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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, 1995
ALPHARMA INC.
(Exact name of registrant as specified in its charter)
Delaware 22-2095212
(State of Incorporation) (I.R.S. Employer Identification No.)
One Executive Drive, Fort Lee, New Jersey 07024
(Address of principal executive offices) zip code
(201) 947-7774
(Registrant's Telephone Number Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Name of each Exchange on
Title of each Class which Registered
Class A Common Stock, New York Stock Exchange
$.20 par value
Warrants to Purchase Shares New York Stock Exchange
of Class A Common Stock
Securities registered pursuant to Section 12 (g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed
all reports to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding twelve months (or for
such shorter period that the Registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days. YES X NO .
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will
not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ( )
The aggregate market value of the voting stock of the
Registrant (Class A Common Stock, $.20 par value) as of March
1, 1996 was $348,257,000.
The number of shares outstanding of each of the Registrant's
classes of common stock as of March 15, 1996 was:
Class A Common Stock, $.20 par value - 13,466,568 shares;
Class B Common Stock, $.20 par value - 8,226,562 shares.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Proxy Statement relating to the Annual Meeting
of Shareholders to be held on May 30, 1996 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
ALPHARMA INC., formerly called A. L. Pharma, Inc.,
(the "Company") is a multinational pharmaceutical company
engaged in developing, manufacturing and marketing specialty
generic and proprietary human pharmaceuticals and animal
health products. The Company maintains dual corporate
headquarters in Fort Lee, New Jersey and Oslo, Norway.
The Company was originally organized in 1975 as a
whollyowned subsidiary of Apothekernes Laboratorium A.S, a Norwegian
health care company established in 1903. In February 1984,
the Company's Class A Common Stock was initially listed
on the American Stock Exchange through a public offering and
such stock is currently listed on the New York Stock Exchange.
On October 3, 1994, the Company completed a transaction
(the "Combination Transaction") in which the Company
acquired the pharmaceutical, bulk antibiotic, animal health
and aquatic animal health businesses of Apothekernes
Laboratorium A.S (the "Related Norwegian Businesses").
Immediately following the closing, the Company changed its
trading symbol on the New York Stock Exchange to "ALO".
In order to accomplish the Combination
Transaction, Apothekernes Laboratorium A.S changed its name to
A.L. Industrier AS ("A.L. Industrier") and demerged the
Related Norwegian Businesses into a new Norwegian corporation
called Apothekernes Laboratorium AS (which changed its name
in January 1996 to ALPHARMA AS, hereinafter referred to
as "A.L. Oslo"). The Company then acquired the shares of
A.L. Oslo through a tender offer for $23.6 million plus warrants
to purchase 3,600,000 shares of the Company's Class A Common Stock,
par value $0.20 per share. The warrants have an exercise price of
$21.945, and expire on January 3, 1999. Warrants to purchase
2,450,246 shares of Class A common stock (out of the
3,600,000 total) became exercisable after October 3, 1995
with the remainder to become exercisable after
October 3, 1997. The Company filed a
registration statement with the Securities and
Exchange Commission ("SEC"), which became effective on
September 28, 1995, concerning the warrants and warrant shares
exercisable in 1995. In addition, the Company listed the
aforementioned warrants and warrant shares for trading and
quotation on the New York Stock Exchange as of October 9,
1995.
A.L. Industrier is the beneficial owner of 100% of
the outstanding shares of the Company's Class B Common Stock
and is able to control the Company through its ability to
elect more than a majority of the Board of Directors and to
cast a majority of the votes in any vote of the Company's
stockholders. A.L. Industrier's holdings of the Company's
Class B Common Stock account for approximately 38.0% of
the Company's total common stock outstanding at December 31,
1995.
Subsequent to the Combination Transaction, the Company
was reorganized into five operating divisions included in
two business segments, Human Pharmaceuticals and Animal Health.
The Human Pharmaceuticals segment consists of three operating
divisions: U.S. Pharmaceuticals("USPD"), International
Pharmaceuticals("IPD") and Fine Chemicals ("FCD"). The
Animal Health segment consists of two operating divisions,
Animal Health ("AHD") and Aquatic Animal Health("AAHD").
After the closing of the Combination Transaction,
each division was required to evaluate its business to
determine actions necessary to maximize the division's and
the Company's competitive position. As a result, in December
1994, the Board of Directors approved a plan and the
Company announced postcombination management actions which
included exiting certain businesses and product lines which
did not fit into the Company's new strategic direction,
severing certain employees employed in the businesses or
product lines to be exited or whose positions had become
redundant as a result of the acquisition and the sale or
exiting of certain support facilities which also became
redundant as a result of the acquisition (the "Post
Combination Actions"). A summary of the charges resulting from
these actions is included in Note 3 of the Notes to the
Consolidated Financial Statements included in Item 8 of this
report.
In the third quarter of 1995, the Company
announced additional post-combination management actions
which continued the process begun in December 1994. The
actions occurred in the third and fourth quarters of 1995
and included severance of certain employees company-wide,
further efforts toward consolidation of operations in the
USPD, the utilization of substantial consulting resources
focused primarily on accelerating the realization of certain
combination benefits in the IPD and the sale in September of
its minority equity position and certain other product rights
in an R & D company.
In 1996, the IPD has continued to take and
consider additional actions which are designed to further
strengthen the competitive nature of the division by lowering
costs. In the first quarter of 1996, the IPD severed 30
sales and marketing personnel (primarily in the Nordic
countries) and will incur termination related costs of
approximately $1.5 million. The Company also announced
that a preliminary study of production rationalization
alternatives between the IPD's Copenhagen, Denmark and
Lier, Norway manufacturing facilities has identified potential
benefits. Based on these findings, a detailed study is being
initiated which is expected to be completed in the second
quarter of 1996. The Company expects that the detailed
study will result in a formal rationalization proposal which
may result in charges for severance, write downs of fixed
assets, and other exit costs. Any such plan will require
approval by the Board of Directors.
In 1992, the Company's wholly owned Danish subsidiary,
Dumex Ltd, completed the sale of all its former Human
Nutrition businesses. Accordingly, financial information for
1992 and 1991 has been presented to reflect the Human
Nutrition segment as a discontinued operation.
Human Pharmaceuticals
U.S. Pharmaceuticals Division (the "USPD")
The USPD develops, manufactures and markets
specialty generic human pharmaceuticals in the U.S. The
division is managed by a single senior management team and
is comprised of four wholly-owned subsidiaries: Barre-
National, Inc. ("Barre"), NMC Laboratories, Inc. ("NMC"),
Able Laboratories, Inc. ("Able") and ParMed Pharmaceuticals,
Inc. ("ParMed"). Barre, acquired in October 1987, is the
leading U.S. manufacturer of liquid generic pharmaceutical
products. NMC, acquired in August 1990, is a specialized
pharmaceutical manufacturer and marketer of creams
and ointments for topical use, primarily prescription
products. Able, acquired in October 1992, is a manufacturer and
marketer of specialized prescription and over the counter
pharmaceuticals with an emphasis on suppositories and tablets.
ParMed, acquired in May, 1986, has its products manufactured by
drug manufacturers and sells primarily to independent retail
pharmacies utilizing advanced telemarketing techniques.
In March 1993, Barre acquired a pharmaceutical
manufacturing facility in Lincolnton, North Carolina
("Lincolnton"), including inventories, approved Abbreviated New
Drug Applications ("ANDA") and other related assets.
The facility is designed to
manufacture oral liquids and topical ointments and creams.
In addition, a multi-year supply agreement was signed which
provides for the sale of pharmaceutical products from the
USPD to the previous owner of Lincolnton, a major generic
drug distributor. The facility was expanded in 1994 and the
USPD expects future production capacity increases and the
realignment of production capacity to relocate the
manufacture of certain products to Lincolnton. The
USPD has announced that NMC cream, lotion and
ointment products and Able suppository products will
ultimately be moved to Lincolnton. The move, which requires
FDA approval for each ANDA transferred, is expected to take
18 to 24 months. In 1994 the Company announced its intention
to sell or close its Able tablet business. During 1995
divestiture negotiations were held with several potential
buyers and did not result in a sale. However, the Company
intends to continue to try to sell the tablet business in
1996 and if unsuccessful, may have to terminate tablet
operations.
During the formation and organization of the USPD in
late 1993 and 1994, management took a number of consolidating
actions. Sales and marketing functions of all the manufacturing
subsidiaries comprising the division were combined to
provide pharmaceutical purchasers greater access to a larger
portfolio of products. Research and development activities
were centralized in a modern facility at the Bayview
campus of Johns Hopkins
University in Baltimore, Maryland. In addition, the
USPD consolidated distribution from its four manufacturing
sites into one 165,000 square foot facility in Maryland to
better serve customers and improve inventory management.
International Pharmaceuticals Division (the "IPD")
The IPD develops, manufactures and markets a broad range
of generic and specialty dosage-form human pharmaceuticals,
oral health care products, adhesive bandages and surgical tapes
under proprietary brands primarily in the Nordic and other
Western European countries and Indonesia. The division is
managed by a single senior management team and business is
primarily conducted through two wholly-owned subsidiaries,
DUMEX-ALPHARMA A/S of Copenhagen, Denmark ("Dumex") and A.L.
Oslo and their respective subsidiaries. As indicated in the
general section, the IPD has in process and is considering
a further reorganization of its selling and marketing and
manufacturing operations.
Fine Chemicals Division (the "FCD")
The FCD develops, manufactures and markets
bulk pharmaceutical antibiotics to the pharmaceutical
industry worldwide. The products of the FCD constitute
the active substances in a large number of finished
pharmaceuticals. The division is managed by a single senior
management team and business is conducted through the Company
and its A.L.Oslo and Dumex subsidiaries.
Animal Health
Animal Health Division (the "AHD")
The AHD develops, manufactures and markets feed
additives and animal health products for animals raised for
commercial food production worldwide. The division's principal
feed additive is the antibiotic bacitracin methylene
disalicylate sold under the BMD trademark ("BMD"), which is
used to promote growth and feed efficiency and to prevent or
treat diseases in poultry and swine. In addition, as a result
of the Combination Transaction, the AHD also manufactures a
zinc bacitracin based feed additive sold under the
Albac trademark ("Albac"). Sales of the division's
products are made principally to commercial feed
manufacturers and swine and poultry producers through a staff
of scientifically trained sales and technical service
personnel. The division is managed by a single senior
management team and business is primarily conducted through
the Company, A.L. Oslo and certain other subsidiaries.
In August, 1995 the AHD acquired a company whose
principal asset was a New Animal Drug Application ("NADA") for a feed
additive used in the treatment and prevention of
respiratory diseases in swine.
In July 1994 the AHD acquired the Wade Jones Company,
Inc. ("Wade Jones"). Wade Jones is the major poultry animal
health products distributor in the U.S. and is also actively
involved in the development, manufacture and sale of its own
line of products including animal health pharmaceuticals and
feed additives.
In July 1991 the AHD acquired, in two
unrelated transactions, trademarks, New Animal Drug
Applications, other intangibles and inventory associated with
two product lines of growth promotants and disease
preventatives, the principal components of which are
commonly used in combination or sequentially with BMD.
Aquatic Animal Health Division (the "AAHD")
The AAHD develops, manufactures and markets vaccines for
use in immunizing farmed fish against disease. The AAHD
was the leading supplier of fish vaccines to the Norwegian
fish farming industry in 1995. The division is managed by a
single senior management team and business is conducted
through two whollyowned
subsidiaries, A.L. Oslo and ALPHARMA NW INC.
("NW")(formerly called Biomed, Inc.) of Bellevue,
Washington, which was acquired in July 1989.
As part of the Post Combination Actions, AAHD
has discontinued manufacture and marketing of one aquatic
animal health antibiotic product and will close a current
production facility in Tromso, Norway during 1996.
Financial Information About Industry Segments
The Company's two business segments are (1)
Human Pharmaceuticals and (2) Animal Health. The Company's
segments and their operating
divisions contributed the following percentages
of revenues.
1995 1994 1993
USPD 33% 37% 35%
IPD 28% 26% 28%
FCD 8% 7% 8%
Human Pharmaceuticals 69% 70% 71%
Animal Health * 31% 30% 29%
Total Revenues 100% 100% 100%
* Predominantly sales of AHD.
For additional financial information concerning
the Company's business segments see Note 19 of the Notes to
the Consolidated Financial Statements included in Item 8 of
this Report.
Narrative Description of Business
Human Pharmaceuticals
The human pharmaceuticals segment is comprised of three
of the five operating divisions of the Company, namely the
USPD, IPD and FCD.
U.S. Pharmaceuticals Division
The USPD develops, manufactures and markets
specialty generic human pharmaceuticals in the U.S. The
USPD is not dependent on a single customer or a few
customers. Generic pharmaceuticals are chemical equivalents
of drugs that are sold under established brands and that may
have been subject to patent protection.
Although typically less expensive, generic drugs
must meet the same regulatory standards for good
manufacturing practices, efficacy and safety as the
corresponding branded products.
The generic pharmaceutical industry is highly
competitive, with competition from companies specializing in
generic products as well as the branded and generic product
operations of the major
international pharmaceutical companies. Consequently,
profit margins on generic drug products tend to be reduced
as more competitors obtain the necessary approvals to
manufacture and sell such products from the U.S. Food and Drug
Administration (the "FDA").
In recent years generic pharmaceuticals have increased
their market share in the U.S. relative to branded
drugs. This increase is due to several factors including:
(i) state laws permitting and/or mandating substitution
of generics by pharmacists; (ii) pressure from managed
care and third party payors to encourage cost containment by
health care providers and consumers; and (iii) increased
acceptance of generic drugs by physicians, pharmacists and
consumers.
Since 1989 the U.S. pharmaceutical industry has been,
and continues to be, subject to an intense level of scrutiny
by the FDA and by members of Congress. As a result of actions
taken by the Company to respond to the progressively
more demanding regulatory environment in which it operates,
the operating income of the USPD's operations has been
negatively affected.
The Company has spent, and will continue to spend, significant
funds and management time on FDA compliance matters. In
1992 Barre concluded a binding agreement in the form of a
consent decree with the FDA which clarified Barre's
regulatory obligations (the "Consent Decree"). The Consent
Decree defines the standards Barre
must achieve in meeting Current Good Manufacturing
Practices ("CGMP"). In addition, USPD's Able operation is
also a party to an amended consent decree with the FDA
governing manufacturing operations in accordance with
CGMP. In this regard, Able has engaged in extensive
regulatory compliance
activities which have included discontinuing certain
products and making capital expenditures and increasing
operating expenditures for quality assurance and control.
As described above, the cost of actions, both direct
and indirect, taken by the Company with respect to meeting
regulatory requirements has negatively affected gross profit
and operating income. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations"
included in Item 7 of this report. Certain of these
higher costs will continue to be incurred.
The Company has been impacted in previous years by delays
in the receipt of approvals for new products and
supplemental approvals for certain existing products from
the FDA. The Company cannot predict whether future legislative or
regulatory developments might have an adverse effect on the
Company.
In July 1994, the USPD, in accordance with an industry
wide FDA directive discontinued marketing products to treat
respiratory congestion containing iodinated glycerol.
In 1994, sales of iodinated glycerol products
were approximately 2% of the Company's sales and the loss of
iodinated glycerol products negatively impacted the Company's
operations in 1995.
The USPD markets approximately 165 products, primarily
in liquid, cream, ointment and suppository dosage forms.
Each product represents a different formulation or chemical
entity. Products are sold in over 300 product presentations
and are marketed nationwide to pharmaceutical distributors,
merchandising chains and wholesalers under the "Barre" or
"NMC" labels and private labels. Prescription products are
sold by a divisional sales force. Over-the-counter products
are sold by the divisional sales force as well as by certain independent
sales representatives.
Liquid Pharmaceuticals: Through its Barre operation,
the USPD is the leading manufacturer of generic
pharmaceutical products in liquid form with
approximately 110 products. Most of the division's
liquid products are manufactured in its 255,000 square
foot facility in Baltimore, Maryland. The experience and
technical know-how of the USPD enables it to formulate
therapeutic equivalent drugs in liquid forms and to
refine product characteristics such as taste, texture,
appearance and fragrance.
Because of the importance to the USPD of cough and
cold remedies, this business is seasonal in nature. A
higher percentage of sales are made in the winter months and
are affected, from year to year, by the incidence of
colds, respiratory diseases and influenza in its
geographical market.
As with its other products, the USPD must obtain
FDA approval for new generic drugs it is developing.
In late 1995, the USPD received approval from the FDA
to manufacture and market Albuterol Sulfate Syrup
and Chlorhexidine Gluconate Oral Rinse 0.12%. In addition,
the USPD co-developed and received approval for
Albuterol Inhalation Solution 0.083%.
Creams, Lotions and Ointments: The USPD manufactures
approximately 50 cream, lotion and ointment products
for topical use. Most of these creams, lotions and
ointments are prescription products and include antibacterial,
antiinflammatory and combination products. The USPD
presently manufactures many of these creams, lotions
and ointments through its NMC operation in Glendale, New
York. Consistent with the other manufacturing
facilities of USPD, the NMC facility has been affected
by increased regulatory costs in its ongoing efforts to
comply with the FDA's interpretation of CGMP. As
previously mentioned herein, over the next 18 to 24
months, the company will transfer all of its creams,
lotion and ointment manufacturing to Lincolnton and
will close its NMC facility.
