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UNITED STATES
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, 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)
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 3, 1997.
Class A Common Stock, $.20 par value - 13,905,211 shares;
Class B Common Stock, $.20 par value - 9,500,000 shares
ALPHARMA INC.
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheet as of
September 30, 1997 and December 31, 1996 3
Consolidated Statement of Income for the
Three and Nine Months Ended September 30,
1997 and 1996 4
Consolidated Condensed Statement of Cash
Flows for the Nine Months Ended September 30,
1997 and 1996 5
Notes to Consolidated Condensed Financial
Statements 6-11
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 12-19
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8K 20
Signatures 21
Exhibit 11 - Computation of Earnings 22-23
per Common Share
ALPHARMA INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEET
(In thousands of dollars)
September 30,
1997 December 31,
(Unaudited) 1996
ASSETS
Current assets:
Cash and cash equivalents $ 17,148 $ 15,944
Accounts receivable, net 113,732 120,551
Inventories 124,413 123,585
Other 13,278 14,779
Total current assets 268,571 274,859
Property, plant and equipment, net 200,726 209,803
Intangible assets 137,089 119,918
Other assets and deferred charges 9,073 8,827
Total assets $615,459 $613,407
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 7,187 $ 4,966
Short-term debt 39,167 60,952
Accounts payable and accrued
liabilities 79,920 88,288
Accrued and deferred income taxes 3,467 1,445
Total current liabilities 129,741 155,651
Long-term debt 247,663 233,781
Deferred income taxes 28,531 29,882
Other non-current liabilities 7,685 8,051
Stockholders' equity:
Class A Common Stock 2,775 2,762
Class B Common Stock 1,900 1,646
Additional paid-in-capital 143,340 122,252
Foreign currency translation
adjustment (2,997) 10,491
Retained earnings 62,926 54,996
Treasury stock, at cost (6,105) (6,105)
Total stockholders' equity 201,839 186,042
Total liabilities and
stockholders' equity $615,459 $613,407
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,
1997 1996 1997 1996
Total revenue $125,240 $122,438 $365,650 $371,467
Cost of sales 73,681 74,050 214,529 218,803
Gross profit 51,559 48,388 151,121 152,664
Selling, general and
administrative expenses 38,577 42,980 119,325 137,104
Operating income 12,982 5,408 31,796 15,560
Interest expense (4,303) (4,920) (13,635) (14,930)
Other income (expense), net (271) (184) (438) 120
Income before
provision for income taxes 8,408 304 17,723 750
Provision for income taxes 3,151 275 6,736 446
Net income $ 5,257 $ 29 $ 10,987 $ 304
Average common shares
outstanding:
Primary 23,588 21,772 22,221 21,852
Fully diluted 25,848 21,772 24,572 21,852
Earnings per common share:
Primary $ .22 $ .00 $ .49 $ .01
Fully Diluted $ .22 $ .00 $ .49 $ .01
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,
1997 1996
Operating Activities:
Net income $ 10,987 $ 304
Adjustments to reconcile net
income to net cash provided
by operating activities, principally
depreciation and amortization 22,713 23,720
Non-current asset write-off -- 4,068
Changes in assets and liabilities,
net of effects from business
acquisition:
Decrease in accounts receivable 1,701 11,459
(Increase) in inventory (4,828) (2,510)
(Decrease) in accounts
payable and accrued expenses (4,382) (16,071)
Other 2,417 (1,419)
Net cash provided by
operating activities 28,608 19,551
Investing Activities:
Capital expenditures (19,119) (22,831)
Purchase of business and intangibles (27,201)
Net cash used in investing activities (46,320) (22,831)
Financing Activities:
Dividends paid (3,058) (2,950)
Net borrowings (repayments) under lines of credit(19,408) 841
Proceeds from long-term debt 27,505 6,110
Reduction of long-term debt (6,906) (8,859)
Proceeds from issuance of stock 21,355 1,039
Net cash provided by (used in)
financing activities 19,488 (3,819)
Exchange Rate Changes:
Effect of exchange rate changes on cash (1,400) (550)
Income tax effect of exchange rate
changes on intercompany advances 828 334
Net cash flows from exchange
rate changes (572) (216)
Increase (Decrease) in cash 1,204 (7,315)
Cash and cash equivalents at beginning
of year 15,944 18,351
Cash and cash equivalents at end
of period $ 17,148 $ 11,036
The accompanying notes are an integral part
of the consolidated condensed financial statements.
