<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
Amendment No.1
To
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.
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Page 1 of 32
<PAGE> 2
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 17-29
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote
of Security Holders 30
Item 6. Exhibits and reports on Form 8-K 31
Signatures 32
Page 2 of 32
<PAGE> 3
ALPHARMA INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEET
(In thousands of dollars)
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---------- -----------
<S> <C> <C>
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
========== ========
</TABLE>
The accompanying notes are an integral part of the consolidated condensed
financial statements.
Page 3 of 32
<PAGE> 4
ALPHARMA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
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
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part
of the consolidated condensed financial statements.
Page 4 of 32
<PAGE> 5
ALPHARMA INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(In thousands of dollars)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
---------------------
1999 1998
------- -------
<S> <C> <C> <C>
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
--------- ---------
</TABLE>
The accompanying notes are an integral part of the consolidated condensed
financial statements.
Page 5 of 32
<PAGE> 6
ALPHARMA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(In Thousands of dollars)
(Unaudited)
1. General
The accompanying consolidated condensed financial statements include
all adjustments (consisting only of normal recurring accruals) which are, in the
opinion of management, considered necessary for a fair presentation of the
results for the periods presented. These financial statements should be read in
conjunction with the consolidated financial statements of Alpharma Inc. and
Subsidiaries included in the Company's 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:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------- ------------
<S> <C> <C>
Finished product $88,965 $ 68,834
Work-in-process 27,951 25,751
Raw materials 36,001 43,733
------- -------
$152,917 $138,318
======= =======
</TABLE>
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.
Page 6 of 32
<PAGE> 7
ALPHARMA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(In Thousands of dollars)
(Unaudited)
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:
<TABLE>
<CAPTION>
June 30, December 31,
-------- ------------
1999 1998
---- ----
<S> <C> <C>
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
</TABLE>
Page 7 of 32
<PAGE> 8
ALPHARMA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(In Thousands of dollars)
(Unaudited)
<TABLE>
<S> <C> <C> <C>
(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 (NOK) 7,094 7,991
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
======== ========
</TABLE>
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.
Page 8 of 32
<PAGE> 9
ALPHARMA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(In Thousands of dollars)
(Unaudited)
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.
Page 9 of 32
<PAGE> 10
ALPHARMA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(In Thousands of dollars)
(Unaudited)
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:
<TABLE>
<CAPTION>
Proforma Proforma
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
1999 1998* 1999 1998*
---- ---- ---- ----
<S> <C> <C> <C> <C>
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
</TABLE>
* 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:
<TABLE>
<CAPTION>
(Shares in thousands) Three Months Ended Six Months Ended
------------------ ----------------
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
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
====== ====== ====== ======
</TABLE>
Page 10 of 32
<PAGE> 11
ALPHARMA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(In Thousands of dollars)
(Unaudited)
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:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
----------------------- -------------------------
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income - basic $7,772 $2,305 $15,208 $7,707
Adjustments under if -
converted method, net of tax 1,870 - - -
----- ----- -------- -----
Adjusted net income - diluted $9,642 $2,305 $15,208 $7,707
===== ===== ====== =====
</TABLE>
6. Supplemental Data
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------ ------------------------
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Other income (expense), net:
Interest income 258 188 444 268
Foreign exchange losses, net 29 (280) (268) (488)
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
==== ==== ==== ====
</TABLE>
Page 11 of 32
<PAGE> 12
ALPHARMA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(In Thousands of dollars)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30, June 30,
1999 1998
---- ----
<S> <C> <C>
Supplemental cash flow
information:
Cash paid for interest (net of
amount capitalized) $13,226 $9,710
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
======= =======
</TABLE>
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
Page 12 of 32
<PAGE> 13
ALPHARMA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(In Thousands of dollars)
(Unaudited)
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.
Page 13 of 32
<PAGE> 14
ALPHARMA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(In Thousands of dollars)
(Unaudited)
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.
<TABLE>
<CAPTION>
Three Months Ended June 30,
------------------------------------------------------------------------------------
1999 1998 1999 1998
---- ---- ---- ----
Revenues Income
-------- ------
<S> <C> <C> <C> <C>
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
======= ======
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30,
---------------------------------------------------------------------
1999 1998 1999 1998
---- ---- ---- ----
Revenues Income
-------- ------
<S> <C> <C> <C> <C>
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
======= =======
</TABLE>
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
Page 14 of 32
<PAGE> 15
ALPHARMA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(In Thousands of dollars)
(Unaudited)
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
Page 15 of 32
<PAGE> 16
ALPHARMA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(In Thousands of dollars)
(Unaudited)
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.
Page 16 of 32
<PAGE> 17
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. During the 1999 period a number of transactions
occurred, including:
- - 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
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. See "Financial Condition" below for additional information.
- - In April, the Company's IPD purchased a French generic pharmaceutical
business for approximately $26.4 million in cash.
- - In June, the Company issued $170.0 million initial principal amount 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 for approximately $153.0 million in
cash.