The creams, lotions and ointments market is
highly competitive and includes a number of
companies with significant market share. This market is
expected to grow significantly and a number of important
products will come off patent in the next few years.
In 1995, the USPD received approval from the FDA
to manufacture and market Betamethasone Dipropionate
Ointment USP (Augmented) 0.05%, Clobetasol Propionate
Topical Scalp Application Solution 0.05%, and
Fluocinonide Emulsified Cream 0.05%. In addition, the
FDA approved supplements to the existing approvals for
Gentamicin Cream and Ointment 0.1% and to Triple Sulfa
Vaginal Cream.
Suppositories and Other Specialty Generic Products:
During 1995, the USPD suppositories and other products
consisted of 5 products. In addition, the USPD also
manufactures and/or markets certain other specialty
generic products, including Epinephrine Mist and a Home
Pregnancy Test Kit.
In late February 1995, the USPD received FDA approval
to manufacture and market three strengths of
Acetaminophen Suppositories USP, 120 mg., 325 mg.
and 650 mg.
In addition, USPD also began commercial sale of
Miconazole Nitrate Vaginal Suppositories 200 mg. in
January 1995.
Through its ParMed operation, the USPD distributes a line
of over 1800 generic prescription and over-the-
counter pharmaceutical product presentations and offers certain
custom marketing services (such as telemarketing, order
processing and distribution) to the pharmaceutical industry.
The largest part of ParMed's sales are made to U.S.
independent retail pharmacies. A substantial majority of
ParMed's sales are made through a 45 person telemarketing
sales force. ParMed's products are manufactured by drug
manufacturers who package and label products for ParMed.
ParMed also markets USPD products bearing the
"Barre", and "NMC" labels. In addition, a special group
of telemarketers is dedicated to marketing USPD products
to retailers and institutional pharmacies (such as those in
nursing homes). Due to the fact that ParMed does not
manufacture its products, ParMed may be affected from time to time due to
recalls of products by its suppliers.
International Pharmaceuticals Division
The IPD develops, manufactures and markets a broad range
of generic and specialty dosage-form human pharmaceuticals,
oral health care products, adhesive bandages and surgical tapes
under proprietary brands primarily in the Nordic and other
Western European countries, Indonesia and the Middle East.
The IPD conducts its business primarily in Scandinavian and
U.S. Dollar denominated currencies (or currencies which
generally fluctuate with the U.S. Dollar).
Dosage-Form Pharmaceuticals: Substantially all of the
dosage form pharmaceutical products sold by the IPD in the Nordic
Countries, Western Europe and the Middle East are
manufactured at its facilities in Lier, Norway and
Copenhagen, Denmark. The IPD is presently preparing a
detailed study of production rationalization alternatives
between the Copenhagen, Denmark and Lier, Norway
manufacturing facilities. Products sold in Indonesia are
manufactured at its facility in Jakarta, Indonesia. The
facility at Lier, Norway was designed with a view towards
meeting the FDA's CGMP standard. However, given that the
facility's current production is not exported to the U.S.,
the Company has not initiated the process to cause the
facility to be in compliance with the FDA's interpretation
of CGMP.
The IPD has a broad range of dosage-forms, including tablets,
ointments, creams, and liquid and injectable preparations for
many different therapies with a concentration on prescription
drug antibiotics, analgesics/antirheumatics and psychotropics,
over-the-counter skin care, gastrointestinal and analgesic
products.
The principal geographical markets for the IPD's dosage-form
pharmaceutical products are the Nordic and other Western
European countries as well as Indonesia and certain Middle
Eastern countries. The IPD employs a specialized sales
force which markets and promotes dosage-form products to
doctors, hospitals, pharmacies and consumers. In each of
its markets, the IPD uses wholesalers to distribute its
pharmaceutical products.
The pharmaceutical business is highly competitive, and many
of IPD's competitors are substantially larger and have
greater financial, technical and marketing resources than
the IPD. Most of the IPD's pharmaceutical products compete
with one or more products of other companies which contain
the same active ingredient.
The development, manufacture and marketing of IPD
pharmaceutical products is subject to comprehensive
government regulation both in Norway, Denmark and in other
countries where the products are manufactured and marketed.
Government regulation includes detailed inspection of and
controls over manufacturing and quality control practices
and procedures, requires approvals to market products and
can result in the recall of products and the suspension of
production. Such government regulation substantially
increases the cost of producing pharmaceutical products.
Regulatory approvals are required before any new
prescription or over-the-counter drug can be marketed.
In Denmark and Norway, the IPD's pharmaceutical products are
beginning to encounter price pressures from parallel imports
(i.e. imports of competing products from neighboring
countries). The IPD believes that it is likely that
parallel imports may be a developing trend in other markets
in which the IPD sells its dosage-form pharmaceuticals.
Such parallel imports could lead to lower volume growth and
downward pressure on prices in certain product and market
areas.
In the Nordic countries in recent years, there has been an
increase in volume of sales of generic pharmaceuticals
relative to original pharmaceuticals. This increase in
market share is primarily a result of government initiatives
to reduce pharmaceutical expenses through new regulations
which promoted generic pharmaceuticals in lieu of original
formulations. However, the increased focus on the
regulation of pharmaceutical prices may lead to increased
competition and price pressure for suppliers of all types of
pharmaceuticals.
The pharmaceutical business of the IPD also includes oral
health care products. The two primary oral health care
products are Elyzol Dental Gel for the treatment of
periodontal disease and Flux sodium fluoride tablets.
In 1995 significant expenses continued to be incurred for an
administrative, selling and marketing infrastructure to
promote Elyzol Dental Gel and for continuing research and
development work, including the preparation of a New Drug
Application to be submitted for Elyzol Dental Gel in the
United States. IPD management is continuing to study
alternative marketing arrangements for the product which
include obtaining marketing partners in some geographical
areas. The Company considers the Elyzol Dental Gel product
to be in the developmental phase and expects to continue to
incur expenses in excess of revenues during 1996.
Adhesive Bandages and Surgical Tapes: The IPD manufactures
adhesive bandages, surgical tapes and non-medical tapes
under its proprietary Norgesplaster brand, and is the only
manufacturer of adhesive bandages and surgical tapes in the
Nordic countries. Its most significant market is Norway,
where it is the leading supplier in the industry. These
products are sold to consumers and hospitals through
pharmacies and other retail outlets. The IPD's production
facility is located at Vennesla, Norway, which is 320 km
southwest of Oslo.
Fine Chemicals Division
The FCD develops, manufactures and markets bulk
pharmaceutical antibiotics to the pharmaceutical industry
worldwide. The products of the FCD constitute the active
substances in a large number of finished pharmaceuticals,
including finished pharmaceuticals for the treatment of certain
skin, throat, intestinal and systemic infections. Bacitracin,
Zinc Bacitracin and Polymyxin are the most significant products
for the FCD, which believes it is the world's largest
manufacturer and supplier of such products. The division also
manufactures other antibiotics such as Vancomycin, Amphotericin B
and Colistin for use systemically and in specialized topical and
surgical human applications. In addition, the FCD markets other
well-established bulk antibiotics, such as Gramicidin and
Tyrothricin, which are contract manufactured for the division by
a Danish company.
The FCD manufactures its products in its plants in Oslo,
Norway and Copenhagen, Denmark. Both plants include
fermentation, specialized recovery and purification equipment.
Both facilities have been approved as a manufacturer of sterile
and non-sterile bulk antibiotics by the FDA and by the health
authorities of European countries. The manufacturing methods,
quality control procedures and quality assurance systems for the
production of such antibiotics are subject to periodic
inspections by regulatory agencies.
Animal Health
Since the completion of the Combination Transaction on
October 3, 1994, the Animal Health segment is comprised of two
of the operating divisions of the Company, namely the AHD and the
AAHD.
Animal Health Division
The AHD develops, manufactures and markets feed additives
and animal health products for animals raised for commercial food
production worldwide. The AHD's principal animal health product
is BMD, a feed additive, which is used to promote growth and feed
efficiency and prevent or treat diseases in poultry and swine.
In addition, the AHD also manufactures and markets a feed
additive for poultry, swine and calves sold under the Albac
trademark. Albac is produced in granulated, powder and
lactodispersible forms and contains a special grade of zinc
bacitracin as its active ingredient.
In 1991, the Company purchased two animal health lines which
are commonly used in combination or sequentially with BMD. These
products include 3-Nitro, Histostat, Zoamix, Mycostatin, and
chlortetracycline ("CTC"), a feed grade antibiotic. The AHD also
manufactures and sells Vitamin D3; and other feed additives which
are used for poultry and swine.
The AHD presently sells a major portion of its volume in the
U.S. However, with the recent opening of sales offices in
Canada, Latin America, and the Far East, coupled with the
international scope of the animal health business acquired in the
Combination Transaction, the AHD has increased its manufacturing
and marketing capabilities outside the U.S. and expects
international sales to increase in the future.
Historically, the principal market for BMD has been the
poultry segment of the feed additives business in which it is one
of the leading products. The AHD continues to increase its
marketing efforts with respect to the swine segment of the
market, which is more fragmented than the poultry market.
Effective August 1994, the AHD completed a distribution
arrangement with Merck AgVet, a division of Merck & Co., Inc.
whereby the AHD assumed all sales, marketing and distribution
functions for Merck AgVet's poultry products line in the U.S.
However, Merck AgVet recently notified the AHD that it intends to
sell its poultry products line to a third party and it is unclear
at this time as to whether this agreement will continue with the
new purchaser of such business.
Sales of the AHD's products in the U.S., Canada and Mexico
are made principally to commercial feed manufacturers and
integrated swine and poultry producers through a staff of
technically trained sales and technical service personnel located
throughout the country. Sales of the AHD's products outside
North America are made primarily through the use of distributors
and sales companies.
The AHD produces BMD at its Chicago Heights, Illinois
facility, which includes a modern fermentation and recovery
plant. During recent years, the Chicago Heights facility's
capacity has increased and it has operated at or near capacity.
In the Combination Transaction the Company acquired the
technology to manufacture BMD which it previously licensed from
A.L. Industrier.
The Albac product is manufactured at the division's Skoyen
facility in Oslo, Norway. The 3-Nitro product line is
manufactured in accordance with a ten year agreement using AHD
technology at an unrelated company's facility in Charles City,
Iowa. The contract requires the AHD to purchase minimum yearly
quantities on a cost plus basis. CTC is purchased primarily from
foreign suppliers and blended domestically.
In August 1995, the AHD acquired a company whose principal
asset was a NADA for a feed additive used in the treatment and
prevention of respiratory diseases in swine.
In July 1994, the AHD acquired Wade Jones Company, Inc.
Wade Jones is the major poultry animal health products
distributor in the U.S. and is also actively involved in the
development, manufacture and sales of its own line of products
including animal health pharmaceuticals and feed additives.
Approximately ninety percent (90%) of all products sold by the
AHD in the U.S. in 1995 to the poultry industry were distributed
by Wade Jones.
The animal health industry is highly competitive and
includes a large number of companies with greater financial,
technical and marketing resources than the Company. These
companies offer a wide range of products with various therapeutic
and growth stimulating qualities. Competition is also affected
by the issuance of regulatory approvals for similar or competing
products (particularly in the U.S.) and the availability of
generic versions of certain products. The Company believes that
its competitive position in the animal health business has been
enhanced because BMD and Albac are not absorbed into animal
tissues. The FDA does not require BMD and Albac to be withdrawn
from feed prior to the marketing of the food animals. Certain
tests have also shown that BMD and Albac do not tend to produce
resistance in bacteria which is a characteristic of some
competitive products.
Aquatic Animal Health Division
The AAHD develops, manufactures and markets vaccines for use
in immunizing farmed fish against disease. The Company
originally entered the aquaculture business with the purchase of
NW in 1989. This base business was expanded after the
Combination Transaction with the acquisition of A.L. Oslo's fish
health business. Presently, the AAHD is the leading supplier of
vaccines for farm raised salmon in Norway, which is the largest
market for the farming of salmon and other cold water species of
fish. In 1995, approximately 75% of the revenues of the AAHD
were generated from the Norwegian market. The Company believes
that the share of sales from markets outside Norway will increase
in the future as the division continues to expand its sales
efforts internationally.
The AAHD maintains two manufacturing locations, Bellevue,
Washington and Overhalla, Norway. The Overhalla facility was
purchased by the AAHD in November 1994 and presently manufactures
ringworm vaccines for cattle and listeriosis vaccines for sheep
and goats. The AAHD is currently involved in a major capital
investment to enable the Overhalla facility to manufacture
aquaculture products using state of the art technology. Such
project is expected to be completed in the second half of 1996.
Competition in the aquatic animal health industry is
characterized by relatively few competitors. However, the
industry is subject to rapid technological change. As a result,
new techniques and products developed by competitors could cause
the AAHD products to become obsolete if the division was unable
to match technological improvements.
Research, Product Development and Technical Activities
Scientific development is important to each of the Company's
business segments. The Company's research, product development
and technical activities in the Human Pharmaceuticals segment
within the U.S., Norway and Denmark concentrate on the
development of generic equivalents of established branded
products as well as discovering creative uses of existing drugs
for new treatments and on compiling the necessary data to obtain
government approvals. The Company's research, product
development and technical activities also focus on developing
proprietary drug delivery systems and on improving existing
delivery systems and packaging and manufacturing techniques. In
view of the substantial funds which are generally required to
develop new chemical drug entities the Company has not emphasized
such activities. The Company's technical development activities
for the Animal Health segment involve extensive product
development and testing for the primary purpose of establishing
clinical support for new products and additional uses for or
variations of existing products and seeking related FDA and
analogous governmental approvals.
Generally, research and development are conducted on a
divisional basis. The Company conducts its technical product
development activities at its facilities in Copenhagen, Denmark,
Oslo, Norway, Baltimore, Maryland, Bellevue, Washington and
Chicago Heights, Illinois, as well as through independent
research facilities in the U.S.
Significant research and development projects in progress
include: A project to conduct clinical trials as part of the new
drug approval process in the U.S. for Elyzol Dental Gel (a
product for the treatment of the gum disease periodontitis), a
project to obtain FDA approval for Albuterol metered dose
inhalant products, and a project to obtain FDA approval for a
gram negative antibiotic which will be used as an injectable
treatment for respiratory and systemic diseases in broilers and
cattle.
Research and development expenses were approximately
$ 32.8 million, $32.5 million and $24.0 million in 1995, 1994 and
1993, respectively.
Financial Information About Foreign and Domestic Operations and
Export Sales
The Company derives a substantial portion of its revenues
and operating income from its foreign operations. Revenues from
foreign operations accounted for over 40% of the Company's
revenues in 1995. For certain financial information concerning
foreign and domestic operations see Note 19 of the Notes to the
Consolidated Financial Statements included in Item 8 of this
Report. Export sales from domestic operations were not
significant.
The Company's foreign operations are subject to various
risks which are not present in domestic operations, including, in
certain countries, currency exchange fluctuations and
restrictions, restrictions on imports, government price controls,
restrictions on the level of remittance of dividends, interest,
royalties and other payments, the need for governmental approval
of new operations, the continuation of existing operations and
other corporate actions, political instability, the possibility
of expropriation and uncertainty as to the enforceability of
commercial rights, trademarks and other proprietary rights.
Regulation; Proprietary Rights
The development, manufacturing and marketing of the
Company's products are subject to comprehensive government
regulation in the U.S., Norway, Denmark and other countries.
Government regulation includes detailed inspection of and
controls over manufacturing practices and procedures, requires
approvals to market products and can result in the recall of
products and suspension of production. Such government
regulation substantially increases the cost of producing human
pharmaceutical and animal health products. FDA approval is
required before any new prescription or over-the-counter drug
products or any animal health drug can be marketed in the U.S.
Analogous governmental and agency approvals are similarly
required before such products are marketed in other countries.
These government approvals are therefore very important to both
the Human Pharmaceuticals and Animal Health segments.
Continuing studies of the proper utilization, safety, and
efficacy of pharmaceuticals and other health care products are
being conducted by industry, government agencies and others.
Such studies, which increasingly employ sophisticated methods and
techniques, can call into question the utilization, safety and
efficacy of previously marketed products and in some cases have
resulted, and may in the future result, in the discontinuance of
their marketing and, in certain countries, give rise to claims
for damages from persons who believe they have been injured as a
result of their use.
The Company's manufacturing operations are required to
comply with CGMP as interpreted by the FDA and, in countries
outside the U.S., with similar regulations. This concept
encompasses all aspects of the production process, including
validation and record keeping, and involves changing and evolving
standards. Consequently, continuing compliance with CGMP is a
particularly difficult and expensive part of regulatory
compliance.
The evolving and complex nature of regulatory requirements,
the broad authority and discretion of the FDA and analogous
foreign agencies, and the generally increased level of regulatory
oversight have resulted in a higher possibility that from time to
time the Company will be adversely affected by regulatory actions
despite its ongoing efforts and commitment to achieve and
maintain full compliance with all regulatory requirements.
