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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, 1997
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 2, 1998 was
$371,482,000.
The number of shares outstanding of each of the Registrant's
classes of common stock as of March 2, 1998 was:
Class A Common Stock, $.20 par value - 15,848,187 shares;
Class B Common Stock, $.20 par value - 9,500,000 shares.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Proxy Statement relating to the Annual Meeting of
Shareholders to be held on May 8, 1998 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
Formation
Alpharma Inc. (the "Company") is a multinational
pharmaceutical company that develops, manufactures and markets
specialty generic and proprietary human pharmaceutical and animal
health products.
The Company was originally organized in 1975 as a wholly-
owned subsidiary of Apothekernes Laboratorium A.S, a Norwegian
health care company established in 1903. The Company's Class A
Common Stock is listed on the New York Stock Exchange under the
trading symbol "ALO".
The Company has grown significantly since it became publicly
held in 1984; it now operates in more than 50 countries around
the world. The Company relies on its own employees to serve
customers at 33 sites in 21 countries. At its other locations,
the Company does business through independent contractors.
A.L. Industrier
A.L. Industrier (formally Apothekernes Laboratorium
A.S.)beneficially owns all of the outstanding shares of the
Company's Class B Common Stock, or 37.5% of the Company's total
common stock outstanding at December 31, 1997. The Class B
Common Stock bears the right to elect more than a majority of the
Company's Board of Directors and to cast a majority of the votes
in any vote of the Company's stockholders. As a result, A.L.
Industrier can control the Company.
Acquisition of Complementary Business and Related Transactions
The Combination Transaction: In October,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.
Immediately after the Combination Transaction was completed,
the Company reorganized into two business segments: Human
Pharmaceuticals and Animal Health.
Human Pharmaceuticals comprises three operating divisions:
U.S. Pharmaceuticals, which is referred to as the "USPD."
International Pharmaceuticals, which is referred to as the
"IPD"
Fine Chemicals, which is referred to as the "FCD."
The Animal Health segment comprises two operating divisions:
Animal Health, which is referred to as the "AHD."
Aquatic Animal Health, which is referred to as the "AAHD."
The Stock Purchase Warrants: In connection with the
Combination Transaction the Company issued warrants which allow
the holders to purchase 3,819,600 of the Company's Class A Common
stock at an exercise price of $20.69 and expire on January 3,
1999. The Company registered approximately 68% of the warrants
(those not issued to E.W. Sissener, the CEO of the Company and
certain related parties) with the Securities and Exchange
Commission. In addition, the Company listed all warrants and
shares to be issued upon the exercise of the warrants for trading
and quotation on the New York Stock Exchange.
The Rights Offering and Related Purchase of B Shares
In February 1997, the Board of Directors(a)entered into a
subscription agreement pursuant to which A.L. Industrier
irrevocably committed to purchase (and has purchased) 1,273,348
new shares of Class B Common Stock at 16.34 per share and (b)
approved a distribution to the Company's Class A Common
shareholders of special rights (the "Rights") to purchase
additional shares of Class A Common Stock for $16.34 per share.
The Rights were registered with the Securities and Exchange
Commission and distributed to the Class A shareholders in
September 1997. Each Right entitled the holder to acquire one
share of new Class A Common Stock for every six shares already
owned - a ratio designed to enable Class A shareholders to
maintain their respective ownership percentages after A.L.
Industrier purchased its 1,273,438 new shares of Class B Common
Stock. Before the Rights expired on November 25, 1997, over 97%
were exercised, resulting in the issuance of 2,201,837 new shares
of Class A Common Stock.
Forward-Looking Statements
This annual report contains "forward-looking statements," or
statements that are based on current expectations, estimates, and
projections rather than historical facts. The Company offers
forward-looking statements in reliance on the safe harbor
provisions of the Private Securities Litigation Reform Act of
1995. Forward-looking statements may prove, in hindsight, to
have been inaccurate because of risks and uncertainties that are
difficult to predict. Many of the risks and uncertainties that
the Company faces are included under the caption "Risk Factors"
in "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Financial Information About Industry Segments
The Company's two business segments are Human
Pharmaceuticals and Animal Health. The table that follows shows
how much each of these segments and their respective operating
divisions contributed to revenues in the past three years.
1997 1996 1995
Human Pharmaceuticals
USPD 31% 31% 33%
IPD 27% 29% 28%
FCD 7% 7% 8%
65% 67% 69%
Animal Health
AHD 32% 30% 29%
AAHD 3% 3% 2%
35% 33% 31%
Total Revenues 100% 100% 100%
For additional financial information concerning the
Company's business segments see Note 20 of the Notes to the
Consolidated Financial Statements included in Item 8 of this
Report.
NARRATIVE DESCRIPTION OF BUSINESS
HUMAN PHARMACEUTICALS
The human pharmaceuticals segment is comprised of three of
the five operating divisions of the Company, namely the USPD, IPD
and FCD. Each of these divisions is managed by a single senior
management team.
U.S. Pharmaceuticals Division (the "USPD")
Overview: The USPD develops, manufactures, and markets
specialty generic prescription and over-the-counter ("OTC")
pharmaceuticals for human use.
Generic pharmaceuticals are the chemical and therapeutic
equivalents of brand-name drugs. Although typically less
expensive, they are required to meet the same governmental
standards as brand-name drugs and most must receive approval from
the U.S. Food and Drug Administration ("USFDA") prior to
manufacture and sale. A manufacturer cannot produce or market a
generic pharmaceutical until all relevant patents (and any
additional government-mandated market exclusivity periods)
covering the original brand-name product have expired.
Sales of generic pharmaceuticals have continued to increase.
The Company has identified four reasons for this trend:
laws permitting and/or requiring pharmacists to substitute
generics for brand-name drugs;
pressure from managed care and third party payors to
encourage health care providers and consumers to contain costs;
increased acceptance of generic drugs by physicians,
pharmacists, and consumers; and
an increase in the number of formerly patented drugs which
have become available to off-patent competition.
(See "Regulation" and "Risk Factors - Competition" for a
discussion of certain recent trends and factors affecting the
generic drug industry.)
Product Lines: The USPD (excluding its telemarketing
operation) manufactures and/or markets approximately 170 generic
products, primarily in liquid, cream, ointment and suppository
dosage forms. Each product represents a different chemical
entity. These products are sold in over 300 product presentations
under the "Alpharma", "Barre" or "NMC" labels and private labels.
Since January 1997, the USPD has received approvals from the FDA
to manufacture and market six additional pharmaceutical products
and tentative approvals for two products.
Liquid Pharmaceuticals: The USPD is the leading U.S.
manufacturer of generic pharmaceutical products in liquid
form with approximately 110 products. The experience and
technical know-how of the USPD enables it to formulate
therapeutic equivalent drugs in liquid forms and to refine
product characteristics such as taste, texture, appearance
and fragrance.
Cough and cold remedies constitute a significant portion of
the USPD's liquid pharmaceuticals business. This business is
seasonal in nature, and sales volume is higher in the fall
and winter months and is affected, from year to year, by the
incidence of colds, respiratory diseases, and influenza.
Creams, Lotions and Ointments: The USPD manufactures
approximately 50 cream, lotion and ointment products for
topical use. Most of these creams, lotions and ointments
are sold only by prescription.
Suppositories, Aerosols and Other Specialty Generic
Products. The USPD also manufactures five suppository
products and markets certain other specialty generic
products, including two aerosols and two nebulizer products.
In addition, in 1997, the USPD entered into third party
alliances to market certain USPD products under third party
brands and other USPD products in unit dose package sizes. A
single product is presently being sold by each of these ventures
with the intent to add additional products as appropriate.
See "Legal Proceedings" for a discussion of certain
litigation relating to a USPD product and "Environmental Matters"
for a discussion of an administrative proceeding involving a USPD
product.
Facilities: The USPD maintains two manufacturing facilities
for its U.S. pharmaceutical operations, a research and
development center, two telemarketing facilities and an automated
central distribution center. The USPD's largest manufacturing
facility is located in Baltimore, Maryland and is designed to
manufacture high volumes of liquid pharmaceuticals. The USPD's
facility in Lincolnton, North Carolina manufactures creams,
ointments and suppositories. Pursuant to the USPD's plan to
reduce manufacturing costs and improve efficiencies, the USPD
closed two facilities in New York and New Jersey and transferred
the operations conducted at those facilities to its facility in
Lincolnton. The Company expects the Lincolnton facility's
production to increase and become more efficient as it realigns
production capacity in accordance with the accelerated production
consolidation plan announced in May 1996.
Competition: Although the USPD is a market leader in the
U.S. in the manufacture and marketing of specialty generic
pharmaceuticals, it operates in a highly competitive market. The
USPD competes with other companies that specialize in generic
products and with the generic drug divisions of major
international branded drug companies and encounters market entry
resistance from branded drug manufacturers. (see "Risk Factors -
Competition").
Geographical Markets: The USPD sells substantially all of
its products in the United States.
Sales and Distribution: The USPD maintains a sales force of
ten sales professionals to market the U.S. Pharmaceutical
Division's products. The USPD supplements its sales effort
through its use of selected independent sales representatives.
In addition, the USPD's advanced telemarketing operation, which
employs 75 sales personnel, markets and distributes products
manufactured by third parties and, to a limited extent, the USPD.
The USPD plans to increase the use of its telemarketing
operations for the sale of its own products and intends to add
approximately 50 sales personnel for this expanded activity. This
business also provides certain custom marketing services, such as
order processing, and distribution, to the pharmaceutical and
certain other industries.
Customers: The USPD has historically sold its products to
pharmaceutical wholesalers, distributors, mass merchandising and
retail chains, and to a lesser extent, grocery stores, hospitals
and managed care providers. In response to the general trend of
consolidation among pharmaceutical customers and greater amount
of products sold through wholesalers, the USPD is placing an
increased emphasis on marketing its product directly to managed
care organizations, purchasing groups, mass merchandisers and
chain drug stores to gain market share and enhance margins. (see
"Regulation" and "Risk Factors - Competition").
International Pharmaceuticals Division ("IPD")
Overview: The IPD develops, manufactures, and markets a
broad range of pharmaceuticals for human use.
Product Lines: The IPD manufactures approximately 170
products which are sold in approximately 450 product
presentations including tablets, ointments, creams, liquids,
suppositories and injectable dosage forms.
Prescription Pharmaceuticals: The IPD has a broad range of
products with a concentration on prescription drug antibiotics,
analgesics/antirheumatics, psychotropics, cardiovascular and oral
health care products. The predominant number of these products
are sold on a generic basis.
OTC Products: The IPD also has a broad range of OTC
products, such as those for skin care, gastrointestinal care and
pain relief, and including such products as vitamins, fluoride
tablets, adhesive bandages and surgical tapes. Substantially all
of these products are sold on a branded basis.
Facilities: The IPD maintains four manufacturing
facilities all of which also house administrative offices and
warehouse space. The IPD's plant in Lier, Norway, completed in
1992, includes many technologically advanced manufacturing
applications and manufactures the Division's tablet, liquid and
ointment products. The IPD's plant in Copenhagen, Denmark,
which it shares with the FCD, manufactures sterile products. In
addition to the Copenhagen and Lier facilities, the IPD also
operates plants in Vennesla, Norway, for bandages and surgical
tape products, and Jakarta, Indonesia, for tablets, ointments
and liquids. The Jakarta plant has received regulatory approval
to export certain products to Europe.
In 1996 and 1997, the IPD implemented a production
rationalization plan which included the transfer of all tablet,
ointment and liquid production from Copenhagen to Lier and the
transfer of all sterile production to the Copenhagen facility.
It is expected that the transfer of production and the receipt
of required regulatory approval for manufacturing at Lier will
be substantially completed in 1998. There can be no assurance
that the IPD will receive such approvals in a timely manner. In
addition to increasing available capacity, the IPD has
recognized, and expects to recognize further, manufacturing
efficiencies from this reorganization, including the anticipated
ability to produce the transferred products with approximately
one-third of the employees.
Competition: The pharmaceutical business in each area
where the IPD operates is highly competitive. Many of the IPD's
competitors are substantially larger and have greater financial,
technical, and marketing resources than IPD. Most of the IPD's
pharmaceutical products compete with one or more other products
that contain the same active ingredient. In the Nordic
countries in recent years, sales of generic pharmaceuticals have
been increasing relative to sales of branded or patent protected
pharmaceuticals. Generics are gaining market share because
governments are attempting to reduce pharmaceutical expenses by
enacting regulations that promote generic pharmaceuticals in
lieu of original formulations. However, this increased focus on
the regulation of pharmaceutical prices may lead to increased
competition and price pressure for suppliers of all types of
pharmaceuticals, including branded generics.(See "Risk Factors -
Government Regulations Affecting the Company"). The IPD's
pharmaceutical products have also been encountering price
pressures from "parallel imports". (i.e. imports of identical
products from lower priced markets) under the European Union
("EU")laws of free movement of goods. (See "Risk Factors -
Generic Pharmaceutical Industry").
Geographic Markets: The principal geographical markets for
the IPD's dosage-form pharmaceutical products are the Nordic and
other Western European countries, Indonesia, and the Middle East.
Sales and Distribution and Customers: Generic products have
been predominantly marketed under brand names, but are
increasingly marketed under generic names. Over-the-counter
products are typically marketed under brand names with
concentration on skin care, cavities prevention, pain relief and
vitamins. The IPD employs a specialized sales force of
approximately 350 persons, 150 of whom are in Indonesia, that
markets and promotes products to doctors, dentists, hospitals,
pharmacies, and consumers. In each of its international
markets, the IPD uses wholesalers to distribute its
pharmaceutical products.
Fine Chemicals Division ("FCD")
Overview: The FCD develops, manufactures and markets
bulk specialty antibiotics to the pharmaceutical industry for
use in finished dose products sold in more than 50 countries and
benefits from decades of experience in the use and development
of fermentation and purification technology. The FCD develops,
manufactures and sells active ingredients in bulk quantities for
use in human pharmaceuticals produced by third parties and, to a
limited extent, the Company. In addition, the FCD's
fermentation expertise in the production of bulk antibiotics has
a direct technological application to the manufacture of
products of the Company's animal health segment.
Product Lines: The products of the FCD constitute the active
substances in certain pharmaceuticals for the treatment of
certain skin, throat, intestinal and systemic infections. These
products include:
Bacitracin, Zinc Bacitracin and Polymyxin, the most
significant products for the FCD, as to which the Company is the
world's largest manufacturer and supplier.
Vancomycin, Amphotericin B and Colistin for use systemically
and in specialized topical and surgical human applications.
Other well-established bulk antibiotics, such as Gramicidin
and Tyrothricin, which are contract manufactured for the division
by a Danish company.
In November, 1997 the Company purchased the Polymyxin
business of Cultor Food Science, Inc. The sale to former
customers of Cultor, will be undertaken by FCD's present
marketing staff with product supplied from its existing
Copenhagen manufacturing facility.
Facilities: The FCD manufactures its products in plants in
Oslo, Norway (which it shares with AHD) and Copenhagen, Denmark
(which it shares with IPD). Both plants include fermentation and
specialized recovery and purification equipment. Both facilities
have been approved as a manufacturer of certain sterile and non-
sterile bulk antibiotics by USFDA and by the health authorities
of European countries. During 1997, in connection with an
expansion of production capacity at the Copenhagen facility,
USFDA approved the facility for Vancomycin manufacture. See
"Environmental" for a discussion of an administrative action
related to the Oslo facility.
Competition: The bulk antibiotic industry is highly
competitive and includes a large number of companies which are
larger than the Company. Sales are made to relatively few large
customers with prices and quality as the determining sales
factors. In the Company's opinion its fermentation expertise and
established reputation provide it with a competitive advantage
in these antibiotic products.
Geographical Markets and Sales and Distribution: U.S. sales
of FCD represent approximately 50% of the revenue from these
products with significant additional sales in Europe, Asia and
Latin America. The FCD distributes and sells its fine chemical
products in the U.S. using its sales force of four professionals.
Sales outside the U.S. are primarily through the use of local
agents and distributors.
ANIMAL HEALTH
The Animal Health segment is comprised of two operating
divisions of the Company, namely the AHD and the AAHD. Each of
these divisions is managed by a single senior management team.
Animal Health Division ("AHD")
Overview: The AHD develops, manufactures and markets
feed additives and animal health products for animals raised for
commercial food production worldwide.
Product Lines: The AHD's principal animal health products
are: (i) BMDT, a feed additive, which is used to promote growth
and feed efficiency and prevent or treat diseases in poultry and
swine; (ii) AlbacT, a feed additive for poultry, swine and
calves;(iii) other feed additives which are commonly used in
combination or sequentially with BMD including 3-Nitror,
Histostatr, Zoamixr, anticoccidials, and chlortetracycline
("CTC"), a feed grade antibiotic; (iv) Deccoxr cattle and calf
feed additives and(v) Vitamin D3, and other feed additives which
are used for poultry and swine. Based upon its fermentation
experience and a strong marketing presence, the AHD is the
market leader in the manufacture and sale of bacitracin-based
feed additives marketed under the brand names AlbacT and BMDT.
In addition, the Company believes that it has a significant
market share in several other feed additives including those sold
under the Company's 3-Nitro brands.
In September 1997, the AHD acquired the Deccox brand name
and certain related assets from Rhone-Poulenc's Animal Nutrition
Division. Under the agreement pursuant to which Deccox was
acquired, Rhone-Poulenc will continue to manufacture this
product for sale by the AHD for a period of 15 years. Deccox is
used to prevent and control coccidiosis (a parasite that
adversely affects growth). The acquisition of the Deccox brand
has provided the AHD with its initial entry into the cattle and
calf market. In addition to Deccox sales, this offers the
opportunity to market to the cattle industry several of the
AHD's established products which have historically been sold
only in the swine and poultry markets.