Page 17 of 32
<PAGE> 18
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.
Page 18 of 32
<PAGE> 19
A major portion of the dollar increase in the Company's consolidated
gross profits 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, price increases 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.
Page 19 of 32
<PAGE> 20
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%.
Page 20 of 32
<PAGE> 21
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.
Page 21 of 32
<PAGE> 22
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.
Page 22 of 32
<PAGE> 23
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
<TABLE>
<CAPTION>
Quarter forecasted for
Approximate range substantial
Phase of completion completion
- ----- ------------- -----------
<S> <C> <C>
1 100% Completed
2 100% Completed
3 90 - 100% 3rd Quarter 1999
4 80 - 95% 3rd Quarter 1999
</TABLE>
Embedded Factory Systems
<TABLE>
<CAPTION>
Quarter forecasted for
Approximate range substantial
Phase of completion completion
- ----- ------------- -----------
<S> <C> <C>
1 100% Completed
2 100% Completed
3 75 -100% 3rd Quarter 1999
4 75 -100% 3rd Quarter 1999
</TABLE>
Page 23 of 32
<PAGE> 24
Third Party Relationships
<TABLE>
<CAPTION>
Quarter forecasted
Approximate range for substantial
Phase of completion completion
- ----- ------------- -----------
<S> <C> <C>
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)
</TABLE>
(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.
Page 24 of 32
<PAGE> 25
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.
Page 25 of 32
<PAGE> 26
The change in the Company's long-term debt to equity ratio was
primarily the result of the issuance of $170 million initial principal amount of
3% Convertible Senior Subordinated Notes in the second quarter of 1999 to reduce
revolving credit debt and thereby create sufficient financing capacity 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. These decreases in balance sheet captions 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 only
for general corporate purposes, with $28 million of proceeds reserved for
approved 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. 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 requested. The outstanding loan and future loans to Ascent are
subject to a risk of collectibility. Ascent has incurred operating losses since
its inception. For the first six months of 1999 Ascent reported revenues of $3.6
million and a net loss of $7.2 million. An important element of Ascent's
business plan contemplated the late 1999 commercial introduction of two
pediatric pharmaceutical products which require FDA approval.
Page 26 of 32
<PAGE> 27
Ascent has stated in its Form 10-Q Report for the quarter ended June 30, 1999
that, in August 1999, it received a major deficiency letter from the FDA with
regard to its application for one of these approvals which will delay commercial
introduction of the relevant drug; possibly significantly beyond the time
originally anticipated.
As a result of this delay in drug introduction, Ascent has informed the
Company that, without any further action, it now forecasts that its accumulated
losses will exceed the combined sum of its stockholders' equity and indebtedness
subordinate to the Company's loans during the first half of 2000. However,
Ascent, one of its major stockholders and the Company are discussing actions
intended to mitigate the effect of these delays. The Company is required to
recognize losses, up to the amount of its loans, to the extent Ascent has
accumulated losses in excess of its stockholders' equity and the indebtedness
subordinate to the Company's loans. The Company is further required to assess
the general collectability of its loans to Ascent and make any appropriate
reserves. The Company can limit further 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 will
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 licensed 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
plus a margin of between .875% and 1.6625% depending on the ratio of total debt
to EBITDA.
Page 27 of 32
<PAGE> 28
Such margins can be higher based on the equity to asset ratio and, as described
below, are currently .75% higher. 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, 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. 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 interest rate
margin on debt under the 1999 Credit Agreement of .75% and requires the Company
to achieve a minimum 25% ratio within six months. A failure to meet the minimum
ratio by December 18, 1999 would constitute an event of default under the 1999
Credit Facility and could have a material adverse effect on the Company.
The ratio can be improved above the 25% requirement 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. However, 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 various options, including a possible equity offering, to
meet the ratio and is filing a shelf registration statement with the Securities
and Exchange Commission for such purpose. The Company believes it will be
successful in reaching the required 25% ratio.
=================
Page 28 of 32
<PAGE> 29
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.
Page 29 of 32
<PAGE> 30
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:
<TABLE>
<CAPTION>
Votes
-----
Class A Directors For Withheld
----------------- --- --------
<S> <C> <C>
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
0yvin A. Br0ymer 9,500,000 0
</TABLE>
(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
Page 30 of 32
<PAGE> 31
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Certificate of Amendment to the Amended and Restated Certificate
of Incorporation of the Company effective July 22, 1999.
10.1 The Company's Non-Employee Stock Option Plan, as amended through
June, 1999.
10.2 Supplemental Agreement dated as of July 1, 1999 by and among
Ascent, Alpharma USPD Inc. and the Company relating to the
various agreements between these parties filed as Exhibits to
the Company's Form 8-K dated February 23, 1999.
27.1 Incorporated by Reference to Quarterly Report on Form 10-Q Filed
by the Company on August 9, 1999.
(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.