In many countries in which the Company does business,
including some of the Scandinavian countries, the initial prices
of pharmaceutical preparations for human use are dependent upon
governmental approval or clearance under governmental
reimbursement schemes usually based on costs or prices of
comparable products and subsequent price increases may also be
regulated. In the past three years, as part of overall programs
to lower health care costs, certain European governments have not
allowed price increases and have introduced various systems to
lower prices. As a result, cost increases and/or lower revenues
due to exchange rate fluctuations have not been recovered.
Environmental Matters
The Company believes that it is substantially in compliance
with all presently applicable federal, state and local provisions
regulating the discharge of materials into the environment, or
otherwise relating to the protection of the environment. During
1995, the Company's Barre subsidiary received and responded to a
Notice of Potential Liability and Request for Information on a
site owned by Ramp Industries, an unaffiliated third party.
Barre historically made one small shipment to the site and no
material expenditures are expected to be made in conjunction with
this matter. Although many major capital projects typically
include a component for environmental control, including the
Company's current expansion projects, no material expenditures
specifically for environmental control are expected to be made in
1996.
Employees
As of December 31, 1995, the Company had approximately 2,788
employees, including 1,373 in the U.S. and 1,415 outside of the
United States.
Item 1A. Executive Officers of the Registrant
The following is a list of the names and ages of all of the
Company's corporate officers and certain officers of each of the
Company's principal operating units, indicating all positions and
offices with the Registrant held by each such person and each
such person's principal occupations or employment during the past
five years.
Each of the Company's corporate officers has been elected to
the indicated office or offices of the Registrant, to serve as
such until the next annual election of officers of the Registrant
(expected to occur May 30, 1996) and until his successor is
elected, or until his earlier death, resignation or removal.
Name and Position Principal Business Experience
with the Company Age During the Past Five Years
E.W. Sissener 67 Chief Executive Officer since
Chairman, Director and June 1994. Member of the
Chief Executive Officer Office of the Chief Executive
of the Company July 1991 - May
1994. Chairman of the Company
since 1975. President of
ALPHARMA AS (formerly
Apothekernes Laboratorium AS)
since October 1994. President
of A.L. Industrier AS from 1972-
1994. Chairman of A.L.
Industrier AS since November
1994.
Jeffrey E. Smith 48 Chief Financial Officer and
Vice President, Finance Vice President since May 1994.
and Chief Financial Executive Vice President and
Officer Member of the Office of the
Chief Executive July 1991 May
1994. Vice President, Finance
of the Company from November
1984 to July 1991.
Beth P. Hecht 32 Corporate Counsel of the
Secretary and Corporate Company since June 1993;
Counsel Secretary of the Company since
November 1993; Attorney with
the law firm of Kirkland &
Ellis 1990-1993.
Albert N. Marchio, II 43 Treasurer of the Company since
Treasurer May 1992; Treasurer of Laura
Ashley, Inc. 1990-1992.
David E. Cohen 41 President of the Company's
Vice President and Animal Health Division since
President, Animal Health October 1994; President,
Division Animal Health Division of
A. L. Laboratories, Inc.
September 1988-October 1994.
George S. Barrett 40 President of the Company's
Vice President and U.S. Pharmaceuticals Division
President, U.S. since 1993; President of Barre-
Pharmaceuticals Division National since August 1991;
President of NMC since August
1990; Vice President, Operations
of NMC, 1984 to August 1990.
Thor Kristiansen 52 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 45 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 51 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
The Company's principal production and technical development
facilities are located in the United States, Denmark, Norway and
Indonesia. The Company also owns or leases offices and
warehouses in the United States, Sweden, Holland, Finland and
elsewhere.
FACILITY
LAND SIZE
LOCATION TITLE (acres) (sq. USE
ft.)
Fort Lee, NJ Leased -- 48,000 Office - dual
ALPHARMA INC.
corporate office and
AHD Headquarters
Skoyen, Norway Leased -- 204,400 Manufacturing of
AHD and FCD products,
dual ALPHARMA INC.
corporate office and
headquarters for IPD,
FCD and AAHD.
Chicago Owned 20 195,000 Manufacturing,
Heights, IL warehouse, R&D and
offices for AHD
Bellevue, WA Leased -- 20,000 Manufacturing,
warehouse,
laboratory and
offices for AAHD
Baltimore, MD Owned 19 255,000 Manufacturing, and
headquarters for
USPD
Baltimore, MD Leased -- 18,000 Research and
Development for USPD
Columbia, MD Leased -- 165,000 Central
Distribution Center
for USPD
Lincolnton, NC Owned 13 138,000 Manufacturing and
offices for USPD
Glendale, NY Leased -- 78,000 Manufacturing and
offices for USPD
Lowell, AK Leased -- 68,000 Manufacturing,
warehouse and
offices for AHD
Niagara Falls, Owned 2 30,000 Warehouse and
NY offices for USPD
South Leased -- 60,000 Manufacturing and
Plainfield, NJ offices for USPD
Lier, Norway Owned 23 118,400 Manufacturing of
IPD products,
warehousing and
offices
Overhalla, Owned 1 12,900 Manufacturing of
Norway vaccines,
warehousing and
offices for AAHD
Vennesla, Owned 4 81,300 Manufacturing of
Norway adhesive bandages
and surgical tapes,
warehousing and
offices for IPD
Copenhagen, Owned 10 425,000 Manufacturing,
Denmark warehouse, R&D and
offices for IPD and
FCD
Jakarta, Owned 5 80,000 Manufacturing,
Indonesia building warehouse, R&D and
leased offices for IPD
land
The Company believes that its principal facilities described
above are generally in good repair and condition and adequate and
suitable for the products they produce.
Item 3. Legal Proceedings
On September 13, 1982, the Company filed at the FDA a "Citizen
Petition" requesting the agency to reconsider and rescind its approval
of a new animal drug application ("NADA") filed by Philips Roxane,
Inc. ("PRI") for the use of Bacitracin Zinc in animal feeds for growth
promotion. PRI is now a subsidiary of Boehringer Ingleheim Animal
Health Inc. The Citizen Petition contended that FDA's approval was
invalid and improper in several respects. FDA denied the Citizen
Petition on May 9, 1984, and the Company filed an action for judicial
review in the U.S. District Court for the District of Columbia (the
"Action") seeking to have FDA's denial of the Citizen Petition set
aside. Subsequent administrative proceedings also resulted in FDA
decisions denying the relief sought. The complaint in this Action was
amended to challenge FDA's decisions on these subsequent proceedings.
The parties filed cross-motions for summary judgment and the U.S.
District Court granted FDA's motion for summary judgment to dismiss
the Action. The Company appealed this decision to the U.S. Court of
Appeals for the District of Columbia. On August 25, 1995, the Court
of Appeals held that FDA had not provided a reasonable explanation to
support its finding of safety and efficacy of the PRI Bacitracin Zinc.
The Court's order gave the FDA 90 days to provide a satisfactory
explanation. On October 27, 1995, the FDA sent to the Company's
counsel a letter containing its explanation and filed this letter in
the U.S. District Court, together with a Memorandum arguing that it
had complied with the Court of Appeals' remand. The Company filed an
opposing Memorandum arguing that FDA's purported explanation did not
meet the terms of the Court of Appeals order. Oral argument was held
in the District Court on November 29, 1995. Thereafter, on December
4, 1995, the District Court issued an order continuing the PRI NADA
pending a decision by it as to whether the FDA's explanation was
reasonable. The matter remains pending before the District Court.
From time to time the Company is involved in certain non-material
litigation which is ordinarily found in businesses of this type,
including product liability, contract and employment 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 1995 and 1994
sales prices of the Company's Class A Common Stock are set forth in
the table below.
Stock Trading Price
1995 1994
Quarter High Low High Low
First $23.13 $19.25 $16.88 $14.00
Second $24.00 $16.50 $16.25 $13.00
Third $23.33 $17.25 $17.25 $12.63
Fourth $26.38 $21.38 $20.63 $15.63
As of December 31, 1995 and March 1, 1996 the Company's stock
closing price was $26.125 and $25.875, respectively.
Warrants to purchase the Company's Class A Common Stock with an
exercise price of $21.945 and expiring on January 3, 1999 commenced
trading on the NYSE in October 1995 with an initial trade of $7.00. At
December 31, 1995 and March 1, 1996, the closing price of the
Company's warrants was $11.00 and $9.00, respectively.
Holders
As of March 1, 1996, there were 1,059 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 1995 and 1994 were $.045 per
quarter or $.18 per year.
Item 6. Selected Financial Data
The following is a summary of selected financial data for the
Company and its subsidiaries. Financial data for prior years has been
restated to reflect the 1994 combination with A.L. Oslo as a pooling
of interests. The data for each of the three years in the period ended
December 31, 1995 have been derived from, and all data should be read
in conjunction with, the audited consolidated financial statements of
the Company, included in Item 8 of this Report. All amounts are in
thousands, except per share data.
Years Ended December 31,
Income Statement Data (1) 1995 1994(3) 1993 1992 1991
Total revenue $520,882 $469,263 $402,675 $358,632 $301,814
Cost of sales 302,127 275,543 233,423 194,665 162,523
Gross profit 218,755 193,720 169,252 163,967 139,291
Selling, general and
administrative
expenses 166,274 177,742 139,038 128,658 122,175
Operating income 52,481 15,978 30,214 35,309 17,116
Interest expense (21,993) (15,355) (14,996) (18,534) (15,070)
Other income, net (260) 1,113 1,880 3,937 5,961
Income from continuing
operations before
taxes 30,228 1,736 17,098 20,712 8,007
Provision for taxes 11,411 3,439 6,969 7,161 3,389
Income (loss) from
continuing operations $ 18,817 $ (1,703) $ 10,129 $ 13,551 $ 4,618
Net income (loss)(2) $ 18,817 $ (2,386) $ 10,129 $ 20,974 $ 9,120
Average number of
shares outstanding:
Primary 21,754 21,666 21,581 18,388 17,050
Fully Diluted 22,407 21,666 21,581 21,568 21,611
Earnings per share:
Fully diluted
Income (loss) from
continuing operations $ .84 $ (.08) $ .47 $ .74 $ .27
Net income (loss) $ .84 $ (.11) $ .47 $ 1.09 $ .54
Dividend per common
share $ .18 $ .18 $ .18 $ .18 $ .16
(1) Includes results of operations from date of acquisition of the Wade Jones
Company (July 1994), the Lincolnton facility (March 1993), Norgesplaster A/S
(January 1993), and Able Laboratories, Inc. (October 1992). Reflects the
adoption of Statement of Financial Accounting Standards No. 109 and No. 106
effective January 1, 1992 and January 1, 1993, respectively.
(2) Net income includes: 1994 - extraordinary item - loss on extinguishment of
debt ($683); 1992 - cumulative effect of a change in accounting for income taxes
- - $2,614; 1992 and 1991 - Income from discontinued Human Nutrition Segment -
$4,809 and $4,502, respectively.
(3) 1994 includes transaction costs relating to the combination with A.L. Oslo
and post-combination actions which are included in cost of goods sold
($450) and selling, general and administrative ($24,200). Amount net after
tax of approximately $17,400.
As of December 31,
Balance Sheet Data (1) 1995 1994 1993 1992 1991
Current assets $282,886 $250,499 $202,913 $178,283 $187,416
Non-current assets 351,967 341,819 324,704 302,730 301,140
Total assets $634,853 $592,318 $527,617 $481,013 $488,556
Current liabilities $169,283 $154,650 $139,205 $107,015 $125,697
Long-term debt,
less current
maturities 219,451 220,036 144,350 133,701 196,103
Deferred taxes and
other non-current
liabilities 40,929 36,344 40,129 33,454 28,449
Stockholders' equity(2) 205,190 181,288 203,933 206,843 138,307
Total liabilities
and equity $634,853 $592,318 $527,617 $481,013 $488,556
(1) Includes accounts from date of acquisition of the Wade Jones
Company (July 1994), the Lincolnton facility (March 1993),
Norgesplaster A/S (January 1993), and Able Laboratories, Inc.
(October 1992) and the conversion of the Convertible Subordinated
Debentures in 1992.
(2) 1994 reflects acquisition of A.L. Oslo accounted for as a pooling of
interests with cash purchase price deducted from stockholders'
equity.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Overview
1995 was the first full year of combined operations for
ALPHARMA INC. after the significant changes which occurred
in 1994. The following major events occurred in 1994 which
had a continuing ongoing effect on the Company's operations
and financial position.
- The Company acquired the related Norwegian
Human Pharmaceutical and Animal Health businesses
("A.L. Oslo") of its controlling shareholder for
$23.6 million and warrants to purchase 3.6
million shares of the Company's Class A Common
Stock. The combination was accounted for in a
manner similar to a pooling of interests since the
companies were under common control. All prior
financial statements were restated to
include A.L. Oslo and the following discussion
reflects such restatement.
- The Company changed its name from A.
L. Laboratories, Inc. to A.L. Pharma Inc.
(simplified to ALPHARMA INC. in 1995) and
reorganized its business into two main segments. The
Human Pharmaceuticals Segment ("HPS") includes
the International Pharmaceuticals Division
("IPD"), the U.S. Pharmaceuticals
Division ("USPD") and the Fine Chemicals Division
("FCD"), and the Animal Health Segment ("AHS")
includes the Animal Health Division ("AHD") (both
U.S. and International) and the Aquatic Animal
Health Division ("AAHD").
- The Company incurred significant charges as
follows:
- Direct transaction expenses relating to the
acquisition of A.L. Oslo including special
committee fees, investment banking, legal,
accounting and other expenses - $2.9 million
after tax.
- Post-combination management actions which
resulted in charges for severance, exiting of
certain businesses and product lines and other
related actions - $14.5 million after tax.
- The Company obtained a $185.0 million
credit facility to purchase A.L. Oslo,
refinance a significant amount of existing long and
short term debt and for general corporate
purposes. The refinancing of existing debt
resulted in an extraordinary item for a loss on
debt extinguishment of $.7 million after tax.
In 1995 the Company continued to review and rationalize
operations to strengthen its competitive position and
prepare for future growth. The Company believes it is still
in transition in its goal of optimization and believes that
further actions and related charges may be required in 1996
and beyond. The following occurred in 1995 and had an effect
on operations:
- The Company announced third and fourth
quarter management actions which included pre-tax
income from the sale of an equity position and
other rights in an R&D company ($6.5 million)
essentially offset by expenses for significant
consulting costs incurred in the IPD ($4.6
million) and further charges for severance in IPD,
USPD and AHD ($1.7 million).
On a comparative basis excluding post-combination
management actions operating income by segment for the three
years was as follows (in millions):
HPS AHS Unallocated Total
Operating income*
1995 $25.5 $31.4 $(4.6) $52.3
Operating income*
1994 $15.2 $30.5 $(5.0) $40.7
Operating income
1993 $ 8.6 $28.8 $(7.2) $30.2
* Excludes post-combination management actions which
are detailed in the year on year analysis.
Results of Operations - 1995 Compared to 1994
Total revenue increased to $520.9 million in 1995
compared to $469.3 million in 1994. Operating income, net
income and earnings per share all increased substantially in
1995 as 1994 included significant transaction expenses and
post-combination management actions. As a result, the
Company reported net income of $18.8 million ($.84 per share
fully diluted) in 1995 versus a loss of $2.4 million in 1994
($.11 loss per share).
Revenue in the Human Pharmaceuticals Segment accounted
for $29.3 million of the consolidated revenue increase. The
IPD accounted for the major portion of the HPS increase. IPD
revenues increased due to volume growth in Northern Europe
and Indonesia, the translation of sales in Norwegian Kroner
("NOK") and Danish Kroner ("DKK") into the U.S. Dollar and
to a lesser extent selected price increases where permitted.
Current pricing in a number of European markets continues to
be suppressed in part by legislation enacted to contain
pharmaceutical costs. Oral Health Care ("OHC") revenues
increased over $1.0 million compared to 1994 and due to
increased R&D expenses the operating loss was approximately
the same as 1994. Sales by the FCD were approximately the
same as in 1994 in local currencies but increased when
translated into U.S. Dollars.
Revenues in the USPD were flat on a year to year basis.
Increases in sales of products introduced in late 1994 and
1995 (including Cimetidine HCL Solution, Clobetasol Cream
and Ointment, Clemastine Fumarate Syrup and a number of
other over the counter and prescription products), some
price increases and increased volume in a number of products
were offset by declines in the volume of cough and cold
products sold due to a mild flu season in early 1995 as well
as the discontinuance of products containing iodinated
glycerol in July of 1994.
Animal Health Segment revenues increased primarily due
to the acquisition of the Wade Jones Company, Inc. in July
1994. In addition, revenue increases were achieved due to
higher sales internationally and, to a lesser extent,
domestically, of disease preventative products used in
poultry markets and sales of products made pursuant to a
poultry products distribution agreement signed with Merck
AgVet in July 1994. The Company has been informed that Merck
AgVet may sell the poultry products line. If it is sold the
distribution agreement may be renegotiated. BMDr sales
increased marginally with volume gains in poultry markets,
offset by lower volume in the domestic swine market which
was impacted by adverse economic conditions experienced by
pork producers. The AAHD sales of fish vaccines were lower
than 1994 due to increased competition in the Norwegian
salmon farming market, offset partially by sales of newly
introduced trout and other vaccines.