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 1996
Annual Report on Form 10-K. The reported results for the three
and nine month periods ended September 30, 1997 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,
1997 1996
Finished product $72,375 $ 69,629
Work-in-process 18,991 17,126
Raw materials 33,047 36,830
$124,413 $123,585
3. Supplemental Cash Flow Information:
Nine Months Ended
September 30, September 30,
1997 1996
Cash paid for interest $13,815 $15,849
Cash paid for taxes
(net of refunds) $(2,888) $6,353
4. 1996 Management Actions
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 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 reduction of approximately 175 employees (primarily
involved in production). 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
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 second quarter charge 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,
has instituted stay bonus plans. The overall cost of the stay
bonus plans is 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 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 for 1996
periods:
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 lease 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
5. Class B Common Stock Subscription and Class A Rights
Offering
On February 10, 1997, the Company entered into a Stock
Subscription and Purchase Agreement with A.L. Industrier AS. A.L.
Industrier AS is the beneficial owner of all issued and
outstanding shares of the Company's Class B Common stock and is
able to control the Company through its ability to elect more
than a majority of the Board of Directors and to cast a majority
of the votes in any vote of the Company's stockholders. The
agreement provided for the sale of 1,273,438 newly issued shares
of Class B Common stock for $16.34 per share. The shares of Class
B Common stock are convertible on a share for share basis into
shares of the Company's Class A Common stock. 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 A.L.
Industrier pay the original agreed consideration and receive no
later than November 30, 1997 an early payment amount estimated to
be approximately $428. The early payment amount recognizes the
benefit to the Company in the A.L. Industrier purchase of the
stock on June 27, 1997 instead of November 25, 1997 (the date the
Class A rights expire). The sale of stock was completed for cash
on June 27, 1997. Accordingly, stockholders' equity has increased
by $20,380 to reflect the issuance of the Class B shares. A.L.
Industrier AS is now the beneficial owner of 9,500,000 shares of
Class B Common stock.
On September 4, 1997 the Board of Directors issued as a
dividend to the holders of its Class A Common Stock of record on
August 26, 1997, certain subscription rights. Each Record Holder
received one Right for every six shares of Class A Stock held by
such holder on the Record Date. Each Right, evidenced by
transferable certificates, entitles the holder to purchase one
share of Class A Stock at a subscription price of $16.34 per
share. The Rights are listed and trade on the New York Stock
Exchange. The Rights are exercisable at the holder's option
ending on November 25, 1997. After the Expiration Date,
unexercised Rights will be null and void.
The Company has outstanding warrants to purchase Class A
Common stock which expire on January 3, 1999. Pursuant to the
warrant agreement, the issuance of these Rights to the Class A
shareholders of Alpharma Inc. changes both the exercise price and
the number of shares of Class A common stock of Alpharma Inc.
purchasable upon the exercise of each warrant. As a result of
this Rights distribution, each warrant will now purchase 1.063
shares of Class A common stock of Alpharma Inc. (originally one
share per warrant) at an exercise price of $20.65 per share
(original exercise price of $21.945).
If, upon expiration of the rights on November 25, 1997, any
rights remain unexercised, the Warrant Exercise Price and number
of share of Class A Common Stock purchasable upon the exercise of
each Warrant will be readjusted to reflect the reduced dilution
of the rights offering. Any readjustment made will not result in
an exercise price exceeding the original warrant issuance
exercise price of $21.945 or a decrease in the number of shares
purchasable upon exercise of the warrants below the amount
originally issued.
6. Business Acquisition:
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 Deccox 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 acquisition was accounted for in accordance with
the purchase method and sales of decoquinate are included from
the date of acquisition. The cost was approximately $27,200,
which included approximately $1,600 of inventory. The balance of
the purchase price has been allocated to intangible assets and
will generally be amortized over 15 years.
