Page 24 of 24
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
March 31, 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 April 30, 1999:
Class A Common Stock, $.20 par value -- 18,004,928 shares;
Class B Common Stock, $.20 par value -- 9,500,000 shares.
ALPHARMA INC.
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheet as of
March 31, 1999 (restated) and December 31, 1998 3
Consolidated Statement of Income for the
Three Months Ended March 31, 1999 (restated) and
1998 4
Consolidated Condensed Statement of Cash
Flows for the Three Months Ended March 31,
1999 (restated) and 1998 5
Notes to Consolidated Condensed Financial
Statements 6-15
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 16-23
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 23
Signatures 24
ALPHARMA INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEET
(In thousands of dollars)
(Unaudited)
March 31,
1999 December 31,
(Restated) 1998
ASSETS
Current assets:
Cash and cash equivalents $ 11,266 $ 14,414
Accounts receivable, net 145,025 169,744
Inventories 140,923 138,318
Prepaid expenses and other
current assets 12,226 13,008
Total current assets 309,440 335,484
Property, plant and equipment, net 237,694 244,132
Intangible assets, net 304,098 315,709
Other assets and deferred charges 23,731 13,611
Total assets $874,963 $908,936
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 9,852 $ 12,053
Short-term debt 17,769 41,921
Accounts payable and accrued expenses 101,201 105,679
Accrued and deferred income taxes 6,514 10,784
Total current liabilities 135,336 170,437
Long-term debt:
Senior 236,484 236,184
Convertible subordinated notes,
including $67,850 to related party 192,850 192,850
Deferred income taxes 31,180 31,846
Other non-current liabilities 9,178 10,340
Stockholders' equity:
Class A Common Stock 3,640 3,551
Class B Common Stock 1,900 1,900
Additional paid-in-capital 230,228 219,306
Accumulated other comprehensive
loss (22,249) (7,943)
Retained earnings 62,600 56,649
Treasury stock, at cost (6,184) (6,184)
Total stockholders' equity 269,935 267,279
Total liabilities and
stockholders' equity $874,963 $908,936
The accompanying notes are an integral part
of the consolidated condensed financial statements.
ALPHARMA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(In thousands, except per share data)
(Unaudited)
Three Months Ended
March 31,
1999
(Restated) 1998
Total revenue $155,949 $126,562
Cost of sales 87,941 73,145
Gross profit 68,008 53,417
Selling, general and
administrative expenses 50,071 40,007
Operating income 17,937 13,410
Interest expense (7,466) (4,490)
Other, net 943 (201)
Income before provision for income taxes 11,414 8,719
Provision for income taxes 4,216 3,317
Net income $7,198 $5,402
Earnings per common share:
Basic $ 0.26 $ 0.21
Diluted $ 0.26 $ 0.21
Dividend per common share $ .045 $ .045
The accompanying notes are an integral part
of the consolidated condensed financial statements.
ALPHARMA INC. AND SUBSIDIARIES
CONSOLIDATED CONSENSED STATEMENT OF CASH FLOWS
(In thousands of dollars)
(Unaudited)
Three Months Ended
March 31,
1999
(Restated)1
998
Operating Activities:
Net income $7,198 $5,402
Adjustments to reconcile net
income to net cash provided
by operating activities, principally
depreciation and amortization 10,582 7,969
Changes in assets and liabilities,
net of effects from business
acquisitions:
Decrease in accounts receivable 18,414 12,619
(Increase) in inventory (7,400) (4,751)
(Decrease) in accounts payable,
accrued expenses and taxes payable (3,780) (5,679)
Other, net (870) (1,460)
Net cash provided by
operating activities 24,144 14,100
Investing Activities:
Capital expenditures (6,739) (6,364)
Loan to Ascent Pediatrics (4,000) -
Net cash used in investing
activities (10,739) (6,364)
Financing Activities:
Dividends paid (1,247) (1,142)
Proceeds from sale of convertible
subordinated debentures - 192,850
Proceeds from senior long-term debt 187,000 -
Reduction of senior long-term debt (187,673) (166,829)
Net repayments under lines of credit (22,777) (30,028)
Payments for debt issuance costs (3,104) (3,750)
Proceeds from issuance of common stock 11,011 699
Net cash used in financing activities(16,790) (8,200)
Exchange Rate Changes:
Effect of exchange rate changes
on cash (824) (373)
Income tax effect of exchange rate
changes on intercompany advances 1,061 339
Net cash flows from exchange
rate changes 237 (34)
Decrease in cash (3,148) (498)
Cash and cash equivalents at
beginning of year 14,414 10,997
Cash and cash equivalents at
end of period $ 11,266 $ 10,499
The accompanying notes are an integral part
of the consolidated condensed financial statements.