Facilities: With four decades of expertise in fermentation
and manufacturing technologies, the AHD produces its products in
three state-of-the-art manufacturing facilities.
The AHD produces BMD at its Chicago Heights, Illinois
facility, which includes a modern fermentation and recovery
plant. The Albac product is manufactured at the Oslo facility
shared with FCD. CTC is purchased from foreign suppliers and
blended domestically at the AHD facility in Lowell, Arkansas and
at independent blending facilities. The 3-Nitro product line is
manufactured in accordance with a ten year agreement using AHD
technology at an unrelated company's facility. The contract
requires the AHD to purchase minimum yearly quantities on a cost
plus basis. Blending of 3-Nitro is done at the AHD's Lowell
plant.
See "Environmental" for a discussion of an administrative
action related to the Oslo facility.
Competition: The animal health industry is highly
competitive and includes a large number of companies with greater
financial, technical, and marketing resources than the Company.
These companies offer a wide range of products with various
therapeutic and growth stimulating qualities. Due to the
Company's strong market position in antibiotic feed additives and
its experience in obtaining requisite FDA approvals for
combination therapies, the Company believes it enjoys a
competitive advantage in commercializing FDA-approved combination
animal feed additives.
Management believes that features of BMD and Albac have
enhanced the AHD's competitive position in the animal health
business. Generally, the USFDA does not permit animals to be
sold for food production unless their feed has been free of
additives that are absorbed into animal tissue for at least a 14
day period of time required by USFDA rules. BMD and Albac are not
absorbed into animal tissue, and therefore need not be withdrawn
from feed prior to the marketing of the food animals. This
attribute of BMD and Albac allows producers to avoid the burden
of removing these additives from feed in order to meet the USFDA
requirement. Certain tests have also shown that BMD and Albac do
not tend to produce resistance in bacteria, which is a negative
characteristic of some competitive products. See "Risk Factors-
Governmental Actions Affecting the Company" for a discussion
of potential legislative action with respect to feed additives.
Geographic Markets: The AHD presently sells a major portion
of its products in the U.S. and Europe. However, with the
opening of sales offices in Canada, Latin America, and the Far
East, the AHD has expanded its international sales and plans
further growth in the future.
Sales and Distribution: Sales of the AHD's products in the
U.S., Canada and Mexico are sold through a staff of 37
technically trained sales and technical service employees and
distributors located throughout the U.S. Sales of the AHD's
products outside North America are made primarily through the use
of distributors and sales companies. The AHD has sales offices in
Canada, Mexico, Singapore and the People's Republic of China and
in 1997 added sales offices in Brazil and France. The AHD
anticipates establishing additional foreign sales offices.
Customers: Sales are made principally to commercial animal
feed manufacturers and integrated swine and poultry producers.
Although the AHD is not dependent on any one customer, the
customer base for animal health products is in a consolidation
phase. Therefore, as consolidation continues, the AHD could
become more dependent on certain individual customers as such
customers increase their size and market share.
Aquatic Animal Health Division ("AAHD")
Overview: The Company believes AAHD is a leader in the
development, manufacture and marketing of vaccines for use in
immunizing farmed fish against disease. The Company believes AAHD
has been, and expects to continue as, a leading innovator with
respect to the research and development of vaccines to combat
newly developing forms of aquatic disease.
The AAHD's vaccines for fish are used by fish farms to
control disease in densely populated, artificial growth
environments. The Company believes that the market for vaccines
will continue to grow along with the growth of fish farms as the
worldwide demand for fish continues to increase beyond what can
be supplied from the natural fish habitat.
Product Lines: The AAHD is the leading supplier of
injectable vaccines for farm raised salmon. In addition the AAHD
is a pioneer in the development of injectable vaccines for trout,
sea bass, catfish, yellow tail and other commercially important
farm species.
Facilities: The AAHD manufactures approximately two-thirds
of its fish vaccine products at its manufacturing facility in
Bellevue, Washington with the remaining one-third manufactured at
AAHD's Overhalla, Norway facility. A contract manufacturer in
Germany provides certain raw materials for vaccine production.
The AAHD is in the process of obtaining required regulatory
approval at its facility in Overhalla, Norway for the production
of fish vaccines presently manufactured in Bellevue. See
"Regulation" for a discussion of certain regulatory actions
relating to the Bellevue facility.
Competition: The Company has very few competitors in the
aquatic animal health industry. However, the industry is subject
to rapid technological change. Competitors could develop new
techniques and products that would render the AAHD's products
obsolete if the division was unable to quickly match the
improvements.
Geographical Market: The AAHD sells its products in Norway,
the United Kingdom, Canada and the United States. In 1997,
approximately 62% of the revenues of the AAHD were generated from
the Norwegian market.
Sales and Distribution: The AAHD sells its aquatic animal
health products through its own technically oriented sales staff
of twelve people in Norway and the United States. In other
markets, the AAHD operates through distributors. The AAHD sells
its products to fish farms, usually under a contract which
extends for at least one growing season. There are relatively
few customers for the AAHD's products.
INFORMATION APPLICABLE TO ALL BUSINESS SEGMENTS
Research, Product Development and Technical Activities
Scientific development is important to each of the Company's
business segments. The Company's research, product development
and technical activities in the Human Pharmaceuticals segment
within the U.S., Norway and Denmark concentrate on the
development of generic equivalents of established branded
products as well as discovering creative uses of existing drugs
for new treatments. The Company's research, product development
and technical activities also focus on developing proprietary
drug delivery systems and on improving existing delivery systems,
fermentation technology and packaging and manufacturing
techniques. In view of the substantial funds which are generally
required to develop new chemical drug entities the Company does
not anticipate undertaking such activities.
The Company's technical development activities for the
Animal Health segment involve extensive product development and
testing for the primary purpose of establishing clinical support
for new products and additional uses for or variations of
existing products and seeking related USFDA and analogous
governmental approvals.
Generally, research and development are conducted on a
divisional basis. The Company conducts its technical product
development activities at its facilities in Copenhagen, Denmark;
Oslo, Norway; Baltimore, Maryland; Bellevue, Washington; and
Chicago Heights, Illinois, as well as through independent
research facilities in the U.S.
Research and development expenses were approximately $32.1
million, $34.3 million, and $32.8 million in 1997, 1996, and
1995, respectively.
Regulation
General: The research, development, manufacturing and
marketing of the Company's products are subject to extensive
government regulation by either the USFDA or the USDA, as well as
by the United States Drug Enforcement Agency (the "DEA"), Federal
Trade Commission (the "FTC"), Consumer Product Safety Commission
("CSPC"),and by comparable authorities in the EU, Norway,
Indonesia and other countries. Although Norway is not a member
of the EU, it is a member of the European Economic Association
and, as such, has accepted all EU regulations with respect to
pharmaceuticals. Government regulation includes detailed
inspection of and controls over testing, manufacturing, safety,
efficacy, labeling, storage, recordkeeping, approval,
advertising, promotion, sale and distribution of pharmaceutical
products. Noncompliance with applicable requirements can result
in civil or criminal fines, recall or seizure of products, total
or partial suspension of production and/or distribution,
debarment of individuals or the Company from obtaining new
generic drug approvals, refusal of the government to approve new
products and criminal prosecution. Such government regulation
substantially increases the cost of producing human
pharmaceutical and animal health products.
The evolving and complex nature of regulatory requirements,
the broad authority and discretion of the USFDA and analogous
foreign agencies, and the generally high level of regulatory
oversight results in a continuing possibility that from time to
time the Company will be adversely affected by regulatory actions
despite its ongoing efforts and commitment to achieve and
maintain full compliance with all regulatory requirements. As a
result of actions taken by the Company to respond to the
progressively more demanding regulatory environment in which it
operates, the Company has spent, and will continue to spend,
significant funds and management time on regulatory compliance.
Product Marketing Authority: In the U.S., the FDA regulatory
procedure applicable to the Company's generic pharmaceutical
products depends on whether the branded drug is: (i)the subject
of an approved New Drug Application ("NDA") which has been
reviewed for both safety and effectiveness; or (ii) marketed
under an NDA approved for safety only or without an NDA. If the
drug to be offered as a generic version of a branded product is
the subject of an NDA approved for both safety and effectiveness,
the generic product must be the subject of an Abbreviated New
Drug Application ("ANDA") and be approved by USFDA prior to
marketing. Drug products which are generic copies of the other
types of branded products may be marketed in accordance with
either an USFDA enforcement policy or the over-the-counter drug
review monograph process and currently are not subject to ANDA
filings and approval prior to market introduction. While the
Company believes that all of its current pharmaceutical products
are legally marketed under the applicable USFDA procedure, the
Company's marketing authority is subject to revocation by the
agency. Certain of the Company's animal health products are
regulated by the USDA. All applications for regulatory approval
of generic drug products subject to ANDA requirements must
contain data relating to product formulation, raw material
suppliers, stability, manufacturing, packaging, labeling and
quality control. Those subject to a Waxman-Hatch Act ANDA also
must contain bioequivalency data. Each product approval limits
manufacturing to a specifically identified site. Supplemental
filings for approval to transfer products from one manufacturing
site to another also require review and approval.
An EU Directive requires that medical products must have a
marketing authorization before they are placed on the market in
the EU. The criteria upon which grant of an authorization is
assessed are quality, safety and efficacy. Demonstration of
safety and efficacy in particular requires clinical trials on
human subjects and the conduct of such trials is subject to the
standards codified in the EU guideline on Good Clinical Practice.
In addition, the EU requires that such trials be preceded by
adequate pharmacological and toxicological tests in animals and
that clinical trials should use controls, be carried out double
blind and capable of statistical analysis by using specific
criteria wherever possible, rather than relying on a large sample
space. The working party on the Committee of Proprietary
Medicinal Products has also made various recommendations in this
area. Analogous governmental and agency approvals are similarly
required in other countries where the Company conducts business.
There can be no assurance that new product approvals will
be obtained in a timely manner, if ever. Failure to obtain such
approvals, or to obtain them when expected, could have a material
adverse effect on the Company's business, results of operations
and financial condition.
Facility Approvals: The Company's manufacturing operations
(in the U.S. as well as two of the Company's European facilities
that manufacture products for export to the U.S.) are required to
comply with Current Good Manufacturing Practices ("CGMP") as
interpreted by the USFDA. CGMP encompasses all aspects of the
production process, including validation and record keeping, and
involves changing and evolving standards. Consequently,
continuing compliance with CGMP can be a particularly difficult
and expensive part of regulatory compliance, especially since the
USFDA and certain other analogous governmental agencies have
increased the number of regular inspections to determine
compliance. There are similar regulations in other countries
where the Company has manufacturing operations. The EU requires
that before a medicinal product can be manufactured and
assembled, each person or company who carries out such an
operation must hold a manufacturer's license, a product license
must be held by the person responsible for the composition of the
product, and the manufacture and assembly must be in accordance
with the product license. There is also a Directive relating to
Good Manufacturing Practice ("GMP") which makes compliance with
the principles of GMP compulsory throughout the EU.
The Company is making certain improvements to its aquatic
animal health plant in Bellevue, Washington as a result of an
inspection by United Kingdom regulatory authorities. The Company
expects a reinspection by this agency in the spring of 1998.
There can be no assurance that the action being taken by the
Company will be satisfactory to the agency.
Potential Liability for Current Products: Continuing studies
of the proper utilization, safety, and efficacy of
pharmaceuticals and other health care products are being
conducted by the industry, government agencies and others. Such
studies, which increasingly employ sophisticated methods and
techniques, can call into question the utilization, safety and
efficacy of previously marketed products and in some cases have
resulted, and may in the future result, in the discontinuance of
their marketing and, in certain countries, give rise to claims
for damages from persons who believe they have been injured as a
result of their use.
Extended Protection for Branded Products: The Drug Price
Competition and Patent Term Restoration Act of 1984 ("Waxman-
Hatch Act") amended both the Patent Code and the Federal Food,
Drug and Cosmetics Act (the "FDC Act"). The Waxman-Hatch Act
codified and expanded application procedures for obtaining FDA
approval for generic forms of brand-name pharmaceuticals which
are off-patent or whose market exclusivity has expired. The
Waxman-Hatch also provides market exclusivity provisions for
innovator drug manufacturers which preclude the submission or
delay the approval of a competing ANDA under certain conditions.
One such provision allows a five year market exclusivity period
for NDA involving new chemical compounds and a three year market
exclusivity period for NDA's containing new clinical
investigations essential to the approval of such application.
The market exclusivity provisions apply equally to patented and
non-patented drug products. Another provision authorizes the
extension of patent terms for up to five years as compensation
for reduction of the effective life of the patent as a result of
time spent in testing for, and USFDA review of, an application
for a drug approval. Patent terms may also be extended pursuant
to the terms of the Uruguay Round Agreements Act ("URAA"). In
addition, new legislation recently enacted by the U.S. Congress,
the USFDA Modernization Act of 1997, will allow brand name
manufacturers to seek six months of additional exclusivity when
they have conducted pediatric studies on the drug. Therefore,
the Company cannot predict the extent to which the Waxman-Hatch
Act, the USFDA Modernization Act of 1997, or URAA could postpone
launch of some of its new products.
In Europe, certain Directives confer a similar market
exclusivity in respect of proprietary medicines, irrespective of
any patent protection. Before a generic manufacturer can present
an abridged application for a marketing authorization, it must
generally wait until the original proprietary drug has been on
the market for a certain period (unless he has the consent of the
person who submitted the original test data for the first
marketing authorization, or can compile an adequate dossier of
his own). In the case of high-technology products, this period
is ten years and six years in respect of other medicinal
products, subject to the option for member states to elect for an
exclusivity period of ten years in respect of all products, or to
dispense with the six-year period where that would offer
protection beyond patent expiry.
In addition to the exclusivity period, it is also possible
in the EU to effectively extend the period of patent protection
for a product which has a marketing authorization by means of a
Supplementary Protection Certificate ("SPC"). An SPC comes into
force on the expiry of the relevant patent and lasts for a period
calculated with reference to the delay between the lodging of the
patent and the granting of the first marketing authorization for
the drug. This period of protection, subject to a maximum of
five years, further delays the marketing of generic medicinal
products.
The Generic Drug Enforcement Act: The Generic Drug
Enforcement Act of 1992, which amended the FDC Act, gives the FDA
six ways to penalize anyone that engages in wrongdoing in
connection with the development or submission of an ANDA. The
USFDA can: (i) permanently or temporarily prohibit alleged
wrongdoers from submitting or assisting in the submission of an
ANDA; (ii) temporarily deny approval of, or suspend applications
to market, particular generic drugs; (iii) suspend the
distribution of all drugs approved or developed pursuant to an
invalid ANDA; (iv) withdraw approval of an ANDA; (v) seek civil
penalties against the alleged wrongdoer; and (vi) significantly
delay the approval of any pending ANDA from the same party. The
Company has never been the subject of an enforcement action under
this or any similar statue.
Controlled Substances Act: The Company also manufacturers
and sells drug products which are "controlled substances" as
defined in the Controlled Substances Act, which establishes
certain security and record keeping requirements administered by
the DEA, a division of the Department of Justice. The Company is
licensed by the DEA to manufacture and distribute certain
controlled substances. The DEA has a dual mission-law
enforcement and regulation. The former deals with the illicit
aspects of the control of abusable substances and the equipment
and raw materials used in making them. The DEA shares enforcement
authority with the Federal Bureau of Investigation, another
division of the Department of Justice. The DEA's regulatory
responsibilities are concerned with the control of licensed
handlers of controlled substances, and with the substances
themselves, equipment and raw materials used in their manufacture
and packaging, in order to prevent such articles from being
diverted into illicit channels of commerce. The Company is not
under any restrictions for non-compliance with the foregoing
regulations, but there can be no assurance given that
restrictions or fines will not be imposed upon the Company in the
future.
Health Care Reimbursement: The methods and level of
reimbursement for pharmaceutical products under Medicare,
Medicaid, and other domestic reimbursement programs are the
subject of constant review by state and federal governments and
private third party payors like insurance companies. Management
believes that U.S. government agencies will continue to review
and assess alternative payment methodologies and reform measures
designed to reduce the cost of drugs to the public. Because the
outcome of these and other health care reform initiatives is
uncertain, the Company cannot predict what impact, if any, they
will have on the Company.
Medicaid legislation requires all pharmaceutical
manufacturers to rebate to individual states a percentage of the
revenues that the manufacturers derive from Medicaid reimbursed
pharmaceutical sales in those states. The required rebate for
manufacturers of generic products is currently 11%.
In many countries other than the U.S. in which the Company
does business, the initial prices of pharmaceutical preparations
for human use are dependent upon governmental approval or
clearance under governmental reimbursement schemes. These
government programs generally establish prices by reference to
either manufacturing costs or the prices of comparable products.
Subsequent price increases may also be regulated. In past years,
as part of overall programs to reduce health care costs, certain
European governments have prohibited price increases and have
introduced various systems designed to lower prices. As a result,
affected manufacturers, including the Company, have not always
been able to recover cost increases or compensate for exchange
rate fluctuations.
In order to control expenditures on pharmaceuticals, most
member states in EU regulate the pricing of such products and in
some cases limits the range of different forms of a drug
available for prescription by national health services. These
controls can result in considerable price differences between
member states. There is also a Common External Tariff payable on
import of medicinal products into the EU, though exemptions are
available in respect of certain products which allows duty free
importation. Where there is no tariff suspension in operation in
respect of a medicinal product, an application can be made to
import the product duty free but this is subject to review at
European level to establish whether a member state would be able
to produce the product in question instead. In addition, some
products are subject to a governmental quota which restricts the
amount which can be imported duty free.
Financial Information About Foreign and Domestic Operations and
Export Sales
The Company derives a substantial portion of its revenues
and operating income from its foreign operations. Revenues from
foreign operations accounted for approximately 45% of the
Company's revenues in 1997. For certain financial information
concerning foreign and domestic operations see Note 20 of the
Notes to the Consolidated Financial Statements included in Item 8
of this Report. Export sales from domestic operations were not
significant.
