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FORM 6-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE MONTH OF MAY, 2002
GALEN HOLDINGS PUBLIC LIMITED COMPANY
(Translation of registrant's name into English)
SEAGOE INDUSTRIAL ESTATE
CRAIGAVON
BT63 5UA
UNITED KINGDOM
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports
under cover of Form 20-F or Form 40-F.
Form 20-F [X] Form 40-F [ ]
Indicate by check mark whether the registrant by furnishing the information
contained in this form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes [ ] No [X]
If "Yes" is marked, indicate below the file number assigned to the registrant in
connection with Rule 12g3-2(b): 82- .
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EXPLANATORY NOTE
PURPOSE OF FILING
The purpose of this report on Form 6-K by Galen Holdings Public Limited Company
("Galen," the "Company", "we", "our" or "us") is to make public the unaudited
consolidated financial statements, as listed in the accompanying index, of Galen
and its subsidiaries. These unaudited financial statements have been prepared in
accordance with U.S. generally accepted accounting principles ("U.S. GAAP") and
are presented in U.S. dollars.
This report contains certain statements that may be deemed to be
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. This Act provides safe harbor protections for
forward-looking statements in order to encourage companies to provide
prospective information about their businesses. Statements that are not
historical facts, including statements about our plans, beliefs, objectives,
expectations and intentions, are forward-looking statements. These statements
are based on current plans, estimates and projections, and therefore you should
not place too much reliance on them. The words "believe," "expect,"
"anticipate," "intends," "estimate," "forecast," "project" and similar
expressions are generally intended to identify forward-looking statements.
Forward-looking statements speak only as of the date they are made, and we
undertake no obligation to update any of them in light of new information or
future events. Forward-looking statements involve inherent risks and
uncertainties. Although we believe the expectations expressed in the
forward-looking statements are based on reasonable assumptions within the bounds
of our knowledge of our business, including management's examination of
historical operating trends, data contained in our records and other third party
data, we caution you that a number of important factors could cause actual
results or outcomes to differ materially from those expressed in any
forward-looking statement. These factors include those identified in our 2001
Annual Report on Form 20-F filed with the Securities and Exchange Commission on
December 28, 2001 (the "U.S. 2001 Annual Report") and in our other filings with
the Commission.
Today we filed a separate Form 6-K with the Securities and Exchange Commission
that contains a press release announcing the execution of an agreement to
dispose of our clinical trials services business, and our unaudited consolidated
financial statements as of March 31, 2002 and for the three and six months ended
March 31, 2002 and 2001, prepared in accordance with U.K. generally accepted
accounting principles ("U.K. GAAP") and presented in U.K. pounds sterling.
GALEN HOLDINGS PUBLIC LIMITED COMPANY
TABLE OF CONTENTS
PAGE NO.
--------
I Financial Information
A. Consolidated Financial Statements (unaudited)
Consolidated Balance Sheets as of March 31, 2002
and September 30, 2001 2
Consolidated Statements of Operations for the three
and six months ended March 31, 2002 and 2001 3
Consolidated Statements of Comprehensive Income for
the three and six months ended March 31, 2002
and 2001 4
Consolidated Statements of Cash Flows for three and
six months ended March 31, 2002 and 2001 5
Notes to the Consolidated Financial Statements 6 - 19
B. Management's Discussion and Analysis of Financial Condition
and Results of Operations 20
C. Quantitative and Qualitative Disclosures About Market Risk 28
II Other Information
A. Legal Proceedings 29
B. Submission of Matters to a Vote of Security Holders 29
C. Exhibits and Reports on Form 6-K or 8-K 30
1
GALEN HOLDINGS PUBLIC LIMITED COMPANY
UNAUDITED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF U.S. DOLLARS)
MARCH 31, SEPTEMBER 30,
2002 2001
----------- -------------
ASSETS
Current Assets:
Cash and cash equivalents $ 290,215 $ 326,076
Accounts receivable, net 48,645 43,617
Inventories 26,410 24,274
Deferred tax asset 9,622 13,600
Prepaid expense and other assets 11,272 7,595
Current assets -- discontinued operations -- 1,488
---------- ----------
Total current assets 386,164 416,650
---------- ----------
Property, plant and equipment, net 111,519 116,325
Property, plant and equipment, net --
discontinued operations -- 17,097
Intangible assets, net 371,717 346,287
Goodwill, net 258,594 253,680
---------- ----------
Total assets $1,127,994 $1,150,039
========== ==========
LIABILITIES
Current Liabilities:
Accounts payable $ 19,110 $ 18,607
Accrued and other liabilities 33,019 35,548
Current installments of long-term debt 11,751 17,695
Current installments of obligation under
capital leases 383 538
Income taxes 7,399 3,113
Deferred consideration 4,144 10,914
Current liabilities -- discontinued operations -- 576
---------- ----------
Total current liabilities 75,806 86,991
---------- ----------
Other Liabilities:
Long-term debt, excluding current installments 257,391 281,107
Long-term obligations under capital leases,
excluding current installments 425 583
Deferred income taxes 34,627 34,392
Other non-current liabilities 5,960 7,503
Other non-current liabilities -- discontinued
operations -- 923
---------- ----------
Total liabilities 374,209 411,499
---------- ----------
Minority interest -- 357
SHAREHOLDERS' EQUITY
Ordinary shares, par value (pound)0.10 per share;
250,000,000 (September 30, 2001; 250,000,000)
shares authorized, 189,832,755 shares issued
and outstanding at March 31, 2002, and 189,311,298
issued and outstanding at September 30, 2001 29,976 29,902
Additional paid-in capital 677,153 673,144
Retained earnings 79,306 53,982
Treasury stock (11,444) (11,444)
Accumulated other comprehensive loss (21,206) (7,401)
---------- ----------
Total shareholders' equity 753,785 738,183
---------- ----------
Total liabilities and shareholders' equity $1,127,994 $1,150,039
========== ==========
See accompanying notes to unaudited consolidated financial statements.
2
GALEN HOLDINGS PUBLIC LIMITED COMPANY
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AMOUNTS)
THREE MONTHS ENDED MARCH 31, SIX MONTHS ENDED MARCH 31,
---------------------------- ----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
REVENUES
Product revenue $ 56,664 $ 45,052 $ 111,554 $ 86,009
Service revenue 19,712 17,396 40,341 35,280
------------ ------------ ------------ ------------
Total revenues 76,376 62,448 151,895 121,289
------------ ------------ ------------ ------------
OPERATING EXPENSES
Cost of sales (excluding depreciation shown below) 22,022 19,608 45,199 39,963
Selling, general and administrative 23,643 23,618 45,724 40,868
Research and development 4,732 2,605 9,206 5,222
Depreciation 2,567 1,952 4,669 3,751
Amortization 4,387 6,884 8,827 13,169
------------ ------------ ------------ ------------
Total operating expenses 57,351 54,667 113,625 102,973
------------ ------------ ------------ ------------
OPERATING INCOME 19,025 7,781 38,270 18,316
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE)
Interest income 2,086 1,112 4,600 2,839
Interest expense (5,071) (6,424) (10,918) (13,995)
------------ ------------ ------------ ------------
Total other income (expense) (2,985) (5,312) (6,318) (11,156)
------------ ------------ ------------ ------------
INCOME BEFORE TAXES & MINORITY INTEREST 16,040 2,469 31,952 7,160
------------ ------------ ------------ ------------
Provision for income taxes 2,909 2,271 9,078 4,743
Minority interest in earnings of subsidiaries -- 52 47 109
------------ ------------ ------------ ------------
INCOME FROM CONTINUING OPERATIONS
BEFORE EXTRAORDINARY LOSS 13,131 146 22,827 2,308
------------ ------------ ------------ ------------
DISCONTINUED OPERATIONS
Income/(loss) from discontinued operations,
net of tax benefit of $140 $ -- 52 (304) 223
Gain on disposal of discontinued operations,
net of tax charge of $2,163 -- -- 8,690 --
------------ ------------ ------------ ------------
NET INCOME BEFORE EXTRAORDINARY LOSS 13,131 198 31,213 2,531
Extraordinary loss on early retirement of debt,
net of tax benefit of $950 -- -- (1,426) --
------------ ------------ ------------ ------------
NET INCOME $ 13,131 $ 198 $ 29,787 $ 2,531
============ ============ ============ ============
BASIC AND DILUTED NET INCOME PER ORDINARY SHARE
- continuing operations before extraordinary loss $ 0.07 $ -- $ 0.12 $ 0.02
- income and gain on disposal of discontinued operations -- -- 0.05 --
- extraordinary loss on debt retirement -- -- (0.01) --
------------ ------------ ------------ ------------
Basic and diluted net income per ordinary share $ 0.07 $ -- $ 0.16 $ 0.02
============ ============ ============ ============
BASIC AND DILUTED NET INCOME PER ADS EQUIVALENT
- continuing operations before extraordinary loss $ 0.28 $ -- $ 0.49 $ 0.06
- loss from discontinued operations -- -- (0.01) --
- gain on disposal of discontinued operations -- -- 0.19 --
- extraordinary loss on debt retirement -- -- (0.03) --
------------ ------------ ------------ ------------
Basic and diluted net income per ADS equivalent $ 0.28 $ -- $ 0.64 $ 0.06
============ ============ ============ ============
WEIGHTED AVERAGE ORDINARY SHARES OUTSTANDING
Basic 184,901,919 156,987,118 184,844,558 156,895,052
============ ============ ============ ============
Diluted 186,195,464 159,961,194 186,320,589 160,484,918
============ ============ ============ ============
WEIGHTED AVERAGE ADS EQUIVALENTS OUTSTANDING
Basic 46,225,480 39,246,780 46,211,140 39,223,763
============ ============ ============ ============
Diluted 46,548,866 39,990,298 46,580,147 40,121,230
============ ============ ============ ============
See accompanying notes to unaudited consolidated financial statements.
