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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant To Section 13 or 15 (d) of
the Securities Exchange Act of 1934
For quarter ended Commission file number 1-8593
September 30, 2000
Alpharma Inc.
(Exact name of registrant as specified in its charter)
Delaware 22-2095212
(State of Incorporation) (I.R.S. Employer Identification No.)
One Executive Drive, Fort Lee, New Jersey 07024
(Address of principal executive offices) Zip Code
(201) 947-7774
(Registrant's Telephone Number Including Area Code)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15 (d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such requirements
for the past 90 days.
YES X NO
Indicate the number of shares outstanding of each of the
Registrant's classes of common stock as of November 3, 2000.
Class A Common Stock, $.20 par value - 30,685,333 shares;
Class B Common Stock, $.20 par value - 9,500,000 shares
ALPHARMA INC.
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheet as of
September 30, 2000 and December 31, 1999
(restated) 3
Consolidated Statement of Income for the
Three and Nine Months Ended September 30,
2000 and 1999 (restated) 4
Consolidated Condensed Statement of Cash
Flows for the Nine Months Ended September 30,
2000 and 1999 (restated) 5
Notes to Consolidated Condensed Financial
Statements 6-19
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 20-27
Item 3. Quantitative and Qualitative Disclosures 28
about Market Risk
PART II. OTHER INFORMATION
Item 4. Results of Votes of Security Holders 29
Item 6. Exhibits and reports on Form 8-K 29
Signatures 29
ALPHARMA INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEET
(In thousands of dollars)
(Unaudited)
December 31,
September 30, 1999
2000 (Restated)
ASSETS
Current assets:
Cash and cash equivalents $ 95,583 $ 17,655
Accounts receivable, net 270,250 189,261
Inventories 239,336 161,033
Prepaid expenses and other 12,872 13,923
Total current assets 618,041 381,872
Property, plant and equipment, net 324,119 244,413
Intangible assets, net 607,072 488,958
Other assets and deferred charges 62,619 45,023
Total assets $1,611,851 $1,160,266
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $50,614 $ 9,111
Short-term debt 2,717 4,289
Accounts payable and accrued expenses163,514 135,281
Accrued and deferred income taxes 16,698 15,595
Total current liabilities 233,543 164,276
Long-term debt:
Senior 129,997 225,110
Convertible subordinated notes,
including $67,850 to related
party 371,826 366,674
Deferred income taxes 32,023 35,065
Other non-current liabilities 21,646 17,208
Stockholders' equity:
Class A Common Stock 6,193 4,078
Class B Common Stock 1,900 1,900
Additional paid-in-capital 791,105 297,780
Accumulated other comprehensive
loss (92,988) (34,201)
Retained earnings 123,549 88,560
Treasury stock, at cost (6,943) (6,184)
Total stockholders' equity 822,816 351,933
Total liabilities and
stockholders' equity $1,611,851 $1,160,266
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 Nine Months Ended
September 30, September 30,
1999 1999
2000 Restated 2000 Restated
Total revenue $252,634 $199,829 $662,751 $517,995
Cost of sales 139,461 106,972 360,460 283,970
Gross profit 113,173 92,857 302,291 234,025
Selling, general and
administrative expenses 71,757 64,664 203,147 167,478
Operating income 41,416 28,193 99,144 66,547
Interest expense (11,324) (11,257) (35,237) (27,580)
Other income (expense), (511) (673) (4,420) 248
net
Income before provision for
income taxes 29,581 16,263 59,487 39,215
Provision for income 9,286 5,890 19,783 14,276
taxes
Net income $20,295 $10,373 $39,704 $ 24,939
Earnings per common share:
Basic $ .54 $ .38 $ 1.19 $ .91
Diluted $ .48 $ .35 $ 1.11 $ .88
Dividends per common share $ .045 $ .045 $ .135 $ .135
The accompanying notes are an integral part
of the consolidated condensed financial statements.
ALPHARMA INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(In thousands of dollars)
(Unaudited)
Nine Months Ended
September 30,
1999
2000 (Restated)
Operating Activities:
Net income $ 39,704 $ 24,939
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization 49,758 35,952
Stock option income tax benefits 6,189 1,631
Interest accretion on long-term debt 5,207 2,159
Changes in assets and liabilities,
net of effects from business
acquisitions:
(Increase) in accounts receivable (89,125) (2,671)
(Increase)decrease in inventories (49,164) (16,938)
Increase in accounts payable, accrued
expenses and taxes payable 39,131 920
Other, net 1,493 2,929
Net cash provided by
operating activities 3,193 48,921
Investing Activities:
Capital expenditures (57,516) (23,332)
Loans to Ascent Pediatrics (1,500) (7,000)
Purchase of businesses and intangible
assets, net of cash acquired (268,711) (203,408)
Net cash used in investing activities(327,727) (233,740)
Financing Activities:
Dividends paid (4,715) (3,726)
Proceeds from sale of convertible
subordinated notes - 170,000
Proceeds from senior long-term debt 128,000 317,000
Reduction of senior long-term debt (206,241) (279,619)
Net repayments under lines of credit (1,072) (15,609)
Payments for debt issuance costs (747) (8,757)
Proceeds from issuance of common stock 489,196 14,264
Purchase of treasury stock (759) -
Net cash provided by
financing activities 403,662 193,553
Exchange Rate Changes:
Effect of exchange rate changes
on cash (2,913) (965)
Income tax effect of exchange rate
changes on intercompany advances 1,713 1,122
Net cash flows from exchange
rate changes (1,200) 157
Increase in cash 77,928 8,891
Cash and cash equivalents at
beginning of year 17,655 14,414
Cash and cash equivalents at
end of period $ 95,583 $23,305
The accompanying notes are an integral part
of the consolidated condensed financial statements.