Page 31 of 32
<PAGE> 32
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 27, 1999 /s/ Jeffrey E. Smith
--------------------
Jeffrey E. Smith
Vice President, Finance and
Chief Financial Officer
Page 32 of 32
<PAGE> 1
EXHIBIT 3.1
CERTIFICATE OF AMENDMENT
TO THE
CERTIFICATE OF INCORPORATION
OF
ALPHARMA INC.
Pursuant to Section 242 of the Delaware Corporation Law of the State of
Delaware, the undersigned, being the Secretary of Alpharma Inc., a Delaware
corporation (the "Corporation") does hereby certify the following:
FIRST: The name of the Corporation is Alpharma Inc.
SECOND: The original Certificate of Incorporation was filed with the
Secretary of State of Delaware on September 6, 1983.
THIRD: The Certificate of Incorporation is hereby amended to effect a
change in Article Fourth hereof, relating to the shares of stock of the
Corporation, accordingly the first paragraph of Article Fourth of the
Certificate of Incorporation shall be amended as follows:
ARTICLE FOURTH
FOURTH: The total number of shares which the Corporation shall have
authority to issue shall be 65,500,00 shares, divided into three
classes, namely: 500,000 shares of Preferred Stock of the par value of
$1.00 per share; 50,000,000 shares of Class A Common Stock of the par
value of $.20; and 15,000,000 shares of Class B Common Stock of the par
value of $.20.
FOURTH: The amendment of the Certificate of Incorporation of the
Corporation effected hereby was approved by the Board of Directors of the
Corporation, which declared its advisability to the stockholders and,
thereafter, the holders of a majority of the outstanding shares of common stock,
namely, the holders of Class A Common Stock and Class B Common Stock voting
together as a single class duly approved said amendment.
<PAGE> 2
FIFTH: The amendment reflected herein only amends the first paragraph
of Article Fourth and the remainder of Article Fourth and other provisions of
the Certificate of Incorporation remain unaffected.
IN WITNESS WHEREOF, the undersigned affirms as true the foregoing under
penalties of perjury, as his act and deed and the act and deed of Alpharma Inc.
on this 2nd day of July, 1999.
Alpharma Inc.
By: /s/ ROBERT F. WROBELL
------------------------
Name: Robert F. Wrobel
Title: Secretary
<PAGE> 1
EXHIBIT 10.1
APPENDIX
ALPHARMA INC.
NON-EMPLOYEE DIRECTOR OPTION PLAN
1. PURPOSE OF THE PLAN
The purpose of this Plan is to promote the interests of the Company (i) by
tying more directly the compensation of directors to the performance of the
Company as measured by the market price of its stock and (ii) through aligning
more closely the interests of directors with the interests of the Company's
stockholders.
2. ADMINISTRATION
Except for the discretion reserved to the Board of Directors, the Plan
shall be administered by a committee of the Board of Directors of the Company
consisting of one or more directors (the "Director Options Committee") appointed
for such purpose by the Compensation Committee of the Board of Directors. All
questions of interpretation and application of this Plan to options granted
hereunder (the "Director Options") and of this Plan and any related agreements
and instruments shall be subject to the good faith determination of the Director
Options Committee, which shall be final and binding on all persons. No member of
the Committee shall be liable for anything done or omitted to be done by him or
her or by any other member of the Committee in connection with the Plan, except
for his or her own willful misconduct or as expressly provided by statute.
3. DIRECTOR OPTION SHARES
The stock subject to the Director Options and other provisions of this Plan
shall be shares of the Company's Class A Common Stock, with $.20 par value
(hereinafter referred to as the "Class A Stock"). The aggregate number of shares
of Class A Stock authorized to be issued upon exercise of Director Options and
reserved for issuance under the Plan is 150,000. In the event that application
of any provision of this Plan would result in the issuance of, or the right to
purchase, any fractioned share of Class A Stock, the fraction shall be rounded
to a full share.
4. GRANTING OF DIRECTOR OPTIONS
Subject to the discretion and approval of the Board of Directors, each
director shall receive an option to purchase up to 5,000 shares of Class A Stock
immediately following each annual meeting of stockholders of the Company at
which such director is elected to serve on the Board of Directors of the
Company. If a director is elected or appointed to the Board of Directors other
than at the annual meeting of stockholders, such director shall receive as of
the date of such election or appointment an option to purchase a number of share
of Class A Stock equal to (i) the amount of the then most recent grant
multiplied by (ii) a fraction, the numerator of which is the number of days
remaining from the date of such election or appointment until the anniversary of
the preceding annual meeting of the stockholders and the denominator of which is
365. The price at which shares may be purchased pursuant to any Director Option
shall be the fair market value of the shares on the date that the Director
Option is granted.
5. ELIGIBILITY
The individuals who will be eligible to receive Director Options will be
each person elected or appointed as a director of the Company who is not also an
employee of the Company or any of its subsidiaries at the time such person is so
elected or appointed. A Director Option granted to a director under this Plan
shall continue to be
<PAGE> 2
effective in accordance with its terms notwithstanding that prior to or
subsequent to the grant of such option such director was or becomes an employee
of the Company or its subsidiaries.
