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, 1998
ALPHARMA INC.
(Exact name of registrant as specified in its charter)
Delaware 22-2095212
(State of Incorporation) (I.R.S. Employer
Identification No.)
One Executive Drive, Fort Lee, New Jersey 07024
(Address of principal executive offices) zip
code
(201) 947-7774
(Registrant's Telephone Number Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Name of each Exchange on
Title of each Class which Registered
Class A Common Stock, New York Stock Exchange
$.20 par value
Subordinated Convertible Notes New York Stock Exchange
Securities registered pursuant to Section 12 (g) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all
reports to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding twelve months (or for
such shorter period that the Registrant was required to file such
reports), and (2) has been subject to such filing requirements
for the past 90 days. YES X NO .
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ( )
The aggregate market value of the voting stock of the Registrant
(Class A Common Stock, $.20 par value) as of March 10, 1999 was
$734,958,000.
The number of shares outstanding of each of the Registrant's
classes of common stock as of March 10, 1999 was:
Class A Common Stock, $.20 par value - 17,763,347 shares;
Class B Common Stock, $.20 par value - 9,500,000 shares.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Proxy Statement relating to the Annual Meeting of
Shareholders to be held on June 10, 1999 are incorporated by
reference into Part III of this report. Other documents
incorporated by reference are listed in the Exhibit index.
PART I
Item 1. Business
GENERAL
The Company is a multinational pharmaceutical company that
develops, manufactures and markets specialty human pharmaceutical
and animal health products. The Company manufactures and markets
approximately 600 pharmaceutical products for human use and 40
animal health products. The Company conducts business in more
than 60 countries and has approximately 3,000 employees at 38
sites in 22 countries. For the year ended December 31, 1998, the
Company generated revenue and operating income of over $600
million and $65 million, respectively.
Formation
The Company was originally organized as A.L. Laboratories,
Inc., a wholly owned subsidiary of Apothekernes Laboratorium
A.S., a Norwegian healthcare company (the predecessor company to
A.L. Industrier). In 1994, the Company acquired the complementary
human pharmaceutical and animal health business of its parent
company and subsequently changed its name to Alpharma Inc. to
operate worldwide as one corporate entity (the "Combination
Transaction").
Controlling Stockholder
A.L. Industrier beneficially owns all of the outstanding
shares of the Company's Class B Common Stock, or 35.2% of the
Company's total common stock outstanding at December 31, 1998.
The Class B Common Stock bears the right to elect more than a
majority of the Company's Board of Directors and to cast a
majority of the votes in any vote of the Company's stockholders.
Mr. Einar Sissener, Chairman of the Board of the Company and a
controlling stockholder of A.L. Industrier, and members of his
immediate family, also beneficially own 346,668 shares of the
Company's Class A Common Stock. (See "Purchase of Outstanding
Warrants"). As a result, A.L. Industrier, and ultimately Mr.
Sissener, can control the Company. In addition, A.L. Industrier
may, under certain circumstances, convert the Company's Class B
Notes into 2,372,896 shares of the Company's Class B Common Stock
(see "Convertible Subordinated Note Offering").
Convertible Subordinated Note Offering
On March 30, 1998, the Company sold $125,000,000 and
$67,850,000 of Convertible Subordinated Notes convertible at
$28.59375 per share into shares of the Company's Class A and
Class B Common Stock, respectively (the "Class A and Class B
Notes"). A.L. Industrier purchased all of the Class B Notes.
The Class A Notes were sold to unaffiliated parties and,
substantially all of the Class A Notes have been registered with
the Securities and Exchange Commission and listed on the New York
Stock Exchange. The Class B Notes are automatically convertible
into Class B Common Stock on or after March 30, 2001 if at least
75% of the Class A Notes have been converted into Class A Common
Stock.
Purchase of Outstanding Warrants
In connection with the Combination Transaction, the Company
issued warrants which allowed the holders to purchase 3,819,600
shares of the Company's Class A Common Stock at an exercise price
of $20.69 with an expiration date of January 3, 1999 (the
"Warrants"). On October 21, 1998, the Company offered to
exchange the Warrants for newly issued shares of the Company's
Class A Common Stock based upon an exchange formula which
approximated $1.00 plus the "spread" between the $20.69 warrant
exercise price and the market price of the Company's stock for
the ten days immediately after the Company filed its Form 10-Q
for the quarter ended September 30, 1998. Based upon this
formula, 3,345,921 warrants to purchase shares were tendered to
the Company for which 1,230,448 shares of the Company's Class A
Common Stock were issued. Of this amount, 346,668 shares were
issued to Mr. Sissener, members of his immediate family or other
entities under his control. This is Mr. Sissener's initial
ownership of Class A Common Stock. Additionally, warrants for
237,680 shares were exercised prior to January 3, 1999 in
accordance with the original warrant terms.
Forward-Looking Statements
This annual report contains "forward-looking statements," or
statements that are based on current expectations, estimates, and
projections rather than historical facts. The Company offers
forward-looking statements in reliance on the safe harbor
provisions of the Private Securities Litigation Reform Act of
1995. Forward-looking statements may prove, in hindsight, to
have been inaccurate because of risks and uncertainties that are
difficult to predict. Many of the risks and uncertainties that
the Company faces are included under the caption "Risk Factors"
in "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Financial Information About Industry Segments
The Company operates in the human pharmaceutical and animal
health industries. It has five business segments within these
industries. The table that follows shows how much each of these
segments contributed to revenues and operating income in the past
three years.
($ in Millions) REVENUES OPERATING INCOME
(lOSS)
1998 1997 1996 1998 1997 1996
U.S. Pharmaceutical
Division 178.8 155.4 152.3 11.1 4.1 (19.2)
International
Pharmaceuticals
Division 193.1 134.1 142.0 8.0 11.0 2.5
Fine Chemicals 53.0 38.7 36.0 17.5 9.4 8.5
Division
Animal Health 166.3 158.4 146.0 37.8 32.0 21.0
Division
Aquatic Animal Health
Division 19.0 15.3 12.2 3.6 2.8 (.3)
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 Company's human pharmaceuticals business is comprised of
the U.S. Pharmaceuticals Division, International Pharmaceuticals
Division and Fine Chemicals Division. Each of these Divisions is
managed by a separate senior management team. The Company's human
pharmaceutical business had sales of approximately $424.9 million
in 1998, before elimination of intercompany sales, with operating
profit of approximately $36.6 million.
U.S. Pharmaceuticals Division ("USPD")
The U.S. Pharmaceuticals Division develops, manufactures, and
markets specialty generic prescription and over-the-counter
("OTC") pharmaceuticals for human use. With approximately 170
products, the Division is a market leader in generic liquid and
topical pharmaceuticals with what the Company believes to be
the broadest portfolio of manufactured products in the generic
industry. In addition, the Company believes it is the only major
U.S. generic prescription drug manufacturer with a substantial
presence in generic OTC pharmaceuticals. With approximately 60
OTC products, the Company is increasing its presence as a
significant supplier to major retailers. The Company believes
that its broad product lines gives the Company a competitive
advantage by providing large customers the ability to buy a
significant line of products from a single source.
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 most must receive approval from
the FDA prior to manufacture and sale. A manufacturer cannot
produce or market a generic pharmaceutical until all relevant
patents (and any additional government-mandated market
exclusivity periods) covering the original brand-name product
have expired.
Sales of generic pharmaceuticals have continued to increase.
The Company has identified four reasons for this trend: (i) laws
permitting and/or requiring pharmacists to substitute generics
for brand-name drugs; (ii) pressure from managed care and third
party payors to encourage health care providers and consumers to
contain costs; (iii) increased acceptance of generic drugs by
physicians, pharmacists, and consumers; and (iv) an increase in
the number of formerly patented drugs which have become available
to off-patent competition.
Product Lines. The Company's U.S. Pharmaceutical
Division (excluding its telemarketing operation)
manufactures and/or markets approximately 170 generic
products, primarily in liquid, cream and ointment,
respiratory and suppository dosage forms. Each product
represents a different chemical entity. These products are
sold in over 300 product presentations under the "Alpharma",
"Barre" or "NMC" labels and private labels.
Liquid Pharmaceuticals. The U.S. Pharmaceuticals
Division is the leading U.S. manufacturer of generic
pharmaceutical products in liquid form with approximately
110 products. The experience and technical know-how of the
Division enables it to formulate therapeutic equivalent
drugs in liquid forms and to refine product characteristics
such as taste, texture, appearance and fragrance.
Cough and cold remedies constitute a significant
portion of the Division's liquid pharmaceuticals business.
This business is seasonal in nature, and sales volume is
higher in the fall and winter months and is affected, from
year to year, by the incidence of colds, respiratory
diseases, and influenza.
Creams, Lotions and Ointments. The Division
manufactures approximately 50 cream, lotion and ointment
products for topical use. Most of these creams, lotions and
ointments are sold only by prescription.
Suppositories, Aerosols and Other Specialty Generic
Products. The Division also manufactures five suppository
products and markets certain other specialty generic
products, including two aerosols and two nebulizer products.
In 1998, the Company continued the strategy of entering into
third party alliances to market certain of its U.S.
pharmaceutical products under licenses to third parties or under
third party brands. In addition, in February of 1999, the
Company reached an agreement with Ascent Pediatrics, Inc. to lend
that entity a maximum of $40 million; $12 million of which can be
used for working capital purposes with the remainder to be used
to execute projects reasonably designed for intermediate term
growth. The Company also received an option to purchase all of
the capital stock of Ascent in 2002 for approximately 12.2 times
Ascent's 2001 operating earnings. Except for $4 million of the
aforesaid loan presently advanced, the Ascent transaction is
subject to the approval of a majority of Ascent's stockholders.
Ascent would add a branded pediatric product line to the U.S.
Pharmaceuticals Division along with a strong direct sales force
dedicated to the pediatric market.
Facilities. The Company maintains two manufacturing
facilities for its U.S. pharmaceutical operations, a research and
development center, three telemarketing facilities and an
automated central distribution center. The Division's largest
manufacturing facility is located in Baltimore, Maryland and is
designed to manufacture high volumes of liquid pharmaceuticals.
The Company's facility in Lincolnton, North Carolina manufactures
creams, ointments and suppositories. Pursuant to the Company's
plan to reduce manufacturing costs and improve efficiencies, the
Company closed two facilities in New York and New Jersey and
transferred the operations conducted at those facilities to its
facility in Lincolnton. The Company's Lincolnton facility's
production was increased and its operations have become more
efficient as a result of production consolidation plans announced
in May 1996.
Competition. Although the Company is a market leader in the
U.S. in the manufacture and marketing of specialty generic
pharmaceuticals, it operates in a highly competitive market. The
Company competes with other companies that specialize in generic
products and with the generic drug divisions of major
international branded drug companies and encounters market entry
resistance from branded drug manufacturers.
Sales and Distribution. The Company maintains a sales force
of approximately ten sales professionals to market the U.S.
Pharmaceutical Division's products. The Company supplements its
sales effort through its use of selected independent sales
representatives. In addition, the Company's advanced
telemarketing operation, which employs approximately 75 sales
personnel, markets and distributes products manufactured by third
parties and, to a limited extent, the Division. The Company has
recently increased the use of its telemarketing operations for
the sale of its own products by adding a third facility for this
expanded activity. This business also provides certain custom
marketing services, such as order processing, and distribution,
to the pharmaceutical and certain other industries.
Customers. The Company has historically sold its U.S.
pharmaceutical products to pharmaceutical wholesalers,
distributors, mass merchandising and retail chains, and, to a
lesser extent, grocery stores, hospitals and managed care
providers. In response to the general trend of consolidation
among pharmaceutical customers and greater amount of products
sold through wholesalers, the Company is placing an increased
emphasis on marketing its products directly to managed care
organizations, purchasing groups, mass merchandisers and chain
drug stores to gain market share and enhance margins.
International Pharmaceuticals Division ("IPD")
The Company's International Pharmaceuticals Division develops,
manufactures, and markets a broad range of pharmaceuticals for
human use. The Company believes that it has a leading market
position for branded generic pharmaceuticals in the Nordic
countries, the United Kingdom, and the Netherlands with a strong
presence in Indonesia.
Product Lines. The International Pharmaceuticals Division
manufactures approximately 290 products which are sold in
approximately 670 product presentations including tablets,
ointments, creams, liquids, suppositories and injectable dosage
forms.
Prescription Pharmaceuticals. The Division has a broad range
of products with a concentration on prescription drug
antibiotics, analgesics/antirheumatics, psychotropics,
cardiovascular and oral healthcare products. The predominant
number of these products are sold on a generic basis.
OTC Products. The Division also has a broad range of OTC
products, such as those for skin care, gastrointestinal care and
pain relief, and including such products as vitamins, fluoride
tablets, adhesive bandages and surgical tapes. Substantially all
of these products are sold on a branded basis.
On May 7, 1998, the Company acquired a substantial generic
pharmaceutical presence in the United Kingdom through the
purchase of all of the capital stock of Arthur H. Cox and Co.
Ltd. ("Cox") from Hoechst AG for a total purchase price including
direct costs of acquisition of approximately $198 million in
cash. Cox's main operations (which consist primarily of a
manufacturing plant, warehousing facilities and a sales
organization) are located in Barnstaple, England. Cox is a
generic pharmaceutical manufacturer and marketer of tablets,
capsules, suppositories, liquids, ointments and creams. Cox
distributes its products to pharmacy retailers and pharmaceutical
wholesalers primarily in the United Kingdom and the Netherlands.
In addition, in November, 1998, the Company acquired, in a
substantially smaller transaction, a generic pharmaceutical
product line in Germany. All of the products purchased in this
transaction are manufactured under contract by third parties.
The Company intends to continue the operations of Cox and the
acquired German generic product line to achieve benefits from
leveraging these new activities with the other European
businesses of the International Pharmaceutical Division. In
addition, the Company plans to expand the scope of the acquired
operations by adding to the acquired product base certain other
pharmaceutical products of the Company. The Company is continuing
to review market expansion opportunities in Europe.
Facilities. The Company maintains five manufacturing facilities
for its international pharmaceutical products, all of which also
house administrative offices and warehouse space. The Company's
plants in Lier, Norway and Barnstaple, England, include many
technologically advanced applications for the manufacturing of
tablet, liquid and ointment products. The Company's plant in
Copenhagen, Denmark, which it shares with the Fine Chemical
Division, manufactures sterile products. In addition to the
Barnstaple, Copenhagen and Lier facilities, the Company also
operates plants in Vennesla, Norway, for bandages and surgical
tape products, and Jakarta, Indonesia, for tablets, ointments and
liquids. The Jakarta plant has received regulatory approval to
export certain products to Europe.
In 1998, the Company substantially completed the implementation
of a production rationalization plan which commenced in 1996 and
included the transfer of all tablet, ointment and liquid
production from Copenhagen to Lier and the transfer of sterile
production from Norway to the Copenhagen facility. In addition to
increasing available capacity, the Company expects to recognize
manufacturing efficiencies from this reorganization.
Competition. The Division operates in geographic areas that
are highly competitive. Many of the Company's competitors in this
area are substantially larger and have greater financial,
technical, and marketing resources than the Company. Most of the
Company's international pharmaceutical products compete with one
or more other products that contain the same active ingredient.
In the Nordic countries and certain other European countries in
recent years, sales of generic pharmaceuticals have been
increasing relative to sales of patent protected pharmaceuticals.
Generics are gaining market share because, among other things,
governments are attempting to reduce pharmaceutical expenses by
enacting regulations that promote generic pharmaceuticals in lieu
of original formulations. This increased focus on pharmaceutical
prices may lead to increased competition and price pressure for
suppliers of all types of pharmaceuticals, including branded
generics(see "Risk Factors-Government Regulations Affecting the
Company"). The Company's international pharmaceutical products
have also been encountering price pressures from "parallel
imports" (i.e.,imports of identical products from lower priced
markets under EU laws of free movement of goods). (See "Risk
Factors-Generic Pharmaceutical Industry").
Geographic Markets. The principal geographic markets for the
Division's pharmaceutical products are the United Kingdom,
Netherlands, the Nordic and other Western European countries,
Indonesia, and the Middle East.
Sales and Distribution and Customers. Depending on the
characteristics of each geographic market, generic products are
predominantly marketed under either brand or generic names. OTC
products are typically marketed under brand names with
concentration on skin care, tooth cavity prevention, pain relief
and vitamins. The Division employs a specialized sales force of
approximately 310 persons, 150 of whom are in Indonesia, that
markets and promotes products to doctors, dentists, hospitals,
pharmacies and consumers. In each of its international markets,
the Company uses wholesalers to distribute its pharmaceutical
products.
Fine Chemicals Division ("FCD")
The Company's Fine Chemicals Division develops, manufactures
and markets bulk antibiotics to the pharmaceutical industry for
use in finished dose products sold in more than 50 countries and
benefits from over four decades of experience in the use of and
development of fermentation and purification technology. The
Division develops, manufactures and sells active ingredients in
bulk quantities for use in human and veterinary pharmaceuticals
produced by third parties and, to a limited extent, the Company.
In addition, the Company's fermentation expertise in the
production of bulk antibiotics has a direct technological
application to the manufacture of products of the Company's
animal health business.
Product Lines. The Company's fine chemical products
constitute the active substances in certain pharmaceuticals for
the treatment of certain skin, throat, intestinal and systemic
infections. The Company is the world's leading producer of
bacitracin, bacitracin zinc and polymixin, and is a leading
producer of vancomycin; all of which are important pharmaceutical
grade antibiotics. The Company also manufactures other
antibiotics such as amphotericin B and colistin for use
systemically and in specialized topical and surgical human
applications. The Company has substantially expanded its
production capacity and sales of vancomycin through the 1997
approval to sell vancomycin in the U.S., expanded capacity at its
Copenhagen facility, and the December 1998 acquisition of a
facility in Budapest, Hungary.
Facilities. The Company manufactures its fine chemical
products in its plants in Oslo, Norway (which also manufactures
products for the Animal Health Division), Copenhagen, Denmark
(which it shares with the International Pharmaceuticals
Division)and Budapest, Hungary. Each plant includes fermentation,
specialized recovery and purification equipment. The Budapest
facility is presently undergoing a material upgrade in
manufacturing processes and capacity. All these facilities have
been approved as a manufacturer of certain sterile and non-
sterile bulk antibiotics by the FDA and by the health authorities
of certain European countries. (See "Environmental" for a
discussion of an administrative action related to the Budapest
facility)
Competition. The bulk antibiotic industry is highly competitive
and many of the Company's competitors in this area are
substantially larger and have greater financial, technical, and
marketing resources than the Company. Sales are made to
relatively few large customers with prices and quality as the
determining sales factors. The Company believes its fermentation
and purification expertise and established reputation provide it
with a competitive advantage in these antibiotic products.
Geographic Markets and Sales and Distribution. U.S. sales of
fine chemical products represent approximately 50% of the revenue
from these products with significant additional sales in Europe,
Asia and Latin America. The Company distributes and sells its
fine chemical products in the U.S. using its sales force of two
professionals. Sales outside the U.S. are primarily through the
use of local agents and distributors.
Animal Health
The animal health business is comprised of the Animal Health
Division and the Aquatic Animal Health Division. Each of these
divisions is managed by a separate senior management team. In
1998, the Company had animal health product sales of
approximately $185.3 million, before elimination of intercompany
sales, with operating profit of approximately $41.4 million.
Animal Health Division ("AHD")
The Company develops, manufactures and markets feed additive
and animal health products for animals raised for commercial food
production worldwide. The Company believes that its animal health
business is a leading manufacturer and marketer of feed additives
to the worldwide poultry and swine industries.