3
GALEN HOLDINGS PUBLIC LIMITED COMPANY
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS OF U.S. DOLLARS)
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
-------------------- --------------------
2002 2001 2002 2001
-------- -------- -------- --------
NET INCOME $ 13,131 $ 198 $ 29,787 $ 2,531
-------- -------- -------- --------
Other comprehensive income:
Foreign currency translation adjustment (4,196) (15,473) (13,805) (8,571)
-------- -------- -------- --------
Other comprehensive income (loss) (4,196) (15,473) (13,805) (8,571)
-------- -------- -------- --------
COMPREHENSIVE INCOME (LOSS) $ 8,935 $(15,275) $ 15,982 $ (6,040)
======== ======== ======== ========
See accompanying notes to unaudited consolidated financial statements.
4
GALEN HOLDINGS PUBLIC LIMITED COMPANY
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF U.S. DOLLARS)
SIX MONTHS ENDED
MARCH 31,
--------------------
2002 2001
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 29,787 $ 2,531
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation 4,963 4,173
Amortization of intangibles 8,827 13,169
Gain on sale of businesses (10,853) --
Loss on sale of assets -- 20
Amortization of government grants (992) (1,486)
Stock compensation expense -- 4,469
Minority interest 47 109
Changes in assets and liabilities:
(Increase)/decrease in accounts receivable,
prepaid expense and other assets (9,394) 5,397
(Increase)/decrease in inventories (2,160) 1,148
Increase/(decrease) in accounts payable,
accrued liabilities and other liabilities 3,290 (7,393)
Income taxes 2,636 5,760
Foreign exchange gain 3,270 685
-------- --------
Net cash provided by operating activities 29,421 28,582
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (10,526) (10,599)
Purchase of intangible assets (42,037) --
Proceeds from sale of intangible assets -- 309
Proceeds from sale of business 35,758 --
Deferred consideration and acquisition costs (8,772) (25,614)
-------- --------
Net cash used in investing activities (25,577) (35,904)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt repaid, net (8,782) (31,603)
Loan notes repaid (20,000) --
Payments under capital leases (313) (311)
Proceeds from share capital issue, net of expenses 101 6,907
Cash dividends paid (4,465) (3,163)
-------- --------
Net cash used in financing activities (33,459) (28,170)
-------- --------
Net decrease in cash and cash equivalents (29,615) (35,492)
Cash and cash equivalents, beginning of period 326,076 113,671
Foreign exchange adjustment on cash and cash equivalents (6,246) (1,145)
-------- --------
Cash and cash equivalents, end of period $290,215 $ 77,034
======== ========
See accompanying notes to unaudited consolidated financial statements.
5
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - U.S. GAAP
IN THOUSANDS (EXCEPT PER SHARE AMOUNTS)
1. BASIS OF PRESENTATION
The unaudited consolidated financial statements included herein have been
prepared in accordance with U.S. generally accepted accounting principles, and
pursuant to the rules and regulations of the Securities and Exchange Commission
for interim reporting. Certain information and footnote disclosures normally
included in complete financial statements prepared in accordance with U.S.
generally accepted accounting principles have been condensed or omitted. In the
opinion of management, the financial statements reflect all adjustments
necessary for a fair statement of the operations for the interim periods
presented. Interim results are not necessarily indicative of results to be
expected in future periods or for the full year. The statements should be read
in conjunction with the accounting policies and notes to the consolidated
financial statements included in the Galen Holdings Public Limited Company 2001
Annual Report on Form 20-F filed with the Securities and Exchange Commission.
The consolidated financial statements include the financial statements of Galen
Holdings Public Limited Company ("Galen" or the "Company") and all of its
majority owned subsidiaries. Galen does not presently hold investments in any
entities that are not majority owned, nor does it have any majority owned
subsidiary in which it does not have a controlling financial interest. All
intercompany transactions and account balances have been eliminated on
consolidation. During 2001 and 2000 the Company completed several acquisitions,
which were accounted for under the purchase method of accounting. The
consolidated financial statements include the results of operations from each of
these business combinations as of the date of acquisition. Additional disclosure
related to the Company's acquisitions is provided in Note 6.
2. ADOPTION OF NEW ACCOUNTING STANDARDS
Effective October 1, 2001 the Company adopted the provisions of Statement of
Financial Accounting Standards No. 141, Business Combinations ("SFAS 141"), and
Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets ("SFAS 142"). SFAS 141 eliminates the pooling-of-interest
method of accounting for business combinations initiated after July 1, 2001, and
changes the criteria for recognizing intangible assets apart from goodwill. SFAS
141 also requires that any business combination initiated after June 30, 2001 be
accounted for by the purchase method. SFAS 142 provides that goodwill no longer
be amortized and the value of identifiable intangible assets be amortized over
their useful life, unless the asset is determined to have an indefinite useful
life. The Company has determined that none of its intangible assets are deemed
to have an indefinite life. In accordance with these accounting statements and
upon adoption, the Company reclassified a total of $2,914 to goodwill from
intangible assets (net), representing the assembled workforce associated with
the Company's acquisition of Warner Chilcott. See Note 4.
Galen also adopted Statement of Financial Accounting Standards No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS 144"),
effective October 1, 2001. The objectives of SFAS 144 are to address significant
issues relating to the implementation of Statement of Financial Accounting
Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of ("SFAS 121"), and to develop a single
accounting model based on the framework established
6
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - U.S. GAAP (CONTINUED)
IN THOUSANDS (EXCEPT PER SHARE AMOUNTS)
in SFAS 121, for long-lived assets to be disposed of by sale. The standard
requires that long-lived assets that are to be disposed of by sale be measured
at the lower of book value or fair value less cost to sell. Additionally, the
standard expands the scope of discontinued operations to include all components
of an entity with operations that can be distinguished from the rest of the
entity in a disposal transaction. The results of the Chemical Synthesis Services
("CSS") component of Galen's Pharmaceutical Services operating segment, divested
during the first quarter fiscal 2002, were treated as "discontinued operations."
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities ("SFAS 133"). SFAS 133 establishes a new model for
accounting for derivatives and hedging activities and supersedes and amends a
number of existing standards. SFAS 133 is effective for fiscal years beginning
after June 15, 1999, but earlier application is permitted as of the beginning of
any fiscal quarter subsequent to June 15, 1998. Upon initial application, all
derivatives are required to be recognized in the statement of financial position
as either assets or liabilities and measured at fair value. In addition, all
hedging relationships must be reassessed and documented pursuant to the
provisions of SFAS 133. Subsequent to the issuance of SFAS 133, the FASB issued
SFAS 137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement 133," which defers the
effective date of SFAS 133 to periods beginning after June 15, 2000. Galen
adopted the statement beginning October 1, 2000. Adoption of the statement had
no material impact on the financial statements.
On April 30, 2002, the FASB issued Statement of Financial Accounting Standards
No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections ("SFAS 145"). Among other amendments
and rescissions, SFAS No.145 eliminates the requirement that gains and losses
from the extinguishment of debt be aggregated and, if material, classified as an
extraordinary item, net of the related income tax effect, unless such gains and
losses meet the criteria in paragraph 20 of Accounting Principles Board Opinion
No. 30, Reporting the Results of Operations Reporting the Effects of Disposal of
a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions. Generally, SFAS 145 is effective for fiscal years
beginning after May 15, 2002. Upon adoption of SFAS No. 145, the Company will
reclassify the loss on extinguishment of debt that was classified as an
extraordinary item in the quarter ended December 31, 2001 since it does not meet
the criteria in Opinion 30 for classification as an extraordinary item.
3. INVENTORY
Inventory is stated at the lower of cost or market. Cost is determined
principally on the basis of first in, first out or standards that approximate
average cost. Inventory consists of the following:
7
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - U.S. GAAP (CONTINUED)
IN THOUSANDS (EXCEPT PER SHARE AMOUNTS)
MARCH 31, SEPTEMBER 30,
2002 2001
--------- -------------
Finished goods $17,169 $13,373
Raw materials 9,241 10,901
------- -------
$26,410 $24,274
======= =======
4. GOODWILL AND INTANGIBLE ASSETS
Pursuant to SFAS 142 the Company's goodwill is no longer amortized effective
October 1, 2001 (the date of the Company's adoption of this statement) and the
Company is required to perform a periodic impairment test for goodwill. Goodwill
is tested for impairment at a level of reporting referred to as a reporting
unit. For this purpose the Company has determined that its operating segments
also represent its reporting units, which are Pharmaceutical Products and
Pharmaceutical Services. To identify potential impairment, the fair value of
each reporting unit is compared with its carrying amount including goodwill. If
the fair value of the reporting unit is less than its carrying value, goodwill
is deemed to be potentially impaired. The Company has completed this impairment
test as of October 1, 2001 and has determined that goodwill has not been
impaired.
Amortizable intangible assets at March 31, 2002 were as follows:
PRODUCT TOTAL
SPECIFIC INTANGIBLE
ASSETS TRADEMARKS ASSETS
-------- ---------- ----------
NET BOOK VALUE $346,626 $ 25,091 $371,717
======== ======== ========
ACCUMULATED AMORTIZATION $ 20,495 $ 2,034 $ 22,529
======== ======== ========
These intangible assets are being amortized on a straight-line basis over 20
years, their estimated useful lives. Intangible asset amortization expense for
the six months ended March 31, 2002 and 2001 amounted to $8,827 and $6,354,
respectively. Following is the estimated aggregate amortization expense for the
Company's next five fiscal years:
YEAR ENDING SEPTEMBER 30,
-------------------------
2002 $18,797
2003 $19,939
2004 $19,939
2005 $19,939
2006 $19,939
8
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - U.S. GAAP (CONTINUED)
IN THOUSANDS (EXCEPT PER SHARE AMOUNTS)
The following table reconciles reported net income to that which would have been
reported had SFAS 142 been applied as of the beginning of fiscal 2001:
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
------------------- -------------------
2002 2001 2002 2001
------- ------- ------- -------
Reported net income $13,131 $ 198 $29,787 $ 2,531
Add back: Goodwill amortization, net of tax -- 3,025 -- 6,026
------- ------- ------- -------
Adjusted net income $13,131 $ 3,223 $29,787 $ 8,557
======= ======= ======= =======
BASIC AND DILUTED EARNINGS PER ADS:
Reported net income $ 0.28 $ -- $ 0.64 $ 0.06
Goodwill amortization, net of tax -- 0.08 -- 0.15
------- ------- ------- -------
Adjusted net income $ 0.28 $ 0.08 $ 0.64 $ 0.21
======= ======= ======= =======
5. WARNER CHILCOTT SENIOR NOTES DUE 2008
Warner Chilcott, Inc. ("WCI") at the time of its acquisition by Galen on
September 29, 2000 had $200,000 principal amount of 12?% senior notes
outstanding. The senior notes were issued by WCI in February 2000 and are
unconditionally guaranteed by Warner Chilcott, plc ("Warner Chilcott"), WCI's
direct parent. In March 2001, Galen unconditionally guaranteed the notes.