7. Long-term Debt
On April 10, 1997, the Company's existing credit facility
was amended to increase the available credit from $170,000 to
$180,000. At September 30, 1997, the Company had $178,150
outstanding under the facility.
8. Recent Accounting Pronouncements
In February 1997, Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings per Share", was issued
which established standards for computing and presenting earnings
per share. SFAS No. 128 is effective for financial statements
issued for periods ending after December 15, 1997, including
interim periods.
The Company has evaluated the effect of this new
pronouncement on earnings per share and believes that adoption of
SFAS No. 128 would not have a material impact on reported
earnings per share for the periods ended September 30, 1997 and
1996.
In June 1997 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 the FASB issued Statement 131,
"Disclosures About Segments of an Enterprise and Related
Information." 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. As with SFAS No. 130 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.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations - Nine Months Ended September 30, 1997
Overview
For the nine months ended September 30, 1997 revenue was
$365.7 million, a decrease of $5.8 million (1.6%) compared to
1996. Operating income was $31.8 million, an increase of $16.2
million, compared to 1996. Net income was $11.0 million ($.49 per
share fully diluted) compared to $.3 million ($.01 per share
fully diluted) in 1996.
Net income in 1996 was reduced by approximately $8.7 million
($.39 per share) for severance related to a reorganization of the
International Pharmaceuticals Division ("IPD") sales and
marketing function in the Nordic countries in the first quarter,
charges and expenses resulting from production rationalization
plans in the IPD and the U.S. Pharmaceuticals Division ("USPD")
in the second and third quarters and third quarter actions in the
Animal Health Division("AHD"). (See section "1996 Management
Actions.")
Revenues
On an overall basis revenues increased in the Animal Health
Segment and decreased in the Human Pharmaceuticals Segment. 1997
revenues compared to 1996 were reduced approximately $13.5
million due to translation of sales in foreign currency into the
U.S. dollar.
Revenues in the Human Pharmaceutical Segment ("HPS") were
lower than 1996. Revenues declined in the USPD primarily due to
reductions in net selling prices resulting from programs
initiated by major wholesalers in the second half of 1996 which
fundamentally shifted generic pharmaceutical industry
distribution, purchasing and stocking patterns. Overall volume
was approximately the same as 1996. (See "U.S. Generic
Pharmaceutical Industry".) 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. For the first nine
months of 1997 average exchange rates for Scandinavian currencies
where IPD conducts a substantial portion of its business have
declined by approximately 9%-14% compared to the comparable
period in 1996. Sales in the Fine Chemicals Division ("FCD")
principally increased due to higher volume.
Within the Animal Health Segment ("AHS"), AHD revenues
increased primarily due to increased volume of most major
products. In addition, the acquisition of the decoquinate
business in September 1997 contributed to the increase. Aquatic
Animal Health Division ("AAHD") revenues increased compared to
1996 due to increased sales in the Norwegian fish vaccine market.
Gross Profit
On a consolidated basis, gross profit decreased $1.5 million
and the gross margin percent increased slightly to 41.3% in 1997
compared to 41.1% in 1996.
The net decrease in dollars resulted from the interaction of
a number of factors. IPD experienced lower gross profits due
mainly to translation effects. USPD had a higher gross profit and
gross margin percentage. Lower net selling prices in the USPD
directly lowered gross profits and margin percentages but were
more than offset by lower overall manufacturing expenses
resulting from the execution of the production rationalization
plan. AHD had higher gross profits and margins due to increased
volume of most products including BMD only partially offset by
lower prices in certain markets.
Operating Expenses
Operating expenses on a consolidated basis decreased $17.8
million or 13.0%. Included in operating expenses in 1996 were
charges incurred for management actions totaling $14.0 million.
(See section "1996 Management Actions.") In addition, the third
quarter of 1996 includes approximately $2.0 million of bad debt
expense relating to the bankruptcy of a major wholesaler. The
following table estimates adjustments necessary to compare the
operating expenses for the year to date periods:
1997 1996
Operating expenses as reported $119.3 $137.1
Management actions - 1996 (14.0)
Bad debt expense related to the
bankruptcy of a major wholesaler (2.0)
______ _____
$119.3 $121.1
The net reduction reflects translation effects on expenses
incurred in foreign currencies, a continued emphasis on cost
control, 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 and employee incentive
programs.
