Page 3 of 25
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant To Section 13 or 15 (d) of
the Securities Exchange Act of 1934
For quarter ended Commission file number 1-8593
September 30, 1996
Alpharma Inc.
(Exact name of registrant as specified in its charter)
Delaware 22-2095212
(State of Incorporation) (I.R.S. Employer Identification No.)
One Executive Drive, Fort Lee, New Jersey 07024
(Address of principal executive offices) zip code
(201) 947-7774
(Registrant's Telephone Number Including Area Code)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15 (d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such requirements
for the past 90 days.
YES X NO
Indicate the number of shares outstanding of each of the
Registrant's classes of common stock as of November 4, 1996
Class A Common Stock, $.20 par value -- 13,512,860 shares;
Class B Common Stock, $.20 par value -- 8,226,562 shares
ALPHARMA INC.
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheet as of
September 30, 1996 and December 31, 1995 3
Consolidated Statement of Income for the
Three and Nine Months Ended September 30,
1996 and 1995 4
Consolidated Condensed Statement of Cash
Flows for the Nine Months Ended September 30,
1996 and 1995 5
Notes to Consolidated Condensed Financial
Statements 6-10
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 11-21
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8K 22
Signatures 23
Exhibit 11 - Computation of Earnings 24-25
per Common Share
ALPHARMA INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEET
(In thousands of dollars)
September 30,
1996 December 31,
(Unaudited) 1995
ASSETS
Current assets:
Cash and cash equivalents $ 11,036 $ 18,351
Accounts receivable, net 118,422 132,161
Inventories 120,503 120,084
Other 11,915 12,290
Total current assets 261,876 282,886
Property, plant and equipment, net 207,646 212,176
Intangible assets 121,899 128,186
Other assets and deferred charges 8,293 11,605
Total assets $599,714 $634,853
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 18,719 $ 13,160
Short-term debt 62,726 62,695
Accounts payable and accrued
liabilities 73,253 86,778
Accrued and deferred income taxes 2,322 6,650
Total current liabilities 157,020 169,283
Long-term debt 209,527 219,451
Deferred income taxes 28,007 30,961
Other non-current liabilities 6,626 9,968
Stockholders' equity:
Class A Common Stock 2,757 2,740
Class B Common Stock 1,645 1,646
Additional paid-in-capital 121,660 120,357
Foreign currency translation
adjustment 10,835 15,884
Retained earnings 67,739 70,385
Treasury stock, at cost (6,102) (5,822)
Total stockholders' equity 198,534 205,190
Total liabilities and
stockholders' equity $599,714 $634,853
The accompanying notes are an integral part
of the consolidated condensed financial statements.
ALPHARMA INC.
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
(In thousands, except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
Total revenue $122,438 $132,375 $371,467 $382,272
Cost of sales 74,050 80,252 218,803 225,056
Gross profit 48,388 52,123 152,664 157,216
Selling, general and
administrative expenses 42,980 37,061 137,104 118,931
Operating income 5,408 15,062 15,560 38,285
Interest expense (4,920) (5,605) (14,930) (16,864)
Other income (expense), net (184) 366 120 (215)
Income before
provision for income taxes 304 9,823 750 21,206
Provision for income taxes 275 3,654 446 8,058
Net income $ 29 $ 6,169 $ 304 $ 13,148
Average common shares
outstanding:
Primary 21,772 21,799 21,852 21,783
Fully diluted 21,772 22,012 21,852 21,996
Earnings per common share:
Primary $ .00 $ .28 $ .01 $ .60
Fully Diluted $ .00 $ .28 $ .01 $ .60
Dividends per common share $ .045 $ .045 $ .135 $ .135
The accompanying notes are an integral part
of the consolidated condensed financial statements.