1A. 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
month period ended March 31, 1999 are not necessarily indicative
of the results to be expected for the full year.
1B. Restatement of Financial Statements
In the third quarter of 2000 the Company discovered that
with respect to its Brazilian AHD operations, which reported
revenues of approximately $1,800, $6,000 and $13,700 for the
years 1997, 1998, and 1999, respectively, a small number of
employees collaborated to circumvent established company policies
and controls to create invoices that were either not supported by
underlying transactions or for which the recorded sales were
inconsistent with the underlying transactions.
A full investigation of the matter with the assistance of
counsel and the company's independent auditors was initiated and
completed. As a result, the individuals responsible have been
removed, new management has been appointed to supervise AHD
Brazilian operations and the Company has restated all affected
periods, comprising all four quarters of 1999 and the first two
quarters of 2000.
A summary of the effects of the restatement adjustments on
the accompanying balance sheet as of March 31, 1999 and statement
of income for the three months ended March 31, 1999 follows:
March 31, 1999
Reported Reported
ASSETS:
Accounts receivable $145,844 $145,025
Inventory 140,492 140,923
Other current assets 23,492 23,492
Current assets 309,828 309,440
Non current assets 565,523 565,523
Total assets $875,351 $874,963
LIABILITIES AND EQUITY:
Current liabilities $135,482 $135,336
Long-term debt 429,334 429,334
Deferred taxes and other 40,358 40,358
Cumulative translation adj. (22,245) (22,249)
Stockholders' equity 292,422 292,184
Total liabilities &
equity $875,351 $874,963
Three Months Ended
March 31, 1999
Reported Restated
Total revenue $156,759 $155,949
Cost of sales 88,367 87,941
Gross profit 68,392 68,008
Selling, general &
administrative
expenses 50,071 50,071
Operating income 18,321 17,937
Interest expense (7,466) (7,466)
Other, net 943 943
Income before
provision for
income taxes 11,798 11,414
Provision for
income taxes 4,362 4,216
Net income $ 7,436 $ 7,198
Earnings per
common share:
Basic $0.27 $0.26
Diluted $0.27 $0.26
2. Inventories
Inventories consist of the following:
March 31, December 31,
1999 1998
Finished product $ 78,400 $68,834
Work-in-process 28,835 25,751
Raw materials 33,688 43,733
$140,923 $138,318
3. Long-Term Debt
In January 1999, the Company signed a $300,000 credit
agreement ("1999 Credit Facility") with a consortium of banks
arranged by the Union Bank of Norway, Den norske Bank A.S., and
Summit Bank. The agreement replaced the prior revolving credit
facility and a U.S. short-term credit facility and increased
overall credit availability. The prior revolving credit facility
was repaid in February 1999 by drawing on the 1999 Credit
Facility.
The 1999 Credit Facility provides for (i) a $100,000 six
year Term Loan; and (ii) a revolving credit agreement of
$200,000 with an initial term of five years with two possible
one year extensions.
The 1999 Credit Facility has several financial covenants,
including an interest coverage ratio, total debt to earnings
before interest, taxes, depreciation and amortization
("EBITDA"), and equity to asset ratio.
Interest on the facility will be at the LIBOR rate with a
margin of between .875% and 1.6625% depending on the ratio of
total debt to EBITDA.
Long-term debt consists of the following:
March 31, December 31,
1999 1998
Senior debt:
U.S. Dollar Denominated:
1999 Revolving Credit Facility (6.6%) $187,000 -
Prior Revolving Credit Facility
(6.6 - 7.0%) - $180,000
A/S Eksportfinans - 7,200
Industrial Development Revenue Bonds:
Baltimore County, Maryland
(7.25%) 4,565 4,565
(6.875%) 1,200 1,200
Lincoln County, NC 4,500 4,500
Other, U.S. 265 504
Denominated in Other Currencies:
Mortgage notes payable (NOK) 41,067 42,224
Bank and agency development loans (NOK) 7,719 7,991
Other, foreign 20 53
Total senior debt 246,336 248,237
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
Total subordinated debt 192,850 192,850
Total long-term debt 439,186 441,087
Less, current maturities 9,852 12,053
$429,334 $429,034
4. Earnings Per Share
Basic earnings per share is based upon the weighted average
number of common shares outstanding. Diluted earnings per share
reflect the dilutive effect of stock options, warrants and
convertible debt when appropriate.
