Page 7 of 23
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, 1998
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 October 23, 1998.
Class A Common Stock, $.20 par value - 15,988,433 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, 1998 and December 31, 1997 3
Consolidated Statement of Income for the
Three and Nine Months Ended September 30,
1998 and 1997 4
Consolidated Condensed Statement of Cash
Flows for the Nine Months Ended September 30,
1998 and 1997 5
Notes to Consolidated Condensed Financial
Statements 6-12
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 13-22
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 23
Signatures 23
ALPHARMA INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEET
(In thousands of dollars)
(Unaudited)
September 30, December 31,
1998 1997
ASSETS
Current assets:
Cash and cash equivalents $ 15,853 $ 10,997
Accounts receivable, net 151,400 127,637
Inventories 140,077 121,451
Other 13,070 13,592
Total current assets 320,400 273,677
Property, plant and equipment, net 238,013 199,560
Intangible assets 307,680 149,816
Other assets and deferred charges 12,770 8,813
Total assets $878,863 $631,866
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 6,180 $ 10,872
Short-term debt 16,552 39,066
Accounts payable and accrued
liabilities 100,999 78,798
Accrued and deferred income taxes 19,173 5,190
Total current liabilities 142,904 133,926
Long-term debt:
Senior 244,838 223,975
Convertible subordinated notes 192,850 -
Deferred income taxes 29,925 26,360
Other non-current liabilities 9,284 9,132
Stockholders' equity:
Class A Common Stock 3,252 3,224
Class B Common Stock 1,900 1,900
Additional paid-in-capital 182,290 179,636
Accumulated other comprehensive
loss (2,293) (8,375)
Retained earnings 80,031 68,206
Treasury stock, at cost (6,118) (6,118)
Total stockholders' equity 259,062 238,473
Total liabilities and
stockholders' equity $878,863 $631,866
The accompanying notes are an integral part
of the consolidated condensed financial statements.
ALPHARMA INC.
CONSOLIDATED STATEMENT OF INCOME
(In thousands, except per share data)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
Total revenue $164,337 $125,240 $430,412 $365,650
Cost of sales 97,642 73,681 251,138 214,529
Gross profit 66,695 51,559 179,274 151,121
Selling, general and
administrative expense 46,801 38,577 134,634 119,325
Operating income 19,894 12,982 44,640 31,796
Interest expense (7,454) (4,303) (18,433) (13,635)
Other income (expense), (377) (271) (195) (438)
net
Income before provision for
income taxes 12,063 8,408 26,012 17,723
Provision for income 4,512 3,151 10,754 6,736
taxes
Net income $ 7,551 $ 5,257 $ 15,258 $ 10,987
Earnings per common share:
Basic $ .30 $ .23 $ .60 $ .50
Diluted $ .28 $ .22 $ .59 $ .49
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,
1998 1997
Operating Activities:
Net income $ 15,258 $ 10,987
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization 27,250
22,713
Purchased in-process research & development 2,081 -
Changes in assets and liabilities,
net of effects from business
acquisitions:
(Increase)decrease in accounts receivable (3,699) 1,701
(Increase)decrease in inventories 2,299
(4,828)
Increase(decrease) in accounts
payable and accrued expenses 3,094
(4,382)
Other, net 5,964
2,417
Net cash provided by
operating activities 52,247 28,608
Investing Activities:
Capital expenditures (20,347)
(19,119)
Purchase of Cox, net of cash acquired (197,044)
- -
Purchase of business and intangibles -
(27,201)
Net cash used in investing activities (217,391)
(46,320)
Financing Activities:
Dividends paid (3,433)
(3,058)
Proceeds from sale of convertible
subordinated debentures 192,850 -
Proceeds from senior long-term debt 187,522
27,505
Reduction of senior long-term debt (182,494)
(6,906)
Net repayment under lines of credit (22,649)
(19,408)
Payments for debt issuance costs (4,175) -
Proceeds from issuance of common stock
2,682 21,355
Net cash provided by
financing activities
170,303 19,488
Exchange Rate Changes:
Effect of exchange rate changes
on cash 498
(1,400)
Income tax effect of exchange rate
changes on intercompany advances
(801) 828
Net cash flows from exchange
rate changes (303)
(572)
Increase in cash 4,856
1,204
Cash and cash equivalents at
beginning of year 10,997 15,944
Cash and cash equivalents at
end of period $ 15,853
$17,148
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 1997
Annual Report on Form 10-K. The reported results for the three
and nine month periods ended September 30, 1998 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,
1998 1997
Finished product $ 73,723 $ 68,525
Work-in-process 27,316 20,009
Raw materials 39,038 32,917
$140,077 $121,451
3. Long-Term Debt
In March 1998, the Company issued $125,000 of 5.75%
Convertible Subordinated Notes (the "Notes") due 2005. The Notes
may be converted into common stock at $28.594 at any time prior
to maturity, subject to adjustment under certain conditions. The
Company may redeem the Notes, in whole or in part, on or after
April 6, 2001, at a premium plus accrued interest.
