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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
June 30, 1999
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 July 30, 1999:
Class A Common Stock, $.20 par value - 18,048,159 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
June 30, 1999 and December 31, 1998 3
Consolidated Statement of Income for the
Three and Six Months Ended June 30, 1999
and 1998 4
Consolidated Condensed Statement of Cash
Flows for the Six Months Ended June 30,
1999 and 1998 5
Notes to Consolidated Condensed Financial
Statements 6-16
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 17-26
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote
of Security Holders 27
Item 6. Exhibits and reports on Form 8-K 28
Signatures 29
ALPHARMA INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEET
(In thousands of dollars)
(Unaudited)
June 30, December 31,
1999 1998
___ ASSETS
Current assets:
Cash and cash equivalents $ 22,516 $ 14,414
Accounts receivable, net 172,470 169,744
Inventories 152,917 138,318
Prepaid expenses and other 13,067 13,008
Total current assets 360,970 335,484
Property, plant and equipment, net 237,784 244,132
Intangible assets, net 473,227 315,709
Other assets and deferred charges 36,010 13,611
Total assets $1,107,991 $908,936
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 9,258 $ 12,053
Short-term debt 46,917 41,921
Accounts payable and accrued liabilities 128,508 105,679
Accrued and deferred income taxes 7,972 10,784
Total current liabilities 192,655 170,437
Long-term debt:
Senior 237,923 236,184
Convertible subordinated notes,
including $67,850 to related party 363,362 192,850
Deferred income taxes 31,424 31,846
Other non-current liabilities 11,776 10,340
Stockholders' equity:
Class A Common Stock 3,662 3,551
Class B Common Stock 1,900 1,900
Additional paid-in-capital 233,626 219,306
Accumulated other comprehensive
loss (31,522) (7,943)
Retained earnings 69,369 56,649
Treasury stock, at cost (6,184) (6,184)
Total stockholders' equity 270,851 267,279
Total liabilities and
stockholders' equity $1,107,991 $908,936
The accompanying notes are an integral part
of the consolidated condensed financial statements.
ALPHARMA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(In thousands, except per share data)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
Total revenue $163,839 $139,513 $320,598 $266,075
Cost of sales 90,028 80,351 178,395 153,496
Gross profit 73,811 59,162 142,203 112,579
Selling, general and
administrative expenses 52,743 47,826 102,814 87,833
Operating income 21,068 11,336 39,389 24,746
Interest expense (8,857) (6,489) (16,323) (10,979)
Other, net (22) 383 921 182
Income before provision
for income taxes 12,189 5,230 23,987 13,949
Provision for income
taxes 4,417 2,925 8,779 6,242
Net income $ 7,772 $ 2,305 $ 15,208 $ 7,707
Earnings per common share:
Basic $ 0.28 $ 0.09 $ 0.56 $ 0.30
Diluted $ 0.28 $ 0.09 $ 0.55 $ 0.30
Dividends per common share $ 0.045 $ 0.045 $ 0.09 $ 0.09
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)
Six Months Ended
June 30,
1999 1998
Operating Activities:
Net income $ 15,208 $ 7,707
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization 21,893 17,327
Purchased in-process research & development 2,081
Changes in assets and liabilities,
net of effects from business
acquisitions:
Decrease in accounts receivable 8,628 14,216
(Increase) in inventory (18,314) (3,788)
(Decrease) in accounts payable,
accrued expenses and taxes payable (3,560) (3,198)
Other, net 1,259 893
Net cash provided by
operating activities 25,114 35,238
Investing Activities:
Capital expenditures (15,050) (13,652)
Loan to Ascent Pediatrics (4,000) --
Purchase of businesses, net of cash acquired (173,626) (197,044)
Net cash used in investing activities (192,676) (210,696)
Financing Activities:
Dividends paid (2,488) (2,286)
Proceeds from sale of convertible
subordinated debentures 170,000 192,850
Proceeds from senior long-term debt 277,000 187,522
Reduction of senior long-term debt (278,858) (180,494)
Net advances (repayment) under lines of credit 4,020 (12,074)
Payments for debt issuance costs (8,445) (4,105)
Proceeds from issuance of common stock 14,431 1,365
Net cash provided by financing activities 175,660 182,778
Exchange Rate Changes:
Effect of exchange rate changes
on cash (1,519) (189)
Income tax effect of exchange rate
changes on intercompany advances 1,523 93
Net cash flows from exchange
rate changes 4 (96)
Increase (decrease) in cash 8,102 7,224
Cash and cash equivalents at
beginning of year 14,414 10,997
Cash and cash equivalents at
end of period $ 22,516 $ 18,221
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 1998
Annual Report on Form 10-K. The reported results for the three
and six month periods ended June 30, 1999 are not necessarily
indicative of the results to be expected for the full year.