Operating Income
Operating income as reported in 1997 increased $16.2
million. The decrease in gross profit in dollars was more than
offset by lower operating expenses and the absence of charges for
management actions.
Interest Expense/Other/Taxes
Interest expense decreased $1.3 million due to lower debt
levels (aided by the receipt, in June 1997 of approximately $20
million of new equity - See "Financial Conditions") and generally
lower interest rates in 1997.
Other, net in 1997 was a $.4 million loss compared to a $.1
million income in 1996. Foreign exchange transaction losses
included in other, net in 1997 and 1996 were approximately $.6
million and $.1 million, respectively. The loss in 1997 was
primarily the result of the strengthening of the U.S. dollar
during 1997.
On a year to date basis the estimated tax rate in 1997 is
38%. The rate is in excess of the statutory rate due to the
effect of non-tax deductible expenses, principally goodwill
amortization.
Results of Operations - Three Months Ended September 30, 1997
Overview
Total revenue for the three months ended September 30, 1997
was $125.2 million, an increase of $2.8 million (2.3%) compared
to 1996. Operating income was $13.0 million in 1997 compared to
$5.4 million in 1996. Net income in 1997 was $5.3 million ($.22
per share) compared to less than $.1 million ($.00 per share) in
1996.
Revenue
Revenues decreased marginally in the Human Pharmaceuticals
Segment and increased in the Animal Health Segment. Overall
revenues were reduced approximately $6.0 million due to
translation of sales in foreign currency into the U.S. dollar.
Revenues in the Human Pharmaceuticals Segment declined
primarily due to lower IPD sales. IPD sales were lower as
increased volume for current and new products was more than
offset by the translation effects of a strengthening U.S. dollar.
USPD sales were higher overall as increased volume was partially
offset by lower net pricing. (See "U.S. Generic Pharmaceutical
Industry.") Fine Chemicals sales were approximately the same as
1996.
Within the Animal Health Segment, AHD revenues increased due
to higher volume of BMDr and other feed additives offset in part
by some price erosion. In addition, the acquisition of the
decoquinate business in September 1997 provided a major portion
of the Animal Health increase.
Gross Profit
On a consolidated basis, gross profit increased $3.2 million
and the gross margin percent increased to 41.2% in 1997 compared
to 39.5% in 1996. Increases in gross profit and gross margin
percentage resulted from increased volume of sales in the higher
margin Animal Health Segment and increases in gross profit and
gross margin percent for USPD where price declines were more than
offset by cost reductions which resulted mainly from production
rationalizations. IPD gross profit was lower as a result of
translation effects.
Operating Expenses
Operating expenses on a consolidated basis decreased $4.4
million. Included in operating expenses in 1996 is a bad debt
expense of $2.0 million relating to the bankruptcy of a major
wholesaler. The decrease in operating expenses, net of the 1996
bad debt expense, reflects translation effects of expenses
incurred in foreign currencies, a continued emphasis on cost
control and a reduction of expenses resulting from prior year
management actions offset partially by additional selling,
marketing and administrative expenses for 1997 employee incentive
and other programs.
Operating Income
As a result of increased gross profits, the absence of a
significant bad debt expense, and generally lower expenses 1997
operating income was $13.0 million compared to $5.4 million in
1996.
Interest Expense
Interest expense decreased $.6 million due to generally
lower interest rates in 1997 and to decreased average debt levels
in 1997. (Aided by the receipt, in June 1997 of approximately $20
million of new equity - See "Financial Condition".)
1996 Management Actions
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
estimated the annual expense reduction from this action is over
$1.0 million.
Production Rationalization
In May 1996, IPD began a production rationalization plan
which includes 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 net reduction of approximately 100 employees. The
rationalization plan resulted in a charge in the second quarter
of 1996 for severance for Copenhagen employees, write-offs for
certain buildings and machinery and equipment and other exit
costs.
Also in May 1996, USPD accelerated a plan to move all
suppositories, cream and ointment production from two locations
to their Lincolnton, N.C. location.
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 adoption of the
acceleration plan resulted in a second quarter charge 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.