Concurrently, A.L. Industrier A.S., the controlling
stockholder of the Company, purchased at par for cash $67,850
principal amount of a Convertible Subordinated Note (the
"Industrier Note"). The Note has substantially identical
adjustment terms and interest rate.
The Notes are convertible into Class A common stock. The
Industrier Note is automatically convertible into Class B common
stock if at least 75% of the Class A notes are converted into
common stock.
The net proceeds from the combined offering of $189,100 were
used to retire outstanding senior long-term debt. The Revolving
Credit Facility was used in the second quarter, along with an
amount of short term debt, to finance the acquisition of Cox
Pharmaceuticals. (See note 4.)
Long-term debt consists of the following:
September December 31,
30,1998 1997
Senior debt:
U.S. Dollar Denominated:
Revolving Credit Facility 6.8% -
7.2%:
Revolving credit $180,000 $161,575
A/S Eksportfinans 9,000 9,000
Industrial Development Revenue Bonds 10,265 11,355
Other, U.S. 562 758
Denominated in Other Currencies 51,191 52,159
Total senior debt 251,018 234,847
Subordinated:
5.75% Convertible Subordinated Notes
due 2005 125,000 -
5.75% Convertible Subordinated
Note due 2005 - Industrier Note 67,850 -
Total subordinated debt 192,850 -
Total long-term debt 443,868 234,847
Less, current maturities 6,180 10,872
$437,688 $223,975
4. Business Acquisition - Cox
On May 7, 1998, the Company acquired all of the capital
stock of Cox Investments Ltd. and its wholly owned subsidiary,
Arthur H. Cox and Co., Ltd. and all of the capital stock of
certain related marketing subsidiaries ("Cox") from Hoechst AG
for approximately $192 million in cash, the assumption of bank
debt which was repaid subsequent to the closing, and a further
purchase price adjustment equal to an increase in net assets of
Cox from January 1, 1998 to the date of acquisition. The total
purchase price including the purchase price adjustment and direct
costs of acquisition was approximately $198 million. Cox's main
operations are located in the United Kingdom with distribution
operations located in Scandinavia, the Netherlands and Belgium.
Cox is a generic pharmaceutical manufacturer and marketer of
tablets, capsules, suppositories, liquids, ointments and creams.
Cox distributes its products to pharmacy retailers and
pharmaceutical wholesalers primarily in the United Kingdom.
The Company financed the $198 million purchase price and
related debt repayments from borrowings under its existing long-
term Revolving Credit Facility and short-term lines of credit
which had been repaid in March, 1998 with the proceeds of the
convertible subordinated notes offering(see Note 3). To
accomplish the acquisition the principal members of the bank
syndicate, which are parties to the Company's Revolving Credit
Facility, consented to a change until December 31, 1998 in the
method of calculation of the financial convenant which specifies
an equity to asset ratio of 30%. The change in calculation method
allows the adding back of equity reductions due to foreign
currency translation to equity.
The acquisition was accounted for in accordance with the
purchase method. The fair value of the assets acquired and
liabilities assumed and the results of Cox's operations is
included in the Company's consolidated financial statements
beginning on the acquisition date, May 7, 1998. The Company is
amortizing the acquired goodwill over 35 years using the straight
line method.