2. Inventories
Inventories consist of the following:
June 30, December 31,
1999 1998
Finished product $88,965 $ 68,834
Work-in-process 27,951 25,751
Raw materials 36,001 43,733
$152,917 $138,318
3. Long-Term Debt
In January 1999, the Company signed a $300,000 credit
agreement ("1999 Credit Facility") with a consortium of banks
arranged by the Union Bank of Norway, Den norske Bank A.S., and
Summit Bank. The agreement replaced the prior revolving credit
facility and a U.S. short-term credit facility and increased
overall credit availability. The prior revolving credit facility
was repaid in February 1999 by drawing on the 1999 Credit
Facility.
The 1999 Credit Facility provides for (i) a $100,000 six
year Term Loan; and (ii) a revolving credit agreement of $200,000
with an initial term of five years with two possible one year
extensions.
The 1999 Credit Facility has several financial covenants,
including an interest coverage ratio, total debt to earnings
before interest, taxes, depreciation and amortization ("EBITDA"),
and equity to asset ratio.
Interest on the facility will be at the LIBOR rate with a
margin of between .875% and 1.6625% depending on the ratio of
total debt to EBITDA. Margins can increase based on the ratio of
equity to total assets.
Primarily as a result of the Company's acquisition of the
Isis Group, the equity to total asset ratio at June 30, 1999 was
24.5%. The ratio falling below 25% requires a prospective
increase in the margin on debt outstanding under the 1999 Credit
Agreement of .75% (2.25% aggregate margin) and requires the
Company to achieve a minimum 25% ratio within six months.
In June 1999, the Company issued $170,000 principal amount
of 3.0% Convertible Senior Subordinated Notes due 2006 (the "06
Notes"). The 06 Notes will pay cash interest of 3% per annum,
calculated on the initial principal amount of the Notes. The
Notes will mature on June 1, 2006 at a price of 134.104% of the
initial principal amount. The payment of the principal amount of
the Notes at maturity (or earlier, if the Notes are redeemed by
the Company prior to maturity), together with cash interest paid
over the term of the Notes, will yield investors 6.875% per
annum. The interest accrued but which will not be paid prior to
maturity (3.875% per annum) is reflected as long-term debt in the
accounts of the Company. The 06 Notes are redeemable by the
Company after June 16, 2002.
The Notes are convertible at any time prior to maturity,
unless previously redeemed, into 31.1429 shares of the Company's
Class A Common stock per one thousand dollars of initial
principal amount of 06 Notes. This ratio results in an initial
conversion price of $32.11 per share. The number of shares into
which a 06 Note is convertible will not be adjusted for the
accretion of principal or for accrued interest.
The net proceeds from the offering of approximately $164,000
were used to retire outstanding senior long-term debt principally
outstanding under the 1999 Credit Facility. This created the
capacity under the 1999 Credit Facility to finance the
acquisition of Isis Pharma in the second quarter. (See Note 4.)
Long-term debt consists of the following:
June 30, December 31,
1999 1998
Senior debt:
U.S. Dollar Denominated:
1999 Revolving Credit Facility $190,000 -
(6.5 - 6.6%)
Prior Revolving Credit Facility $180,000
(6.6 - 7.0%) -
A/S Eksportfinans - 7,200
Industrial Development Revenue Bonds:
Baltimore County, Maryland
(7.25%) 3,930 4,565
(6.875%) 1,200 1,200
Lincoln County, NC 4,500 4,500
Other, U.S. 232 504
Denominated in Other Currencies:
Mortgage notes payable (NOK) 40,208 42,224
Bank and agency development loans 7,094 7,991
(NOK)
Other, foreign 17 53
Total senior debt 247,181 248,237
Subordinated debt:
5.75% Convertible Subordinated Notes
due 2005
125,000 125,000
5.75% Convertible Subordinated
Note due 2005 - Industrier Note 67,850 67,850
3% Convertible Senior Subordinated
Notes due 2006 (6.875% yield),
including interest accretion 170,512 -
Total subordinated debt 363,362 192,850
Total long-term debt 610,543 441,087
Less, current maturities 9,258 12,053
$601,285 $429,034
4. Business Acquisitions
Cox:
On May 7, 1998, the Company's IPD 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 a total purchase price including direct costs of
the acquisition of approximately $198,000. Cox's operations are
included in IPD and are located primarily in the United Kingdom
with distribution operations located in Scandinavia and the
Netherlands. Cox is a generic pharmaceutical manufacturer and
marketer of tablets, capsules, suppositories, liquids, ointments
and creams.
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 are
included in the Company's consolidated financial statements
beginning on the acquisition date, May 7, 1998. The Company is
amortizing the acquired goodwill (approximately $160,000) over 35
years using the straight line method.
Jumer:
On April 16, 1999, the Company's IPD acquired the generic
pharmaceutical business Jumer Laboratories SARL and related
companies of the Cherqui group ("Jumer") in Paris, France for
approximately $26.4 million, which includes the assumption of
debt which was repaid subsequent to closing. The acquisition
consisted of products, trademarks and registrations.