Environmental Matters
The Company believes that it is substantially in compliance
with all presently applicable federal, state and local provisions
regulating the discharge of materials into the environment, or
otherwise relating to the protection of the environment.
The State of California has commenced an action against the
Company in California Superior Court under the State's Safe
Drinking Water and Toxic Enforcement Act of 1986 (the "Drinking
Water Act") alleging that it failed to include a warning to
California users of two of its prescription drugs to the effect
that said drugs are known to the State of California to cause
cancer or reproductive toxicity. The State further alleges that
by violating the Drinking Water Act, the Company is also in
violation of the Unfair Competition Act (the "Competition Act").
The Company believes that prescription drugs fall under a "safe-
harbor" regulation and the required notice is deemed to be given
by giving the FDA mandated product warnings. On this basis, the
Company intends to defend this action vigorously. The Company has
reason to believe that many other drug manufacturers are relying
upon the same exemption and therefore have not given the notice
required by the Act in connection with the sale of prescription
drugs. While the State's action does not request a specific
monetary fine, the Company understands that the maximum fine for
violation of each of the Drinking Water Act and the Competition
Act is $2,500 for each day of violation subject to a four year
statute of limitation. The Company has no reason to believe this
matter will result in a material liability.
The Company is presently discussing with the relevant
Norwegian authorities, the noxious air emissions at its Oslo
plant. The Company anticipates the need for improvements at this
plant; the cost of which has not yet been determined but is not
believed to be material to the Company.
In addition, the Company is a Potentially Responsible Party
("PRP") at one site subject to U.S. Superfund legislation.
Superfund provides for joint and several liability for all PRP's.
Based upon the Company's minor involvement at this Superfund
site, and the identification of numerous PRP's who were larger
site users, the Company does not believe that its ultimate
liability for this site will be material to the Company.
Although many major capital projects typically include a
component for environmental control, including the Company's
current expansion projects, no material expenditures specifically
for environmental control are expected to be made in 1998.
Employees
As of December 31, 1997, the Company had approximately 2,600
employees, including 1,100 in the U.S. and 1,500 outside of the
U.S.
Item 1A. Executive Officers of the Registrant
The following is a list of the names and ages of all of the
Company's corporate officers and certain officers of each of the
Company's principal operating units, indicating all positions and
offices with the Registrant held by each such person and each
such person's principal occupations or employment during the past
five years.
Each of the Company's corporate officers has been elected to
the indicated office or offices of the Registrant, to serve as
such until the next annual election of officers of the Registrant
(expected to occur May 8, 1998) and until their successor is
elected, or until his or her earlier death, resignation or
removal.
Name and Position Principal Business Experience
with the Company Age During the Past Five Years
E.W. Sissener 69 Chief Executive Officer since
Chairman, Director and June 1994. Member of the
Chief Executive Officer Office of the Chief Executive
of the Company July 1991 to
May 1994. Chairman of the
Company since 1975.
President, Alpharma AS since
October 1994. President of
A.L. Industrier AS 1972 to
1994. President, Apothekernes
AS 1972 to 1994. Chairman of
A.L. Industrier AS since
November 1994.
Gert W. Munthe 41 Director of the Company since
President and Chief June 1994.President and Chief
Operating Officer (as Executive Officer of NetCom
of May 1, 1998)and GSM A.S., a Norwegian cellular
Director telecommunications company,
1993 to 1998. Executive Vice
President and division
President of Hafslund Nycomed
A.S., a Norwegian energy and
pharmaceutical corporation,
1988 to 1993. President of
Nycomed (Imaging) A.S., a
wholly owned subsidiary of
Hafslund Nycomed A.S., 1991 to
1993. Division President in
charge of the energy business
of Hafslund Nycomed A.S., 1988
to 1991. Mr. Munthe is Mr.
Sissener's son-in-law.
Jeffrey E. Smith 50 Chief Financial Officer and
Vice President, Finance Vice President since May 1994.
and Chief Financial Executive Vice President and
Officer Member of the Office of the
Chief Executive July 1991 to
May 1994. Vice President,
Finance of the Company from
November 1984 to July 1991.
Diane M. Cady 43 Vice President, Investor
Vice President, Relations since November 1996.
Investor Relations Vice President, Investor
Relations for Ply Gem
Industries, Inc. 1987 to
October 1996.
Albert N. Marchio, II 45 Treasurer of the Company since
Treasurer May 1992. Treasurer of Laura
Ashley, Inc. 1990 to 1992.
John S. Towler 49 Controller of the Company
Controller since March 1989.
Robert F. Wrobel 53 Vice President and Chief Legal
Vice President and Officer since October of 1997.
Chief Legal Officer Vice President and Associate
General Counsel of Duracell
Inc., 1994 to September 1997
and Senior Vice President,
General Counsel and Chief
Administrative Officer of The
Marley Company 1975 to 1993.
Thomas L. Anderson 49 President of the Company's
Vice President and U.S. Pharmaceuticals Division
President, U.S. since January 1997; President
Pharmaceuticals and Chief Operating Officer of
Division FoxMeyer Health Corporation
May 1993 to February 1996;
Executive Vice President and
Chief Operating Officer of
FoxMeyer Health Corporation
July 1991 to April 1993.
Bruce Andrews, Vice 51 President of the Company's
President and President, Animal Health Division since
Animal Health Division May 1997. Consultant with
Brakke Consulting, Inc. from
1994 through May of 1997 and
President of the Cyanamid
North American Animal Health
and Nutrition Division from
1992 to 1994.
Thor Kristiansen 54 President of the Company's
Vice President and Fine Chemicals Division since
President, Fine October 1994; President,
Chemicals Division Biotechnical Division of
Apothekernes Laboratorium A.S
1986 to 1994.
Knut Moksnes 41 President of the Company's
Vice President and Aquatic Animal Health Division
President, Aquatic since October 1994; Managing
Animal Health Division Director, Fish Health Division
of Apothekernes Laboratorium
A.S 1991 to 1994.
Ingrid Wiik 53 President of the Company's
Vice President and International Pharmaceuticals
President, Division since October 1994;
International President, Pharmaceutical
Pharmaceuticals Division of Apothekernes
Division Laboratorium A.S 1986 to 1994.
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 -- 37,000 Office - Alpharma
corporate office
and AHD
Headquarters
Oslo, Norway Leased -- 204,400 Manufacturing of
AHD and FCD
products, Alpharma
corporate office
and headquarters
for IPD, FCD and
AAHD.
Chicago Owned 20 195,000 Manufacturing,
Heights, IL warehouse, R&D and
offices for AHD
Bellevue, WA Leased -- 20,000 Manufacturing,
warehouse,
laboratory and
offices for AAHD
Baltimore, MD Owned 19 268,000 Manufacturing, and
headquarters for
USPD
Baltimore, MD Leased -- 18,000 Research and
Development for
USPD
Columbia, MD Leased -- 165,000 Central
Distribution
Center for USPD
Lincolnton, NC Owned 13 138,000 Manufacturing and
offices for USPD
Lowell, AK Leased -- 68,000 Manufacturing,
warehouse and
offices for AHD
Niagara Falls, Owned 2 30,000 Warehouse and
NY offices of USPD
Lier, Norway Owned 23 180,000 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
The Company is one of multiple defendants in 33 lawsuits
filed in various US Federal District Courts alleging personal
injuries resulting from the use of phentermine distributed by the
Company and prescribed for use in combination with fenfluramine
or dexfenfluramine manufactured and sold by other defendants
("Fen-Phen" lawsuits). None of the plaintiffs has specified the
amount of his or her monetary demand, but a majority of the
lawsuits allege serious injury. The Company has demanded defense
and indemnification from the manufacturers from whom it has
purchased phentermine and has filed claims against said
manufacturers' insurance carriers and the Company's carriers.
The Company does not expect that the Fen-Phen lawsuits will be
material to the Company. It is possible that the Company could
later be named as a defendant in some of the additional lawsuits
already on file with respect to these drugs or in similar
lawsuits which could be filed in the future.
From time to time the Company is involved in certain non-
material litigation which is ordinarily found in businesses of
this type, including contract, employment matters and product
liability actions. Product liability suits represent a
continuing risk to pharmaceutical companies. The Company
attempts to minimize such risks by strict controls over
manufacturing and quality procedures. Although the Company
carries what it believes to be adequate insurance, there is no
assurance that such insurance can fully protect it against all
such risks due to the inherent potential liability in the
business of producing pharmaceuticals for human and animal use.
The Company is also subject to an action commenced by the
State of California under the State's Safe Drinking Water and
Toxic Enforcement Act of 1986 (See "-Environmental Matters").
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
Market Information
The Company's Class A Common Stock is listed on the New York
Stock Exchange ("NYSE"). Information concerning the 1997 and
1996 sales prices of the Company's Class A Common Stock are set
forth in the table below.
Stock Trading Price
1997 1996
Quarter High Low High Low
First $15.13 $11.38 $27.375 $22.00
Second $18.13 $13.50 $26.00 $19.125
Third $23.50 $15.25 $21.25 $14.625
Fourth $23.88 $21.25 $16.50 $10.625
As of December 31, 1997 and March 2, 1998 the Company's
stock closing price was $21.75 and $23.44, respectively.
Warrants to purchase the Company's Class A Common Stock with
an exercise price of $20.69 and expiring on January 3, 1999
commenced trading on the NYSE in October 1995. At December 31,
1997 and March 2, 1998, the closing price of the Company's
warrants was $4.38 and $4.38, respectively.
Holders
As of March 2, 1998, there were 968 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 98% 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 1997
and 1996 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 1993 has
been restated to reflect the 1994 combination with Alpharma Oslo
as a pooling of interests. The data for each of the three years
in the period ended December 31, 1997 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) 1997 1996(4) 1995 1994(3) 1993
Total revenue $500,288 $486,184 $520,882 $469,263 $402,675
Cost of sales 289,235 297,128 302,127 275,543 233,423
Gross profit 211,053 189,056 218,755 193,720 169,252
Selling, general and
administrative
expenses 164,155 185,136 166,274 177,742 139,038
Operating income 46,898 3,920 52,481 15,978 30,214
Interest expense (18,581) (19,976) (21,993) (15,355) (14,996)
Other income (expense),
net (567) (170) (260) 1,113 1,880
Income (loss) before
income taxes and
extraordinary item 27,750 (16,226) 30,228 1,736 17,098
Provision (benefit)
for income taxes 10,342 (4,765) 11,411 3,439 6,969
Income (loss) before
extraordinary item $ 17,408 $(11,461) $ 18,817 $ (1,703) $10,129
Net income (loss)(2) $ 17,408 $(11,461) $ 18,817 $ (2,386) $10,129
Average number of
shares outstanding:
Diluted 22,780 21,715 21,754 21,568 21,581
Earnings (loss) per share:
Diluted
Income (loss) before
extraordinary item $ .76 $ (.53) $ .87 $ (.08) $ .47
Net income (loss) $ .76 $ (.53) $ .87 $ (.11) $ .47
Dividend per common
share $ .18 $ .18 $ .18 $ .18 $ .18
(1) Includes results of operations from date of acquisition of the Wade
Jones Company (July 1994) and the Lincolnton facility (March 1993).
(2) Net loss includes: 1994 - extraordinary item - loss on extinguishment
of debt ($683).
(3) 1994 includes transaction costs relating to the combination with
Alpharma Oslo and Management Actions which are included in cost of
goods sold ($450) and selling, general and administrative ($24,200).
Amounts net after tax of approximately $17,400 ($0.81 per share).
(4) 1996 includes Management Actions relating to production
rationalizations and severance which are included in cost of
goods sold ($1,100) and selling, general and administrative
($17,700). Amounts net after tax of approximately $12,600
($0.58 per share).
As of December 31,
Balance Sheet Data (1) 1997 1996 1995 1994 1993
Current assets $273,677 $274,859 $282,886 $250,499 $202,913
Non-current assets 358,189 338,548 351,967 341,819 324,704
Total assets $631,866 $613,407 $634,853 $592,318 $527,617
Current liabilities $133,926 $155,651 $169,283 $154,650 $139,205
Long-term debt,
less current
maturities 223,975 233,781 219,451 220,036 144,350
Deferred taxes and
other non-current
liabilities 35,492 37,933 40,929 36,344 40,129
Stockholders' equity(2) 238,473 186,042 205,190 181,288 203,933
Total liabilities
and equity $631,866 $613,407 $634,853 $592,318 $527,617
(1) Includes accounts from date of acquisition of the Wade Jones
Company (July 1994) and the Lincolnton facility (March
1993).
(2) 1994 reflects acquisition of Alpharma Oslo accounted for as
a pooling of interests with cash purchase price deducted
from stockholders' equity.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Overview
1997 was a year in which operations improved relative to
1996 and a number of transactions were accomplished which the
Company believes will enhance its future growth prospects. Such
transactions included:
The Company raised $56.4 million by issuing Class B stock
through a stock subscription ($20.4 million) and Class A stock
through a rights offering ($36.0 million).
The Animal Health Division ("AHD") acquired the worldwide
decoquinate ("Deccoxr") product and business from a major
pharmaceutical company. The product is an anticocidial feed
additive which provides AHD with its first major product in the
cattle industry.
The Fine Chemicals Division ("FCD") purchased a worldwide
polymyxin business which complements its existing polymyxin
business.
Both the U.S. Pharmaceuticals Division ("USPD") and the
International Pharmaceuticals Division ("IPD") completed
partnership alliances and marketing agreements to broaden their
product lines.
Results in 1996 included charges for Management Actions. In
addition, operations were negatively affected by external market
conditions in both industry segments. The factors which combined
to produce a loss in 1996 and the status of these factors in 1997
are as follows:
1996 charges for Management Actions - approximately $12.6
million after tax.
Rationalization of the IPD's selling and marketing
organization in Scandinavia resulting in charges for
severance. 1997 status - completed.
Commencement of an IPD plan to transfer all tablet,
ointment and liquid production from Copenhagen, Denmark to
Lier, Norway resulting in charges for severance, asset write-
offs and other exit costs. 1997 status - in process,
completion expected in late 1998.
Commencement of a USPD plan to accelerate the move of
production from locations in New Jersey and New York to an
existing plant in Lincolnton, North Carolina resulting in
charges for severance, asset write-offs and other exit
costs. 1997 status - completed, benefits realized due to
more efficient production in the USPD.
Rationalization of the AHD and USPD organizations to
address current competitive conditions in their respective
industries resulting in charges for severance and other
termination benefits. 1997 status - completed.
1996 External Factors.
Fundamental shift in generic pharmaceutical industry
distribution, purchasing and stocking patterns resulting in
significantly lower sales and prices in the USPD. 1997
status - USPD sales increased marginally in a more orderly
market; however there was continuing but significantly
lessened pressure on pricing relative to 1996.
Significant bad debt expense due to the bankruptcy of a
major wholesaler to the USPD and collection difficulties in
certain international markets. 1997 status - no major
bankruptcies, but collection of certain accounts remains
slow in certain international markets.
High feed grain prices in the animal health industry which
resulted in lower industry usage of feed additive products
supplied by AHD and increased competition among feed
additive suppliers. 1997 status - grain prices at more
normal levels. Competitive conditions continue.
Generally increased competition in all industries and
markets served by the Company's operating divisions. 1997
status - all markets remain competitive.
Results of Operations
Comparison of Year Ended December 31, 1997 to Year Ended
December 31, 1996.
For the year ended December 31, 1997 revenue was $500.3
million, an increase of $14.1 million (2.9%) compared to 1996.
Operating income was $46.9 million, an increase of $43.0 million,
compared to 1996. Net income was $17.4 million ($.76 per share)
compared to a loss of $11.5 million ($.53 per share) in 1996.
Net income in 1996 was reduced by approximately $12.6
million ($.58 per share) for severance related to a
reorganization of the IPD sales and marketing function in the
Nordic countries, charges and expenses resulting from production
rationalization plans in the IPD and the USPD and additional
Management Actions in the AHD. (See section "Management
Actions.")
Revenues
On an overall basis revenues increased in the Animal Health
Segment ("AHS") and decreased in the Human Pharmaceuticals
Segment ("HPS"). 1997 revenues compared to 1996 were reduced by
over $20.0 million primarily in the HPS due to translation of
sales in foreign currency into the U.S. dollar.
Revenues in the HPS were marginally lower (.5%) than 1996.
Revenues increased in the USPD due primarily to increased volume
in a number of Rx and OTC products including products introduced
in the past three years. The increased volume was partially
offset by lower net selling prices resulting from the
continuation of programs initiated by major wholesalers in the
second half of 1996 which fundamentally shifted generic
pharmaceutical industry distribution purchasing and stocking
patterns. In IPD overall volume and pricing were up on a local
currency basis. However, IPD revenues were lower primarily as a
result of the effect of translation of sales in Scandinavian
currencies into the U.S. dollar. A substantial majority of the
translation effect was recognized in the IPD. For the year 1997
average exchange rates for Scandinavian currencies where IPD
conducts a substantial portion of its business have declined by
10%-14% compared to 1996. Sales in the Fine Chemicals Division
("FCD") principally increased due to higher volume.
Within the AHS, AHD revenues increased primarily due to
increased volume of most major products, as well as the
acquisition of the Deccox business in September 1997. Aquatic
Animal Health Division ("AAHD") revenues increased compared to
1996 due primarily to increased sales in the Norwegian fish
vaccine market resulting from both new product volume and
increased market share of existing products.
Gross Profit
On a consolidated basis, gross profit increased $22.0
million and the gross margin percent increased to 42.2% in 1997
compared to 38.9% in 1996. Both segments increased their margin
percentages and amounts relative to 1996.