<PAGE> 3
6. TERMS OF DIRECTOR OPTIONS; VESTING
Each Director Option shall have a term of ten years from the date of grant
or such lesser term as is approved by the Board of Directors (the "Option
Term"); provided that if a director ceases to be a director for any reason, all
Director Options held by such Director shall terminate on the fifth anniversary,
of the date on which such individual ceases to be a director, if such director
has served for five years or more, or otherwise on the first anniversary of the
date on which such individual ceases to serve as a Director (the "Early
Termination Date"). Each Director Option which has become vested (as described
below) may be exercised from time to time until the earlier of (i) the end of
the Option Term or (ii) the Early Termination Date, in part or in whole. The
exercise price of each Director Option may be paid in cash or by delivery of
shares of Class A Stock previously acquired by the optionee having a fair market
value equal to the exercise price of the Director Option being exercised. Each
Director Option shall vest in full on the date of the first annual meeting of
stockholders following the date of grant of such option; provided that if a
person ceases to be a director for reason of disability or death prior to such
vesting date, a portion of any unvested Director Options held by such director
shall vest as of the day preceding the date such person ceases to be a director
for such reason, which portion shall be equal to (i) the number of unvested
Director Options held by such director multiplied by (ii) a fraction, the
numerator of which is the number of days such Director has held such unvested
option and the denominator of which is 365. If a Director is removed from the
Board or resigns other than for reasons of disability or death, the unvested
Director Options held by such director shall not vest following such removal or
resignation.
7. EXERCISE OF DIRECTOR OPTIONS
Director Options shall be exercised by the delivery of written notice to
the Company (Attention: Treasurer) setting forth the number of shares with
respect to which the Director Option is to be exercised and the address to which
the certificates for such shares are to be mailed, together with (i) cash
(including checks, bank drafts or postal or express money orders payable to the
order of the Company) or (ii), shares of Class A Stock, previously acquired,
having an aggregate value equal to the option price of such shares. As promptly
as practicable after receipt of such written notification and payment, the
Company shall deliver to the optionee certificates for the number of shares with
respect to which such Director Option has been so exercised ("Option Shares"),
issued in the optionee's name; provided, that such delivery shall be deemed
effected for all purposes when such certificates shall have been deposited in
the United States mail, addressed to the optionee, at the address specified
pursuant to this paragraph. For all purposes, an optionee shall be deemed to
have exercised a Director Option and to have purchased and become the holder of
the Option Shares as of the date the Company receives written notification of
exercise and payment as provided herein.
8. TRANSFERABILITY OF DIRECTOR OPTIONS
Director Options shall not be transferable otherwise than by will or the
laws of descent and distribution and shall be exercisable during the optionee's
lifetime only by him or by his guardian or legal representative.
9. REQUIREMENTS IMPOSED BY LAW AND DIRECTOR OPTIONS COMMITTEE
The Company shall not be required to sell or issue any shares under any
Director Option if the issuance of such shares shall constitute a violation by
the optionee or by the Company of any provisions of any law or regulation of any
governmental authority. Any determination in this connection by the Director
Options Committee shall be final, binding and conclusive.
The Company shall not be required to issue any shares upon exercise of any
option unless the Company has received the optionee's representation or other
evidence satisfactory to it to the effect that the holder of such Director
Option will not transfer such Option Shares in any manner which could constitute
a violation of any securities or other law, or which would not be in compliance
with such other conditions as the Director Options Committee may deem
appropriate.
-2-
<PAGE> 4
The Director Options Committee may impose such other limitations on the
exercise of Director Options as it concludes are necessary to comply with
applicable law and carry out the intent and purpose of the Plan.
10. NO RIGHTS AS STOCKHOLDER
No optionee shall have rights as a stockholder with respect to shares
covered by a Director Option until the date of exercise of such Director Option;
and, except as otherwise provided in paragraph 12 hereof, no adjustment for
dividends, or otherwise, shall be made if the record date therefore is prior to
the date of exercise of such option.
11. NO OBLIGATION TO RETAIN DIRECTOR
The granting of any option shall not impose upon Company, its stockholders
or the Board of Directors any obligation to elect, appoint or retain any person
as a member of the Board of Directors; and the right to remove any director as
provided by applicable law shall not be diminished or affected by reason of the
fact that a Director Option has been granted to such Director.
12. CHANGES IN THE COMPANY'S CAPITAL STRUCTURE
The existence of outstanding Director Options shall not affect in any way
the right of power of the Company or its stockholders to make or authorize any
or all adjustment, recapitalizations, reorganization, or other changes in the
Company's capital structure or its business, or any merger or consolidation of
the Company, or any issue of bonds, debentures or preferred or prior preference
stock senior to or otherwise affecting the Class A Stock or the rights thereof,
or the dissolution or liquidation of the Company, or any sale or transfer of all
or any part of its assets or business, or any other corporate act or proceeding,
whether of a similar character or otherwise.