A reconciliation of weighted average shares outstanding for
basic to diluted weighted average shares outstanding is as
follows:
(Shares in thousands) Three Months Ended
March 31, March 31,
1999 1998
Average shares outstanding - basic 27,255 25,350
Stock options 430 172
Warrants - 191
Convertible debt -___ -___
Average shares outstanding - diluted 27,685 25,713
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 outstanding at March 31,
1999 and 1998 but was not included in the computation of diluted
EPS because the calculation of the assumed conversion was
antidilutive for the three months ended March 31, 1999 and 1998.
The numerator for the calculation of both basic and diluted is
net income for the period.
5. Supplemental Data
Three Months Ended
March 31, March 31,
1999 1998
Other income (expense), net:
Interest income $ 186 $ 80
Foreign exchange losses, net (297) (208)
Amortization of debt costs (279) (75)
Litigation settlement 1,000 -
Income from joint venture
carried at equity 300 -
Other, net 33 2
$ 943 $(201)
Supplemental cash flow information:
Cash paid for interest (net amount
capitalized) $3,521 $6,747
Cash paid for income taxes (net of
refunds) $5,648 $1,948
6. 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 loss amounted to approximately $7,109 and $182 for
the three months ended March 31, 1999 and 1998, respectively. The
only components of accumulated other comprehensive loss for the
Company are foreign currency translation adjustments.
7. Contingent Liabilities and Litigation
The Company is one of multiple defendants in 80 lawsuits
alleging personal injuries and seven class actions for medical
monitoring resulting from the use of phentermine distributed by
the Company and subsequently prescribed for use in combination
with fenflurameine or dexfenfluramine manufactured and sold by
other defendants (Fen-Phen Lawsuits). None of the plaintiffs have
specified an amount of monetary damage. Because the Company has
not manufactured, but only distributed phentermine, it has
demanded defense and indemnification from the manufacturers and
the insurance carriers of manufacturers from whom it has
purchased the phentermine. The Company has received a partial
reimbursement of litigation costs from one of the manufacturer's
carriers. The plaintiff in 34 of these lawsuits has agreed to
dismiss the Company without prejudice but such dismissals must be
approved by the Court. Based on an evaluation of the
circumstances as now known, including but not solely limited to,
1) the fact that the Company did not manufacture phentermine, 2)
it had a diminimus share of the phentermine market and 3) the
presumption of some insurance coverage, the Company does not
expect that the ultimate resolution of the current Fen-Phen
lawsuits will have a material impact on the financial position or
results of operations of the Company.
Bacitracin zinc, one of the Company's feed additive products
has been banned from sale in the European Union (the "EU")
effective July 1, 1999. While no assurance of success can be
given, the Company is actively pursuing initiatives based on
scientific evidence available for the product, to limit the
effects of this ban. 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.
8. Business Acquisition
On May 7, 1998, the Company acquired all of the capital
stock of Cox Investments Ltd. and its wholly owned subsidiary,
Arthur H. Cox and Co., Ltd. and all of the capital stock of
certain related marketing subsidiaries ("Cox") from Hoechst AG
for 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.
The following pro forma information on results of
operations for the period presented assumes the purchase of Cox
as if the companies had combined at the beginning of 1998:
Pro Forma
Three Months Ended
March 31,1998
(Unaudited)
Revenues $149,500
Net income $4,150
Basic EPS $0.16
Diluted EPS $0.16
9. Business Segment Information
The Company's reportable segments are five decentralized
divisions (i.e. International Pharmaceuticals Division ("IPD"),
Fine Chemicals Division ("FCD"), U.S. Pharmaceuticals Division
("USPD"), Animal Health Division ("AHD") and Aquatic Animal
Health Division ("AAHD"). Each division has a president and
operates in distinct business and/or geographic area. Segment
data includes immaterial intersegment revenues which are
eliminated in the consolidated accounts.
The operations of each segment are evaluated based on
earnings before interest and taxes. Corporate expenses and
certain other expenses or income not directly attributable to
the segments are not allocated.