The increase in dollars and percent was the result of a
number of factors. HPS gross profits accounted for approximately
half of the increase in dollars and USPD accounted for the
majority of HPS increase. USPD gross profits improved as a result
of lower manufacturing costs in the aggregate (due to the
transfer of production and closing of two marginal facilities as
part of Management Actions in 1996) and increased production
efficiencies in the two remaining core facilities. Offsetting
savings in production costs were lower net selling prices in the
UPSD. IPD had increased gross profits in local currencies but
decreased in the aggregate when translated into U.S. dollars. FCD
gross profits increased marginally compared to 1996.
AHD gross profits increased due to increased volume (both
existing products and Deccox) offset partially by somewhat lower
pricing. AAHD gross profits increased due to higher margin
products introduced in 1997.
Operating Expenses
Operating expenses on a consolidated basis decreased $21.0
million or 11.3%. Included in operating expenses in 1996 were
charges incurred for Management Actions totaling $17.7 million.
See section "Management Actions". The following table compares
operating expenses for the year with and without Management
Actions:
1997 1996
Operating expenses as reported $164.2 $185.1
Management actions - 1996 _____ (17.7)
$164.2 $167.4
As a % of revenues 32.8% 34.4%
The net reduction in operating expenses, after excluding
Management Actions reflects a continued emphasis on cost control,
the effect of currency translation on expenses incurred in
foreign currencies, and a reduction of expenses resulting from
prior year Management Actions which reduced payroll, offset by
planned increases in certain expenses and increases in
administrative expenses resulting from personnel changes,
employee incentive programs, and litigation expenses.
Operating Income
Operating income as reported in 1997 increased $43.0
million. The increase in gross profit due to increased sales and
lower production costs, lower operating expenses, and the absence
of charges for Management Actions all contributed to the
increase.
The Company believes the change in operating income from
1996 to 1997 can be approximated as follows:
Un-
($ in millions) HPS AHS allocated Total
1996 Operating income (loss) $(8.2) $17.9 $(5.8) $ 3.9
Add-back of 1996 Management
Actions 13.8 4.5 .5 18.8
Sub-total 5.6 22.4 (5.3) 22.7
Increase (decrease) in
operating income due to:
Volume increase, net 7.4 5.3 12.7
Price decrease, net (8.6) (1.7) (10.3)
New products 4.1 6.8 10.9
Production and operating
expenses - decrease
(increase), net 13.6 (1.1) (2.9) 9.6
Translation and other 1.2 .1 ____ 1.3
1997 Operating income (loss) $23.3 $31.8 $(8.2) $46.9
Interest Expense/Other/Taxes
Interest expense decreased $1.4 million due to lower debt
levels (aided by the receipt, in 1997 of approximately $56.4
million of new equity) and generally lower interest rates in
1997.
Other, net in 1997 was a $0.6 million loss compared to a
$0.2 million loss in 1996. Foreign exchange transaction losses
included in Other, net in 1997 and 1996 were approximately $0.7
million and $0.2 million, respectively. The loss in 1997 was
primarily the result of the strengthening of the U.S. dollar
during 1997.
The provision for income taxes was 37.3% in 1997 compared to
a benefit for income taxes (due to a pre-tax loss) of 29.4% in
1996. The difference between the statutory rate and the effective
rate is the interaction of state income taxes and non-deductible
costs which increase the rate partially offset by lower taxes in
foreign jurisdictions.
Results of Operations
Comparison of Year Ended December 31, 1996 to Year Ended
December 31, 1995.
Total revenue decreased $34.7 million (6.7%) in 1996
compared to 1995. Operating income in 1996 was $3.9 million, a
decrease of $48.6 million, compared to 1995. The Company recorded
a net loss in 1996 of $.53 per share compared to net income of
$.87 per share in 1995. The net loss is attributable to charges
for Management Actions (approximately $.58 per share net loss)
and generally difficult operating conditions (See "Management
Actions").
Revenues
Revenues declined by $5.1 million (3.1%) in the AHS. The AHD
revenues declined due to lower sales volume of BMDr and other
feed additives primarily to the poultry market and price erosion
due to competition. The decline in the sale of other feed
additives to the poultry market is attributable mainly to the
mutual termination of a distribution agreement with Merck AgVet.
AAHD revenues were lower due to the introduction of competitive
products in the Norwegian fish vaccine market and an overall
reduction in Norwegian salmon production.
Revenues in the HPS were $29.7 million lower primarily due
to USPD revenues which declined approximately 12%, as a result of
price and volume reductions in the base product line (principally
cough and cold products) due to a fundamental shift in industry
distribution, purchasing and stocking patterns including a
substantial drop in sales to generic drug distributors. The
declines were partially offset by increased sales of products
introduced in 1994 and 1995 and sales of Minoxidil introduced in
the second quarter of 1996. Revenues for IPD and FCD declined by
3.9% and 5.1%, respectively due to volume reductions and to a
lesser extent currency translation offset partially by limited
price increases.
Gross Profit
On a consolidated basis, gross profit decreased $29.7
million
and the gross margin percent was 38.9% in 1996 compared to 42.0%
in 1995. The gross profit for the AHS declined due to the lower
volume sold of BMD and high margin fish vaccines and generally
lower pricing due to competition. The gross profit in the HPS
declined over $20.0 million due principally to the USPD. The USPD
was affected by lower sales volume, and significantly lower
pricing across the product line due to changes in the generic
pharmaceutical industry. Lower sales volume also affected gross
profit by causing reduced production volume which increases
production costs per unit. IPD and FCD also had lower gross
margins due primarily to lower sales. In addition, 1996 includes
$1.1 million primarily for accrued stay bonuses for production
employees in facilities to be closed in both the USPD and IPD.
(See "Management Actions.")
Operating Expenses
Operating expenses (i.e. selling, general and administrative
expenses "SG&A") on a consolidated basis increased $18.9 million
or 11.3%. Included in 1996 operating expenses are Management
Actions totaling $17.7 million which include the following by
segment: HPS - severance and termination benefits, $6.7 million;
write off of assets at facilities to be closed $4.1 million; and
exit costs and other $2.1 million. AHS - Severance and
termination benefits $4.0 million; and exit costs and other $.4
million. Unallocated - severance and termination benefits $.4
million. Additionally, 1996 includes bad debt expenses of $2.0
million related to the bankruptcy of a major wholesaler and $1.0
million for financial advisory and consulting services related to
a potential acquisition. The following table summarizes the
above:
1996 1995
Operating expenses
as reported $185.1 $166.3
Management Actions
(described herein) (17.7) .2
Financial advisory fees (1.0)
Bad debt expense related
to the bankruptcy
of a wholesaler (2.0) _____
Operating expenses
as adjusted $164.4 $166.5
The lack of growth in operating expenses, excluding the
items described above, reflects an emphasis on cost control in
response to difficult business conditions in a number of markets
(including lower bonuses paid in 1996), a reduction of expenses
resulting from prior year Management Actions which reduced
payroll and generally flat selling and marketing expenses certain
of which vary directly with sales.
Operating Income
Operating income as reported declined $48.6 million.
The Company believes the change in operating income from
1995 to 1996 can be approximated as follows:
HPS AHS Unallocated Total
1995 Operating
income (loss) $26.1 $30.8 $(4.4) $52.5
Sales/gross profit
(decrease) increase:
Volume (21.0) (7.0) (28.0)
Price (8.0) (2.0) (10.0)
New products 12.0 4.0 16.0
(Increase) Decrease in:
Production and
operating expenses (2.9) (3.8) (.9) (7.6)
Management Actions (14.4) (4.1) (.5) (19.0)
1996 Operating
income (loss) $ (8.2) $17.9 $(5.8) $ 3.9
Interest Expense/Taxes
Interest expense declined $2.0 million in 1996 compared to
1995 due to lower interest rates in 1996 and to a lesser extent
decreased average debt levels.
The provision for income taxes was 37.8% in 1995 compared to
a benefit for income taxes (due to the pre-tax loss) of 29.4% in
1996. The principal difference between both the actual rates and
the statutory rates is due to the effect of non-deductible
expenses (principally goodwill).
Management Actions
In December 1994, after the acquisition of Alpharma Oslo
from A.L. Industrier A.S., the Company announced a number of
Management Actions which included staff reductions and certain
product line and facilities rationalizations as a first step
toward realizing combination synergies and maximizing the overall
position of the newly combined Company.
In September 1995, the Company announced additional
Management Actions which continued the process begun in December
1994. The actions included elimination of approximately 130
positions company-wide (77 employees were severed in 1995),
further efforts toward consolidation of operations in 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 a research and development
company which was identified for disposal in December 1994.
In the first quarter of 1996, the Company continued the
rationalization process and announced the reorganization of the
IPD sales and marketing organization in Scandinavia. The
reorganization resulted in severing 30 personnel at a cost of
$1.9 million. IPD estimates the annual expense reduction by 1997
from this action at over $1.0 million.
In the second quarter of 1996, the Board of Directors
approved an IPD production rationalization plan which includes
the transfer of all tablet, ointment and liquid production from
Copenhagen, Denmark to Lier, Norway. The full transfer will be
completed in 1998 and will result in a net reduction of
approximately 100 employees. The rationalization plan resulted in
a charge in the second quarter for severance for Copenhagen
employees, an impairment write-off for certain buildings and
machinery and equipment and other exit costs.
In 1995, the Company announced a plan by USPD to move all
suppositories and cream and ointment production from two
locations to the Lincolnton, North Carolina location. In the
second quarter of 1996, USPD prepared a plan to accelerate the
previously approved plan for consolidation of the manufacturing
operations within USPD. The Board of Directors approved the
acceleration in May 1996.
The acceleration plan included the discontinuing of all
activities in two USPD manufacturing facilities in New York and
New Jersey and the transfer of all pharmaceutical production from
those sites to the facility in Lincolnton, North Carolina. The
plan provided for complete exit by early 1997 and resulted in a
net reduction of over 150 employees. The acceleration plan
resulted in a second quarter charge in 1996 for severance of
employees, a write-off for leasehold improvements and machinery
and equipment and significant exit costs including estimated
remaining lease costs and facility refurbishment costs. In the
third quarter of 1996, the Company sold its tablet business which
was located in New Jersey and sub-leased the New Jersey location.
The sale netted proceeds of approximately $0.5 million and
resulted in the adjustment of certain accruals for exit costs
made in the second quarter which contemplated the shut down of
the facility.
Because of the time necessary to complete the transfers, the
production rationalization plans include stay bonus plans to keep
the production work force intact until the transfer is complete.
The stay bonus plans generally require the employee remain until
their position is eliminated to earn a payment. The overall cost
of these plans is estimated at $1.9 million and is being accrued
over the periods necessary to achieve the shut downs. In the
first quarter of 1997, the USPD stay bonus was paid upon
completion of the transfer.
In the second half of 1996, additional Management Actions
included a reorganization at USPD which resulted in severing 15
employees and a reorganization of the AHD business practices and
staffing levels which resulted in severing and/or early
retirement of 33 employees and other exit costs.
As a result of the 1996 reorganizations in USPD and AHD the
Company believes annual payroll and payroll related costs of $2.5
million have been eliminated. The production rationalization
plans have begun to benefit operations in 1997 for USPD and are
expected to benefit operations in IPD in late 1998.
Inflation
The effect of inflation on the Company's operations during
1997, 1996 and 1995 was not significant.
Liquidity and Capital Resources
At December 31, 1997, stockholders' equity was $238.5
million compared to $186.0 million and $205.2 million at December
31, 1996, and 1995, respectively. The ratio of long-term debt to
equity was .94:1, 1.26:1 and 1.07:1 at December 31, 1997, 1996
and 1995, respectively. The increase in stockholders' equity in
1997 primarily reflects net income in 1997 less dividends, the
sale of $56.4 million in common stock in 1997 offset partially by
a decrease in the translation adjustment ($18.9 million) due to
the weakening of the Danish Krone, Norwegian Krone and the
Indonesian Rupiah in 1997.
Working capital at December 31, 1997 was $139.8 million
compared to $119.2 million and $113.6 million at December 31,
1996 and 1995, respectively. The current ratio was 2.04:1 at
December 31, 1997 compared to 1.77:1 and 1.67:1 at December 31,
1996 and 1995, respectively.
Significant fluctuations included accounts receivable being
higher in 1997 by $7.1 million resulting from substantially
higher fourth quarter sales in the USPD and the European
subsidiaries. Prior year accounts receivable included a tax
refund receivable of $7.2 million recorded in 1996 due to the
domestic tax loss incurred by the Company. The tax receivable was
collected in 1997. Accrued expenses decreased due primarily to
payments in 1997 of accruals for severance related to Management
Actions set up in 1996.
All working capital elements also decreased in 1997 in U.S.
Dollars as the functional currencies of the Company's principal
foreign subsidiaries, the Danish Krone and Norwegian Krone,
weakened versus the U.S. Dollar as compared to 1996 by
approximately 15% and 14%, respectively. In addition, the Danish
subsidiary has a subsidiary in Indonesia whose assets,
liabilities and equity translated into substantially less Danish
Krone and ultimately U.S. Dollars due to the devaluation in 1997
of the Indonesian Rupiah. The approximate decrease due to
currency translation was: accounts receivable $5.9 million,
inventory $6.6 million and accounts payable and accrued expenses
$4.7 million.
The Company presently has various capital expenditure
programs under way and planned including the expansion of the
Lier, Norway facility. In 1997, the Company's capital
expenditures were $27.8 million, and in 1998 the Company plans to
spend a greater amount than in 1997.
At December 31, 1997, the Company had $50.2 million
available under existing short-term unused lines of credit and
$11.0 million in cash. In addition, the Company has $5.5 million
available in Europe under long-term lines of credit and $18.4
million available under an amended revolving credit facility. The
Company believes that the combination of cash from operations and
funds available under existing lines of credit will be sufficient
to cover its currently planned operating needs. A substantial
portion of the Company's short-term and long-term debt is at
variable interest rates. At December 31, 1997, the Company has
entered into interest rate agreements to fix the interest rates
for $54.6 million of the variable debt at 5.7% plus the required
margin through October 1998. The Company is considering similar
transactions to fix additional variable rate debt for specified
periods to minimize the impact of future changes in interest
rates. The Company's policy is to selectively enter into "plain
vanilla" agreements to fix interest rates for existing debt if it
is deemed prudent.
In addition to investments for internal growth, the Company
has intensified its pursuit of complementary acquisitions,
particularly in human pharmaceuticals, that can provide new
products and market opportunities as well as leverage existing
assets. In order to accomplish any significant acquisition, it is
likely that the Company will need to obtain additional financing
in the form of equity related securities and/or borrowings. The
Company is currently seeking between $159 million and $185
million of financing through a private placement of convertible
subordinated notes including a commitment of A.L. Industrier to
purchase at least $59 million of such convertible subordinated
debt. Any new borrowings (other than pursuant to existing lines
of credit) by the Company will require consent of the bank
lenders under the Company's revolving credit facility who have
approved the issuance of such convertible subordinated debt. The
Company's outstanding warrants for the issuance of common stock
expire on January 3, 1999, and the Company cannot predict whether
such warrants will be exercised. If all such warrants were
exercised the Company would issue 3,819,600 shares of Common
Stock and receive approximately $79 million. Depending upon the
timing and success of the Company's potential acquisitions and
other corporate developments, the Company may seek additional
debt or equity financing in the future and intends to seek
refinancing of the indebtedness under its revolving credit
agreement which matures in 2000.
Year 2000
The Company has taken various actions to understand the
nature and work required to make its systems year 2000 compliant.
The Company continues to evaluate the estimated costs and has
commenced portions of the work required to achieve compliance.
While compliance has and will involve additional costs the
Company believes, based on current information, it will achieve
year 2000 compliance without a material adverse effect on its
operations or financial position.
Recent Accounting Pronouncements
In June 1997, Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income," was issued
and established standards for reporting and display of
comprehensive income and its components (revenues, expenses,
gains, and losses) in the financial statements. This statement
requires that all items that are recognized in equity under
accounting standards be included as components of comprehensive
income and be reported in a financial statement that is displayed
with the same prominence as other financial statements. SFAS No.
130 addresses disclosure issues; and, therefore, will not have
any effect on the financial position or results of operations of
the Company. The Company is in the process of evaluating the
statement's implementation. This statement is effective for
fiscal years beginning after December 15, 1997.
Also in June 1997 SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information" was issued. This
Statement, which supersedes Statement 14, "Financial Reporting
for Segments of a Business Enterprise," provides different
criteria for public companies to apply in reporting information
about segments by moving to the management approach to segment
reporting. In addition, the statement has requirements relating
to disclosure of products, services, customers, and the material
countries in which the entity holds assets and reports revenues.
This statement addresses disclosure issues and therefore will not
have an effect in the Company's financial position or results of
operations. The Statement is effective for periods beginning
after December 15, 1997.
In February 1998 SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits" was issued. This
statement modifies financial statement disclosures related to
pension and other postretirement plans, including standardization
of disclosures for pension plans and other postretirement plans,
permitting the aggregation of information regarding certain
plans, additional disclosures related to the change in benefit
obligations and the fair value of plan assets, and elimination of
certain other disclosures. This statement addresses disclosure
issues and therefore will not have an effect on the Company's
financial position or results of operations, and is effective for
periods beginning after December 15, 1997.
RISK FACTORS
This report includes certain forward looking statements.
Like any company subject to a competitive business environment,
the Company cannot guarantee the results predicted in any of the
Company's forward-looking statements. Important factors that
could cause actual results to differ materially from those in the
forward-looking statements include (but are not limited to) the
following:
Competition
All of the Company's businesses operate in highly
competitive markets and many of the Company's competitors are
substantially larger and have greater financial, technical and
marketing resources than the Company.
As a result, the Company may be at a disadvantage in its
ability to develop new products to meet competitive demands. In
addition, once a product is approved, the Company may not be able
to market its product (or establish a favorable market price)as
effectively as larger competitors.