Interest payments on the notes are due semi-annually in arrears on February 15
and August 15. The senior notes are due in February 2008 and are redeemable
prior to maturity at the option of WCI, in whole or part, beginning in February
2004 at redemption prices that decrease annually and range from 106.3125% to
100% of the principal amount of the senior notes plus accrued interest. The
indenture governing the senior notes limits Warner Chilcott and its
subsidiaries' ability to incur or guarantee additional debt, as well as to pay
dividends or distributions on, or redeem or repurchase, capital stock.
The indenture governing the senior notes provides that upon a change of control,
each note holder has the right to require WCI to repurchase their notes at a
price equal to 101% of the principal amount plus accrued interest. Galen's
acquisition of Warner Chilcott triggered the right of holders to require WCI to
repurchase the senior notes. Approximately 20% of the note holders elected to
tender their notes under this provision and, on December 13, 2000, Warner
Chilcott purchased $40,300 principal amount of the notes. On December 18, 2001,
Galen Limited, a wholly owned subsidiary of the Company, purchased $20,000 of
principal amount of the senior notes for $23,000. The Company may, from time to
time depending on market conditions, repurchase senior notes in the open market.
6. ACQUISITIONS
9
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - U.S. GAAP (CONTINUED)
IN THOUSANDS (EXCEPT PER SHARE AMOUNTS)
On September 29, 2000, Galen acquired all of the outstanding shares and share
equivalents of Warner Chilcott through a scheme of arrangement under the laws of
the Republic of Ireland. The Company issued 2.5 Galen ordinary shares for each
of Warner Chilcott's outstanding ordinary shares. All of Warner Chilcott's
outstanding share options and warrants were converted at the same ratio into
options and warrants to acquire Galen shares. The total acquisition price of
$325,500 consisted of (i) $282,900, in respect of 31,698,554 Galen shares issued
in exchange for the 12,680,812 outstanding shares of Warner Chilcott, (ii)
$31,200 representing the fair market value of Galen share options and warrants
issued in exchange for Warner Chilcott options and warrants, and (iii) $11,400
of acquisition costs. The Warner Chilcott transaction closed on September 29,
2000, the last business day of the Company's fiscal year 2000, and was accounted
for as a purchase. Under purchase accounting, the purchase price is allocated to
the tangible and intangible assets acquired based upon their respective fair
values as of the purchase date.
In June 2001, Galen purchased from Bristol-Myers Squibb Company Estrace(R)
tablets, a branded estrogen replacement therapy product, for approximately
$95,000. In connection with the purchase, Galen entered into a five-year supply
agreement with Bristol-Myers Squibb Laboratories Company in relation to this
product with an option to renew for two additional years. Galen acquired rights
to all of the intangible assets associated with the product including the
trademark, regulatory files, manufacturing know-how and other intellectual
property. The acquisition of the product is being accounted for as a purchase.
The entire purchase price was allocated to the product, and no goodwill was
recorded. No value was assigned to the supply agreement for the acquired product
as the product purchase price under the agreement approximates the price Galen
would expect to pay third party contract manufacturers. The asset value has been
increased to $123,000 in order to account for certain liabilities assumed by the
Company at the time of purchase, and for deferred taxes. The intangible assets
are being amortized over 20 years, the product's estimated useful life.
In March 2002, Galen purchased from Bristol-Myers Squibb Duricef(R), an
antibiotic, and Moisturel(R), a skin cream, for approximately $40,440. The asset
value has been increased by an additional $5,700 for deferred taxes. The
acquisition of the product is being accounted for as a purchase. The entire
purchase price was allocated to the product, and no goodwill was recorded. The
intangible assets are being amortized over 20 years, the product's estimated
useful life.
The following unaudited pro forma information presents Galen's results of
operations for the six months ended March 31, 2002 and 2001 assuming that the
purchases of Duricef(R), Moisturel(R) and Estrace(R) tablets were completed as
of October 1, 2000. These unaudited pro forma results have been prepared for
comparative purposes only and include certain adjustments, such as additional
amortization expense, increased interest expense on acquisition debt and related
adjustments. They do not purport to be indicative of the results of operations
that actually would have resulted had the transactions occurred as of October 1,
2000, or of future results of operations.
10
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - U.S. GAAP (CONTINUED)
IN THOUSANDS (EXCEPT PER SHARE AMOUNTS)
SIX MONTHS ENDED MARCH 31,
-----------------------------------------------------
2002 2001
------------------------- -------------------------
ACTUAL PRO FORMA ACTUAL PRO FORMA
----------- ----------- ----------- -----------
Revenue $ 151,895 $ 158,094 $ 121,289 $ 151,066
Net income $ 29,787 $ 33,386 $ 2,531 $ 14,717
=========== =========== =========== ===========
Net income per ADS -- Basic $ 0.64 $ 0.72 $ 0.06 $ 0.38
=========== =========== =========== ===========
Net income per ADS -- Diluted $ 0.64 $ 0.72 $ 0.06 $ 0.37
=========== =========== =========== ===========
Weighted average ADS equivalents
outstanding
Basic 46,211,140 46,211,140 39,223,763 39,223,763
=========== =========== =========== ===========
Diluted 46,580,147 46,580,147 40,121,230 40,121,230
=========== =========== =========== ===========
7. SALE OF CHEMICAL SYNTHESIS SERVICES
As of December 31, 2001, the Company sold the Chemical Synthesis Services
business ("CSS") for which the Company received cash consideration of
approximately $36,000. CSS was a component of the Company's pharmaceutical
services business and consisted of SynGal (a Galen subsidiary) and QuChem
Limited (a Galen subsidiary), and provides integrated services from basic
research and development and small-scale synthesis to kilogram-scale synthesis
to customers requiring custom chemical syntheses. CSS employed approximately 110
people based in two Northern Ireland sites and had revenue of $7,500 in the year
ended September 30, 2001. In anticipation of the transaction, Galen purchased
the 24% minority interest in QuChem Limited that it did not already own for
consideration of approximately $960. The Company reported a pre-tax gain of
$8,690 from the sale that is included in the Company's Statement of Operations
for the six months ended March 31, 2002. Included in the Company's provision for
income taxes for the six months ended March 31, 2002 are taxes related to the
CSS sale amounting to $2,163. As part of this transaction Alan Armstrong,
President of Galen's pharmaceutical services business, resigned from both his
position with Galen and his Galen directorship. Galen intends to use the
proceeds from this transaction to expand its portfolio of branded pharmaceutical
products particularly in the women's healthcare therapeutic area, by pursuing
other selected product acquisitions and strategic opportunities, and for general
corporate purposes. Asset and liabilities of the discontinued operations as of
December 31, 2001 were as follows:
Fixed assets $ 26,265
Current assets 2,201
Current liabilities (2,324)
Deferred income (1,290)
--------
Net assets of discontinued operations $ 24,852
========
11
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - U.S. GAAP (CONTINUED)
IN THOUSANDS (EXCEPT PER SHARE AMOUNTS)
8. REVENUE RECOGNITION
PHARMACEUTICAL PRODUCTS
Revenue from product sales is recognized upon shipment of products, that is,
when title to the product is passed to the customer. The Company warrants
products against defects and for specific quality standards, permitting the
return of products under certain circumstances. Product sales are recorded net
of value-added tax and similar taxes, trade discounts, sales returns, rebates
and intercompany transactions.
PHARMACEUTICAL SERVICES
Clinical Trial Services ("CTS") provides clinical packaging services to
pharmaceutical companies, which includes the design, manufacturing, packaging
and distribution of both active drugs and placebos to clinical trial patients.
Revenue for these services is recognized upon shipment of the finished clinical
supplies to the customer which is when title to the product is passed to the
customer and the Company has no future performance obligations. Service revenue
generated from CTS's drug accountability facility is recognized when the
services are completed which is generally after the drugs are properly disposed
of. CTS also charges monthly fees for specialized pharmaceutical management and
storage services, and revenue is recognized upon invoice to the customer at
which point the customer is obligated to pay and the Company has no future
performance obligations. Chemical Synthesis Services ("CSS"), sold by Galen as
of December 31, 2001, provided custom design services and chemical synthesis
operations to pharmaceutical companies. In general, projects were billed and
revenue was recognized upon the completion of the project. CSS also provided
laboratory services that were charged on an hourly basis. These laboratory
services were billed and recognized as revenue on a monthly basis upon
completion of work. Pharmaceutical service revenue is recognized exclusive of
value-added tax, similar taxes and inter-company transactions.
9. EARNINGS PER SHARE
Basic net income per ordinary share (and ADS) is based on the income available
to ordinary shareholders divided by the weighted average number of ordinary
shares (and equivalent ADSs) outstanding during the period. Diluted income per
share is computed by adjusting the weighted average number of ordinary shares
(and equivalent ADSs) outstanding during the period for potentially dilutive
rights to acquire ordinary shares or ADSs that were outstanding during the
period. The dilution attributable to rights to acquire shares is computed using
the treasury stock method and depends upon the market price of the Company's
shares during the period.
Shares held in the Employee Share Trust are excluded from these calculations.