Three Months Ended March 31,
1999 1998 1999 1998
Revenues Income
IPD $60,145 $35,362 $5,457 $1,980
USPD 39,436 37,041 2,121 720
FCD 15,433 12,281 5,754 3,591
AHD 39,661 (1) 38,947 8,966(1) 8,285
AAHD 2,112 3,718 (920) (3)
Unallocated and
eliminations (838) (787) (2,498) (1,364)
$155,949(1) $126,562
Interest expense (7,466) (4,490)
Pretax income $11,414(1) $ 8,719
(1) Restated
10. Strategic Alliances
Joint Venture:
In January 1999, the AHD contributed the distribution
business of its Wade Jones Company ("WJ") into a partnership
with G&M Animal Health Distributors and T&H Distributors. The WJ
distribution business which was merged had annual sales of
approximately $30,000 and assets (primarily accounts receivable
and inventory) of less than $10,000. The Company owns 50% of the
new entity, WYNCO LLC ("WYNCO"). The Company accounts for its
interest in WYNCO under the equity method.
WYNCO is a regional distributor of animal health products
and services primarily to integrated poultry and swine producers
and independent dealers operating in the Central South West and
Eastern regions of the U.S. WYNCO is the exclusive distributor
for the Company's animal health products. Manufacturing and
premixing operations at WJ remain part of the Company.
Ascent Loan Agreement and Option:
On February 4, 1999, the Company entered into a loan
agreement with Ascent Pediatrics, Inc. ("Ascent") under which the
Company will 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. As of March 31, 1999, the
Company has advanced $4,000 to Ascent under the agreement.
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 transactions are subject to the approval of Ascent's
stockholders at a meeting expected to be held during the second
quarter of 1999.
11. Subsequent Event
In April 1999, the Company's IPD purchased the generic
pharmaceutical business Jumer Laboratories SARL and related
companies of the Cherqui group in Paris, France. The Cherqui
group generated revenues in 1998 of approximately $10.0 million.
The acquisition consisted of products, trademarks and
registrations and will be accounted for in accordance with the
purchase method.
12. 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 is effective for all fiscal
quarters of all fiscal years beginning after June 15, 1999
(January 1, 2000 for the Company). SFAS 133 requires that all
derivative instruments be recorded on the balance sheet at their
fair value. Changes in the fair value of derivatives are
recorded each period in current earnings or other comprehensive
income, depending on whether a derivative is designated as part
of a hedge transaction and, if it is, the type of hedge
transaction.
SFAS 133 is not expected to have a material impact on the
Company's consolidated results of operations, financial position
or cash flows.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
(All 1999 amounts have been restated as appropriate. See Note 1B
to the Consolidated Condensed Financial Statements.)
Overview
Operations in the first quarter of 1999 improved relative to
the comparable quarter in 1998 and included a number of
significant transactions which we believe will enhance future
growth. Such transactions include:
1999
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, 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 completed negotiations to replace
its revolving credit facility and existing domestic short
term credit lines with a comprehensive syndicated facility
which provides for increased borrowing capacity of up to
$300.0 million.
In February, USPD entered into an agreement with Ascent
Pediatrics, Inc., a branded pediatric pharmaceutical
company, under which USPD will provide up to $40 million in
loans in the form of convertible debenture to Ascent. In
addition, the Company will have the option to acquire
Ascent in 2002 for a price based on Ascent's operating
income. These transactions are subject to the approval of
Ascent's stockholders.
In April, IPD purchased a French generic pharmaceutical
business. The cash required to acquire the business and
repay existing loans was approximately $26.0 million.
Results of Operations - Three Months Ended March 31, 1999
Total revenue increased $29.4 million (23.2%) in the three
months ended March 31, 1999 compared to 1998. Operating income
in 1999 was $17.9 million, an increase of $4.5 million, compared
to 1998. Net income was $7.2 million ($.26 per share diluted)
compared to $5.4 million ($.21 per share diluted) in 1998.
Revenues increased in the Human Pharmaceuticals business by
$30.4 million and were slightly 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 three month period ended March
31, 1999 compared to March 31, 1998 are as follows:
Revenues in IPD increased by $24.8 million due primarily to
the Cox acquisition in 1998 ($26.7 million) and the introduction
of new products offset partially by lower volume in certain
markets. Revenues in FCD increased by $3.2 million due mainly to
volume increases in vancomycin and polymyxin. USPD revenues
increased $2.4 million due to volume increases in new products
and revenue from licensing activities offset partially by lower
net pricing. AHD revenues increased $.7 million due to increased
volume in the poultry and cattle markets offset partially 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 $1.6 million lower
due to market developments which resulted in lower vaccine volume
in the Norwegian salmon market.
On a consolidated basis, gross profit increased $14.6
million and the gross margin percent increased to 43.6% in 1999
compared to 42.2% in 1998.