The plan was substantially completed in the first quarter of
1997.
Because of the time necessary to complete the transfers in
both the IPD and USPD, production rationalization plans included
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 of 1996 the Company sold its tablet
business which was located in New Jersey and subleased 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.
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.
Through September 30, 1996 the Company's management actions
totaled 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, $1.7 million for other exit
costs and $.6 million for accrued stay bonuses.
The production rationalization plans have begun to benefit
operations in 1997 for USPD and are expected to benefit
operations beginning late 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 may be
considered in the future.
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 beginning in the second half
of 1996 by a rapidly emerging fundamental shift in industry
distribution, purchasing and stocking patterns. The shift
resulted in a substantial drop in the USPD's 1996 volume and in
particular to generic drug distributors who represent an
important but declining part of the Company's base business.
Programs initiated by major wholesalers accelerated the changes
and forced prices to decline. 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 was 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. Such agreements are
continually reviewed and are subject to change. USPD 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 (i.e. large
wholesalers, distributors and chain stores), a rapidly changing
market and uncertainty of timing of new product approvals, USPD
sales volume and prices are subject to unforeseen fluctuation.
The generic industry in general is subject to similar
fluctuations.
USPD 1997
In the first quarter of 1997 the USPD's volume increased
relative to 1996 with increases in wholesaler volume being only
partially offset by declines in volume to distributors and other
accounts overall. Prices declined substantially relative to the
first quarter of 1996 but declined only marginally relative to
the second half of 1996. As a result of the effects of lower
pricing the USPD had an operating loss in the first quarter of
1997.
In the second quarter of 1997 USPD volume decreased relative
to 1996 with an increase in wholesaler volume being completely
offset by overall declines in volume to drug chains and
distributors compared to 1996. Prices declined substantially
compared to the second quarter of 1996, but eroded only slightly
relative to the first quarter of 1997. The relative stabilization
of pricing and lower manufacturing costs resulted in USPD
achieving an operating profit in the second quarter although for
the six months ended June 30, 1997 USPD incurred an operating
loss.
In the third quarter of 1997 USPD volume increased
approximately 4% with increases in wholesaler volume being only
partially offset by declines in volume sold to drug chains and
certain distributors. Pricing is lower when compared to the third
quarter in 1996 when programs were initiated by the wholesalers
and continues to erode somewhat. Volumes sold to wholesalers,
distributors and chains increased in part due to seasonal
expectations of increased demand by consumers for cough cold
products. If such demand does not occur fourth quarter volume
could be negatively effected. The increased volume and lower
manufacturing costs resulted in an operating profit for the third
quarter and on a year to date basis.
International Operations
The fluctuations of European currencies and to a lesser
extent the Indonesian Rupiah have and will continue to impact the
Company's International operations which comprise approximately
45% of total revenues. 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 including potential devaluations or future
governmental pricing actions or their impact on the Company's
results.
Financial Condition
Working capital at September 30, 1997 was $138.8
million compared to $119.2 million at December 31, 1996. The
current ratio was 2.07:1 at September 30, 1997 compared to 1.77:1
at year end. Long-term debt to stockholders' equity was 1.23:1 at
September 30, 1997 compared to 1.26:1 at December 31, 1996.
The change in the ratios relative to December 31, 1996, was
impacted by the sale in June 1997 of approximately 1.3 million
shares of Class B Common stock for approximately $20.4 million.
The proceeds of the sale were used to repay short term debt. At
September 30, 1997, short term debt was $39.2 million compared to
$61.0 million at December 31, 1996. Long-term debt increased
relative to year end as a portion of the purchase of the
decoquinate business and certain capital expenditures were
financed with long-term debt.
The Company's Class B Common stock was sold to the Company's
principal shareholder, A.L. Industrier AS pursuant to
Subscription agreement. 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 Class A rights distribution
was made in the third quarter with a prospectus. The rights are
transferable and have a term expiring on November 25, 1997. The
Company cannot predict whether all rights will be exercised,
however, if all rights are exercised the Company will receive
proceeds of approximately $37.0 million.