1. General
The accompanying consolidated condensed financial statements
include all adjustments (consisting only of normal recurring
accruals) which are, in the opinion of management, considered
necessary for a fair presentation of the results for the periods
presented. These financial statements should be read in
conjunction with the consolidated financial statements of
Alpharma Inc. and Subsidiaries included in the Company's 1999
Annual Report on Form 10-K/A. The reported results for the three
and nine month periods ended September 30, 2000 are not
necessarily indicative of the results to be expected for the full
year.
2. 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 December 31, 1999 and
statements of income for the three and nine month periods ended
September 30, 1999 follows:
December 31, 1999
Reported Restated
ASSETS:
Accounts receivable, net $199,207 $189,261
Inventories 155,338 161,033
Other current assets 31,578 31,578
Current assets 386,123 381,872
Non current assets 778,394 778,394
Total assets $1,164,517 $1,160,266
LIABILITIES AND EQUITY:
Current liabilities $165,856 $164,276
Long-term debt 591,784 591,784
Deferred taxes and other 52,273 52,273
Cumulative translation adj. (34,109) (34,201)
Stockholders' equity 388,713 386,134
Total liabilities &
equity $1,164,517 $1,160,266
Three Months Ended Nine Months Ended
September 30, 1999 September 30, 1999
Reported Restated Reported Restated
Total revenue $203,131 $199,829 $523,729 $517,995
Cost of sales 108,838 106,972 287,233 283,970
Gross profit 94,293 92,857 236,496 234,025
Selling, general &
administrative
expenses 64,664 64,664 167,478 167,478
Operating income 29,629 28,193 69,018 66,547
Interest expense (11,257) (11,257) (27,580) (27,580)
Other, net (673) (673) 248 248
Income before
provision for
income taxes 17,699 16,263 41,686 39,215
Provision for
income taxes 6,436 5,890 15,215 14,276
Net income $ 11,263 $ 10,373 $ 26,471 $ 24,939
Earnings per
common share:
Basic $0.41 $0.38 $0.96 $0.91
Diluted $0.38 $0.35 $0.93 $0.88
3. Inventories
Inventories consist of the following:
December 31,
September 30, 1999
2000 (Restated)
Finished product $146,890 $ 94,189
Work-in-process 32,173 28,938
Raw materials 60,273 37,906
$239,336 $161,033
4. Business Acquisitions
2000
Roche MFA and Bridge Financing:
On May 2, 2000, Alpharma announced the completion of the
acquisition of the Medicated Feed Additive Business of Roche
Ltd.("MFA") for a cash payment of approximately $258,000 and
issuance of a $30,000 promissory note to Roche. The Note is due
December 31, 2000 and bears interest at the Prime rate. The
purchase price will be adjusted based on actual product
inventories as of May 2, 2000. In addition certain international
inventories were purchased from Roche during a transition period
of approximately three months.
The MFA business had 1999 sales of $213,000 and consists of
products used in the livestock and poultry industries for
preventing and treating diseases in animals. MFA sales by region
are approximately 56% in North America, 20% in Europe and 12% in
both Latin America and Southeast Asia.
The acquisition included inventories, five manufacturing and
formulation sites in the United States, global product
registrations, licenses, trademarks and associated intellectual
property. Approximately 200 employees primarily in manufacturing
and sales and marketing are included in the acquisition.
The acquisition has been accounted for in accordance with
the purchase method. The fair value of the assets acquired and
liabilities assumed based on a preliminary allocation and the
results of the acquired business operations are included in the
Company's consolidated financial statements beginning on the
acquisition date. The Company is amortizing the acquired
intangibles and goodwill based on lives of 5 to 20 years (average
approximately 18 years) using the straight line method.
The Company financed the $258,000 cash payment under a
$225,000 Bridge Financing agreement ("Bridge Financing") with the
balance of the financing being provided under its then current
$300,000 credit facility ("1999 Credit Facility").
The Bridge Financing was arranged by Union Bank of Norway,
First Union National Bank, and a group of other banks and was
fully repaid on June 29, 2000.
Under the Bridge Financing the Company paid a 1% fee for the
banks commitment and in connection with drawing the funds.
Interest was payable at Libor plus 2.75%. In addition, because of
the size of the acquisition, other possible acquisitions, and the
existing restrictive covenants under the 1999 Credit Facility,
the Company engaged and incurred fees to investment bankers to
advise on alternatives and strategies to finance the Roche
acquisition. All fees relating to the bridge financing were
expensed in the second quarter.
The impact on cost of sales of the write up of inventory to
net realizable value pursuant to Accounting Principles Board
Opinion No. 16 "Business Combinations" was reflected in cost of
sales as manufactured inventory acquired was sold during the
second quarter. In addition, certain employees of AHD have been
severed as a result of the acquisition and resulted in $400
severance expense in the second quarter.