The following table sets forth the computation for each of these calculations:
12
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - U.S. GAAP (CONTINUED)
IN THOUSANDS (EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
--------------------------- ---------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Numerator for basic and diluted net income per
per ordinary share and ADS $ 13,131 $ 198 $ 29,787 $ 2,531
============ ============ ============ ============
Weighted average number of ordinary shares (basic) 184,901,919 156,987,118 184,844,558 156,895,052
Effect of dilutive stock options 1,293,545 2,974,076 1,476,031 3,589,866
------------ ------------ ------------ ------------
Weighted average number of ordinary shares (diluted) 186,195,464 159,961,194 186,320,589 160,484,918
Basic net income per ordinary share $ 0.07 $ -- $ 0.16 $ 0.02
============ ============ ============ ============
Diluted net income per ordinary share $ 0.07 $ -- $ 0.16 $ 0.02
============ ============ ============ ============
Weighted average number of equivalent ADSs (basic) 46,225,480 39,246,780 46,211,140
39,223,763
Effect of dilutive stock options 323,386 743,518 369,007 897,467
------------ ------------ ------------ ------------
Weighted average number of equivalent ADSs (diluted) 46,548,866 39,990,298 46,580,147 40,121,230
============ ============ ============ ============
Basic and diluted net income per ADS $ 0.28 $ -- $ 0.64 $ 0.06
============ ============ ============ ============
10. CONTINGENCIES
The Company is involved in various legal proceedings of a nature considered
normal to its business including product liability and other matters. In the
event of the adverse outcome of these proceedings, the Company believes that
resulting liabilities are either covered by insurance, established reserves, or
would not have a material adverse effect on the financial condition or results
of operations of the Company.
11. INCOME TAXES
Galen operates primarily in three tax jurisdictions, the United Kingdom, the
United States and the Republic of Ireland. In the United Kingdom the statutory
rate was 30% in both the current and prior year periods. The federal statutory
rate in the U.S. was 35% in both periods. In the Republic of Ireland, the
statutory rate was 17% in the current period and 21% in the prior year period.
Our effective tax rate was 28% in the current period and 66% in the prior year
period. The primary reason for the unusually high rate in the prior year period
was the goodwill amortization associated with the Company's Warner Chilcott
transaction, which is not deductible for tax purposes. The lower effective tax
rate for the current period is attributed to the cessation of goodwill
amortization upon the Company's adoption of SFAS 142 effective October 1, 2001
(see Note 2) and the increased proportion of our profits arising in the Republic
of Ireland.
13
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - U.S. GAAP (CONTINUED)
IN THOUSANDS (EXCEPT PER SHARE AMOUNTS)
12. CONSOLIDATING SCHEDULE
Following are consolidating schedules reflecting Balance Sheet and Statement of
Operations information for the Company as of March 31, 2002, and for the three
and six months ended March 31, 2002 and 2001:
GALEN WARNER WARNER OTHER
HOLDINGS CHILCOTT, CHILCOTT, SUBSIDIARY ELIMINATION
PLC PLC INC. COMPANIES ENTRIES CONSOLIDATED
----------- ----------- ----------- ----------- ----------- ------------
MARCH 31, 2002
BALANCE SHEET DATA:
ASSETS
Cash and cash equivalents $ 241,894 $ -- $ 10,285 $ 38,036 $ -- $ 290,215
Accounts receivable, net 90 -- 15,611 32,944 -- 48,645
Inventories -- -- 42,352 (15,942) -- 26,410
Inter-company receivable (payable) 158,846 (20,713) (21,503) (116,630) --
Other current assets -- -- 11,136 9,758 -- 20,894
--------- --------- --------- --------- --------- ---------
Current assets $ 400,830 $ (20,713) $ 57,881 $ (51,836) $ -- $ 386,164
--------- --------- --------- --------- --------- ---------
Property, plant and equipment, net $ -- $ -- $ 3,190 $ 108,329 $ -- $ 111,519
Intangible assets, net $ -- $ -- $ 384,873 $ 245,438 $ -- $ 630,311
Investment in subsidiaries $ 326,134 $ 185,593 $ -- $ -- $(511,727) $ --
LIABILITIES AND EQUITY
Current liabilities $ 712 $ -- $ 16,964 $ 58,130 $ -- $ 75,806
Long-term debt $ -- $ -- $ 143,919 $ 113,897 $ -- $ 257,816
Deferred income taxes $ -- $ -- $ -- $ 34,627 $ -- $ 34,627
Other non-current liabilities $ -- $ -- $ -- $ 5,960 $ -- $ 5,960
Minority interests $ -- $ -- $ -- $ -- $ --
Shareholders' equity $ 726,252 $ 164,880 $ 285,061 $ 89,319 $(511,727) $ 753,785
========= ========= ========= ========= ========= =========
THREE MONTHS ENDED MARCH 31, 2002
STATEMENT OF OPERATIONS DATA:
REVENUES
Product revenue $ -- $ -- $ 41,748 $ 14,916 $ -- $ 56,664
Service revenue -- -- -- 19,712 -- 19,712
--------- --------- --------- --------- --------- ---------
Total revenues -- -- 41,748 34,628 -- 76,376
--------- --------- --------- --------- --------- ---------
OPERATING EXPENSES
Cost of goods sold -- -- 14,920 7,102 -- 22,022
SG&A (2,573) 78 12,631 13,507 -- 23,643
Research and development -- -- 657 4,075 -- 4,732
Depreciation -- -- 171 2,396 -- 2,567
Amortization -- -- 2,802 1,585 -- 4,387
--------- --------- --------- --------- --------- ---------
Total operating expenses (2,573) 78 31,181 28,665 -- 57,351
--------- --------- --------- --------- --------- ---------
INTEREST INCOME (EXPENSE) 1,840 -- (4,246) (579) -- (2,985)
PROVISION FOR INCOME TAXES -- -- 2,557 352 -- 2,909
--------- --------- --------- --------- --------- ---------
NET INCOME (LOSS) $ 4,413 $ (78) $ 3,764 $ 5,032 $ -- $ 13,131
========= ========= ========= ========= ========= =========
14
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - U.S. GAAP (CONTINUED)
IN THOUSANDS (EXCEPT PER SHARE AMOUNTS)
GALEN WARNER WARNER OTHER
HOLDINGS CHILCOTT, CHILCOTT, SUBSIDIARY ELIMINATION
PLC PLC INC. COMPANIES ENTRIES CONSOLIDATED
----------- ----------- ----------- ----------- ----------- ------------
SIX MONTHS ENDED MARCH 31, 2002
STATEMENT OF OPERATIONS DATA:
REVENUES
Product revenue $ -- $ -- $ 79,789 $ 31,765 $ -- $ 111,554
Service revenue -- -- -- 40,341 -- 40,341
--------- --------- --------- --------- --------- ---------
Total revenues -- -- 79,789 72,106 -- 151,895
--------- --------- --------- --------- --------- ---------
OPERATING EXPENSES
Cost of goods sold -- -- 27,485 17,714 -- 45,199
SG&A (2,610) 78 24,510 23,746 -- 45,724
Research and development -- -- 719 8,487 -- 9,206
Depreciation -- -- 329 4,340 -- 4,669
Amortization -- -- 5,602 3,225 -- 8,827
--------- --------- --------- --------- --------- ---------
Total operating expenses (2,610) 78 58,645 57,512 -- 113,625
--------- --------- --------- --------- --------- ---------
INTEREST INCOME (EXPENSE) 4,087 -- (9,879) (526) -- (6,318)
PROVISION FOR INCOME TAXES -- -- 3,984 5,094 -- 9,078
MINORITY INTEREST IN EARNINGS OF SUBSIDIARIES -- -- -- 47 -- 47
DISCONTINUED OPERATIONS -- -- -- 8,386 -- 8,386
EXTRAORDINARY LOSS -- -- (1,426) -- -- (1,426)
--------- --------- --------- --------- --------- ---------
NET INCOME (LOSS) $ 6,697 $ (78) $ 5,855 $ 17,313 $ -- $ 29,787
========= ========= ========= ========= ========= =========
THREE MONTHS ENDED MARCH 31, 2001
STATEMENT OF OPERATIONS DATA:
REVENUES
Product revenue $ -- $ -- $ 27,644 $ 17,408 $ -- $ 45,052
Service revenue -- -- -- 17,396 -- 17,396
--------- --------- --------- --------- --------- ---------
Total revenues -- -- 27,644 34,804 -- 62,448
--------- --------- --------- --------- --------- ---------
OPERATING EXPENSES
Cost of goods sold -- -- 4,812 14,796 -- 19,608
SG&A -- -- 9,501 14,117 -- 23,618
Research and development -- -- -- 2,605 -- 2,605
Depreciation -- -- 90 1,862 -- 1,952
Amortization -- -- 5,691 1,193 -- 6,884
--------- --------- --------- --------- --------- ---------
Total operating expenses -- -- 20,094 34,573 -- 54,667
--------- --------- --------- --------- --------- ---------
INTEREST INCOME (EXPENSE) 25 -- (4,972) (365) -- (5,312)
PROVISION FOR INCOME TAXES -- -- 2,140 131 -- 2,271
MINORITY INTEREST IN EARNINGS OF SUBSIDIARIES -- -- -- 52 -- 52
DISCONTINUED OPERATIONS -- -- -- 52 -- 52
--------- --------- --------- --------- --------- ---------
NET INCOME (LOSS) $ 25 $ -- $ 438 $ (265) $ -- $ 198
========= ========= ========= ========= ========= =========
SIX MONTHS ENDED MARCH 31, 2001
STATEMENT OF OPERATIONS DATA:
REVENUES
Product revenue $ -- $ -- $ 53,656 $ 32,353 $ -- $ 86,009
Service revenue -- -- -- 35,280 -- 35,280
--------- --------- --------- --------- --------- ---------
Total revenues -- -- 53,656 67,633 -- 121,289
--------- --------- --------- --------- --------- ---------
OPERATING EXPENSES
Cost of goods sold -- -- 10,339 29,624 -- 39,963
SG&A -- (3) 19,068 21,803 -- 40,868
Research and development -- -- -- 5,222 -- 5,222
Depreciation -- -- 163 3,588 -- 3,751
Amortization -- -- 11,383 1,786 -- 13,169
--------- --------- --------- --------- --------- ---------
Total operating expenses -- (3) 40,953 62,023 -- 102,973
--------- --------- --------- --------- --------- ---------
INTEREST INCOME (EXPENSE) 70 -- (10,547) (679) -- (11,156)
PROVISION FOR INCOME TAXES -- -- 2,695 2,048 -- 4,743
MINORITY INTEREST IN EARNINGS OF SUBSIDIARIES -- -- -- 109 -- 109
DISCONTINUED OPERATIONS -- -- -- 223 -- 223
--------- --------- --------- --------- --------- ---------
NET INCOME (LOSS) $ 70 $ 3 $ (539) $ 2,997 $ -- $ 2,531
========= ========= ========= ========= ========= =========
15
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - U.S. GAAP (CONTINUED)
IN THOUSANDS (EXCEPT PER SHARE AMOUNTS)
13. SEGMENT INFORMATION
This segment information is provided based on the manner in which Galen's
management assesses performance and allocates resources, and for which discrete
financial information is available. Galen evaluates performance based on
operating income. The Company's business is classified into two operating
segments for internal financial reporting purposes: Pharmaceutical Products and
Pharmaceutical Services. All intercompany items are eliminated. The accounting
policies of both reportable segments are the same as those described in the
Company's Annual Report on Form 20-F.