The non-recurring charges related to the acquisition of Cox
included in the second quarter of 1998 are summarized below. The
charge for in process research and development ("R&D") is not tax
benefited; therefore the computed tax benefit is below the
expected rate.
Inventory write-up $1,300 (Included in cost of sales)
In process R&D 2,100 (Included in selling, general
Severance 200 and administrative expenses)
3,600
Tax benefit (470)
$3,130 ($.12 per share)
The following pro forma information on results of operations
for the periods presented assumes the purchase of Cox as if the
companies had combined at the beginning of each of the respective
periods:
Pro Forma Pro Forma
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1998* 1997
Revenues $149,140 $463,715 $431,227
Net income $5,158 $16,395 $7,852
Basic EPS $0.22 $0.65 $0.35
Diluted EPS $0.22 $0.63 $0.35
* 1998 excludes actual non-recurring charges related to the
acquisition of $ 3,130 after tax or $ .12 per share.
5. 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, rights, warrants
and convertible debt when appropriate.
A reconciliation of weighted average shares outstanding for
basic to diluted weighted average shares outstanding used in the
calculation of EPS is as follows:
(Shares in thousands) Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
Average shares
outstanding - basic 25,437 23,081 25,391 22,144
Stock options 244 136 194 66
Rights - 371 - 11
Warrants 552 - 359 -
Convertible debt 6,744 - - -
Average shares
outstanding - diluted 32,977 23,588 25,944 22,221
The amount of dilution attributable to the options, rights,
and warrants determined by the treasury stock method depends on
the average market price of the Company's common stock for each
period. Subordinated debt, convertible into 6,744,481 shares of
common stock at $28.59 per share, was outstanding at September
30, 1998 and was included in the computation of diluted EPS using
the if-converted method for the three months ended September 30,
1998. The if-converted method was antidilutive for the nine
months ended September 30, 1998 and therefore the shares
attributable to the subordinated debt were not included in the
diluted EPS calculation.
The numerator for the calculation of basic EPS is net income
for all periods. The numerator for the calculation of diluted EPS
is net income for the nine months ended September 30, 1998. The
numerator for the three months ended September 30, 1998 includes
an add back for interest expense and debt cost amortization, net
of income tax effects, related to the convertible notes.
A reconciliation of net income for the numerator of the
diluted EPS calculations is as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
Net income, as reported $7,551 $5,257 $15,258 $10,987
Net income effect of
convertible debt 1,812 - - -
Adjusted net income for
diluted EPS purposes $9,363 $5,257 $15,258 $10,987
6. Stockholders' Equity
On October 21, 1998 the Company announced that its Board of
Directors had approved an offer by the Company to its
Warrantholders to exchange all of the Company's outstanding
warrants for shares of its Class A Common Stock. There are
3,596,254 outstanding Warrants, each of which represents the
right to purchase 1.061 shares of Class A Common Stock at an
exercise price of $20.69 per share. The Warrants expire January
3, 1999 and trade on the New York Stock Exchange.
Under the transaction, the Company is offering to issue to
each warrantholder a number of Class A shares in exchange for
each Warrant pursuant to an exchange formula based upon the
market prices of the shares during the offer. The number of
shares to be issued for each Warrant pursuant to the Offer
(Exchange Formula) is the result of dividing (i) the sum of $1
plus the Warrant Spread by (ii) the Average Market Price.
"Warrant Spread" means 1.061 times the result of subtracting
$20.69 from the Average Market Price. The "Average Market Price"
will be the arithmetic average (rounded to the nearest cent) of
the closing prices on each of the ten consecutive days the Shares
trade on the New York Stock Exchange commencing with the first
day following the filing of the Company's Form 10-Q Report for
the period ended September 30, 1998.