The non-recurring charges related to the acquisition and
financing of MFA included in the second quarter of 2000 are
summarized as follows:
Inventory write-up $1,000 (Included in cost of sales)
Severance of existing
AHD employees 400 (Included in selling,
general and
administrative expenses)
Bridge financing and
advisory costs 4,730 (Included in other, net)
6,130
Tax benefit (2,104)
$4,026 $.09 per share-diluted
1999
I.D. Russell:
On September 2, 1999, the Company's AHD acquired the
business of I.D. Russell Company Laboratories ("IDR") for
approximately $23,500 in cash (including a purchase price
adjustment and other direct costs of acquisition). IDR is a US
manufacturer of animal health products primarily soluble
antibiotics and vitamins. The acquisition consisted of working
capital, an FDA approved manufacturing facility in Colorado,
product registrations, trademarks and 35 employees. The Company
has allocated the purchase price to the manufacturing facility
and identified intangibles and goodwill (approximately $13,000)
which will be generally amortized over 15 years. The purchase
agreement provides for up to $4,000 of additional purchase price
if two product approvals currently pending are received in the
next four years.
Isis:
Effective June 15, 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 a total cash purchase
price of approximately $153,000, including purchase price
adjustments and direct costs 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 is amortizing the acquired
intangibles and goodwill based on lives which vary from 7 to 20
years (average approximately 16 years) using the straight-line
method.
Jumer:
On April 16, 1999, the Company's IPD acquired the generic
pharmaceutical business Jumer Laboratories SARL and related
companies of the Cherqui group ("Jumer") in Paris, France for
approximately $26,000, which includes the assumption of debt
which was repaid subsequent to closing. Based on product
approvals received, additional purchase price of approximately
$2,100 may be paid in the next 2 years. The acquisition consisted
of products, trademarks and registrations. The Company is
amortizing the acquired intangibles and goodwill based on lives
which vary from 16 to 25 years (average approximately 22 years)
using the straight line method.
Pro forma Information:
The following unaudited pro forma information on results of
operations assumes the purchase at the beginning of 1999 of all
businesses discussed above as if the companies had been combined
at such date:
Proforma Proforma
Three Months Ended Nine Months Ended
September 30, September 30,
1999 2000* 1999
Revenue $256,400 $719,800 $726,100
Net income $4,000 $32,400 $4,800
Basic EPS $0.15 $0.97 $0.18
Diluted EPS $0.14 $0.94 $0.17
* 2000 excludes actual non-recurring charges related to the
Roche MFA acquisition of $4,026 after tax or $0.09 per share.
These unaudited pro forma results have been prepared for
comparative purposes only and include restated amounts, where
appropriate and certain adjustments, such as additional
amortization expense as a result of acquired intangibles and
goodwill and 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 the period, or of future results of operations of
the consolidated entities.
5. Long-Term Debt and Equity Financing
Long-term debt consists of the following:
September 30, December 31,
2000 1999
Senior debt:
U.S. Dollar Denominated:
1999 Credit Facility
(7.70 - 8.25%) $105,000 $180,000
Note payable - Roche (9.5%) 30,000 -
Industrial Development Revenue Bonds 7,950 9,130
Other, U.S. 81 172
Denominated in Other Currencies (NOK) 37,580 44,919
Total senior debt 180,611 234,221
Subordinated debt:
3% Convertible Senior Subordinated
Notes due 2006 (6.875% yield),
including interest accretion 179,031 173,824
5.75% Convertible Subordinated Notes
due 2005 124,945 125,000
5.75% Convertible Subordinated
Note due 2005 - Industrier Note 67,850 67,850
Total subordinated debt 371,826 366,674
Total long-term debt 552,437 600,895
Less, current maturities 50,614 9,111
$501,823 $591,784
In May 2000, the Company sold 4,950,000 shares of Class A
Common Stock to an investment banker and received proceeds of
approximately $185,600. The proceeds were used to repay a portion
of the Bridge Financing which was arranged for the purpose of
purchasing the Roche MFA business. (See note 4.)
In June 2000 the Company signed an amendment to its $300,000
1999 Credit Facility with the original consortium of banks plus
the Bank of America whereby the six year term loan agreement was
increased by $10,000 and the revolving credit facility was
increased by $90,000. Concurrently with the completion of the
Amendment the Company borrowed the necessary funds, repaid the
balance of the Bridge Financing and terminated the Bridge
Financing Agreement.
In August 2000, the Company sold 5,000,000 shares of Class A
Common Stock to an investment banker and received proceeds of
approximately $287,300. The proceeds were used to repay all
outstanding revolving debt under the 1999 Credit Facility with
the remainder invested in short-term money market instruments.
6. Elyzol Dental Gel ("EDG") Product Sale and Related
Agreements
In July 2000, the Company's Danish subsidiary sold the
patents, trademarks, marketing authorizations, and inventory
related to the Elyzol Dental Gel ("EDG") product for cash
proceeds of approximately $8,250. Concurrently with this sale,
and due to the specialized nature of the manufacturing process
for EDG, the company entered into a Toll Manufacturing agreement
with the purchaser under which the Company will manufacture EDG
for the purchaser for a four year period, for which it will be
reimbursed direct manufacturing costs plus an agreed upon amount
for overhead and a variable manufacturing profit which declines
as production volumes increase. The Company also entered into a
Transition Services agreement under which the Company provides
regulatory and/or sales and marketing assistance to the purchaser
for which it is reimbursed at agreed upon hourly rates.