ALPHARMA INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(In thousands of dollars)
(Unaudited)
Nine Months Ended
September 30,
1996 1995
Operating Activities:
Net income $ 304 $13,148
Adjustments to reconcile net
income to net cash provided
by operating activities, principally
depreciation and amortization 23,720 24,662
Non-current asset write-off 4,068
Changes in assets and liabilities,
net of effects from business
acquisition:
Decrease in accounts receivable 11,459 1,891
(Increase) in inventory (2,510) (3,161)
(Decrease) in accounts
payable and accrued expenses (16,071) (7,781)
Other (1,419) 2,546
Net cash provided by
operating activities 19,551 31,305
Investing Activities:
Capital expenditures (22,831) (17,298)
Purchase of business and intangibles (3,000)
Net cash used in investing activities (22,831) (20,298)
Financing Activities:
Dividends paid (2,950) (2,940)
Net borrowings under lines of credit 841 (4,951)
Proceeds from long-term debt 6,110
Reduction of long-term debt (8,859) (12,247)
Other, net 1,039 1,696
Net cash used by financing activities (3,819) (18,442)
Exchange Rate Changes:
Effect of exchange rate changes on cash (550) 1,328
Income tax effect of exchange rate
changes on intercompany advances 334 (732)
Net cash flows from exchange
rate changes (216) 596
Decrease in cash (7,315) (6,839)
Cash and cash equivalents at beginning
of year 18,351 15,512
Cash and cash equivalents at end
of period $ 11,036 $ 8,673
The accompanying notes are an integral part
of the consolidated condensed financial statements.
ALPHARMA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. General
The accompanying consolidated condensed financial statements
include all adjustments (consisting only of normal recurring
accruals) which are, in the opinion of management, considered
necessary for a fair presentation of the results for the periods
presented. These financial statements should be read in
conjunction with the consolidated financial statements of
Alpharma Inc. and Subsidiaries included in the Company's 1995
Annual Report on Form 10-K. The reported results for the three
and nine month periods ended September 30, 1996 are not
necessarily indicative of the results to be expected for the full
year.
2. Inventories
Inventories consist of the following:
September 30, December 31,
1996 1995
Finished product $67,305 $ 68,529
Work-in-process 17,401 16,697
Raw materials 35,797 34,858
$120,503 $120,084
3. Supplemental Cash Flow Information:
September 30, September 30,
1996 1995
Cash paid for interest $15,849 $14,965
Cash paid for taxes $6,353 $4,351
4. Post Combination Management Actions - 1995
In September 1995, the Company announced management actions
which spanned both the third and fourth quarters of 1995 and
included elimination of up to 130 positions company-wide, efforts
toward consolidation of operations in the Company's U.S.
Pharmaceuticals Division, the utilization of substantial
consulting resources focused primarily on accelerating the
realization of certain combination benefits in the International
Pharmaceuticals Division and the sale in September of its
minority equity position and certain other product rights in an
R&D company.
The net effect of the additional management actions for both
the three and nine months ended September 30, 1995 was a net
reduction of selling, general and administrative expenses of
$2,829 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
($3,634). The expenses of the other management actions were
$2,831 for consulting services and $803 for severance for 67
employees in the IPD and USPD.
5. Post-Combination Management Actions - 1996
The Company continues to consider opportunities to take
actions which are intended to improve its long term
profitability.
In 1996, the International Pharmaceuticals Division ("IPD")
has taken additional actions which are 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 March 1996, the
Company announced that a preliminary study of production
rationalization alternatives between IPD's Copenhagen, Denmark
and Lier, Norway manufacturing facilities identified potential
benefits.
In May 1996, the Board of Directors approved a production
rationalization plan which includes the transfer of all tablet,
ointment and liquid production from Copenhagen, Denmark to Lier,
Norway. The full transfer will be completed in 1998 and will
result in the 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 addition in May 1996, the Board of Directors approved the
U.S. Pharmaceuticals Division ("USPD") plan to accelerate a
previously approved consolidation of manufacturing operations
within USPD.
The plan includes 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 will provide for
complete exit by early 1997 and will result in a net reduction of
approximately 150 employees. The acceleration plan resulted in a
second quarter charge for severance of employees, an impairment
write-off for leasehold improvements and machinery and equipment
and significant exit costs including estimated remaining lease
costs and facility refurbishment costs.