If the Company shall effect a subdivision or consolidation of shares or
other capital readjustment, or pay a dividend in shares of its Class A or Class
B Common Stock, then (a) the number, type, and per share price of shares of
stock subject to outstanding Director Options hereunder shall be appropriately
adjusted in such a manner as to entitle each optionee to receive upon exercise
of his Director Option, for the same aggregate consideration, the same total
number and type of shares as he would have received as a result of the event
requiring the adjustment had he exercise his Director Option in full immediately
prior to such event; provided, however, that if any such adjustment would result
in the right to purchase a fractional share, the number of shares subject to the
Director Option will be decreased to the next lower whole number; and (b) the
number and type of shares then reserved for issuance under the Plan shall be
adjusted by substituting for the total number of shares of Class A Stock then
reserved that number and type of shares of stock that would have been received
by the owner of an equal number of outstanding shares of Class A Stock as the
result of the event requiring the adjustment.
If the Company shall be a party to any merger or consolidation or effect
any recapitalization which causes a change in the Class A Stock which does not
effect an adjustment under the prior paragraph, the Director Options Committee,
in its discretion, may, if it considers it to be appropriate to carry out the
intent and purpose of the Plan, make such adjustments in the nature or amount of
securities subject to the Director Options or the Director Option price as it
considers appropriate, and such adjustments shall be binding and conclusive of
all holders of Options.
Except as expressly provided herein, the issue by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class,
for cash or property, or for labor or services either upon sale, or upon the
exercise or rights or warrants to subscribe therefore, or upon conversion of
other securities, shall not affect, and no adjustment by reason thereof shall be
made with respect to, the number or price of shares of Class A Stock then
subject to outstanding Director Options.
-3-
<PAGE> 5
13. AMENDMENT OR TERMINATION OF PLAN
The Board of Directors of the Company may modify, revise or terminate this
Plan at any time and from time to time, except that none of the term of the
Plan, the eligibility of grantees, the aggregate number of shares reserved for
issuance pursuant to this Plan, the amount of Directors Options to be granted to
any director or the minimum option price shall, other than by operation of
paragraph 12 hereof, be modified or revised without the consent of the holders
of Class A and Class B Common Stock having a majority of the voting power. The
termination of the Plan by the Board of Directors shall not affect any Director
Options granted prior to such termination. The terms upon which Directors
Options are granted may not be amended more frequently than once every six
months (except to comply with applicable tax or other laws).
14. WRITTEN OPTION AGREEMENTS
Each Director Option granted hereunder may be embodied in a written option
agreement which shall contain such other provisions as the Director Options
Committee in its discretion shall deem advisable. The failure to provide a
written option agreement shall not affect the validity of Director Options
provided for herein or the rights of directors to receive and exercise such
options as herein provided.
15. DIRECTOR AND STOCKHOLDER APPROVAL; DURATION OF PLAN
This Plan has been duly adopted by the Board of Directors on March 14, 1996
and approved by the stockholders of the Company on May 30, 1996. This Plan shall
terminate on December 31, 2005 or by earlier action of the Board of Directors
pursuant to paragraph 13 hereof provided such termination shall not affect any
Director Options granted prior to such termination.
16. ELECTION TO RECEIVE SHARES IF SUBJECT TO DETRIMENTAL NON-U.S. INCOME TAX
CONSEQUENCES
If a person would be subject to significantly detrimental income tax
consequences as a result of receiving Director Options under any non-United
States income tax provisions, such person may elect (by written notice to the
Director Options Committee prior to the date of grant) to receive in lieu
thereof one share of Class A stock for every ten shares purchasable under the
Director Options such person would otherwise have received.
17. REFERENCE TO EMPLOYEE STOCK OPTION PLAN ("EMPLOYEE PLAN")
To the extent not inconsistent with the terms of this Plan, the terms and
provisions of the Employee Plan shall apply to any options granted hereunder.
-4-
<PAGE> 1
EXHIBIT 10.2
EXECUTION COPY
ASCENT PEDIATRICS, INC.
SUPPLEMENTAL AGREEMENT
Date: July 1, 1999
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I
DEFINITIONS, ETC.....................................................2
ARTICLE II
AMOUNT AND TERMS OF SECURITIES.......................................3
ARTICLE III
ADDITIONAL CONDITIONS OF OBLIGATIONS OF THE LENDER...................3
ARTICLE IV
COVENANTS OF THE COMPANY.............................................4
ARTICLS V
ADDITIONAL REPRESENTATIONS OF THE COMPANY............................5
ARTICLE VI
OTHER AMENDMENTS ....................................................5
</TABLE>
i
<PAGE> 3
SUPPLEMENTAL AGREEMENT (the "Agreement") dated as of July 1, 1999
among Ascent Pediatrics, Inc., a Delaware corporation (the "Company"), Alpharma
USPD Inc., a Maryland corporation (the "Lender"), and Alpharma Inc., a Delaware
corporation (the "Parent"), State Street Bank and Trust Company (the
"Depositary") and each of the Original Lenders named in the Subordination
Agreement described below.