On a consolidated basis gross profit increased $25.0
million and the gross margin percent increased to 42.0% in
1995 compared to 41.3% in 1994.
Gross profit dollars in HPS accounted for a substantial
amount of the dollar increase due to increased sales volume
(especially by the IPD), production efficiencies, the effect
of translation of gross profits in DKK and NOK into U.S.
Dollars for both the IPD and FCD and selected price
increases partially offset by the elimination of sales of
high margin iodinated glycerol products. Gross profit
percentages improved in HPS as a result of increases in
gross margin percentages and amounts in IPD and FCD which
have higher than the prior years average gross margin
percentage. Accordingly, the overall percentage increase is
attributable to the HPS.
Gross profit dollars in the Animal Health Segment
increased at a rate lower than the sales increase. The gross
profit percent declined due to sales increases attributable
to the Wade Jones Company, Inc., a distributor to the
poultry market, and sales made pursuant to a poultry product
distribution agreement with Merck AgVet. The composition of
Animal Health Division sales has changed with the addition
of these two distribution businesses which have lower gross
margins. In addition, gross profits were negatively affected
due to lower volume of high gross margin fish vaccine sales.
Operating expenses were $166.3 million in 1995 compared
to $177.7 million in 1994. Operating expenses in 1995
include a net benefit of $.2 million relating to 1995 post
combination management actions. The net benefit includes
income from the sale of an equity interest and other rights
in an R&D company ($6.5 million) offset by the utilization
of substantial consulting resources focused primarily on
accelerating the realization of certain combination benefits
in the IPD ($4.6 million) and severance of 77 employees in
the IPD, USPD and AHD ($1.7 million). Operating expenses in
1994 include $24.2 million of expenses for post combination
actions. (See 1994 compared to 1993 for details.) On a
comparable basis operating expenses increased approximately
$13.0 million (8.5%) compared to an 11.0% sales increase.
Operating expenses increased due to variable selling expense
increases, additional research and development expenses, the
acquisition of the Wade Jones Company in July 1994 and the
effect of the translation of NOK and DKK expenses into U.S.
Dollars.
Post combination and transaction expenses impacted
operating income by segment in 1995 and 1994 as follows:
HPS AHS Unallocated Total
Operating income
(loss) as reported:
1995 $26.1 $30.8 $(4.4) $52.5
1994 $(3.8) $28.5 $(8.7) $16.0
Transaction costs
and post-combination
actions (income)
expense:
1995 $ (.7) $ .5 $ - $ (.2)
1994 $19.0 $ 2.0 $ 3.7 $24.7
Operating income (loss)
excluding transaction
costs (1994) and post-combination
actions:
1995 $25.4 $31.3 $(4.4) $52.3
1994 $15.2 $30.5 $(5.0) $40.7
Interest expense increased $6.6 million for the year
ended 1995, due to increased debt levels resulting from the
acquisition of A.L. Oslo in October 1994, increased capital
expenditures in 1994, the acquisition of the Wade Jones
Company, Inc. in July 1994, and increased working capital
requirements to support sales increases. Additionally,
interest rates have generally increased relative to 1994.
Comparability is also affected in that the Company restated
the 1994 financials to reflect the acquisition of A.L. Oslo
in a manner similar to a pooling of interests. The restated
results for 1994 do not include interest expense on either
the cash consideration or actual transaction costs which
would have been incurred had the acquisition taken place in
prior periods. The Company estimates that interest expense
calculated on a comparable basis in 1994 would have been
approximately $1.5 million higher.
Other income (expense), net for 1995 includes net
foreign exchange transaction losses of approximately $.8
million resulting from the translation of non-functional
currency receivables net of non-functional currency payables
and forward foreign exchange contracts. The losses were
primarily recorded by the Company's subsidiaries in Norway
and Denmark in the first quarter of 1995 and primarily
relate to sales denominated in currencies (i.e. U.S. Dollar,
Swedish Kroner, British Pound and Portuguese Escudo) which
depreciated significantly in the first quarter compared to
the NOK and DKK. In addition, currency losses were sustained
by the Company's Mexican operations due to the devaluation
of the Mexican Peso.
The provision for income taxes in 1995 was 37.8%
compared to income taxes in excess of pretax income in 1994.
The rate in 1995 represents a more normal relationship and
the diminishing effect as pre-tax income increases of non
deductible expenses primarily related to goodwill
amortization.
Results of Operations - 1994 Compared to 1993
Total revenue increased to $469.3 million in 1994
compared to $402.7 million in 1993 while operating income
and income before extraordinary item and taxes decreased
substantially due to transaction expenses and post-
combination expenses related to the acquisition of A.L.
Oslo. As a result, the Company had a loss before
extraordinary item of $1.7 million ($.08 loss per share) in
1994 compared to income of $10.1 million ($.47 per share) in
1993.
Revenue in the HPS accounted for $44.4 million of the
consolidated revenue increase. The USPD accounted for a
major portion of the increase due primarily to volume
increases achieved in its liquids (including products
containing iodinated glycerol), creams and ointments, and
suppository product lines. The volume increase was fueled
by products introduced in late 1993, (Epinephrine Mist and
Clotrimazole cream) and products introduced in 1994
(Cimetidine liquid, Clobetasol cream and ointment,
Miconazole suppositories and Clemastine liquid). On an
overall basis price increases for certain products offset
and slightly exceeded price declines for other products
caused by competitive pressures.
IPD, including oral health care, also accounted for a
portion of the revenue increase due primarily to volume, and
where permitted by local conditions selected price
increases. Oral health care revenues increased by $2.9
million and the related operating loss declined due to
continued penetration in markets where approval has been
received, especially Sweden. FCD revenues improved by
approximately 10% due to volume increases for Bacitracin,
Vancomycin and Amphotericin B and selected price increases
for Polymyxin and Bacitracin.
AHS revenue increased $22.3 million primarily due to
the acquisition of Wade Jones Company in July 1994, higher
volume sales of BMDr and international and domestic sales of
disease preventative products used in poultry markets. In
addition, sales volume of fish vaccines, primarily for
salmon, increased approximately 10% compared to 1993.
On a consolidated basis gross profit increased $24.5
million while the gross margin percentage declined
marginally from 42.0% to 41.3% in 1994.
Gross profit dollars in the HPS increased at a rate
consistent with the sales increase as the aggregate gross
profit percentage improved slightly compared to 1993. The
USPD increased significantly in dollars and marginally in
percent as overall product volume increases and higher value
added new products offset continued high production and
operating costs incurred to maintain compliance with
"Current Good Manufacturing Practices" ("CGMP"). IPD and
FCD generally maintained gross margins in line with revenue
increases.
Gross profit dollars in the AHS increased at a rate
less than the sales increase as the gross margin percent
declined slightly. The gross margin percent for the AHD
declined mainly due to competitive pressure on BMDr prices
and due to the acquisition of the Wade Jones Company, a
distributor to the poultry market, and sales made pursuant
to a distribution agreement with Merck AgVet for poultry
products. The gross profits earned in the distribution
business are generally lower than manufacturing gross
profits. Gross profits earned by the AAHD as a percentage
of sales were generally maintained as sales increased.
Operating expenses on a consolidated basis increased
$38.7 million compared to 1993. Included in operating
expenses are $24.2 of expenses for transaction costs and for
post-combination actions by management relating to the
combination with A.L. Oslo.
If the transaction and post-combination expenses were
excluded the operating expense increase was $14.5 million or
10.4% compared to a 16.5% revenue increase.
Operating expenses, not including transaction and post
combination expenses, in the HPS increased due to variable
selling expenses related to volume increases, additional
research and development expenses for planned projects in
process, and additional costs incurred in USPD in setting up
a Central Distribution Center in 1994. Operating expenses,
excluding transaction and post-combination expenses, for the
AHS increased due to the acquisition of Wade Jones in July
1994, increases in variable selling expenses and increases
in research and development expenses.
Including transaction and post-combination costs operating income
was $16.0 million in 1994 compared to $30.2 million in 1993. By segment
operating income was impacted as follows (in millions):
HPS AHS Unallocated Total
Operating income (loss)
as reported $(3.8) $28.5 $(8.7) $16.0
Transaction costs and
post-combination
actions $19.0 $ 2.0 $ 3.7 $24.7
Operating income (loss)
excluding transaction
costs and post-combination
actions - 1994 $15.2 $30.5 $(5.0) $40.7
Operating income (loss) -
1993 $ 8.6 $28.8 $(7.2) $30.2
Post-combination charges reflect the following management actions
for the HPS: severance of $2.9 million for employees eliminated due to
redundancy, $8.8 million (including the write off of $5.8 million of
intangibles) for the exit of the USPD from the tablet business in the
U.S., $3.4 million for a write off of an intangible relating to an oral
health care product which will no longer be marketed, $.9 million for
the write down to fair market value of land which will be held for sale,
$2.5 million for an accelerated payment for contractually committed
research and development relating to a project which will no longer be
funded by the Company and $.5 million for closing sales offices and
eliminating duplicate distributors and other.
Post-combination management actions for the AHS relate to AAHD and
include the exiting of an antibiotic product and related equipment of
$1.7 million and severance of $.3 million.
Unallocated expenses relate primarily to Corporate functions and
include severance for redundant personnel of $.6 million and $3.1
million for transaction expenses primarily for legal, accounting and
investment banking services incurred in 1994 to complete the
combination. 1993 unallocated expenses include approximately $1.0
million for pre-combination transaction costs.
The transaction costs and charges for post-combination management
actions, a majority of which did not use cash, are anticipated to
lower future expenses (i.e. eliminate redundant employees,
distributors, etc.) and allow management to focus on its core
businesses (i.e. eliminate U.S. tablet business and other minor
products and exit non core research and development projects). The
Company has provided for the exiting of the U.S. tablet business by
the preferred exit plan (i.e. sale). If the exit by sale is not
achieved an adjustment for additional future costs could be required.
Interest expense increased $.4 million in 1994 to $15.4 million
due primarily to additional debt incurred for the acquisition of A.L.
Oslo and capital expenditures in the U.S., and higher U.S. interest
rates in the latter part of 1994. Partially offsetting domestic
increases was lower foreign interest expense due primarily to lower
rates relative to 1993. As required the Company restated the prior
years results of operations to reflect the acquisition of A.L. Oslo in a
manner similar to a pooling of interests. Previous restated periods
do not include the interest expense on the purchase price of $23.6
million and other transaction costs which would have been incurred had
the acquisition actually taken place in prior periods. The Company
estimates interest calculated on a comparable basis for 1994 and 1993
would have been approximately $1.5 million and $2.0 million higher,
respectively.
The provision for income taxes in 1994 exceeded pre-tax income
compared to a more representative 40.8% tax rate in 1993. The
disproportionate relationship is the result of low pre-tax income (due
to the transaction costs and post-combination actions) which magnifies
the effect of non-deductible expenses principally goodwill
amortization and portions of the transaction costs capitalized for tax
purposes.
Results for 1994 include an extraordinary item for a loss on
extinguishment of debt. The loss of $.7 million ($1.1 million less a
tax benefit of $.4 million) results from the expensing of debt
issuance costs related to the previously existing debt when the
Company refinanced such debt with a $185.0 million credit agreement.
Inflation
The effect of inflation on the Company's operations during 1995,
1994 and 1993 was not significant.
Governmental Actions affecting the Company
The Company's operations in all countries are subject to
regulation which includes inspections of manufacturing facilities,
requires approvals to market products, and can result in the recall of
products and suspension of production. In the United States the Food
and Drug Administration (FDA) has imposed more stringent regulatory
requirements on the pharmaceutical industry.
The U.S. manufacturing companies included in the Company's Human
Pharmaceuticals Segment, Barre, NMC, and Able, are affected in that
they are required to comply with the FDA's interpretation of CGMP. In
this regard, Barre and Able are parties to separate consent decrees
with the FDA which define the specific standards they must meet to
comply with CGMP.
In 1993, 1994 and 1995, regulatory compliance has continued to
affect costs directly by requiring the addition of personnel, programs
and capital and indirectly by adding activities without directly
increasing efficiency. The costs both direct and indirect of
regulatory compliance (which have increased in recent years) may
continue to increase in the future.
In July 1994, the Company ceased the marketing of products which
contain iodinated glycerol. The cessation was the result of an
industry wide banning of such products by the FDA. Because the FDA
allowed for an orderly cessation of sales of these products the
immediate impact was minimized.
Iodinated glycerol products represented approximately 2% of the
Company's 1994 sales and the loss of sales of these products has
negatively impacted the Company's 1995 operations.
The Company and its subsidiaries have filed applications to
market products with regulatory agencies both in the U.S. and
internationally. The timing of receipt of approvals of these
applications can significantly increase future revenues and income.
The Company cannot control or predict with accuracy whether such
applications will be approved or the timing of their approval.
Post Combination Management Actions
In December 1994, the Company announced a number of management
actions which included staff reductions and certain product line and
facilities rationalizations as a first step toward realizing
combination synergies and maximizing the overall position of the newly
combined Company. As a part of the December 1994 management actions,
the Company discontinued funding research projects relating to the
colonic delivery of drugs and committed to disposing of the resultant
equity interest in the R&D company performing the research.
In September 1995, the Company announced additional management
actions which continue the process begun in December 1994. The actions
include elimination of up to 130 positions company-wide (77 employees
were severed in 1995), further efforts toward consolidation of
operations in the Company's USPD, the utilization of substantial
consulting resources focused primarily on accelerating the realization
of certain combination benefits in the IPD and the sale in September
of its minority equity position and certain other rights in the R&D
company.
In addition, announced management actions related to the USPD
include a plan to transfer all suppository and cream and ointment
production from two present locations to the Lincolnton, N.C.
location. The transfer of prescription products requires the Company
to obtain the approval of the FDA for each product transferred. The
entire process is expected to take from 18 to 24 months. The process,
however, may take longer due to the required FDA approval. The Company
cannot predict with certainty FDA timing or approval. Because of the
time necessary to achieve the transfer the Company has instituted a
retention program which assures each NMC employee a retention payment
if the employee remains employed until terminated by the Company. If
the employee leaves of their own accord no payment is made. The
Company has commenced accruing the estimated retention payment over
the period which employees are expected to be employed. If all
affected employees stay until termination the Company estimates the
retention payments will total approximately $2.0 million.
As part of the post-combination management actions in 1994 the
Company provided for the exiting of the U.S. tablet business by the
most probable exit plan (i.e. sale). However, if such exit by sale
should fail to be consummated, an adjustment for additional future
costs (including severance for tablet business employees) could be
required. The Company was not successful in selling the tablet
business in 1995 although extensive negotiations were held with
prospective buyers. Efforts to sell the tablet business are
continuing.
The 1994 and 1995 post-combination management actions included
severing certain employees. As a result of the personnel actions, the
Company believes that approximately $4.6 million of annual payroll and
payroll related costs have been eliminated.
The Company is continuing to study other opportunities to
rationalize personnel functions and operations, both selectively and
on a location basis, and accordingly, similar management actions may
be initiated in the future. In 1996, the IPD has continued incurring
consulting expenses (at a reduced level from 1995) and is taking and
considering additional actions which are designed to further
strengthen the competitive nature of the division by lowering costs.
In the first quarter of 1996, the IPD has severed 30 sales and
marketing personnel primarily in the Nordic countries and will incur
termination related costs of approximately $1.5 million. The Company
also announced that a preliminary study of production rationalization
alternatives between the IPD's Copenhagen, Denmark and Lier, Norway
manufacturing facilities has identified potential benefits. Based on
these findings, a detailed study is being initiated which is expected
to be completed in the second quarter of 1996. The Company expects
that the detailed study will result in a formal rationalization
proposal which may result in charges for severance, write downs of
fixed assets, and other exit costs. Any such plan will require
approval by the Board of Directors.
European Operations
The fluctuations of European currencies have and will continue to
impact the Company's European operations which comprise approximately
40% of revenues in 1995. In addition, many European governments have
enacted or are in the process of enacting mechanisms aimed at lowering
the cost of pharmaceuticals. Currency fluctuations and governmental
actions to reduce or not allow increases of prices have affected
revenue. The Company cannot predict future currency fluctuations or
future governmental pricing actions or their impact on the Company's
results.
Liquidity and Capital Resources
At December 31, 1995, stockholders' equity was $205.2 million
compared to $181.3 million and $203.9 million at December 31, 1995,
1994 and 1993, respectively. The ratio of long-term debt to equity
was 1.07:1, 1.21:1 and .71:1 at December 31, 1995, 1994 and 1993,
respectively. The increase in stockholder's equity and subsequent
improvement in the ratio in 1995 primarily reflects the 1995 earnings
of the Company and an increase in the translation adjustment ($7.8
million) due to the strengthening of the DK and NOK in 1995 coupled
with scheduled 1995 repayments of long-term debt. The increase in the
ratio from 1993 to 1994 reflects the financing required for the
acquisition of A.L. Oslo, significant capital expenditures in 1994,
and increased working capital requirements. Additionally, the
required accounting for the A.L. Oslo acquisition magnified the change
in the 1994 ratio since restated prior year financials include A.L.
Oslo's equity as part of restated stockholders' equity and upon
acquisition, the cash purchase price, $23.6 million, was deducted from
stockholders' equity and in effect, added to long-term debt (i.e. the
acquisition was financed).