The U.S. generic pharmaceutical industry has historically
been characterized by intense competition. As patents for brand-
name products and other bases for market exclusivity expire,
prices typically decline as generic competitors enter the
marketplace. Normally, there is a further unit price decline as
the number of generic competitors increase causing an
intensifying of competitive pricing. The timing of these price
decreases as to any particular product is unpredictable and can
result in a significantly curtailed profitable generic product
life cycle. In addition brand-name manufacturers frequently take
actions to prevent or discourage the use of generic equivalents
through marketing and regulatory activities and litigation.
During 1997, some branded pharmaceutical companies appeared to
increase their efforts to utilize state and federal legislative
and regulatory forums to delay generic competition and limit the
branded product market erosion that occurs once patent protection
is lost for a branded product.
Generic pharmaceutical market conditions in the U.S. were
further exacerbated in the second half of 1996 by a fundamental
shift in industry distribution, purchasing and stocking patterns
resulting from increased importance of sales to major wholesalers
and a concurrent reduction in sales to private label generic
distributors. The Company believes that this trend continues to
date. Programs initiated by major wholesalers have accelerated
price declines and have had a negative effect on sales.
Wholesaler programs generally require lower prices on products
sold, lower inventory levels kept at the wholesaler and fewer
manufacturers selected to provide products to the wholesaler's
own marketing programs.
The Company has been and will continue to be affected by the
competitive and changing nature of this industry. Accordingly,
because of competition, the significance of relatively few major
customers (e.g. large wholesalers and chain stores), a rapidly
changing market and uncertainty of timing of new product
approvals, the sales volume, prices and profits of the Company's
U.S. Pharmaceutical Division and its generic competitors are
subject to unforeseen fluctuation.
In addition, in Europe the Company is encountering price
pressure from parallel imports (i.e., imports of identical
products from lower priced markets under European Union ("EU")
laws of free movement of goods) and general governmental
initiatives to reduce drug prices. Parallel imports could lead to
lower volume growth and both parallel imports and governmental
cost containment could create downward pressure on prices in
certain product and geographical market areas including the
Nordic countries where the Company has significant sales.
Government Regulation
The research, development, manufacturing and marketing of
the Company's products are subject to extensive government
regulation by either the USFDA, or the U.S. Department of
Agriculture ("USDA"), as well as by the Drug Enforcement
Administration ("DEA"), the Federal Trade Commission ("FTC"), the
Consumer Product Safety Commission ("CPSC"), and by comparable
authorities in the EU, Norway, Indonesia and other countries.
Although Norway is not a member of the EU, it is a member of the
European Economic Association and, as such, has accepted all EU
regulations with respect to pharmaceuticals. Government
regulation includes detailed inspection of and controls over
testing, manufacturing, safety, efficacy labeling, storage,
recordkeeping, approval, advertising, promotion, sale and
distribution of pharmaceutical products. Noncompliance with
applicable requirements can result in civil or criminal fines,
recall or seizure of products, total or partial suspension of
production and/or distribution, debarment of individuals or the
Company from obtaining new generic drug approvals, refusal of the
government to approve new products and criminal prosecution. Such
government regulation substantially increases the cost of
producing human pharmaceutical and animal health products.
In the U.S., the USFDA has imposed stringent regulatory
requirements relating to the operation of manufacturing plants.
The Company's U.S. manufacturing facilities, as well as two of
the Company's European plants that manufacture products for
export to the U.S. and certain of its contract manufacturers, are
affected in that they are required to comply with the U.S.
manufacturing regulations. Failure to demonstrate compliance
during periodic inspections could lead to a cessation or
curtailment of plant operations. Similar regulatory requirements
exist in the foreign countries where the Company or its contract
manufacturers have facilities, and in certain countries where the
Company sells its products, and non-compliance could lead to
adverse events similar to those described above.
The Company and its subsidiaries have filed applications to
market pharmaceutical and animal health products with regulatory
agencies both in the U.S. and internationally. The approval of
these applications, and the timing of such approvals, can
significantly affect future revenues and income. This is
particularly important with respect to human pharmaceuticals
where it is the Company's strategy to obtain regulatory approval
to market a generic formulation as soon as third party's patent
protection ends and prior to the price erosion normally caused by
the entry of other generic competitors. There can be no assurance
that new product approvals will be obtained in a timely manner,
if ever. Failure to obtain such approvals, or to obtain such
approvals when expected, could have a material adverse affect on
the Company's business, results of operations, and financial
condition.
The Company's animal health products, such as feed
additives, could be affected by legislation or regulatory rulings
reportedly under consideration in one or more countries
restricting the sale of products containing antibiotics. Based
upon public reports, the Company understands that the governments
of certain European countries have banned the sale of certain of
such products. The Company cannot predict whether such
initiatives will ultimately affect its products. Any such
restrictive legislation or regulation in Norway or the U.S. would
have a significant effect on the Company's business.
Regulatory compliance impacts operating expenses 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.
For a more detailed description of governmental regulations
see "Information Applicable to All Business Segments -
Regulation".
Foreign Operations; Risk of Currency Fluctuation
The Company's foreign operations are subject to various
risks which are not present in domestic operations, including, in
certain countries, currency exchange fluctuations and
restrictions, restrictions on imports, government price controls,
restrictions on the level of remittance of dividends, interest,
royalties and other payments, the need for government 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.
The Company's Far East operations, particularly Indonesia
where the Company has a manufacturing facility, are being
affected by the wide currency fluctuations and decreased economic
activity in many countries in such geographical areas. While the
Company's present exposure to economic factors in the Far East is
not material, the region is a key area for the Company's
anticipated future growth.
While from time to time the Company may engage in hedging
activities, the Company cannot predict future currency
fluctuations or future governmental regulatory actions or their
impact on the Company.
Dependence on Single Sources of Raw Material Supply and Contract
Manufacturers
Raw materials used in certain products are currently sourced
from single qualified suppliers, both foreign and domestic, and
certain products sold by the Company are purchased from single
contract manufacturers. Although the Company has not experienced
difficulty to date in acquiring active raw materials, other
materials for production development, or products purchased from
contract manufacturers, there can be no assurance that supply
interruptions will not occur in the future or that the Company
will not have to obtain substitute materials or products, which
would require additional product validations and regulatory
submissions. Further, there can be no assurance that contract
manufacturers that supply the Company will continue to do so.
Any such interruption of supply could have a material adverse
effect on the Company's ability to manufacture products, to sell
products manufactured under contract or to obtain or maintain
regulatory approval of such products.
Third Party Reimbursement Pricing Pressures
The Company's commercial success in producing, marketing and
selling generic products will depend, in part, on the
availability of adequate reimbursement from third-party health
care payers, such as government and private health insurers and
managed care organizations. Third-party payers are increasingly
challenging the pricing of medical products and services. There
can be no assurance that reimbursement will be available to
enable the Company to maintain its present product price levels.
In addition, the market for the Company's products may be limited
by actions of third-party payers. For example, many managed
health care organizations are now controlling the pharmaceutical
products for which reimbursement will be provided. The resulting
competition among pharmaceutical companies to place their
products on these approved lists has created a trend of downward
pricing pressure in the industry. There can be no assurance that
the Company's products will be included on the approved lists of
managed care organizations or that downward pricing pressures in
the industry generally will not negatively impact the Company's
business, results of operations and financial condition.
Potential Liability for Current Products
Continuing studies of the proper utilization, safety, and
efficacy of pharmaceuticals and other health care products are
being conducted by 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 business, results of
operations and financial condition could be materially adversely
affected by the assertion of such a product liability claim.
Risks Associated with Potential Acquisitions
The Company has intensified its search for acquisitions
which will provide new product and market opportunities, leverage
existing assets and add critical mass. The Company's human
pharmaceutical divisions currently are actively evaluating
various acquisition possibilities, including joint ventures and
licensing arrangements. The Company cannot predict whether any
acquisition which meets its criteria will be available on terms
acceptable to the Company, that financing for any such
acquisitions will be available on satisfactory terms, that the
Company will be able to accomplish its strategic objectives as a
result of any such acquisition or that any business or assets
acquired by the Company will be integrated successfully into the
Company's operations. Given other transactions in the
pharmaceutical industry, and the values of potential acquisition
targets, any such acquisitions could initially be dilutive to the
Company's earnings and may add significant intangible assets and
related goodwill amortization charges. Depending upon the timing
and success of the Company's acquisition strategy and other
corporate developments, the Company may seek additional debt or
equity financing, resulting in additional leverage and dilution
of ownership, respectively. There can be no assurance that the
Company's acquisition strategy, or any other component of its
strategy, will be successful.
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 8, 1998, which Proxy Statement will be filed on or prior to
March 30, 1998, 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 8, 1998,
which Proxy Statement will be filed on or prior to March 30,
1998, 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 8, 1998, is incorporated into this Report by
reference. Such Proxy Statement will be filed on or prior to
March 30, 1998.
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 8, 1998, is incorporated into this Report by
reference. Such Proxy Statement will be filed on or prior to
March 30, 1998.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K
List of Financial Statements
See page F-1 of this Report, which includes an index to
consolidated financial statements and financial statement
schedule.
List of Exhibits (numbered in accordance with Item 601 of
Regulation S-K)
3.1A Amended and Restated Certificate of Incorporation of
the Company, dated September 30, 1994 and filed with the
Secretary of State of the State of Delaware on October 3, 1994,
was filed as Exhibit 3.1 to the Company's 1994 Annual Report on
Form 10-K and is incorporated by reference.
3.1B Certificate of Amendment of the Certificate of
Incorporation of the Company dated September 15, 1995 and filed
with the Secretary of State of Delaware on September 15, 1995 was
filed as Exhibit 3.1 to the Company's Amendment No. 1 to Form S-3
dated September 21, 1995 (Registration on No. 33-60029) and is
incorporated by reference.
3.2 Amended and Restated By-Laws of the Company,
effective as of October 3, 1994, were filed as Exhibit 3.2 to the
Company's 1994 Annual Report on Form 10-K and is incorporated by
reference.
4.1 Reference is made to Article Fourth of the Amended
and Restated Certificate of Incorporation of the Company which is
referenced as Exhibit 3.1 to this Report.
4.2 Warrant Agreement between the Company and The First
National Bank of Boston, as warrant agent, was filed as an
Exhibit 4.2 to the Company's 1994 Annual Report on Form 10-K and
is incorporated by reference.
10.1 $185,000,000 Credit Agreement among A.L.
Laboratories, Inc.,(now known as Alpharma U.S. Inc.) as Borrower,
Union Bank of Norway, as agent and arranger, and Den norske Bank
AS, as co-arranger, dated September 28, 1994, was filed as
Exhibit 10.1 to the Company's 1994 Annual Report on Form 10-K and
is incorporated by reference.
10.1A Amendment to the Credit Agreement dated February 26,
1997 between the Company and the Union Bank of Norway, as agent
was filed as Exhibit 10.1A to the Company's 1996 Annual Report on
Form 10K and is incorporated by reference.
10.1B Amendment to the Credit Agreement dated April 10,
1997 between the Company and Union Bank of Norway, as agent was
filed as Exhibit 10.a to the Company's March 31, 1997 quarterly
report on Form 10Q and is incorporated by reference.
Copies of debt instruments (other than those listed above)
for which the related debt does not exceed 10% of consolidated
total assets as of December 31, 1997 will be furnished to the
Commission upon request.
10.2 Parent Guaranty, made by the Company in favor of
Union Bank of Norway, as agent and arranger, and Den norske Bank
AS, as co-arranger, dated September 28, 1994 was filed as Exhibit
10.2 to the Company's 1994 Annual Report on Form 10-K and is
incorporated by reference.
10.3 Restructuring Agreement, dated as of May 16, 1994,
between the Company and Apothekernes Laboratorium A.S (now known
as A.L. Industrier AS) was filed as Exhibit A to the Definitive
Proxy Statement dated August 22, 1994 and is incorporated herein
by reference.
10.4 Employment Agreement dated January 1, 1987, as
amended December 12, 1989, between I. Roy Cohen and the Company
and A.L. Laboratories, Inc. was filed as Exhibit 10.3 to the
Company's 1989 Annual Report on Form 10-K and is incorporated
herein by reference.
10.5 Control Agreement dated February 7, 1986 between
Apothekernes Laboratorium A.S (now known as A.L. Industrier AS)
and the Company was filed as Exhibit 10.10 to the Company's 1985
Annual Report on Form 10-K and is incorporated herein by
reference.
10.6 Amendment to Control Agreement dated October 3, 1994
between A.L. Industrier AS (formerly known as Apothekernes
Laboratorium A.S) and the Company was filed as Exhibit 10.6 to
the Company's 1994 Annual Report on Form 10-K and is incorporated
by reference.
10.6A Amendment to Control Agreement dated December 19,
1996 between A.L. Industrier AS and the Company was filed as
Exhibit 10.6A to the Company's 1996 Annual Report on Form 10-K
and is incorporated by reference.
10.7 The Company's 1997 Incentive Stock Option and
Appreciation Right Plan, as amended was filed as an Exhibit to
the Company's 1996 Proxy Statement and is incorporated by
reference.
10.8 Employment agreement dated July 30, 1991 between the
Company and Jeffrey E. Smith was filed as Exhibit 10.8 to the
Company's 1991 Annual Report on Form 10-K and is incorporated by
reference.
10.9 Employment agreement between the Company and Thomas
Anderson dated January 13, 1997 was filed as Exhibit 10.9 to the
Company's 1996 Annual Report on Form 10-K and is incorporated by
reference.
10.10 Employment Agreement between the Company and Bruce I.
Andrews dated April 7, 1997 was filed as Exhibit 10.b to the
Company's March 31, 1997 quarterly report on Form 10-Q and is
incorporated by reference.
10.11 Lease Agreement between A.L. Industrier AS, as
landlord, and Alpharma AS, as tenant, dated October 3, 1994 was
filed as Exhibit 10.10 to the Company's 1994 Annual Report on
Form 10-K and is incorporated by reference.
10.12 Administrative Services Agreement between A.L.
Industrier AS and Alpharma AS dated October 3, 1994 was filed as
Exhibit 10.11 to the Company's 1994 Annual Report on Form 10-K
and is incorporated by reference.
10.13 Employment agreement dated March 14, 1996 between the
Company and Einar W. Sissener was filed as Exhibit 10.13 to the
Company's 1995 Annual Report on Form 10-K and is incorporated by
reference.
10.14 Employment contract dated October 5, 1989 between
Apothekernes Laboratorium A.S (transferred to Alpharma Oslo per
the combination transaction) and Ingrid Wiik was filed as Exhibit
10.13 to the Company's 1994 Annual Report on Form 10-K and is
incorporated by reference.
10.15 Employment contract dated October 5, 1989 between
Apothekernes Laboratorium A.S (transferred to Alpharma Oslo per
the combination transaction) and Thor Kristiansen was filed as
Exhibit 10.14 to the Company's 1994 Annual Report on Form 10-K
and is incorporated by reference.
10.16 Employment contract dated October 2, 1991 between
Apothekernes Laboratorium A.S (transferred to Alpharma Oslo per
the combination transaction) and Knut Moksnes was filed as
Exhibit 10.15 to the Company's 1994 Annual Report on Form 10-K
and is incorporated by reference.
10.17 Agreement dated April 28, 1997 between D.E.Cohen and
the Company is filed as an Exhibit to this report.
10.18 Stock Subscription and Purchase Agreement dated
February 10, 1997 between the Company and A.L. Industrier was
filed as Exhibit 10 on Form 8-K filed on February 19, 1997 and is
incorporated by reference.
10.18a Amendment No. 1 to Stock Subscription and Purchase
Agreement dated June 26, 1997, between the Company and A.L.
Industrier AS was filed as an Exhibit to the Company's Form 8-K
dated June 27, 1997 and is incorporated by reference.
10.19 Note Purchase Agreement dated March 5, 1998 between
the Company and A.L. Industrier AS is filed as an exhibit to this
report.
21 A list of the subsidiaries of the Registrant as of
March 1, 1998 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
No reports on Form 8-K was filed for the quarter ended
December 31, 1997.
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 9, 1998 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 9, 1998 /s/ Einar W. Sissener
Einar W. Sissener
Chairman, Director and
Chief Executive Officer
Date: March 9, 1998 /s/ Jeffrey E. Smith
Jeffrey E. Smith
Vice President, Finance and
Chief Financial Officer
(Principal accounting officer)
Date: March 9, 1998 /s/ I. Roy Cohen
I. Roy Cohen
Director and Chairman of the
Executive Committee
Date: March 9, 1998 /s/ Thomas G. Gibian
Thomas G. Gibian
Director and Chairman of the
Audit Committee
Date: March , 1998 __________________________
Glen E. Hess
Director
Date: March 9, 1998 /s/ Peter G. Tombros
Peter G. Tombros
Director and Chairman
of the Compensation Committee
Date: March 9, 1998 /s/ Erik G. Tandberg
Erik G. Tandberg
Director
Date: March , 1998 __________________________
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, 1997 and 1996 F-3
Consolidated Statement of Operations for
the years ended December 31, 1997,
1996 and 1995 F-4
Consolidated Statement of Stockholders'
Equity for the years ended
December 31, 1997, 1996 and 1995 F-5 to F-8
Consolidated Statement of Cash Flows
for the years ended December 31, 1997,
1996 and 1995 F-9 to F-10
Notes to Consolidated Financial Statements F-11 to F-44
Financial statement schedules are omitted for the reason that
they are not applicable or the required information is included
in the consolidated financial statements or notes thereto.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and
Board of Directors of
Alpharma Inc.:
We have audited the consolidated financial statements of
Alpharma Inc. and Subsidiaries (the "Company") listed in the
index on page F-1 of this Form 10-K. These financial statements
are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that we
plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Alpharma Inc. and Subsidiaries as of
December 31, 1997 and 1996 and the consolidated results of their
operations and their cash flows for each of the three years in
the period ended December 31, 1997 in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Parsippany, New Jersey
February 25, 1998
ALPHARMA INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In thousands, except share data)
December 31,
1997 1996
ASSETS
Current assets:
Cash and cash equivalents $ 10,997 $ 15,944
Accounts receivable, net 127,637 120,551
Inventories 121,451 123,585
Prepaid expenses and other
current assets 13,592 14,779
Total current assets 273,677 274,859
Property, plant and equipment, net 199,560 209,803
Intangible assets, net 149,816 119,918
Other assets and deferred charges 8,813 8,827
Total assets $631,866 $613,407
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 10,872 $ 4,966
Short-term debt 39,066 60,952
Accounts payable 27,659 30,557
Accrued expenses 51,139 57,731
Accrued and deferred income taxes 5,190 1,445
Total current liabilities 133,926 155,651
Long-term debt 223,975 233,781
Deferred income taxes 26,360 29,882
Other non-current liabilities 9,132 8,051
Stockholders' equity:
Preferred stock, $1 par value,
no shares issued
Class A Common Stock, $.20
par value, 16,118,606 and
13,813,516 shares issued 3,224 2,762
Class B Common Stock, $.20 par value,
9,500,000 and 8,226,562 shares issued 1,900 1,646
Additional paid-in capital 179,636 122,252
Foreign currency translation adjustment (8,375) 10,491
Retained earnings 68,206 54,996
Treasury stock, 275,382 and 274,786
shares of Class A Common Stock,
at cost (6,118) (6,105)
Total stockholders' equity 238,473 186,042
Total liabilities and
stockholders' equity $631,866 $613,407
See notes to consolidated financial statements.