The acquisition was accounted for in accordance with the
purchase method. The preliminary fair value of the assets
acquired and liabilities assumed and the results of Jumer's
operations is included in the Company's consolidated financial
statements beginning on the acquisition date, April 16, 1999. The
Company is amortizing the acquired intangibles and goodwill based
on preliminary estimates of lives generally over an average of 15
years using the straight line method.
Isis:
On June 18, 1999, the Company's IPD acquired all of the
capital stock of Isis Pharma GmbH and its subsidiary, Isis Puren
("Isis") from Schwarz Pharma AG for approximately $153 million in
cash, and a further purchase price adjustment equal to any
increase (or decrease) in the net assets of Isis from January 1,
1999 to the date of acquisition. Isis operates a generic and
branded pharmaceutical business in Germany. The acquisition
consisted of personnel (approximately 200 employees; 140 of whom
are in the sales force) and product registrations and trademarks.
No plant, property or manufacturing equipment were part of the
acquisition.
The Company financed the $153 million purchase price under
its 1999 Credit Facility. On June 2, 1999, the Company repaid
borrowings under the 1999 Credit Facility with a substantial
portion of the proceeds from the issuance of the 06 Notes. Such
repayment created the capacity under the 1999 Credit Facility to
incur the borrowings used to finance the acquisition of Isis.
The acquisition was accounted for in accordance with the
purchase method. The preliminary fair value of the assets
acquired and liabilities assumed and the results of Isis
operations are included in the Company's consolidated financial
statements beginning on June 15, 1999. The Company is amortizing
the acquired intangibles and goodwill based on preliminary
estimates of lives over an average of approximately 18 years
using the straight line method.
Proforma Information:
The following pro forma information on results of operations
assumes the purchase of all businesses discussed above as if the
companies had combined at the beginning of each period presented:
Proforma Proforma
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998* 1999 1998*
Revenue $180,900 $174,600 $356,100 $346,700
Net income $8,500 $7,100 $15,300 $12,500
Basic EPS $0.31 $0.28 $0.56 $0.49
Diluted EPS $0.30 $0.28 $0.55 $0.49
* Excludes actual non-recurring charges related to the
acquisition of Cox of $3,130 after tax or $0.12 per share.
These unaudited pro forma results have been prepared for
comparative purposes only and include certain adjustments, such
as additional amortization expense as a result of acquired
intangibles and goodwill and an increased interest expense on
acquisition debt. They do not purport to be indicative of the
results of operations that actually would have resulted had the
acquisitions occurred at the beginning of each respective period,
or of future results of operations of the consolidated entities.
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, warrants and
convertible debt when appropriate.
A reconciliation of weighted average shares outstanding for
basic to diluted weighted average shares outstanding is as
follows:
(Shares in thousands) Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
Average shares
outstanding - basic 27,503 25,384 27,379 25,367
Stock options 353 174 380 171
Warrants - 235 - 219
Convertible debt 6,744 - - -
Average shares
outstanding - diluted 34,600 25,793 27,759 25,757
The amount of dilution attributable to the options 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 included in the computation
of diluted EPS for the three months ended June 30, 1999. The
calculation of the assumed conversion was antidilutive for all
other periods presented. In addition the 06 Notes, convertible
into 5,294,301 shares of common stock at $32.11 per share, were
not included in the computation of diluted EPS because the
calculation of the assumed conversion was antidilutive for all
periods presented.
The numerator for the calculation of both basic and diluted
is net income for all periods presented except the three months
ended June 30, 1999. A reconciliation of net income for basic to
diluted is as follows:
Three Months Six Months Ended
Ended
June June June June
30, 30, 30, 30,
1999 1998 1999 1998
Net income - basic $7,772 $2,305 $15,208 $7,707
Adjustments under if -
converted method, net of 1,870 - - -
tax
Adjusted net income - $9,642 $2,305 $15,208 $7,707
diluted
6. Supplemental Data
Three Months Six Months Ended
Ended
June June June June
30, 30, 30, 30,
1999 1998 1999 1998
Other income (expense),
net:
Interest income 258 188 444 268
Foreign exchange losses, 29 (280) (268) (488)
net
Amortization of debt costs (367) (218) (657) (293)
Litigation settlement - - 1,000 -
Income from joint venture
carried at equity 348 - 648 -
Gain (loss) on sale of
assets (56) 681 (56) 681
Other, net (234) 12 (190) 14
$ (22) $ 383 $ 921 $ 182
Six Months Ended
June June
30, 30,
1999 1998
Supplemental cash flow
information:
Cash paid for interest (net
of $13,226 $9,710
amount capitalized)
Cash paid for income taxes
(net of refunds) $ 7,660 $3,043
Detail of Businesses
Acquired:
Fair value of assets $213,087 $230,740
Liabilities 38,558 33,229
Cash paid 174,529 197,511
Less cash acquired 903 467
Net cash paid for
acquisitions $173,626 $197,044
7. 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 requires foreign currency
translation adjustments to be included in other comprehensive
income (loss). Total comprehensive income (loss) amounted to
approximately $(1,505) and $1,974 for the three months ended
June 30, 1999 and 1998, respectively. Total comprehensive income
(loss) amounted to approximately $(8,371) and $1,792 for the six
months ended June 30, 1999 and 1998. The only components of
accumulated other comprehensive income (loss) for the Company are
foreign currency translation adjustments.