Due to the time necessary to achieve both transfers of
production the Company, as part of the severance arrangements,
has instituted stay bonus plans. The overall cost of the stay
bonus plans is estimated at $1,900, and will be accrued over the
periods necessary to achieve shut down and transfer. The stay
bonus plans generally require the employee remain until their
position is eliminated to earn the payment.
In the third quarter of 1996 the Company's management
actions were adjusted for the sale of the Able tablet business
and include severance charges of $700 related to a reorganization
of the Animal Health divisions distribution 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 made in the second quarter which reflected significant
exit costs which would have been incurred in closing the
facility. The net reduction of the second quarter charge for the
sale and subleasing was $1,100 including the net proceeds
received on the sale of approximately $500.
A summary of the year to date and third quarter charges and
expenses resulting from the management actions which are included
in selling, general and administrative expenses follows:
3rd Year to
Quarter Date Description
$ 700 $7,000 Severance and employee termination
benefits for all 1996 employees terminated
(approximately 400 employees).
400 600 Stay bonus accrued.
(300) 4,000 Impairment of buildings, leasehold
improvements and machinery and equipment.
(Net of sales proceeds of approximately
$500 in the third quarter.)
(800) 700 Accrual of the non cancelable term of the
operating leases and estimated
refurbishment costs for USPD facilities.
(The third quarter reduction results from
accrual reversals related to Able.)
0 1,700 Exit costs for demolition of facilities,
___ _____ clean up costs and other.
$ 0 $14,000
6. Recently Adopted Accounting Standards
Effective January 1, 1996, the Company formally adopted
Statement of Financial Accounting Standards ("SFAS") No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to be Disposed of."
The standard requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity be
reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable. The adoption of SFAS No. 121 did not have a
material impact on the Company.
Effective January 1, 1996, the Company formally adopted SFAS
No. 123, "Accounting for Stock-Based Compensation." The standard
establishes a fair value method for accounting for or disclosing
stock-based compensation plans. The Company will adopt this
standard by disclosing the pro forma net income and earnings per
share amounts assuming the fair value method in the year-end 1996
financial statements, as required. As a result, the adoption of
this standard will not have any impact on reported results of
operations and financial position.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations - Nine Months Ended September 30, 1996
Total revenue decreased $10.8 million (2.8%) in the nine
months ended September 30, 1996 compared to 1995. Operating
income in 1996 was $15.6 million, a decrease of $22.7 million,
compared to 1995. Net income was $.3 million ($.01 per share
fully diluted) compared to $13.1 million ($.60 per share fully
diluted) in 1995. Net income in 1996 is reduced by approximately
$8.7 million ($.39 per share) for severance incurred in the first
quarter related to the reorganization of the International
Pharmaceuticals Division ("IPD") sales and marketing function in
the Nordic countries and for charges and expenses resulting from
production rationalization plans in the IPD and the U.S.
Pharmaceuticals Division ("USPD") in the second quarter and
adjustments and continuing actions in the third quarter. (See
section "Post-Combination Management Actions.")
Revenues declined marginally in the Animal Health Segment
and decreased by over $10.0 million in the Human Pharmaceuticals
Segment.
Within the Animal Health Segment, Animal Health Division
revenues decreased due to lower sales volume of BMDr and other
feed additives primarily to the poultry market and price erosion
due to competition. (See section "Animal Health Division Market
Conditions.") Aquatic Animal Health Division revenues were lower
due to increased competition in the Norwegian fish vaccine
market.
Revenues in the Human Pharmaceuticals Segment were lower
primarily due to USPD revenues which declined over 7% 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. (See Section
"U.S. Generic Pharmaceutical Industry.") Revenues for IPD and
Fine Chemicals ("FCD") were substantially the same as 1995.
On a consolidated basis, gross profit decreased $4.6 million
and the gross margin percent of 41.1% was the same in 1996 and
1995. The decrease in dollars resulted from lower gross profit
margins on approximately the same sales dollars in the Animal
Health Segment and by decreased sales and production volume in
the USPD which resulted in a lower margin in percent and dollars.