ALPHARMA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share data)
Years Ended December 31,
1997 1996 1995
Total revenue $500,288 $486,184 $520,882
Cost of sales 289,235 297,128 302,127
Gross profit 211,053 189,056 218,755
Selling, general and
administrative expenses 164,155 185,136 166,274
Operating income 46,898 3,920 52,481
Interest expense (18,581) (19,976) (21,993)
Other income (expense), net (567) (170) (260)
Income (loss) before
income taxes 27,750(16,226) 30,228
Provision (benefit) for
income taxes 10,342 (4,765) 11,411
Net income (loss) $ 17,408 $(11,461) $ 18,817
Average common shares outstanding:
Basic 22,695 21,715 21,631
Diluted 22,780 21,715 21,754
Earnings (loss) per common share:
Basic $ .77 $ (.53) $ .87
Diluted $ .76 $ (.53) $ .87
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, 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) and other 44,025 9 9
Employee stock purchase plan 36,776 7 7
Balance, December 31, 1995 21,926,154 $2,740 $1,646 (263,017) $(5,822) $(1,436)
Purchase of treasury stock (11,769) (283) (283)
Exercise of stock options
(Class A) and other 66,637 13 13
Employee stock purchase plan 47,287 9 9
Balance, December 31, 1996 22,040,078 $2,762 $1,646 (274,786) $(6,105) $(1,697)
Purchase of treasury stock (596) (13) (13)
Exercise of stock options
(Class A) and other 63,300 14 14
Exercise of stock rights
(Class A) 2,201,837 440 440
Stock subscription by
A.L. Industrier (Class B) 1,273,438 254 254
Employee stock purchase plan 39,953 8 8
Balance, December 31, 1997 25,618,606 $3,224 $1,900 (275,382) $(6,118) $ (994)
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, 1994 $(1,152) $118,833 $ 8,125 $55,482 $181,288
Net income - 1995 18,817 18,817
Dividends declared
($.18 per common share) (3,914) (3,914)
Net foreign currency
translation adjustment 7,759 7,759
Tax benefit realized from
stock option plan 137 137
Purchase of treasury stock (300) (300)
Exercise of stock options
(Class A) 9 578 587
Employee stock purchase plan 7 809 816
Balance, December 31, 1995 $(1,436) $120,357 $ 15,884 $70,385 $205,190
Net loss - 1996 (11,461) (11,461)
Dividends declared
($.18 per common share) (3,928) (3,928)
Net foreign currency
translation adjustment (5,393) (5,393)
Tax benefit realized from
stock option plan 202 202
Purchase of treasury stock (283) (283)
Exercise of stock options
(Class A) 13 862 875
Employee stock purchase plan 9 831 840
Balance, December 31, 1996 $(1,697) $122,252 $ 10,491 $54,996 $186,042
Net income - 1997 17,408 17,408
Dividends declared
($.18 per common share) (4,198) (4,198)
Net foreign currency
translation adjustment (18,866) (18,866)
Tax benefit realized from
stock option plan 228 228
Purchase of treasury stock (13) (13)
Exercise of stock options
(Class A) 14 794 808
Exercise of stock rights
(Class A) 440 35,538 35,978
Stock subscription by
A.L. Industrier (Class B) 254 20,125 20,379
Employee stock purchase plan 8 699 707
Balance, December 31, 1997 $ (994) $179,636 $ (8,375) $68,206 $238,473
See notes to consolidated financial statement.
ALPHARMA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands of dollars)
Years Ended
December 31,
1997 1996 1995
Operating activities:
Net income (loss) $17,408 $(11,461) $18,817
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization 30,908 31,503 31,022
Deferred income taxes (1,101) (3,104) 1,054
Noncurrent asset write-offs - 5,753 -
Change in assets and liabilities, net
of effects from business
acquisitions:
(Increase) decrease in accounts
receivable (13,029) 9,204 (9,295)
(Increase) in inventory (2,121) (5,876) (10,468)
(Increase) decrease in prepaid
expenses and other current
assets (1,013) (595) (1,462)
Increase (decrease) in accounts
payable and accrued expenses (4,782) 3,346 4,462
Increase (decrease) in accrued
income taxes 4,077 (4,523) 2,802
Other, net 616 574 (104)
Net cash provided by operating
activities 30,963 24,821 36,828
Investing activities:
Capital expenditures (27,783) (30,874) (24,836)
Purchase of businesses
and intangibles (44,029) - (3,500)
Other - (348) 579
Net cash used in investing
activities (71,812) (31,222) (27,757)
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,
1997 1996 1995
Financing activities:
Net repayments
under lines of credit $(19,389) $ (630) $ (296)
Proceeds of long-term debt 27,506 24,213 9,000
Reduction of long-term debt (25,366) (17,137) (13,121)
Dividends paid (4,198) (3,928) (3,914)
Treasury stock acquired (13) (283) (300)
Proceeds from issuance of stock
(Class A) 35,978 - -
Proceeds from issuance of stock
(Class B) 20,379 - -
Proceeds from employee stock option
and stock purchase plan 1,515 1,715 1,403
Other, net 227 201 137
Net cash provided by (used in)
financing activities 36,639 4,151 (7,091)
Exchange rate changes:
Effect of exchange rate changes
on cash (1,606) (627) 1,338
Income tax effect of exchange rate
changes on intercompany advances 869 470 (479)
Net cash flows from exchange rate
changes (737) (157) 859
Increase (decrease) in cash and cash
equivalents (4,947) (2,407) 2,839
Cash and cash equivalents at
beginning of year 15,944 18,351 15,512
Cash and cash equivalents at
end of year $10,997 $15,944 $18,351
See notes to consolidated financial statements.
ALPHARMA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
1. The Company:
Alpharma Inc., (the "Company") is a multinational
pharmaceutical company which develops, manufactures and markets
specialty generic and proprietary human pharmaceutical and
animal health products.
In 1994 the Company acquired the pharmaceutical, animal
health, bulk antibiotic and aquatic animal health business
("Alpharma Oslo") of A.L. Industrier A.S ("A.L. Industrier") the
beneficial owner of 100% of the outstanding shares of the
Company's Class B Stock. The Class B stock represents 37.5% of
the total outstanding common stock. (See Note 16.)
Upon consummation of the acquisition of Alpharma Oslo, the
Company was reorganized on a global basis into five
decentralized divisions each operating under either the Human
Pharmaceutical business or the Animal Health business.
The Company's Human Pharmaceutical business consists of
three divisions: The U.S. Pharmaceuticals Division ("USPD"), The
International Pharmaceuticals Division ("IPD") and the Fine
Chemicals Division ("FCD"). The USPD's principal products are
generic liquid and topical pharmaceuticals sold primarily to
wholesalers, distributors and merchandising chains. The IPD's
principal products are dosage form pharmaceuticals and adhesive
bandages sold primarily in Scandinavia and western Europe as well
as Indonesia and certain middle eastern countries. The FCD's
principal products are bulk pharmaceutical antibiotics sold to
the pharmaceutical industry in the U.S. and worldwide for use as
active substances in a number of finished pharmaceuticals.
The Company's Animal Health business consists of two
divisions: The Animal Health Division ("AHD") and the Aquatic
Animal Health Division ("AAHD"). The AHD's principal products are
feed additive and other animal health products for animals raised
for commercial food production (principally poultry and swine) in
the U.S. and worldwide. The AAHD manufactures and markets
vaccines primarily for use in immunizing farmed fish (principally
salmon) worldwide with a concentration in Norway. (See Note 20
for segment and geographic information.)
A.L. Industrier, a Norwegian company, is able to control the
Company through its ability to elect more than a majority of the
Board of Directors and to cast a majority of the votes in any
vote of the Company's stockholders. (See Note 16.)
2. Summary of Significant Accounting Policies:
Principles of consolidation:
The consolidated financial statements include the accounts
of the Company and its domestic and foreign subsidiaries. The
effects of all significant intercompany transactions have been
eliminated.
Use of Estimates:
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions. The estimates and assumptions
affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ
from those estimates.
Cash equivalents:
Cash equivalents include all highly liquid investments that
have an original maturity of three months or less.
Inventories:
Inventories are valued at the lower of cost or market. The
last-in, first-out (LIFO) method is principally used to determine
the cost of the USPD manufacturing subsidiary inventories. The
first-in, first-out (FIFO) and average cost methods are used to
value remaining inventories.
Property, plant and equipment:
Property, plant and equipment are recorded at cost.
Expenditures for additions, major renewals and betterments are
capitalized and expenditures for maintenance and repairs are
charged to income as incurred. When assets are sold or retired,
their cost and related accumulated depreciation are removed from
the accounts, with any gain or loss included in net income.
Interest is capitalized as part of the acquisition cost of
major construction projects. In 1997, 1996 and 1995, $407, $572
and $318 of interest cost was capitalized, respectively.
Depreciation is computed by the straight-line method over
the estimated useful lives which are generally as follows:
Buildings 30-40 years
Building improvements 10-30 years
Machinery and equipment 2-20 years
Intangible assets:
Intangible assets represent the excess of cost of acquired
businesses over the underlying fair value of the tangible net
assets acquired and the cost of technology, trademarks, New
Animal Drug Applications ("NADAs"), and other non-tangible assets
acquired in product line acquisitions. Intangible assets are
amortized on a straight-line basis over their estimated period of
benefit. The Company analyzes its intangible assets by division,
based upon estimated future undiscounted cash flows. At December
31, 1997 and 1996 such analyses did not demonstrate any evidence
of impairment. The following table is net of accumulated
amortization of $50,514 and $42,982 for 1997 and 1996,
respectively.
1997 1996 Life
Excess of cost of acquired
businesses over the fair value
of the net assets acquired $92,228 98,304 20 - 40
Technology, trademarks, NADAs
and other 57,588 21,614 6 - 20
$149,816 $119,918
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 1997, 1996 and 1995 is net of $869, $470, and
($479), respectively, representing the foreign tax effects
associated with intercompany advances to foreign subsidiaries.
Foreign exchange contracts:
The Company selectively enters into foreign exchange
contracts to buy and sell certain cash flows in non-functional
currencies and to hedge certain firm commitments due in foreign
currencies. Foreign exchange contracts, other than hedges of firm
commitments, are accounted for as foreign currency transactions
and gains or losses are included in income. Gains and losses
related to hedges of firm commitments are deferred and included
in the basis of the transaction when it is completed.
Interest Rate Transactions:
The Company selectively enters into interest rate agreements
which fix the interest rate to be paid for specified periods on
variable rate long-term debt. The effect of these agreements is
recognized over the life of the agreements as an adjustment to
interest expense.
Income Taxes:
The provision for income taxes includes federal, state and
foreign income taxes currently payable and those deferred because
of temporary differences in the basis of assets and liabilities
between amounts recorded for financial statement and tax
purposes. Deferred taxes are calculated using the liability
method.
At December 31, 1997, the Company's share of the
undistributed earnings of its foreign subsidiaries (excluding
cumulative foreign currency translation adjustments) was
approximately $44,800. No provisions are made for U.S. income
taxes that would be payable upon the distribution of earnings
which have been reinvested abroad or are expected to be returned
in tax-free distributions. It is the Company's policy to provide
for U.S. taxes payable with respect to earnings which the Company
plans to repatriate.
Accounting for Postretirement Benefits:
The Company accounts for postretirement benefits in
accordance with Statement of Financial Accounting Standards
"SFAS" No. 106 "Employers' Accounting for Postretirement Benefits
Other than Pensions". The statement requires accrual accounting
for these benefits over the service lives of the employees.
Earnings Per Share:
At year end 1997, the Company adopted Statement of Financial
Accounting Standards No. 128 that requires the reporting of both
basic and diluted earnings per share. Basic earnings per share is
based upon the weighted average number of common shares
outstanding.
Diluted earnings per share reflect the dilutive effect of
stock options and the diluted effect of the warrants when
appropriate. Such options and warrants did not have a dilutive
effect in 1996. Prior periods have been restated to reflect the
new standard.
A reconciliation of weighted average shares outstanding for
basic to diluted weighted average shares outstanding is as
follows:
1997 1996 1995
(Shares in thousands)
Average shares outstanding-basic 22,695 21,715 21,631
Stock options 85 - 123
Warrants - - -
Average shares
outstanding - diluted 22,780 21,715 21,754
Stock options outstanding in each year and weighted average
exercise prices are included in Note 18. The amount of dilution
attributable to the options determined by the treasury stock
method will depend on the average market price of the Company's
common stock each year. Warrants to purchase common stock are
outstanding and do not have a dilutive effect in that the
exercise price exceeded the average market price each year. The
numerator for the calculation of both basic and diluted is net
income (loss) for each year.
Accounting for Stock Based Compensation:
Effective January 1, 1996, the Company adopted SFAS No. 123,
"Accounting for Stock-Based Compensation." The standard
establishes a fair value method of accounting for or,
alternatively, disclosing the pro-forma effect of the fair value
method of accounting for stock-based compensation plans. The
Company has adopted the disclosure alternative. As a result, the
adoption of this standard did not have any impact on reported
results of operations and financial position.
3. Management Actions - 1995 and 1996
As a result of the acquisition of Alpharma Oslo (Note 1), in
December 1994 the Board of Directors approved a plan and the
Company announced Management Actions which included exiting
certain businesses and product lines which did not fit into the
Company's 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 net after
tax effect of the 1994 Management Actions described above was
$14,500 ($ .67 per share). All of the Management Actions
commenced in 1994 have been completed.
In the third quarter of 1995, the Company announced
additional 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 which was identified for disposal in December of
1994.
The net effect of the additional Management Actions for the
year ended December 31, 1995 was a net reduction of selling,
general and administrative expenses of $159 resulting from the
income received on the sale of the equity position in the R&D
company and certain other product rights ($6,463) net of expenses
for the other Management Actions ($6,304). The expenses of the
other Management Actions were $4,556 for consulting services and
$1,748 for severance for 77 employees in the IPD, USPD and AHD.
The net after tax effect of the 1995 actions was approximately
zero.
In 1996, the IPD continued to take additional actions
designed to further strengthen the competitive nature of the
division by lowering costs. In the first quarter of 1996, IPD
severed approximately 30 sales, marketing and other personnel
based primarily in the Nordic countries and incurred termination
related costs of approximately $1,900. The termination costs are
included in selling, general and administrative expenses.
In May 1996, the Board of Directors approved a production
rationalization plan which included the transfer of all tablet,
ointment and liquid production from Copenhagen, Denmark to Lier,
Norway. The full transfer is expected to be completed in late
1998 and will result in the reduction of approximately 175
employees (primarily involved in production). The rationalization
plan resulted in a charge in the second quarter of 1996 for
severance for Copenhagen employees, an impairment write off for
certain buildings and machinery and equipment and other exit
costs.
In addition in May 1996, the Board of Directors approved the
USPD plan to accelerate a consolidation of manufacturing
operations within USPD.
The plan included the discontinuing of all activities in two
USPD manufacturing facilities in New York and New Jersey and the
transfer of all pharmaceutical production from those sites to the
facility in Lincolnton, North Carolina. The plan provided for
complete exit by early 1997 and resulted in a reduction of
approximately 200 employees (i.e. all production, administration
and support personnel at the plants). The acceleration plan
resulted in a charge in the second quarter of 1996 for severance
of employees, a write-off of leasehold improvements and machinery
and equipment and significant exit costs including estimated
remaining lease costs and refurbishment costs for the facilities
being exited.
Due to the time necessary to achieve both transfers of
production the Company, as part of the severance arrangements,
instituted stay bonus plans. The overall cost of the stay bonus
plans was estimated at $1,900, and is being accrued over the
periods necessary to achieve shut down and transfer. The stay
bonus plans generally require the employee to remain until their
position is eliminated to earn the payment.
In the second half of 1996 the USPD's Management Actions
were adjusted for the sale of the Able tablet business. The sale
of the Able tablet business and sub-lease of the Able facility
(located in New Jersey) resulted in the Company reducing certain
accruals which would have been incurred in closing the facility.
The net reduction of the second quarter charge for the sale was
$1,400 and included the net proceeds received on the sale of
approximately $500. In addition in 1996 certain staff and
executives at USPD headquarters were terminated (15 employees)
resulting in severance of $782. In 1997 USPD completed the
transfer of production, paid the stay bonus as accrued, and
severed all identified employees.