Product Lines. The Company's principal animal health products
are: (i) BMDT, a bacitracin based feed additive used to promote
growth and feed efficiency and prevent or treat diseases in
poultry and swine; (ii) Albac(TM), a bacitracin based feed
additive to promote growth and prevent or treat diseases in
poultry, swine and calves; (iii) 3-Nitro(R), Histostat(TM),
Zoamix(R), anticoccidials, and chloromax ("CTC"), feed grade
antibiotics, all of which are commonly used in combination or
sequentially with BMD; (iv) Deccox cattle and calf feed
additives; and (v) Vitamin D3, a feed additive used for poultry
and swine. Based upon its fermentation experience and a strong
marketing presence, the Company is the market leader in the
manufacture and sale of bacitracin-based feed additives which are
marketed under the brand names Albac and BMD. (See "Risk Factors
Governmental Actions Affecting the Company" for a discussion of
certain legislative action affecting the sales of Albac.) In
addition, the Company believes that it has a significant market
share with several other of its feed additives, including those
sold under the Company's 3-Nitro brands.
In 1997, the Company acquired the Deccox brand name and certain
related assets from Rhone-Poulenc's Animal Nutrition Division.
Under the agreement pursuant to which Deccox was acquired, Rhone-
Poulenc will continue to manufacture this product for sale by the
Company for a period of 15 years. Deccox is used to prevent and
control coccidiosis (a parasite that adversely affects growth)in
cattle. The acquisition of the Deccox brand has provided the
Company with its initial entry into the cattle and calf market.
In addition to Deccox sales, this has offered the opportunity to
market to the cattle industry several of the Company's
established products which have historically been sold only in
the swine and poultry markets.
The Company believes that the number of products it has
approved to be used in combination with other products is a
significant competitive advantage. FDA regulations require animal
health products to be approved for use in combination with other
products in animal feeds. Therefore, it is generally difficult to
gain market acceptance for new products unless such products are
approved for use with other existing products. The approval for
use of a new product in combination with other products generally
requires the cooperation of the manufacturer of such other
products. When seeking such cooperation from other manufacturers,
the Company believes it is a competitive advantage to have
products with which other manufacturers desire to obtain
combination approval. To date, the Company has been successful in
its ability to obtain the cooperation of third parties in seeking
combination approval for its products. There can be no assurance,
however, that the Company will continue to obtain such
cooperation from others. Presently, the Company has a total of
271 combination approvals in the U.S.
The Company believes that features of BMD have enhanced the
Company's competitive position in the animal health business.
Generally, FDA regulations do not permit animals to be sold for
food production unless their feed has been free of additives that
are absorbed into animal tissue for at least a 14-day period of
time required by FDA rules. BMD is not absorbed into animal
tissue, and therefore need not be withdrawn from feed prior to
the marketing of the food animals. This attribute of BMD allows
producers to avoid the burden of removing these additives from
feed in order to meet the FDA requirement.
Facilities. The Company produces its animal health products in
state-of-the-art manufacturing facilities. The Animal Health
Division produces BMD at its Chicago Heights, Illinois facility,
which contains a modern fermentation and recovery plant. Albac is
manufactured at the Oslo facility shared with the Fine Chemicals
Division. CTC is purchased from foreign suppliers and blended
domestically at the Company's facility in Lowell, Arkansas and at
independent blending facilities. The 3-Nitro product line is
manufactured in accordance with a ten year agreement using the
Company's technology at an unrelated company's facility. The
contract requires the Company to purchase minimum yearly
quantities on a cost plus basis. Blending of 3-Nitro is done at
the Company's Lowell plant. (See "Environmental" for a discussion
of an administrative action related to the Oslo facility").
Competition. The animal health industry is highly competitive
and includes a large number of companies with greater financial,
technical, and marketing resources than the Company. These
companies offer a wide range of products with various therapeutic
and production enhancing qualities. Due to the Company's strong
market position in antibiotic feed additives and its experience
in obtaining requisite FDA approvals for combination therapies,
the Company believes it enjoys a competitive advantage in
commercializing FDA-approved combination animal feed additives.
Geographic Markets. The Company presently sells a major portion
of its animal health products in the U.S. and Europe. With the
opening of sales offices in Canada, Latin America, and the Far
East, the Animal Health Division has expanded its international
sales capability consistent with its strategy for internal
growth.
Sales and Distribution. The Company's animal health products in
the U.S., Canada and Mexico are sold through a staff of
technically trained sales and technical service employees and
distributors located throughout the U.S. In January of 1999, the
Company combined its wholly-owned U.S. distribution company with
two similar third party distribution businesses to form a joint
venture 50% owned by the Company. It is anticipated that
approximately 50% of the Company's U.S. animal health sales will
be made through this joint venture. Sales of the Animal Health
Division's products outside North America are made primarily
through the use of distributors and sales companies. The Company
has sales offices in Norway, Canada, Mexico, Singapore and the
People's Republic of China and in 1997 added sales offices in
Brazil and France and, in 1998, added a sales office in Belgium.
The Company anticipates establishing additional foreign sales
offices.
Customers. Sales are made principally to commercial animal feed
manufacturers and integrated swine and poultry producers.
Although the Division is not dependent on any one customer, the
customer base for animal health products is in a consolidation
phase. Therefore, as consolidation continues, the Company may
become more dependent on certain individual customers as such
customers increase their size and market share.
Aquatic Animal Health Division ("AAHD")
The Company believes it is a leader in the development,
manufacture and marketing of vaccines for use in immunizing
farmed fish against disease. The Company believes it has been,
and expects to continue as, a leading innovator with respect to
the research and development of vaccines to combat newly
developing forms of aquatic disease.
The Company's vaccines for fish are used by fish farms to
control disease in densely populated, artificial growth
environments. The Company believes that the market for vaccines
will continue to grow along with the growth of fish farms as the
worldwide demand for fish continues to increase beyond what can
be supplied from the natural fish habitat.
Product Lines. The Aquatic Animal Health Division is the
leading supplier of injectable vaccines for farm raised salmon.
In addition the Division is a pioneer in the development of
vaccines for trout, sea bass, sea bream, catfish, yellowtail and
other commercially important farm species.
Facilities. The Company manufactures its fish vaccine products
in Bellevue, Washington and at its Overhalla, Norway facility. A
contract manufacturer in Germany provides certain raw materials
for vaccine production.
Competition. The Company has few competitors in the aquatic
animal health industry. However, the industry is subject to rapid
technological change. Competitors could develop new techniques
and products that would render the Company's aquatic animal
health products obsolete if the Company was unable to match the
improvements quickly. In this regard, the Company is presently
developing a new salmon vaccine to meet the market perception
that a competing product may provide better disease protection.
Geographic Markets. The Company sells its aquatic animal health
products in Norway, the United Kingdom, Canada and the U.S.
Sales and Distribution. The Company sells its aquatic animal
health products through its own technically oriented sales staff
of twelve people in Norway and the U.S. In other markets, the
Company operates through distributors. The Company sells its
products to fish farms, usually under a contract which extends
for at least one growing season. There are relatively few
customers for the Division's products.
Information Applicable to all Business Segments
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. 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 does
not anticipate undertaking 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. and Norway.
Research and development expenses were approximately $36.0
million, $32.1 million, and $34.3 million in 1998, 1997, and
1996, respectively. In 1998, the Company received approximately
100 governmental product, market and manufacturing approvals.
Government Regulation
General. The research, development, manufacturing and marketing
of the Company's products are subject to extensive government
regulation by either the FDA or the USDA, as well as by the DEA,
FTC, CPSC, and by comparable authorities in the EU, Norway,
Indonesia and other countries. Although Norway is not a member of
the EU, it is a member of the European Economic Association
and, as such, has accepted all EU regulations with respect to
pharmaceuticals except in the area of feed antibiotics.
Government regulation includes detailed inspection of and
controls over testing, manufacturing, safety, efficacy, labeling,
storage, recordkeeping, approval, advertising, promotion, sale
and distribution of pharmaceutical products. Noncompliance with
applicable requirements can result in civil or criminal fines,
recall or seizure of products, total or partial suspension of
production and/or distribution, debarment of individuals or the
Company from obtaining new generic drug approvals, refusal of the
government to approve new products and criminal prosecution. Such
government regulation substantially increases the cost of
producing human pharmaceutical and animal health products.
The evolving and complex nature of regulatory requirements, the
broad authority and discretion of the FDA and analogous foreign
agencies, and the generally high level of regulatory oversight
results in a continuing possibility that from time to time the
Company will be adversely affected by regulatory actions despite
its ongoing efforts and commitment to achieve and maintain full
compliance with all regulatory requirements. As a result of
actions taken by the Company to respond to the progressively more
demanding regulatory environment in which it operates, the
Company has spent, and will continue to spend, significant funds
and management time on regulatory compliance.
Product Marketing Authority. In the U.S., the FDA regulatory
procedure applicable to the Company's generic pharmaceutical
products depends on whether the branded drug is: (i) the subject
of an approved New Drug Application ("NDA") which has been
reviewed for both safety and effectiveness; (ii) marketed under
an NDA approved for safety only; (iii)marketed without an NDA or
(iv) marketed pursuant to over-the-counter ("OTC") monograph
regulations. If the drug to be offered as a generic version of a
branded product is the subject of an NDA approved for both safety
and effectiveness, the generic product must be the subject of an
Abbreviated New Drug Application ("ANDA") and be approved by FDA
prior to marketing. Drug products which are generic copies of the
other types of branded products may be marketed in accordance
with either an FDA enforcement policy or the over-the-counter
drug review monograph process and currently are not subject to
ANDA filings and approval prior to market introduction. While the
Company believes that all of its current pharmaceutical products
are legally marketed under the applicable FDA procedure, the
Company's marketing authority is subject to revocation by the
agency. All applications for regulatory approval of generic drug
products subject to ANDA requirements must contain data relating
to product formulation, raw material suppliers, stability,
manufacturing, packaging, labeling and quality control. Those
subject to a Waxman-Hatch Act ANDA also must contain
bioequivalency data. Each product approval limits manufacturing
to a specifically identified site. Supplemental filings for
approval to transfer products from one manufacturing site to
another also require review and approval.
Certain of the Company's animal health products are regulated
by the FDA, as described above, while other animal health
products are regulated by the USDA. An EU Directive requires that
medical products must have a marketing authorization before they
are placed on the market in the EU. The criteria upon which grant
of an authorization is assessed are quality, safety and efficacy.
Demonstration of safety and efficacy in particular requires
clinical trials on human subjects and the conduct of such trials
is subject to the standards codified in the EU guideline on Good
Clinical Practice. In addition, the EU requires that such trials
be preceded by adequate pharmacological and toxicological tests
in animals and that clinical trials should use controls, be
carried out double blind and capable of statistical analysis by
using specific criteria wherever possible, rather than relying on
a large sample size. The working party on the Committee of
Proprietary Medicinal Products has also made various
recommendations in this area. Analogous governmental and agency
approvals are similarly required in other countries where the
Company conducts business. There can be no assurance that new
product approvals will be obtained in a timely manner, if ever.
Failure to obtain such approvals, or to obtain them when
expected, could have a material adverse effect on the Company's
business, results of operations and financial condition.
Facility Approvals. The Company's manufacturing operations (in
the U.S. as well as three 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 EU regulations. CGMP encompasses all
aspects of the production process, including validation and
record keeping, and involves changing and evolving standards.
Consequently, continuing compliance with CGMP can be a
particularly difficult and expensive part of regulatory
compliance, especially since the FDA and certain other analogous
governmental agencies have increased the number of regular
inspections to determine compliance. There are similar
regulations in other countries where the Company has
manufacturing operations. The EU requires that before a medicinal
product can be manufactured and assembled, each person or company
who carries out such an operation must hold a manufacturer's
license, a product license must be held by the person responsible
for the composition of the product, and the manufacture and
assembly must be in accordance with the product license. There is
also a Directive relating to Good Manufacturing Practice ("GMP")
which makes compliance with the principles of GMP compulsory
throughout the EU.
Potential Liability for Current Products. Continuing studies of
the proper utilization, safety, and efficacy of pharmaceuticals
and other health care products are being conducted by the
industry, government agencies and others. Such studies, which
increasingly employ sophisticated methods and techniques,
can call into question the utilization, safety and efficacy of
previously marketed products and in some cases have resulted, and
may in the future result, in the discontinuance of their
marketing and, in certain countries, give rise to claims for
damages from persons who believe they have been injured as a
result of their use.
Extended Protection for Branded Products. The Drug Price
Competition and Patent Term Restoration Act of 1984 ("Waxman-
Hatch Act") amended both the Patent Code and the Federal Food,
Drug, and Cosmetic Act (the "FDC Act"). The Waxman-Hatch Act
codified and expanded application procedures for obtaining FDA
approval for generic forms of brand-name pharmaceuticals which
are off-patent and/or whose market exclusivity has expired. The
Waxman-Hatch Act also provides patent extension and market
exclusivity provisions for innovator drug manufacturers which
preclude the submission or delay the approval of a competing ANDA
under certain conditions. One such provision allows a five year
market exclusivity period for NDAs involving new chemical
compounds and a three year market exclusivity period for NDAs
containing new clinical investigations essential to the approval
of such application. The market exclusivity provisions apply
equally to patented and non-patented drug products. Another
provision authorizes the extension of patent terms for up to five
years as compensation for reduction of the effective life of the
patent as a result of time spent in testing for, and FDA review
of, an application for a drug approval. Patent terms may also be
extended pursuant to the terms of the Uruguay Round Agreements
Act ("URAA")or by future legislation. In addition, the FDA
Modernization Act of 1997 allows brand name manufacturers to seek
six months of additional exclusivity when they have conducted
pediatric studies on the drug. Therefore, the Company cannot
predict the extent to which the Waxman-Hatch Act, the FDA
Modernization Act of 1997, the URAA or future legislation could
postpone launch of some of its new products.
In Europe, certain Directives confer a similar market
exclusivity in respect of proprietary medicines, irrespective of
any patent protection. Before a generic manufacturer can present
an abridged application for a marketing authorization, it must
generally wait until the original proprietary drug has been on
the market for a certain period (unless he has the consent of the
person who submitted the original test data for the first
marketing authorization, or can compile an adequate dossier of
his own). In the case of high-technology products, this period is
ten years and six years in respect of other medicinal products,
subject to the option for member states to elect for an
exclusivity period of ten years in respect of all products, or to
dispense with the six-year period where that would offer
protection beyond patent expiry.
In addition to the exclusivity period, it is also possible in
the EU to effectively extend the period of patent protection for
a product which has a marketing authorization by means of a
Supplementary Protection Certificate ("SPC"). An SPC comes into
force on the expiry of the relevant patent and lasts for a period
calculated with reference to the delay between the lodging of the
patent and the granting of the first marketing authorization for
the drug. This period of protection, subject to a maximum of five
years, further delays the marketing of generic medicinal
products.
The Generic Drug Enforcement Act. The Generic Drug Enforcement
Act of 1992, which amended the FDC Act, gives the FDA six ways to
penalize anyone that engages in wrongdoing in connection with the
development or submission of an ANDA. The FDA can: (i)
permanently or temporarily prohibit alleged wrongdoers from
submitting or assisting in the submission of an ANDA; (ii)
temporarily deny approval of, or suspend applications to market,
particular generic drugs; (iii) suspend the distribution of all
drugs approved or developed pursuant to an invalid ANDA; (iv)
withdraw approval of an ANDA; (v) seek civil penalties against
the alleged wrongdoer; and (vi) significantly delay the approval
of any pending ANDA from the same party. The Company has never
been the subject of an enforcement action under this or any
similar statute but there can be no assurance that restrictions
or fines will not be imposed upon the Company in the future.
Controlled Substances Act. The Company also manufacturers and
sells drug products which are "controlled substances" as defined
in the Controlled Substances Act, which establishes certain
security and record keeping requirements administered by the DEA,
a division of the Department of Justice. The Company is licensed
by the DEA to manufacture and distribute certain controlled
substances. The DEA has a dual mission-law enforcement and
regulation. The former deals with the illicit aspects of the
control of abusable substances and the equipment and raw
materials used in making them. The DEA shares enforcement
authority with the Federal Bureau of Investigation, another
division of the Department of Justice. The DEA's regulatory
responsibilities are concerned with the control of licensed
handlers of controlled substances, and with the substances
themselves, equipment and raw materials used in their manufacture
and packaging, in order to prevent such articles from being
diverted into illicit channels of commerce. The Company is not
under any restrictions for non-compliance with the foregoing
regulations, but there can be no assurance that restrictions or
fines will not be imposed upon the Company in the future.
Health Care Reimbursement. The methods and level of
reimbursement for pharmaceutical products under Medicare,
Medicaid, and other domestic reimbursement programs are the
subject of constant review by state and federal governments and
private third party payors like insurance companies. Management
believes that U.S. government agencies will continue to review
and assess alternative payment methodologies and reform measures
designed to reduce the cost of drugs to the public. Because the
outcome of these and other health care reform initiatives is
uncertain, the Company cannot predict what impact, if any, they
will have on the Company.
Medicaid legislation requires all pharmaceutical manufacturers
to rebate to individual states a percentage of the revenues that
the manufacturers derive from Medicaid reimbursed pharmaceutical
sales in those states. The required rebate for manufacturers of
generic products is currently 11%.
In many countries other than the U.S. in which the Company does
business, the initial prices of pharmaceutical preparations for
human use are dependent upon governmental approval or clearance
under governmental reimbursement schemes. These government
programs generally establish prices by reference to either
manufacturing costs or the prices of comparable products.
Subsequent price increases may also be regulated. In past years,
as part of overall programs to reduce health care costs, certain
European governments have prohibited price increases and have
introduced various systems designed to lower prices. As a
result, affected manufacturers, including the Company, have not
always been able to recover cost increases or compensate for
exchange rate fluctuations.
In order to control expenditures on pharmaceuticals, most
member states in the EU regulate the pricing of such products and
in some cases limit the range of different forms of a drug
available for prescription by national health services. These
controls can result in considerable price differences between
member states. There is also a Common External Tariff payable on
import of medicinal products into the EU, though exemptions are
available in respect of certain products which allows duty free
importation. Where there is no tariff suspension in operation in
respect of a medicinal product, an application can be made to
import the product duty free but this is subject to review at
European level to establish whether a member state would be able
to produce the product in question instead. In addition, some
products are subject to a governmental quota which restricts the
amount which can be imported duty free.
Financial Information About Foreign and Domestic Operations and
Export Sales
The Company derives a substantial portion of its revenues
and operating income from its foreign operations. Revenues from
foreign operations accounted for approximately 44% of the
Company's revenues in 1998. 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.
Environmental Matters
The Company believes that it is substantially in compliance
with all presently applicable federal, state and local provisions
regulating the discharge of materials into the environment, or
otherwise relating to the protection of the environment.
The State of California has commenced an action against the
Company in the California Superior Court under the State's Safe
Drinking Water and Toxic Enforcement Act of 1986 (the "Drinking
Water Act") alleging that it failed to include a warning to
California users of two of its prescription drugs to the
effect that said drugs are known to the State of California to
cause cancer or reproductive toxicity. The State further alleges
that by violating the Drinking Water Act, the Company is also in
violation of the Unfair Competition Act (the "Competition Act").
The Company believes that prescription drugs fall under a
"safe-harbor" regulation and the required notice is deemed to be
given by giving the FDA mandated product warnings. On this basis,
the Company intends to defend this action vigorously. The Company
has reason to believe that many other drug manufacturers are
relying upon the same regulation and therefore have not given any
notice beyond that required by the FDA in connection with the
sale of prescription drugs. While the State's action does not
request a specific monetary fine, the Company understands that
the maximum fine for violation of each of the Drinking Water Act
and the Competition Act is $5,000 for each day of violation
subject to a four year statute of limitation. The Company
believes that this matter will not result in a material
liability.