As the relative fair value of the assets sold and the
Company's toll manufacturing obligation cannot be reliably
estimated, the Company has deferred the entire excess of the cash
proceeds over the carrying amount of the assets sold and expenses
associated with the sale. The deferral amounts to approximately
$7,700 and will be amortized over the four year term of the Toll
Manufacturing agreement on a straight line basis, which
management believes will approximate amortization using the units
of production method. Income from the Transition Service
agreement and the contractual profit under the Toll Manufacturing
agreement will be recognized as services are provided or goods
are sold to the purchaser.
Approximately $480 of the deferral was recognized for the
three months ended September 30, 2000. The remaining deferral of
$7,220 has been deferred and $1,920 is included in accrued
expenses and $5,300 is classified as other non-current
liabilities.
7. 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 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 Nine Months Ended
Sept 30, Sept 30,
Sept 1999 Sept 30, 1999
30, (restated) 2000 (restated)
2000
Average shares
outstanding - basic 37,615 27,555 33,255 27,439
Stock options 689 393 486 375
Convertible debt 12,039 6,744 12,039 6,744
Average shares
outstanding - diluted 50,343 34,692 45,780 34,558
The amount of dilution attributable to the stock options,
determined by the treasury stock method, depends on the average
market price of the Company's common stock for each period.
Subordinated notes issued in March 1998 ("05 Notes"),
convertible into 6,744,481 shares of common stock at $28.59 per
share, were included in the computation of diluted EPS for all
periods presented.
In addition, subordinated senior notes issued in June 1999
("06 Notes") convertible into 5,294,301 shares of common stock at
$32.11 per share were included in the computation of diluted EPS
for the three and nine months periods in 2000. The calculation of
the assumed conversion was not included for the three and nine
months periods in 1999 because the result was antidilutive.
The numerator for the calculation of basic EPS is net income
for all periods. The numerator for diluted EPS includes an add
back for interest expense and debt cost amortization, net of
income tax effects, related to the 05 and the 06 Notes.
A reconciliation of net income used for basic to diluted EPS
is as follows:
Three Months Nine Months Ended
Ended
Sept 30, Sept 30,
Sept 1999 Sept 1999
30, (Restated 30, (Restated
2000 ) 2000 )
Net income - basic $20,295 $10,373 $39,704 $24,939
Adjustments under if -
converted method, net of 3,750 1,855 11,249 5,565
tax
Adjusted net income - $24,045 $12,228 $50,953 $30,504
diluted
8. Supplemental Data
Three Months Nine Months
Ended Ended
Sept Sept Sept Sept
30, 30, 30, 30,
2000 1999 2000 1999
Other income (expense),
net:
Fees for bridge financing
MFA acquisition $ - $ - $(4,730) $ -
Interest income 1,259 260 2,343 704
Foreign exchange gains
(losses), net (1,526) (622) (1,968) (890)
Amortization of debt costs (540) (498) (1,535) (1,155)
Litigation/Insurance
settlement - - 483 1,000
Income from joint venture
carried at equity 348 286 1,306 934
Other, net (52) (99) (319) (345)
$( 511) $ (673) $(4,420) $ 248
Supplemental cash flow
information:
Nine Months
Ended
Sept Sept
30, 30,
2000 1999
Cash paid for interest (net
of $28,124 $19,986
amount capitalized)
Cash paid for income taxes
(net of refunds) $15,533 $ 9,018
Detail of businesses and
intangibles acquired:
Fair value of assets $298,711 $252,810
Seller financed debt - 30,000 -
Roche
Liabilities assumed - 43,482
Cash paid 268,711 209,328
Less cash acquired - 5,920
Net cash paid for
businesses and
intangibles $268,711 $203,408
9. Reporting Comprehensive Income
SFAS 130, "Reporting Comprehensive Income" requires foreign
currency translation adjustments and certain other items to be
included in other comprehensive income (loss). Total
comprehensive income (loss) amounted to approximately $(6,815)
and $26,581 for the three months ended September 30, 2000 and
1999, respectively. Total comprehensive income (loss) amounted to
approximately $(19,083) and $17,589 for the nine months ended
September 30, 2000 and 1999. The only components of accumulated
other comprehensive loss for the Company are foreign currency
translation adjustments.
10. Contingent Liabilities and Litigation
The Company was originally named as one of multiple
defendants in 68 lawsuits alleging personal injuries and six
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 Company has been
dismissed in all the class actions and the plaintiffs in 59 of
the lawsuits have agreed to dismiss the Company without
prejudice. 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 initial efforts to reverse the ban
in court were unsuccessful, the Company is continuing to pursue
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 and certain individual customers outside
the EU may be refraining from the use of bacitracin because of
the negative inferences of the ban. 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 additional
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 United Kingdom Office of Fair Trading ("OFT") is
conducting an investigation into the pricing and supply of
medicine by the generic industry in the United Kingdom. As part
of this investigation, Cox received in February 2000 a request
for information from the OFT. The request states that the OFT is
particularly concerned about the sustained rise in the list price
of a range of generic pharmaceuticals over the course of 1999 and
is considering this matter under competition legislation. In
December 1999 Cox received a request for information from the
Oxford Economic Research Association ("OXERA"), an economic
research company which has been commissioned by the United
Kingdom Department of Health to carry out a study of the generic
drug industry. The requests related to certain specified drugs.