Working capital at December 31, 1995 was $113.6 million compared
to $95.8 million and $63.7 million at December 31, 1993 and 1992,
respectively. The current ratio was 1.67:1 at December 31, 1995
compared to 1.62:1 and 1.46:1 at December 31, 1994 and 1993,
respectively.
Working capital increased in 1995 relative to 1994 and 1993
primarily due to increases in accounts receivable and inventory
partially offset by an increase in accounts payable and accrued
expenses. Accounts receivable increased due to seasonal sales of
liquid pharmaceuticals by the USPD, and increased fourth quarter sales
by the European subsidiaries.
Inventory increased due to planned increases in Animal Health
inventories and higher inventories for European subsidiaries to meet
higher expected demand.
All working capital elements also increased in 1995 in U.S.
Dollars as the functional currencies of the Company's principal
foreign subsidiaries, the Danish Krone and Norwegian Krone,
strengthened versus the U.S. Dollar as compared to 1994 by
approximately 9% and 7%, respectively. The approximate increase due
to currency translation was: accounts receivable $4.1 million,
inventory $3.6 million and accounts payable and accrued expenses $2.9
million.
The Company presently has various capital expenditure programs
under way and planned including the expansion of a fermentation
facilities in Copenhagen, Denmark and Skoyen and Overhalla, Norway. In
1995, the Company's capital expenditures were $24.8 million and in
1996 the Company plans to spend a higher amount than 1995.
If anticipated sales growth occurs the Company will have
increased working capital requirements.
At December 31, 1995, the Company had $27.5 million available
under existing short-term unused lines of credit and $18.4 million in
cash. In addition, the Company has $11.0 million available in Europe
under long-term lines of credit and $30.0 million available under a
revolving credit facility which was included in the $185.0 million
credit facility. The Company believes that the combination of cash
from operations and funds available under existing lines of credit
will be sufficient to cover its currently planned operating needs. A
substantial portion of the Company's short-term and long-term debt is
at variable interest rates. At December 31, 1995, the Company has
entered into interest rate agreements to fix the interest rates for
$65.0 million of the variable debt at 5.655% plus the required margin
through October 1988 and for $7.9 million of debt at 5.13% for six
months. The Company is considering similar transactions to fix
additional variable rate debt for specified periods to minimize the
impact of future changes in interest rates. The Company's policy is to
selectively enter into "plain vanilla" agreements to fix interest
rates for existing debt if it is deemed prudent.
The $185.0 million credit facility contains various financial
covenants including the maintenance of minimum equity to assets,
current and interest coverage ratios. The equity to asset ratio
requires the Company maintain stockholders' equity (plus adjustments)
of at least 30% of total assets. Unless waived, this ratio will in
effect require the Company to issue equity in the near term if
significant additional funding for acquisitions or other purposes is
required.
Item 8. Financial Statements and Supplementary Data
See page F-1 of this Report, which includes an index to the
consolidated financial statements and financial statement schedule.
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information as to the Directors of the Registrant set forth
under the sub-caption "Board of Directors" appearing under the caption
"Election of Directors" of the Proxy Statement relating to the Annual
Meeting of Shareholders to be held on May 30, 1996, which Proxy
Statement will be filed on or prior to April 8, 1996, is incorporated
by reference into this Report. The information as to the Executive
Officers of the Registrant is included in Part I hereof under the
caption Item 1A "Executive Officers of the Registrant" in reliance
upon General Instruction G to Form 10-K and Instruction 3 to Item
401(b) of Regulation S-K.
Item 11. Executive Compensation
The information to be set forth under the subcaption "Directors'
Fees and Related Information" appearing under the caption "Board of
Directors" of the Proxy Statement relating to the Annual Meeting of
Shareholders to be held on May 30, 1996, which Proxy Statement will be
filed on or prior to April 8, 1996, and the information set forth
under the caption "Executive Compensation and Benefits" in such Proxy
Statement is incorporated into this Report by reference.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
The information to be set forth under the caption "Security
Ownership of Certain Beneficial Owners" of the Proxy Statement
relating to the Annual Meeting of Stockholders expected to be held on
May 30, 1996, is incorporated into this Report by reference. Such
Proxy Statement will be filed on or prior to April 8, 1996.
There are no arrangements known to the Registrant, the operation
of which may at a subsequent date result in a change in control of the
Registrant.
Item 13. Certain Relationships and Related Transactions
The information to be set forth under the caption "Certain
Related Transactions and Relationships" of the Proxy Statement
relating to the Annual Meeting of Stockholders expected to be held on
May 30, 1996, is incorporated into this Report by reference. Such
Proxy Statement will be filed on or prior to April 8, 1996.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K
List of Financial Statements
See page F-1 of this Report, which includes an index to
consolidated financial statements and financial statement schedule.
List of Financial Statement Schedule
See index to consolidated financial statements and financial
statement schedule, which appears at page F-1 of this Report.
List of Exhibits (numbered in accordance with Item 601 of Regulation
S-K)
3.1A 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.
Copies of debt instruments (other than those listed above) for
which the related debt does not exceed 10% of consolidated total
assets as of December 31, 1995 will be furnished to the Commission
upon request.
10.2 Parent Guaranty, made by the Company in favor of Union
Bank of Norway, as agent and arranger, and Den norske Bank AS, as co
arranger, dated September 28, 1994 was filed as Exhibit 10.2 to the
Company's 1994 Annual Report on Form 10-K and is incorporated by
reference.
10.3 Restructuring Agreement, dated as of May 16, 1994, between
the Company and Apothekernes Laboratorium A.S (now known as A.L.
Industrier AS) was filed as Exhibit A to the Definitive Proxy
Statement dated August 22, 1994 and is incorporated herein by
reference.
10.4 Employment Agreement dated January 1, 1987, as amended
December 12, 1989, between I. Roy Cohen and the Company and A.L.
Laboratories, Inc. was filed as Exhibit 10.3 to the Company's 1989
Annual Report on Form 10-K and is incorporated herein by reference.
10.5 Control Agreement dated February 7, 1986 between
Apothekernes Laboratorium A.S (now known as A.L. Industrier AS) and
the Company was filed as Exhibit 10.10 to the Company's 1985 Annual
Report on Form 10-K and is incorporated herein by reference.
10.6 Amendment to Control Agreement dated October 3, 1994
between A.L. Industrier AS (formerly known as Apothekernes
Laboratorium A.S) and the Company was filed as Exhibit 10.6 to the
Company's 1994 Annual Report on Form 10-K and is incorporated by
reference.
10.7 The Company's 1983 Incentive Stock Option Plan, as amended
through June 7, 1995 is filed as an Exhibit to this Report.
10.8 Employment agreement dated July 30, 1991 between the
Company and Jeffrey E. Smith was filed as Exhibit 10.8 to the
Company's 1991 Annual Report on Form 10-K and is incorporated herein
by reference.
10.9 Employment agreement between the Company and George S.
Barrett dated December 31, 1995 is filed as an Exhibit to this Report.
10.10 Employment Agreement between the Company and David E.
Cohen dated December 31, 1995 is filed as an Exhibit to this Report.
10.11 Lease Agreement between A.L. Industrier AS, as landlord,
and ALPHARMA AS, as tenant, dated October 3, 1994 was filed as Exhibit
10.10 to the Company's 1994 Annual Report on Form 10-K and is
incorporated by reference.
10.12 Administrative Services Agreement between A.L. Industrier
AS and ALPHARMA AS dated October 3, 1994 was filed as Exhibit 10.11 to
the Company's 1994 Annual Report on Form 10-K and is incorporated by
reference.
10.13 Employment agreement dated March 14, 1996 between the
Company and Einar W. Sissener is filed as an exhibit to this report.
10.14 Employment contract dated October 5, 1989 between
Apothekernes Laboratorium A.S (transferred to A.L. Oslo per the
combination transaction) and Ingrid Wiik was filed as Exhibit 10.13 to
the Company's 1994 Annual Report on Form 10-K and is incorporated by
reference.
10.15 Employment contract dated October 5, 1989 between
Apothekernes Laboratorium A.S (transferred to A.L. Oslo per the
combination transaction) and Thor Kristiansen was filed as Exhibit
10.14 to the Company's 1994 Annual Report on Form 10-K and is
incorporated by reference.
10.16 Employment contract dated October 2, 1991 between
Apothekernes Laboratorium A.S (transferred to A.L. 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.
11 Computation of Earnings per Common Share for the years
ended December 31, 1995, 1994 and 1993.
21 A list of the subsidiaries of the Registrant as of March
18, 1996 is filed as an Exhibit to this Report.
23 Consent of Coopers & Lybrand L.L.P., Independent
Accountants, is filed as an Exhibit to this Report.
27 Financial Data Schedule
See exhibit index on Page E-1 for exhibits filed with this
report.
Report on Form 8-K
On October 16, 1995, the Company filed a report on Form 8-K dated
October 9, 1995 reporting Item 5. "Other events". The event reported
was the listing of the warrants for trading on the New York Stock
Exchange.
Undertakings
For purposes of complying with the amendments to the rules
governing Form S-8 (effective July 13, 1990) under the Securities Act
of 1933, the undersigned Registrant hereby undertakes as follows,
which undertaking shall be incorporated by reference into Registrant's
Registration Statement on Form S-8 No. 33-60495:
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Securities Act of 1933
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered,
the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be governed
by the final adjudication of such issue.
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities and Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
March 22, 1996 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 22, 1996 /s/ Einar W. Sissener
Einar W. Sissener
Chairman, Director and
Chief Executive Officer
Date: March 22, 1996 /s/ Jeffrey E. Smith
Jeffrey E. Smith
Vice President, Finance and
Chief Financial Officer
(Principal accounting officer)
Date: March 22, 1996 /s/ I. Roy Cohen
I. Roy Cohen
Director and Chairman of the
Executive Committee
Date: March 22, 1996 /s/ Thomas G. Gibian
Thomas G. Gibian
Director and Chairman of the Compensation
Committee
Date: March 22, 1996 /s/ Glen E. Hess
Glen E. Hess
Director
Date: March 22, 1996 /s/ Peter G. Tombros
Peter G. Tombros
Director and Chairman
of the Audit Committee
Date: March 22, 1996 /s/ Georg W. Sverdrup
Georg W. Sverdrup
Director
Date: March 22, 1996 /s/ Erik G. Tandberg
Erik G. Tandberg
Director
Date: March 22, 1996 /s/ Gert Munthe
Gert Munthe
Director
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
______________
Page
Consolidated Financial Statements:
Report of Independent Accountants F-2
Consolidated Balance Sheet at
December 31, 1995 and 1994 F-3 to F-4
Consolidated Statement of Operations for
the years ended December 31, 1995,
1994 and 1993 F-5
Consolidated Statement of Stockholders'
Equity for the years ended
December 31, 1995, 1994 and 1993 F-6 to F-8
Consolidated Statement of Cash Flows
for the years ended December 31, 1995,
1994 and 1993 F-9 to F-10
Notes to Consolidated Financial Statements F-11 to F-44
Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts
for the years ended December 31, 1995,
1994 and 1993 F-45
Financial statement schedules other than Schedule II are omitted for
the reason that they are not applicable or the required information is
included in the consolidated financial statements or notes thereto.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and
Board of Directors of
ALPHARMA INC.:
We have audited the consolidated financial statements and the
financial statement schedule of ALPHARMA INC. and Subsidiaries
(formerly A.L. Pharma Inc.) (the "Company") listed in the index on page
F-1 of this Form 10-K. These financial statements and financial
statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position
of ALPHARMA INC. and Subsidiaries as of December 31, 1995 and 1994 and
the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1995 in
conformity with generally accepted accounting principles. In addition,
in our opinion, the financial statement schedule referred to above,
when considered in relation to the basic financial statements taken as
a whole, presents fairly, in all material respects, the information
required to be included therein.
As discussed in Note 2 to the consolidated financial statements,
effective January 1, 1993, the Company changed its method of accounting
for postretirement benefits other than pensions.
COOPERS & LYBRAND L.L.P.
Parsippany, New Jersey
March 4, 1996
ALPHARMA INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In thousands, except share data)
December 31,
1995 1994
ASSETS
Current assets:
Cash and cash equivalents $ 18,351 $ 15,512
Accounts receivable, net 132,161 119,084
Inventories 120,084 106,297
Prepaid expenses and other
current assets 12,290 9,606
Total current assets 282,886 250,499
Property, plant and equipment, net 212,176 202,903
Intangible assets, net 128,186 128,758
Other assets and deferred charges 11,605 10,158
Total assets $634,853 $592,318
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 13,160 $ 13,288
Short-term debt 62,695 61,196
Accounts payable 38,343 31,153
Accrued expenses 48,435 46,651
Accrued and deferred income taxes 6,650 2,362
Total current liabilities 169,283 154,650
Long-term debt 219,451 220,036
Deferred income taxes 30,961 27,528
Other non-current liabilities 9,968 8,816
Stockholders' equity:
Preferred stock, $1 par value,
no shares issued
Class A Common Stock, $.20
par value, 13,699,592 and
13,618,791 shares issued 2,740 2,724
Class B Common Stock, $.20 par value,
8,226,562 shares issued 1,646 1,646
Additional paid-in capital 120,357 118,833
Foreign currency translation adjustment 15,884 8,125
Retained earnings 70,385 55,482
Treasury stock, 263,017 and 248,920
shares of Class A Common Stock,
at cost (5,822) (5,522)
Total stockholders' equity 205,190 181,288
Total liabilities and
stockholders' equity $634,853 $592,318
See notes to consolidated financial statements.
ALPHARMA INC. AND SUBSIDIARIES CONSOLIDATED
STATEMENT OF OPERATIONS (In thousands, except
per share data)
Years Ended December 31,
1995 1994 1993
Total revenue $520,882 $469,263 $402,675
Cost of sales 302,127 275,543 233,423
Gross profit 218,755 193,720 169,252
Selling, general and
administrative expenses 166,274 177,742 139,038
Operating income 52,481 15,978 30,214
Interest expense (21,993) (15,355) (14,996)
Other income (expense), net (260) 1,113 1,880
Income before provision for income
taxes, and extraordinary item 30,228 1,736 17,098
Provision for income taxes 11,411 3,439 6,969
Income (loss) before extraordinary
item 18,817 (1,703) 10,129
Extraordinary item, net of tax _______ (683) _______
Net income (loss) $ 18,817 $ (2,386) $ 10,129
Average common shares outstanding:
Primary 21,754 21,666 21,581
Fully diluted 22,407 21,666 21,581
Earnings per common share:
Primary
Income (loss) before extraordinary
item $ .86 $ (.08) $ .47
Net income (loss) $ .86 $ (.11) $ .47
Fully diluted
Income (loss) before extraordinary
item $ .84 $ (.08) $ .47
Net income (loss) $ .84 $ (.11) $ .47
See notes to consolidated financial statements.
ALPHARMA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (COMMON
STOCK ACCOUNTS)
(In thousands, except share data)
Class Class
A B
Common Common
Stock Stock Treasury Stock Total
Common Common
Shares Par Par Shares Stock
Issued Value Value Held Cost Accounts
Balance, December 31, 1992 21,699,041 $2,694 $1,646 (206,998) $(4,410) $ (70)
Purchase of treasury stock (40,212) (1,088) (1,088)
Exercise of stock options
(Class A) and other 57,574 13 13
Employee stock purchase plan 37,630 7 7
Balance, December 31, 1993 21,794,245 $2,714 $1,646 (247,210) $(5,498) $(1,138)
Purchase of treasury stock (1,710) (24) (24)
Exercise of stock options
(Class A) 2,750 1 1
Employee stock purchase plan 48,358 9 9
Balance, December 31, 1994 21,845,353 $2,724 $1,646 (248,920) $(5,522) $(1,152)
Purchase of treasury stock (14,097) (300) (300)
Exercise of stock options
(Class A) 44,025 9 9
Employee stock purchase plan 36,776 7 7
Balance, December 31, 1995 21,926,154 $2,740 $1,646 (263,017) $(5,822) $(1,436)
ALPHARMA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
Foreign Total
Common Additional Currency Stock-
Stock Paid-In Translation Retained holders'
Accounts Capital Adjustment Earnings Equity
Balance, December 31, 1992 $ (70) $109,877 $ 6,643 $90,393 $206,843
Net income - 1993 10,129 10,129
Dividends declared
($.18 per common share) (3,873) (3,873)
Net foreign currency
translation adjustment (6,336) (6,336)
Purchase of treasury stock (1,088) (1,088)
Tax benefit realized from
stock option plan 311 311
Exercise of stock options
(Class A) and other 13 586 599
Employee stock purchase plan 7 699 706
Remittances from A.L. Oslo to
A.L. Industrier (3,358) (3,358)
Balance, December 31, 1993 $(1,138) $111,473 $ 307 $93,291 $203,933
Net loss - 1994 (2,386) (2,386)
Dividends declared
($.18 per common share) (3,893) (3,893)
Net foreign currency
translation adjustment 7,818 7,818
Purchase of treasury stock (24) (24)
Exercise of stock options
(Class A) 1 30 31
Employee stock purchase plan 9 778 787
Remittances from A.L. Oslo to
A.L. Industrier (1,384) (1,384)
Appropriation of retained
earnings equal to cash
purchase price for A.L.