7. Supplemental Cash Flow Information:
Nine Months Ended
September 30, September 30,
1998 1997
Cash paid for interest $14,310 $13,815
Cash paid for income taxes
(net of refunds) $ 3,640 $(2,888)
Detail of Cox Acquisition:
Fair value of assets $230,740 -
Liabilities 33,229 -
Cash paid 197,511 -
Less cash acquired 467 -
Net cash paid for Cox acquisition $197,044 -
8. Reporting Comprehensive Income
As of January 1, 1998, the Company adopted Statement of
Financial Accounting Standards No. 130 (SFAS 130), "Reporting
Comprehensive Income." SFAS 130 establishes new rules for the
reporting and display of comprehensive income and its components;
however, the adoption of this Statement had no impact on the
Company's net income or stockholders' equity.
SFAS 130 requires foreign currency translation adjustments
and certain other items, which prior to adoption were reported
separately in stockholders' equity, to be included in other
comprehensive income (loss). Total comprehensive income (loss)
amounted to $21,340 and $(2,501) for the nine months ended
September 30, 1998 and 1997, respectively. Total comprehensive
income (loss) amounted to $19,548 and $4,013 for the three months
ended September 30, 1998 and 1997, respectively. The only
components of accumulated other comprehensive loss for the
Company are foreign currency translation adjustments.
9. Contingent Liabilities and Litigation
The Company is one of multiple defendants in approximately
75 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 plaintiffs has specified an amount of
monetary damage. Because the Company has not manufactured, 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
consolidation financial position or results of operations of the
Company.
10. Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards No.
133, Accounting for Derivative Instruments and Hedging Activities
(FAS 133). FAS 133 is effective for all fiscal quarters of all
fiscal years beginning after June 15, 1999 (January 1, 2000 for
the Company). FAS 133 requires that all derivative instruments
be recorded on the balance sheet at their fair value. Changes in
the fair value of derivatives are recorded each period in current
earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and, if
it is, the type of hedge transaction.
The Company has not yet determined the impact that the
adoption of FAS 133 will have on its earnings or statement of
financial position.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Acquisition of Cox
In May of 1998, the Company acquired all the capital stock
of Cox Investments Ltd. and its wholly owned subsidiary, Arthur
H. Cox and Co. Ltd., and all of the capital stock of certain
related marketing subsidiaries ("Cox") for a total purchase price
including direct costs of acquisition of approximately $198
million. Cox's main operations (which primarily consists of a
manufacturing plant, warehousing facilities and a sales
organization) are located in the United Kingdom with distribution
and sales operations located in Scandinavia, the Netherlands and
Belgium. Cox is a generic pharmaceutical manufacturer and
marketer of tablets, capsules, suppositories, liquids, ointments
and creams. Cox distributes its products to pharmacy retailers
and pharmaceutical wholesalers primarily in the United Kingdom.
The Company financed the $198 million purchase price and
related debt repayments from borrowings under its existing long-
term Revolving Credit Facility and short-term lines of credit.
The $180 million Revolving Credit Facility ("RCF") was used to
fund the principal portion of the purchase price. At the end of
March 1998, the Company repaid approximately $162 million
borrowings under the RCF with the proceeds from the issuance of
convertible subordinated notes. Such repayment created the
capacity under the RCF to incur the borrowings used to finance
the acquisition of Cox.
The acquisition was accounted in accordance with the
purchase method. The fair value of the assets acquired and
liabilities assumed and the results of operations are included
from the date of acquisition.
The purchase of Cox had a significant effect on the results
of operations of the Company for the three and nine month periods
ended September 30, 1998. Cox is included in the Human
Pharmaceutical Segment as part of the International
Pharmaceutical Division ("IPD").
For the approximate five month period since acquisition in
1998, Cox contributed sales of $38.6 million and operating
income, exclusive of one-time acquisition charges, of $3.4
million. Operating income is reduced by the amortization of
goodwill totaling approximately $1.8 million. Interest expense
increased by approximately $5.0 million reflecting the financing
of the acquisition primarily with long-term debt. The Company
estimates the net after tax dilution of Cox, exclusive of one
time charges, was approximately $0.07 per share.