8. Contingent Liabilities and Litigation
The Company is one of multiple defendants in 72 lawsuits
(after the dismissal in the second quarter of 1999 of 8 lawsuits)
alleging personal injuries and seven class actions for medical
monitoring 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 have
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. The Company has received a partial
reimbursement of litigation costs from one of the manufacturer's
carriers. The plaintiff in 34 of these lawsuits has agreed to
dismiss the Company without prejudice but such dismissals must be
approved by the Court. 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 had 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.
Bacitracin zinc, one of the Company's feed additive products
has been banned from sale in the European Union (the "EU")
effective July 1, 1999. The Company's request for a court
injunction to prevent the imposition of the ban was rejected. The
Company is continuing to actively pursue other initiatives, based
on scientific evidence available for the product, to limit the
effects of this ban although an assurance of success cannot be
given. In addition, certain other countries, not presently
material to the Company's sales of bacitracin zinc have either
followed the EU's ban or are considering such action. The
existing governmental actions negatively impact the Company's
business but are not material to the Company's financial position
or results of operations. However, an expansion of the ban to
further countries where the Company has material sales of
bacitracin based products could be material to the financial
condition and results of operations of the Company.
The Company and its subsidiaries are, from time to time,
involved in other litigation arising out of the ordinary course
of business. It is the view of management, after consultation
with counsel, that the ultimate resolution of all other pending
suits should not have a material adverse effect on the
consolidated financial position or results of operations of the
Company.
9. Business Segment Information
The Company's reportable segments are five decentralized
divisions (i.e. International Pharmaceuticals Division ("IPD"),
Fine Chemicals Division ("FCD"), U.S. Pharmaceuticals Division
("USPD"), Animal Health Division ("AHD") and Aquatic Animal
Health Division ("AAHD"). Each division has a president and
operates in distinct business and/or geographic area. Segment
data includes immaterial intersegment revenues which are
eliminated in the consolidated accounts.
The operations of each segment are evaluated based on
earnings before interest and taxes. Corporate expenses and
certain other expenses or income not directly attributable to the
segments are not allocated.
Three Months Ended June 30,
1999 1998 1999 1998
Revenues Income
IPD $68,055 $47,095 $7,565 $420
USPD 42,315 39,122 2,322 1,621
FCD 16,019 13,612 6,192 4,847
AHD 35,103 38,633 9,151 8,648
AAHD 2,522 2,293 (920) (309)
Unallocated and
eliminations (175) (1,242) (3,264) (3,508)
$163,839 $139,513
Interest expense (8,857) (6,489)
Pretax income $ 12,189 $ 5,230
Six Months Ended June 30,
1999 1998 1999 1998
Revenues Income
IPD $128,200 $82,457 $13,022 $2,400
USPD 81,751 76,163 4,443 2,341
FCD 31,452 25,893 11,946 8,438
AHD 75,574 77,580 18,501 16,933
AAHD 4,634 6,011 (1,840) (312)
Unallocated and
eliminations (1,013) (2,029) (5,762) (4,872)
$320,598 $266,075
Interest expense (16,323) (10,979)
Pretax income $ 23,987 $ 13,949
At December 31, 1998 IPD identifiable assets were $379,217.
Due primarily to the acquisitions of Jumer and Isis the
identifiable assets of IPD at June 30, 1999 are approximately
$579,000.
10. Strategic Alliances
Joint Venture:
In January 1999, the AHD contributed the distribution
business of its Wade Jones Company ("WJ") into a partnership with
G&M Animal Health Distributors and T&H Distributors. The WJ
distribution business which was merged had annual sales of
approximately $30,000 and assets (primarily accounts receivable
and inventory) of less than $10,000. The Company owns 50% of the
new entity, WYNCO LLC ("WYNCO"). The Company accounts for its
interest in WYNCO under the equity method.
WYNCO is a regional distributor of animal health products
and services primarily to integrated poultry and swine producers
and independent dealers operating in the Central South West and
Eastern regions of the U.S. WYNCO is the exclusive distributor
for the Company's animal health products. Manufacturing and
premixing operations at WJ remain part of the Company.
Ascent Loan Agreement and Option:
On February 4, 1999, the Company entered into a loan
agreement with Ascent Pediatrics, Inc. ("Ascent") under which the
Company may provide up to $40,000 in loans to Ascent to be
evidenced by 7 1/2% convertible subordinated notes due 2005.
Pursuant to the loan agreement, up to $12,000 of the proceeds of
the loans can be used for general corporate purposes, with
$28,000 of proceeds reserved for projects and acquisitions
intended to enhance growth of Ascent. All potential loans are
subject to Ascent meeting a number of terms and conditions at the
time of each loan. As of June 30, 1999, the Company had advanced
$4,000 to Ascent under the agreement. Subsequently, the Company
advanced $1,500 to Ascent in July 1999.