Pharmaceutical Products includes the development, manufacture, supply and
marketing of prescription pharmaceutical products in the United States, United
Kingdom and Ireland. Pharmaceutical Services includes Galen's CTS business,
which supplies and distributes clinical trial materials internationally and
operates a drug reconciliation business. Interactive Clinical Technologies,
Inc., also a component of Pharmaceutical Services, provides computer-based
interactive voice response systems and related services to permit the efficient
management of worldwide clinical trials and clinical supplies. As of December
31, 2001 Chemical Synthesis Services, formerly a component of Galen's
Pharmaceutical Services segment, was sold (see Note 7).
Following is selected information for the periods indicated:
16
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - U.S. GAAP (CONTINUED)
IN THOUSANDS (EXCEPT PER SHARE AMOUNTS)
(A) CONTRIBUTION BY OPERATING SEGMENT
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
------------------- -------------------
2002 2001 2002 2001
-------- -------- -------- --------
PHARMACEUTICAL PRODUCTS
Revenue $ 56,664 $ 45,052 $111,554 $ 86,009
Cost of sales 10,917 10,751 24,125 21,678
Operating expenses 24,444 22,936 46,825 39,732
Amortization and depreciation expense 5,859 7,325 11,369 14,022
-------- -------- -------- --------
Total operating expenses 41,220 41,012 82,319 75,882
-------- -------- -------- --------
Operating income $ 15,444 $ 4,040 $ 29,235 $ 10,577
======== ======== ======== ========
PHARMACEUTICAL SERVICES
Revenue $ 19,712 $ 17,396 $ 40,341 $ 35,280
Cost of sales 11,105 8,857 21,074 18,285
Operating expenses 3,931 3,287 8,105 6,358
Amortization and depreciation expense 1,095 1,511 2,127 2,898
-------- -------- -------- --------
Total operating expenses 16,131 13,655 31,306 27,541
-------- -------- -------- --------
Operating income $ 3,581 $ 3,741 $ 9,035 $ 7,739
======== ======== ======== ========
(B) GEOGRAPHICAL ANALYSIS (BASED ON THE LOCATION IN WHICH SALE ORIGINATED)
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
------------------- -------------------
2002 2001 2002 2001
-------- -------- -------- --------
REVENUE
United States $ 54,314 $ 36,248 $102,933 $ 74,403
United Kingdom 21,464 25,739 47,986 46,075
All Other 598 461 976 811
-------- -------- -------- --------
$ 76,376 $ 62,448 $151,895 $121,289
======== ======== ======== ========
OPERATING INCOME
United States $ 14,745 $ 5,111 $ 28,772 $ 12,453
United Kingdom 4,429 2,665 10,417 5,870
All Other (149) 5 (919) (7)
-------- -------- -------- --------
$ 19,025 $ 7,781 $ 38,270 $ 18,316
======== ======== ======== ========
17
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - U.S. GAAP (CONTINUED)
IN THOUSANDS (EXCEPT PER SHARE AMOUNTS)
(C) PRODUCT AND SERVICE REVENUE
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
------------------- -------------------
2002 2001 2002 2001
-------- -------- -------- --------
PHARMACEUTICAL PRODUCTS - NET SALES
Womens' healthcare $ 21,052 $ 13,821 $ 36,878 $ 25,610
Dermatology and urology 20,537 14,157 43,493 26,825
Other 15,075 17,074 31,183 33,574
-------- -------- -------- --------
$ 56,664 $ 45,052 $111,554 $ 86,009
======== ======== ======== ========
PHARMACEUTICAL SERVICES
Clinical Trial Services* $ 19,712 $ 19,058 $ 42,241 $ 38,900
Chemical Synthesis Services -- (1,662) (1,900) (3,620)
-------- -------- -------- --------
$ 19,712 $ 17,396 $ 40,341 $ 35,280
======== ======== ======== ========
* includes Interactive Clinical Technologies, Inc., or ICTI
(D) CHANGES IN GOODWILL BY BUSINESS ACTIVITY
PHARMACEUTICAL PRODUCTS
Balance as of September 30, 2001 $220,226
Plus: Reclassification of assembled workforce 2,914
--------
Balance as of March 31, 2002 $223,140
========
PHARMACEUTICAL SERVICES
Balance as of September 30, 2001 $ 33,454
Plus: Accrual of contingent consideration
2,000
--------
Balance as of March 31, 2002 $ 35,454
========
14. SUBSEQUENT EVENT
On May 8, 2002, the Company announced that it agreed to the sale of its Clinical
Trial Services business ("CTS") for a total cash consideration, on a cash and
debt free basis, of approximately $191,000. CTS, carried out through Gaelta
Research and Development Limited and Galen, Inc., provides clinical packaging
services to pharmaceutical companies that choose to outsource their
manufacturing, packaging and distribution of both active drugs and placebos to
targeted clinical trial patients. CTS also offers analytical services, including
stability testing, complete analytical testing and release and analytical method
development. CTS had revenue of $58,700 in the year ended September 30, 2001.
This sale is part of the Company's ongoing strategy to focus on our faster
18
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - U.S. GAAP (CONTINUED)
IN THOUSANDS (EXCEPT PER SHARE AMOUNTS)
growing pharmaceutical products business, freeing up additional resources for
our growth plans in this area through the sale of the Company's non-core
pharmaceutical services businesses. The approval of the Company's shareholders
to this sale will be sought at an extraordinary general meeting of the Company
to be held on May 29, 2002. Galen still retains Interactive Clinical
Technologies, Inc., or ICTI, which the Company intends to sell.
19
B. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis of financial condition and results of
operations of Galen should be read in conjunction with the consolidated
unaudited financial statements and notes thereto, appearing in Section I-A of
this Form 6-K. The financial data analyzed in this discussion has been prepared
in accordance with U.S. GAAP.
OVERVIEW
Galen is a specialty pharmaceutical company focused principally on the women's
healthcare, dermatology and urology therapeutic areas. We develop, manufacture,
supply and market branded prescription pharmaceutical products in the United
Kingdom, Ireland and the United States. Revenue from sales of our products in
the United States is now the most rapidly expanding element of our business. An
important part of our strategy is to develop and commercialize pharmaceutical
products based on innovative formulations and novel drug delivery technology,
particularly our proprietary intravaginal ring, or IVR, technology. Our IVR is
able to deliver a wide range of medicines to the patient over periods of up to
three months.
Our pharmaceutical products business, which includes our research and
development activities, focuses on the women's healthcare therapeutic area and
other product areas such as dermatology and urology. Our principal products
include:
o Estrace(R) vaginal cream, a locally applied estrogen to treat vaginal
atrophy, that we acquired from Bristol-Myers Squibb Company in
February 2000;
o Estrace(R) tablets, an estrogen replacement therapy product, that we
acquired from Bristol-Myers Squibb Company in June 2001;
o Ovcon(R) 35 and Ovcon(R) 50, both oral contraceptives, that we
acquired from Bristol-Myers Squibb Company in February 2000;
o Doryx(R), an oral antibiotic for the treatment of acne and for
adjunctive therapy in the treatment of severe acne; and
o Duricef(R), an antibiotic for the treatment of streptococcal
pharyngitis and skin/skin-structure infections, that we acquired from
Bristol-Myers Squibb Company in March 2002.
We have a pipeline of products in development principally for the U.S. market,
including a number utilizing the IVR drug delivery technology.
Through our U.S. sales force of approximately 225 representatives, we market our
portfolio of branded pharmaceutical specialty products targeted at the women's
healthcare market. We believe we have one of the largest women's healthcare
sales forces calling on physician specialists including
obstetrician/gynecologists, dermatologists and urologists in the United States.
Our sales force of approximately 115 representatives in the United Kingdom and
Ireland market our product portfolio through direct contact with general
practitioners, community pharmacists and hospital consultants.
We manufacture finished pharmaceutical products for our U.K. products business
at our facilities in Craigavon and Larne, Northern Ireland. While we manufacture
most of the products that we market in the United Kingdom, certain of our U.K.
pharmaceutical products and all of our U.S. pharmaceutical products are
manufactured for us under contracts with third parties.
20
As part of our ongoing strategy to focus on our faster growing pharmaceutical
products business, we have begun divesting our pharmaceutical services business.
This process began in December 2001 when we disposed of our Clinical Syntheses
Services, or CSS, business for a cash consideration of approximately $36
million. We announced on May 8, 2002 that we agreed to dispose of our Clinical
Trials Services business, or CTS, for a total consideration on a cash and debt
free basis of $191 million to be satisfied in cash at closing. The disposition
is subject to shareholder approval and is expected to close on or about May 31,
2002. We still retain Interactive Clinical Technologies, Inc., or ICTI, which we
intend to sell.
For the period under review, our consolidated results of operations should be
considered in light of the following specific factors.