For the three months ended September 30, 1998, Cox
contributed sales of $24.5 million and operating income of $2.2
million. Interest expense increased by approximately $3.1 million
reflecting the financing of the acquisition. The Company
estimates the net after tax dilution of Cox was approximately
$0.04 per share.
One time acquisition charges required by generally accepted
accounted principles and recorded in the second quarter included
the write-up of inventory and write-off on the sale of the
inventory of $1.3 million, a write-off of in process research and
development ("R&D") of $2.1 million and severance of certain
employees of the IPD of $0.2 million. Because in process R&D is
not tax benefited the one time charges were $3.1 million after
tax or $.12 per share.
The balance sheet of the Company as of September 30, 1998 is
also significantly affected by the acquisition.
Increases in major categories resulting from the acquisition
were:
($ in millions)
Current assets $40
Property, plant and equipment 34
Intangible assets 161
$235
Short term debt $28
Other current liabilities 27
Long term debt 180
$235
Results of Operations - Nine Months Ended September 30, 1998
Total revenue increased $64.8 million (17.7%) in the nine
months ended September 30, 1998 compared to 1997. Operating
income in 1998 was $44.6 million, an increase of $12.8 million,
compared to 1997. Net income was $15.3 million ($.59 per share
diluted) compared to $11.0 million ($.49 per share diluted) in
1997. Net income in 1998 included charges relating to the
acquisition of Cox which reduced net income by $3.1 million ($.12
per share).
Revenues increased in both the business segments in which
the company operates, Human Pharmaceuticals and Animal Health.
The increase in revenues was reduced by over $18.0 million due to
changes in exchange rates used in translating sales in foreign
currency into the U.S. dollar.
Within the Human Pharmaceutical Segment ("HPS"), Fine
Chemicals Division ("FCD") revenues increased primarily due to
increased volume of vancomycin and polymyxin, including volume
related to the polymyxin business purchased in the fourth quarter
of 1997. Revenues increased in the U.S. Pharmaceutical Division
("USPD") primarily as a result of higher volume of products
introduced since 1996. In the IPD, revenues increased mainly due
to the sales of Cox supplemented by volume increases in other
products offset partially by the effect of translation of sales
in Indonesian and Scandinavian currencies into the U.S. dollar.
Within the Animal Health Segment ("AHS"), Animal Health
division ("AHD") revenues were higher due to sales of Deccox
products (acquired in September of 1997) and generally higher
prices in base products partially offset by lower volume in
certain products and the effect of translation of sales in
foreign currencies into the U.S. dollar. Revenues in the Aquatic
Animal Health division increased mainly due to the introduction
of two new products partially offset by lower volume in certain
other products.
On a consolidated basis, gross profit increased $28.2
million and the gross margin percent increased to 41.7% in 1998
compared to 41.3% in 1997. The increase in gross profit dollars
resulted from sales of new and acquired products introduced
particularly in the USPD and AHD, increased volume in most
divisions and the inclusion of Cox offset partially by decreases
due mainly to currency translation effects primarily in the IPD.
Gross profit in 1998 was reduced by the one time charge for
inventory of $1.3 million associated with the Cox acquisition.
Operating expenses on a consolidated basis increased $15.3
million. Operating expenses increased mainly due to higher
selling and marketing expenses for new and existing products,
normal operating expenses related to Cox, and acquisition charges
of $2.3 million related to Cox with such increase being partially
offset by the effects of currency translation.
Operating income increased $12.8 million primarily as a
result of new and acquired products, increased net volume and to
a lesser extent higher net prices partially offset by an increase
in operating expenses which include one-time Cox acquisition
expenses of $3.6 million.
Interest expense increased $4.8 million due to increased
debt balances since May 7, 1998 compared to 1997 primarily
related to the Cox acquisition.
Other, net in 1998 was a $.2 million loss compared to $.4
million loss in 1997. Foreign exchange transaction losses in 1998
and 1997 were approximately $1.1 million and $.6 million,
respectively. The loss in 1998 was primarily the result of the
weakening currencies of the Company's subsidiaries in Mexico and
Brazil versus the U.S. dollar. The loss in 1997 was primarily the
result of the strengthening of the U.S. dollar versus the
Scandinavian currencies.