Oslo 23,594 (23,594)
Purchase of A.L. Oslo
Cash paid (23,594) (23,594)
Warrants issued 6,552 (6,552)
Balance, December 31, 1994 $(1,152) $118,833 $ 8,125 $55,482 $181,288
Net income - 1995 18,817 18,817
Dividends declared
($.18 per common share) (3,914) (3,914)
Net foreign currency
translation adjustment 7,759 7,759
Tax benefit realized from
stock option plan 137 137
Purchase of treasury stock (300) (300)
Exercise of stock options
(Class A) 9 578 587
Employee stock purchase plan 7 809 816
Balance, December 31, 1995 $(1,436) $120,357 $ 15,884 $70,385 $205,190
See notes to consolidated financial statement.
ALPHARMA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (In thousands of
dollars)
Years Ended December 31,
1995 1994 1993
Operating activities:
Net income (loss) $18,817 $ (2,386) $ 10,129
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization 31,022 26,773 23,842
Deferred income taxes 1,054 (5,506) 493
Noncurrent asset writeoffs 14,841
Extraordinary item 683
Change in assets and liabilities, net
of effects from business
acquisitions:
(Increase) in accounts
receivable (9,295) (14,864) (16,000)
(Increase) in inventory (10,468) (11,639) (4,635)
(Increase) in prepaid
expenses and other current
assets (1,462) (774) (833)
Increase in accounts
payable and accrued expenses 4,462 8,492 3,497
Increase (decrease) in accrued
income taxes 2,802 (1,269) (2,592)
Other, net (104) 2,811 1,847
Net cash provided by operating
activities 36,828 17,162 15,748
Investing activities:
Capital expenditures (24,836) (44,326) (24,044)
Acquisition of A.L. Oslo (23,594)
Purchase of acquired businesses,
and intangibles, net of cash
acquired (3,500) (13,733) (17,280)
Other 579 _______ 268
Net cash used in investing
activities (27,757) (81,653) (41,056)
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,
1995 1994 1993
Financing activities:
Net borrowings under
lines of credit $ (296)$ 4,494 $ 23,484
Proceeds of long-term debt 9,000 164,423 26,375
Reduction of long-term debt (13,121) (100,719) (12,397)
Dividends paid (3,914) (3,893) (3,873)
Cash transfers between A.L. Oslo
and A.L. Industrier 4,991 (3,358)
Treasury stock acquired (300) (24) (1,088)
Proceeds from employee stock option
and stock purchase plan 1,403 818 1,305
Other, net 137 (2,713) 575
Net cash provided by (used in)
financing activities (7,091) 67,377 31,023
Exchange rate changes:
Effect of exchange rate changes
on cash 1,338 1,481 (818)
Income tax effect of exchange rate
changes on intercompany advances (479) (502) 225
Net cash flows from exchange rate
changes 859 979 (593)
Increase in cash and cash
equivalents 2,839 3,865 5,122
Cash and cash equivalents at
beginning of year 15,512 11,647 6,525
Cash and cash equivalents at
end of year $18,351 $15,512 $11,647
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., previously named A.L. Pharma Inc., (the "Company")
is a multinational pharmaceutical company which develops,
manufactures and markets specialty generic and proprietary human
pharmaceutical and animal health products.
The Company's Human Pharmaceutical business consists of three
divisions: The U.S. Pharmaceuticals Division ("USPD"), The
International Pharmaceuticals Division ("IPD") and the Fine Chemicals
Division ("FCD"). The USPD's principal products are generic liquid and
topical pharmaceuticals sold primarily to wholesalers, distributors
and merchandising chains. The IPD's principal products are dosage form
pharmaceuticals and adhesive bandages sold primarily in Scandinavia
and western Europe as well as Indonesia and certain middle eastern
countries. The FCD's principal products are bulk pharmaceutical
antibiotics sold to the pharmaceutical industry in the U.S. and
worldwide for use as active substances in a number of finished
pharmaceuticals.
The Company's Animal Health business consists of two divisions:
The Animal Health Division ("AHD") and the Aquatic Animal Health
Division ("AAHD"). The AHD's principal products are feed additive and
other animal health products for animals raised for commercial food
production (principally poultry and swine) in the U.S. and worldwide.
The AAHD manufactures and markets vaccines for use in immunizing
farmed fish (principally salmon) worldwide with a concentration in
Norway. (See Note 19 for segment and geographic information.)
The Company's Class B stock (38.0% of total outstanding common
stock) is totally held by A.L. Industrier AS (A.L. Industrier), a
Norwegian Company. A.L. Industrier is able to control the Company
through its ability to elect more than a majority of the Board of
Directors and to cast a majority of the votes in any vote of the
Company's stockholders. (See Note 15.)
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 including: Barre
National, Inc. ("Barre"), NMC Laboratories, Inc. ("NMC") and Able
Laboratories, Inc. ("Able"). The first-in, first-out (FIFO) and
average cost methods are used to value remaining inventories.
Property, plant and equipment:
Property, plant and equipment are recorded at cost. Expenditures
for additions, major renewals and betterments are capitalized and
expenditures for maintenance and repairs are charged to income as
incurred. When assets are sold or retired, their cost and related
accumulated depreciation are removed from the accounts, with any gain
or loss included in net income.
Interest is capitalized as part of the acquisition cost of major
construction projects. In 1995, 1994 and 1993, $318, $722 and $262 of
interest cost was capitalized, respectively.
Depreciation is computed by the straight-line method over the
estimated useful lives which are generally as follows:
Buildings 30-40 years
Building improvements 10-30 years
Machinery and equipment 2-20 years
Intangible assets:
Intangible assets represent the excess of cost of acquired
businesses over the underlying fair value of the tangible net assets
acquired and the cost of technology, trademarks, New Animal Drug
Applications ("NADAs"), and other non-tangible assets acquired in
product line acquisitions. Intangible assets are amortized on a
straight-line basis over their estimated period of benefit. The
Company's policy in assessing the recoverability of intangible assets
is to compare the carrying value of the intangible assets with the
anticipated future income of businesses to which the intangibles
relate. In connection with the acquisition of A.L. Oslo and the
reorganization of the Company in December 1994, the Company decided to
exit its U.S. tablet business and cease the marketing of an oral
health care product based on licensed technology. These actions
resulted in a write off of intangible assets of $9,200. (See Note 3).
The following table is net of accumulated amortization of $35,903 and
$28,699 for 1995 and 1994, respectively.
1995 1994 Life
Excess of cost of acquired
businesses over the fair value
of the net assets acquired $102,434 $104,768 20 - 40
Technology, trademarks, NADAs
and other 25,752 23,990 6 - 20
$128,186 $128,758
Foreign currency translation and transactions:
The assets and liabilities of the Company's foreign subsidiaries
are translated from their respective functional currencies into U.S.
Dollars at rates in effect at the balance sheet date. Results of
operations are translated using average rates in effect during the
year. Foreign currency transaction gains and losses are included in
income. Foreign currency translation adjustments are accumulated in a
separate component of stockholders' equity. The foreign currency
translation adjustment for 1995, 1994 and 1993 is net of ($479),
($502), and $225, respectively, representing the foreign tax effects
associated with intercompany advances to foreign subsidiaries.
Foreign exchange contracts:
The Company selectively enters into foreign exchange contracts to
buy and sell certain cash flows in non-functional currencies. Foreign
exchange contracts are accounted for as foreign currency transactions
and gains or losses are included in income.
Interest Rate Transactions:
The Company selectively enters into interest rate agreements
which fix the interest rate to be paid for specified periods on
variable rate long-term debt. The effect of these agreements is
recognized over the life of the agreements as an adjustment to
interest expense.
Income Taxes:
The provision for income taxes includes federal, state and
foreign income taxes currently payable and those deferred because of
temporary differences in the basis of assets and liabilities between
amounts recorded for financial statement and tax purposes.
The Company provides deferred taxes under the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes". SFAS 109 requires the utilization of
the liability method of accounting for deferred taxes based on enacted
tax rates.
At December 31, 1995, the Company's share of the undistributed
earnings of its foreign subsidiaries (excluding cumulative foreign
currency translation adjustments) was approximately $35,100. No
provisions are made for U.S. income taxes that would be payable upon
the distribution of earnings which have been reinvested abroad or are
expected to be returned in tax-free distributions. It is the
Company's policy to provide for U.S. taxes payable with respect to
earnings which the Company plans to repatriate.
Accounting for Postretirement Benefits:
Effective January 1, 1993, the Company adopted SFAS No. 106
"Employers' Accounting for Postretirement Benefits Other than
Pensions". The statement requires accrual accounting for these
benefits over the service lives of the employees instead of expensing
payments as incurred. Adoption of SFAS 106 did not have a material
impact on the Company. (See Note 11.)
Accounting for Postemployment Benefits:
Effective January 1, 1994, the Company formally adopted SFAS No.
112 "Employers' Accounting for Postemployment Benefits". The
statement requires accrual of postemployment benefits during the
employment period when certain conditions are met. The adoption of
SFAS 112 did not have a material impact on the Company.
Earnings Per Share:
Primary earnings per share is based upon the weighted average
number of common shares outstanding and common stock equivalents (i.e.
stock options and commencing in 1994 warrants to purchase common
shares are included when dilutive).
Fully diluted earnings per share reflect the dilutive effect of
stock options and the fully diluted effect of the 1994 warrants.
Recently Issued Accounting Standards:
In March 1995, The Financial Accounting Standards Board issued
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of." The standard requires that
long-lived assets and certain identifiable intangibles to be held and
used by an entity be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. This standard must be adopted in 1996.
Management is currently assessing the impact of the adoption on the
Company's results of operations and financial position.
In October 1995, The Financial Accounting Standards Board issued
SFAS No. 123, "Accounting for Stock-Based Compensation." The standard
establishes a fair value method for accounting for or disclosing stock
based compensation plans. The standard is effective for financial
statements for fiscal years beginning in 1996. The Company expects to
adopt this standard by disclosing the pro forma net income and
earnings per share amounts assuming the fair value method. As a
result, the adoption of this standard will not have any impact on
reported results of operations and financial position.
3. Acquisition of A. L. Oslo, Transaction Expenses and Post-
Combination Management Actions
On October 3, 1994, the Company completed the acquisition of the
pharmaceutical, animal health, bulk antibiotic and aquatic animal
health businesses of Apothekernes Laboratorium A.S (the "Related
Norwegian Businesses"). Concurrent with the closing of the acquisition
the Company changed its name to A.L. Pharma Inc. from A. L.
Laboratories, Inc.
In order to accomplish the transaction Apothekernes Laboratorium
A.S changed its name to A.L. Industrier A.S ("A.L. Industrier") and
demerged the Related Norwegian Businesses into a new Norwegian
corporation called Apothekernes Laboratorium AS ("A.L. Oslo"). The
Company then acquired the shares of A.L. Oslo through a tender offer.
A.L. Industrier is the beneficial owner of 100% of the
outstanding shares of the Company's Class B stock. (See Notes 1 and
15.)
The consideration paid by the Company for A.L. Oslo was $30,146
consisting of $23,594 in cash, and warrants to purchase 3.6 million
shares of the Company's Class A Common Stock (estimated value at time
of closing of $1.82 per share or $6,552 in total). The warrants expire
on January 3, 1999 and have an exercise price of $21.945.
The Company was required to account for the acquisition of A.L.
Oslo as a transfer and exchange between companies under common
control. Accordingly in 1994, the accounts of A.L. Oslo were combined
with the Company at historical cost in a manner similar to a poolingof-
interests and the Company's financial statements were restated to
include A.L. Oslo. At the acquisition date, the consideration paid for
A.L. Oslo was reflected as a decrease to stockholders' equity net of
the estimated value ascribed to the warrants. There were no
adjustments required to conform accounting practices of the companies.
The restated statement of operations for 1993 and the period
January 1, to October 2, 1994 does not include interest expense
related to the cash consideration paid on October 3, 1994 by the
Company for A.L. Oslo and related transaction costs. Assuming cash
consideration of $23,594, and transaction costs of approximately
$3,100, interest expense after tax would have decreased reported
results by approximately $950 in 1994 (for the period January 1, to
October 2, 1994), and $1,250 in 1993.
In connection with the acquisition of A.L. Oslo in 1994, the
Company incurred transaction expenses related to the combination for
fees paid to a special committee of the Board of Directors (charged
with evaluating the feasibility of the transaction), and investment
banking, legal, accounting and other transaction expenses. In 1994
these expenses before tax totaled $3,100 of which $2,600 were expensed
in the fourth quarter of 1994. Certain of these expenses are not
deductible for tax purposes. Similar expenses of approximately $1,000
were incurred in 1993 relating to a possible combination.
Additionally, to complete the acquisition, the Company refinanced its
long-term debt and incurred a loss on extinguishment of $683 ($1,102
loss less $419 of income taxes or $.03 per share which has been
classified as an extraordinary item.)
Upon consummation of the acquisition the Company was reorganized
on a global basis into decentralized business divisions. Each
division was required to evaluate its business to determine actions
necessary to maximize the division's and the Company's competitive
position. As a result, in December 1994 the Board of Directors
approved a plan and the Company announced post-combination management
actions which included exiting certain businesses and product lines
which did not fit into the Company's new strategic direction, severing
certain employees employed in the businesses or product lines to be
exited or whose positions had become redundant as a result of the
acquisition and the sale or exiting of certain support facilities
which also became redundant as a result of the acquisition. A summary
of the 1994 charges resulting from these actions follows:
Pre-tax
Amount Description of Action
$3,750 Sever 53 employees primarily in the Human
Pharmaceuticals Segment. All identified
employees were notified in the fourth quarter
of 1994. At year end $3,156 was accrued for
severance to be paid subsequent to
December 31, 1994. In 1995 $2,782 was paid,
the accrual was reduced by $25 and increased
for translation by $57. At December 31, 1995
the balance was $406.
$8,800 Exit by sale or closing the U.S. tablet
business. Write-off includes intangible
assets of $5,800 and plant and equipment of
$3,000. No severance for tablet employees
was accrued based on management's evaluation
of the preferred exit plan (sale). During
1995 the tablet business operated at a
reduced level with a negligible impact on
operating income. Divestiture negotiations
with several potential buyers were not
successful. The Company is continuing to
attempt an exit via a sale transaction.
Should such exit plan fail to be consummated
an adjustment for additional future costs
could be required if the business is closed.
$5,000 Discontinue manufacturing and marketing of
Aquatic Animal Health antibiotics and an oral
health care product produced under license.
Write off includes $1,600 of tangible assets,
primarily machinery and equipment and
intangible assets of $3,400.
$900 Sell unimproved land which was to be the site
for manufacturing expansion. This land is no
longer needed as a result of the acquisition
resulting in a write down to fair market
value. In 1995 the land was offered for sale
however, no transaction was consummated. The
Company believes no additional write down is
warranted.
$600 Close duplicate sales offices and eliminate
duplicate distributors.
In addition, the Company made the decision to no longer pursue
research and development activities relating to the colonic delivery
of drugs and dispose, if possible, of the resultant equity position
and certain other rights in the R&D company performing the research.
The Company accelerated all contractually required payments of $2,500
in the fourth quarter of 1994.
The 1994 expenses for transaction costs (excluding the
extraordinary item) and the post-combination actions described are
included in cost of goods sold ($450) and in selling, general and
administrative expenses ($24,200).
The net after tax effect in 1994 of the transaction costs
including the extraordinary item was approximately $3,600 ($.17 per
share) and the net after tax effect of the post-combination actions
described above was approximately $14,500 ($.67 per share).
In the third quarter of 1995, the Company announced additional
post-combination management actions which continue the process begun
in December 1994. The actions occurred in the third and fourth
quarters of 1995 and include severance of certain employees company
wide, further efforts toward consolidation of operations in the USPD,
the utilization of substantial consulting resources focused primarily
on accelerating the realization of certain combination benefits in the
IPD and the sale in September of its minority equity position and
certain other product rights in the R&D company.
The net effect of the additional management actions for the year
ended December 31, 1995 was a net reduction of selling, general and
administrative expenses of $159 resulting from the income received on
the sale of the equity position in the R&D company and certain other
product rights ($6,463) net of expenses for the other management
actions ($6,304). The expenses of the other management actions were
$4,556 for consulting services and $1,748 for severance for 77
employees in the IPD, USPD and AHD ($1,285 severance accrued at year
end). The net after tax effect of the 1995 actions was approximately
zero.
In 1996, the IPD has continued to take and consider additional
actions which are designed to further strengthen the competitive
nature of the division by lowering costs. In the first quarter of
1996, the IPD has severed 30 sales and marketing personnel primarily
in the Nordic countries and will incur termination related costs of
approximately $1,500. The Company also announced that a preliminary
study of production rationalization alternatives between the IPD's
Copenhagen, Denmark and Lier, Norway manufacturing facilities has
identified potential benefits. Based on these findings, a detailed
study is being initiated which is expected to be completed in the
second quarter of 1996. The Company expects that the detailed study
will result in a formal rationalization proposal which may result in
charges for severance, write downs of fixed assets, and other exit
costs. Any such plan will require approval by the Board of Directors.