The Company is presently engaged in administrative proceedings
with respect to the air emissions and noise levels at its Oslo
plant and soil and acquifier contamination of its Budapest plant.
The Company anticipates the need for improvements at both plants;
the cost of which has not yet been determined but is not believed
to be material to the Company. Certain costs incurred at the
Budapest facility are subject to reimbursement obligations of the
previous owner.
In addition, the Company is a Potentially Responsible Party
("PRP") at one site subject to U.S. Superfund legislation.
Superfund provides for joint and several liability for all PRP's.
Based upon the Company's minor involvement at this Superfund
site, and the identification of numerous PRP's who were larger
site users, the Company does not believe that its ultimate
liability for this site will be material to the Company.
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 1999.
Employees
As of December 31, 1998, the Company had approximately 3,000
employees, including 1,100 in the U.S. and 1,900 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 June 10, 1999) and until their successor is
elected, or until his or her earlier death, resignation or
removal.
Name and Position Principal Business Experience
with the Company Age During the Past Five Years
E.W. Sissener 70 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 to
May 1994. Chairman of the
Company since 1975.
President, Alpharma AS since
October 1994. President,
Apothekernes AS (now AL
Industrier AS) 1972 to 1994.
Chairman of A.L. Industrier AS
since November 1994.
Gert W. Munthe 42 President since May 1998 and
President, Director and Director of the Company since
Chief Operating Officer June 1994.President and Chief
Executive Officer of NetCom
GSM A.S., a Norwegian cellular
telecommunications company,
1993 to 1998. Executive Vice
President and division
President of Hafslund Nycomed
A.S., a Norwegian energy and
pharmaceutical corporation,
1988 to 1993. President of
Nycomed (Imaging) A.S., a
wholly owned subsidiary of
Hafslund Nycomed A.S., 1991 to
1993. Division President in
charge of the energy business
of Hafslund Nycomed A.S., 1988
to 1991. Mr. Munthe is Mr.
Sissener's son-in-law.
Jeffrey E. Smith 51 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 to
May 1994. Vice President,
Finance of the Company from
November 1984 to July 1991.
Robert F. Wrobel 54 Vice President and Chief Legal
Vice President and Chief Officer since October of 1997.
Legal Officer Vice President and Associate
General Counsel of Duracell
Inc., 1994 to September 1997
and Senior Vice President,
General Counsel and Chief
Administrative Officer of The
Marley Company 1975 to 1993.
Diane M. Cady 44 Vice President, Investor
Vice President, Investor Relations since November 1996.
Relations Vice President, Investor
Relations for Ply Gem
Industries, Inc. 1987 to
October 1996.
Albert N. Marchio, II 46 Treasurer of the Company since
Vice President and May 1992. Treasurer of Laura
Treasurer Ashley, Inc. 1990 to 1992.
John S. Towler 50 Controller of the Company
Vice President and since March 1989.
Controller
Thomas L. Anderson 50 President of the Company's
Vice President and U.S. Pharmaceuticals Division
President, U.S. since January 1997; President
Pharmaceuticals Division and Chief Operating Officer of
FoxMeyer Health Corporation
May 1993 to February 1996;
Executive Vice President and
Chief Operating Officer of
FoxMeyer Health Corporation
July 1991 to April 1993.
Bruce Andrews, Vice 52 President of the Company's
President and President, Animal Health Division since
Animal Health Division May 1997. Consultant with
Brakke Consulting, Inc. from
1996 through May of 1997,
President of Lifelearn, Inc.
in 1995, and President of the
Cyanamid North American Animal
Health and Nutrition Division
from 1992 to 1994.
Thor Kristiansen 55 President of the Company's
Vice President and Fine Chemicals Division since
President, Fine Chemicals October 1994; President,
Division Biotechnical Division of
Apothekernes Laboratorium A.S
1986 to 1994.
Knut Moksnes 48 President of the Company's
Vice President and Aquatic Animal Health Division
President, Aquatic Animal since October 1994; Managing
Health Division Director, Fish Health Division
of Apothekernes Laboratorium
A.S 1991 to 1994.
Ingrid Wiik 54 President of the Company's
Vice President and International Pharmaceuticals
President, International Division since October 1994;
Pharmaceuticals Division President, Pharmaceutical
Division of Apothekernes
Laboratorium A.S 1986 to 1994.
Item 2. Properties
Manufacturing and Facilities
The Company's corporate offices and principal production and
technical development facilities are located in the U.S., the
United Kingdom, Denmark, Norway and Indonesia. The Company also
owns or leases offices and warehouses in the U.S., Sweden,
Holland, Finland and elsewhere.
Facility
Location Status Size Use
(sq.ft.)
Fort Lee, NJ Leased 37,000 Offices-Alpharma corporate
and AHD headquarters
Oslo, Norway Leased 204,400 Manufacturing of AHD and FCD
products, Alpharma corporate
offices and headquarters for
IPD,FCD and AAHD
Baltimore, MD Owned 268,000 Manufacturing and offices for
USPD
Baltimore, MD Leased 18,000 Research and development for
USPD
Bellevue, WA Leased 20,000 Warehousing, laboratory and
offices for AAHD
Chicago Owned 195,000 Manufacturing,warehousing,res
Heights, IL. earch and development and
offices for AHD
Columbia, MD Leased 165,000 Distribution center for USPD
Lincolnton, NC Owned 138,000 Manufacturing and offices for
USPD
Lowell, AR Leased 68,000 Manufacturing,warehousing and
offices for AHD
Niagara Falls, Owned 30,000 Warehousing and offices for
NY USPD
Barnstaple,Engl Owned 250,000 Manufacturing, warehousing
and and offices for IPD
Budapest,Hungar Owned 175,000 Manufacturing,warehousing and
y.. offices for FCD
Copenhagen,Denm Owned 345,000 Manufacturing,warehousing,
ark research and development and
offices for IPD and FCD
Jakarta,Indones Owned 80,000 Manufacturing, warehousing,
ia. research and development and
offices for IPD
Lier,Norway. . Owned 180,000 Manufacturing,warehousing and
. offices for IPD
Overhalla,Norwa Owned 39,500 Manufacturing,warehousing and
y.. offices for AAHD
Vennesla,Norway Owned 81,300 Manufacturing, warehousing
. . and offices for IPD
The Company believes that its principal facilities described
above are generally in good repair and condition and adequate and
suitable for the products they produce.
Item 3. Legal Proceedings
The Company is one of multiple defendants in 80 lawsuits filed
in various US Federal District Courts and several State Courts
alleging personal injuries and two class actions requesting
medical monitoring resulting from the use of phentermine
distributed by the Company and prescribed for use in combination
with fenfluramine or dexfenfluramine manufactured and sold by
other defendants ("Fen-Phen" lawsuits). None of the plaintiffs
has specified the amount of his or her monetary demand, but a
majority of the lawsuits allege serious injury. The Company has
demanded defense and indemnification from the manufacturers from
whom it has purchased phentermine and has filed claims against
said manufacturers' insurance carriers and the Company's
carriers. The Company has received a partial reimbursement of
litigation costs from one of the manufacturer's carriers. The
plaintiff in 34 of these lawsuits has agreed to dismiss the
Company without prejudice but such dismissals must be approved by
the Court. The Company does not expect that the Fen-Phen lawsuits
will be material to the Company. It is possible that the Company
could later be named as a defendant in some of the additional
lawsuits already on file with respect to these drugs or in
similar lawsuits which could be filed in the future.
The Company has received written notice of a claim alleging
that it is violating certain third party U.S. patents in the area
of electronic reading devices and offering to enter into
licensing discussions. While the Company has not completed its
analysis of either the validity or applicability of said patents,
several material Company manufacturing facilities do use devices
and machinery within the general technical area covered by these
third party patents. Based upon factors considered reasonable as
of this date, the Company has no reason to anticipate that this
matter will result in liability material to the Company.
From time to time the Company is involved in certain non-
material litigation which is ordinarily found in businesses of
this type, including contract, employment matters and product
liability actions. Product liability suits represent a continuing
risk to pharmaceutical companies. The Company attempts to
minimize such risks by strict controls over manufacturing and
quality procedures. Although the Company carries what it believes
to be adequate insurance, there is no assurance that such
insurance can fully protect it against all such risks due to the
inherent potential liability in the business of producing
pharmaceuticals for human and animal use.
The Company is also subject to an action commenced by the
State of California under the State's Safe Drinking Water and
Toxic Enforcement Act of 1986. (See "Environmental Matters").
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 1998 and 1997
sales prices of the Company's Class A Common Stock is set forth
in the table below.
Stock Trading Price
1998 1997
Quarter High Low High Low
First $24.31 $18.94 $15.13 $11.38
Second $23.00 $19.75 $18.13 $13.50
Third $26.31 $21.44 $23.50 $15.25
Fourth $36.94 $22.56 $23.88 $21.25
As of December 31, 1998 and March 10, 1999 the Company's
stock closing price was $35.31 and $41.38, respectively.
Holders
As of March 10, 1999, there were 1,609 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 1998
and 1997 were $.045 per quarter or $.18 per year.
Item 6. Selected Financial Data
The following is a summary of selected financial data for
the Company and its subsidiaries. The data for each of the three
years in the period ended December 31, 1998 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.
Income Statement Data
Years Ended December 31,
1998(4) 1997 1996(3) 1995 1994(2)
Total revenue $604,584 $500,288 $486,184 $520,882 $469,263
Cost of sales 351,324 289,235 297,128 302,127 275,543
Gross profit 253,260 211,053 189,056 218,755 193,720
Selling, general and
administrative expense 188,264 164,155 185,136 166,274 177,742
Operating income 64,996 46,898 3,920 52,481 15,978
Interest expense (25,613) (18,581) (19,976) (21,993) (15,355)
Other income
(expense), net (400) (567) (170) (260) 1,113
Income (loss) before
income taxes and
extraordinary item 38,983 27,750 (16,226) 30,228 1,736
Provision (benefit)
for income taxes 14,772 10,342 (4,765) 11,411 3,439
Income (loss) before
extraordinary item $24,211 $ 17,408 $(11,461) 18,817 $(1,703)
Net income (loss) (1) $24,211 $ 17,408 $(11,461) 18,817 $(2,386)
Average number of
shares outstanding:
Diluted 26,279 22,780 21,715 21,754 21,568
Earnings (loss) per
share: Diluted
Income (loss)
before
extraordinary $ .92 $ .76 $ (.53) $ .87 $ (.08)
item
Net income (loss) $ .92 $ .76 $ (.53) $ .87 $ (.11)
Dividend per common
share $ .18 $ .18 $ .18 $ .18 $ .18
(1) Net loss includes: 1994 - extraordinary item - loss on
extinguishment of debt ($683).
(2) 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 ($0.81
per share).
(3) 1996 includes Management Actions relating to production
rationalizations and severance which are included in cost of
goods sold ($1,100) and selling, general and
administrative ($17,700). Amounts net after tax of
approximately $12,600 ($0.58 per share).
(4) 1998 includes results of operations from date of acquisition
of Cox Pharmaceuticals (May 1998) and non-recurring charges
related to the Cox acquisition which are included in cost of
sales ($1,300) and selling, general and administrative ($2,300).
Charges, net after tax, were approximately $3,130 ($0.12 per
share).
As of December 31,
Balance Sheet Data 1998(1) 1997 1996 1995
1994
Current assets $335,484 $273,677 $274,859 $282,886 $250,499
Non-current assets 573,452 358,189 338,548 351,967 341,819
Total assets $908,936 $631,866 $613,407 $634,853 $592,318
Current liabilities $170,437 $133,926 $155,651 $169,283 $154,650
Long-term debt, less
current maturities 429,034 223,975 233,781 219,451 220,036
Deferred taxes and
other non-current
liabilities 42,186 35,492 37,933 40,929 36,344
Stockholders' equity 267,279 238,473 186,042 205,190 181,288
Total liabilities
and equity $908,936 $631,866 $613,407 $634,853 $592,318
(1) Includes accounts from date of acquisition of Cox
Pharmaceuticals (May 1998).
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Overview
1998 and 1997 were years in which operations improved
relative to the preceding year. Both years included a number of
significant transactions which the Company believes will enhance
future growth. Such transactions include:
1998
In March the Company issued $192.8 million of 5.75%
Convertible Subordinated Notes due in 2005.
In May the Company's International Pharmaceuticals
Division ("IPD") purchased the Cox Generic Pharmaceutical
business ("Cox") conducted primarily in the United
Kingdom for approximately $198.0 million.
In November the Company's IPD purchased a generic
pharmaceutical product line in Germany for $13.3 million.
In November the Company acquired pursuant to a tender
offer approximately 93% of the outstanding warrants which
were to have expired on January 3, 1999 with common stock
with a market value of approximately $37.0 million.
Subsequent to December 31, 1998 the majority of the
remaining warrants were exercised for $4.4 million in
cash.
In December the Company's Fine Chemicals Division
("FCD") purchased a fine chemical manufacturing plant in
Budapest, Hungary for $8.4 million.
During the year the Company commenced negotiations
(completed in January 1999) to replace its Revolving
Credit Facility and existing domestic short term credit
lines with a comprehensive syndicated facility which
provides for increased borrowing capacity of up to $300.0
million.
1997
The Company raised $56.4 million by issuing Class B stock
through a stock subscription ($20.4 million) and Class A stock
through a rights offering ($36.0 million).
The Animal Health Division ("AHD") acquired the worldwide
decoquinate ("Deccoxr") product and business from a major
pharmaceutical company. The product is an anticocidial feed
additive which provides AHD with its first major product in the
cattle industry.
The FCD purchased a worldwide polymyxin business which
complements its existing polymyxin business.
Both the U.S. Pharmaceuticals Division ("USPD") and the IPD
completed partnership alliances and marketing agreements to
broaden their product lines.
1996
Results in 1996 included charges for Management Actions. In
addition, operations were negatively affected by external market
conditions. The factors which combined to produce a loss in 1996
and the status of these factors in 1997/1998 are as follows:
1996 charges for Management Actions - approximately $12.6
million after tax.
Rationalization of the IPD's selling and marketing
organization in Scandinavia resulting in charges for
severance. Rationalization completed in 1997.
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. Transfer completed in late 1998.
Commencement of a 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. Completed in 1997, benefits realized in 1997 and 1998
due to more efficient production in the USPD.
Rationalization of the AHD and USPD organizations to
address current competitive conditions in their respective
industries resulting in charges for severance and other
termination benefits. Rationalization completed in 1997.
1996 External Factors.
Fundamental shift in generic pharmaceutical industry
distribution, purchasing and stocking patterns resulting in
significantly lower sales and prices in the USPD. USPD sales
have increased in both 1997 and 1998 in a more orderly
market; however, there is continuing but significantly
lessened pressure on pricing relative to 1996.
Significant bad debt expense due to the bankruptcy of a
major wholesaler to the USPD and collection difficulties in
certain international markets. No major bankruptcies
occurred in 1997 and 1998, but collection of certain
accounts remains slow 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. Grain prices were at more normal levels
in 1997 and 1998. Competitive conditions continue.
Results of Operations
Comparison of year ended December 31, 1998 to year ended
December 31, 1997.
For the year ended December 31, 1998 revenue was $604.6
million, an increase of $104.3 million (20.8%) compared to 1997.
Operating income was $65.0 million, an increase of $18.1 million,
compared to 1997. Net income was $24.2 million ($.92 per share)
compared to a net income of $17.4 million ($.76 per share) in
1997. Results for 1998 include non-recurring charges resulting
from the Cox acquisition which reduced net income by $3.1 million
($.12 per share).
Acquisition of Cox
All comparisons of 1998 results to 1997 are affected by Cox
which was acquired in May of 1998 for a total purchase price
including direct costs of acquisition of approximately $198
million. Cox is a generic pharmaceutical manufacturer and
marketer of tablets, capsules, suppositories, liquids, ointments
and creams. Cox's main operations (which primarily consist of a
manufacturing plant, warehousing facilities and a sales
organization) are located in the United Kingdom with distribution
and sales operations located in Scandinavia and the Netherlands.
Cox distributes its products to pharmacy retailers and
pharmaceutical wholesalers primarily in the United Kingdom.
Exports account for approximately 10% of its sales.
The Company financed the $198 million purchase price and
related debt repayments from borrowings under its then existing
long-term Revolving Credit Facility and short-term lines of
credit. The $180 million Revolving Credit Facility ("RCF") was
used to fund the principal portion of the purchase price. At the
end of March 1998, the Company repaid approximately $162 million
of borrowings under the RCF with the proceeds from the issuance
of $193 million of convertible subordinated notes. Such repayment
created the capacity under the RCF to incur the borrowings used
to finance the acquisition of Cox.
The acquisition was accounted for in accordance with the
purchase method. The fair value of the assets acquired and
liabilities assumed and the results of operations are included
from the date of acquisition.
The purchase of Cox had a significant effect on the results
of operations of the Company for the year ended December 31,
1998. Cox is included in IPD.
For the approximate eight month period included in 1998, Cox
contributed sales of $62.1 million and operating income,
exclusive of non-recurring acquisition related charges, of $5.2
million. Operating income is reduced by the amortization of
goodwill totaling approximately $3.0 million. Interest expense
increased by approximately $8.0 million reflecting the financing
of the acquisition primarily with long-term debt.
Acquisition charges required by generally accepted accounted
principles and recorded in the second quarter of 1998 included
the write-up of inventory to fair value and related write-off on
the sale of the inventory of $1.3 million, a write-off of in-
process research and development ("R&D") of $2.1 million and
severance of certain employees of the IPD of $0.2 million.
Because in-process R&D is not tax benefited the one-time charges
were $3.1 million after tax or $.12 per share.
Revenues
Revenues increased $104.3 million in 1998 despite currency
translation of international sales into U.S. dollars which
reduced reported sales by over $20.0 million. Increases in
revenues and major components of change for each division in 1998
compared to 1997 are as follows:
Revenues in IPD increased by $59.0 million due to the Cox
acquisition ($62.1 million), increased volume for existing and
other new and other acquired products ($14.0 million) offset by
translation of IPD sales in local currencies into the U.S. dollar
($17.1 million). Revenues in USPD increased $23.4 million due
primarily to volume increases in existing and new products and
revenue from licensing activities offset slightly by lower net
pricing. FCD revenues increased $14.4 million due mainly to
volume increases in vancomycin and polymyxin. AHD revenues
increased $7.9 million due primarily to sales of the Deccox
product line acquired in 1997. Aquatic Animal Health Division
("AAHD") sales increased $3.7 million due principally to
increased sales of AlphaMax, a treatment for salmon lice.
Gross Profit
On a consolidated basis gross profit increased $42.2 million
with margins at 41.9% in 1998 compared to 42.2% in 1997. Included
in 1998 results is the non-recurring charge of $1.3 million
related to the write-up and subsequent sale of acquired Cox
inventory. Without the charge overall gross profit percentages
would be essentially the same for both years. Gross profit
dollars were positively affected by volume increases for existing
and new products in all divisions and the acquisition of Cox
offset by increased costs incurred by IPD in the transfer of
production from Copenhagen to Lier and currency translation
effects primarily in IPD. On an overall basis pricing had a minor
positive effect.
Operating Expenses
Operating expenses increased by $24.1 million in 1998 on a
consolidated basis. Included in 1998 operating expenses is a
charge for in-process R&D of $2.1 million and IPD employee
severance of $.2 million resulting from the Cox acquisition.
Operating expenses in 1998 were 30.8% of revenues (31.1%
including the Cox acquisition charges) compared to 32.8% of
revenues in 1997. Operating expenses increased primarily due to
the acquisition of Cox including goodwill amortization, increased
selling and marketing expenses due to higher revenues, increased
general and administrative expenses due to targeted increases in
staffing and increased incentive programs offset slightly by
translation of costs incurred in foreign currencies.