A major portion of the increase in dollars results from the
Cox acquisition. 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 $10.1 million and represented
32.1% of revenues in 1999 compared to 31.6% in 1998.
Approximately half of the increase is attributable to the Cox
acquisition. 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 increased
incentive programs.
Operating income increased $4.5 million (33.8%). IPD
accounted for $3.5 million of the increase primarily due to Cox
operating income. Increases were recorded by AHD due primarily
to increased volume, by USPD due to new products and licensing
activities, 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 $3.0 million due
primarily to debt incurred to finance the acquisition of Cox and
other 1998 acquisitions offset partially by increased cash flow
in 1999 which lowered overall debt levels relative to year end
1998.
Other, net was $.9 million income in 1999 compared to ($.2)
million expense in 1998. 1999 included patent litigation
settlement income of $1.0 million and equity income from the
Wynco joint venture of $.3 million.
Management Actions
The dynamic nature of our business gives rise, from time to
time, to additional opportunities to rationalize personnel
functions and operations to increase efficiency and
profitability. Management is continuously reviewing these
opportunities and may take actions in the future which could be
material to the results of operations in the quarter they are
announced.
Year 2000
General
The Year 2000 ("Y2K") issue is primarily the result of
certain computer programs and embedded computer chips being
unable to distinguish between the year 1900 and 2000. As a
result, the Company along with all other business and
governmental entities, is at risk for possible miscalculations
of a financial nature and systems failures which may cause
disruptions in its operations. The Company can be affected by
the Y2K readiness of its systems or the systems of the many
other entities with which it interfaces, directly or indirectly.
The Company began its program to address its potential Y2K
issues in late 1996 and has organized its activities to prepare
for Y2K at the division level. The divisions have focused their
efforts on three areas: (1) information systems software and
hardware; (2) manufacturing facilities and related equipment;
(i.e. embedded technology) and (3) third-party relationships
(i.e. customers, suppliers, and other). Information system and
hardware Y2K efforts are being coordinated by an IT steering
committee composed of divisional personnel.
The Company and the divisions have organized their
activities and are monitoring their progress in each area by the
following four phases:
Phase 1: Awareness/Assessment - identify, quantify and
prioritize business and financial risks by area.
Phase 2: Budget/Plan/Timetable - prepare a plan including costs
and target dates to address phase 1 exposures.
Phase 3: Implementation - execute the plan prepared in phase 2.
Phase 4: Testing/Validation - test and validate the implemented
plans to insure the Y2K exposure has been eliminated
or mitigated.
State of Readiness
The Company summarizes its divisions' state of readiness
March 31, 1999 as follows:
Information Systems and Hardware
Quarter forecasted
Approximate range for substantial
Phase of completion completion
1 100% Completed
2 100% Completed
3 70 - 80% 2nd Quarter 1999
4 50 - 90% 3rd Quarter 1999
Embedded Factory Systems
Quarter forecasted
Approximate range for substantial
Phase of completion completion
1 100% Completed
2 100% Completed
3 50 - 85% 3rd Quarter 1999
4 50 - 85% 3rd Quarter 1999
Third Party Relationships
Quarter forecasted
Approximate range for substantial
Phase of completion completion
1 50 - 100% (a) 2nd Quarter 1999(a)
2 55 - 90% (a) 2nd Quarter 1999 (a)
3 (a) (b) (a) (b)
4 (a) (b) (a) (b)
(a)Refers to significant identified risks - (e.g. customers,
suppliers of raw materials and providers of services) does
not include exposures that relate to interruption of utility
or government provided services.
(b)Awaiting completion of vendor response and follow-up due
diligence to Y2K readiness surveys.
Cost
The Company expects the costs directly associated with its
Y2K efforts to be between $3.0 and $4.0 million of which
approximately $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 has identified the following significant
reasonably possible Y2K problems and is considering related
contingency plans.
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. Since various drug regulations will make the
establishment of alternative supply sources difficult, the
Company is considering building inventory levels of critical
materials prior to December 31, 1999.
Possible problem: the failure to properly interface caused
by noncompliance of significant customer operated electronic
ordering systems. The Company is considering plans to manually
process orders until these systems become compliant.
Possible problem: the shutdown or malfunctioning of Company
manufacturing equipment. The Company will advance internal clocks
to the year 2000 on certain key equipment during scheduled plant
shutdowns in 1999 to determine the effect on operations and
develop plans, as necessary, for manual operations or third party
contract manufacturing.