WHEREAS, pursuant to the Loan Agreement dated as of February 16, 1999
among the Company, the Lender and the Parent (the "Loan Agreement"), the Lender
has agreed to loan to the Company an aggregate of up to $40 million from time
to time upon the terms and conditions set forth therein;
WHEREAS, the Lender, the Company and the Depositary are parties to a
Depository Agreement dated February 16, 1999 (the "Depositary Agreement");
WHEREAS, the Lender, the Company and the Original Purchasers named
therein are parties to a Subordination Agreement dated February 16, 1999 (the
"Subordination Agreement");
WHEREAS, the Company, the Lender and the Parent are part to a Master
Agreement dated February 16, 1999 (the "Master Agreement");
WHEREAS, the parties wish to supplement and amend the Loan Agreement,
the Depositary Agreement, the Master Agreement and the Subordination
Agreement upon the terms and conditions set forth herein;
WHEREAS, the Lender is the sole Holder of the Note (as defined in the
Loan Agreement) and the parties are entering into this Agreement (to the extent
it modifies the Loan Agreement) pursuant to Section 12.1 of the Loan Agreement.
WHEREAS, on or prior to the date hereof, this Agreement has been
approved by a majority of the Non-Alpharma Directors pursuant to Section 9.01
of the Depositary Agreement and Section 8.5 of the Master Agreement;
NOW, THEREFORE, in consideration of the premises, it is agreed by and
among the parties hereto as follows:
<PAGE> 4
ARTICLE I
DEFINITIONS, ETC.
1.1 Capitalized terms used herein and not otherwise defined herein
shall have the meanings ascribed to them in the Loan Agreement or in the
Ancillary Agreements (as defined in the Loan Agreement).
1 .2 Unless the context otherwise requires:
a a term has the meaning assigned to it;
b. an accounting term not otherwise defined has the meaning
assigned to it in accordance with GAAP;
c. "or" is not exclusive;
d. words in the singular include the plural and in the
plural include the singular;
e. provisions apply to successive events and transactions;
and
f. "herein", "hereof" and other words of similar import
refer to this Agreement as a whole and not to any
particular Article, Section or other subdivision.
1.3 This Agreement amends and supplements the Loan Agreement, the
Depositary Agreement, the Subordination Agreement, the Guaranty Agreement and
the Master Agreement. In case of any inconsistency between the terms of this
Agreement and the Loan Agreement, the Depositary Agreement, the Subordination
Agreement, the Guaranty Agreement or the Master Agreement, the terms of this
Agreement shall govern. In the absence of such inconsistency, all provisions of
the Loan Agreement, the Depositary Agreement, the Subordination Agreement, the
Guaranty Agreement and the Master Agreement shall remain in full force and
effect. Without limiting the foregoing, (a) the conditions set forth in Article
III hereof shall for all purposes be considered part of Section 4.2 or 4.3 of
the Loan Agreement, as applicable; (b) the representations set forth in Article
V hereof shall for all purposes be considered part of Article II of the Loan
Agreement; and (c) the covenants set forth in Sections 6.5 and 6.7 and Article
IV hereof shall for all purposes (including defining Defaults and Events
of Default) be considered part of Article VI of the Loan Agreement. Any
reference in the Loan Agreement, the Depositary Agreement, the Master Agreement,
the Guaranty Agreement or the Subordination Agreement to any such agreement or
to the Ancillary Agreements shall be deemed to be a reference to such agreement
as modified hereby. Any reference in any such agreement to approval or adoption
of the Merger Agreement and the transactions contemplated thereby shall be
deemed to be a reference to the Merger Agreement and such transactions as
modified hereby.
2
<PAGE> 5
1.4 The parties may sign any number of copies of this Agreement.
Each signed copy shall be an original and may be signed in counterparts, but
all of them together represent the same agreement.
1.5 The laws of the State of New York, without regard to principles
of conflicts of law, shall govern this Agreement to the extent it modifies the
Loan Agreement or the Subordination Agreement. The laws of the State of
Delaware, without regard to principles of conflicts of laws, shall govern this
Agreement to the extent it modifies the Depositary Agreement or the Master
Agreement.
ARTICLE II
AMOUNT AND TERMS OF SECURITIES
2.1 In addition to its obligations under Section 2.3(a) of the Loan
Agreement, with respect to any Project Loan or Screened Project Loan, the
Company shall, on the date required by such Section, deliver a Notice of
Borrowing to each member of the Screening Committee (as defined herein) and to
the Lender.
2.2 In addition to the requirements under 2.3(b) of the Loan
Agreement, each Notice of Borrowing shall describe the proposed use of
proceeds, and shall provide sufficient information to allow the Lender and the
Screening Committee to reasonably determine that the proceeds of the requested
Loan will be used as required by Section 4.1 or 4.3 of this Agreement.