EFFECT OF THE ACQUISITION OF WARNER CHILCOTT. On September 29, 2000 we acquired
Warner Chilcott, a U.S. based developer and marketer of branded prescription
pharmaceutical products, for $325.5 million. The purchase consideration
consisted of the issuance of 31,698,554 ordinary shares, valued at $282.9
million, in exchange for all of the outstanding shares of Warner Chilcott, and
the issuance of Galen share options and warrants valued at $31.2 million to
former holders of Warner Chilcott options and warrants and $11.4 million of
transaction related costs.
The acquisition of Warner Chilcott, which closed on the last business day of our
2000 fiscal year, was accounted for as a purchase. The acquisition had and will
have the following effects on our results of operations:
o We recognized intangible assets in the amount of $199.9 million
related to the Ovcon(R) 35 and Ovcon(R) 50 and Estrace(R) cream
products of Warner Chilcott. We are amortizing this amount over a
period of 20 years and, as a consequence, amortization of intangible
assets will be substantially greater than prior periods and reduce net
income accordingly.
o We recognized goodwill in the amount of $212.1 million (Galen ceased
amortizing goodwill effective October 1, 2001 upon the adoption of a
new U.S. accounting standard which prohibits the amortization of
goodwill).
o In February 2000, Warner Chilcott, Inc. issued $200.0 million
principal amount of 12 5/8% senior notes due 2008. Our acquisition of
Warner Chilcott triggered the right of each holder of Warner Chilcott
senior notes to require us to repurchase their notes at 101% of the
principal amount of notes presented for repurchase. After holders of
approximately 20% of the notes exercised their repurchase right,
Warner Chilcott had $159.7 million of senior notes outstanding. In
December 2001 we repurchased $20.0 million of principal amount of
senior notes, and in our third quarter fiscal 2002 we repurchased an
additional $45.9 million of principal amount of senior notes. We may,
from time to time depending on market conditions, continue to
repurchase Warner Chilcott's senior notes in the open market. Interest
payments on the senior notes are due semi-annually in arrears on
February 15 and August 15. The senior notes are redeemable prior to
maturity at the option of Warner Chilcott, Inc., in whole or in part,
beginning in February 2004 at redemption prices that decrease annually
and range from 106.3125% to 100%. Unless and until redeemed, interest
payments associated with the senior notes will substantially increase
our net interest expense as compared with our interest expense prior
to the acquisition of Warner Chilcott.
EFFECT OF THE ACQUISITION OF ESTRACE(R) TABLETS. Consistent with our strategy to
acquire established branded pharmaceutical products and to increase sales of
those products in the United States through enhanced promotional efforts, on
June 29, 2001 we acquired from Bristol-Myers Squibb Company Estrace(R) tablets,
an estrogen replacement therapy product with net sales of $40.5 million for the
year ended December 31, 2000.
21
The gross profit for this product was $39.2 million for the year ended December
31, 2000. The purchase price for Estrace(R) tablets was approximately $95
million. In connection with this acquisition, we also entered into a five-year
supply agreement with Bristol-Myers Squibb Laboratories Company in relation to
this product with an option to renew for two additional years.
EFFECT OF EQUITY OFFERING. In July 2001, we completed our third equity offering.
The total net proceeds to us, after underwriters' commissions and other expenses
of the offering, were approximately $268 million. We have used a portion of
these net proceeds to expand our portfolio of pharmaceutical products and to
repurchase a portion of our outstanding senior notes, and we intend to use the
remaining net proceeds to pursue other selected product acquisitions and
strategic opportunities, and for general corporate purposes.
EFFECT OF CHEMICAL SYNTHESIS SERVICES SALE. As of December 31, 2001, we sold our
CSS business. CSS consisted of SynGal (a Galen subsidiary) and QuChem Limited
(a Galen subsidiary), and provides integrated service from basic research and
development and small-scale synthesis to kilogram scale synthesis to customers
requiring custom chemical syntheses. CSS employed approximately 110 staff
members based in two Northern Ireland sites and had revenue of $7.5 million in
the year ended September 30, 2001. We reported a pre-tax gain of $10.9 million
from the sale that is included in our Statement of Operations for the six months
ended March 31, 2002. As part of this transaction Alan Armstrong, President of
our pharmaceutical services business, resigned from both his position with Galen
and his Galen directorship. We intend to use the proceeds from this transaction
to expand our portfolio of branded pharmaceutical products particularly in the
women's healthcare therapeutic area, by pursuing other selected product
acquisitions and strategic opportunities, and for general corporate purposes.
EFFECT OF THE ACQUISITION OF DURICEF(R) AND MOISTUREL(R). Consistent with our
strategy to acquire established branded pharmaceutical products and to increase
sales of those products in the United States through enhanced promotional
efforts, on March 28, 2002 we acquired from Bristol-Myers Squibb Company
Duricef(R), an antibiotic, and Moisturel(R), a skin cream. Prior to our
acquisition of the products, they generated combined sales for the year ended
December 31, 2001 of approximately $17 million, with gross margins of 85%. The
purchase price for Duricef(R) and Moisturel(R) was approximately $40.4 million.
In connection with this acquisition, we also entered into five-year supply
agreements with Bristol-Myers Squibb Laboratories Company in relation to these
products.
EFFECT OF CLINICAL TRIAL SERVICES SALE. On May 8, 2002, we announced that we
agreed to the sale of our CTS business. CTS, carried out through Gaelta Research
and Development Limited and Galen, Inc., provides clinical packaging services to
pharmaceutical companies that choose to outsource their manufacturing, packaging
and distribution of both active drugs and placebos to targeted clinical trial
patients. CTS also offers analytical services, including stability testing,
complete analytical testing and release and analytical method development. CTS
had revenue of $58.7 million in the year ended September 30, 2001. This sale is
part of our ongoing strategy to focus on our faster growing pharmaceutical
products business through the sale of our non-core pharmaceutical services
businesses. Proceeds from the sale will provide us with greater financial
flexibility and enable us to continue our growth strategy through ongoing
development and selective product acquisitions to strengthen our pharmaceutical
products business. The approval by our shareholders of this sale will be sought
at an extraordinary general meeting of the Company to be held on May 29, 2002.
EFFECT OF CURRENCY FLUCTUATIONS. Our revenue streams and operating expenses are
denominated in two primary currencies: the U.S. dollar and the pound sterling.
With the acquisition of Warner Chilcott, an increasing proportion of our revenue
is earned in U.S. dollars (approximately 67% for the six months ended March 31,
2002). In this report, we translated revenue earned in pounds sterling to U.S.
dollars in our Statement of Operations at the average exchange rate for the
relevant period. Substantially all of our operating expenses in the United
States are denominated in U.S. dollars and our capital investment in the United
States
22
has been funded by U.S. dollar borrowings, reducing our exposure to changes in
the U.S. dollar to pounds sterling exchange rate. However, changes in exchange
rates between the U.S. dollar and the pound sterling will affect our reported
results of operations. A material appreciation of the U.S. dollar against the
pound sterling would reduce our U.S. dollar reported earnings, while the
depreciation of the U.S. dollar against the pound sterling would increase our
U.S. dollar reported earnings
CRITICAL ACCOUNTING POLICIES
The preparation of our financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. We
believe the following critical accounting policies affect our more significant
judgments and estimates used in the preparation of our consolidated financial
statements. Our significant policies are described in Note 1 to the consolidated
financial statements included in our U.S. 2001 Annual Report.
IMPAIRMENT OF GOODWILL. We periodically evaluate acquired businesses for
potential impairment indicators. Our judgments regarding the existence of
impairment indicators are based on legal factors, market conditions and
operational performance of our acquired businesses. We have completed our
impairment test as of October 1, 2001 and have determined that goodwill has not
been impaired. Future events could cause us to conclude that impairment
indicators exist and that goodwill associated with our acquired businesses is
impaired. Any resulting impairment would affect our financial condition and
results of operations.
ALLOWANCE FOR DOUBTFUL ACCOUNTS. We record an allowance for estimated bad debts
included in our accounts receivable. This allowance is determined based on our
historical collection and write-off experience. An allowance is also made for
customer accounts for which we believe that collectibility is doubtful.
Management's judgment is a key factor in determining this allowance and, as
such, additional allowances may be required.
INVENTORY. Our inventory is stated at the lower of cost or net realizable value.
Cost is determined on a first in, first out basis and includes transportation
and handling costs. In the case of manufactured products, cost includes
material, labor and applicable manufacturing overhead. Provisions are made for
obsolete, slow moving or defective items where appropriate. The provisioning
process requires the use of management's judgment.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2002 AND 2001.
REVENUE. Our total revenue for the three months ended March 31, 2002 (the second
quarter fiscal 2002) increased 22.3%, or $14.0 million to $76.4 million from
$62.4 million for the three months ended March 31, 2001 (the second quarter
fiscal 2001). Significant sales increases in both our pharmaceutical products
business and our pharmaceutical services business accounted for these favorable
results. Our acquisition of Estrace(R) tablets on June 29, 2001 and the strong
development of our pharmaceutical products business, particularly in the U.S.,
were the major drivers of growth. Significant changes in exchange rates between
the U.K. pound sterling and U.S. dollar can affect our reported results of
operations. In comparison to the prior year period, the average exchange rate
for the three months ended March 31, 2002 remained fairly consistent as the
pound depreciated less than 1% over these periods.
23
Our pharmaceutical products business includes the development, promotion and
sale of branded prescription products in the United States, United Kingdom and
Ireland. Revenue from our pharmaceutical products business increased 25.8%, or
$11.6 million, to $56.7 million as compared to $45.1 million in the second
quarter fiscal 2001. Results for Estrace(R) tablets are included in our results
for the second quarter fiscal 2002 and not in the prior year quarter as
Estrace(R) tablets were acquired by us in June 2001. Our pharmaceutical products
business continues to benefit from the positive strategic impact of the
acquisition of Warner Chilcott in September 2000 and the establishment of a
strong pharmaceutical base in the U.S. In women's healthcare we have products in
two important therapeutic categories: contraception and hormone
replacement therapy. Ovcon(R), our oral contraceptive, and Estrace(R) tablets,
our estrogen replacement therapy, continue to demonstrate strong growth.