In addition, Ascent and the Company have entered into an
agreement under which the Company will have the option during the
first half of 2002 to acquire all of the then outstanding shares
of Ascent for cash at a price to be determined by a formula based
on Ascent's operating income.
The above transactions were approved by Ascent's
stockholders in July of 1999.
11. 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" (SFAS 133). SFAS 133, as amended in 1999, is
effective for all fiscal quarters of all fiscal years beginning
after June 15, 2000 (January 1, 2001 for the Company). SFAS 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.
SFAS 133 is not expected to have a material impact on the
Company's consolidated results of operations, financial position
or cash flows.
12. Subsequent Events
In July 1999, the Company made the decision to rationalize
Aquatic Animal Health production capacity by closing its
Bellevue, Washington plant and severing all 21 employees. The
plant is expected to be closed and all employees terminated by
the end of 1999.
The plant closing will require a charge for severance, lease
costs and other exit activities in the third quarter of 1999
(presently estimated at between $2,000 and $3,000 pre-tax). The
closing plan and charge will be finalized by the end of the third
quarter of 1999.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Overview
Operations in the first six months of 1999 improved relative
to the comparable period in 1998 and included a number of
significant transactions which we believe will enhance future
flexibility and growth. Such transactions include:
In January, the Company contributed the distribution
business of our Wade Jones subsidiary into a joint venture
with two similar third-party distribution businesses. The
new entity, WYNCO, which is a regional distributor of animal
health products in the Central South West and Eastern
regions of the U.S., is 50% owned by Alpharma.
In January, the Company replaced its revolving credit
facility and existing domestic short term credit lines with
a $300.0 million comprehensive syndicated facility which
provides for increased borrowing capacity.
In February, USPD entered into an agreement with Ascent
Pediatrics, Inc., a branded pediatric pharmaceutical
company, under which USPD may provide up to $40 million in
loans subject to Ascent meeting agreed terms and conditions.
In addition, the Company will have the option to acquire
Ascent in 2002 for a price based on Ascent's operating
income. These transactions were approved by Ascent's
stockholders in July of 1999.
In April, the Company's IPD purchased a French generic
pharmaceutical business. The cash required to acquire the
business and repay existing loans was approximately $26.4
million.
In June, the Company issued $170.0 million of 3% Convertible
Senior Subordinated Notes due in 2006.
In June, the Company's IPD acquired the Isis Pharma Group, a
German generic pharmaceutical business. The cash required to
acquire the business was approximately $153.0 million.
Results of Operations - Six Months Ended June 30, 1999
Total revenue increased $54.5 million (20.5%) in the six
months ended June 30, 1999 compared to 1998. Operating income in
1999 was $39.4 million, an increase of $14.6 million, compared to
1998. Net income was $15.2 million ($.55 per share diluted)
compared to $7.7 million ($.30 per share diluted) in 1998.
Results for 1998 include non-recurring charges resulting from the
Cox acquisition which reduced income by $3.1 million ($.12 per
share).
Revenues increased in the Human Pharmaceuticals business by
$56.9 million and were $3.4 million lower in the Animal Health
business. Currency translation of international sales into U.S.
dollars was not a major factor in the increases or decreases of
any business segment. Changes in revenue and major components of
change for each division in the six month period ended June 30,
1999 compared to June 30, 1998 are as follows:
Revenues in IPD increased by $45.7 million due primarily to
the acquisitions in 1998 and 1999 ($40.8 million aggregate
increase due mainly to the Cox acquisition). The introduction of
new products and limited pricing improvements which were offset
partially by lower volume in certain markets account for the
balance of the IPD increase. Revenues in FCD increased by $5.6
million due mainly to volume increases in vancomycin and
amphotericin. USPD revenues increased $5.6 million due to volume
increases in existing and new products and revenue from licensing
activities offset partially by lower net pricing. AHD revenues
decreased $2.0 million due to increased volume in the poultry and
cattle markets being offset entirely by sales previously recorded
by Wade Jones company now being recorded by WYNCO, the Company's
joint venture distribution company. (i.e. WYNCO joint venture
revenues are not included in the Company's consolidated sales
effective in January 1999 when the joint venture commenced.) AAHD
sales were $1.4 million lower due to market developments which
resulted in lower vaccine volume in the Norwegian salmon market.
On a consolidated basis, gross profit increased $29.6
million and the gross margin percent increased to 44.4% in 1999
compared to 42.3% in 1998. Gross profit in 1998 was reduced by a
$1.3 million charge related to the acquisition of Cox.
A major portion of the increase in dollars was recorded in
IPD and results from the 1998 and 1999 acquisitions (particularly
Cox). Other increases are attributable to higher volume,
manufacturing cost reductions and yield efficiencies in AHD and
FCD and sales of new products and licensing activities in IPD and
USPD.