Operating Income
Operating income as reported in 1998 increased by $18.1
million. The Company believes the change in operating income can
be approximated as follows:
($ in millions) IPD USPD FCD AHD AAHD Unalloc Total
.
1997 Operating
income $11.0 4.1 9.4 32.0 2.8 (12.4) $46.9
Acquisition
charges - Cox (3.6) - - - - - (3.6)
Cox operating 5.2 - - - - - 5.2
income
Net margin
improvement due
to volume, new
products and price 5.9 10.5 7.7 9.8 3.0 - 36.9
(Increase) in
production and
operating
expenses,
net (7.1) (3.5) (.1) (4.1) (1.9) (.6) (17.3)
Translation and
other (3.4) - .5 .1 (.3) - (3.1)
1998 Operating $8.0 11.1 17.5 37.8 3.6 (13.0) $65.0
income
Interest Expense/Other/Taxes
Interest expense increased in 1998 by $7.0 million due
primarily to the acquisition of Cox. Lower interest rates and
positive cash flow from operations which lowered debt levels
required for operations relative to 1997, offset a portion of the
increased interest from acquisitions.
The provision for income taxes was 37.9% in 1998 compared to
37.3% in 1997. The slight increase in 1998 results from a 1.7%
rate increase due to the write-off of in-process R&D which is not
tax benefited, a .7% rate increase due to non-deductible goodwill
resulting from the Cox acquisition offset partially by higher tax
credits and lower statutory tax rates on foreign earnings.
Results of Operations
Comparison of Year Ended December 31, 1997 to Year Ended
December 31, 1996.
For the year ended December 31, 1997 revenue was $500.3
million, an increase of $14.1 million (2.9%) compared to 1996.
Operating income was $46.9 million, an increase of $43.0 million,
compared to 1996. Net income was $17.4 million ($.76 per share)
compared to a net loss of $11.5 million ($.53 per share) in 1996.
Net income in 1996 was reduced by approximately $12.6
million ($.58 per share) for severance related to a
reorganization of the IPD sales and marketing function in the
Nordic countries, charges and expenses resulting from production
rationalization plans in the IPD and the USPD and additional
Management Actions in the AHD. (See section "Management
Actions.")
Revenues
On an overall basis revenues increased $14.1 million. 1997
revenues compared to 1996 were reduced by over $20.0 million due
to translation of sales in foreign currency into the U.S. dollar.
Revenue changes by division are as follows:
Revenues increased by $3.1 million in the USPD due primarily
to increased volume in a number of Rx and OTC products including
products introduced in the past three years. The increased volume
was partially offset by lower net selling prices resulting from
the continuation of programs initiated by major wholesalers in
the second half of 1996 which fundamentally shifted generic
pharmaceutical industry distribution purchasing and stocking
patterns. In IPD overall volume and pricing were up on a local
currency basis. However, IPD revenues were lower by $7.9 million
primarily as a result of the effect of translation of sales in
Scandinavian currencies into the U.S. dollar. A substantial
majority of the translation effect was recognized in the IPD. For
the year 1997 average exchange rates for Scandinavian currencies
where IPD conducts a substantial portion of its business had
declined by 10%-14% compared to 1996. Sales in the FCD increased
by $2.6 million principally due to higher volume.
AHD revenues increased $12.4 million primarily due to
increased volume of most major products, as well as the
acquisition of the Deccox business in September 1997. AAHD
revenues increased $3.0 million compared to 1996 due primarily to
increased sales in the Norwegian fish vaccine market resulting
from both new product volume and increased market share of
existing products.
Gross Profit
On a consolidated basis, gross profit increased $22.0
million and the gross margin percent increased to 42.2% in 1997
compared to 38.9% in 1996.
The increase in dollars and percent was the result of a
number of factors. USPD gross profits accounted for the majority
of the increase and improved as a result of lower manufacturing
costs in the aggregate (due to the transfer of production and
closing of two marginal facilities as part of Management Actions
in 1996) and increased production efficiencies in the two
remaining core facilities. Offsetting savings in production costs
were lower net selling prices in the UPSD. IPD had increased
gross profits in local currencies but decreased in the aggregate
when translated into U.S. dollars. FCD gross profits increased
marginally compared to 1996.
AHD gross profits increased due to increased volume (both
existing products and Deccox) offset partially by somewhat lower
pricing. AAHD gross profits increased due to higher margin
products introduced in 1997.
Operating Expenses
Operating expenses on a consolidated basis decreased $21.0
million or 11.3%. Included in operating expenses in 1996 were
charges incurred for Management Actions totaling $17.7 million.
(See section "Management Actions"). The following table compares
operating expenses for the year with and without Management
Actions:
($ in millions) 1997 1996
Operating expenses as reported $164.2 $185.1
Management actions - 1996 - (17.7)
$164.2 $167.4
As a % of revenues 32.8% 34.4%
The net reduction in operating expenses, after excluding
Management Actions reflects a continued emphasis on cost control,
the effect of currency translation on expenses incurred in
foreign currencies, and a reduction of expenses resulting from
prior year Management Actions which reduced payroll, offset by
planned increases in certain expenses and increases in
administrative expenses resulting from personnel changes,
employee incentive programs, and litigation expenses.
Operating Income
Operating income as reported in 1997 increased $43.0
million. The increase in gross profit due to increased sales and
lower production costs, lower operating expenses, and the absence
of charges for Management Actions all contributed to the
increase.
The Company believes the change in operating income from
1996 to 1997 can be approximated as follows:
($ in millions) IPD USPD FCD AHD AAHD Unalloc Total
.
1996 Operating
income(loss) $2.5 (19.2) 8.5 21.0 (.3) (8.6) $3.9
Add back 1996
management 8.1 5.7 - 4.5 - .5 18.8
actions
Sub-total 10.6 (13.5) 8.5 25.5 (.3) (8.1) 22.7
Net margin change
due to volume,
new products and
price 3.9 (3.3) 3.8 6.6 3.8 - 14.8
(Increase)decrease
in production and
operating expenses,
net (3.1) 20.8 (2.9) (.4) (.4) (4.0) 10.0
Translation and
other (.4) .1 - .3 (.3) (.3) (.6)
1997 Operating
income $11.0 4.1 9.4 32.0 2.8 (12.4) $46.9
Interest Expense/Other/Taxes
Interest expense decreased $1.4 million due to lower debt
levels (aided by the receipt, in 1997 of approximately $56.4
million of new equity) and generally lower interest rates in
1997.
Other, net in 1997 was a $0.6 million loss compared to a
$0.2 million loss in 1996. Foreign exchange transaction losses
included in Other, net in 1997 and 1996 were approximately $0.7
million and $0.2 million, respectively. The loss in 1997 was
primarily the result of the strengthening of the U.S. dollar
during 1997.
The provision for income taxes was 37.3% in 1997 compared to
a benefit for income taxes (due to a pre-tax loss) of 29.4% in
1996. The difference between the statutory rate and the effective
rate is the interaction of state income taxes and non-deductible
costs which increase the rate partially offset by lower taxes in
foreign jurisdictions.
Management Actions
In December 1994, after the acquisition of Alpharma Oslo
from A.L. Industrier, and continuing to some degree in 1995 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.
In the first quarter of 1996, the Company 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 included
the transfer of all tablet, ointment and liquid production from
Copenhagen, Denmark to Lier, Norway. The full transfer was
completed in late 1998 and resulted in a net reduction of
approximately 100 employees. The rationalization plan resulted in
a charge in the second quarter of 1996 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
locations to the Lincolnton, North Carolina location. In the
second quarter of 1996, USPD prepared a 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 resulted in a
net reduction of over 150 employees. The acceleration plan
resulted in a second quarter charge in 1996 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 provided net proceeds of approximately $0.5 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.
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 AHD 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 were eliminated. The production rationalization plans
have benefited operations in 1997 and 1998 for USPD and are
expected to begin to benefit operations in IPD in 1999.
The Company believes the dynamic nature of its business may
present additional opportunities to rationalize personnel
functions and operations to increase efficiency and
profitability. Accordingly, similar management actions may be
considered in the future and could be material to the results of
operations in the quarter they are announced.
Inflation
The effect of inflation on the Company's operations during
1998, 1997 and 1996 was not significant.
Liquidity and Capital Resources
At December 31, 1998, stockholders' equity was $267.3
million compared to $238.5 million and $186.0 million at December
31, 1997, and 1996, respectively. The ratio of long-term debt to
equity was 1.61:1, 0.94:1 and 1.26:1 at December 31, 1998, 1997
and 1996, respectively. The increase in stockholders' equity in
1998 primarily reflects net income in 1998 less dividends and the
issuance of common stock in 1998 through the exercise of stock
options and purchases under the employee stock purchase plan. The
increase in long-term debt from 1997 to 1998 was due primarily to
the acquisition of Cox in May 1998.
Working capital at December 31, 1998 was $165.0 million
compared to $139.8 million and $119.2 million at December 31,
1997 and 1996, respectively. The current ratio was 1.97:1 at
December 31, 1998 compared to 2.04:1 and 1.77:1 at December 31,
1997 and 1996, respectively.
The Cox acquisition substantially increased the following
balance sheet captions: accounts receivable ($17.7 million),
inventory ($17.1 million), property, plant and equipment ($33.9
million), intangible assets ($160.0 million), and accounts
payable and accrued expenses ($17.7 million). Additionally at
year end accounts receivable increased by over $22.0 million due
to significantly higher fourth quarter 1998 sales relative to
1997.
The Company presently has various capital expenditure
programs under way and planned including the expansion of the
newly acquired FCD facility in Budapest, Hungary. In 1998, the
Company's capital expenditures were $31.4 million, and in 1999
the Company plans to spend a greater amount than in 1998.
In February 1999, the Company's USPD entered into an
agreement with Ascent Pediatrics, Inc. ("Ascent") under which
UPSD will provide up to $40 million in loans to Ascent to be
evidenced by 7 1/2% convertible subordinated notes due 2005. Up to
$12 million of the proceeds of the Loans can be used for general
corporate purposes, with $28 million of proceeds reserved for
projects and acquisitions intended to enhance growth of Ascent.
While exact timing cannot be predicted, it is expected the $40.0
million will be advanced in the next two years.
At December 31, 1998, the Company had $65.8 million
available under existing short-term unused lines of credit and
$14.4 million in cash. In January 1999, the Company replaced its
prior $180.0 million revolving credit facility and domestic short
term lines of credit with a $300.0 million credit facility ("1999
Credit Facility"). In addition, European short term credit lines
were set at $30.0 million. The 1999 Credit Facility provides for
a $100.0 million six year term loan and a $200.0 million
revolving credit facility with an initial five year term with two
possible one year extensions. The 1999 Credit Facility extends
the maturities under prior agreements and allows the Company
additional financing flexibility. Comparing year end debt amounts
for the prior Revolving Credit, domestic short term debt and the
A/S Eksportfinans loan (all of which were refinanced in the first
quarter 1999), to the 1999 Credit Facility the Company has
approximately $95.0 million available. Comparing the 1999
European line of credit to the year end short term debt balance,
the Company has over $10.0 million available. 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. During 1999, the Company
will consider entering into interest rate agreements to fix
interest rates for all or a portion of its variable debt to
minimize the impact of future changes in interest rates. The
Company's policy is to selectively enter into "plain vanilla"
agreements to fix interest rates for existing debt if it is
deemed prudent.
In addition to investments for internal growth, the Company
has continued its pursuit of complementary acquisitions or
alliances, particularly in human pharmaceuticals, that can
provide new products and market opportunities as well as leverage
existing assets. In order to accomplish any significant
acquisition, it is likely that the Company will need to obtain
additional financing in the form of equity related securities
and/or borrowings. Any significant new borrowings require the
Company meet the debt covenants included in the 1999 Credit
Facility which provide for varying interest rates based on the
ratio of total debt to EBITDA.
Year 2000
General
The Year 2000 ("Y2K") issue is primarily the result of
certain computer programs and embedded computer chips being
unable to distinguish between the year 1900 and 2000. As a
result, the Company along with all other business and
governmental entities, is at risk for possible miscalculations of
a financial nature and systems failures which may cause
disruptions in its operations. The Company can be affected by
the Y2K readiness of its systems or the systems of the many other
entities with which it interfaces, directly or indirectly.
The Company began its program to address its potential Y2K
issues in late 1996 and has organized its activities to prepare
for Y2K at the division level. The divisions have focused their
efforts on three areas: (1) information systems software and
hardware; (2) manufacturing facilities and related equipment;
(i.e. embedded technology) and (3) third-party relationships
(i.e. customers, suppliers, and other). Information system and
hardware Y2K efforts are being coordinated by an IT steering
committee composed of divisional personnel.
The Company and the divisions have organized their
activities and are monitoring their progress in each area by the
following four phases:
Phase 1: Awareness/Assessment - identify, quantify and
prioritize business and financial risks by area.
Phase 2: Budget/Plan/Timetable - prepare a plan including
costs and target dates to address phase 1
exposures.
Phase 3: Implementation - execute the plan prepared in
phase 2.
Phase 4: Testing/Validation - test and validate the
implemented plans to insure the Y2K exposure has
been eliminated or mitigated.
State of Readiness
The Company summarizes its divisions' state of readiness at
December 31, 1998 as follows:
Information Systems and Hardware
Quarter forecasted
Approximate range for substantial
Phase of completion completion
1 100% Completed
2 95 - 100% 1st Quarter 1999
3 70 - 80% 2nd Quarter 1999
4 50 - 90% 3rd Quarter 1999
Embedded Factory Systems
Quarter forecasted
Approximate range for substantial
Phase of completion completion
1 90 - 100% 1st Quarter 1999
2 85 - 100% 1st Quarter 1999
3 35 - 85% 3rd Quarter 1999
4 35 - 85% 3rd Quarter 1999
Third Party Relationships
Quarter forecasted
Approximate range for substantial
Phase of completion completion
1 50 - 100% (a) 2nd Quarter 1999(a)
2 55 - 90% (a) 2nd Quarter 1999(a)
3 (a) (b) (a) (b)
4 (a) (b) (a) (b)
(a) Refers to significant identified risks - (e.g. customers,
suppliers of raw materials and providers of services) does not
include exposures that relate to interruption of utility or
government provided services.
(b) Awaiting completion of vendor response and follow-up due
diligence to Y2K readiness surveys.
Cost
The Company expects the costs directly associated with its
Y2K efforts to be between $3.0 and $4.0 million of which
approximately $1.3 has been spent to date. The cost estimates do
not include additional costs that may be incurred as a result of
the failure of third parties to become Y2K compliant or costs to
implement any contingency plans.
Risks
The Company has identified the following significant
reasonably possible Y2K problems and is considering related
contingency plans.
Possible problem: the inability of significant sole source
suppliers of raw materials or active ingredients to provide an
uninterrupted supply of material necessary for the manufacture of
Company products. Since various drug regulations will make the
establishment of alternative supply sources difficult, the
Company is considering building inventory levels of critical
materials prior to December 31, 1999.
Possible problem: the failure to properly interface caused
by noncompliance of significant customer operated electronic
ordering systems. The Company is considering plans to manually
process orders until these systems become compliant.
Possible problem: the shutdown or malfunctioning of Company
manufacturing equipment. The Company will advance internal clocks
to the year 2000 on certain key equipment during scheduled plant
shutdowns in 1999 to determine the effect on operations and
develop plans, as necessary, for manual operations or third party
contract manufacturing.
Based on the assessment efforts to date, the Company does
not believe that the Y2K issue will have a material adverse
effect on its financial condition or results of operation. The
Company believes that any effect of the Year 2000 issue will be
mitigated because of the Company's divisional operating structure
which is diverse both geographically and with respect to customer
and supplier relationships. Therefore, the adverse effect of
most individual failures should be isolated to an individual
product, customer or Company facility. However, there can be no
assurance that the systems of third-parties on which the Company
relies will be converted in a timely manner, or that a failure to
properly convert by another company would not have a material
adverse effect on the Company.
The Company's Y2K program is an ongoing process that may
uncover additional exposures and all estimates of costs and
completion are subject to change as the process continues.
Derivative Financial Instruments-Market Risk and Risk Management
Policies
The Company's earnings and cash flow are subject to
fluctuations due to changes in foreign currency exchange rates
and interest rates. The Company's risk management practice
includes the selective use, on a limited basis, of forward
foreign currency exchange contracts and interest rate agreements.
Such instruments are used for purposes other than trading.
Foreign currency exchange rate movements create fluctuations
in U.S. dollar reported amounts of foreign subsidiaries whose
local currencies are their respective functional currencies. The
Company has not used foreign currency derivative instruments to
manage translation fluctuations. The Company and its respective
subsidiaries primarily use forward foreign exchange contracts to
hedge certain cash flows denominated in currencies other than the
subsidiary's functional currency. Such cash flows are normally
represented by actual receivables and payables and anticipated
receivables and payables for which there is a firm commitment.
At December 31, 1998 the Company had forward foreign
exchange contracts with a notional amount of $17,300. The fair
market value of such contracts is essentially the same as the
notional amount. All contracts expire in the first quarter of
1999. The cash flows expected from the contracts will generally
offset the cash flows of related non-functional currency
transactions. The change in value of the foreign currency forward
contracts resulting from a 10% movement in foreign currency
exchange rates would be approximately $1.0 million and generally
would be offset by the change in value of the hedged receivable
or payable.
At December 31, 1998 the Company has no interest rate
agreements outstanding. The Company is considering entering into
interest rate agreements in 1999 to fix the interest rate on a
portion of its long term debt.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board
(FASB) issued SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities (SFAS 133). SFAS 133 is effective for all
fiscal quarters of all fiscal years beginning after June 15, 1999
(January 1, 2000 for the Company). SFAS 133 requires that all
derivative instruments be recorded on the balance sheet at their
fair value. Changes in the fair value of derivatives are recorded
each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a
hedge transaction and, if it is, the type of hedge transaction.
SFAS 133 is not expected to have a material impact on the
Company's consolidated results of operations, financial position
or cash flows.
RISK FACTORS
This report includes certain forward looking statements.
Like any company subject to a competitive business environment,
the Company cannot guarantee the results predicted in any of the
Company's forward-looking statements. Important factors that
could cause actual results to differ materially from those in the
forward-looking statements include (but are not limited to) the
following:
Government Regulation
The research, development, manufacturing and marketing of
the Company's products are subject to extensive government
regulation. Government regulation includes inspection of and
controls over testing, manufacturing, safety, efficacy, labeling,
record keeping, sale and distribution of pharmaceutical products.
The U.S. and other governments regularly review manufacturing
operations. Noncompliance with applicable requirements can result
in fines, recall or seizure of products, suspension of production
and debarment of individuals or the Company from obtaining new
drug approvals. Such government regulation substantially
increases the cost of manufacturing and selling the Company's
products.
The Company has filed applications to market its products
with regulatory agencies both in the U.S. and internationally.
The timing of receipt of approvals of these applications can
significantly affect future revenues and income, particularly
with respect to human pharmaceuticals at the end of third parties
patent protection. There can be no assurance that new product
approvals will be obtained in a timely manner, if ever. Failure
to obtain approvals, or timing of approvals when expected, could
have a material adverse effect on the Company's business.
The use of bacitracin zinc, a feed antibiotic growth
promoter, is being banned for use in livestock feeds in the
European Union, effective 1st July, 1999. The Company is
attempting to reverse or limit this action, that affects its
Albac product, by political and legal means. Although no
assurance of success can be given, it is the Company's belief
that strong scientific evidence exists to refute the EU action.