The Company has responded to both requests for information. The
Company has not had any communications from either agency
regarding the initial responses. Effective August 3, 2000 the
government has adopted interim maximum pricing legislation. The
government has indicated that it will review the interim
legislation within the next 12 to 15 months based in part on the
results of the OXERA activities. The Company is unable to predict
what final impact the OFT investigation or OXERA activities will
have on the operations of Cox and the pricing of generic
pharmaceuticals in the United Kingdom.
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.
11. 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 September 30,
2000 1999 2000 1999
Revenues Operating Income
IPD $73,500 $84,057 $ 8,236 $11,716
USPD 68,076 59,421 11,166 7,555
FCD 16,509 15,331 6,432 5,773
AHD 89,051 37,362 (1) 17,647 8,106 (1)
AAHD 6,622 5,383 1,951 (211)
Unallocated and
eliminations (1,124) (1,725) (4,016) (4,746)
$252,634 $199,829(1) $ 41,416 $28,193 (1)
Nine Months Ended September 30,
2000 1999 2000* 1999
Revenues Operating Income
IPD $235,513 $212,257 $ 35,420 $24,738
USPD 163,876 19,051 141,172 11,998
FCD 47,322 46,783 18,591 17,719
AHD 205,753 110,504 (1) 39,227 25,572 (1)
AAHD 12,623 10,017 (446) (2,051)
Unallocated and
eliminations (2,336) (2,738) (12,699) (11,429)
$662,751 $517,995(1) $99,144 $66,547(1)
(1) Restated
* AHD 2000 operating income includes one-time charges of $1,400
related to the acquisition of Roche MFA.
At December 31, 1999 AHD identifiable assets were $204,188.
Due primarily to the acquisition of Roche MFA the identifiable
assets of AHD at September 30, 2000 are approximately $600,000.
12. Strategic Alliance
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. All potential loans are
subject to Ascent meeting a number of terms and conditions at the
time of each loan. As of September 30, 2000, the Company has
advanced $12,000 to Ascent under the general corporate purpose
section of agreement and the loans are included as other assets.
In addition, Ascent and the Company have entered into an
amended agreement under which the Company will have the option
during the first half of 2003 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 during its 2002
fiscal year. The amended agreement extended the option from 2002
to 2003 and altered the formula period from 2001 to 2002.
Ascent has incurred operating losses since its inception and
has publicly disclosed that if a significant product is not
approved by the FDA in the fourth quarter of 2000 it may need to
raise additional financing or curtail operations. The Company's
accounting policy with regard to its Ascent loans is 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. Additionally,
the Company is required to assess the general collectibility of
its loans to Ascent and make any appropriate reserves. The
Company evaluates its Ascent loans quarterly. As of September 30,
2000, no losses or reserves were provided.
13. Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board
(FASB) issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS 133 is effective for
all fiscal quarters of all fiscal years beginning after June 15,
2000 (January 1, 2001 for the Company). SFAS 133 requires that
all derivative instruments be recorded on the balance sheet at
their fair value. Changes in the fair value of derivatives are
recorded each period in current earnings or other comprehensive
income, depending on whether a derivative is designated as part
of a hedge transaction and, if it is, the type of hedge
transaction. SFAS 133 is not expected to have a material impact
on the Company's consolidated results of operations, financial
position or cash flows.
14. Subsequent Event
In November, 2000 two lawsuits were filed against the
Company and certain of its executive officers alleging violations
of securities laws and seeking to recover damages on behalf of a
class consisting of those persons and entities who purchased the
Company's common stock between April 1999, and October 2000.
Publicly available sources indicate that one or more additional
lawsuits containing similar allegations may have been filed, but
the Company has not received or reviewed court documents in that
regard. The Company believes it has defenses to these allegations
and intends to engage in a vigorous defense.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Overview
In 1999, the Company made a number of acquisitions intended
to enhance future growth. The International Pharmaceuticals
Division ("IPD") acquired Human Pharmaceuticals businesses in
Germany ("Isis") and France. The Animal Health Division ("AHD")
acquired an Animal Pharmaceutical business in the United States
("ID Russell") and a technology license for Reporcin. The Aquatic
Animal Health Division ("AAHD") purchased an aquatic health
distribution company in the United Kingdom, ("Vetrepharm"). In
2000 the Company continued its strategy of growth and completed
its largest acquisition and related financings.
- On May 3, 2000, the Company's AHD purchased the
Medicated Feed Additive Business of Roche Ltd. ("MFA") for
a cash payment of $258.0 million and the issuance of a
$30.0 million promissory note to Roche. The acquisition
was initially financed under a $225.0 million bridge
financing agreement ("Bridge Financing") and existing
credit agreements.
- On May 12, 2000, the Company sold 4,950,000 shares of
Class A common stock and received proceeds of
approximately $185.6 million which were used to repay a
portion of the Bridge Financing.
- In June 2000, the Company signed an amendment to its
1999 Credit Facility and increased the facility by $100.0
million. Upon the completion of the amendment the Company
borrowed the necessary funds and repaid and terminated the
Bridge Financing.
- In August 2000, the Company sold 5,000,000 shares of
Class A Common stock and received net proceeds of
approximately $287.3 million. The proceeds were used to
pay down existing line of credit and other short-term debt
with the balance being invested in money market
instruments.