Estrace(R) cream which we promote to the urologist continues to show steady
progress. Doryx(R), our pelletized oral formulation of doxycycline for the
treatment of acne, also posted continued strong results. In January 2002, we
launched a new 75mg strength of Doryx(R) and expect incremental growth for this
new dosage form. In the U.K., our business continues to focus on women's
healthcare. Our proprietary anticholinergic, Regurin(R), for the treatment of
incontinence continues to progress well since its U.K. launch in October 2000.
Late in September 2001 we launched Menoring(R), our first intravaginal ring
product for estrogen replacement therapy. This product has performed to
expectation with early sales progress comparable to other recently launched
estrogen therapies.
Revenues from our pharmaceutical services business of $19.7 million increased
13.3%, or $2.3 million, as compared to $17.4 million in the prior year quarter
reflecting the increased demand for these services. Revenue reported for the
second quarter fiscal 2002 and 2001 represents results of our Clinical Trial
Services business, or CTS, and Interactive Clinical Technologies, Inc., or ICTI.
We announced on May 8, 2002 that we agreed to dispose of CTS. We still retain
ICTI which we intend to sell. As of December 31, 2001 we sold our Clinical
Synthesis Services business, or CSS; results of which are appropriately
classified as discontinued operations in our statement of operations.
Gross profit and gross margin. Gross profit of $54.4 million increased 26.9%, or
$11.6 million, from $42.8 million in the prior year quarter. These improved
results reflect the impact of our improved gross margin to 71.2% from 68.6% in
the prior year quarter, demonstrating the increasing impact of sales of higher
margin U.S. pharmaceutical products.
Operating expenses. Selling, general and administrative expenses of $23.6
million were consistent with the prior year quarter. Our research and
development expenses of $4.7 million increased 81.7%, or $2.1 million, from $2.6
million in the prior year quarter. Our activities are now firmly directed
towards the development of proprietary products for commercialization in the
U.S. which are based on drug delivery systems such as the intravaginal ring, or
IVR. We are also pursuing the development of new products and line extensions
that complement and strengthen our core prescription business. The line
extension for our contraceptive, Ovcon(R), has been filed with the Food and Drug
Administration, or FDA. During the quarter, the New Drug Application, or NDA,
for our estradiol acetate vaginal ring was accepted for filing by the FDA. Our
proprietary line extension for Estrace(R) tablets is in Phase III in the U.S.
and we anticipate filing the NDA in 2003. Our activities also include the
development of other IVR applications in the areas of contraception, sexual
dysfunction and local infection control. During the quarter we launched a 75mg
line extension for Doryx(R). We are evaluating the development of a new
Duricef(R) dose form which would be manufactured in our Craigavon facility.
Depreciation and amortization expense. Depreciation expense of $2.6 million for
the second quarter fiscal 2002 increased $0.6 million as compared to $2.0
million in the prior year quarter. This increase is the result of our continued
expansion and investment in our property, plant and equipment. Amortization
expense of $4.4 million decreased $2.5 million from $6.9 million primarily due
to the cessation of goodwill amortization upon our adoption of Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets,
effective October 1, 2001. Amortization of goodwill recorded in the second
quarter of fiscal 2001 amounted to $3.6 million. This reduction in second
quarter fiscal 2002 amortization expense was offset somewhat
24
by amortization charges related to Estrace(R) tablets which were not recorded in
the second quarter fiscal 2001 as this product was acquired in June 2001.
Interest income and interest expense. Interest income of $2.1 million nearly
doubled as compared to the prior year quarter income of $1.1 million as funds
held for investment were higher during the second quarter fiscal 2002 than in
the prior year quarter. Funds held for investment were most significantly
increased as a result of our July 2001 equity offering from which we raised
approximately $268 million net of fees. Interest expense of $5.1 million
decreased $1.3 million as compared to $6.4 million incurred during the prior
year quarter. A significant part of this expense reduction is related to the
repurchase of a portion of our senior subordinated notes acquired as part of the
Warner Chilcott transaction. During the second quarter fiscal 2001 the principal
outstanding was $159.7 million. In December 2001, we repurchased $20.0 million
of the principal amount. The principal outstanding remained at $139.7 million
through March 31, 2002. A decline in interest rates also contributed to the
decrease in interest expense.
Income tax expense. Taxes increased $0.6 million to $2.9 million for the second
quarter fiscal 2002 as compared to $2.3 million for the prior year quarter. We
operate primarily in three tax jurisdictions, the United Kingdom, the United
States and the Republic of Ireland. In the United Kingdom the statutory rate was
30% in both the current and prior year quarters. The federal statutory rate in
the U.S. was 35% in both quarters. In the Republic of Ireland, the statutory
rate was 17% in the current quarter and 21% in the prior year quarter. Our
effective tax rate was 18% in the current quarter and 92% in the prior year
quarter. The primary reason for the unusually high rate in the second quarter
fiscal 2001 was the goodwill amortization associated with our Warner Chilcott
transaction, which is not deductible for tax purposes. The lower effective tax
rate for the second quarter fiscal 2002 is attributed to the cessation of
goodwill amortization effective October 1, 2001 described above and the
increased proportion of our taxable profits arising in the Republic of Ireland.
Net income. The result of the items discussed above was that we reported $13.1
million of net income for the second quarter fiscal 2002 as compared to net
income of $0.2 million in the prior year quarter. Net income per ADS was $0.28
on both a basic and diluted basis. The board has declared the payment of an
interim dividend of 1.00 pence per ordinary share (4.0 pence per ADS), which
represents an increase of 20% over the 0.83 pence per ordinary share (3.32 pence
per ADS) declared for the previous interim period. The weighted average number
of ADS equivalent shares outstanding increased by 7 million due primarily to the
issuance of 6.6 million ADS equivalents in relation to our July 2001 equity
offering.
SIX MONTHS ENDED MARCH 31, 2002 AND 2001.
Revenue. Our total revenue for the six months ended March 31, 2002 (the first
half fiscal 2002) increased 25.2%, or $30.6 million to $151.9 million from
$121.3 million for the six months ended March 31, 2001 (the first half fiscal
2001). Significant sales increases in both our pharmaceutical products business
and our pharmaceutical services business accounted for these favorable results.
Our acquisition of Estrace(R) tablets on June 29, 2001 and the strong
development of our pharmaceutical products business, particularly in the U.S.,
were the major drivers of growth. Significant changes in exchange rates between
the U.K. pound sterling and U.S. dollar can affect our reported results of
operations. In comparison to the prior year period, the average exchange rate
for the three six ended March 31, 2002 remained fairly consistent as the pound
depreciated less than 2% over these periods.
Our pharmaceutical products business includes the development, promotion and
sale of branded prescription products in the United States, United Kingdom and
Ireland. Revenue from our pharmaceutical products business increased 29.7%, or
$25.6 million, to $111.6 million as compared to $86.0 million in the first half
fiscal 2001. Results for Estrace(R) tablets are included in our results for the
first half fiscal 2002 and not in the prior year period as Estrace(R) tablets
were acquired by us in June 2001. Our pharmaceutical products business continues
to benefit from the positive strategic impact of the acquisition of Warner
Chilcott in September 2000
25
and the establishment of a strong pharmaceutical base in the U.S. In women's
healthcare we have products in two important therapeutic categories:
contraception and hormone replacement therapy. Ovcon(R), our oral contraceptive,
and Estrace(R) tablets, our estrogen replacement therapy, continue to
demonstrate strong growth. Estrace(R) cream which we promote to the urologist
continues to show steady progress. Doryx(R), our pelletized oral formulation of
doxycycline for the treatment of acne, also posted continued strong results. In
January 2002, we launched a new 75mg strength of Doryx(R) and expect incremental
growth for this new dosage form. In the U.K., our business continues to focus on
women's healthcare. Our proprietary anticholinergic, Regurin(R), for the
treatment of incontinence continues to progress well since its U.K. launch in
October 2000. Late in September 2001 we launched Menoring(R), our first
intravaginal ring product for estrogen replacement therapy. This product has
performed to expectation with early sales progress comparable to other recently
launched estrogen therapies.
Revenues from our pharmaceutical services business of $40.3 million increased
14.3%, or $5.0 million, as compared to $35.3 million in the prior year period
reflecting the increased demand for these services. Revenue reported for the
first half fiscal 2002 and 2001 represents results of our Clinical Trial
Services business, or CTS, and Interactive Clinical Technologies, Inc., or ICTI.
We announced on May 8, 2002 that we agreed to dispose of CTS. We still retain
ICTI which we intend to sell. As of December 31, 2001 we sold our Clinical
Synthesis Services business, or CSS; results of which are appropriately
classified as discontinued operations in our Statement of Operations.
Gross profit and gross margin. Gross profit of $106.7 million increased 31.2%,
or $25.4 million, from $81.3 million in the prior year period. These improved
results reflect the impact of our improved gross margin to 70.2% from 67.1% in
the prior year period, demonstrating the increasing impact of sales of higher
margin U.S. pharmaceutical products.
Operating expenses. Selling, general and administrative expenses of $45.7
million increased 11.9% as compared to $40.9 million incurred in the prior year
period. This is due to increased selling and promotional spending by Warner
Chilcott. Our research and development expenses of $9.2 million increased 76.3%,
or $4.0 million, from $5.2 million in the prior year period. Our activities are
now firmly directed towards the development of proprietary products for
commercialization in the U.S. which are based on drug delivery systems such as
the intravaginal ring, or IVR. We are also pursuing the development of new
products and line extensions that complement and strengthen our core
prescription business. The line extension for our contraceptive, Ovcon(R), has
been filed with the Food and Drug Administration, or FDA. During the period, the
New Drug Application, or NDA, for our estradiol acetate vaginal ring was
accepted for filing by the FDA. Our proprietary line extension for Estrace(R)
tablets is in Phase III in the U.S. and we anticipate filing the NDA in 2003.
Our activities also include the development of other IVR applications in the
areas of contraception, sexual dysfunction and local infection control. During
the period we launched a 75mg line extension for Doryx(R). We are evaluating the
development of a new Duricef(R) dosage form which would be manufactured in our
Craigavon facility.