In addition, certain other countries have enacted or are
considering a similar ban. If the loss of Albac sales is limited
to the European Union and those countries that have already taken
similar action, the Company does not anticipate a material
adverse effect. If either (a) other countries more important to
the Company's sales of bacitracin based products should ban the
product or (b) the European Union should act to prevent the
importation of meat products from countries that allow the use of
bacitracin based products, such actions could depending on their
scope, be materially adverse to the Company. The Company cannot
predict whether the present bacitracin zinc ban will be expanded.
Risks Associated with Leverage
As of December 31, 1998, the Company had total outstanding
long-term indebtedness of approximately $429.0 million, or
approximately 62% of the Company's total capitalization. After
refinancing of its long-term debt in January 1999 the Company may
incur approximately $105.0 million additional indebtedness
through borrowings under its credit agreements, subject to the
satisfaction of certain financial conditions. The Company's
leverage could have important consequences, including the
following: (i) the ability to obtain additional financing may be
limited; (ii) the operating flexibility is limited by covenants
contained in the credit agreements, and (iii) the degree of
leverage makes it more vulnerable to economic downturns, may
limit its ability to pursue other business opportunities and
reduces its flexibility. In addition, the Company believes that
it has greater leverage on its balance sheet than many of its
competitors.
Risks Associated with Acquisitions
The Company maintains its search for acquisitions which will
provide new product and market opportunities, leverage existing
assets and add critical mass. The Company is actively evaluating
various acquisition possibilities. Based on current acquisition
prices in the pharmaceutical industry, acquisitions could
initially be dilutive to the Company's earnings and add
significant intangible assets and related goodwill amortization
charges. The Company's acquisition strategy will require
additional debt or equity financing, resulting in additional
leverage and dilution of ownership, respectively. There can be no
assurance that the Company's acquisition strategy will be
successful.
Foreign Operations; Risk of Currency Fluctuation
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, political instability, and uncertainty as to the
enforceability of, and government control over, commercial
rights.
The Company's Far East operations, particularly Indonesia
where the Company has a manufacturing facility, are being
affected by the wide currency fluctuations and decreased economic
activity in the Far East and by the social and political unrest
in Indonesia. While the Company's present exposure to economic
factors in the Far East is not material, the region is an
important area for anticipated future growth.
Products in many countries recognized to be susceptible to
significant foreign currency risk are generally sold for U.S.
dollars which eliminates the direct currency risk but can create
a risk of collectibility if the local currency devalues
significantly.
Fluctuating Operating Results
The Company has experienced in the past, and will experience
in the future, variations in revenues and net income as a result
of many factors, including acquisitions, delays in the
introduction of new products, the level of expenses, management
actions and the general conditions of the pharmaceutical and
animal health industry.
Competition
All of the Company's businesses operate in highly
competitive markets and many of the Company's competitors are
substantially larger and have greater financial, technical and
marketing resources than the Company. As a result, the Company
may be at a disadvantage in its ability to develop and market new
products to meet competitive demands.
The U.S. generic pharmaceutical industry has historically
been characterized by intense competition. As patents and other
basis for market exclusivity expire, prices typically decline as
generic competitors enter the marketplace. Normally, there is a
further unit price decline as the number of generic competitors
increase. The timing of these price decreases is unpredictable
and can result in a significantly curtailed period of
profitability for a generic product. In addition brand-name
manufacturers frequently take actions to prevent or discourage
the use of generic equivalents through marketing and regulatory
activities and litigation.
Generic pharmaceutical market conditions in the U.S. were
further exacerbated in the second half of 1996 by a fundamental
shift in industry distribution, purchasing and stocking patterns
resulting from increased importance of sales to major wholesalers
and a concurrent reduction in sales to private label generic
distributors. The Company believes that this trend continues to
date. Wholesaler programs generally require lower prices on
products sold, lower inventory levels kept at the wholesaler and
fewer manufacturers selected to provide products to the
wholesaler's own marketing programs.
The factors which have adversely affected the U.S. generic
pharmaceutical industry may also affect some or all of the
markets in which the International Pharmaceutical Division
operates. In addition, in Europe the Company is encountering
price pressure from parallel imports (i.e., imports of identical
products from lower priced markets under EU laws of free movement
of goods) and general governmental initiatives to reduce drug
prices. Parallel imports could lead to lower volume growth. Both
parallel imports and governmental cost containment could create
downward pressure on prices in certain product and geographical
market areas including the Nordic countries where the Company has
significant sales.
The Company 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 (e.g., large wholesalers and chain stores), a rapidly
changing market and uncertainty of timing of new product
approvals, the sales volume, prices and profits of the Company's
U.S. and International Pharmaceutical Divisions and its generic
competitors are subject to unforeseen fluctuation.
Dependence on Single Sources of Raw Material Supply and Contract
Manufacturers
Raw materials and certain products are currently sourced
from single domestic or foreign suppliers. Although the Company
has not experienced difficulty to date, there can be no assurance
that supply interruptions will not occur in the future or that
the Company will not have to obtain substitute materials or
products, which would require additional regulatory approvals.
Further, there can be no assurance that third parties that supply
the Company will continue to do so. Any interruption of supply
could have a material adverse effect on the Company.
Third Party Reimbursement Pricing Pressures
The Company's commercial success with respect to generic
products will depend, in part, on the availability of adequate
reimbursement from third-party health care payers, such as
government and private health insurers and managed care
organizations. Third-party payers are increasingly challenging
the pricing of medical products and services. There can be no
assurance that reimbursement will be available to enable the
Company to maintain its present product price levels. In
addition, the market for the Company's products may be limited by
actions of third-party payers. For example, many managed health
care organizations are now controlling the pharmaceutical
products which will be approved for reimbursement. The
competition to place products on these approved lists has
created a trend of downward pricing pressure in the industry.
There can be no assurance that the Company's products will be
included on the approved lists of managed care organizations or
that downward pricing pressures in the industry generally will
not negatively impact the Company's business.
Potential Liability for Current Products
Continuing studies of the proper utilization, safety, and
efficacy of pharmaceuticals and other health care products are
being conducted by the industry, government agencies and others.
Such studies, which increasingly employ sophisticated methods and
techniques, can call into question the utilization, safety and
efficacy of previously marketed products. In some cases these
studies have resulted in the removal of products from the market
and have given rise to claims for damages from previous users.
The Company's business could be materially adversely affected by
the assertion of such product liability claims.
Relationship of the Company and A.L. Industrier; Controlling
Stockholder; Conflicts of Interest
A.L. Industrier, ("Industrier") as the beneficial owner of
100% of the outstanding shares of the Class B Stock, is presently
entitled to elect two-thirds of the members of the Company's
Board of Directors and to cast more than 50% of the votes
generally entitled to be cast on matters presented to the
Company's stockholders. Secondly, Industrier controls the Company
and its policies. Mr. Sissener, Chairman and Chief Executive
Officer of the Company, controls a majority of Industrier's
outstanding shares and thus may be deemed the indirect
controlling stockholder of the Company. Industrier's ownership of
the Class B Stock has the effect of preventing hostile takeovers,
including transactions in which stockholders might otherwise
receive a premium for their shares over current market prices.
Industrier also beneficially owns a convertible note of the
Company in the principal amount of $67.9 million, which may
convert upon the occurrence of certain events after April 6, 2001
into 2,373,896 shares of Class B Stock. In addition, Mr. Sissener
and his family hold 346,668 shares of Class A Common Stock.
E.W. Sissener, Chairman and Chief Executive Officer of the
Company, is also Chairman of Industrier and controls Industrier.
Gert Munthe, President and Chief Operating Officer of the
Company, is a director of Industrier. The Company and Industrier
engage in various transactions from time to time, and conflicts
of interest are present with respect to the terms of such
transactions. The Company believes that contractual arrangements
with Industrier are no less favorable to the Company than other
third party contracts that are negotiated on an arm's length
basis. All contractual arrangements between the Company and
Industrier are subject to approval by, or ratification of, the
Audit Committee of the Board of Directors of the Company
consisting of directors who are unaffiliated with Industrier.
Year 2000
See previous section included in Item 7.
Item 8. Financial Statements and Supplementary Data
See page F-1 of this Report, which includes an index to the
consolidated financial statements and financial statement
schedule.
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information as to the Directors of the Registrant set
forth under the sub-caption "Board of Directors" appearing under
the caption "Election of Directors" of the Proxy Statement
relating to the Annual Meeting of Shareholders to be held on
June 10, 1999, which Proxy Statement will be filed on or prior to
April 15, 1999, 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 June 10, 1999,
which Proxy Statement will be filed on or prior to April 15,
1999, and the information set forth under the caption "Executive
Compensation and Benefits" in such Proxy Statement is
incorporated into this Report by reference.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
The information to be set forth under the caption "Security
Ownership of Certain Beneficial Owners" of the Proxy Statement
relating to the Annual Meeting of Stockholders expected to be
held on June 10, 1999, is incorporated into this Report by
reference. Such Proxy Statement will be filed on or prior to
April 15, 1999.
There are no arrangements known to the Registrant, the
operation of which may at a subsequent date result in a change in
control of the Registrant.
Item 13. Certain Relationships and Related Transactions
The information to be set forth under the caption "Certain
Related Transactions and Relationships" of the Proxy Statement
relating to the Annual Meeting of Stockholders expected to be
held on June 10, 1999, is incorporated into this Report by
reference. Such Proxy Statement will be filed on or prior to
April 15, 1999.
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
was filed as Exhibit 10.1A to the Company's 1996 Annual Report on
Form 10K and is incorporated by reference.
10.1B Amendment to the Credit Agreement dated April 10,
1997 between the Company and Union Bank of Norway, as agent was
filed as Exhibit 10.a to the Company's March 31, 1997 quarterly
report on Form 10Q and is incorporated by reference.
10.2 $300,000,000 Credit Agreement among Alpharma U.S.
Inc. as Borrower, Union Bank of Norway, as agent and arranger,
and Den norske Bank AS, as co-arranger, dated January 20, 1999,
is filed as an Exhibit to this report.
10.3 Purchase Agreement, dated as of March 25, 1998, by
and among the Company, SBC Warburg Dillion Read Inc., CIBC
Oppenheimer Corp. and Cowen Company was filed as Exhibit 1.1 of
the Company's Form 8-K, dated as of March 30, 1998 and is
incorporated by reference.
10.4 Indenture, dated as of March 30, 1998, by amd among
the Company and First Union National Bank, as trustee, with
respect to the 5 _% Convertible Subordinated Notes due 2005 was
filed as Exhibit 4.1 of the Company's Form 8-K dated as of March
30, 1998 and is incorporated by reference.
10.5 Note Purchase Agreement dated March 5, 1998 and
Amendment No. 1 thereto dated March 25, 1998 by and between the
Company and A.L. Industrier A.S. was filed as Exhibit 1.2 of the
Company's Form 8-K dated as of March 30, 1998 and is incorporated
by reference.
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, 1997 will be furnished to the
Commission upon request.
10.6 Parent Guaranty, made by the Company in favor of
Union Bank of Norway, as agent and arranger, and Den norske Bank
AS, as co-arranger, dated 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.
10.7 Parent Guaranty, made by the Company in favor of
Union Bank of Norway, as agent and arranger, and Den norske Bank
AS, as co-arranger, dated January 20, 1999 is filed as an Exhibit
to this report.
10.8 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.
10.9 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.
10.10 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.
10.11 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.
10.12 Amendment to Control Agreement dated December 19,
1996 between A.L. Industrier AS and the Company was filed as
Exhibit 10.6A to the Company's 1996 Annual Report on Form 10-K
and is incorporated by reference.
10.13 The Company's 1997 Incentive Stock Option and
Appreciation Right Plan, as amended was filed as an Exhibit to
the Company's 1996 Proxy Statement and is incorporated by
reference.
10.14 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.
10.15 Employment agreement between the Company and Thomas
Anderson dated January 13, 1997 was filed as Exhibit 10.9 to the
Company's 1996 Annual Report on Form 10-K and is incorporated by
reference.
10.16 Employment Agreement between the Company and Bruce I.
Andrews dated April 7, 1997 was filed as Exhibit 10.b to the
Company's March 31, 1997 quarterly report on Form 10-Q and is
incorporated by reference.
10.17 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.
10.18 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.
10.19 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.
10.20 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.
10.21 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.
10.22 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.
10.23 Agreement dated April 28, 1997 between D.E.Cohen and
the Company was filed as Exhibit 10.17 to the Company's 1997
Annual Report on Form 10-K and is incorporated by reference.
10.24 Stock Subscription and Purchase Agreement dated
February 10, 1997 between the Company and A.L. Industrier was
filed as Exhibit 10 on Form 8-K filed on February 19, 1997 and is
incorporated herein by reference.
10.24a Amendment No. 1 to Stock Subscription and Purchase
Agreement dated June 26, 1997, between the Company and A.L.
Industrier AS was filed as an Exhibit to the Company's Form 8-K
dated June 27, 1997 and is incorporated herein by reference.
10.25 Employment Agreement dated March 13, 1998 between the
Company and Gert W. Munthe was filed as Exhibit 10a to the
Company's March 31, 1998 Quarterly Report on Form 10-Q and is
incorporated by reference.
10.26 Master Agreement dated as of February 16, 1999 by and
among Ascent, USPD and the Company and was filed as Exhibit 99.1
of the Company's Form 8-K dated February 23, 1999 and is
incorporated by reference.
10.26a Depositary Agreement dated as of February 16, 1999 by
and among Ascent, USPD the Company and State Street Bank and
Trust Company was filed as Exhibit 99.2 of the Company's Form 8-K
dated February 23, 1999 and is incorporated by reference.
10.26b Loan Agreement dated as of February 16, 1999 by and
among Ascent, USPD and the Company was filed as Exhibit 99.3 of
the Company's Form 8-K dated February 23, 1999 and is
incorporated by reference.
10.26c Guaranty Agreement dated as of February 16, 1999 by
and between Ascent and the Company was filed as Exhibit 99.4 of
the Company's Form 8-K dated February 23, 1999 and is
incorporated by reference.
10.26d Registration Rights Agreement dated as of February
16, 1999 by and between Ascent and USPD was filed as Exhibit 99.5
of the Company's Form 8-K dated February 23, 1999 and is
incorporated by reference.
10.26e Subordination Agreement dated as of February 16, 1999
by and among Ascent, USPD and the purchasers named therein was
filed as Exhibit 99.6 of the Company's Form 8-K dated February
23, 1999 and is incorporated by reference.
10.27 Agreement for the sale and purchase of the issued
share capital of Cox Investments Limited, dated April 30, 1998
between Hoechst AG, Alpharma (U.K.) Limited, and Alpharma Inc.
was filed as Exhibit 2.1 of the Company's Form 8-K, dated as of
May 7, 1998 and is incorporated by reference.
21 A list of the subsidiaries of the Registrant as of
March 1, 1999 is filed as an Exhibit to this Report.
23 Consent of PricewaterhouseCoopers L.L.P., Independent
Accountants, is filed as an Exhibit to this Report.
27 Financial Data Schedule
Report on Form 8-K
On February 23, 1999 the Company filed a report on Form 8-K
dated February 16, 1999 reporting Item 5, "Other Events". The
event reported was a loan agreement between the Company and
Ascent Pediatrics, Inc.
Undertakings
For purposes of complying with the amendments to the rules
governing Registration Statements under the Securities Act of
1933, the undersigned Registrant hereby undertakes as follows,
which undertaking shall be incorporated by reference into
Registrant's Registration Statements on Form S-8 (No. 33-60495,
effective July 13, 1990) and Form S-3 (File Nos. 333-57501 and
333-70229):
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers
and controlling persons of the Registrant pursuant to the
foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
expressed in the Securities Act of 1933 and is, therefore,
unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of
any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question
whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final
adjudication of such issue.
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly authorized.
March 25, 1999 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 25, 1999 /s/ Einar W. Sissener
Einar W. Sissener
Chairman, Director and
Chief Executive Officer
Date: March 25, 1999 /s/ Gert W. Munthe
Gert W. Munthe
Director, President and
Chief Operating Officer
Date: March 25, 1999 /s/ Jeffrey E. Smith
Jeffrey E. Smith
Vice President, Finance and
Chief Financial Officer
(Principal accounting officer)
Date: March 25, 1999 /s/ I. Roy Cohen
I. Roy Cohen
Director and Chairman of the
Executive Committee
Date: March 25, 1999 /s/ Thomas G. Gibian
Thomas G. Gibian
Director and Chairman of the
Audit Committee
Date: March 25, 1999 /s/ Glen E. Hess
Glen E. Hess
Director
Date: March 25, 1999 /s/ Peter G. Tombros
Peter G. Tombros
Director and Chairman
of the Compensation Committee
Date: March 25, 1999 /s/ Erik G. Tandberg
Erik G. Tandberg
Director
Date: March 25, 1999 /s/Oyvin Broymer
Oyvin Broymer
Director
Date: March 25, 1999 /s/ Erik Hornnaess
Erik Hornnaess
Director
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
______________
Page
Consolidated Financial Statements:
Report of Independent Accountants F-2
Consolidated Balance Sheet at
December 31, 1998 and 1997 F-3
Consolidated Statement of Operations for
the years ended December 31, 1998,
1997 and 1996 F-4
Consolidated Statement of Stockholders'
Equity for the years ended
December 31, 1998, 1997 and 1996 F-5 to F-6
Consolidated Statement of Cash Flows
for the years ended December 31, 1998,
1997 and 1996 F-7 to F-8
Notes to Consolidated Financial Statements F-9 to F-42
Financial statement schedules are omitted for the reason that
they are not applicable or the required information is included
in the consolidated financial statements or notes thereto.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and
Board of Directors of
Alpharma Inc.:
In our opinion, the accompanying consolidated financial
statements listed in the index on page F-1 of this Form 10-K
present fairly, in all material respects, the consolidated
financial position of Alpharma Inc. and Subsidiaries (the
"Company") as of December 31, 1998 and 1997 and the consolidated
results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the
opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Florham Park, New Jersey
February 24, 1999
ALPHARMA INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In thousands, except share data)
December 31,
1998 1997
ASSETS
Current assets:
Cash and cash equivalents $ 14,414 $ 10,997
Accounts receivable, net 169,744 127,637
Inventories 138,318 121,451
Prepaid expenses and other
current assets 13,008 13,592
Total current assets 335,484 273,677
Property, plant and equipment, net 244,132 199,560
Intangible assets, net 315,709 149,816
Other assets and deferred charges 13,611 8,813
Total assets $908,936 $631,866
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 12,053 $ 10,872
Short-term debt 41,921 39,066
Accounts payable 41,083 27,659
Accrued expenses 64,596 51,139
Accrued and deferred income taxes 10,784 5,190
Total current liabilities 170,437 133,926
Long-term debt:
Senior 236,184 223,975
Convertible subordinated notes,
including $67,850 to related party 192,850 -
Deferred income taxes 31,846 26,360
Other non-current liabilities 10,340 9,132
Stockholders' equity:
Preferred stock, $1 par value,
no shares issued - -
Class A Common Stock, $.20
par value, 17,755,249 and
16,118,606 shares issued 3,551 3,224
Class B Common Stock, $.20 par value,
9,500,000 shares issued 1,900 1,900
Additional paid-in capital 219,306 179,636
Accumulated other comprehensive loss (7,943) (8,375)
Retained earnings 56,649 68,206
Treasury stock, at cost (6,184) (6,118)
Total stockholders' equity 267,279 238,473
Total liabilities and
stockholders' equity $908,936 $631,866
See notes to consolidated financial statements.