Operating expenses (i.e. selling, general and administrative
expenses "SG&A") on a consolidated basis increased $18.2 million
or 15.3%. Included in 1996 operating expenses are charges
incurred in the first quarter for severance of $1.9 million
relating to the reorganization of the sales and marketing
function for IPD in the Nordic countries. In the second quarter
charges and expenses of $12.1 million were incurred in connection
with production rationalization plans being implemented by IPD
and USPD. Additionally, the third quarter of 1996 includes
approximately $2.0 million of bad debt expense to estimate the
effect of the bankruptcy of a major wholesaler. The nine months
ended September 30, 1995 includes a net reduction of operating
expenses of $2.8 million relating to income received on the sale
of the equity position in an R&D company offset by expenses for
1995 management actions. The following table summarizes the
above:
1996 1995
SG&A as reported $137.1 $118.9
Management actions
(described herein)
1996 (14.0)
1995 2.8
Bad debt expense related
to the bankruptcy of a
wholesaler (2.0) ____
SG&A as adjusted $121.1 $121.7
The lack of growth in SG&A reflects an emphasis on cost
control in response to difficult business conditions in a number
of markets, a reduction of expenses resulting from prior year
management actions which reduced payroll and generally flat
selling and marketing expenses which vary directly with sales.
Operating income as reported declined $22.7 million as a
result of charges for severance and production rationalization
and a significant bad debt expense incurred in the nine month
period. In addition, lower sales and gross profits also
contributed to the decline.
Results of Operations - Three Months Ended September 30, 1996
Total revenue decreased $9.9 million (7.5%) in the three
months ended September 30, 1996 compared to 1995. Operating
income in 1996 was $5.4 million, compared to $15.1 million
operating income in 1995. The Company recorded net income of
less than $.1 million ($.00 per share) compared to income of $6.2
million ($.28 per share) in 1995. The substantially lower income
in 1996 is primarily the result of extremely difficult market
conditions in the Generic Pharmaceutical industry and the Animal
Health industry. In addition 1995 net income includes income from
post combination management actions of approximately $1.8 million
($.08 per share). (See section "Post-Combination Management
Actions.")
Revenues increased marginally in the Animal Health Segment
and declined significantly in the Human Pharmaceuticals Segment.
Within the Animal Health Segment, Animal Health Division
revenues increased due to approximately the same sales volume of
BMDr (i.e. lower volume to the poultry market offset by higher
volume to the swine market), increased volume of other feed
additives and offset by some price erosion primarily related to
BMDr. (See section "Animal Health Division Market Conditions.")
Revenues in the Human Pharmaceutical Segment were
significantly lower primarily due to a 14% reduction in USPD
revenues reflecting volume and price 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, offset by increased sales of products
introduced in 1994 and 1995 and sales of Minoxidil introduced in
the second quarter of 1996. (See section "U.S. Generic
Pharmaceutical Industry.") In addition revenues in IPD and FCD
were below the prior period in 1995 due to lower volume.
On a consolidated basis, gross profit decreased $3.7 million
and the gross margin percent was 39.5% in 1996 compared to 39.4%
in 1995. The decrease in dollars resulted primarily from lower
margins and sales in the USPD. Lower USPD margins were the result
of lower volume which results in unabsorbed manufacturing costs
and the effects of price declines which directly reduced margins.
In FCD and IPD margin percentages were generally maintained but
resulted in lower gross profit dollars due to lower sales.
Operating expenses (i.e. selling, general and administrative
expenses "SG&A") on a consolidated basis increased $5.9 million.
Included in operating expenses in 1996 is approximately $2.0
million of bad debt expense resulting from the bankruptcy of a
major wholesaler. The third quarter of 1995 includes a net
reduction of operating expenses of $2.8 million relating to
income received on the sale of an equity position in an R&D
company offset by 1995 management actions.
The following summarizes selling, general and administrative
on a comparable basis.