On a year to date basis the effective tax rate is 41.3% in
1998 compared to 38.0% in 1997. The primary reason for the rate
increase is the recording of a charge related to the Cox
acquisition for in process R&D in the second quarter of 1998
which is not tax benefited.
Results of Operations - Three Months Ended September 30, 1998
Total revenue increased $39.1 million (31.2%) in the three
months ended September 30, 1998 compared to 1997. Operating
income in 1998 was $19.9 million, an increase of $6.9 million,
compared to 1997. Net income was $7.6 million ($.28 per share
diluted) compared to $5.3 million ($.22 per share diluted) in
1997.
Revenues increased in both the business segments in which
the company operates, Human Pharmaceuticals and Animal Health.
The increase in revenues was reduced by almost $5.0 million due
to translation of sales in foreign currency into the U.S. dollar.
Within the HPS, IPD revenues increased due to the Cox
acquisition offset partially by the effect of translation of
sales in Indonesian and Scandinavian currencies into the U.S.
dollar. FCD revenues increased primarily due to increased volume
of vancomycin and polymyxin, including volume related to the
polymyxin business purchased in the fourth quarter of 1997.
Revenues increased in the USPD mainly as a result of increased
volume of products introduced since 1996 and generally higher
volume in certain other products offset partially by lower net
sales prices in certain products. Third quarter volume of the
USPD is generally increased 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.
Within the AHS, AHD revenues were higher primarily due to
sales of Deccox products (acquired in September of 1997).
Revenues in the Aquatic Animal Health division increased mainly
due to the introduction of two new products partially offset by
decreased volume in certain other products.
On a consolidated basis, gross profit increased $15.1
million. The increase in gross profit dollars resulted from new
and acquired product revenues in all divisions including the
effect of the Cox acquisition only partially offset by decreases
due mainly to translation effects primarily in the IPD. The gross
margin percent was 40.6% in 1998 compared to 41.2% in 1997. The
gross margin percentage was negatively impacted by the increased
percentage of sales and gross profit compared to the prior
quarter of the Company's generic pharmaceutical divisions USPD
and IPD (including Cox) which generate lower gross margin
percents than the overall Company average.
Operating expenses on a consolidated basis increased $8.2
million mainly due to higher selling and marketing, R&D expenses
and Cox operating expenses.
Operating income increased $6.9 million as a result of new
product sales and the inclusion of Cox operations from May 1998
partially offset by an increase in operating expenses and the
effects of currency translation.
Interest expense increased $3.2 million due to higher debt
balances in 1998 compared to 1997 resulting from the Cox
acquisition.
Other, net in 1998 was a $.4 million loss compared to $.3
million loss in 1997. Foreign exchange transaction losses in 1998
and 1997 were approximately $.6 million and $.3 million,
respectively. The loss in 1998 was primarily the result of the
weakening currencies in the Company's subsidiaries in Mexico and
Brazil versus the U.S. dollar. The loss in 1997 was primarily the
result of the strengthening of the U.S. dollar versus the
Scandinavian currencies.
Year 2000
General
The Year 2000 (Y2K) issue is primarily the result of certain
computer programs and embedded computer chips being unable to
distinguish between the year 1900 and 2000. As a result, the
Company along with all other business and governmental entities,
is at risk for possible miscalculations of a financial nature and
systems failures which may cause disruptions in its operations.
The Company can be affected by the Y2K readiness of its systems
or the systems of the many other entities with which it
interfaces, directly or indirectly.
The Company began its program to address its potential Y2K
issues in late 1996 and has organized its activities to prepare
for Y2K at the division level. The divisions have focused their
efforts on three areas: (1) information systems software and
hardware; (2) manufacturing facilities and related equipment;
(i.e. embedded technology) and (3) third-party relationships
(i.e. customers, suppliers, and other). Information system and
hardware Y2K efforts are being coordinated by an IT steering
committee composed of divisional personnel.
The Company and the divisions' have organized their
activities and are monitoring their progress in each area by the
following four phases:
Phase 1: Awareness/Assessment - identify, quantify and
prioritize business and financial risks by area.