4. Business and Product Line Acquisitions:
The following acquisitions were accounted for under the purchase
method and the accompanying financial statements reflect results of
operations from their respective acquisition dates.
In August 1995, the Company acquired a company whose principal
asset was a NADA for a feed additive used in the treatment and
prevention of respiratory diseases in swine. The cost of $3,000 has
been allocated to intangible assets ($1,500) and a covenant not to
compete ($1,500) and will be amortized over 20 and 5 year periods,
respectively.
In July 1994, the Company acquired the Wade Jones Company ("Wade
Jones") headquartered in Lowell, Arkansas. Wade Jones is a major
distributor of poultry animal health products and also manufactures
and blends certain animal health products.
The purchase agreement required a purchase price of approximately
$8,350. In addition, the agreement provided for contingent payments
based on future product approvals. In 1995 a contingent payment of
$500 was made based on receipt of a product approval. The excess of
purchase price over the underlying estimated fair value of net assets
acquired is being amortized over 20 years.
Had the acquisition of Wade Jones occurred as of January 1, 1994
and 1993 pro forma revenues and net income (loss) would have been as
follows (unaudited):
Year Ended
December 31,
1994 1993
Revenues $481,525 $427,014
Income (loss) before extraordinary
item $ (1,488) $ 10,471
Net Income (loss) $ (2,168) $ 10,471
Net Income (loss) per common share
Primary $(.10) $.49
Fully diluted $(.10) $.49
The foregoing pro forma information is presented in response to
applicable accounting rules relating to business acquisitions and is
not necessarily indicative of results of operations that would have
been reported had the acquisition been completed at the beginning of
1994 and 1993.
On January 1, 1993, A.L. Oslo acquired the outstanding shares
(50% ownership) of Norgesplaster A/S which it did not already own from
an unrelated third party for $2,100 in cash. Norgesplaster is a
Norwegian manufacturer of adhesive bandages, surgical tapes and non
medical tapes. The excess of the total cost of the acquisition over
the fair value of the net assets aggregated approximately $900 and is
being amortized over 20 years.
In March 1993, the Company's subsidiary, Barre, acquired a
pharmaceutical manufacturing facility in Lincolnton, North Carolina
("Lincolnton"), including inventories, approved ANDAs and other
related assets for approximately $16,000 including direct costs of
acquisition. The purchase price was paid by cash and by issuance of a
$5,000 long-term promissory note bearing interest at prime. The
facility was designed to manufacture oral liquids and topical
ointments and creams. In addition, a multi-year supply agreement was
signed which provides for the sale from the USPD of pharmaceutical
products to the previous owner of Lincolnton, a major generic drug
distributor.
During 1995 the Company recorded a contingent payment based on
the results of operations required by the purchase agreement of
approximately $1,250 for NMC (acquired in 1990). No further
contingent payments are required for NMC.
Contingent payments are included in intangible assets when earned
and amortized over their remaining life. The excess of purchase
prices over the underlying fair value of net assets acquired for
Lincolnton is being amortized on a straight-line basis over 30 years.
5. Inventories:
Inventories consist of the following:
December 31,
1995 1994
Finished product $ 68,529 $ 60,443
Work-in-process 16,697 14,075
Raw materials 34,858 31,779
$120,084 $106,297
At December 31, 1995 and 1994, approximately $50,800 and $47,300
of inventories, respectively, are valued on a LIFO basis. Such
amounts are higher/(lower) than the FIFO basis by $(321) in 1995
and $376 in 1994.
6. Property, Plant and Equipment:
Property, plant and equipment, at cost, consist of the following:
December 31,
1995 1994
Land $10,040 $ 9,279
Buildings and building
improvements 97,649 90,321
Machinery and equipment 216,728 191,701
Construction in progress 11,763 12,069
336,180 303,370
Less, accumulated depreciation 124,004 100,467
$212,176 $202,903
7. Long-Term Debt:
Long-term debt consists of the following:
December 31,
1995 1994
U.S. Dollar Denominated:
1994 Credit Facility
Term Loan A - 7.000% $ 65,000 $ 65,000
Term Loan B - 7.25% 72,000 72,000
Revolving Credit - 7.00% 18,000 18,000
A/S Eksportfinans 9,000
Lincolnton acquisition note 1,500 3,000
Industrial Development Revenue
Bonds:
Baltimore County, Maryland
(7.25%) 6,220 6,700
(6.875%) 1,200 1,200
Lincoln County, NC 6,000 6,000
Niagara County, NY
(70% of Prime) 100
Other, U.S. 1,919 4,809
Denominated in Other Currencies:
Mortgage notes payable (NOK) 33,571 32,496
Bank and agency development
loans (NOK) 17,345 16,979
Lundbeck acquisition note 6,056
Other, foreign 857 984
232,611 233,324
Less, current maturities 13,160 13,288
$219,451 $220,036
On September 28, 1994, the Company signed a $185,000 credit
agreement ("1994 Credit Facility") with a consortium of banks arranged
by the Union Bank of Norway and Den norske Bank A.S. The agreement
provided for the refinancing of outstanding indebtedness, the
acquisition of A.L. Oslo (including related transaction costs, fees
and expenses) and for general corporate purposes.
The 1994 Credit Facility provided for the loans as follows:
Term Loan Term Loan Revolving Credit
(A) (B) Facility
Maximum Amount $65,000 $72,000 $48,000
Term 7 years 5 years 4 years 3 months
Interest Rate Eurodollar Eurodollar Eurodollar rate
(Variable) rate plus rate plus plus 1.0% (2)
1.25% (1)(2) 1.125%(2)
Amount of 5% to 9% of 5% to 10% of Revolving
repayment loan amount loan amount 100% at
per year per year maturity
commencing in commencing in subject to
1996 and 30% 1996 and 55% extension
at final at final
maturity maturity
(1) The interest rate was fixed at 5.655% plus 1.25% by the use
of an interest rate swap through October 1998. (See Note 16.)
(2) Margin rate, in effect, at next interest fixing date.
On October 3, 1994, concurrent with the acquisition of A.L. Oslo
the Company borrowed $142,000 under the 1994 Credit Facility and
subsequently repaid bank term loans of $71,279 and line of credit debt
of $30,620. The repayment of the bank term loans resulted in a loss on
repayment to $1,102 ($683 net of tax). The loss has been classified as
an extraordinary item.
On December 21, 1995, the Company's Danish subsidiary A/S Dumex
borrowed $9,000 from A/S Eksportfinans with credit support provided by
Union Bank of Norway and Bikuben Girobank A/S ("Bikuben") to finance
an expansion of its Vancomycin manufacturing facility in Copenhagen.
The term of the loan is seven years. Repayment will be made in ten
semi-annual installments of $900 beginning March 23, 1998 and ending
September 22, 2002 Interest for the loan is fixed at 6.59%, including
the cost of the credit support provided via guarantee by Union Bank of
Norway and Bikuben.
In connection with the purchase of the Lincolnton facility, the
Company issued the former owner a promissory note of $5,000 bearing
interest at prime. ($1,500 at 8.75% is outstanding as of December 31,
1995.) Repayment of the balance is required in 1996.
The Baltimore County Industrial Development Revenue Bonds are
payable in varying amounts through 2009. Plant and equipment with an
approximate net book value of $13,200 collateralize the Baltimore
County Industrial Revenue Bonds.
In August 1994, the Company issued Industrial Development Revenue
Bonds for $6,000 in connection with the expansion of the Lincolnton,
North Carolina plant. The bonds require monthly interest payments at
a floating rate (5.45% at December 31, 1995; 4.11% cumulative weighted
average for 1995) approximating the current money market rate on tax
exempt bonds and the payment by the Company of annual letter of
credit, remarketing, trustee, and rating agency fees of 1.125%. The
bonds require a yearly sinking fund redemption of $500 from August
1996 to August 2004 and $300 thereafter through August 2009. Plant and
equipment with an approximate net book value of $10,700 serve as
collateral for this loan.
The mortgage notes payable denominated in Norwegian Kroner (NOK)
were originally issued in connection with the construction of a
pharmaceutical facility in Lier, Norway and are collateralized by this
facility (net book value of $39,500 at December 31, 1995) and the
Oslo, Norway ("Skoyen") facility. (See Note 12.) The debt was
borrowed in a number of tranches over the construction period and
interest is fixed for specified periods based on actual yields of
Norgeskreditt publicly traded bonds plus a lending margin of 0.70%.
The weighted average interest rate at December 31, 1995 and 1994 was
8.8% and 9.6%, respectively. In 1996, debt of approximately $27,000
will be subject to interest rate adjustments based on the then current
rates. The tranches are repayable in semiannual installments through
2021. Yearly amounts payable vary between $1,265 and $2,085.
A.L. Oslo has various loans with government development agencies
and banks which have been used for acquisitions and construction
projects. Such loans are collateralized by the Skoyen property and
require yearly payments made semiannually through 1998 of between $772
and $1,866 and a final payment of $12,378 in 1999. The weighted
average interest rate of the loans at December 31, 1995 and 1994 was
6.4% and 6.9%, respectively. At December 31, 1995, A.L. Oslo has
entered a six month forward rate agreement for approximately $7,900 of
such debt at an interest rate of 5.13%. The banks and agencies have
the option to extend payment in 1999.
As of December 31, 1995, A.L. Oslo had approximately $11,000
available in NOK in three year line of credit agreements with two
banks. The credit lines require certain equity, cash flow and quick
ratios, as defined, be maintained.
The 1994 Credit Facility has a number of loan covenants, the most
restrictive of which is the equity to asset ratio. Certain NOK loans
have loan covenants which apply directly to A.L. Oslo.
Maturities of long-term debt during each of the next five years
and thereafter are as follows:
Year ending December 31,
1996 $13,160
1997 19,539
1998 30,409
1999 91,429
2000 15,525
Thereafter 62,549
$232,611
8. Short-Term Debt:
Short-term debt consists of the following:
December 31,
1995 1994
Domestic $48,240 $42,096
Foreign 14,456 19,100
$62,695 $61,196
At December 31, 1995, the Company and its domestic subsidiaries
have available bank lines of credit totaling $61,250. Borrowings
under these lines are made for periods generally less than three
months and bear interest from 6.58% to 8.25% at December 31, 1995. At
December 31, 1995, the amount of the unused lines totaled $13,010.
At December 31, 1995, the Company's foreign subsidiaries have
available lines of credit with various banks totaling $29,007 ($26,127
in Europe and $2,880 in the Far East). Drawings under these lines are
made for periods generally less than three months and bear interest at
December 31, 1995 at rates ranging from 5.45% to 6.81%. At December
31, 1995, the amount of the unused lines totaled $14,551 ($12,427 in
Europe and $2,124 in the Far East).
The weighted average interest rate on short-term debt during the
years 1995, 1994 and 1993 was 6.6%, 5.9% and 5.7%, respectively.
9. Income Taxes:
Domestic and foreign income from continuing operations before
income taxes was $17,548 and $12,680, respectively in 1995, $158 and
$1,578, respectively in 1994, and $13,348 and $3,750, respectively in
1993. 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,
1995 1994 1993
Current:
Federal $ 6,009 $6,246 $4,104
Foreign 3,074 1,389 1,595
State 1,274 1,310 777
10,357 8,945 6,476
Deferred:
Federal (27) (5,018) 748
Foreign 958 142 (397)
State 123 (630) 142
1,054 (5,506) 493
Provision for
income taxes $11,411 $3,439 $6,969
A reconciliation of the statutory U.S. federal income tax
rate to the effective rate follows:
Years Ended December 31,
1995 1994 1993
Provision for income taxes at
statutory rate 35.0% 35.0% 35.0%
State income tax, net of federal
tax benefit 3.0% 25.5% 3.5%
Higher (lower) taxes on foreign
earnings, net (2.6%) 14.2% (4.4%)
Tax credits (1.3%) (0.1%) (0.4%)
Non-deductible costs, principally
depreciation and amortization
related to acquired companies 3.9% 78.1% 7.1%
Capitalized combination costs 49.4%
Other ( .2%) (4.0%)
Provision for income taxes 37.8% 198.1% 40.8%
Deferred tax liabilities (assets) are comprised of the following:
Year Ended
December 31,
1995 1994
Accelerated depreciation and amortization
for income tax purposes $24,637 $22,157
Excess of book basis of acquired assets
over tax bases 9,308 9,200
Differences between inventory valuation
methods used for book and tax purposes
(Denmark) 2,887 2,186
Other 1,462 40
Gross deferred tax liabilities 38,294 33,583
Accrued liabilities and other reserves (7,245) (6,115)
Pension liabilities (1,321) (1,250)
Loss carryforwards (988) (801)
Other (2,666) (1,035)
Gross deferred tax assets (12,220) (9,201)
Deferred tax assets valuation allowance 988 801
Net deferred tax liabilities $27,062 $25,183
As of December 31, 1995, the Company has state loss carryforwards
of approximately $10,976, which are available to offset future taxable
income. These carryforwards will expire between the years 1999 and
2002. Accordingly, the Company has recognized a deferred tax asset
relating to these carryforwards. Based on analysis of current
information, the Company has established a valuation allowance for the
entire amount of these carryforwards.
Danish tax law prior to 1991 allowed the Company's Danish
subsidiaries to appropriate an investment fund of up to 25% of annual
taxable income adjusted for certain items. The appropriation is tax
deductible in the year it was made. Fifty percent of the amount
appropriated must be deposited in an interest-yielding blocked bank
account. Blocked funds are released with the acquisition of the
qualifying property and equipment. Included in "other assets and
deferred charges" as of December 31, 1995 and 1994 is $1,181 and
$1,481, respectively, of such blocked funds.
10. Pension Plans:
Domestic:
Prior to July 1, 1994, the Company maintained two qualified
noncontributory, defined benefit pension plans ("A.L. Plan" and
"Subsidiary Plan") covering the majority of its domestic employees.
Effective July 1, 1994, the Company amended the A.L. Plan to include
certain subsidiary employees and merged the Subsidiary Plan into the
A.L. Plan. The benefits are based on years of service and the
employee's compensation during the last five years of service. The
Company's funding policy is to contribute annually an amount that can
be deducted for federal income tax purposes. During 1995 the Company
consolidated its Plan assets under a single custodian and a single
investment manager. Plan assets are invested in equities, government
securities and bonds.
Net pension cost for 1995, 1994 and 1993 included the following
components:
Years Ended December 31,
1995 1994 1993
Service cost $1,049 $1,047 $ 939
Interest cost 874 856 693
Actual return on plan assets (1,434) 105 (375)
Net amortization and deferral 957 (502) 106
$1,446 $1,506 $1,363
The following tables set forth the plan's funded status as of
December 31, 1995 and 1994:
Accumulated
Benefits Exceed
Assets
1995 1994
Accumulated benefit obligation:
Vested $ 7,549 $ 5,388
Nonvested 1,196 770
$ 8,745 $ 6,158
Projected benefit obligation $12,827 $ 8,767
Fair value of plan assets (9,972) (5,658)
Unrecognized net loss (4,014) (2,705)
Unrecognized prior service cost 1,439 1,540
Unrecognized net transition
obligation (244) (274)
Accrued pension costs $ 36 $ 1,670
The assumptions used were as follows:
1995 1994 1993
Weighted average discount rate 7.25% 8.5% 7.25%
Rate of increase in compensation
rate 4.0% 5.0% 5.0%
Expected long-term rate of return
on plan assets 8.0% 8.0% 8.0%
In 1993, the Company incurred a settlement loss of $322 as a
result of a number of retirees accepting lump sum settlements in lieu
of receiving pension benefits.
In addition, the Company has unfunded supplemental executive
pension plans providing additional benefits to a few highly
compensated employees. For 1995 and 1994 such pension expense was
approximately $65 and $60 and the year end accrual was $180 and $115.
Prior year expenses and accruals were not material.
The Company and its domestic subsidiaries also have a number of
defined contribution plans, both qualified and non-qualified, which
allow eligible employees to withhold a fixed percentage of their
salary (maximum 10%) and provide for a Company match based on service
(maximum 6%). The Company's contributions to these plans were
approximately $1,200, $700 and $500 in 1995, 1994 and 1993,
respectively.
Europe:
A.L. Oslo has defined benefit plans which cover the majority of
its employees. These pension commitments are funded through a
collective agreement with a Norwegian insurance company and A.L. Oslo
makes annual contributions to the plan in accordance with Norwegian
insurance principles and practices. In addition to the annual
premiums, A.L. Oslo has made prepayments to specific premium funds.
These premium funds are used to cover ordinary future annual premiums.
The pension plan assets are deposited in the insurance company's
general account which is principally invested in fixed income
securities.
A.L. Oslo also maintains a direct pension arrangement with
certain employees. These pension commitments are paid out of general
assets and the obligations are accrued but not prefunded.