Partially offsetting increases were volume decreases in
certain IPD markets, lower vaccine sales by AAHD and lower net
pricing primarily in USPD.
Operating expenses increased $15.0 million and represented
32.1% of revenues in 1999 compared to 33.0% in 1998. A portion of
the increase is attributable to the 1998 and 1999 acquisitions
which include operating expenses and amortization of intangible
assets acquired. Other increases included professional and
consulting fees for litigation and administrative actions to
attempt to reverse the European Union ban on bacitracin zinc,
consulting expenses for information technology and acquisitions,
and annual increases in compensation including incentive
programs. Operating expenses in 1998 include a write off of in-
process research and development of $2.1 million and $.2 million
for severance related to the Cox acquisition.
Operating income increased $14.6 million (59.2%). IPD
accounted for $10.6 million of the increase primarily due to 1998
and 1999 acquisitions, the absence of 1998 acquisition charges
related to Cox, positive pricing and new product sales. Increased
operating income was recorded by AHD due primarily to increased
volume, by USPD due to higher volume and licensing activities net
of pricing reductions, and by FCD due to increased volume.
Increases in certain operating expenses and lower AAHD income due
to market developments offset increased operating income to some
extent.
Interest expense increased in 1999 by $5.3 million due
primarily to debt incurred to finance the acquisitions of Cox and
other 1998 and 1999 acquisitions.
Other, net was $.9 million income in 1999 compared to $.2
million income in 1998. Other, net in 1999 includes patent
litigation settlement income of $1.0 million and equity income
from the WYNCO joint venture of $.6 million. 1998 included gains
on property sales of $.7 million.
Results of Operations - Three Months Ended June 30, 1999
Total revenue increased $24.3 million (17.4%) in the three
months ended June 30, 1999 compared to 1998. Operating income in
1999 was $21.1 million, an increase of $9.7 million, compared to
1998. Net income was $7.8 million ($.28 per share diluted)
compared to $2.3 million ($.09 per share diluted) in 1998.
Results for 1998 include non-recurring charges resulting from the
Cox acquisition which reduced income by $3.1 million ($.12 per
share).
Revenues increased in the Human Pharmaceuticals business by
$26.6 million and declined by $3.3 million in the Animal Health
business. Currency translation of international sales into U.S.
dollars was not a major factor in the increases or decreases of
any business segment. Changes in revenue and major components of
change for each division in the three month period ended June 30,
1999 compared to June 30, 1998 are as follows:
Revenues in IPD increased by $21.0 million due primarily to
the acquisitions in 1998 and 1999 ($15.5 million primarily due to
Cox), the introduction of new products and selected price
increases. Revenues in FCD increased by $2.4 million due mainly
to volume increases in vancomycin and amphotericin. USPD revenues
increased $3.2 million due to volume increases in existing and
new products and revenue from licensing activities offset
partially by lower net pricing. AHD revenues decreased $3.5
million due to sales previously recorded by Wade Jones company
now being recorded by Wynco, the company's joint venture
distribution company. (i.e. Wynco joint venture revenues are not
included in the Company's consolidated sales effective in January
1999 when the joint venture commenced.) AHD revenues in core
product lines increased in volume partially offsetting the
reduction due to the establishment of the joint venture. AAHD
sales were approximately the same in a seasonally slow second
quarter of both years.
On a consolidated basis, gross profit increased $14.6
million and the gross margin percent increased to 45.1% in 1999
compared to 42.4% in 1998. The second quarter of 1998 was
negatively effected by the $1.3 million charge related to the Cox
acquisition and the gross margin percent without the charges was
43.3%.
A major portion of the increase in dollars was recorded by
IPD and is mainly attributable to the 1998 and 1999 acquisitions
(primarily Cox). Other increases are attributable to higher
volume, manufacturing cost reductions and yield efficiencies in
USPD, AHD and FCD and sales of new products and licensing
activities in IPD and USPD.
Partially offsetting increases were volume decreases in
certain IPD markets, and lower net pricing primarily in USPD.
Operating expenses increased $4.9 million and represented
32.2% of revenues in 1999 compared to 34.3% in 1998. The increase
results mainly from operating expenses including amortization of
intangible assets related to 1998 and 1999 acquisitions. Charges
for in-process R&D and severance related to the Cox acquisition
of $2.3 million are included in the 1998 amounts.
Operating income increased $9.7 million. On a comparable
basis without the charge in the second quarter of 1998 related to
Cox operating income increased $6.1 million (41.1%). Not
including the Cox charges IPD operating income increased $3.5
million due to 1998 and 1999 acquisitions, increased pricing and
new product sales. Increases were recorded by AHD due primarily
to increased volume, by USPD due to volume increases exceeding
price declines and by FCD due to increased volume. AAHD operating
income declined due to unfavorable market developments.
Interest expense increased in 1999 by $2.4 million due
primarily to debt incurred to finance the acquisition of Cox and
other 1998 and 1999 acquisitions.