Phase 2: Budget/Plan/Timetable - prepare a plan including
costs and target dates to address phase 1
exposures.
Phase 3: Implementation - execute the plan prepared in
phase 2.
Phase 4: Testing/Validation - test and validate the
implemented plans to insure the Y2K exposure has
been eliminated or mitigated.
State of Readiness
The company summarizes its divisions' state of readiness at
September 30, 1998 as follows:
Information Systems and Hardware
Quarter forecasted
Approximate range for substantial
Phase of completion completion
1 80 - 100% 4th Quarter 1998
2 70 - 100% 1ST Quarter 1999
3 50 - 75% 2nd Quarter 1999
4 25 - 75% 3rd Quarter 1999
Embedded Factory Systems
Quarter forecasted
Approximate range for substantial
Phase of completion completion
1 80 -100% 4th Quarter 1998
2 50 - 90% 1ST Quarter 1999
3 25 - 50% 2nd Quarter 1999
4 25 - 60% 3rd Quarter 1999
Third Party Relationships
Quarter forecasted
Approximate range for substantial
Phase of completion completion
1 50 - 100% (a) 1st Quarter 1999(a)
2 40 - 60% (a) 1st Quarter 1999(a)
3 (a) (b) (a) (b)
4 (a) (b) (a) (b)
(a) Refers to significant identified risks - (e.g. customers,
suppliers of raw materials and providers of services) does not
include exposures that relate to interruption of utility or
government provided services.
(b) Awaiting completion of vendor response and follow-up due
diligence to Y2K readiness surveys.
Cost
The Company expects the costs directly associated with its
Y2K efforts to be between $3.0 and $4.0 million of which
approximately $1.0 has been spent to date. The cost estimates do
not include additional costs that may be incurred as a result of
the failure of third parties to become Y2K compliant or costs to
implement any contingency plans.
Risks
The Company has identified the following significant
reasonably possible Y2K problems and is considering related
contingency plans.
The inability of significant sole source suppliers of raw
materials or active ingredients to provide an uninterrupted
supply of material necessary for the manufacture of Company
products. Since various drug regulations will make the
establishment of alternative supply sources difficult, the
Company is considering building inventory levels of critical
materials prior to December 31, 1999.
The failure to properly interface caused by noncompliance of
significant customer operated electronic ordering systems. The
Company is considering plans to manually process orders until
these systems become compliant.
The shutdown or malfunctioning of Company manufacturing
equipment. The Company will advance internal clocks to the year
2000 on certain key equipment during scheduled plant shutdowns in
1999 to determine the effect on operations and develop plans, as
necessary, for manual operations or third party contract
manufacturing.
Based on the assessment efforts to date, the Company does
not believe that the Y2K issue will have a material adverse
effect on its financial condition or results of operation. The
Company believes that any effect of the Year 2000 issue will be
mitigated because of the Company's divisional operating structure
which is diverse both geographically and with respect to customer
and supplier relationships. Therefore, the adverse effect of
most individual failures should be isolated to an individual
product, customer or Company facility. However, there can be no
assurance that the systems of third-parties on which the Company
relies will be converted in a timely manner, or that a failure to
properly convert by another company would not have a material
adverse effect on the Company.
The Company's Y2K program is an ongoing process that may
uncover additional exposures and all estimates of costs and
completion are subject to change as the process continues.
Financial Condition
Working capital at September 30, 1998 was $177.5
million compared to $139.8 million at December 31, 1997. The
current ratio was 2.24 to 1 at September 30, 1998 compared to
2.04 to 1 at year end. Long-term debt to stockholders' equity was
1.69:1 at September 30, 1998 compared to .94:1 at December 31,
1997. The primary difference in the ratios at September 30, 1998
compared to December 31, 1997 is the acquisition of Cox. (See
section "Acquisition of Cox").