ALPHARMA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share data)
Years Ended December 31,
1998 1997 1996
Total revenue $604,584 $500,288 $486,184
Cost of sales 351,324 289,235 297,128
Gross profit 253,260 211,053 189,056
Selling, general and
administrative expenses 188,264 164,155 185,136
Operating income 64,996 46,898 3,920
Interest expense (25,613) (18,581) (19,976)
Other income (expense), net (400) (567) (170)
Income (loss) before
income taxes 38,983 27,750 (16,226)
Provision (benefit) for
income taxes 14,772 10,342 (4,765)
Net income (loss) $24,211 $ 17,408 $(11,461)
Earnings (loss) per common share:
Basic $ .95 $ .77 $ (.53)
Diluted $ .92 $ .76 $ (.53)
See notes to consolidated financial statements.
ALPHARMA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands)
Accumulated
Other Total
Additional Comprehen- Stock-
Common Paid-In sive Income Retained Treasury holders
Stock Capital (Loss) Earnings Stock Equity
Balance, December 31, 1995 $4,386 $120,357 $15,884 $70,385 $(5,822) $205,190
Comprehensive
income(loss):
Net loss - 1996 (11,461) (11,461)
Currency translation
adjustment (5,393) (5,393)
Total comprehensive loss (16,854)
Dividends declared
($.18 per common share) (3,928) (3,928)
Tax benefit realized from
stock option plan 202 202
Purchase of treasury stock (283) (283)
Exercise of stock options
(Class A) and other 13 862 875
Employee stock purchase
plan 9 831 840
Balance, December 31, 1996 $4,408 $122,252 $10,491 $54,996 $(6,105) $186,042
Comprehensive
income(loss):
Net income - 1997 17,408 17,408
Currency translation
adjustment (18,866) (18,866)
Total comprehensive loss (1,458)
Dividends declared
($.18 per common share) (4,198) (4,198)
Tax benefit realized from
stock option plan 228 228
Purchase of treasury stock (13) (13)
Exercise of stock options
(Class A) and other 14 794 808
Exercise of stock rights
(Class A) 440 35,538 35,978
Stock subscription by
A.L. Industrier (Class B) 254 20,125 20,379
Employee stock purchase
plan 8 699 707
Balance, December 31, 1997 $5,124 $179,636 $(8,375) $68,206 $(6,118) $238,473
Comprehensive
income(loss):
Net income - 1998 24,211 24,211
Currency translation
adjustment 432 432
Total comprehensive
income 24,643
Dividends declared
($.18 per common share) (4,651) (4,651)
Tax benefit realized from
stock option plan 1,415 1,415
Purchase of treasury stock (66) (66)
Exercise of stock options
(Class A) and other 68 5,687 5,755
Exercise of warrants 48 4,910 4,958
Stock subscription
receivable for warrant
exercises (47) (4,869) (4,916)
Stock issued in tender
offer for warrants 246 30,871 (31,117)
Employee stock purchase
plan 12 1,656 1,668
Balance, December 31, 1998 $5,451 $219,306 $(7,943) $56,649 $(6,184) $267,279
See notes to consolidated financial statements.
ALPHARMA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands of dollars)
Years Ended
December 31,
1998 1997 1996
Operating activities:
Net income (loss) $24,211 $17,408 $(11,461)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization 38,120 30,908 31,503
Deferred income taxes 493 (1,101) (3,104)
Noncurrent asset write-offs - - 5,753
Purchased in-process research and
development 2,081 - -
Change in assets and liabilities, net
of effects from business
acquisitions:
(Increase) decrease in accounts
receivable (22,487) (13,029) 9,204
Decrease (increase) in inventory 3,212 (2,121) (5,876)
(Increase) in prepaid expenses
and other current assets (686) (1,013) (595)
Increase(decrease) in accounts
payable and accrued expenses 8,189 (4,782) 3,346
Increase (decrease) in accrued
income taxes 3,641 4,077 (4,523)
Other, net (119) 616 574
Net cash provided by operating
activities 56,655 30,963 24,821
Investing activities:
Capital expenditures (31,378) (27,783) (30,874)
Purchase of Cox, net of cash acquired (197,354) - -
Purchase of other businesses
and intangibles, net of cash
acquired (23,315) (44,029) -
Other - - (348)
Net cash used in investing
activities (252,047) (71,812) (31,222)
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,
1998 1997 1996
Financing activities:
Net advances (repayments)
under lines of credit $ 2,542 $(19,389) $ (630)
Proceeds of senior long-term debt 187,522 27,506 24,213
Reduction of senior long-term debt (183,751) (25,366) (17,137)
Dividends paid (4,651) (4,198) (3,928)
Proceeds from sale of convertible
subordinated notes 192,850 - -
Proceeds from exercise of stock
rights - 56,357 -
Payment for debt issuance costs (4,175) - -
Proceeds from employee stock option
and stock purchase plan 7,427 1,515 1,715
Other, net 1,387 214 (82)
Net cash provided by
financing activities 199,151 36,639 4,151
Exchange rate changes:
Effect of exchange rate changes
on cash 397 (1,606) (627)
Income tax effect of exchange rate
changes on intercompany advances (739) 869 470
Net cash flows from exchange
rate changes (342) (737) (157)
Increase (decrease) in cash and cash
equivalents 3,417 (4,947) (2,407)
Cash and cash equivalents at
beginning of year 10,997 15,944 18,351
Cash and cash equivalents at
end of year $14,414 $10,997 $15,944
See notes to consolidated financial statements.
ALPHARMA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
1. The Company:
Alpharma Inc. and Subsidiaries, (the "Company") is a
multinational pharmaceutical company which develops,
manufactures and markets specialty generic and proprietary human
pharmaceutical and animal health products.
In 1994 the Company acquired the pharmaceutical, animal
health, bulk antibiotic and aquatic animal health business
("Alpharma Oslo") of A.L. Industrier A.S ("A.L. Industrier"), the
beneficial owner of 100% of the outstanding shares of the
Company's Class B Stock. The Class B stock represents 35.2% of
the total outstanding common stock. A.L. Industrier, a Norwegian
company, is able to control the Company through its ability to
elect more than a majority of the Board of Directors and to cast
a majority of the votes in any vote of the Company's
stockholders. (See Note 16.)
Upon consummation of the acquisition of Alpharma Oslo, the
Company was reorganized on a global basis within its Human
Pharmaceutical and Animal Health businesses into five
decentralized divisions each of which has a president and
operates in a distinct business and/or geographic area.
Divisions in the Human Pharmaceutical business include: the
U.S. Pharmaceuticals Division ("USPD"), the International
Pharmaceuticals Division ("IPD") and the Fine Chemicals Division
("FCD"). The USPD's principal products are generic liquid and
topical pharmaceuticals sold primarily to wholesalers,
distributors and merchandising chains. The IPD's principal
products are dosage form pharmaceuticals sold primarily in
Scandinavia, the United Kingdom and western Europe as well as
Indonesia and certain middle eastern countries. The FCD's
principal products are bulk pharmaceutical antibiotics sold to
the pharmaceutical industry in the U.S. and worldwide for use as
active substances in a number of finished pharmaceuticals.
Divisions in the Animal Health business include: the Animal
Health Division ("AHD") and the Aquatic Animal Health Division
("AAHD"). The AHD's principal products are feed additive and
other animal health products for animals raised for commercial
food production (principally poultry, cattle and swine) in the
U.S. and worldwide. The AAHD manufactures and markets vaccines
primarily for use in immunizing farmed fish (principally salmon)
worldwide with a concentration in Norway. (See Note 20 for
segment and geographic information.)
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 1998, 1997 and 1996, $744, $407
and $572 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 following table is net of accumulated amortization
of $63,014 and $50,514 at December 31, 1998 and 1997,
respectively.
1998 1997 Life
Excess of cost of acquired
businesses over the fair value
of the net assets acquired $247,869 $92,228 20 - 40
Technology, trademarks, NADAs
and other 67,840 57,588 6 - 20
$315,709 $149,816
Foreign currency translation and transactions:
The assets and liabilities of the Company's foreign
subsidiaries are translated from their respective functional
currencies into U.S. Dollars at rates in effect at the balance
sheet date. Results of operations are translated using average
rates in effect during the year. Foreign currency transaction
gains and losses are included in income. Foreign currency
translation adjustments are included in accumulated other
comprehensive income (loss) as a separate component of
stockholders' equity. The foreign currency translation
adjustment for 1998, 1997 and 1996 is net of $(739), $869, and
$470, respectively, representing the foreign tax effects
associated with intercompany advances to foreign subsidiaries.
Foreign exchange contracts:
The Company selectively enters into foreign exchange
contracts to buy and sell certain cash flows in non-functional
currencies and to hedge certain firm commitments due in foreign
currencies. Foreign exchange contracts, other than hedges of firm
commitments, are accounted for as foreign currency transactions
and gains or losses are included in income. Gains and losses
related to hedges of firm commitments are deferred and included
in the basis of the transaction when it is completed.
Interest rate transactions:
The Company selectively enters into interest rate agreements
which fix the interest rate to be paid for specified periods on
variable rate long-term debt. The effect of these agreements is
recognized over the life of the agreements as an adjustment to
interest expense.
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, 1998, the Company's share of the
undistributed earnings of its foreign subsidiaries (excluding
cumulative foreign currency translation adjustments) was
approximately $51,000. No provisions are made for U.S. income
taxes that would be payable upon the distribution of earnings
which have been reinvested abroad or are expected to be returned
in tax-free distributions. It is the Company's policy to provide
for U.S. taxes payable with respect to earnings which the Company
plans to repatriate.
Accounting for stock based compensation:
Effective January 1, 1996, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation." The standard establishes a fair value
method of accounting for or, alternatively, disclosing the pro-
forma effect of the fair value method of accounting for stock-
based compensation plans. The Company has adopted the disclosure
alternative. As a result, the adoption of this standard had no
impact on the Company's consolidated results of operations,
financial position or cash flows.
Comprehensive income:
As of January 1, 1998, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income." SFAS 130 established new rules
which require the reporting of comprehensive income and its
components. The adoption of this statement had no impact on the
Company's consolidated results of operations, financial position
or cash flows.
SFAS 130 requires foreign currency translation adjustments
and certain other items, which prior to adoption were reported
separately in stockholders' equity, to be included in other
comprehensive income (loss). The only components of accumulated
other comprehensive loss for the Company are foreign currency
translation adjustments. Total comprehensive income (loss) for
the years ended 1998, 1997 and 1996 is included in the Statement
of Stockholders' Equity.
Segment information:
In 1998, the Company adopted SFAS 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS 131
supersedes SFAS 14, "Financial Reporting for Segments of a
Business Enterprise," replacing the "industry segment" approach
with the "management" approach. The management approach is based
on the method that management organizes the segments within the
Company for making operating decisions and assessing performance.
SFAS 131 also requires disclosures about products and services,
geographic areas, and major customers. The adoption of SFAS 131
did not affect results of operations or financial position but
did affect the disclosure of segment information.
Accounting for pensions and postretirement benefits:
In 1998, the Company adopted SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits".
SFAS 132 revises employers' disclosures about pension and other
postretirement benefit plans. Restatement of disclosures for
earlier periods provided for comparative purposes was required.
The adoption of SFAS 132 has no impact on the Company's
consolidated results of operations, financial position or cash
flows.
Recent accounting pronouncements:
In June 1998, the Financial Accounting Standards Board (FASB) issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS 133 is effective for all fiscal quarters of all
fiscal years beginning after June 15, 1999 (January 1, 2000 for
the Company). SFAS 133 requires that all derivative instruments
be recorded on the balance sheet at their fair value. Changes in
the fair value of derivatives are recorded each period in current
earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and, if
it is, the type of hedge transaction. SFAS 133 is not expected to
have a material impact on the Company's consolidated results of
operations, financial position or cash flows.
3. Management Actions - 1996
In 1996, the IPD took actions designed to 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 included the transfer of all tablet,
ointment and liquid production from Copenhagen, Denmark to Lier,
Norway. The full transfer was completed in late 1998 and resulted
in the reduction of approximately 175 employees (primarily
involved in production). The rationalization plan resulted in a
charge in the second quarter of 1996 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
USPD plan to accelerate a consolidation of manufacturing
operations within the 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 charge in the second quarter of 1996 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,
instituted stay bonus plans. The overall cost of the stay bonus
plans was approximately $1,900, and was accrued over the periods
necessary to achieve shut down and transfer. The stay bonus plans
generally required the employee to 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. In 1997 the USPD completed the
transfer of production, paid the stay bonus as accrued, and
severed all identified employees.
As a result of difficult market conditions experienced in
1996, the Company's 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:
Pre-Tax
Amount Description
$11,200 Severance and employee termination benefits for all
1996 employee related actions (approximately 450
employees were to be terminated; at December 31,
1998, 446 employees were terminated).
1,000 Stay bonus accrued, as earned as of December 31,
1996.
4,175 Write off of building, leasehold improvements and
machinery and equipment. (Net of sales proceeds of
approximately $500 in the third quarter of 1996.)
550 Accrual of the non cancelable term of the operating
leases and estimated refurbishment costs for exited
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):
1996
Accruals $11,338
Payments (2,122)
Translation and
adjustments (2)
Balance, December 31, 1996 $ 9,214
1997
Accruals - Stay bonus IPD 652
Payments (5,980)
Translation and adjustments (479)
Balance, December 31, 1997 $ 3,407
1998
Payments (3,007)
Translation and adjustments 78
Balance, December 31, 1998 $ 478
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.
Cox:
On May 7, 1998, the Company acquired all of the capital
stock of Cox Investments Ltd. and its wholly owned subsidiary,
Arthur H. Cox and Co., Ltd. and all of the capital stock of
certain related marketing subsidiaries ("Cox") from Hoechst AG
for approximately $192,000 in cash, the assumption of bank debt
which was repaid subsequent to the closing, and a further
purchase price adjustment equal to an increase in net assets of
Cox from January 1, 1998 to the date of acquisition. The total
purchase price including the purchase price adjustment and direct
costs of the acquisition was approximately $198,000. Cox's
operations are included in IPD and are located primarily in the
United Kingdom with distribution operations located in
Scandinavia and the Netherlands. Cox is a generic pharmaceutical
manufacturer and marketer of tablets, capsules, suppositories,
liquids, ointments and creams. Cox distributes its products to
pharmacy retailers and pharmaceutical wholesalers primarily in
the United Kingdom.
The Company financed the $198,000 purchase price and related
debt repayments from borrowings under its existing long-term
Revolving Credit Facility and short-term lines of credit which
had been repaid in March 1998 with the proceeds of the
convertible subordinated notes offering. To accomplish the
acquisition the principal members of the bank syndicate, which
were parties to the Company's Revolving Credit Facility,
consented to a change until December 31, 1998 in the method of
calculating certain financial convenants. The Revolving Credit
Facility was replaced in January 1999 with a new credit facility
which contains updated financial covenants. (See Note 9.)
The acquisition was accounted for in accordance with the
purchase method. The fair value of the assets acquired and
liabilities assumed and the results of Cox's operations are
included in the Company's consolidated financial statements
beginning on the acquisition date, May 7, 1998. The Company is
amortizing the acquired goodwill (approximately $160,000) over 35
years using the straight line method.
The non-recurring charges related to the acquisition of Cox
included in the second quarter of 1998 are summarized below. The
charge for in-process research and development ("R&D") is not tax
benefited; therefore the computed tax benefit is below the
expected rate. The valuation of purchased in-process R&D was
based on the cost approach for 12 generic products at varying
stages of development at the acquisition date.
Inventory write-up $1,300 (Included in cost of sales)
In-process R&D 2,100 (Included in selling, general
Severance of existing and administrative expenses)
employees 200
3,600
Tax benefit (470)
$3,130 ($.12 per share)
The following pro forma information on results of operations
for the periods presented assumes the purchase of Cox as if the
companies had combined at the beginning of each of the respective
periods:
Pro Forma
Year Ended
December 31,
(Unaudited)
1998* 1997
Revenues $637,139 $590,450
Net income $26,868 $13,311
Basic EPS $1.05 $0.59
Diluted EPS $1.02 $0.58
* 1998 excludes actual non-recurring charges related to the
acquisition of $ 3,130 after tax or $ .12 per share.
Other Acquisitions:
In December 1998, the Company acquired SKW Biotech, a part
of SKW Trostberg AG, in Budapest, Hungary. The purchase included
an antibiotic fermentation and purification plant in Budapest on
a 300,000 square foot site. SKW Biotech is included in the FCD
and currently produces vancomycin. The cost of approximately
$8,400 was preliminarily allocated to goodwill and property,
plant and equipment. A final purchase allocation will be
completed in 1999.
In November 1998, the Company acquired the Siga product
line in Germany from Hexal AG. The branded product line, "Siga",
is included in the IPD and consists of over 20 products. The
acquisition consisted of product registrations and trademarks; no
personnel or plants were part of the transaction. The cost of
approximately $13,300 has been allocated to intangible assets and
will be amortized over 15 years.
In November 1997, the Company acquired the worldwide
polymyxin business from Cultor Food Science. Polymyxin is an
antibiotic mainly used in topical ointments and creams. The
transaction included product technology, registrations, customer
information and inventories. The Company's FCD manufactures
polymyxin in its Copenhagen facility and has manufactured its
additional polymyxin requirements at this facility. The cost was
approximately $16,500 which included approximately $500 of
inventory. The balance of the purchase price has been allocated
to intangible assets and will generally be amortized over 15
years. The purchase agreement also provides for a contingent
payment and future royalties in the event that certain sales
levels are achieved of a product presently being developed by an
independent pharmaceutical company utilizing polymyxin supplied
by the Company.
In September 1997, the Company acquired the worldwide
decoquinate business from Rhone-Poulenc Animal Nutrition of
France (RPAN). Decoquinate is an anticoccidial feed additive used
primarily in beef cattle and calves. The transaction included all
rights for decoquinate worldwide and the trademark Deccoxr that
is registered in over 50 countries. The agreement also provides
that RPAN will continue to manufacture decoquinate for the AHD
under a long term supply contract. The cost was approximately
$27,550, which included approximately $1,850 of inventory. The
balance of the purchase price has been allocated to intangible
assets and will generally be amortized over 15 years.
5. Earnings Per Share
Basic earnings per share is based upon the weighted average
number of common shares outstanding. Diluted earnings per share
reflect the dilutive effect of stock options, rights, warrants
and convertible debt when appropriate.
A reconciliation of weighted average shares outstanding for
basic to diluted weighted average shares outstanding used in the
calculation of EPS is as follows:
(Shares in thousands) For the years ended
December 31,
1998 1997 1996
Average shares
outstanding - basic 25,567 22,695 21,715
Stock options 222 85 -
Rights - - -
Warrants 490 - -
Convertible debt - - -
Average shares
outstanding - diluted 26,279 22,780 21,715
The amount of dilution attributable to the options, rights,
and warrants determined by the treasury stock method depends on
the average market price of the Company's common stock for each
period. Subordinated debt, convertible into 6,744,481 shares of
common stock at $28.59 per share, was outstanding at December 31,
1998 and was included in the computation of diluted EPS using the
if-converted method for the three month periods ended September
30, and December 31, 1998. The if-converted method was
antidilutive for the year ended December 31, 1998 and therefore
the shares attributable to the subordinated debt were not
included in the diluted EPS calculation.
The numerator for the calculation of basic and diluted EPS
is net income for all periods. The numerator for the three month
periods ended September 30, and December 31, 1998 includes an add
back for interest expense and debt cost amortization, net of
income tax effects, related to the convertible notes.