Based on the assessment efforts to date, the Company does
not believe that the Y2K issue will have a material adverse
effect on its financial condition or results of operation. The
Company believes that any effect of the Year 2000 issue will be
mitigated because of the Company's divisional operating structure
which is diverse both geographically and with respect to customer
and supplier relationships. Therefore, the adverse effect of most
individual failures should be isolated to an individual product,
customer or Company facility. However, there can be no assurance
that the systems of third-parties on which the Company relies
will be converted in a timely manner, or that a failure to
properly convert by another company would not have a material
adverse effect on the Company.
The Company's Y2K program is an ongoing process that may
uncover additional exposures and all estimates of costs and
completion are subject to change as the process continues.
Financial Condition
Working capital at March 31, 1999 was $174.1 million
compared to $165.0 million at December 31, 1998. The current
ratio was 2.29 to 1 at March 31, 1999 compared to 1.97 to 1 at
year end. Long-term debt to stockholders' equity was 1.59:1 at
March 31, 1999 compared to 1.61:1 at December 31, 1998.
All balance sheet captions decreased as of March 31, 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 three months of 1999 by
approximately 2%, 8% and 3%, respectively. In addition, the
Company's operations in Indonesia and Brazil were negatively
affected due to the decline of their currencies versus the U.S.
Dollar. The decreases do impact to some degree the above
mentioned ratios. The approximate decrease due to currency
translation of selected captions was: accounts receivable $3.1
million, inventories $2.7 million, accounts payable and accrued
expenses $2.3 million, and total stockholders' equity $14.3
million. The $14.3 million decrease in stockholder's equity
represents accumulated other comprehensive loss for the three
months ended March 31, 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 will provide up to $40 million in loans to Ascent to be
evidenced by 7 1/2% convertible subordinated notes due 2005. Up
to $12 million of the proceeds of the loans can be used for
general corporate purposes, with $28 million of proceeds
reserved for projects and acquisitions intended to enhance
growth of Ascent. While exact timing cannot be predicted, it is
expected the $40.0 million will be advanced in the next two
years. As of March 31, 1999, $4.0 million has been advanced and
in the third and fourth quarters of 1999 additional amounts are
expected to be advanced. The outstanding loan and future loans
to Ascent are subject to a normal risk of collectibility. In
addition, the Company may be required to recognize losses to the
extent Ascent has accumulated losses in excess of its
stockholders' equity and indebtedness subordinate to our loan.
The Company can limit loans to Ascent in certain circumstances.
At March 31, 1999, the Company had $11.3 million in cash
and approximately $125.0 million available under existing
European lines of credit and its $300.0 million credit facility.
The Company believes that the combination of cash from operations
and funds available under existing lines of credit will be
sufficient to cover its currently planned operating needs and
smaller acquisitions.
In April 1999, the Company acquired a generic
pharmaceutical business in France. The cash required to acquire
the business and repay existing loans totaled $26.0 million and
was funded through existing credit lines.
The Company expects to continue its pursuit of
complementary acquisitions or alliances, particularly in human
pharmaceuticals, that can provide new products and market
opportunities as well as leverage existing assets. In order to
accomplish any significant acquisition, it is likely that the
Company will need to obtain additional financing in the form of
equity related securities and/or borrowings. Any significant new
borrowing require the Company meet the debt covenants included in
the 1999 Credit Facility which provide for varying interest rates
based on the ratio of total debt to EBITDA.
The Company is evaluating and actively pursuing a number of
acquisitions but has not reached any definitive agreements or
understandings. To provide financing flexibility for possible
acquisitions the Company is presently planning a convertible
debenture issue of approximately $170.0 million in the second
quarter of 1999. One of the possible acquisitions could require
the use of a substantial portion of the planned financing.
Statements made in this Form 10-Q/A, are forward-looking
statements made pursuant to the safe harbor provisions of the
Securities Litigation Reform Act of 1995. Such statements involve
certain risks and uncertainties that could cause actual results
to differ materially from those in the forward looking
statements. Information on other significant potential risks and
uncertainties not discussed herein may be found in the Company's
filings with the Securities and Exchange Commission including its
Form 10K for the year ended December 31, 1998.
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Financial Data Schedule (electronic filing only).
(b) Reports on Form 8-K
On February 23, 1999, the Company filed a report on Form 8-K
dated February 16, 1999 reporting Item 5. "Other Events".
The event reported was a loan agreement between the Company
and Ascent Pediatrics, Inc.
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: December 4, 2000 /s/ Jeffrey E. Smith
Jeffrey E. Smith
Vice President, Finance and
Chief Financial Officer