The acquisition of the MFA, the 1999 acquisitions by IPD and
AHD, and the financing required to complete the acquisitions
affect most comparisons of 2000 results to 1999. The year to date
results for 2000 include one-time charges incurred in the second
quarter related to the MFA acquisition of $6.1 million ($4.0
million after tax or $.09 per share diluted).
The Company has integrated the operations of the 1999
acquisitions and MFA within the respective divisional operations
in varying degrees. The MFA acquisition has been integrated to a
greater extent because its assets, operations and personnel were
immediately absorbed in existing AHD legal entities. The MFA, in
particular, and to a lesser extent the other acquisitions share
with their respective divisions customers, R&D efforts, supply
chain activities, and administrative support and have
complementary product lines and sales forces. As a result the
full incremental impact of the acquisitions is impractical to
segregate. The Company estimates acquisitions contributed
revenues of approximately $56.0 million and $142.0 million,
respectively, in the three and nine months ended September 30,
2000.
Results of Operations - Nine Months Ended September 30, 2000
(All amounts for prior years have been restated as
appropriate. See Note 2 to the Condensed Financial Statements.)
Total revenue increased $144.8 million (27.9%) in the nine
months ended September 30, 2000 compared to 1999. Operating
income in 2000 was $99.1 million, an increase of $32.6 million,
compared to 1999. Net income was $39.7 million ($1.11 per share
diluted) compared to $24.9 million ($.88 per share diluted) in
1999. 2000 earnings per share are diluted by the sale of Class A
Common stock in November 1999, May 2000, and August 2000. The
nine month period ended September 30, 2000 results are reduced by
one-time charges totaling $4.0 million after tax or $.09 per
share related to the acquisition and interim financing of MFA in
May 2000. Without the charges net income would have been $43.7
million ($1.20 per share diluted).
Revenues increased in the Human Pharmaceuticals business by
$46.5 million and in the Animal Pharmaceuticals business by $97.9
million. The aggregate increase in revenues was reduced by over
$21.0 million due to changes in exchange rates used in
translating sales in foreign currencies into the U.S. Dollar,
primarily in the IPD.
Changes in revenue and major components of change for each
division in the nine month period ended September 30, 2000
compared to September 30, 1999 are as follows:
Revenues in IPD increased by $23.3 million due primarily to
the 1999 acquisitions. Higher pricing in the U.K. was offset
substantially by effects of currency translation and lower volume
in certain markets. The pricing in the U.K. market was higher
relative to the first half of 1999, but was lower in the third
quarter 2000 compared to the third quarter of 1999. U.K. revenues
grew in 1999 primarily as a result of higher pricing due in large
part to conditions affecting the market which abated somewhat
during the second quarter of 2000. Effective August 3, 2000 the
U.K. government has adopted interim maximum pricing legislation.
The government has indicated that it will review the interim
legislation within the next 12 to 15 months. Market conditions
resulted in certain lower prices in the second quarter of 2000
and further reductions as a result of the adoption of the above
noted legislation have occurred in the third quarter of 2000. The
Company's 2000 business plan anticipated the approximate effect
of lower pricing.
USPD revenues increased $22.7 million due to volume
increases in new and existing products offset in part by lower
net pricing. Revenues in FCD increased by $.5 million due mainly
to minor price increases being partially offset by translation of
sales in local currency into the U.S. Dollar.
AHD revenues increased $95.2 million due to acquisitions
primarily MFA. Adverse market and competitive conditions in a
number of AHD's main markets caused volume and to a lesser extent
price reductions in certain ongoing products. AAHD revenues
increased due to new product introductions and the acquisition of
Vetrepharm in November of 1999.
On a consolidated basis, gross profit increased $68.3
million and the gross margin percent increased marginally to
45.6% in 2000 compared to 45.2% in 1999.
A major portion of the dollar increase results from the
acquisitions (primarily MFA and Isis). Higher pricing in the
IPD's United Kingdom market and volume increases of a number of
products in USPD also contributed to the increase. Partially
offsetting increases were volume decreases in AHD ongoing
products and certain IPD markets, lower net pricing in USPD and
the effects of foreign currency translation.
In addition, AHD gross profits were reduced by a $1.0
million write-up and subsequent write-off upon sale of MFA
manufactured inventory. The write-up is required by Generally
Accepted Accounting Principles.
Operating expenses increased $35.7 million and represented
30.7% of revenues in 2000 compared to 32.3% in 1999. The dollar
increase is attributable to the acquisitions (primarily MFA and
Isis). Other increases included professional and consulting
expenses for strategic planning, information technology and
acquisitions, and a $.4 million charge for severance of existing
AHD employees resulting from the combining of the sales forces of
MFA and AHD. The percentage reduction is primarily the result of
leveraging of incremental MFA sales on the existing AHD business
infrastructure.
Operating income increased $32.6 million (49.0%). AHD
accounted for $13.7 million of the increase due primarily to the
MFA acquisition offset by weakness in base product sales in a
number of markets. IPD increased $10.7 million due to higher
pricing in the UK market during the first 6 months and to a
lesser extent the Isis acquisition offset partially by lower
volume in certain IPD markets. USPD increased $7.1 million due to
increased volume offset in part by lower net pricing.
Interest expense increased in 2000 by $7.7 million due
primarily to debt incurred to finance the acquisitions and to a
lesser extent, higher interest rates in 2000.