Net pension cost for 1995, 1994 and 1993 included the following
components:
1995 1994 1993
Service cost $ 954 $1,009 $ 729
Interest cost 993 766 895
Actual return on plan assets (456) (340) (12)
Net amortization and deferral (66) (178) (478)
$1,425 $1,257 $1,134
The following tables set forth the plans' funded status as of December
31, 1995 and 1994:
Assets Exceed Accumulated
Accumulated Benefits
Benefits Exceed Assets
1995 1994 1995 1994
Accumulated benefit
obligation:
Vested $ 9,195 $ 7,337 $ 1,376 $ 1,455
Nonvested 140 418 ______ ______
$ 9,335 $ 7,755 $ 1,376 $ 1,455
Projected benefit
obligation $14,468 $12,041 $ 1,422 $ 1,503
Fair value of plan
assets (10,298) (8,978)
Unrecognized net gain
(loss) 1,893 2,082 (40) (7)
Unrecognized prior
service cost (868) (856) (426) (459)
Unrecognized net
transition obligation (1,398) (1,409) (33) (36)
Additional minimum
liability ______ 454 454
Accrued pension costs $ 3,797 $ 2,880 $ 1,377 $ 1,455
The assumptions used were as follows:
1995 1994 1993
Weighted average discount rate 7.0% 7.0% 7.0%
Rate of increase in compensation
rate 3.5% 3.5% 3.5%
Expected long-term rate of return
on plan assets 7.0% 7.0% 7.0%
The Company's Danish subsidiary, Dumex, has a defined
contribution pension plan for salaried employees. Under the plan, the
Company contributes a percentage of each salaried employee's
compensation to an account which is administered by an insurance
company. Pension expense under the plan was approximately $2,400,
$1,900 and $1,800 in 1995, 1994 and 1993, respectively.
11. Postretirement Benefits:
The Company has an unfunded postretirement medical and nominal
life insurance plan covering certain domestic employees included in
the A.L. Plan as of January 1, 1993. The plan will not be extended to
any additional employees. Retired employees are required to
contribute for coverage as if they were active employees.
The Company adopted SFAS 106 on January 1, 1993 and elected to
recognize the change on a delayed recognition basis. Accordingly, the
transition obligation of $1,079 will be amortized over twenty years.
The discount rate used in determining the 1995, 1994 and 1993 expense
was 8.5%, 7.25%, and 8.0%, respectively. The discount rate used in
determining the accumulated post retirement obligation as of December
31, 1995 and 1994 was 7.25% and 8.5%, respectively. The health care
cost trend rate was 8.0% declining to 5.0% over a ten year period,
remaining level thereafter.
The unfunded plan is recognized at December 31, 1995 and 1994 as
follows:
1995 1994
Accumulated postretirement benefit obligation
Retirees $ 579 $ 277
Fully eligible active participants 191 180
Other active participants 1,276 819
2,046 1,276
Unrecognized estimated net (loss) gain (500) 102
Unrecognized transition obligation (917) (971)
Accrued postretirement benefit cost $ 629 $ 407
The net periodic postretirement benefit cost included the
following components.
1995 1994 1993
Service cost $ 101 $102 $ 94
Interest cost 127 97 85
Amortization of
transition obligation 54 54 54
$282 $253 $233
12. Transactions With A. L. Industrier:
Years Ended December 31,
1995 1994 1993
Sales to and commissions received
from A.L. Industrier $3,353 $2,805 $2,855
Compensation received for
management services rendered to
A.L. Industrier $ 630 $ 854 $ 876
Inventory purchased from and
commissions paid to A.L.
Industrier $ 214 $ 291 $ 580
Net interest received from A.L.
Industrier - $ 401 $ 850
As of December 31, 1995 and 1994 there was a net current
receivable of $702 and $673, respectively, from A.L. Industrier.
The Company and A.L. Industrier have an administrative service
agreement whereby the Company is required to provide management
services to A.L. Industrier with an initial term through January 1,
1997. The agreement provides for payment equal to the direct and
indirect cost of providing the services subject to a minimum amount in
the initial term. The agreement may be terminated by either party
upon six months notice after the initial term.
In addition, in connection with the agreement to purchase A.L.
Oslo, A.L. Industrier retained the ownership of the Skoyen
manufacturing facility and administrative offices (not including
leasehold improvements and manufacturing equipment) and leases it to
the Company. The agreement also permits the Company to use the Skoyen
facility as collateral on existing debt for five years. The Company
is required to pay all expenses related to the operation and
maintenance of the facility in addition to nominal rent. The lease
has an initial 20 year term and is renewable at the then fair rental
value at the option of the Company for four consecutive five year
terms.
13. Contingent Liabilities, Litigation and Commitments:
In November 1992, a class action complaint was filed against the
Company and certain senior executives related to alleged losses as a
result of a decline in the Company's stock price in November 1992. In
the fourth quarter of 1993 the Company settled the lawsuit while
continuing to deny all facts and liabilities in the matter. The gross
settlement amount was $2,300 with a significant amount covered by
insurance. The settlement amount was paid prior to December 31, 1993.
The Company and its subsidiaries are, from time to time, involved
in litigation arising out of the ordinary course of business. It is
the view of management, after consultation with counsel, that the
ultimate resolution of all pending suits should not have a material
adverse effect on the consolidated financial position of the Company.
In connection with a 1991 product line acquisition, the Company
entered into a ten-year manufacturing agreement which requires the
Company to purchase a yearly minimum quantity of feed additives on a
cost-plus basis. If the minimum quantities are not purchased, the
Company must reimburse the supplier a percentage of the fixed costs
related to the unpurchased quantities. The current cost of the yearly
minimum quantity is approximately $7,000 and the fixed cost portion is
approximately 20%. For 1995 and prior years, the Company has
purchased in excess of the minimum quantities.
As part of an exclusive distributorship agreement the Company is
required to purchase minimum quantities of certain poultry products
(approximately $10,000 per year) through 1998. Should the Company not
purchase the minimum quantities for reasons other than a substantial
disruption of the market it could be required to pay for the
difference between the minimum quantity and the actual amount
purchased.
14. Leases:
Rental expense under operating leases for 1995, 1994 and 1993 was
$5,574, $5,313 and $5,099, 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,
1996 $ 4,900
1997 4,200
1998 3,600
1999 3,000
2000 2,500
Thereafter 8,900
$27,100
15. Stockholders' Equity:
The holders of the Company's Class B Common Stock, (totally held
by A. L. Industrier at December 31, 1995) are entitled to elect 66
2/3% of the Board of Directors of the Company and may convert each
share of Class B Common Stock held into one fully paid share of Class
A Common Stock. Whenever the holders of the Company's common stock
are entitled to vote as a combined class, each holder of Class A and
Class B Common Stock is entitled to one and four votes, respectively,
for each share held.
In connection with the acquisition of A.L. Oslo the Company
issued warrants to purchase 3,600,000 shares of Class A Common stock
for $21.945 per share through January 3, 1999. Warrants to purchase
2,450,246 shares became exercisable in October 1995 with the balance
to become exercisable in October 1997. (See Note 3.)
The number of authorized shares of Preferred Stock is 500,000;
the number of authorized shares of Class A Common Stock is 40,000,000;
and the number of authorized shares of Class B Common Stock is
15,000,000.
16. Derivatives and Fair Value of Financial Instruments:
The Company currently uses the following derivative financial
instruments for purposes other than trading.
Derivative Use Purpose
Forward foreign 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, 1995 and 1994, the Company's European
subsidiaries had foreign currency contracts outstanding with a
notional amount of approximately $8,000 and $19,000, respectively.
These contracts called for the exchange of Scandinavian and European
currencies and in some cases the U.S. Dollar to meet commitments in or
sell cash flows generated in non-functional currencies. All
outstanding contracts will expire by March 15, 1996.
In November 1995, the Company entered into two interest rate swap
agreements with two members of the consortium of banks which are
parties to the 1994 Credit Facility to reduce the impact of changes in
interest rates on a portion of its floating rate long-term debt. The
swap agreements fix the interest rate at 5.655% plus 1.25% for term
loan A ($65,000 at December 31, 1995) through October 1998. (See Note
7.) In addition, A.L. Oslo has a forward rate agreement which fixes
the interest rate on a 50,000,000 NOK tranche ($7,900) for a six month
period in 1996 at 5.13%.
Counterparties to derivative agreements are major financial
institutions. Management believes the risk of incurring losses
related to credit risk is remote.
The carrying amount reported in the consolidated balance sheets
for cash and cash equivalents, accounts receivable, accounts payable
and short-term debt approximates fair value because of the immediate
or short-term maturity of these financial instruments. The carrying
amount reported for long-term debt approximates fair value because a
significant portion of the underlying debt is at variable rates and
reprices frequently.
17. Stock Options and Employee Stock Purchase Plan:
Under the Company's 1983 Incentive Stock Option Plan, as amended
(the "Plan"), the Company may grant options to key employees to
purchase shares of Class A Common Stock. In June 1995 the Company's
stockholders approved an increase, from 1,650,000 to 2,500,000, in the
maximum number of shares available for grant. The exercise price of
options granted under the Plan may not be less than 100% of the fair
market value of the Class A Common Stock on the date of the grant.
Generally, options are exercisable in installments of 25% beginning
one year from date of grant. The Plan permits a cash appreciation
right to be granted to certain employees. This right must be
exercised at the same time the stock option is exercised and is
limited to one half of the total number of shares being exercised.
Included in options outstanding at December 31, 1995 are options to
purchase 1,875 shares with cash appreciation rights, all of which are
exercisable. If an option holder ceases to be an employee of the
Company or its subsidiaries for any reason prior to vesting of any
options, all options which are not vested at the date of termination
are forfeited. As of December 31, 1995 and 1994, options for 881,748
and 299,373 shares, respectively, were available for future grant. The
table below summarizes the activity of the Plan:
Shares Option Shares
Outstanding Price Exercisable
Balance at December 31, 1992 444,461 $ 4.58 - $19.50 195,555
Granted in 1993 122,500 $21.38 - $27.13
Canceled in 1993 (20,187) $15.00 - $22.13
Exercised in 1993 (56,874) $ 4.58 - $16.62
Balance at December 31, 1993 489,900 $ 4.58 - $27.13 226,155
Granted in 1994 207,000 $13.50 - $16.87
Canceled in 1994 (23,625) $ 8.75 - $23.13
Exercised in 1994 ( 1,700) $ 8.75 - $ 8.75
Balance at December 31, 1994 671,575 $ 4.58 - $27.13 319,703
Granted in 1995 308,500 $18.38 - $18.75
Canceled in 1995 (40,875) $13.50 - $26.25
Exercised in 1995 (42,425) $ 6.58 - $22.13
Balance at December 31, 1995 896,775 383,278
The Company implemented an Employee Stock Purchase Plan on
January 1, 1991. Eligible employees of the Company and its domestic
subsidiaries may authorize payroll deductions up to 4% of their
regular base salary to purchase shares of Class A Common Stock at the
fair market value. The Company matches these contributions with an
additional contribution equal to 25% of the employee's contribution.
Shares are issued on the last day of each calendar quarter. The
Company's contributions to the plan were approximately $155, $156 and
$140 in 1995, 1994 and 1993, respectively.
18. Supplemental Data:
Years Ended December 31,
1995 1994 1993
Allowance for doubtful accounts
receivable at year end $ 5,751 $ 4,897 $ 2,983
Research and development
expense 32,815 32,497* 24,032
Depreciation expense 22,085 18,342 16,096
Amortization expense 8,937 8,431 7,746
Interest cost incurred 22,311 16,077 15,258
Other income (expense) net:
Interest income 711 1,432 1,915
Foreign exchange gains
(losses), net (854) (34) 163
Other, net (117) (285) (198)
$ (260) $ 1,113 $ 1,880
* Includes $2,500 for contractually required payments for
Research and Development paid on an accelerated basis in December
1994. (See Note 3.)
Supplemental cash flow information:
Cash paid for interest
(net of amount capitalized) $19,812 $15,687 $15,025
Cash paid for income taxes 8,223 9,228 8,848
Supplemental schedule of
noncash investing and
financing activities:
Warrants issued $ 6,552
Fair value of assets acquired $ 3,500 $19,437 $36,461
Cash paid 3,500 13,733 17,280
Liabilities assumed $ 0 $ 5,704 $19,181
19. Information Concerning Business Segments and Geographic
Operations:
The Company currently conducts its business operations in two
business segments: (1) Human Pharmaceuticals and (2) Animal Health.
The Human Pharmaceuticals business includes the USPD, IPD and FCD.
The Animal Health business consists of the AHD and AAHD. The
Company's operations outside the United States are conducted primarily
in Europe by the Company's manufacturing subsidiaries in Norway and
Denmark.
Depre-
ciation
and
Identi- Amorti- Capital
Total Operating fiable zation Expendi-
1995 Revenue Income(1) Assets Expense tures
Business segments:
Human
Pharmaceuticals $358,392 $26,115 $476,738 $23,375 $15,708
Animal Health 163,322 30,839 140,860 7,406 8,720
Unallocated 407 (4,445) 17,255 241 408
Eliminations (1,239) (28) _______ ______ ______
$520,882 $52,481 $634,853 $31,022 $24,836
Geographic:
United States $328,491 $32,799 $376,134
Europe and Other 219,970 20,327 260,510
Eliminations (27,579) (645) (1,791)
$520,882 $52,481 $634,853
1994
Business segments:
Human
Pharmaceuticals $329,113 $(3,850) $454,685 $20,900 $25,201
Animal Health 141,077 28,532 122,804 5,657 18,134
Unallocated 615 (8,708) 14,829 216 991
Eliminations (1,542) 4
$469,263 $15,978 $592,318 $26,773 $44,326
Geographic:
United States $303,270 $ 6,774 $362,359
Europe and Other 179,714 9,180 230,722
Eliminations (13,721) 24 (763)
$469,263 $15,978 $592,318
1993
Business segments:
Human
Pharmaceuticals $284,739 $ 8,564 $428,372 $18,780 $16,630
Animal Health 118,733 28,848 86,244 4,891 7,144
Unallocated 470 (7,253) 13,001 171 270
Eliminations (1,267) 55 ______
$402,675 $30,214 $527,617 $23,842 $24,044
Geographic:
United States $249,301 $17,404 $319,854
Europe and Other 164,075 12,853 208,618
Eliminations (10,701) (43) (855)
$402,675 $30,214 $527,617
1. 1994 operating income includes charges for post-combination actions related
to the acquisition of A.L. Oslo and transaction expenses. 1995 operating
income includes (income) and charges for additional management actions. The
segments are impacted as follows:
1995 1994
Human Pharmaceuticals $(639) $19,000
Animal Health 480 1,950
Unallocated - 3,700
$(159) $24,650
20. Selected Quarterly Financial Data (unaudited):
Quarter
Total
1995 First Second Third Fourth Year
Total revenue $126,080 $123,817 $132,375 $138,610 $520,882
Gross profit 52,669 52,424 52,123 61,539 $218,755
Net income(a) 3,925 3,054 6,169 5,669 18,817
Earnings per common share:
Primary .18 .14 .28 .26 .86
Net income
Fully diluted
Net income(b) .18 .14 .28 .25 .84
1994
Total revenue $107,380 $110,958 $117,438 $133,487 $469,263
Gross profit 45,230 45,504 48,261 54,725 193,720
Income loss before
extraordinary item 3,551 2,807 4,005 (12,066) (1,703)
Net income (loss)(c) $ 3,551 $ 2,807 $ 4,005 $(12,749) $(2,386)
Earnings per common share:
Primary
Income (loss) before
extraordinary item $ .16 $ .13 $ .19 $ (.56) $(.08)
Net income (loss) $ .16 $ .13 $ .19 $ (.59) $(.11)
Fully diluted
Income (loss) before
extraordinary item $ .16 $ .13 $ .19 $ (.56) $(.08)
Net income (loss) $ .16 $ .13 $ .19 $(.59) $ (.11)
(a) The third quarter of 1995 includes post-combination
management actions which increased net income by $1,754 ($.08 per
share). Actions included pre-tax income from the sale of
an equity interest in an R&D company $6,463 less pre-tax
expenses of $3,634 for severance and substantial consulting
expenses.
The fourth quarter of 1995 includes post-combination
management actions which reduced net income by $1,776 ($.08
per share). Actions included pre-tax expenses of $2,670 for
severance and consulting. (See Note 3.)
(b) The sum of the fully diluted earnings per share for the four
quarters in 1995 does not equal the total for the year due to
the dilutive effect of the Company's warrants on the full
year computation.
(c) The fourth quarter 1994 reflects an extraordinary item for
the write off of deferred loan costs of $683, net of tax,
related to the early extinguishment of debt. The fourth
quarter also includes expenses for transaction costs and
related charges for post-combination actions taken by
management. Such expenses reduced net income by $17,025
($.79 per share). (See Note 3.)
ALPHARMA INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In thousands of dollars)
Column A Column B Column C Column D Column E
Additions
Balance at Charged (Credited) to Balance
Beginning Costs and Other At End
Description of Period Expenses Accounts Deductions of Period
Reserve for doubtful accounts:
Year ended December 31,
1995 $ 4,897 $2,166 ($195) * ($1,117)** $5,751
1994 $ 2,983 $1,861 $ 261 * ($ 208)** $4,897
1993 $ 2,965 $ 502 ($ 148) * ($ 336)** $2,983
* Includes $65 in 1993, related to business acquisitions and $283,
($152) and ($150) in 1995, 1994 and 1993, respectively, related to
foreign currency translation adjustments. Includes ($480) and
($61) of cash collected in 1995 and 1993, respectively, on
previously written off accounts.
** Accounts written off to reserve.