1996 1995
SG&A as reported $43.0 $37.1
Bad debt expense
related to the bankruptcy
of a wholesaler (2.0)
Management actions - 1995
(described herein) 2.8
____ ____
SG&A as adjusted $41.0 $39.9
The increase in SG&A results from higher R&D expenses in
certain divisions and increases in various general expenses
relative to 1995.
Operating income as reported declined to $5.4 million
compared to $15.1 million due to lower sales which resulted in
lower gross profits and higher operating expenses in 1996 as
detailed above.
* * * * * *
Interest Expense
Interest expense decreased $.7 million and $1.9 million in
the three and nine months ended September 30, 1996, respectively
due to lower interest rates in 1996 and to a lesser extent
decreased average debt levels.
Provision for Income Taxes
In the quarter and nine months ended September 30, 1996 the
company's effective tax rate is substantially in excess of the
38.0% in 1995 due primarily to relatively low levels of pre-tax
income which magnify the effect of non-deductible expenses
(principally goodwill amortization). The 1996 full year tax rate
will be dependent on actual full year pre-tax income which may
include charges for additional management actions.
Post-Combination Management Actions
Since the completion of the combination in October 1994 the
Company has announced a number of management actions which
included staff reductions, certain product line and facility
rationalizations, the sale of an equity interest in a R & D
company, the utilization of significant consulting resources by
IPD and major production rationalization plans in IPD and USPD.
1995 Management Actions
In September 1995, the Company announced management actions
which spanned both the third and fourth quarters of 1995 and
included the elimination of up to 130 positions company-wide,
further efforts toward consolidation of operations in the
Company's U.S. Pharmaceuticals Division, the utilization of
substantial consulting resources focused primarily on
accelerating the realization of certain combination benefits in
the International Pharmaceuticals Division and the sale in
September of its minority equity position and certain other
rights in an R&D company.
The net effect of the additional management actions for the
third quarter and nine months ended September 30, 1995 was a net
benefit to pre-tax income of approximately $2.8 million resulting
from the income received on the sale of the equity position in
the R&D company and certain other product rights ($6.5 million)
net of expenses for the other management actions ($3.7 million).
The expenses of the other management actions were $2.9 million
for consulting services, and $.8 million for severance for 67
employees in the IPD and USPD. The net effect on net income of
the additional management actions was approximately $1.8 million
($.08 per share fully diluted).
1996 Management Actions
Certain of the announced management actions in 1996 are
still in process and have affected the first three quarters of
1996 and will affect 1996 and 1997. The management actions in
process and their current and potential impact are as follows:
Selling and Marketing Reorganization
In the first quarter of 1996 IPD reorganized its sales and
marketing organization in the Nordic countries and severed
approximately 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.
Production Rationalization
In the first quarter of 1996, the Company announced that a
preliminary study of production rationalization alternatives
between IPD's Copenhagen, Denmark and Lier, Norway manufacturing
facilities had identified potential benefits. Based on these
findings, a detailed study was completed and in May 1996, the
Board of Directors approved a production rationalization plan
which includes the transfer of all tablet, ointment and liquid
production from Copenhagen, Denmark to Lier, Norway. The full
transfer will be completed in 1998 and will result in the net
reduction of approximately 100 employees. The rationalization
plan resulted in a charge in the second quarter for severance for
Copenhagen employees, an impairment write-off for certain
buildings and machinery and equipment and other exit costs.
In 1995 the Company announced a plan by USPD to move all
suppositories and cream and ointment production from two present
locations to the Lincolnton, N.C. location. The transfer of
prescription products requires the Company to obtain the approval
of the FDA for each product transferred. The Company expects to
be successful in the product transfer but the time necessary and
ultimate success cannot be predicted with certainty by the
Company. Based on results to date 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 includes 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 will provide for complete exit by early 1997 and will result
in a net reduction of approximately 150 employees. The
acceleration plan resulted in a second quarter charge for
severance of employees, an impairment write-off for leasehold
improvements and machinery and equipment and significant exit
costs including estimated remaining lease costs and facility
refurbishment costs. In the third quarter of 1996 the Company
sold its tablet business which was located in New Jersey and sub-
leased the New Jersey location. The sale netted proceeds of
approximately $.5 million and resulted in the adjustment of
certain accruals for exit costs made in the second quarter which
contemplated the shut down of the facility. The net result of the
tablet sale was to reduce the second quarter charge by
approximately $1.1 million.