Other, net was $4.4 million expense in 2000, due primarily
to $4.7 million fees incurred as part of the $225.0 million MFA
bridge financing and other financing fees. The bridge financing
was committed, drawn, repaid and terminated in the second
quarter. All fees associated with the interim financing were
expensed in the second quarter.
The year-to-date estimated effective tax rate was 33.3% in
2000 compared to 36.4% in 1999. The primary reason for the lower
rate is the acquisition of foreign businesses in recent years and
the restructuring of ownership of legal entities in 2000 to allow
for movement of funds between the international entities and
maximize foreign tax efficiency.
Results of Operations - Three Months Ended September 30, 2000
Total revenue increased $52.8 million (26.4%) in the three
months ended September 30, 2000 compared to 1999. Operating
income in 2000 was $41.4 million, an increase of $13.2 million,
compared to 1999. Net income was $20.3 million ($.48 per share
diluted) compared to $10.4 million ($.35 per share diluted) in
1999. 2000 earnings per share are diluted by the sale of stock in
November 1999, May 2000 and August 2000.
Revenues decreased in the Human Pharmaceuticals business by
$.7 million and increased the Animal Pharmaceuticals business by
$52.9 million. The aggregate increase in revenues was reduced by
over $11.0 million due to changes in exchange rates used in
translating sales in foreign currencies into the U.S. Dollar,
primarily in the IPD.
Changes in revenue and major components of change for each
division in the three month period ended September 30, 2000
compared to September 30, 1999 are as follows:
Revenues in IPD decreased by $10.6 million due primarily to
the effects of currency translation and lower pricing. The
pricing in the U.K. market was lower relative to the third
quarter of 1999. U.K. revenues grew in 1999 primarily as a result
of higher pricing due in large part to conditions temporarily
affecting the market. The market has stabilized and prices have
lowered due to market conditions. Effective August 3, 2000 the
U.K. government has adopted interim maximum pricing legislation
which caused IPD to lower prices. The government has indicated
that it will review the interim legislation within the next 12 to
15 months. Further price decreases may occur in the fourth
quarter of 2000 as a result of the legislation. The Company's
2000 business plan anticipated the approximate effect of lower
pricing.
USPD revenues increased $8.7 million due to volume increases
in new and existing products offset in part by lower net pricing.
Revenues in FCD increased by $1.2 million due mainly to price and
volume and offset partially by currency translation. AHD revenues
increased $51.7 million due primarily to the acquisition of MFA
in May 2000. Volume in other core products and markets declined
marginally due to adverse market and competitive conditions. AAHD
sales increased $1.2 million due to the introduction of new
vaccines and to a lesser extent to the acquisition of Vetrepharm
in 1999.
On a company-wide basis, gross profit increased $20.3
million and the gross margin percent declined to 44.8% in 2000
compared to 46.5% in 1999.
A major portion of the increase in dollars results from the
acquisitions (primarily MFA), and to a lesser extent increased
volume in USPD. Partially offsetting increases were volume
declines in certain AHD and IPD markets, the effects of foreign
currency translation and by lower net pricing in USPD and AHD.
Operating expenses increased $7.1 million and represented
28.4% of revenues in 2000 compared to 32.4% in 1999. The dollar
increase is mainly attributable to the acquisition of MFA.
However, the lower percent to sales is also attributable to MFA
due to leveraging of MFA sales on the existing AHD business
infrastructure. Partially offsetting the operating expense
increase was the reversal of the AHD 2000 bonus of $1.0 million
accrued thru the second quarter as compared to an approximate $.7
million accrual for AHD bonuses in the third quarter of 1999.
Divisional bonuses are dependent on achieving budgeted goals for
operating income and return on capital. Recent developments in
AHD make it highly unlikely a bonus will be payable to AHD
employees. In addition, the effects of foreign currency
translation lowered expenses as reported in U.S. dollars.
On an overall basis operating income increased $13.2 million
primarily due to the acquisition of MFA, increased volume in
USPD, lower percentage of operating expenses in AHD and income as
opposed to a loss by AAHD. Increases were reduced by lower income
in IPD due mainly to the expected decrease in Cox operating
income when compared to the 1999 which was impacted favorably by
market conditions.
Interest expense was approximately equal to 1999 as debt
incurred to finance acquisitions was substantially refinanced by
equity sales in November 1999, May 2000 and August 2000.
Financial Condition
Working capital at September 30, 2000 was $384.5 million
compared to $217.6 million at December 31, 1999. The current
ratio was 2.65 to 1 at September 30, 2000 compared to 2.32 to 1
at year end. Long-term debt to stockholders' equity was 0.61:1 at
September 30, 2000 compared to 1.68:1 at December 31, 1999.
The Company's balance sheet changed substantially as a
result of the acquisition and financing of MFA in second quarter
of 2000. Accounts receivable and inventory each increased at June
30, 2000 by approximately $40.0 million in the AHD. Intangible
assets and property, plant and equipment increased by over $250.0
million. The acquisition was ultimately financed principally by a
sale of Class A Common stock of approximately $186.0 million with
the balance of the MFA acquisition financed by long-term debt.
Increased accounts payable and short-term debt financed the
additional working capital required by MFA.
The balance sheet improved in the third quarter as a result
of the sale of Class A Common stock of approximately $288.0
million. The proceeds were used to pay off all revolving debt
under the 1999 credit facility and substantially all short term
debt with the balance invested in money market instruments.