Taxes
The effective tax rate for the three and six months ended
June 30, 1999 was 36.2% and 36.6% compared to 55.9% and 44.7% in
the comparable periods in 1998. The primary reason for the higher
rate in 1998 was the charge related to the acquisition of Cox
included a $2.1 million expense for in-process research and
development which is not tax benefited.
Management Actions
The dynamic nature of our business gives rise, from time to
time, to additional opportunities to rationalize personnel
functions and operations to increase efficiency and
profitability. Management is continuously reviewing these
opportunities and may take actions in the future which could be
material to the results of operations in the quarter they are
announced.
In this regard, the AAHD in July 1999 concluded a study of
production capacity and recommended that the AAHD's Bellevue
Washington facility be closed by the end of 1999. The proposal
was approved by executive management and 21 affected employees
were informed in July 1999. The action will require charges in
the third quarter of 1999 for severance, lease costs and other
exit activities. The plan will be finalized in the third quarter.
The charges are presently estimated to be in a range of $2.0 to
$3.0 million before tax.
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
June 30, 1999 as follows:
Information Systems and Hardware
Quarter forecasted
Approximate range for substantial
Phase of completion completion
1 100% Completed
2 100% Completed
3 90 - 100% 3rd Quarter 1999
4 80 - 95% 3rd Quarter 1999
Embedded Factory Systems
Quarter forecasted
Approximate range for substantial
Phase of completion completion
1 100% Completed
2 100% Completed
3 75 -100% 3rd Quarter 1999
4 75 -100% 3rd Quarter 1999
Third Party Relationships
Quarter forecasted
Approximate range for substantial
Phase of completion completion
1 100% (a) Completed (a)
2 90 - 100% (a) 3rd Quarter 1999(a)
3 85 - 90% (a) (b) 3rd Quarter 1999(a,b)
4 75 - 85%(a) (b) 3rd Quarter 1999(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 $2.5 and $3.0 million of which
approximately $2.0 million 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 had previously identified the following
significant reasonably possible Y2K problems:
Possible problem: 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.
Possible problem: the failure to properly interface caused
by noncompliance of significant customer operated electronic
ordering systems.
Possible problem: the shutdown or malfunctioning of
Company manufacturing equipment.
Since these possible problems were initially identified,
risk remediation progress has, in the opinion of the Company,
reduced the likelihood of these Y2K risks:
Sole source suppliers: substantially all major sole
source suppliers were certified by Company inspection or
have self certified as Y2K compliant as of June 30, 1999.
E-Commerce risk: the Company has been advised by a third
party engaged to review this area that it is Y2K compliant with
respect to E-Commerce as of June 30, 1999.
Shutdown of manufacturing equipment: plants were tested
during vacation shutdowns and no significant Y2K problems were
identified as a result of the testing.
Based on the assessment and remediation efforts to date,
which are substantially complete, 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 June 30, 1999 was $168.3 million compared
to $165.0 million at December 31, 1998. The current ratio was
1.87 to 1 at June 30, 1999 compared to 1.97 to 1 at year end.
Long-term debt to stockholders' equity was 2.22:1 at June 30,
1999 compared to 1.61:1 at December 31, 1998.
The change in the Company's long-term debt to equity ratio
was primarily the result of the issuance of $170 million 3%
Convertible Senior Subordinated Notes in the second quarter of
1999 to provide the financing to purchase the Isis Pharma Group,
a German generic pharmaceutical business for approximately $153.0
million.
All balance sheet captions decreased as of June 30, 1999
compared to December 1998 in U.S. Dollars as the functional
currencies of the Company's principal foreign subsidiaries, the
Norwegian Krone, Danish Krone and British Pound, depreciated
versus the U.S. Dollar in the six months of 1999 by approximately
3%, 13% and 5%, respectively. In addition, the Company's
operations in Brazil were negatively affected due to the decline
of its currency versus the U.S. Dollar. The decreases do impact
to some degree the above mentioned ratios. The approximate
decrease due to currency translation of selected captions was:
accounts receivable $5.0 million, inventories $4.2 million,
accounts payable and accrued expenses $4.0 million, and total
stockholders' equity $23.6 million. The $23.6 million decrease in
stockholder's equity represents accumulated other comprehensive
loss for the six months ended June 30, 1999 resulting from the
strengthening of the U.S. dollar.
In February 1999, the Company's USPD entered into an
agreement with Ascent Pediatrics, Inc. ("Ascent") under which
USPD may provide up to $40 million in loans to Ascent to be
evidenced by 7 1/2% convertible subordinated notes due 2005. Up to
$12 million of the proceeds of the loans can be used for general
corporate purposes, with $28 million of proceeds reserved for
projects and acquisitions intended to enhance growth of Ascent.