Because of the time necessary to complete the transfers, the
production rationalization plans include stay bonus plans to keep
the production work force in tact 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 third quarter the Animal Health Division reorganized
its distribution business and incurred severance of approximately
$.7 million. The reduction in the second quarter charge resulting
from the sale of the tablet business and sub-lease of the New
Jersey facility was offset by the Animal Health severance and the
accrual of stay bonuses in the third quarter. Accordingly the
third quarter 1996 has no net effect from management actions.
On a year to date basis for 1996 the Company's management
actions total approximately $14.0 million and included $7.0
million for severance, $4.0 million for facilities write-offs,
$.7 million for lease and refurbishment costs, $1.6 million for
other exit costs and $.6 million for accrued stay bonuses.
Additional charges for stay bonuses and other related exit costs
could be required in the fourth quarter of 1996.
The production rationalization plans are expected to
significantly benefit operations in 1997 for USPD and in 1998 for
IPD.
The Company believes the dynamic nature of its business may
present additional opportunities to rationalize personnel
functions and operations to increase efficiency and
profitability. Accordingly, similar management actions or changes
to announced management actions may be required in the future.
Governmental Actions Affecting the Company
The Company's operations in all countries are subject to
comprehensive government regulation which includes inspection of
and controls over manufacturing and quality control practices and
procedures, requires approvals to market products, and can result
in the recall of products and suspension of production. In the
United States the Food and Drug Administration (FDA) has imposed
more stringent regulatory requirements on the pharmaceutical
industry in recent years.
The U.S. manufacturing companies included in the Company's
U.S. Pharmaceuticals Division, Alpharma USPD Inc. (formerly known
as Barre National, Inc.), and NMC Laboratories, Inc. ("NMC"), as
well as two of the Company's European facilities (Skoyen, Norway
and Copenhagen, Denmark that manufacture products for export to
the U.S.) are affected by the more demanding regulatory
environment in that they are required to comply with the FDA's
interpretation of Current Good Manufacturing Practices ("CGMP").
In this regard, Alpharma USPD Inc. is a party to a consent decree
with the FDA which defines the specific standards it must achieve
in meeting CGMP. Additionally, the Company is currently
responding to the FDA's latest inspection at its Skoyen, Norway
plant.
Regulatory compliance has continued to affect costs
directly, by requiring the addition of personnel, programs and
capital, and indirectly, by adding activities without directly
increasing efficiency. The costs (both direct and indirect) of
actions taken with regard to regulatory compliance (which have
increased in recent years) may continue to increase in the
future.
The Company and its subsidiaries have filed applications to
market products with regulatory agencies both in the U.S. and
internationally. The timing of receipt of approvals of these
applications can significantly increase future revenues and
income. The Company cannot control or predict with accuracy
whether such applications will be approved or the timing of their
approval. With regard to the Company's project to conduct
clinical trials as part of the new drug approval process in the
U.S. for Elyzolr Dental Gel (a product for the treatment of the
gum disease periodontitis), the Company is in the process of
clarifying the FDA's current guidelines for the next phase of
clinical trials. Additionally, as previously reported, the
Company is continuing to study alternative marketing arrangements
for the product which include obtaining marketing partners in
some geographical areas.
U.S. Generic Pharmaceutical Industry
The U.S. Generic Pharmaceutical industry has historically
been characterized by intense competition which is evidenced by
eroding prices for products as additional market participants
receive approvals for these products. Growth has historically
occurred through new product approvals and subsequent sales
exceeding declines in the base product line due to price
reductions and/or volume decreases. Generic pharmaceutical market
conditions were further exacerbated in the third quarter of 1996
by a rapidly emerging fundamental shift in industry distribution,
purchasing and stocking patterns. The shift has initially
resulted in a substantial drop in the USPD's volume overall but
in particular to generic drug distributors who represent an
important but declining part of the Company's base business.