As a result of difficult market conditions experienced in
1996, the Company's AHD reviewed its business practices and
staffing levels. As a result 33 salaried employees were
terminated or elected an early retirement program. Concurrently
office space was vacated resulting in a charge for the write off
of leasehold improvements and lease payments required to
terminate the lease. In addition, the AHD distribution business
was reviewed and a number of minor products were discontinued.
A summary of 1996 charges and expenses resulting from the
Management Actions which are included in cost of goods sold
($1,100), and selling, general and administrative expenses
($17,700)follows:
Pre-Tax
Amount Description
$11,200 Severance and employee termination benefits for all
1996 employee related actions (approximately 450
employees are to be terminated; at December 31,
1997 approximately 355 employees were terminated).
1,000 Stay bonus accrued, as earned as of December 31,
1996.
4,175 Write off of building, leasehold improvements and
machinery and equipment. (Net of sales proceeds of
approximately $500 in the third quarter of 1996.)
550 Accrual of the non cancelable term of the operating
leases and estimated refurbishment costs for exited
USPD facilities.
1,875 Exit costs for demolition of facilities, clean up
costs and other.
______
$18,800
The net after tax effect of the 1996 Management Actions was
a loss of approximately $12,600 or ($.58 per share).
A summary of the liabilities set up for severance and
included in accrued expenses is as follows (including stay
bonus):
1995 1996
Actions Actions
1995
Accruals $1,748
Payments (463)
Translation and
adjustments -
Balance, December 31, 1995 1,285
1996
Accruals - $11,338
Payments (1,270) (2,122)
Translation and
adjustments - (2)
Balance, December 31, 1996 $ 15 $ 9,214
1997
Accruals - Stay bonus IPD - 652
Payments (15) (5,980)
Translation and
adjustments - (479)
Balance, December 31, 1997 $ - $ 3,407
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 November 1997, the Company acquired the worldwide
polymyxin business from Cultor Food Science. Polymyxin is an
antibiotic mainly used in topical ointments and creams as well as
for eye treatments.
The transaction includes product technology, registrations,
customer information and inventories. The Company currently
manufactures polymyxin in its Copenhagen facility and intends to
manufacture its additional polymyxin requirements at this
facility. The cost was approximately $16,500 which included
approximately $500 of inventory. The balance of the purchase
price has been allocated to intangible assets and will generally
be amortized over 15 years. The purchase agreement also provides
for a contingent payment and future royalties in the event that
certain sales levels are achieved of a product presently being
developed by an independent pharmaceutical company utilizing
polymyxin supplied by the Company.
In September 1997, the Company acquired the worldwide
decoquinate business from Rhone-Poulenc Animal Nutrition of
France (RPAN). Decoquinate is an anticoccidial feed additive used
primarily in beef cattle and calves.
The transaction includes all rights for decoquinate
worldwide and the trademark Deccoxr that is registered in over 50
countries. The agreement also provides that RPAN will continue to
manufacture decoquinate for Alpharma under a long term supply
contract. The cost was approximately $27,550, which included
approximately $1,850 of inventory. The balance of the purchase
price has been allocated to intangible assets and will generally
be amortized over 15 years.
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.
5. Accounts receivable, net:
Accounts receivable consist of the following:
December 31,
1997 1996
Accounts receivable, trade $129,382 $113,577
Federal and state income
taxes receivable - 7,194
Other 3,460 4,139
132,842 124,910
Less allowances for doubtful
accounts 5,205 4,359
Accounts receivable, net $127,637 $120,551
The allowance for doubtful accounts for the three years
ended December 31, consisted of the following:
1997 1996 1995
Balance at January 1, $4,359 $5,751 $4,897
Provision for doubtful
accounts 2,111 3,572 2,166
Reductions for accounts
written off (789) (4,589) (1,117)
Translation and other (476) (375) (195)
Balance at December 31, $5,205 $4,359 $5,751
6. Inventories:
Inventories consist of the following:
December 31,
1997 1996
Finished product $ 68,525 $ 69,629
Work-in-process 20,009 17,126
Raw materials 32,917 36,830
$121,451 $123,585
At December 31, 1997 and 1996, approximately $48,700 and
$49,000 of inventories, respectively, are valued on a LIFO basis.
Such amounts are higher (lower) than the FIFO basis by $1,128 in
1997 and $(774) in 1996.
7. Property, Plant and Equipment:
Property, plant and equipment, at cost, consist of the
following:
December 31,
1997 1996
Land $ 8,954 $10,221
Buildings and building
improvements 100,017 104,463
Machinery and equipment 219,566 222,911
Construction in progress 16,197 12,011
344,734 349,606
Less, accumulated depreciation 145,174 139,803
$199,560 $209,803
8. Long-Term Debt:
Long-term debt consists of the following:
December 31,
1997 1996
U.S. Dollar Denominated:
Revolving Credit Facility
6.8% - 7.2%:
Revolving credit $161,575 $ 33,000
Term loans - 130,150
A/S Eksportfinans 9,000 9,000
Industrial Development Revenue
Bonds:
Baltimore County, Maryland
(7.25%) 5,155 5,705
(6.875%) 1,200 1,200
Lincoln County, NC 5,000 5,500
Other, U.S. 758 1,390
Denominated in Other Currencies:
Mortgage notes payable (NOK) 38,099 30,911
Bank and agency development
loans (NOK) 13,803 21,362
Other, foreign 257 529
234,847 238,747
Less, current maturities 10,872 4,966
$223,975 $233,781
In September 1994, the Company signed a $185,000 credit
agreement ("1994 Credit Facility") with a consortium of banks
arranged by the Union Bank of Norway and Den norske Bank A.S. The
agreement provided for the refinancing of outstanding
indebtedness, the acquisition of Alpharma Oslo (including related
transaction costs, fees and expenses)(Note 1) and for general
corporate purposes.
The 1994 Credit Facility provided for (i) a seven year Term
Loan with a maximum amount of $65,000; (ii) a five year Term Loan
with a maximum amount of $72,000; and (iii) a revolving credit
agreement of $48,000 with an initial term of four years and three
months.
The 1994 Credit Facility has several financial covenants,
including an interest coverage ratio, minimum capital, and equity
to asset ratio. In 1997, the Company and syndicate banks amended
the 1994 Credit Facility providing for:
(1) The conversion of Term Loans and the existing revolving
credit agreement into an overall revolving $180,000 Credit
Facility ("Revolving Credit Facility") with an initial expiration
of August 28, 2000. The Revolving Credit Facility may be extended
annually upon approval of the syndicate banks.
(2) Interest on the facility will be at the Eurodollar rate
with a margin of 1.125%.
In December 1995, the Company's Danish subsidiary A/S Dumex
borrowed $9,000 from A/S Eksportfinans with credit support
provided by Union Bank of Norway and Bikuben Girobank A/S
("Bikuben") to finance an expansion of its Vancomycin
manufacturing facility in Copenhagen. The term of the loan is
seven years. Repayment will be made in ten semi-annual
installments of $900 beginning in March 23, 1998 and ending
September 22, 2002 Interest for the loan is fixed at 6.59%,
including the cost of the credit support provided via guarantee
by Union Bank of Norway and Bikuben.
The Baltimore County Industrial Development Revenue Bonds
are payable in varying amounts through 2009. Plant and equipment
with an approximate net book value of $10,740 collateralize the
Baltimore County Industrial Revenue Bonds.
In August 1994, the Company issued Industrial Development
Revenue Bonds for $6,000 in connection with the expansion of the
Lincolnton, North Carolina plant. The bonds require monthly
interest payments at a floating rate (4.35% at December 31, 1997;
3.85% weighted average for 1997) approximating the current money
market rate on tax exempt bonds and the payment by the Company of
annual letter of credit, remarketing, trustee, and rating agency
fees of 1.125%. The bonds require a yearly sinking fund
redemption of $500 to August 2004 and $300 thereafter through
August 2009. Plant and equipment with an approximate net book
value of $5,316 serve as collateral for this loan.
The mortgage notes payable denominated in Norwegian Kroner
(NOK) include amounts originally issued in connection with the
construction of a pharmaceutical facility in Lier, Norway and
amounts issued in 1997 in connection with the expansion of the
Lier facility ($7,150). Upon completion of the expansion in 1998
an additional $7,000 will be issued under this mortgage. The
mortgage is collateralized by this facility (net book value
$42,490) and the Oslo, Norway ("Skoyen") facility. (See Note 13.)
The debt was borrowed in a number of tranches over the
construction period and interest is fixed for specified periods
based on actual yields of Norgeskreditt publicly traded bonds
plus a lending margin of 0.70%. The weighted average interest
rate at December 31, 1997 and 1996 was 5.6% and 6.1%,
respectively. The tranches are repayable in semiannual
installments through 2021. Yearly amounts payable vary between
$1,237 and $2,009.
Mortgage notes payable also include amounts issued in 1997
($5,356) to finance a new production unit at an Aquatic Animal
Health facility in Overhalla, Norway. The mortgage has a 12 year
term and an interest rate of 4.9%, is repayable in 10 equal
installments in years 2000 - 2009, and is collateralized by the
net book value of the facility ($7,630).
Alpharma Oslo has various loans with government development
agencies and banks which have been used for acquisitions and
construction projects. Such loans are collateralized by the
Skoyen property and require semiannual payments in 1998 of $1,406
and a final payment of $8,301 in 1999. The weighted average
interest rate of the loans at December 31, 1997 and 1996 was 5.0%
and 6.1%, respectively. The banks and agencies have the option to
extend payment in 1999.
As of December 31, 1997, Alpharma Oslo had approximately
$5,459 available in NOK in three year line of credit agreements
with two banks. The credit lines require certain equity, cash
flow and quick ratios, as defined, be maintained. Certain NOK
loans have loan covenants which apply directly to Alpharma Oslo.
Maturities of long-term debt during each of the next five
years and thereafter are as follows:
Year ending December 31,
1998 $ 10,872
1999 12,659
2000 166,571
2001 4,981
2002 4,986
Thereafter 34,778
$ 234,847
9. Short-Term Debt:
Short-term debt consists of the following:
December 31,
1997 1996
Domestic $24,200 $41,760
Foreign 14,866 19,192
$39,066 $60,952
At December 31, 1997, the Company and its domestic
subsidiaries have available a bank line of credit totaling
$65,000. Borrowings under the line are made for periods
generally less than three months and bear interest from 6.90% to
7.00% at December 31, 1997. At December 31, 1997, the amount of
the unused lines totaled $40,800.
At December 31, 1997, the Company's foreign subsidiaries
have available lines of credit with various banks totaling
$24,241 ($22,741 in Europe and $1,500 in the Far East). Drawings
under these lines are made for periods generally less than three
months and bear interest at December 31, 1997 at rates ranging
from 4.00% to 6.28%. At December 31, 1997, the amount of the
unused lines totaled $9,399 ($7,899 in Europe and $1,500 in the
Far East).
The weighted average interest rate on short-term debt during
the years 1997, 1996 and 1995 was 5.9%, 6.2% and 6.6%,
respectively.
10. Income Taxes:
Domestic and foreign income (loss) before income taxes was
$14,267, and $13,483, respectively in 1997, $(17,991) and $1,765,
respectively in 1996, and $17,548 and $12,680, respectively in
1995. 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,
1997 1996 1995
Current:
Federal $5,164 $(4,796) $ 6,009
Foreign 5,184 3,367 3,074
State 1,095 (232) 1,274
$11,443 $(1,661) 10,357
Deferred:
Federal 439 (522) (27)
Foreign (1,295) (2,531) 958
State (245) (51) 123
(1,101) (3,104) 1,054
Provision/(benefit)
for income taxes $10,342 $(4,765) $11,411
A reconciliation of the statutory U.S. federal income tax
rate to the effective rate follows:
Years Ended December 31,
1997 1996 1995
Provision for income taxes at
statutory rate 35.0% (35.0%) 35.0%
State income tax, net of federal
tax benefit 2.0% (1.1%) 3.0%
Lower taxes on foreign
earnings, net (4.4%) (2.7%) (2.6%)
Tax credits - (0.9%) (1.3%)
Non-deductible costs, principally
amortization of intangibles
related to acquired companies 4.9% 8.5% 3.9%
Other (0.2%) 1.8% (0.2%)
Provision/(benefit)
for income taxes 37.3% (29.4%) 37.8%
Deferred tax liabilities (assets) are comprised of the
following:
Year Ended
December 31,
1997 1996
Accelerated depreciation and amortization
for income tax purposes $20,976 $23,949
Excess of book basis of acquired assets
over tax bases 8,391 8,815
Differences between inventory valuation
methods used for book and tax purposes 3,306 3,410
Other 808 1,147
Gross deferred tax liabilities 33,481 37,321
Accrued liabilities and other reserves (7,178) (8,791)
Pension liabilities (1,351) (1,408)
Loss carryforwards (1,945) (2,628)
Other (2,118) (2,796)
Gross deferred tax assets (12,592) (15,623)
Deferred tax assets valuation allowance 1,945 2,628
Net deferred tax liabilities $22,834 $24,326
As of December 31, 1997, the Company has state loss
carryforwards in one state of approximately $15,198, which are
available to offset future taxable income. These carryforwards
will expire between the years 1999 and 2004. The Company also has
foreign loss carryforwards in two countries as of December 31,
1997, of approximately $2,000, which are available to offset
future taxable income, and have an unlimited carryforward period.
The Company has recognized a deferred tax asset relating to these
carryforwards; however, based on analysis of current information,
which indicated that it is not likely that such state and foreign
losses will be realized, a valuation allowance has been
established for the entire amount of these carryforwards.
11. Pension Plans:
Domestic:
The Company maintains a qualified noncontributory, defined
benefit pension plan covering the majority of its domestic
employees. The benefits are based on years of service and the
employee's 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. The Plan
assets are under a single custodian and a single investment
manager. Plan assets are invested in equities, government
securities and bonds.
Net pension cost for 1997, 1996 and 1995 included the
following components:
Years Ended December 31,
1997 1996 1995
Service cost $1,179 $1,339 $1,049
Interest cost 1,023 974 874
Actual return on plan assets (2,392) (1,499) (1,434)
Net amortization and deferral 1,312 610 957
$1,122 $1,424 $1,446
The following tables set forth the plan's funded status as
of December 31, 1997 and 1996:
1997 1996
Accumulated benefit obligation:
Vested $ 7,441 $ 6,658
Nonvested 1,365 1,132
$ 8,806 $ 7,790
Projected benefit obligation $13,786 $11,457
Fair value of plan assets (12,898) (11,276)
Unrecognized net loss (1,803) (1,344)
Unrecognized prior service cost 980 1,338
Unrecognized net transition
obligation (184) (214)
Accrued (prepaid) pension costs $ (119) $ (39)
The assumptions used were as follows:
1997 1996 1995
Weighted average discount rate 7.25% 7.75% 7.25%
Rate of increase in compensation
rate 4.0% 4.0% 4.0%
Expected long-term rate of return
on plan assets 9.0% 9.0% 8.0%
In addition, the Company has unfunded supplemental executive
pension plans providing additional benefits to a few highly
compensated employees. For 1997, 1996 and 1995 such pension
expense was approximately $25, $61 and $65, respectively and the
year end accrual at December 31, 1997 and 1996 was $197 and $208,
respectively.
The Company and its domestic subsidiaries also have a number
of defined contribution plans, both qualified and non-qualified,
which allow eligible employees to withhold a fixed percentage of
their salary (maximum 15%) and provide for a Company match based
on service (maximum 6%). The Company's contributions to these
plans were approximately $1,200, $1,300 and $1,200 in 1997, 1996
and 1995, respectively.
Europe:
Alpharma Oslo has defined benefit plans which cover the
majority of its employees. These pension commitments are funded
through a collective agreement with a Norwegian insurance company
and Alpharma Oslo makes annual contributions to the plan in
accordance with Norwegian insurance principles and practices. In
addition to the annual premiums, Alpharma Oslo has made
prepayments to specific premium funds. These premium funds are
used to cover ordinary future annual premiums. The pension plan
assets are deposited in the insurance company's general account
which is principally invested in fixed income securities.
Alpharma Oslo also maintains a direct pension arrangement
with certain employees. These pension commitments are paid out of
general assets and the obligations are accrued but not prefunded.
Net pension cost for 1997, 1996 and 1995 included the following
components:
1997 1996 1995
Service cost $1,264 $1,302 $ 954
Interest cost 1,142 1,122 993
Actual return on plan assets (953) (1,032) (456)
Net amortization and deferral 370 487 (66)
$1,823 $1,879 $1,425
The following tables set forth the plans' funded status as of
December 31, 1997 and 1996:
Assets Exceed Accumulated
Accumulated Benefits
Benefits Exceed Assets
1997 1996 1997 1996
Accumulated benefit
obligation:
Vested $10,582 $10,587 $1,530 $1,361
Nonvested 2,404 1,530 - -
$12,986 $ 12,117 $1,530 $1,361
Projected benefit
obligation $18,700 $16,871 $1,530 $1,361
Fair value of plan
assets (11,832) (11,738) - -
Unrecognized net gain
(loss) (1,309) 970 (316) 8
Unrecognized prior
service cost (666) (803) (245) (348)
Unrecognized net
transition obligation (1,019) (1,264) (20) (28)
Additional minimum
liability - - 582 368
Accrued pension costs $ 3,874 $ 4,036 $1,531 $1,361
The assumptions used were as follows:
1997 1996 1995
Weighted average discount rate 6.0% 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 6.0% 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 $2,204,
$2,250 and $2,400 in 1997, 1996 and 1995, respectively.
12. Postretirement Benefits:
The Company has an unfunded postretirement medical and
nominal life insurance plan covering certain domestic employees
who were eligible as of January 1, 1993. The plan will not be
extended to any additional employees. Retired employees are
required to contribute for coverage as if they were active
employees.