Depreciation and amortization expense. Depreciation expense of $4.7 million for
the first half fiscal 2002 increased $0.9 million as compared to $3.8 million in
the prior year period. This increase is the result of our continued expansion
and investment in our property, plant and equipment. Amortization expense of
$8.8 million decreased $4.3 million from $13.2 million primarily due to the
cessation of goodwill amortization upon our adoption of Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets, effective
October 1, 2001. Amortization of goodwill recorded in the first half of fiscal
2001 amounted to $6.8 million. This reduction in first half fiscal 2002
amortization expense was offset somewhat by amortization charges related to
Estrace(R) tablets which were not recorded in the first half fiscal 2001 as this
product was acquired in June 2001.
Interest income and interest expense. Interest income of $4.6 million increased
significantly as compared to the prior year period income of $2.8 million as
funds held for investment were higher during the first half
26
fiscal 2002 than in the prior year period. Funds held for investment were most
significantly increased as a result of our July 2001 equity offering from which
we raised approximately $268 million net of fees. Interest expense of $10.9
million decreased $3.1 million as compared to $14.0 million incurred during the
prior year period. A significant part of this expense reduction is related to
the repurchase of a portion of our senior subordinated notes acquired as part of
the Warner Chilcott transaction. During the first and second quarters fiscal
2001 the principal outstanding for the majority of the respective periods was
$200.0 million and $159.7 million. In December 2001, we repurchased $20.0
million of the principal amount. The principal outstanding remained at $139.7
million through March 31, 2002. A decline in interest rates also contributed to
the decrease in interest expense.
Income tax expense. Taxes increased $4.3 million to $9.1 million for the first
half fiscal 2002 as compared to $4.7 million for the prior year period. We
operate primarily in three tax jurisdictions, the United Kingdom, the United
States and the Republic of Ireland. In the United Kingdom the statutory rate was
30% in both the current and prior year periods. The federal statutory rate in
the U.S. was 35% in both periods. In the Republic of Ireland, the statutory rate
was 17% in the current quarter and 21% in the prior year quarter. Our effective
tax rate was 28% in the current period and 66% in the prior year period. The
primary reason for the unusually high rate in the first half fiscal 2001 was the
goodwill amortization associated with our Warner Chilcott transaction, which is
not deductible for tax purposes. The lower effective tax rate for the first half
fiscal 2002 is attributed to the cessation of goodwill amortization effective
October 1, 2001 described above and the increased proportion of our profits
arising in the Republic of Ireland.
Net income. The result of the items discussed above was that we reported $29.8
million of net income for the first half fiscal 2002 as compared to net income
of $2.5 million in the prior year period. Net income per ADS was $0.64 on both a
basic and diluted basis. The board has declared the payment of an interim
dividend of 1.00 pence per ordinary share (4.0 pence per ADS), which represents
an increase of 20% over the 0.83 pence per ordinary share (3.32 pence per ADS)
declared for the previous interim period. The weighted average number of ADS
equivalent shares outstanding increased by 7 million due primarily to the
issuance of 6.6 million ADS equivalents in relation to our July 2001 equity
offering.
OFF BALANCE SHEET ARRANGEMENTS
We do not have any off balance sheet arrangements, except for operating leases
considered normal to our business.
LIQUIDITY AND CAPITAL RESOURCES
Although our earnings before interest, tax, depreciation and amortization, or
EBITDA, (adjusted for the CSS sale) of $51.7 million for the first half fiscal
2002 significantly exceeded the prior year period's EBITDA of $35.1 million, net
cash from operating activities remained fairly consistent with the prior year
period. This is the result of our increased investment in working capital during
the current period. Our increased revenues in the current period generated the
increases in our inventory, accounts receivable, prepaid expense, other assets
and current liabilities.
The major use of cash in investing activities during the first half of fiscal
2002 was for the purchase of Duricel(R) and Moisturel(R) for approximately $40.4
million. The sale of CSS in December 2001 also had a significant impact on our
cash as we received cash consideration of approximately $36 million for this
transaction. A use of $10.5 million reflects our continued expansion and
investment in our property, plant and equipment. The significant use of cash for
financing activities was our December 2001 repurchase of $20.0 million principal
amount of Warner Chilcott senior notes for $23.0 million. During our third
quarter fiscal 2002 we repurchased an additional $45.9 million principal amount
for $52.9 million. Depending on
27
market conditions, we may again repurchase senior notes in the open market.
During the first half of fiscal 2002, we disbursed our final fiscal 2001
dividend totaling $4.5 million.
We ended the second half of fiscal 2002 with $290.2 million cash on hand as
compared with $326.1 million at September 30, 2001. We intend to fund our future
operating liquidity needs, including capital expenditures and dividend payments,
through a combination of cash generated from operations, cash balances on hand
and availability under credit facilities. At March 31, 2002, we had $44.1
million of availability agreed in principle but not yet committed, pending our
request.
There is no significant seasonality to our funding requirements, and we believe
that these sources will be sufficient to fund our anticipated working capital
needs for the foreseeable future. We evaluate our balance sheet periodically to
determine whether to refinance outstanding indebtedness with cash on hand or
with other indebtedness. Accordingly, we may choose to reduce our indebtedness
from time to time. In the event that we pursue significant acquisitions, we may
be required to raise additional funds through the issuance of debt or equity
securities.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
"The following summarizes our financial commitments as of March 31, 2002 (in
millions of U.S. dollars):"
<Table>
<Caption>
Less Greater
Than 1 1 To 3 4 To 5 Than 5
Year Years Years Years Totals
------- ------- ------- ------- -------
Short term capital leases $ 0.4 $ - $ - $ - $ 0.4
Long term capital leases - 0.4 - - 0.4
Long term borrowings 11.8 107.0 - 150.3 269.1
Operating lease commitments 3.1 6.3 1.5 - 10.9
------- ------- ------- ------- -------
Totals $ 15.3 $ 113.7 $ 1.5 $ 150.3 $ 280.8
======= ======= ======= ======= =======
</Table>
INFLATION
Inflation had no material impact on our operations during the three months ended
March 31, 2002.
C. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The principal market risks (i.e., the risk of loss arising from adverse changes
in market rates and prices) to which we are exposed are:
o interest rates on debt, and
o foreign exchange rates.
The following risk management discussion and the estimated amounts generated
from analytical techniques are forward-looking statements of market risk
assuming certain market conditions occur. Actual results in the future may
differ materially from these projected results due to actual developments in the
global financial markets.
INTEREST RATES
We manage debt and overall financing strategies centrally using a combination of
short and long term loans with either fixed or variable rates. Currently, we do
not hedge exposure to interest rate fluctuations through the use of derivative
instruments.
FOREIGN EXCHANGE
Most of the revenue generated and expenses incurred during the six months ended
March 31, 2002 and 2001 were denominated in the functional currency of the
country in which they were generated. To the extent that
28
we have expanded and continue to expand our operations in the United States,
revenues and expenses will continue to be generated in the local currency. We
use local currency cash flows to pay similarly denominated expenses to the
extent available, although we cannot be certain that we will be able to continue
this strategy.
We had no foreign currency option contracts at March 31, 2002. To date, we have
not extensively used foreign currency hedging transactions because our exposure
to foreign exchange fluctuations has been limited. Capital investment in the
United States has been funded by U.S. dollar borrowings as a hedge against
foreign currency movements. We intend to use foreign currency hedging more
extensively in the future, but cannot give assurances that the use of such
instruments will effectively limit our exposure.
II - OTHER INFORMATION
A. LEGAL PROCEEDINGS
We are involved in various legal proceedings of a nature considered normal to
our business including product liability and other matters. In the event of
adverse outcomes of these proceedings, we believe that resulting liabilities are
either covered by insurance, established reserves, or would not have a material
adverse effect on our financial condition or our results of operations.
B. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(1) Our Annual General Meeting of shareholders was held on February 19,
2002 in Belfast, Northern Ireland.
(2) All of the nominees for re-election as director to the board were
elected by a majority vote of shares. The re-elected directors are R.
Geoffrey Elliott and David Gibbons. Our other directors are Dr. John
A. King, Roger Boissonneault, Dr. Michael G. Carter and Dr. Harold A.
Ennis.
(3) The following matters were brought to vote:
i. The Report of the Directors and the Financial Statements for the
year ended September 30, 2001 together with the reports of the
auditors thereon were presented to the shareholders and were
approved with a majority vote of shareholders.
ii. PricewaterhouseCoopers was re-appointed as auditors to the
Company and the board of directors was authorized to fix the
remuneration of the auditors with a majority vote of
shareholders.
iii. The proposal to declare a final dividend of 1.66 pence per
ordinary share was presented to the shareholders and approved
with a majority vote.
iv. The proposal to confer upon the board of directors the authority
to allot relevant securities up to an aggregate nominal amount of
(pounds)6,060,823 was presented to the shareholders and approved
with a majority vote.
v. The proposal to disapply statutory pre-emption rights was
presented to the shareholders and approved with a majority vote.
29
vi. The proposal to grant authority for Galen to make market
purchases of its own shares was presented to the shareholders
and approved with a majority vote.
vii. The proposal to amend Galen's Articles of Association was
presented to the shareholders and approved with a majority vote.
viii. The proposal to amend the Company's share schemes was presented
to the shareholders and approved with a majority vote.
C. EXHIBITS AND REPORTS ON FORM 6-K OR 8-K
(i) EXHIBITS:
EXHIBIT NO. DESCRIPTION
For all Exhibits required under Rule 601 of Regulation S-K to be filed with a
Quarterly Report on Form 10-Q, please see the exhibits set forth on pages 74 and
75 of our U.S. 2001 Annual Report.
(ii) REPORTS ON FORM 6-K OR 8-K:
Our Form 6-K, dated February 14, 2002, contained our unaudited consolidated
financial statements for the three months ended December 31, 2001 and 2001, and
as of December 31, 2001.
Our Form 6-K, dated January 10, 2002, contained our news release announcing
our sale of our Chemical Synthesis Services business.
30
SIGNATURES
Pursuant to the requirements 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.
May 15, 2002 Galen Holdings PLC
/s/ R. G. Elliott
----------------------------------------
Name: R. G. Elliott
Title: Chief Financial Officer
31