,850) $454,685 $20,900 $25,201
Animal Health 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
1. 1994 operating income includes charges for management actions
related to the acquisition of Alpharma Oslo and transaction
expenses. 1996 and 1995 operating income includes (income) and
charges for additional management actions. The segments are
impacted as follows:
1996 1995 1994
Human Pharmaceuticals $13,789 $(639) $19,000
Animal Health 4,542 480 1,950
Unallocated 469 ____ 3,700
$18,800 $(159) $24,650
21. Subsequent Event - Class B Common Stock Subscription and
Planned Class A Rights Offering
On February 10, 1997, the Company announced the signing of a
stock subscription and purchase agreement with A.L. Industrier
whereby A.L. Industrier irrevocably subscribed to purchase
1,273,438 shares of Class B Common Stock for $16.34 per share
(total proceeds $20,808). Concurrently the Company announced that
Class A shareholders would be issued special rights to purchase
one share of Class A Common Stock for $16.34 per share for every
six shares of Class A Common currently held. (Potential proceeds
of approximately $34,000.) If the Class A rights are exercised
the current ownership proportion between the Class A and B
shareholders would be maintained. The distribution of the rights
will be made with a prospectus. The final details, terms and
conditions of the rights have not been finalized, however they
are expected to be transferable and have a term expiring no later
than November 30, 1997. A.L. Industrier's purchase of Class B
Common Stock will occur upon termination of the Class A rights,
but is not conditioned on the exercise of any of the Class A
rights.
Upon issuance of the Class A rights, the exercise price of
the 3,600,000 warrants outstanding ($21.945 per share) will be
adjusted pursuant to the warrant agreement. (Note 16.)
22. Selected Quarterly Financial Data (unaudited):
Quarter
Total
1996 First Second Third Fourth Year
Total revenue $127,810 $121,219 $122,438 $114,717 $486,184
Gross profit 54,519 49,757 48,388 36,392 189,056
Net 4,777 (4,502) 29 (11,765) (11,461)
income(loss)(c)
Earnings per
common share:
Primary
Net income (loss) .21 (.20) .00 (.54) (.53)
Fully diluted
Net income (loss) .21 (.20) .00 (.54) (.53)
1995
Total revenue $126,080 $123,817 $132,375 $138,610 $520,882
Gross profit 52,669 52,424 52,123 61,539 218,755
Net income (a) 3,925 3,054 6,169 5,669 18,817
Earnings per
common share
Primary
Net income(loss) .18 .14 .28 .26 .86
Fully diluted
Net income (b) .18 .14 .28 .25 .84
(a) The third quarter of 1995 includes post-combination
management actions which increased net income by $1,754
($.08 per share). Actions included pre-tax income from the
sale of an equity interest in an R&D company $6,463 less pre-
tax expenses of $3,634 for severance and substantial
consulting expenses.
The fourth quarter of 1995 includes post-combination
management actions which reduced net income by $1,776 ($.08
per share). Actions included pre-tax expenses of $2,670 for
severance and consulting. (See Note 3.)
(b) The sum of the fully diluted earnings per share for the four
quarters in 1995 does not equal the total for the year due
to the dilutive effect of the Company's warrants on the full
year computation.
(c) The quarters of 1996 include management actions which
reduced income as follows:
Loss per
Pre-tax After-tax share
First quarter $1,900 $1,200 $ (.05)
Second quarter 12,100 7,500 (.34)
Fourth quarter 4,800 3,900 (.18)
Full year $18,800 $12,600 $ (.58)