ARTICLE III
ADDITIONAL CONDITIONS OF OBLIGATIONS OF THE LENDER
The obligation of the Lender to make any Loans on or after the date
hereof, including the first Unrestricted Loan, is subject to the fulfillment to
its reasonable satisfaction, or the waiver by the Lender, on or prior to the
applicable Loan Date, of each of the following additional conditions:
(a) The Third Amendment to the May 1998 Securities Purchase
Agreement in the form attached hereto as Exhibit A (the "Investment Agreement")
shall be in full force and effect.
(b) The Furman Selz Entities (as defined in the Investment
Agreement) shall have invested $2,000,000 in the Company in exchange for 7.5%
Convertible Subordinated Notes due July 1, 2004 (the "New Notes") as required
by the Investment Agreement and such other amounts as may be required from time
to time pursuant to the Investment Agreement; the Company and each Furman Selz
Entity shall have performed in all material respects all of their respective
obligations under the Investment Agreement;
3
<PAGE> 6
(c) The Lender shall be reasonably satisfied that the proceeds
of any Unrestricted Loans being made will be used as set forth in Section 4.1
of this Agreement and that the proceeds of any Project Loans or Screened
Project Loans will be used for the purposes approved by the Screening Committee
pursuant to Section 4.3 of this Agreement.
ARTICLE IV
COVENANTS OF THE COMPANY
Subject to Section 6.10 of the Loan Agreement, the Company hereby
covenants and agrees that prior to the Option Expiration Date:
4.1 The Lender agrees that the Company delivered to the Lender on or
about May 19, 1999 a detailed operating plan (designated the 1999 P-I plan)
covering the period ending December 31, 2001 (the "Plan"). Not later than the
first day of each calendar month, the Company shall notify the Lender in
writing of any material changes to the Plan or to the assumptions underlying
the Plan (each such notification, an "Update"). Notwithstanding Section 6.6 of
the Loan Agreement, the Company shall use the proceeds of Unrestricted Loans
only for the purposes specified in the Plan or any Update; provided, however
that the Company shall not make any expenditures that are (in the aggregate)
materially in excess of those contemplated by the Plan (or by any Update that
has previously received Screening Committee Approval (as defined below)) unless
such expenditures shall have received Screening Committee Approval. Prior to
the date (the "Final Launch Date") on which (i) the FDA has granted marketing
approval to the Company for both Primsol and the Orapred refrigerated product
and (ii) both of such products have been commercially launched by the Company,
the Plan and any Updates, shall contemplate only normal operating expenses of
the Company, and expenses related to Primsol and the Orapred refrigerated
product and any other purpose that receives Screening Committee Approval. Prior
to the Final Launch Date, the Company shall not use the proceeds of
Unrestricted Loans, any amounts received pursuant to the Investment Agreement
or any other available funds (other than Project Loans or Screened Project
Loans that receive Screening Committee Approval) for any other purpose,
including, without limitation, any purpose related to Pediavent or the Orapred
non-refrigerated product (other than as reflected in the Plan but not any
Update).
4.2 The Company and the Lender hereby form a committee under this
agreement (the "Screening Committee"), consisting of two nominees of the Company
(who together shall have one vote), one nominee of the Lender (who shall have
one vote) and one nominee of the Furman Selz Entities as a group (who shall
have one vote). The initial nominees of the Company shall be the Chairman and
the President and Chief Executive Officer of the Company. Vacancies on the
Screening Committee shall be filled by the Company, the Lender or the Furman
Selz Entities, as applicable. The Screening Committee is not a committee of the
Company or of the Board of Directors. The nominee of Alpharma shall have no
duty to protect the interests of the Company, its stockholders or any of its
creditors other than the Lender. The nominees of the Company and the Furman
Selz Entities shall have no duty to protect the interests of the Lender.
4
<PAGE> 7
4.3 Except as provided in Section 4.1, the Company shall not (a) use
any funds for any Project or (b) enter into commitments or agreements with
respect to any Project, unless in each ease such action has received Screening
Committee Approval. Notwithstanding Section 6.6 of the Loan Agreement, the
Company shall use the proceeds of any Project Loan or Screened Project Loan
only for purposes that have received Screening Committee Approval. Prior to
the Final Launch Date, "Screening Committee Approval" means approval by all
three votes on the Screening Committee. On and after the Final Launch Date,
"Screening Committee Approval means approval by two of the three votes on the
Screening Committee. The Screening Committee may, in its discretion, refuse to
give Screening Committee Approval to any Project or other action.
ARTICLE V
ADDITIONAL REPRESENTATIONS OF THE COMPANY
The Company represents and warrants to the Lender that the Plan, each
operating budget or business plan required by the Loan Agreement to be
delivered and each Update required by this Agreement to be delivered is or will
be based on underlying assumptions of the Company which provide a reasonable
basis for the projections contained therein and which the Company reasonably
believes are fair and reasonable in light of the historical financial
performance of the Company and of current and reasonably foreseeable business
conditions (based upon the good faith best judgment in respect thereof of the
Chief Executive Officer of the Company).