Most balance sheet captions decreased as of September 30,
1997 compared to December 1996 in U.S. Dollars as the functional
currencies of the Company's principal foreign subsidiaries, the
Norwegian Krone and Danish Krone, depreciated versus the U.S.
Dollar in the nine months of 1997 by approximately 10% and 13%,
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 $5.1
million, inventories $5.6 million, accounts payable and accrued
expenses $4.0 million, long term debt $4.5 million, and total
stockholders' equity $13.5 million.
___________
Certain statements made in this Form 10Q, 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. 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 10K for the year ended December 31, 1996.
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, 1997 and 1996.
(b) Reports on Form 8-K
On July 3, 1997, the Company filed a report on Form 8-K
dated June 27, 1997 reporting Item 9. "Sales of Equity Securities
pursuant to Regulation S".
The event reported was an amendment to the Stock
Subscription Agreement signed with A.L. Industrier and the sale
of 1,273,438 shares of Class B Common stock to A.L. Industrier on
June 27, 1997.
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 7, 1997 /s/ Jeffrey E. Smith___
Jeffrey E. Smith
Vice President,
and Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 17,148
<SECURITIES> 0
<RECEIVABLES> 113,732
<ALLOWANCES> 0
<INVENTORY> 124,413
<CURRENT-ASSETS> 268,571
<PP&E> 344,784
<DEPRECIATION> 144,058
<TOTAL-ASSETS> 615,459
<CURRENT-LIABILITIES> 129,741
<BONDS> 247,663
0
0
<COMMON> 4,675
<OTHER-SE> 197,164
<TOTAL-LIABILITY-AND-EQUITY> 615,459
<SALES> 365,650
<TOTAL-REVENUES> 365,650
<CGS> 214,529
<TOTAL-COSTS> 214,529
<OTHER-EXPENSES> 119,325
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,635
<INCOME-PRETAX> 17,723
<INCOME-TAX> 6,736
<INCOME-CONTINUING> 10,987
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,987
<EPS-PRIMARY> .49
<EPS-DILUTED> .49
</TABLE>
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,
1997 1996
Computation for Statement of Income
Primary earnings per share:
Net income $ 10,987 $ 304
Average common shares outstanding 22,144,000 21,706,000
Additions:
Dilutive effect of outstanding
warrants determined by treasury
stock method -- 28,000
Dilutive effect of outstanding stock
options determined by treasury
stock method 66,000 118,000
Dilutive effect of outstanding rights
determined by treasury stock
method 11,000 --
22,221,000 21,852,000
Earnings per common share - Primary $0.49 $0.01
Fully diluted earnings per share:
Income from continuing operations $ 10,987 $ 304
Additions:
Proforma interest savings on
assumed repayment of debt,
net of tax 993 --
Net income $ 11,980 $ 304
Average common shares outstanding 22,144,000 21,706,000
Additions:
Dilutive effect of outstanding
warrants determined by treasury
stock method 1,704,000 28,000
Dilutive effect of outstanding stock
options determined by treasury
stock method 205,000 118,000
Dilutive effect of outstanding rights
determined by treasury stock
method 519,000 --
24,572,000 21,852,000
Earnings per common share - Fully diluted $0.49 $0.01
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,
1997 1996
Computation for Statement of Income
Primary earnings per share:
Net income $ 5,257 $ 29
Average common shares outstanding 23,081,000 21,726,000
Additions:
Dilutive effect of outstanding stock
options determined by treasury
stock method 136,000 46,000
Dilutive effect of outstanding
rights determined by treasury
stock method 371,000 --
23,588,000 21,772,000
Earnings per common share - Primary $0.22 $0.00
Fully diluted earnings per share:
Income from continuing operations 5,257 29
Additions:
Proforma interest savings on
assumed repayment of debt,
net of tax 389 --
Net income $ 5,646 $ 29
Average common shares outstanding 23,081,000 21,726,000
Additions:
Dilutive effect of outstanding
warrants determined by treasury
stock method 1,952,000 --
Dilutive effect of outstanding stock
options determined by treasury
stock method 205,000 46,000
Dilutive effect of outstanding rights
determined by treasury stock
method 610,000 --
25,848,000 21,772,000
Earnings per common share - Fully diluted $0.22 $0.00