Programs recently initiated by major wholesalers have accelerated
the changes and have forced prices to decline at a faster rate.
Wholesaler programs generally require lower prices on products
sold, lower inventory levels kept at the wholesaler and fewer
manufacturers selected to provide products to the wholesalers.
The USPD has been affected by lower sales as distributors reduced
business and as wholesalers reduced inventories and prices. The
Company has made agreements with major wholesalers to provide
product but cannot predict the effect on future volume and
prices. USPD has been and will continue to be affected by the
competitive and changing nature of this industry. Accordingly,
because of competition, a rapidly changing market and uncertainty
of timing of new product approvals, USPD sales volume and prices
are subject to unforeseen fluctuations. Therefore profitability
is also subject to unforeseen fluctuation. The generic industry
in general is subject to similar fluctuations and as a result
stock prices for the group, in which the Company is considered a
member, have historically fluctuated widely.
Animal Health Division Market Conditions
The Animal Health Division's ("AHD") principal product,
BMDr, is a feed additive used to promote growth and feed
efficiency and prevent or treat diseases in Swine and Poultry.
AHD also sells other feed additives most of which are used in
combination or sequentially with BMDr. In 1996 and especially in
the second quarter, results were negatively impacted by a steep
rise in grain (corn and wheat) prices in the U.S. The record high
prices of these feed grains in the second quarter resulted in
intense price competition and a reduction in the use of feed
additives in general, including AHD products, primarily in the
poultry market. In the third quarter feed grain prices have been
lower relative to the second quarter but are still historically
high. Price and other competitive intensity has continued. The
Company does not believe grain prices will remain high
permanently but does believe that competitive conditions in the
industry will remain intense for the foreseeable future. The
Animal Health Division is presently reevaluating its business
structure and practices to address the current industry
conditions. The result of the evaluation may be programs to
reduce costs which may result in additional charges prior to year
end.
European Operations
The fluctuations of European currencies have and will
continue to impact the Company's European operations which
comprised approximately 40% of revenues in the year ended
December 31, 1995. In addition, many European governments have
enacted or are in the process of enacting mechanisms aimed at
lowering the cost of pharmaceuticals. Currency fluctuations and
governmental actions to reduce or not allow increases of prices
have affected revenue. The Company cannot predict future currency
fluctuations or future governmental pricing actions or their
impact on the Company's results.
Fourth Quarter 1996
The factors which have negatively affected results in 1996
and the possibility of additional management actions in the
fourth quarter of 1996 may result in a breakeven or a loss.
Financial Condition
Working capital at September 30, 1996 was $104.9 million
compared to $113.6 million at December 31, 1995. The current
ratio was 1.67:1 at September 30, 1996 compared to 1.67:1 at year
end. Long-term debt to stockholders' equity was 1.06:1 at
September 30, 1996 compared to 1.07:1 at December 31, 1995.
All balance sheet captions decreased as of September 30,
1996 compared to December 31, 1995 in U.S. Dollars as the
functional currencies of the Company's principal foreign
subsidiaries, the NOK and DKK, depreciated versus the U.S. Dollar
in the nine months of 1996 by approximately 3% and 5%,
respectively. The decreases do impact to some degree the above
mentioned ratios. The approximate decrease due to currency
translation of selected captions was: accounts receivable $2.3
million, inventories $2.1 million, accounts payable and accrued
expenses $1.6 million, and total stockholders' equity $5.0
million. Additionally, the accounts receivable balance at
September 30, 1996 was $118.4 million compared to $132.2 million
at December 31, 1995. The reduction reflects the collection of
year end receivables which were higher due to higher sales in the
third and fourth quarters of 1995. The third quarter of 1996
revenue decline of 9.9% and the increase of $2.0 million in the
reserve for bad debts for the bankruptcy of a major wholesaler
also contributed to the decline of accounts receivable at
September 30, 1996.