The transition obligation as of January 1, 1993 of $1,079 is
being amortized over twenty years. The discount rate used in
determining the 1997, 1996 and 1995 expense was 7.75%, 7.25%, and
8.5%, respectively. The discount rate used in determining the
accumulated post retirement obligation as of December 31, 1997
and 1996 was 7.25% and 7.75%, 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, 1997 and
1996 as follows:
1997 1996
Accumulated postretirement benefit obligation
Retirees $1,767 $1,789
Fully eligible active participants - -
Other active participants 1,244 958
3,011 2,747
Unrecognized estimated net loss (695) (526)
Unrecognized transition obligation (809) (863)
Accrued postretirement benefit cost $1,507 $1,358
In 1996 the Company's AHD announced an early retirement plan
for employees meeting certain criteria. As part of the plan
employees electing early retirement would be eligible for post
retirement medical even if they had not met the required service
and age requirements. The charge for the special termination
benefits of $492 was required and is included in the accrued post
retirement benefit cost.
The net periodic postretirement benefit cost included the
following components.
1997 1996 1995
Service cost $ 92 $120 $101
Interest cost 204 146 127
Amortization of:
Transition obligation 54 54 54
Unrecognized loss 15 17 -
$365 $337 $282
13. Transactions With A. L. Industrier:
Years Ended December 31,
1997 1996 1995
Sales to and commissions received
from A.L. Industrier $3,107 $3,075 $3,353
Compensation received for
management services rendered to
A.L. Industrier $ 424 $ 464 $ 630
Inventory purchased from and
commissions paid to A.L.
Industrier $ 34 $ 200 $ 214
As of December 31, 1997 and 1996 there was a net current
receivable of $742 and $764, respectively, from A.L. Industrier.
The Company and A.L. Industrier have an administrative
service agreement whereby the Company provides management
services to A.L. Industrier. The agreement provides for payment
equal to the direct and indirect cost of providing the services
subject to a minimum amount. The agreement is automatically
extended for one year each January 1, but may be terminated by
either party upon six months notice.
In connection with the agreement to purchase Alpharma Oslo,
A.L. Industrier retained the ownership of the Skoyen
manufacturing facility and administrative offices (not including
leasehold improvements and manufacturing equipment) and leases it
to the Company. The agreement also permits the Company to use the
Skoyen facility as collateral on existing debt 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.
In 1997 A.L. Industrier purchased Class B common stock from
the Company. (See Note 16.)
14. Contingent Liabilities, Litigation and Commitments:
The Company is one of multiple defendants in 33 lawsuits
alleging personal injuries resulting from the use of phentermine
distributed by the Company and subsequently prescribed for use in
combination with fenflurameine or dexfenfluramine manufactured
and sold by other defendants (Fen-Phen Lawsuits). None of the
plaintiff's has specified an amount of monetary damage. Because
the Company has not manufacture, but only distributed
phentermine, it has demanded defense and indemnification from the
manufacturers and the insurance carriers of manufacturers from
whom it has purchased the phentermine. Based on an evaluation of
the circumstances as now known, including but not solely limited
to, 1) the fact that the Company did not manufacture phentermine,
2) it has a diminimus share of the phentermine market and 3) the
presumption of some insurance coverage, the Company does not
expect that the ultimate resolution of the current Fen-Phen
lawsuits will have a material impact on the financial position or
results of operations of the Company.
The Company and its subsidiaries are, from time to time,
involved in other litigation arising out of the ordinary course
of business. It is the view of management, after consultation
with counsel, that the ultimate resolution of all other pending
suits should not have a material adverse effect on the
consolidated financial position or results of operations of the
Company.
In connection with a 1991 product line acquisition and the
Decoquinate business purchased in 1997, the Company entered into
manufacturing agreements which require the Company to purchase
yearly minimum quantities of product on a cost-plus basis. If the
minimum quantities are not purchased, the Company must reimburse
the supplier a percentage of the fixed costs related to the
unpurchased quantities. In the case of the Decoquinate agreement
there are contingent payments which may be required of either
party upon early termination of the agreement depending on the
circumstances of the termination.
15. Leases:
Rental expense under operating leases for 1997, 1996 and
1995 was $5,825, $6,578 and $5,574, 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,
1998 $ 5,044
1999 3,953
2000 3,508
2001 3,415
2002 3,165
Thereafter 7,221
$26,306
16. Stockholders' Equity:
The holders of the Company's Class B Common Stock, (totally
held by A. L. Industrier at December 31, 1997) are entitled to
elect 66 2/3% of the Board of Directors of the Company and may
convert each share of Class B Common Stock held into one fully
paid share of Class A Common Stock. Whenever the holders of the
Company's common stock are entitled to vote as a combined class,
each holder of Class A and Class B Common Stock is entitled to
one and four votes, respectively, for each share held.
The number of authorized shares of Preferred Stock is
500,000; the number of authorized shares of Class A Common Stock
is 40,000,000; and the number of authorized shares of Class B
Common Stock is 15,000,000.
On February 10, 1997, the Company entered into a Stock
Subscription and Purchase Agreement with A.L. Industrier. The
agreement provided for the sale of 1,273,438 newly issued shares
of Class B Common stock for $16.34 per share. The agreement also
provided for the issuance of rights to the Class A shareholders
to purchase one share of Class A Common stock for $16.34 per
share for every six shares of Class A Common held. The agreement
required that the Class B shares be purchased at the same time
that the rights for the Class A Common stock would expire and
total consideration for the Class B Common stock was agreed to be
$20,808.
On June 26, 1997, the Company and A.L. Industrier entered
into Amendment No. 1 to the Subscription and Purchase Agreement
whereby A.L. Industrier agreed to purchase the 1,273,438 Class B
shares on June 27, 1997. The amendment provided that the price
paid by A.L. Industrier would be adjusted to recognize the
benefit to the Company of the A.L. Industrier purchase of the
stock on June 27, 1997 instead of November 25, 1997 (the date the
Class A rights expired). The sale of stock was completed for cash
on June 27, 1997. Accordingly, stockholders' equity has increased
by $20,379 to reflect the issuance of the Class B shares. A.L.
Industrier is now the beneficial owner of 9,500,000 shares of
Class B Common stock.
On September 4, 1997, the Board of Directors distributed to
the holders of its Class A Common Stock certain subscription
rights. Each shareholder received one right for every six shares
of Class A Stock held on the record date. Each right, entitled
the holder to purchase one share of Class A Stock at a
subscription price of $16.34 per share. The rights were listed
and traded on the New York Stock Exchange. The rights were
exercisable at the holder's option ending on November 25, 1997.
As a result of the rights offering the Company issued 2,201,837
shares with net proceeds of $35,978. (Approximately 97% of the
rights were exercised.)
The Company has outstanding warrants to purchase 3,819,600
shares of Class A Common stock which expire on January 3, 1999.
Pursuant to the warrant agreement, the issuance of the rights to
the Class A shareholders of the Company changed both the exercise
price and the number of shares of Class A common stock
purchasable upon the exercise of each warrant. As a result of
this Rights distribution, each warrant will now purchase 1.06
shares of Class A common stock of Alpharma Inc. (originally one
share per warrant) at an exercise price of $20.69 per share
(original exercise price of $21.945).
17. Derivatives and Fair Value of Financial Instruments:
The Company currently uses the following derivative
financial instruments for purposes other than trading.
Derivative Use Purpose
Forward foreign Occasional Entered into selectively
exchange contracts to sell or buy cash flows
in non-functional
currencies.
Interest rate Occasional Entered into selectively
agreements to fix interest rate for
specified periods on
variable rate long-term
debt.
At December 31, 1997 and 1996, the Company's had foreign
currency contracts outstanding with a notional amount of
approximately $4,700 and $8,100, 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 February 1998.
In November 1995, the Company entered into two interest rate
swap agreements with two members of the consortium of banks which
were parties to the 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 a portion of the revolving credit facility
($54,600 at December 31, 1997) through October 1998. (See Note
8.)
Counterparties to derivative agreements are major financial
institutions. Management believes the risk of incurring losses
related to credit risk is remote.
The carrying amount reported in the consolidated balance
sheets for cash and cash equivalents, accounts receivable,
accounts payable and short-term debt approximates fair value
because of the immediate or short-term maturity of these
financial instruments. The carrying amount reported for long-term
debt approximates fair value because a significant portion of the
underlying debt is at variable rates and reprices frequently.
18. Stock Options and Employee Stock Purchase Plan:
Under the Company's 1997 Incentive Stock Option and
Appreciation Right Plan (the "Plan"), the Company may grant
options to key employees to purchase shares of Class A Common
Stock. The Plan was formerly named the 1983 Incentive Stock
Option Plan, as amended. The restated plan, including an increase
from 2,500,000 to 3,500,000 in the maximum number of Class A
shares available for grant, was approved by the shareholders in
May 1997. In addition, the Company has a Non-Employee Director
Option Plan (the "Director Plan") which provides for the issue of
up to 150,000 shares of Class A Common stock. The exercise price
of options granted under the Plan may not be less than 100% of
the fair market value of the Class A Common Stock on the date of
the grant. Generally, options are exercisable in installments of
25% beginning one year from date of grant. The Plan permits a
cash appreciation right to be granted to certain employees.
Included in options outstanding at December 31, 1997 are options
to purchase 5,775 shares with cash appreciation rights, 1,875 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, 1997
and 1996, options for 1,572,327 and 873,748 shares, respectively,
were available for future grant.
The table below summarizes the activity of the Plan:
Weighted Weighted
Options Average Average
Out- Exercise Options Exercise
standing Price Exercisabl Price
e
Balance at
December 31, 1994 671,575 $15.89 319,703
Granted in 1995 308,500 18.67
Canceled in 1995 (40,875) 18.41
Exercised in 1995 (42,425) 13.11
Balance at
December 31, 1995 896,775 16.85 383,278 15.49
Granted in 1996 44,000 22.18
Canceled in 1996 (36,000) 18.01
Exercised in 1996 (66,437) 14.21
Balance at
December 31, 1996 838,338 17.30 444,982 16.42
Granted in
1997 (1) 643,075 16.65
Canceled in 1997 (107,347) 17.76
Exercised in 1997 (63,100) 12.22
Balance at
December 31, 1997 1,310,966 17.20 462,765 17.29
(1) Included in options outstanding at December 31, 1997 were
161,100 options granted in 1997 with exercise prices in excess of
the fair market value of Class A stock on the date of grant. The
weighted average exercise price of these options is $22.24. The
weighted average exercise price of the remaining 481,975 options
granted in 1997 is $14.76.
The Company has adopted the disclosure only provisions of
SFAS No. 123. If the Company had elected to recognize
compensation costs in accordance with SFAS No. 123 the reported
net income (loss) would have been reduced to the pro forma
amounts for the years ended December 31, 1997, 1996 and 1995 as
indicated below:
1997 1996 1995
Net income (loss):
As reported $17,408 $(11,461) $18,817
Proforma $16,328 $(12,028) $18,496
Basic earnings (loss) per share:
As reported $ .77 $ (.53) $ .87
Proforma $ .72 $ (.55) $ .86
Diluted earnings (loss) per
share:
As reported $ .76 $ (.53) $ .87
Proforma $ .72 $ (.55) $ .85
The Company estimated the fair value, as of the date of
grant, of options outstanding in the plan using the Black-Scholes
option pricing model with the following assumptions:
1997 1996
Expected life (years) 4-5 4-5
Expected future dividend
yield (average) 1.25% .85%
Expected volatility 0.40 0.40
The risk-free interest rates for 1997, 1996 and 1995 were
based upon U.S. Treasury instrument rates with maturity equal to
expected term. The weighted average interest rate in 1997, 1996
and 1995 amounted to 6.39%, 6.00% and 5.96%, respectively. The
weighted average fair value of options granted during the years
ended December 31, 1997, 1996, and 1995 with exercise prices
equal to fair market value on the date of grant were $5.53, $7.90
and $6.97, respectively. The weighted average fair value of
options granted during the year ended December 31, 1997 with
exercise prices in excess of fair market value at the date of
grant was $3.27. No options with exercise prices in excess of
fair market value at the date of grant were granted in 1996 or
1995.
The following table summarizes information about stock
options outstanding at December 31, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
Weight- Weight-
ed ed
Number Weighted Average Average
Outstand- Average Exer- Number Exer-
Range of ing at Remain- cise Exercisable cise
Exercise 12/31/97 ing Life Price at 12/31/97 Price
Prices
$7.75-13.88 441,689 4.7 $13.39 84,739 $11.75
$14.50-18.75 520,177 4.8 $17.21 243,026 $16.97
$19.50-$27.13 349,100 4.6 $21.98 135,000 $21.32
$7.75-$27.13 1,310,966 4.7 $17.20 462,765 $17.29
The Company has an Employee Stock Purchase Plan by which
eligible employees of the Company and its domestic subsidiaries
may authorize payroll deductions up to 4% of their regular base
salary to purchase shares of Class A Common Stock at the fair
market value. The Company matches these contributions with an
additional contribution equal to 25% of the employee's
contribution. Shares are issued on the last day of each calendar
quarter. The Company's contributions to the plan were
approximately $137, $163 and $155 in 1997, 1996 and 1995,
respectively.
19. Supplemental Data:
Years Ended December 31,
1997 1996 1995
Research and development
expense $32,068 $34,269 $32,815
Depreciation expense 21,591 22,751 22,085
Amortization expense 9,317 8,752 8,937
Interest cost incurred 18,988 20,549 22,311
Other income (expense), net:
Interest income 519 529 711
Foreign exchange
losses, net (726) (195) (854)
Other, net (360) (504) (117)
$ (567) $ (170) $ (260)
Supplemental cash flow information:
1997 1996 1995
Cash paid for interest
(net of amount capitalized) $19,193 $20,250 $19,812
Cash paid for income taxes (net
of refunds) $ 221 $ 9,182 $ 8,223
Supplemental schedule of
noncash investing and
financing activities:
Fair value of assets acquired $44,029 $ 3,500
Cash paid 44,029 3,500
Liabilities assumed $ 0 $ 0
20. Information Concerning Business Segments and Geographic
Operations:
The Company currently conducts its business operations in
two business segments: (1) Human Pharmaceuticals and (2) Animal
Health. The Human Pharmaceuticals business includes the USPD,
IPD and FCD. The Animal Health business consists of the AHD and
AAHD. The Company's operations outside the United States are
conducted primarily in Europe by the Company's manufacturing
subsidiaries in Norway and Denmark.
Depre-
ciation
and
Identi- Amorti- Capital
Total Operating fiable zation Expendi-
Revenue Income(1) Assets Expense tures
1997
Business segments:
Human
Pharmaceuticals $327,096 $23,330 $447,080 $21,462 $23,268
Animal Health 173,687 31,782 167,532 8,643 3,398
Unallocated 387 (8,397) 17,254 803 1,117
Eliminations (882) 183 - - -
$500,288 $46,898 $631,866 $30,908 $27,783
Geographic:
United States $312,309 $26,699 $365,651
Europe and Other 224,791 21,696 266,215
Eliminations (36,812) (1,497) -
$500,288 $46,898 $631,866
1996
Business segments:
Human
Pharmaceuticals $328,724 $(8,216) $446,528 $23,013 $15,747
Animal Health 158,254 17,924 137,867 7,771 12,783
Unallocated 698 (5,521) 29,012 719 2,344
Eliminations (1,492) (267) - - -
$486,184 $3,920 $613,407 $31,503 $30,874
Geographic:
United States $294,252 $(3,522) $355,432
Europe and Other 221,872 8,133 257,975
Eliminations (29,940) (691) -
$486,184 $3,920 $613,407
1995
Business segments:
Human
Pharmaceuticals $358,392 $26,115 $476,738 $23,375 $15,708
Animal Health 163,322 30,839 140,860 7,406 8,720
Unallocated 407 (4,445) 17,255 241 408
Eliminations (1,239) (28) - - -
$520,882 $52,481 $634,853 $31,022 $24,836
Geographic:
United States $328,491 $32,799 $376,134
Europe and Other 219,970 20,327 260,510
Eliminations (27,579) (645) (1,791)
$520,882 $52,481 $634,853
1. 1996 and 1995 operating income includes (income) and charges for
management actions. The segments are impacted as follows:
1996 1995
Human Pharmaceuticals $13,789 $(639)
Animal Health 4,542 480
Unallocated 469 -
$18,800 $(159)
21. Selected Quarterly Financial Data (unaudited):
Quarter
Total
1997 First Second Third Fourth Year
Total revenue $121,424 $118,986 $125,240 $134,638 $500,288
Gross profit 48,122 51,440 51,559 59,932 211,053
Net income 2,260 3,470 5,257 6,421 17,408
Earnings per
common share:
(a)
Basic
Net income .10 .16 .23 .27 .77
Diluted
Net income .10 .16 .22 .26 .76
1996
Total revenue $127,810 $121,219 $122,438 $114,717 $486,184
Gross profit 54,519 49,757 48,388 36,392 189,056
Net 4,777 (4,502) 29 (11,765) (11,461)
income(loss)(b)
Earnings per
common share:
Basic
Net income (loss) .22 (.21) .00 (.54) (.53)
Diluted
Net income (loss) .21 (.21) .00 (.54) (.53)
(a) The sum of the earnings per share for the four
quarters in 1997 does not equal the total for the year due
to higher net income recognized in the third and fourth
quarters combined with a higher number of shares outstanding
during the second half of the year which does not have the
same proportional effect on the total year calculation.
(b) The quarters of 1996 include management actions which
reduced income as follows:
Loss per
Pre-tax After-tax share
First quarter $1,900 $1,200 $ (.05)
Second quarter 12,100 7,500 (.34)
Fourth quarter 4,800 3,900 (.18)
Full year $18,800 $12,600 $ (.58)