At September 30, 2000, the Company had $95.6 million in
cash, available short term lines of credit of approximately $42.0
million and $290.0 million available under its 1999 Credit
Facility. The credit facility was amended in June of 2000 with
the effect of increasing the overall amount available by $100.0
million. The credit facility has several financial covenants,
including an interest coverage ratio, total debt to EBITDA ratio,
and equity to total asset ratio. Interest on borrowings under the
facility is at LIBOR plus a margin of between .875% and 2.0%
depending on the ratio of total debt to EBITDA. As of September
30, 2000 the margin was 1.375%. 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.
All balance sheet captions decreased as of September 30,
2000 compared to December 1999 in U.S. Dollars as the functional
currencies of the Company's principal foreign subsidiaries, the
Norwegian Krone, Danish Krone, British Pound and the Euro
depreciated versus the U.S. Dollar in the nine months of 2000 by
approximately 14%, 15%, 9% and 12%, respectively. The decreases
do impact to some degree the above mentioned ratios. The
approximate decrease due to currency translation of selected
captions was: accounts receivable $8.1 million, inventories $9.5
million, accounts payable and accrued expenses $8.1 million, and
total stockholders' equity $58.8 million. The $58.8 million
decrease in stockholder's equity represents accumulated other
comprehensive loss for the nine months ended September 30, 2000
resulting from the continued strengthening of the U.S. Dollar.
The Company has approved a number of capital projects in
2000 including the purchase and construction of a AHD plant for
Reporcin, (a product and technology acquired in 1999) and a
company-wide information technology project which is expected to
require expenditures of over $30.0 million.
In February 1999, the Company's USPD entered into an
agreement with Ascent Pediatrics, Inc. ("Ascent") under which
USPD may provide up to $40.0 million in loans to Ascent to be
evidenced by 7 1/2% convertible subordinated notes due 2005. Up to
$12.0 million of the proceeds of the loans can be used only for
general corporate purposes, with $28.0 million of proceeds
reserved for approved projects and acquisitions intended to
enhance the 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 September 2000, $12.0 million
has been advanced for general corporate purposes.
Ascent has incurred operating losses since its inception. An
important element of Ascent's business plan contemplated
commercial introduction of two pediatric pharmaceutical products
which require FDA approval. Ascent has received FDA approval in
January 2000 for one product and the other product is subject to
FDA action which has delayed its commercial introduction until
the fourth quarter of 2000 or later. The delay in drug
introduction has resulted in Ascent continuing to incur
substantial losses thru September 30, 2000. If the commercial
introduction of the second product is delayed past the fourth
quarter 2000, Ascent may need to raise additional funds. There is
no assurance that Ascent can raise any additional funds in which
case it may be required to curtail its operations. 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 collectibility of its loans to Ascent and make any
appropriate reserves. The Company will continue to monitor the
operations and forecasts of Ascent to consider what actions, if
any, are required with respect to the Company's loans to Ascent.
An important element of the Company's long term strategy is
to pursue acquisitions that in general will broaden global reach
and/or augment product portfolios. While no commitments exist,
the Company is presently considering and expects to continue its
pursuit of complementary acquisitions or alliances. In order to
accomplish any individually significant acquisition or
combination of acquisitions, the Company may use its available
cash and credit lines and, if more significant, obtain additional
financing in the form of equity related securities and/or
borrowings. To prepare for this possibility, the Company
presently has an effective shelf registration with approximately
$200 million available for either debt or equity financing. In
anticipation of further offerings the Company amended its
Certificate of Incorporation to increase the number of authorized
shares of Class A Common Stock from 50 million to 65 million in
July 2000.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board
(FASB) issued SFAS 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, 2000
(January 1, 2001 for the Company). SFAS 133 requires that all
derivative instruments be recorded on the balance sheet at their
fair value. Changes in the fair value of derivatives are recorded
each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a
hedge transaction and, if it is, the type of hedge transaction.
SFAS 133 is not expected to have a material impact on the
Company's consolidated results of operations, financial position
or cash flows.
Item 3. Quantitative and Qualitative Disclosures about Market
Risk
Quantitative Disclosure - There has been no material changes in
the Company's market risk during the nine months ended
September 30, 2000.
Qualitative Disclosure - This information is set forth under the
caption "Derivative Financial Instruments" included in Item 7 of
the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1999.
___________
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, 1999.
PART II. OTHER INFORMATION
Item 4. Results of Votes of Security Holders
An Amendment to the Company's Amended and Restated
Certificate of Incorporation was approved by written consent of:
For 53,643,595
Against 244,652
Abstain 352,433
The approval increased the authorized number of shares of
Class A Common Stock from 50,000,000 to 65,000,000.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits (electronic filing only)
3 Amendment to the Amended and Restated Certificate
of Incorporation of Alpharma Inc. is filed as an
exhibit to this report.
27 Financial Data Schedule
(b) Reports on Form 8-K
On October 31, 2000, the Company filed a report on Form
8-K reporting in Item 5 - the restatement of its
financial statements for 1999 and the two quarters of
2000 and in Item 9 - the press release reporting third
quarter earnings.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Alpharma Inc.
(Registrant)
Date: November 14, 2000 /s/ Jeffrey E. Smith
Jeffrey E. Smith
Vice President, Finance and
Chief Financial Officer