_______________
Statements made in this Form 10Q, including those relating to
consideration of certain management actions intended to improve
the Company's long term profitability and expectations for fourth
quarter results, are forward-looking statements made pursuant to
the safe harbor provisions of the Securities Litigation Reform
Act of 1995. Such statements involve certain risks and
uncertainties that could cause actual results to differ
materially from those in the forward looking statements. Among
other things, expectations for the 1996 fourth quarter discussed
in Item 2 are not actual results and are based on assumptions
which management believes to be reasonable at this time,
including assumptions concerning the price and number of
competitors for Alpharma's products and the volume and product
mix of sales. Information on other significant potential risks
and uncertainties not discussed herein may be found in the
Company's filings with the Securities and Exchange Commission
including its Form 10Q for the quarter ended June 30, 1996 and
its Form 10K for the year ended December 31, 1995.
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11. Computation of Earnings per Common Share for the three
and nine months ended September 30, 1996 and 1995.
(b) Reports on Form 8-K - None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Alpharma Inc.
(Registrant)
Date: November 13, 1996 /s/ Jeffrey E. Smith___
Jeffrey E. Smith
Vice President,
and Chief Financial Officer
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<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 11036
<SECURITIES> 0
<RECEIVABLES> 118422
<ALLOWANCES> 0
<INVENTORY> 120503
<CURRENT-ASSETS> 261876
<PP&E> 343565
<DEPRECIATION> 135919
<TOTAL-ASSETS> 599714
<CURRENT-LIABILITIES> 157020
<BONDS> 0
0
0
<COMMON> 4402
<OTHER-SE> 194132
<TOTAL-LIABILITY-AND-EQUITY> 599714
<SALES> 371467
<TOTAL-REVENUES> 371467
<CGS> 218803
<TOTAL-COSTS> 218803
<OTHER-EXPENSES> 137104
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14930
<INCOME-PRETAX> 750
<INCOME-TAX> 446
<INCOME-CONTINUING> 304
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> 304
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Exhibit 11
Alpharma Inc.
Computation of Earnings per Common Share
Primary and Fully Diluted
(Dollars in thousands, except for per share data)
Three Months Ended
September 30,
1996 1995
Computation for Statement of Income
Primary earnings per share:
Net income $ 29 $ 6,169
Average common shares outstanding 21,726,000 21,640,000
Additions:
Dilutive effect of outstanding
options determined by treasury
stock method 45,967 159,315
21,771,967 21,799,315
Earnings per common share - Primary $0.00 $0.28
Fully diluted earnings per share:
Net income $ 29 $ 6,169
Average common shares outstanding 21,726,000 21,640,000
Additions:
Dilutive effect of outstanding
warrants determined by treasury
stock method 213,000
Dilutive effect of outstanding
options determined by treasury
stock method 45,967 159,315
21,771,967 22,012,315
Earnings per common share - Fully diluted $0.00 $0.28
Exhibit 11
Alpharma Inc.
Computation of Earnings per Common Share
Primary and Fully Diluted
(Dollars in thousands, except for per share data)
Nine Months Ended
September 30,
1996 1995
Computation for Statement of Income
Primary earnings per share:
Net income $ 304 $ 13,148
Average common shares outstanding 21,706,000 21,624,000
Additions:
Dilutive effect of outstanding
warrants determined by treasury
stock method 28,000
Dilutive effect of outstanding
options determined by treasury
stock method 117,588 159,315
21,851,588 21,783,315
Earnings per common share - Primary $0.01 $0.60
Fully diluted earnings per share:
Net income $ 304 $ 13,148
Average common shares outstanding 21,706,000 21,624,000
Additions:
Dilutive effect of outstanding
warrants determined by treasury
stock method 28,000 213,000
Dilutive effect of outstanding
options determined by treasury
stock method 117,588 159,315
21,851,588 21,996,315
Earnings per common share - Fully diluted $0.01 $0.60