6. Accounts Receivable, Net:
Accounts receivable consist of the following:
December 31,
1998 1997
Accounts receivable, trade $171,073 $129,382
Other 4,941 3,460
176,014 132,842
Less allowances for doubtful
accounts 6,270 5,205
$169,744 $127,637
The allowance for doubtful accounts for the three years
ended December 31, consisted of the following:
1998 1997 1996
Balance at January 1, $5,205 $4,359 $5,751
Provision for doubtful
accounts 1,032 2,111 3,572
Reductions for accounts
written off (175) (789) (4,589)
Translation and other 208 (476) (375)
Balance at December 31, $6,270 $5,205 $4,359
7. Inventories:
Inventories consist of the following:
December 31,
1998 1997
Finished product $ 68,834 $ 68,525
Work-in-process 25,751 20,009
Raw materials 43,733 32,917
$138,318 $121,451
At December 31, 1998 and 1997, approximately $41,900 and
$48,700 of inventories, respectively, are valued on a LIFO basis.
LIFO inventory is approximately equal to FIFO in 1998 and 1997.
8. Property, Plant and Equipment, Net:
Property, plant and equipment, net, consist of the
following:
December 31,
1998 1997
Land $ 10,603 $ 8,954
Buildings and building
improvements 120,357 100,017
Machinery and equipment 259,988 219,566
Construction in progress 20,199 16,197
411,147 344,734
Less, accumulated depreciation 167,015 145,174
$244,132 $199,560
9. Long-Term Debt:
Long-term debt consists of the following:
December 31,
1998 1997
Senior debt:
U.S. Dollar Denominated:
Revolving Credit Facility 6.6% - 7.0% $180,000 $161,575
A/S Eksportfinans 7,200 9,000
Industrial Development Revenue Bonds:
Baltimore County, Maryland
(7.25%) 4,565 5,155
(6.875%) 1,200 1,200
Lincoln County, NC 4,500 5,000
Other, U.S. 504 758
Denominated in Other Currencies:
Mortgage notes payable (NOK) 42,224 38,099
Bank and agency development loans 7,991 13,803
(NOK)
Other, foreign 53 257
Total senior debt 248,237 234,847
Subordinated debt:
5.75% Convertible Subordinated Notes
due 2005 125,000 -
5.75% Convertible Subordinated
Note due 2005 - Industrier Note 67,850 -
Total subordinated debt 192,850 -
Total long-term debt 441,087 234,847
Less, current maturities 12,053 10,872
$429,034 $223,975
In January 1999, the Company signed a $300,000 credit
agreement ("1999 Credit Facility") with a consortium of banks
arranged by the Union Bank of Norway, Den norske Bank A.S., and
Summit Bank. The agreement replaced the prior revolving credit
facility and the current U.S. short-term facilities and increased
overall credit availability. The prior revolving credit was
repaid in February 1999 by drawing on the 1999 Credit Facility.
The 1999 Credit Facility provides for (i) a $100,000 six
year Term Loan; and (ii) a revolving credit agreement of $200,000
with an initial term of five years with two possible one year
extensions.
The 1999 Credit Facility has several financial covenants,
including an interest coverage ratio, total debt to earnings
before interest, taxes, depreciation and amortization ("EBITDA"),
and equity to asset ratio.
Interest on the facility will be at the LIBOR rate with a
margin of between .875% and 1.6625% depending on the ratio of
total debt to EBITDA.
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 was
seven years. Interest for the loan was fixed at 6.59%, including
the cost of the credit support provided via guarantee by Union
Bank of Norway and Bikuben. The loan was repaid in February 1999
from proceeds received under the 1999 Credit Facility.
The Baltimore County Industrial Development Revenue Bonds
are payable in varying amounts through 2009. Plant and equipment
with an approximate net book value of $13,605 collateralize this
obligation.
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 (4.15% at December 31, 1998;
3.56% weighted average for 1998) approximating the current money
market rate on tax exempt bonds and the payment by the Company of
annual letter of credit, remarketing, trustee, and rating agency
fees of 1.125%. The bonds require a yearly sinking fund
redemption of $500 to August 2004 and $300 thereafter through
August 2009. Plant and equipment with an approximate net book
value of $5,166 serve as collateral for this loan.
The mortgage notes payable denominated in Norwegian Kroner
(NOK) include amounts originally issued in connection with the
construction of a pharmaceutical facility in Lier, Norway and
amounts issued in 1997 and 1998 in connection with the expansion
of the Lier facility ($14,700). The mortgage is collateralized by
this facility (net book value $44,985) 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, 1998
and 1997 was 6.8% and 5.6%, respectively. The tranches are
repayable in semiannual installments through 2021. Yearly
amounts payable vary between $1,237 and $2,009.
Mortgage notes payable also include amounts issued in 1997
($5,356) to finance a new production unit at an Aquatic Animal
Health facility in Overhalla, Norway. The mortgage has a 12 year
term and an interest rate of 4.9%, is repayable in 10 equal
installments in years 2001 - 2009, and is collateralized by the
net book value of the facility ($7,367).
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 payments in 1999 of $7,322 and final
payments of $669 in 2000. The weighted average interest rate of
the loans at December 31, 1998 and 1997 was 7.4% and 5.0%,
respectively. The banks and agencies have the option to extend
payment in 1999.
In March 1998, the Company issued $125,000 of 5.75%
Convertible Subordinated Notes (the "Notes") due 2005. The Notes
may be converted into common stock at $28.594 at any time prior
to maturity, subject to adjustment under certain conditions. The
Company may redeem the Notes, in whole or in part, on or after
April 6, 2001, at a premium plus accrued interest.
Concurrently, A.L. Industrier, the controlling stockholder
of the Company, purchased at par for cash $67,850 principal
amount of a Convertible Subordinated Note (the "Industrier
Note"). The Industrier Note has substantially identical
adjustment terms and interest rate as the Notes.
The Notes are convertible into Class A common stock. The
Industrier Note is automatically convertible into Class B common
stock if at least 75% of the Class A notes are converted into
common stock.
The net proceeds from the combined offering of $189,100 were
used initially to retire outstanding senior long-term debt. The
Revolving Credit Facility was used in the second quarter of 1998,
along with an amount of short term debt, to finance the
acquisition of Cox Pharmaceuticals. (See Note 4.)
Maturities of long-term debt during each of the next five
years and thereafter as of December 31, 1998 are as follows
(amounts are presented as reported and on a proforma basis
reflecting the 1999 Credit Facility):
Year ending December 31,
As Reported Proforma
1999 $ 12,053 $ 10,253
2000 185,089 8,289
2001 4,949 18,149
2002 4,947 18,147
2003 3,184 18,184
Thereafter 230,865 368,065
$441,087 $441,087
10. Short-Term Debt:
Short-term debt consists of the following:
December 31,
1998 1997
Domestic $17,275 $24,200
Foreign 24,646 14,866
$41,921 $39,066
At December 31, 1998, the Company and its domestic
subsidiaries have available bank lines of credit totaling
$65,500. Borrowings under the lines are made for periods
generally less than three months and bear interest from 6.60% to
6.75% at December 31, 1998. At December 31, 1998, the amount of
the unused lines totaled $48,225. In January 1999 the lines were
refinanced into the 1999 Credit Facility. (See Note 9.)
At December 31, 1998, the Company's foreign subsidiaries
have available lines of credit with various banks totaling
$42,222 ($40,722 in Europe and $1,500 in the Far East). Drawings
under these lines are made for periods generally less than three
months and bear interest at December 31, 1998 at rates ranging
from 4.00% to 9.50%. At December 31, 1998, the amount of the
unused lines totaled $17,576 ($16,076 in Europe and $1,500 in the
Far East).
The weighted average interest rate on short-term debt during
the years 1998, 1997 and 1996 was 6.4%, 5.9% and 6.2%,
respectively.
11. Income Taxes:
Domestic and foreign income (loss) before income taxes was
$28,296, and $10,687, respectively in 1998, $14,267 and $13,483,
respectively in 1997, and $(17,991) and $1,765, respectively in
1996. 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,
1998 1997 1996
Current:
Federal $8,373 $5,164 $(4,796)
Foreign 4,224 5,184 3,367
State 1,682 1,095 (232)
14,279 11,443 (1,661)
Deferred:
Federal (351) 439 (522)
Foreign 930 (1,295) (2,531)
State (86) (245) (51)
493 (1,101) (3,104)
Provision/(benefit)
for income taxes $14,772 $10,342 $(4,765)
A reconciliation of the statutory U.S. federal income tax
rate to the effective rate follows:
Years Ended December 31,
1998 1997 1996
Statutory U.S. federal rate 35.0% 35.0% (35.0%)
State income tax, net of federal
tax benefit 2.6% 2.0% (1.1%)
Lower taxes on foreign
earnings, net (5.2%) (4.4%) (2.7%)
Tax credits (1.2%) - (0.9%)
Non-deductible costs, principally
amortization of intangibles
related to acquired companies 5.6% 4.9% 8.5%
Non-deductible in-process R&D 1.7% - -
Other, net (0.6%) (0.2%) 1.8%
Effective rate 37.9% 37.3% (29.4%)
Deferred tax liabilities (assets) are comprised of the
following:
Year Ended
December 31,
1998 1997
Accelerated depreciation and amortization
for income tax purposes $23,956 $20,976
Excess of book basis of acquired assets
over tax bases 11,488 8,391
Differences between inventory valuation
methods used for book and tax purposes 2,219 3,306
Other 623 808
Gross deferred tax liabilities 38,286 33,481
Accrued liabilities and other reserves (4,418) (7,178)
Pension liabilities (1,496) (1,351)
Loss carryforwards (1,890) (1,945)
Deferred income (581) -
Other (1,792) (2,118)
Gross deferred tax assets (10,177) (12,592)
Deferred tax assets valuation allowance 1,890 1,945
Net deferred tax liabilities $29,999 $22,834
As of December 31, 1998, the Company has state loss
carryforwards in one state of approximately $16,100, which are
available to offset future taxable income. These carryforwards
will expire between the years 1999 and 2005. The Company also has
foreign loss carryforwards in five countries as of December 31,
1998, of approximately $2,000, which are available to offset
future taxable income, and have carryforward periods ranging from
five years to unlimited. The Company has recognized a deferred
tax asset relating to these 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.
12. Pension Plans and Postretirement Benefits:
Domestic:
The Company maintains a qualified noncontributory, defined
benefit pension plan covering the majority of its domestic
employees. The benefits are based on years of service and the
employee's highest consecutive five years compensation during the
last ten years of service. The Company's funding policy is to
contribute annually an amount that can be deducted for federal
income tax purposes. The plan assets are under a single custodian
and a single investment manager. Plan assets are invested in
equities, government securities and bonds. In addition, the
Company has unfunded supplemental executive pension plans
providing additional benefits to certain employees.
The Company also has an unfunded postretirement medical and
nominal life insurance plan ("postretirement benefits") covering
certain domestic employees who were eligible as of January 1,
1993. The plan will not be extended to any additional employees.
Retired employees are required to contribute for coverage as if
they were active employees.
The postretirement transition obligation as of January 1,
1993 of $1,079 is being amortized over twenty years. The discount
rate used in determining the 1998, 1997 and 1996 expense was
7.25%, 7.75%, and 7.25%, respectively. The health care cost trend
rate was 6.5% declining to 5.0% over a ten year period, remaining
level thereafter. Assumed health care cost trend rates do not
have a significant effect on the amounts reported for the health
care plans. A one-percentage-point change in assumed health care
cost trend rates would not have a material effect on the reported
amounts.
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.
Postretirement
Pension Benefits Benefits
Change in benefit obligation 1998 1997 1998 1997
Benefit obligation at
beginning of year $13,973 $11,691 $3,011 $2,747
Service cost 1,235 1,192 85 92
Interest cost 1,035 1,035 167 204
Plan participants'
contributions - - 23 20
Amendments 32 272 (533) -
Actuarial (gain) loss 882 1,703 70 184
Benefits paid (530) (1,920) (190) (236)
Benefit obligation at end of
year 16,627 13,973 2,633 3,011
Change in plan assets
Fair value of plan assets at
beginning of year 12,897 11,276 - -
Actual return on plan assets 4,051 2,340 - -
Employer contribution 1,200 1,201 - -
Benefits paid (530) (1,920) - -
Fair value of plan assets at
end of year 17,618 12,897 - -
Funded status 991 (1,076) (2,633) (3,011)
Unrecognized net actuarial
(gain)loss (144) 1,750 744 695
Unrecognized net transition
obligation 155 184 258 809
Unrecognized prior service
cost (823) (936) - -
Prepaid (accrued) benefit $ 179 $ (78) $(1,631) $(1,507)
cost
Postretirement
Pension Benefits Benefits
1998 1997 1998 1997
Weighted-average assumptions
as of December 31
Discount rate 6.75% 7.25% 6.75% 7.25%
Expected return on plan 9.25% 9.00% N/A N/A
assets
Rate of compensation increase 4.00% 4.00% N/A N/A
Postretirement
Pension Benefits Benefits
1998 1997 1996 1998 1997 1996
Components of net
periodic benefit
cost
Service cost $1,235 $1,192 $1,380 $85 $92 $120
Interest cost 1,035 1,035 991 167 204 146
Expected return on
plan assets (1,274) (1,056) (946) - - -
Net amortization of
transition 30 30 30 18 54 54
obligation
Amortization of
prior (81) (82) (99) - - -
service cost
Recognized net
actuarial (2) 28 129 21 15 17
(gain)loss
Special termination
benefits - - - - - 492
Net periodic benefit
cost $ 943 $1,147 $1,485 $291 $365 $829
The projected benefit obligation, accumulated benefit
obligation, and fair value of plan assets for plans with
accumulated benefit obligations in excess of plan assets were
$288, $177 and $0 respectively as of December 31, 1998 and $187,
$104 and $0 as of December 31, 1997.
The Company and its domestic subsidiaries also have a number
of defined contribution plans, both qualified and non-qualified,
which allow eligible employees to withhold a fixed percentage of
their salary (maximum 15%) and provide for a Company match based
on service (maximum 6%). The Company's contributions to these
plans were approximately $1,200, $1,200 and $1,300 in 1998, 1997
and 1996, respectively.
Europe:
Certain of the Company's European subsidiaries have various
defined benefit plans, both contributory and noncontributory,
which are available to a majority of employees. Pension plan
contributions from the Company and the participants are paid to
independent trustees and invested in fixed income and equity
securities in accordance with local practices.
Certain subsidiaries also have direct pension arrangements
with a limited number of employees. These pension commitments are
paid out of general assets and the obligations are accrued but
not prefunded.
1998 1997
Change in benefit obligation:
Benefit obligation at
beginning of year $20,230 $18,232
Service cost 2,003 1,264
Interest cost 1,763 1,142
Plan participants' contribution 234 -
Actuarial (gain)/loss 3,859 2,503
Acquisition 16,787 -
Benefits paid (622) (594)
Translation adjustment (620) (2,317)
Benefit obligation at end
of year 43,634 20,230
Change in plan assets:
Fair value of plan assets at
beginning of year 11,832 11,738
Actual return on plan assets 1,818 951
Acquisition 14,700 -
Employer contribution 1,347 1,111
Plan participants' contributions 234 -
Benefits paid (548) (518)
Translation adjustment (321) (1,450)
Fair value of plan assets at
end of year 29,062 11,832
Funded status (14,572) (8,398)
Unrecognized net actuarial
loss 2,155 1,625
Unrecognized transitional
obligation 6,793 1,039
Unrecognized prior service
cost 777 911
Additional minimum liability (452) (582)
Prepaid (accrued) benefit cost $(5,299) $(5,405)
1998 1997
Weighted-average assumptions:
Discount rate 6.4% 6.0%
Expected return on plan assets 7.3% 7.0%
Rate of compensation increase 4.5% 3.5%
1998 1997 1996
Components of net periodic
benefit cost:
Service cost $2,003 $1,264 $1,302
Interest cost 1,763 1,142 1,122
Expected return on plan assets (1,478) (793) (774)
Amortization of transition
obligation 35 102 112
Amortization of prior service
cost 101 107 118
Recognized net actuarial
loss 40 - -
Net periodic benefit cost $2,464 $1,822 $1,880
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 $2,059,
$2,204 and $2,250 in 1998, 1997 and 1996, respectively.
13. Transactions with A. L. Industrier:
Years Ended December 31,
1998 1997 1996
Sales to and commissions received
from A.L. Industrier $2,722 $3,107 $3,075
Compensation received for
management services rendered to
A.L. Industrier $ 397 $ 424 $ 464
Inventory purchased from and
commissions paid to A.L.
Industrier $ 32 $ 34 $ 200
Interest incurred on
Industrier Note $2,937 $ - $ -
In March 1998, A.L. Industrier purchased a convertible
subordinated note issued by the Company in the amount of $67,850.
(See Note 9.) As of December 31, 1998 and 1997 there was a net
current receivable (payable) of $(98) and $742, respectively,
from A.L. Industrier.
In 1997 A.L. Industrier purchased Class B common stock from
the Company. (See Note 16.)
The Company and A.L. Industrier have an administrative
service agreement whereby the Company provides management
services to A.L. Industrier. The agreement provides for payment
equal to the direct and indirect cost of providing the services
subject to a minimum amount. The agreement is automatically
extended for one year each January 1, but may be terminated by
either party upon six months notice.
In connection with the agreement to purchase Alpharma Oslo,
A.L. Industrier retained the ownership of the Skoyen
manufacturing facility and administrative offices (not including
leasehold improvements and manufacturing equipment) and leases it
to the Company. The agreement also permits the Company to use the
Skoyen facility as collateral on existing debt until October
1999. 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 is one of multiple defendants in 80 lawsuits
alleging personal injuries and two class actions for medical
monitoring resulting from the use of phentermine distributed by
the Company and subsequently prescribed for use in combination
with fenflurameine or dexfenfluramine manufactured and sold by
other defendants (Fen-Phen Lawsuits). None of the plaintiffs have
specified an amount of monetary damage. Because the Company has
not manufactured, but only distributed phentermine, it has
demanded defense and indemnification from the manufacturers and
the insurance carriers of manufacturers from whom it has
purchased the phentermine. The Company has received a partial
reimbursement of litigation costs from one of the manufacturer's
carriers. The plaintiff in 34 of these lawsuits has agreed to
dismiss the Company without prejudice but such dismissals must be
approved by the Court. Based on an evaluation of the
circumstances as now known, including but not solely limited to,
1) the fact that the Company did not manufacture phentermine, 2)
it had a diminimus share of the phentermine market and 3) the
presumption of some insurance coverage, the Company does not
expect that the ultimate resolution of the current Fen-Phen
lawsuits will have a material impact on the financial position or
results of operations of the Company.
Bacitracin zinc, one of the Company's feed additive products
has been banned from sale in the European Union (the "EU")
effective July 1, 1999. While no assurance of success can be
given, the Company is actively pursuing initiatives based on
scientific evidence available for the product, to limit the
effects of this ban. In addition, certain other countries, not
presently material to the Company's sales of bacitracin zinc have
either followed the EU's ban or are considering such action. The
existing governmental actions negatively impact the Company's
business but are not material to the Company's financial position
or results of operations. However, an expansion of the ban to
further countries where the Company has material sales of
bacitracin based products could be material to the financial
condition and results of operations of the Company.
The Company and its subsidiaries are, from time to time,
involved in other litigation arising out of the ordinary course
of business. It is the view of management, after consultation
with counsel, that the ultimate resolution of all other pending
suits should not have a material adverse effect on the
consolidated financial position or results of operations of the
Company.
In connection with a 1991 product line acquisition and the
Decoquinate business purchased in 1997, the Company entered into
manufacturing agreements which require the Company to purchase
yearly minimum quantities of product on a cost-plus basis. If the
minimum quantities are not purchased, the Company must reimburse
the supplier a percentage of the fixed costs related to the
unpurchased quantities. The Company has purchased required
minimums in 1998. In the case of the Decoquinate agreement there
are contingent payments which may be required of either party
upon early termination of the agreement depending on the
circumstances of the termination.