All potential loans are subject to Ascent meeting a number of
terms and conditions at the time of each loan. The exact timing
and/or ultimate amount of loans to be provided cannot be
predicted with certainly. As of July 30, 1999, $5.5 million has
been advanced and in the third and fourth quarters of 1999
additional amounts are expected to be advanced. The outstanding
loan and future loans to Ascent are subject to a normal risk of
collectibility. In addition, the Company may be required to
recognize losses to the extent Ascent has accumulated losses in
excess of its stockholders' equity and indebtedness subordinate
to our loan. The Company can limit loans to Ascent in certain
circumstances.
In addition, the Company has signed a technology license and
option agreement and asset purchase agreement for an animal
health product which may require up to a $20 million expenditure
in 1999 subject to fulfillment of all conditions necessary to
closing. Additional amounts will be required in future years if
the product is successfully introduced in a number of markets.
At June 30, 1999, the Company had $22.5 million in cash and
approximately $93.0 million available under existing lines of
credit. In January 1999, the Company replaced its prior $180.0
million revolving credit facility and domestic short term lines
of credit with a $300.0 million credit facility. In addition,
European short term credit lines were set at $30.0 million. The
credit facility provides for a $100.0 million six-year term loan
and a $200.0 million revolving credit facility with an initial
five-year term with two possible one-year extensions. The credit
facility has several financial covenants, including an interest
coverage ratio, total debt to EBITDA ratio, and equity to asset
ratio. Interest on borrowings under the facility is at LIBOR with
a margin of between .875% and 1.6625% depending on the ratio of
total debt to EBITDA and margins can increase based on the equity
to asset ratio. We believe that the combination of cash from
operations and funds available under existing lines of credit
will be sufficient to cover our currently planned operating needs
and firm commitments in 1999.
The Company expects to continue its pursuit of complementary
acquisitions or alliances, both in human pharmaceuticals and
animal health that can provide new products and market
opportunities as well as leverage existing assets. In order to
accomplish any individually significant acquisition or
combination of acquisitions, it is likely that the Company will
need to obtain additional financing in the form of equity related
securities and/or borrowings. Any significant new borrowings
require the Company meet the debt covenants included in the 1999
Credit Facility, which provide for varying interest rates based
on the ratio of total debt to EBITDA and equity to total assets.
In this regard, the Company's acquisition of the Isis Group
resulted in an equity to total asset ratio at June 30, 1999 of
24.5%. The ratio falling below 25% requires a prospective
increase in the margin on debt outstanding under the 1999 Credit
Agreement of .75% and requires the Company to achieve a minimum
25% ratio within six months.
The ratio can be improved by decreasing total assets and/or
increasing equity. In fact, at June 30, 1999 in the aggregate
either a $6.3 million increase in equity or a $25.0 million
decrease in assets would have resulted in a 25% ratio. Based on
current operating plans and growth objectives it is likely that
assets will be increased in the next six months and currently
forecasted income will not increase equity at a sufficient rate
to meet the ratio because of the increase in assets.
Additionally, equity is increased or decreased by currency
movements which can increase or decrease the ratio. For example,
had the actual currency rates as of July 31, 1999 been applied to
June 30, 1999 accounts, the Company would have met the 25% ratio.
The Company is considering all options, including a possible
equity offering, to meet the ratio. The Company believes it will
be successful in reaching the required 25% ratio.
___________
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, 1998.
PART II. OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) Alpharma Inc. annual meeting was held on June 10, 1999.
(b) Proxies were solicited by Alpharma Inc. and there was no
solicitation in opposition to the nominees listed in the proxy
statement. All such nominees were elected to the classes
indicated in the proxy statement pursuant to the vote of the
stockholders as follows:
Votes
Class A Directors For Withheld
Thomas G. Gibian 15,898,939 92,604
Peter G. Tombros 15,899,713 91,830
Erik Hornnaess 15,899,711 91,832
Class B Directors
I. Roy Cohen 9,500,000 0
Glen E. Hess 9,500,000 0
Gert W. Munthe 9,500,000 0
Einar W. Sissener 9,500,000 0
Erik G. Tandberg 9,500,000 0
Oyvin A. Broymer 9,500,000 0
(c) An Amendment to Article IV of the Company's Certificate of
Incorporation, was approved by a vote of:
For 24,826,804
Against 587,459
Abstain 77,280
No Vote 0
(d) An Amendment to the Company's Non-Employee Stock Option
Plan, as amended, was approved by a vote of:
For 21,847,041
Against 3,616,560
Abstain 27,942
No Vote 0
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(b) Reports on Form 8-K
On June 16, 1999, the Company filed a report on Form 8-K
dated June 2, 1999 reporting Item 5. "Other Events". The event
reported was the issuance of Convertible Senior Subordinated
Notes due 2006.
On July 2, 1999, the Company filed a report on Form 8-K
dated June 18, 1999 reporting Item 2. "Acquisition or Disposition
of Assets". The event reported was the acquisition of all the
capital stock of Isis Pharma GmbH and its subsidiary, Isis Puren
("Isis"). The financial statements of Isis and required pro forma
financials were not available at that time.
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: August 9, 1999 /s/ Jeffrey E. Smith
Jeffrey E. Smith
Vice President, Finance and
Chief Financial Officer
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