ARTICLE VI
OTHER AMENDMENTS
6.1 The definition of the term "Option Expiration Date" in the
Depositary Agreement is amended by adding the following text to the end of such
definition:
"or Article III of the Supplemental Agreement dated as of July
1, 1999 among the Company, Alpharma, Alpharma Inc., State Street
Bank and Trust Company and the other parties named on the
signature pages thereof (including, without limitation, the
failure of such condition due to the lack of Screening Committee
Approval (as defined in such agreement))."
6.2 Clause (Y) of the proviso in the definition of the term "Option
Exercise Price" in the Depositary Agreement is amended and restated in its
entirety as follows:
"(Y) with respect to each Depositary Share (the "Series G
Shares") issued or issuable upon conversion of the (I) the
Series C Preferred, (II) any convertible notes issuable upon
exchange of the Series G Preferred or (III) the 7.5% Convertible
5
<PAGE> 8
Subordinated Notes due July 1, 2004, in each case outstanding as
of the Option Closing Date, or issued or issuable upon exercise
of the warrants issued pursuant to the Series G Agreement, as
amended by the third amendment thereto, dated as of June __,
1999 (to the extent any such shares continue to be held as of
the Option Closing Date by one of the purchasers set forth on
Schedule 1 to the Series G Agreement as so amended or an
Affiliate of any such purchasers), the Original Option Exercise
Price; and"
6.3 The Loan Agreement is hereby amended to amend and restate clause
(i) of the definition of "Impairment Event" in its entirety as follows:
"(i) the existence of a Negative Equity Position, provided,
however, that notwithstanding the requirements of GAAP, (A) any
amounts outstanding under the 8% Subordinated Notes, (B) any
amounts outstanding under any debt securities issued upon
conversion or exchange of the Series G Preferred and (C) any
amounts outstanding under the Company's 7.5% Convertible
Subordinated Notes due July 1, 2004 shall be considered to be
equity for purposes of this clause only;"
6.4 The Loan Agreement is hereby amended to amend and restate the
definition of "Negative Equity Position" in its entirety as follows:
"'Negative Equity Position' means the existence of a
stockholders' deficit on the Company's balance sheet, determined
in accordance with GAAP, as of (i) the last day of any monthly
fiscal period or (ii) if so requested by the Lender or the
Original Lenders (as defined in the Subordination Agreement) at
any time when the maximum amount of Unrestricted Loans is
outstanding, the latest practicable date."
6.5 The Lender consents to the Company entering into the Investment
Agreement and consummating the transactions contemplated thereby. Subject to
Section 6.10 of the Loan Agreement, the Company hereby covenants and agrees
that any amendment to the Investment Agreement or the New Notes shall require
the consent of the Lender.
6.6 Section 7.1 of the Loan Agreement is hereby amended to add a
new subsection (i) to read as follows:
"(i) Indebtedness incurred pursuant to the Third Amendment to
the May 1998 Securities Purchase Agreement"
6.7 Subject to Section 6.10 of the Loan Agreement, the Company hereby
covenants and agrees that (a) all amounts required to be invested in the
Company from time to time pursuant to the Investment Agreement shall be so
invested, (b) the Company shall not make any payments on the 8% Subordinated
Notes, the convertible notes issuable pursuant to the May 1998 Securities
Purchase Agreement or the New Notes except pursuant to their terms on the date
hereof.
6
<PAGE> 9
6.8 The Subordination Agreement is hereby amended to include the New
Notes in the definition of "Furman Notes."
6.9 The Subordination Agreement is hereby amended to add the
following sentence to the end of Section 2.1:
"To the extent the Company makes any payment of principal or
interest on the Furman Notes in contravention of this paragraph,
the Original Lenders shall promptly repay such amounts to the
Company."
7
<PAGE> 10
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the day and year first above set forth.
ASCENT PEDIATRICS, INC.
By: /s/ Alan R. Fox
------------------------------------
Name: Alan R. Fox
Title: President and Chief Executive
Officer
ALPHARMA USPD INC.
By: /s/ Thomas L. Anderson
------------------------------------
Name: Thomas L. Anderson
Title: President
ALPHARMA INC.
By: /s/ Jeffrey E. Smith
------------------------------------
Name: Jeffrey E. Smith
Title: V.P. Finance
STATE STREET BANK AND TRUST
COMPANY
By: /s/ Charles Rossi
------------------------------------
Name: Charles Rossi
Title:
8
<PAGE> 11
ORIGINAL LENDERS:
FURMAN SELZ INVESTORS II L.P.
FS EMPLOYEE INVESTORS L.L.C.
FS PARALLEL FUND L.P.
By: FS PRIVATE INVESTMENTS LLC MANAGER
By: /s/ James L. Luikart
------------------------------------
Name: James L. Luikart
Title: Managing Member
BANCBOSTON VENTURES INC.
By: /s/ Marcia T. Baks
------------------------------------
Name: Marcia T. Baks
Title: Managing Director
FLYNN PARTNERS
By: /s/ James F. Flynn
------------------------------------
Name: James F. Flynn
Title: General Partner/Flynn Partners
9