15. Leases:
Rental expense under operating leases for 1998, 1997 and
1996 was $6,665, $5,825 and $6,578, 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,
1999 $ 5,280
2000 4,159
2001 3,868
2002 3,435
2003 2,907
Thereafter 3,865
$23,514
16. Stockholders' Equity:
The holders of the Company's Class B Common Stock, (totally
held by A. L. Industrier at December 31, 1998) are entitled to
elect 66 2/3% of the Board of Directors of the Company and may
convert each share of Class B Common Stock held into one fully
paid share of Class A Common Stock. Whenever the holders of the
Company's common stock are entitled to vote as a combined class,
each holder of Class A and Class B Common Stock is entitled to
one and four votes, respectively, for each share held.
The number of authorized shares of Preferred Stock is
500,000; the number of authorized shares of Class A Common Stock
is 40,000,000; and the number of authorized shares of Class B
Common Stock is 15,000,000.
On February 10, 1997, the Company entered into a Stock
Subscription and Purchase Agreement with A.L. Industrier. The
agreement provided for the sale of 1,273,438 newly issued shares
of Class B Common stock for $16.34 per share. The agreement also
provided for the issuance of rights to the Class A shareholders
to purchase one share of Class A Common stock for $16.34 per
share for every six shares of Class A Common held. The agreement
required that the Class B shares be purchased at the same time
that the rights for the Class A Common stock would expire and
total consideration for the Class B Common stock was agreed to be
$20,808.
On June 26, 1997, the Company and A.L. Industrier entered
into Amendment No. 1 to the Subscription and Purchase Agreement
whereby A.L. Industrier agreed to purchase the 1,273,438 Class B
shares on June 27, 1997. The amendment provided that the price
paid by A.L. Industrier would be adjusted to recognize the
benefit to the Company of the A.L. Industrier purchase of the
stock on June 27, 1997 instead of November 25, 1997 (the date the
Class A rights expired). The sale of stock was completed for cash
on June 27, 1997. Accordingly, stockholders' equity increased in
1997 by $20,379 to reflect the issuance of the Class B shares.
A.L. Industrier is the beneficial owner of 9,500,000 shares of
Class B Common stock.
On September 4, 1997, the Board of Directors distributed to
the holders of its Class A Common Stock certain subscription
rights. Each shareholder received one right for every six shares
of Class A Stock held on the record date. Each right, entitled
the holder to purchase one share of Class A Stock at a
subscription price of $16.34 per share. The rights were listed
and traded on the New York Stock Exchange. The rights were
exercisable at the holder's option ending on November 25, 1997.
As a result of the rights offering the Company issued 2,201,837
shares with net proceeds of $35,978. (Approximately 97% of the
rights were exercised.)
In October 1994, the Company issued approximately 3,600,000
warrants which were a portion of the consideration paid for
Alpharma Oslo. The Company was required to account for the
acquisition of Alpharma Oslo as a transfer and exchange between
companies under common control. Accordingly, the accounts of
Alpharma were combined with the Company at historical cost in a
manner similar to a pooling-of-interests and the Company's
financial statements were restated. At the acquisition date, the
consideration paid for Alpharma Oslo was reflected as a decrease
to stockholders' equity net of the estimated value ascribed to
the warrants. The estimated value of the warrants ($6,552 or
$1.82 per warrant) was added to additional paid in capital and
deducted from retained earnings.
On October 21, 1998 the Company announced that its Board of
Directors had approved an offer by the Company to its
warrantholders to exchange all of the Company's outstanding
warrants for shares of its Class A Common Stock. There were
3,596,254 outstanding warrants, each of which represented the
right to purchase 1.061 shares of Class A Common Stock at an
exercise price of $20.69 per share. The warrants expired
January 3, 1999.
Under the transaction, the Company offered to issue to each
warrantholder a number of Class A shares in exchange for each
warrant pursuant to an exchange formula based upon the market
prices of the shares during the offer. The number of shares
issued for each warrant tendered was .3678 and, in total,
1,230,448 shares were issued in exchange for 3,345,921 warrants
tendered (93% of the warrants outstanding). The excess of the
fair market value of the warrants tendered over the estimated
value in 1994 of $31,117 was added to additional paid-in-capital
and Class A Common stock and deducted from retained earnings to
reflect the fair value of the Class A stock issued.
At December 31, 1998 the holders of 223,211 untendered
warrants gave irrevocable notice of their intention to exercise
their warrants by paying $20.69 per share. The subscription
amount for the exercised but unpaid for warrants are shown in
stockholders equity at year end with the subscribed amount
($4,916) deducted. The subscription proceeds were received in
January 1999. Less than 1% of the original warrant issue was
untendered or unexercised.
A summary of activity in common and treasury stock follows:
Class A Common Stock Issued
1998 1997 1996
Balance, January 1 16,118,606 13,813,516 13,699,592
Exercise of stock options
and other 339,860 63,300 66,637
Exercise of stock rights - 2,201,837 -
Exercise of warrants, net 2,124 - -
Stock issued in tender
offer for warrants 1,230,448 - -
Employee stock purchase
plan 64,211 39,953 47,287
Balance, December 31 17,755,249 16,118,606 13,813,516
Class B Common Stock Issued
1998 1997 1996
Balance, January 1 9,500,000 8,226,562 8,226,562
Stock subscription by
A.L. Industrier - 1,273,438 -
Balance, December 31 9,500,000 9,500,000 8,226,562
Treasury Stock (Class A)
1998 1997 1996
Balance, January 1 275,382 274,786 263,017
Purchases 1,952 596 11,769
Balance, December 31 277,334 275,382 274,786
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, 1998 and 1997, the Company's had foreign
currency contracts outstanding with a notional amount of
approximately $17,300 and $4,700, respectively. These contracts
called for the exchange of Scandinavian and European currencies
and in some cases the U.S. Dollar to meet commitments in or sell
cash flows generated in non-functional currencies. All
outstanding contracts will expire in 1999 and the unrealized
gains and losses are not material.
In November 1995, the Company entered into two interest rate
swap agreements with two members of the consortium of banks which
were parties to the Revolving Credit Facility to reduce the
impact of changes in interest rates on a portion of its floating
rate long-term debt. The swap agreements fixed the interest rate
at 5.655% plus 1.25% for a portion of the revolving credit
facility ($54,600) through October 1998. (See Note 9.)
Counterparties to derivative agreements are major financial
institutions. Management believes the risk of incurring losses
related to credit risk is remote.
The carrying amount reported in the consolidated balance
sheets for cash and cash equivalents, accounts receivable,
accounts payable and short-term debt approximates fair value
because of the immediate or short-term maturity of these
financial instruments. The carrying amount reported for long-term
debt other than the Convertible Subordinated Notes issued in 1998
approximates fair value because a significant portion of the
underlying debt is at variable rates and reprices frequently. The
estimated fair value based on the bid price of the Convertible
Subordinated Notes at December 31, 1998 was $264,928 compared to
a carrying amount of $192,850.
18. Stock Options and Employee Stock Purchase Plan:
Under the Company's 1997 Incentive Stock Option and
Appreciation Right Plan (the "Plan"), the Company may grant
options to key employees to purchase shares of Class A Common
Stock. An increase from 3,500,000 to 4,500,000 in the maximum
number of Class A shares available for grant was approved by the
shareholders in May 1998. In addition, the Company has a Non-
Employee Director Option Plan (the "Director Plan") which
provides for the issue of up to 150,000 shares of Class A Common
stock. The exercise price of options granted under the Plan may
not be less than 100% of the fair market value of the Class A
Common Stock on the date of the grant. Options granted expire
from three to ten years after the grant date. Generally, options
are exercisable in installments of 25% beginning one year from
date of grant. The Plan permits a cash appreciation right to be
granted to certain employees. Included in options outstanding at
December 31, 1998 are options to purchase 12,250 shares with cash
appreciation rights, 4,338 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, 1998 and 1997, options for
1,663,799 and 1,572,327 shares, respectively, were available for
future grant.
The table below summarizes the activity of the Plan:
Weighted Weighted
Options Average Average
Out- Exercise Options Exercise
standing Price Exercisabl Price
e
Balance at
December 31, 1995 896,775 $16.85 383,278 $15.49
Granted in 1996 44,000 $22.18
Canceled in 1996 (36,000) $18.01
Exercised in 1996 (66,437) $14.21
Balance at
December 31, 1996 838,338 $17.30 444,982 $16.42
Granted in 1997(1) 643,075 $16.65
Canceled in 1997 (107,347) $17.76
Exercised in 1997 (63,100) $12.22
Balance at
December 31, 1997 1,310,966 $17.20 462,765 $17.29
Granted in 1998(2) 989,500 $25.14
Canceled in 1998 (80,972) $18.34
Exercised in 1998 (344,160) $17.01
Balance at
December 31, 1998 1,875,334 $21.38 854,514 $23.09
(1) Included in options outstanding at December 31, 1997 were
161,100 options granted in 1997 with exercise prices in excess of
the fair market value of Class A stock on the date of grant. The
weighted average exercise price of these options is $22.24. The
weighted average exercise price of the remaining 481,975 options
granted in 1997 is $14.76.
(2) Included in options outstanding at December 31, 1998 were
383,900 options granted in 1998 with exercise prices in excess of
the fair market value of Class A stock on the date of grant. The
weighted average exercise price of these options is $30.09. The
weighted average exercise price of the remaining 605,600 options
granted in 1998 is $22.01.
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) would have been reduced to the pro forma
amounts for the years ended December 31, 1998, 1997 and 1996 as
indicated below:
1998 1997 1996
Net income (loss):
As reported $24,211 $17,408 $(11,461)
Proforma $22,427 $16,328 $(12,028)
Basic earnings (loss) per share:
As reported $ .95 $ .77 $ (.53)
Proforma $ .88 $ .72 $ (.55)
Diluted earnings (loss) per
share:
As reported $ .92 $ .76 $ (.53)
Proforma $ .85 $ .72 $ (.55)
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:
1998 1997 1996
Expected life (years) 1-5 4-5 4-5
Expected future dividend
yield (average) .81% 1.25% .85%
Expected volatility 0.35 0.40 0.40
The risk-free interest rates for 1998, 1997 and 1996 were
based upon U.S. Treasury instrument rates with maturity
approximating the expected term. The weighted average interest
rate in 1998, 1997 and 1996 amounted to 5.6%, 6.4% and 6.0%,
respectively. The weighted average fair value of options granted
during the years ended December 31, 1998, 1997, and 1996 with
exercise prices equal to fair market value on the date of grant
were $8.36, $5.53 and $7.90, respectively. The weighted average
fair value of options granted during the years ended December 31,
1998 and 1997 with exercise prices in excess of fair market value
at the date of grant were $1.26 and $3.27. No options with
exercise prices in excess of fair market value at the date of
grant were granted in 1996.
The following table summarizes information about stock
options outstanding at December 31, 1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
Weight- Weight-
ed ed
Number Weighted Average Average
Outstand- Average Exer- Number Exer-
Range of ing at Remain- cise Exercisable cise
Exercise 12/31/98 ing Life Price at 12/31/98 Price
Prices
$8.75 - $18.75 641,484 4.0 $15.39 346,850 $15.89
$19.50 - $22.13 674,350 6.1 $21.89 72,250 $20.99
$22.20 - $30.09 559,500 2.6 $27.64 435,414 $29.17
$8.75 - $30.09 1,875,334 4.3 $21.38 854,514 $23.09
The Company has an Employee Stock Purchase Plan by which
eligible employees of the Company may authorize payroll
deductions up to 4% of their regular base salary to purchase
shares of Class A Common Stock at the fair market value. The
Company matches these contributions with an additional
contribution equal to 25% of the employee's contribution. As of
the second quarter of 1998 the Company increased the match to 50%
of the employee contributions. Shares are issued on the last day
of each calendar quarter. The Company's contributions to the plan
were approximately $513, $137 and $163 in 1998, 1997 and 1996,
respectively.
19. Supplemental Data:
Years Ended December 31,
1998 1997 1996
Research and development
expense $36,034* $32,068 $34,269
Depreciation expense $22,941 $21,591 $22,751
Amortization expense $15,179 $ 9,317 $ 8,752
Interest cost incurred $26,357 $18,988 $20,549
Other income (expense), net:
Interest income $ 757 $ 519 $529
Foreign exchange
losses, net (895) (726) (195)
Other, net (262) (360) (504)
$ (400) $ (567) $ (170)
* Includes write-off of purchased in-process R&D related to Cox
acquisition. (See Note 4.)
Supplemental cash flow information:
1998 1997 1996
Cash paid for interest
(net of amount capitalized) $25,078 $19,193 $20,250
Cash paid for income taxes (net
of refunds) $10,175 $ 221 $ 9,182
Supplemental schedule of
noncash investing and
financing activities:
Fair value of assets acquired $255,121 $44,029 -
Liabilities 33,950 - -
Cash paid 221,171 44,029 -
Less cash acquired 502 - -
Net cash paid $220,669 $44,029 $ -
20. Information Concerning Business Segments and Geographic
Operations:
In 1998 the Company adopted SFAS 131. The Company's
reportable segments are the five decentralized divisions
described in Note 1, (i.e. IPD, FCD, USPD, AHD, and AAHD). Each
division has a president and operates in distinct business and/or
geographic area. Prior years segment data has been restated to
present the required information.
The accounting policies of the segments are generally the
same as those described in the "Summary of Significant Accounting
Policies." Segment data includes immaterial intersegment
revenues. No customer accounts for more than 10% of consolidated
revenues.
The operations of each segment are evaluated based on
earnings before interest and taxes (operating income). Corporate
expenses and certain other expenses or income not directly
attributable to the segments are not allocated. Eliminations
include intersegment sales. Geographic revenues represent sales
to third parties by country in which the selling legal entity is
domiciled. Operating assets directly attributable to business
segments are included in identifiable assets (i.e. sum of
accounts receivable, inventories, net property, plant and
equipment and net intangible assets). Cash, prepaid expenses, and
other corporate and non allocated assets are included in
unallocated. For geographic reporting long lived assets include
net property, plant and equipment and net intangibles.
Depre-
ciation
Identi- and Captial
Total Operating fiable Amorti- Expendi-
Revenue Income(a) Assets zation tures
1998
Business segments:
IPD $193,106 $ 7,971(b) $379,217 $11,460 $14,913
USPD 178,785 11,061 209,243 8,063 6,807
FCD 53,048 17,526 85,409 5,301 3,643
AHD 166,343 37,800 151,000 8,578 2,864
AAHD 18,963 3,623 19,850 1,044 815
Unallocated - (12,695) 64,217 3,674 2,336
Eliminations (5,661) (290) - - -
$604,584 $64,996 $908,936 $38,120 $31,378
1997
Business segments:
IPD $134,075 $10,975 $134,679 $ 6,525 $16,430
USPD 155,381 4,057 211,096 8,355 4,703
FCD 38,664 9,442 74,672 4,634 1,621
AHD 158,428 32,023 139,367 7,279 3,028
AAHD 15,283 2,764 19,494 1,110 151
Unallocated - (12,225) 52,558 3,005 1,850
Eliminations (1,543) (138) - - -
$500,288 $46,898 $631,866 $30,908 $27,783
1996
Business segments:
IPD $141,976 $2,521 $137,051 $ 7,638 $ 5,985
USPD 152,317 (19,241) 206,310 9,493 3,727
FCD 36,032 8,538 68,361 4,691 4,931
AHD 146,005 20,993 119,001 6,631 6,778
AAHD 12,241 (302) 20,121 721 6,082
Unallocated - (8,268) 62,563 2,329 3,371
Eliminations (2,387) (321) - - -
$486,184 $3,920 $613,407 $31,503 $30,874
(a) 1998 operating income includes one-time charges related to
the acquisition of Cox Pharmaceuticals and 1996 operating income
includes charges for management actions. The segments are
impacted as follows:
1998 1996
IPD $3,600 $8,051
USPD - 5,738
AHD - 4,542
Unallocated - 469
$3,600 $18,800
(b) Goodwill amortization in IPD related to the Cox acquisition
in 1998 amounted to approximately $3,000.
Geographic
Long-lived
Revenues Identifiable Assets
1998 1997 1996 1998 1997 1996
United States $338,487 $294,772 $280,277 $196,745 $205,188 $190,111
Norway 86,019 91,760 89,329 85,719 86,384 87,400
Denmark 52,565 53,624 55,867 57,144 55,795 48,626
United Kingdom 73,258 8,961 6,680 196,669 - -
Other foreign
(primarily
Europe) 54,255 51,171 54,031 23,564 2,009 3,584
$604,584 $500,288 $486,184 $559,841 $349,376 $329,721
21. Selected Quarterly Financial Data (unaudited):
Quarter
Total
First Second Third Fourth Year
1998
Total revenue $126,562 $139,513 $164,337 $174,172 $604,584
Gross profit $53,417 $59,162 $66,695 $73,986 $253,260
Net income $5,402 $2,305(a) $7,551 $8,953 $24,211
Earnings per
common share(b)
Basic $.21 $.09 $.30 $.34 $.95
Diluted $.21 $.09 $.28 $.32 $.92
1997
Total revenue $121,424 $118,986 $125,240 $134,638 $500,288
Gross profit $48,122 $51,440 $51,559 $59,932 $211,053
Net income $2,260 $3,470 $5,257 $6,421 $17,408
Earnings per
common share(c)
Basic $.10 $.16 $.23 $.27 $.77
Diluted $.10 $.16 $.22 $.26 $.76
(a) The second quarter of 1998 results include non-recurring
charges of $3,600 pre-tax ($3,130 after tax) or $.12 per
share related to the acquisition of Cox Pharmaceuticals. (See
Note 4.)
(b) The sum of the earnings per share for the four quarters in
1998 does not equal the total for the year due to higher
dilution in the third and fourth quarter calculations from
the effect of the convertible debt using the if-converted
method. The convertible debt was anti-dilutive for the year
and therefore not included in the full year calculation.
(c) The sum of the earnings per share for the four quarters in
1997 does not equal the total for the year due to higher net
income recognized in the third and fourth quarters combined
with a higher number of shares outstanding during the second
half of the year which does not have the same proportional
effect on the total year calculation.
22. Subsequent Events
New bank credit facility:
In January 1999, the Company signed a $300,000 credit
agreement with a consortium of banks. (See Note 9.)
Merger of Wade Jones distribution business:
In January 1999, the AHD contributed the distribution business of its
Wade Jones Company ("WJ") into a partnership with G&M Animal
Health Distributors and T&H Distributors. The WJ distribution
business which was merged had annual sales of approximately
$30,000 and assets (primarily accounts receivable and inventory)
of less than $10,000. WJ will own 50% of the new entity, WYNCO
LLC ("WYNCO").
WYNCO is a regional distributor of animal health products and
services primarily to integrated poultry and swine producers and
independent dealers operating in the Central South West and
Eastern regions of the U.S. WYNCO will be the exclusive
distributor for the Company's animal health products.
Manufacturing and premixing operations at Wade Jones will remain
part of the Company.
Strategic alliance with Ascent Pediatrics:
On February 4, 1999, the Company entered into a loan
agreement with Ascent Pediatrics, Inc. ("Ascent") under which
the Company will provide up to $40,000 in loans to Ascent to be
evidenced by 7 1/2% convertible subordinated notes due 2005.
Pursuant to the loan agreement, up to $12,000 of the proceeds of
the loans can be used for general corporate purposes, with
$28,000 of proceeds reserved for projects and acquisitions
intended to enhance growth of Ascent.
In addition, Ascent and the Company have entered into an
agreement under which the Company will have the option during the
first half of 2002 to acquire all of the then outstanding shares
of Ascent for cash at a price to be determined by a formula based
on Ascent's operating income.
The transactions are subject to the approval of Ascent's
stockholders at a meeting expected to be held during the second
quarter of 1999.