In addition, most balance sheet captions increased as of
September 30, 1998 compared to December 1997 in U.S. Dollars as
the functional currencies of two of the Company's principal
foreign subsidiaries, the Danish Krone and British Pound,
appreciated versus the U.S. Dollar in the nine months of 1998 by
approximately 6% and 3%, respectively. Conversely, the Company's
operations in Indonesia were negatively affected due to the
continued decline of the Rupiah versus the U.S. Dollar. The net
increases do impact to some degree the above mentioned ratios.
The approximate increase due to currency translation of selected
captions was: accounts receivable $2.3 million, inventories $1.9
million, accounts payable and accrued expenses $1.5 million, and
total stockholders' equity $6.1 million. The $6.1 million
increase in stockholder's equity represents accumulated other
comprehensive income for the nine months ended September 30, 1998
resulting from the weakening of the U.S. dollar at quarter end.
To accomplish the acquisition of Cox the principal members
of the bank syndicate, which are parties to the Company's
Revolving Credit Facility, consented to a change until December
31, 1998 in the method of calculation of the covenant which
requires the equity to asset ratio to be 30% (the "Waiver"). The
change permitted the Company to meet the required ratio. The
Company has a commitment with its principal banks, subject to
agreement on final documentation, to replace the existing
Revolving Credit Facility and certain existing short-term lines
of credit to provide the financial and covenant flexibility which
will make a further extension of the Waiver unnecessary. The
commitment provides for extended maturity of the bank
indebtedness and increased interest costs.
The acquisition of Cox increased the leverage of the
Company, as evidenced by the long-term debt to stockholders'
equity ratio noted above and total long-term indebtedness of
$437.7 million at September 30, 1998 compared to $224.0 million
at December 31, 1997. The degree to which the Company is
leveraged could have important consequences to the Company,
including the following: (i) the Company's ability to obtain
additional financing for working capital, capital expenditures,
acquisitions or other purposes may be limited or impaired; (ii)
the Company's operating flexibility with respect to certain
matters is limited by covenants contained in the credit
agreements, which limit the ability of the Company's operating
subsidiaries to incur additional indebtedness and contingent
liabilities, grant liens, pay dividends, make investments, prepay
other indebtedness or engage in certain asset sales,
acquisitions, joint ventures, mergers and consolidations; and
(iii) the Company's degree of leverage may make it more
vulnerable to economic downturns, may limit its ability to pursue
other business opportunities and may reduce its flexibility in
responding to changing business and economic conditions. In
addition, the Company believes that it has greater leverage on
its balance sheet than many of its competitors.
The Company is maintaining its search for acquisitions which
will provide new product and market opportunities, leverage
existing assets and add critical mass. The Company is actively
evaluating various acquisition possibilities, including joint
ventures and licensing arrangements. In order to complete such
acquisitions the Company may require additional financing of a
long-term nature which may require the consent of its existing
lenders or additional equity financing. There is no assurance
that any acquisition or the required acquisition financing will
be available on terms suitable to the Company. Given other
transactions in the pharmaceutical industry, and the values of
potential acquisition targets, the Cox acquisition is, and any
future 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.
Regarding potential equity financing, the Company's
outstanding warrants for the issuance of common stock expire on
January 3, 1999. In October 1998 the Company made a tender offer
to exchange all of the Company's outstanding warrants for shares
of its Class A Common Stock based on the difference between the
exercise price of the warrants and the average market price over
a 10 day period plus a $1 premium. The offer, if accepted, will
result in the issuance of Class A Common Stock. The number of
shares of stock to be issued cannot be predicted due to its
dependence on the average market price and level of acceptance.
To the extent such offer is accepted, the Company will not
receive that portion of the $79.0 million due if the warrants
were exercised.
___________
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, 1997.
Part II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits none.
(b) Reports on Form 8-K
(1) On July 21, 1998, the Company filed a report on Form 8-K/A
dated May 7, 1998 reporting Item 2. "Acquisition or Disposition
of Assets".
The event reported was the acquisition of Cox from Hoechst
AG. The Form 8-K/A included the audited financial statements
of Cox and required pro forma financials.
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: October 30, 1998 /s/ Jeffrey E. Smith
Jeffrey E. Smith
Vice President, Finance and
Chief Financial Officer
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